Monday, January 24, 2022

#BusinessLawProfPride

I cannot resist sharing with you today a proud moment that I had last week.  One of the 3L students that I mentor wrote a blog post that our Leading as Lawyers blog published. I could not be more proud.

I had been encouraging this student--a young woman I deeply admire--to write a post for us for a number of months.  She wasn't sure.  But I kept telling her that she had such compelling stories to tell.  Nevertheless, she remained unsure until recently that anything she would write could speak in a powerful enough way about leadership.

More recently, the pieces of her professional development puzzle have started to fall into place.  As a result she could see it--she found her voice; she knew what she had to say.  The result of her labors can be found here.  The title alone is enough to make a business law prof proud: The Unlikely Avenue from Hopeful Environmental Litigator to Inspired Transactional Lawyer.  You can click on the link and read the post in its entirety.  But here is the bottom line:

When I came to law school, I was so scared of “selling out.” I thought that transactional law was the route straight there. It turns out that choosing a path that utilizes my strengths and foregoes my weaknesses was never going to be “selling out.” Choosing transactional law is going to equip me to help animals and people in ways that I had never imagined prior to law school.

Amen.  Thanks, Ashley, for giving me this proud moment that I can share.  I will miss you after you graduate in a few months . . . .

January 24, 2022 in Joan Heminway, Teaching, Weblogs | Permalink | Comments (0)

Sunday, January 23, 2022

Christina Parajon Skinner Reviews “Grow the Pie: How Great Companies Deliver Both Purpose and Profit”

This morning, my inbox included a link to: Christina Parajon Skinner, Cancelling Capitalism? Grow the Pie: How Great Companies Deliver Both Purpose and Profit, 97 Notre Dame L. Rev. 417 (2021) [SSRN: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4000768 ]. What follows is an excerpt from the introduction.

In February 2019, Amazon announced a plan to build its new national headquarters in Queens, New York. The plan would create between 25,000 and 40,000 well-paid jobs and fill New York City's tax coffers with at least $27.5 billion. But Amazon cancelled its decision in the face of intense political opposition. Perhaps the most vocal opponent was New York congressional Representative Alexandria Ocasio-Cortez. She roundly celebrated Amazon's retreat, tweeting, “today was the day a group of dedicated, everyday New Yorkers & their neighbors defeated Amazon's corporate greed.”

But the congresswoman's maligning of Amazon's relocation was a sleight of hand. She told her followers that the “tax breaks” that would have gone to Amazon would instead now be available for public works, like subway repairs and teacher salaries. But this was wrong. The tax breaks would not be a “donation” of dollars that would have taken funds away from other public uses; rather, Amazon would have had some reductions from future tax bills if and only if--the company had improved the community in financially concrete ways. Yet Amazon was bullied out of town on these false pretenses, and Queens lost out on jobs, urban development, and hefty corporate tax payments. Here, both Amazon and Queens residents lost out--the citizens perhaps the most.

The tale of Amazon in retreat is one of many hard-hitting examples Alex Edmans gives in his book, Grow the Pie, all of which illustrate the growing popular antipathy against corporate profit. In the most charitable interpretation of Edmans's examples, people and politicians increasingly reject capitalism--the private harnessing of free-economic markets--because they appear to misunderstand the role that profits play in society. In other cases, however, it seems that politicians feint ignorance of the social benefits of capitalism in seeking to hum the most popular tune. Grow the Pie disabuses misperceptions by providing novel evidence and examples that bust the myriad myths now perpetuating the growing movement to “cancel capitalism,” as I'll call it here.

Continue reading

January 23, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, January 22, 2022

Activision!

This week, it was announced that Microsoft is acquiring Activision.

It was also announced that Microsoft swooped in with a bid because Activision was wounded due to the sexual harassment scandals, which are already the subject of a securities fraud lawsuit and a couple of derivative lawsuits.

And, it is possible that Activision’s CEO – who, it was reported, was aware of/involved in many of Activision’s problems and concealed them from the board – will, as a result of merger, walk away with a change of control golden parachute worth as much as $293 million.

So, this is entertaining for me because it’s like a real life issue spotter.

Issue One: What happens to the ongoing securities fraud lawsuit?

Answer: Presumably it continues; liability will travel with the new entity, and of course will remain with any individual defendants.

Issue Two: What happens to the ongoing derivative lawsuits?

Answer:  Normally, if the plaintiffs lose their shares in the merger, they lose the ability to prosecute a derivative action.  But!  They might be able to maintain the action if they can show the sole purpose of the deal was to deprive them of standing.  See Lewis v. Anderson, 477 A.2d 1040 (Del. 1984).  I don’t know if the Activision deal meets that high standard, but the reporting is certainly fraught.

Issue Three: What merger related claims are plaintiffs likely to advance directly?

Answer: 

(1) They could allege that Kotick ran a flawed sales process so that he could cash out rather than suffer the indignity of being fired, and the board was only too happy to acquiesce and shed themselves of the bother.  As a result, the merger price was too low.

(2) They could also allege that the board failed to secure value for the lost derivative claims, and therefore the merger price was too low.

Issue Four:  Isn’t it funny how the class plaintiffs and the derivative plaintiffs are at cross purposes, because if the derivative plaintiffs can maintain standing (a longshot, but still), it kind of interferes with the class plaintiffs’ allegations that the merger consideration failed to account for the value of the lost derivative claims (which are not, by hypothesis, lost at all)?

Answer: Yes.

Issue Five: Are there any other potential derivative claims here? 

Answer: Someone might consider the option of a double derivative lawsuit, i.e., suing Microsoft to get it to sue the old Activision board on behalf of Activision.  See Lambrecht v. O'Neal, 3 A.3d 277 (Del.2010).

Issue Six:  Could Activision just go ahead and quickly settle the derivative claims, to spare some of the headache?

Answer: I suppose but –

Issue Seven: Wouldn’t the objections to that settlement be convoluted, because if you tried to say the derivative plaintiffs were settling on the cheap, the answer would be that they were about to lose their claims anyway, so any number above zero was fair – and the real injury would be to the class plaintiffs in the merger, who may or may not have standing to object depending on whether the cheap derivative settlement was deemed some kind of improper diversion of merger consideration, permitting a direct claim, in facts that were distinguishable from Kramer v. Western Pacific Industries, Inc, 546 A.2d 348 (Del.1988) because the transactions were more closely related?

Answer:  Yes.

Issue Eight: Will the merger close, and defendants secure a dismissal of merger-related claims on Corwin grounds?

Answer:

¯\_(ツ)_/¯

Okay, internet: What did I miss?

January 22, 2022 in Ann Lipton | Permalink | Comments (1)

Friday, January 21, 2022

Sharing About Some Teaching Materials

We just finished our first week of class for the spring semester!  It was a busy several days (as I would imagine the first week of the semester tends to be for all!).  As I returned to teaching mode, I thought of some teaching materials I’d like to share (and somewhat reshare) with BLPB readers.

First, several years ago, I blogged about Professor Richard Shell’s Springboard: Launching Your Personal Search for Success (here and here).  I mentioned his Six Lives Exercise, but I didn’t explain much about it.  Not only do I think it’s a great personal reflection exercise, but it generally generates a significant amount of classroom discussion and interest.   As I’ve used it several times now and it tends to generate a lot of student discussion, I thought I’d reshare about it!  Although I recommend buying the book, it’s not necessary to do the exercise, which is available here.  Shell provides vignettes of six lives: a teacher, wealthy investor, tennis pro, stone mason, and non-profit executive.  After reading their stories, students (or the reader) is invited to rank the lives in the order of “most successful” to “least successful” from their perspective.  Shell argues that success has an inner (internal happiness and satisfaction) and an outer dimension (social achievement, fame etc.).  The class (or reader) can then reflect upon how success is being defined in each of these lives, how they personally define success, the extent to which their ranking reflects their definition, and small steps to minimize any misalignment.

Second, if you teach contracts and you don’t know about Leonard v Pepsico (I didn’t until Professor Kimberly Houser told me about it.  Thanks, Kim!), you should!  It’s a really fun and students love it!  Professor Jeremy Telman has blogged about it (here) with links to videos of the Pepsi commercial at issue.  In a nutshell, Pepsi made a commercial about various items that could be purchased with different amounts of Pepsi Points.  At the end of the commercial, a Harrier Fighter Jet appeared with the words “7,000,000 Pepsi Points.”  Needless to say, Pepsi wasn’t offering fighter jets to customers in exchange for their Pepsi Points.  However, one customer did amass all of these points and then sought to claim a jet!

January 21, 2022 in Colleen Baker, Teaching | Permalink | Comments (0)

Thursday, January 20, 2022

M&A Disciplining Misconduct in Investment Advisory Firms

There is an interesting new paper, Misconduct Synergies, by  Heather Tookes and Emmanuel Yimfor, which was recently the subject of a Business Scholarship Podcast.  The paper looks at misconduct at registered investment advisory firms after M&A activity.  It finds that "that disclosures of new disciplinary events in the combined firm drops by between 25 and 34 percent following mergers. This reduction is driven mainly by separations of high misconduct employees at the target firm."  In short, after M&A, employees with disciplinary records are much more likely to depart the firm.  

The RIA space is an interesting place to study employee misconduct and M&A activity.  Unlike most other industries, RIA firms have to disclose disciplinary and regulatory information in a way where it becomes publicly accessible.  It's also an interesting area to study because M&A activity has been booming for RIA firms.  Trimming away potential future regulatory issues may be a way to set up the combined firm for another deal.  It also finds that more of the target firm's employees separate than the acquiror, finding that "the sensitivity of separations to employee misconduct increases for target firm employees following mergers, suggesting stricter disciplinary mechanisms for target employees within the merged firm."  It's probably easier to clean house when it's a house you just bought.

January 20, 2022 | Permalink | Comments (0)

Drexel Seeks Two VAPs

The Drexel University Thomas R. Kline School of Law invites applications for a two Visiting Assistant Professor positions.   One position is dedicated to a faculty member who will teach and research in the area of tax.  The other position is open, with a preference for someone who does research that touches on legal implications of new technology and/or someone open to teaching Torts.  Each position will last two years and VAP’s are expected to fully participate in the intellectual life of the law school.

We seek candidates who hold (at minimum) a JD or appropriate equivalent degree.  We are particularly interested in candidates embarking on an academic career.  The Kline School of Law is committed to recruiting, developing, retaining, and rewarding faculty members who bring scholarly interests and life experiences that contribute to the diversity and success of our students, our University, and our communities.

Drexel University, founded in 1891, is an R1 comprehensive research institution.  Drexel established its law school in 2006, and it has rapidly developed a reputation for innovative scholarship across disciplines, a diverse portfolio of academic programs, and a focus on civic engagement.  The Kline School of Law is home to the Center for Law and Transformational Technology and the Center for Law, Policy and Social Action.   The law school has a vibrant scholarly culture, including an active workshop series.  Kline Law has moved up steadily in the rankings and is now ranked #81 by U.S. News.

Applications for this position should include a CV and cover letter.

Review of applications will begin immediately, and prompt application is encouraged.  Questions should be directed to Professor Bret Asbury. 

Apply online via Drexel’s HR portal: https://careers.drexel.edu/en-us/job/497570/visiting-assistant-professor-kline-school-of-law.

January 20, 2022 | Permalink | Comments (0)

Monday, January 17, 2022

Martin Luther King Jr. and the Beginning of a New Semester

I begin teaching again on Wednesday.  The past few weeks have been occupied with course preparation as well as catching up on editing, writing, and other tasks abandoned during a month+ focused on the grading period, attentiveness to  a downturn in my dad's health, Christmas, a nasty cold, and intensive physical therapy.  As I have focused on the spring semester, I continue to be concerned about helping to teach my students critical and intensive thinking, in and outside legal reasoning.  On this day honoring the life and many legacies of Dr. Martin Luther King Jr., I am inspired in my work by this passage from his writing--specifically, Chapter 1 of Strength to Love (1963; Pocket Book ed. 1964):

 . . . The tough mind is sharp and penetrating, breaking through the crust of legends and myths and sifting the true from the false. The tough-minded individual is astute and discerning. He has a strong austere quality that makes for firmness of purpose and solidness of commitment.

Who doubts that this toughness is one of man's greatest needs? Rarely do we find men who willingly engage in hard, solid thinking. There is an almost universal quest for easy answers and half-baked solutions. Nothing pains some people more than having to think.

The last three sentences of this quote are especially meaningful to me.  The world is full of "easy answers and half-baked solutions."  I laugh when a state or  federal legislator sends me survey asking me, e.g., whether I support the taxation of X (as one once did).  How can I answer that question (except in a knee jerk or heuristic-driven process) if I do not know other things first (including whether something else may be taxed instead or whether services may be cut)?  And I am pained when students rely on commercial case briefs and caselaw summaries rather than personally digesting and dissecting the text of even a case excerpt in a casebook.  Suffice it to say, it is difficult to have an in-depth or fully engaged conversation with a student who has not read and thought through the key elements of a particular judicial opinion.

Dr. King may be right that there are relatively few folks "who willingly engage in hard, solid thinking."  But my hope is that many of those who do are and will continue to be lawyers (who lead in our society both in and outside the profession) and that at least a few of those lawyers will have been my students.  I know other law faculty that feel the same way.

Encouraging law students to engage with the legal education process in a way that is productive to willing engagement with "hard, solid thinking" is certainly not easy when easy-to-read summary resources are widely available.  But an investment in that encouragement is worth the time and energy, in my view.  Lawyers can best fulfill their professional promise and responsibility by thinking in a way that is "sharp and penetrating, breaking through the crust of legends and myths and sifting the true from the false."

So, here's to the new semester.  I start with renewed energy to work with my students to get them what they need to succeed in and beyond law school, including by motivating each of them to develop a "sharp and penetrating" mind--a "tough mind."  Sustaining that type of energy in a pandemic-infused, understaffed world will surely be a challenge. But I am up for it!  I wish all law professors well in their pursuit of effective teaching.

January 17, 2022 in Books, Joan Heminway, Law School, Teaching | Permalink | Comments (0)

Saturday, January 15, 2022

Want a trillion dollar client?

My law school classmate is the General Counsel of the Small Business Administration and is looking for a deputy. If I didn't love my work, I would apply myself.

Here's how she describes the role:

"I am searching for my next Deputy General Counsel. What's the job? The right person will be looking to be the managing partner of a mid-sized law practice (125+ persons) in which the sole client has a $1 trillion portfolio and a mission of serving the needs of small businesses throughout the nation."

If you want the actual official job description, see below. 

This Deputy General Counsel reports to the General Counsel. The incumbent provides legal counsel and services to the Administrator and other Agency officials and is responsible for dispensing legal advice on a myriad of issues involving, among other things, litigation, legislation, procurement, appropriations, employment law, labor relations, and financial law. The incumbent is responsible for the day-to-day operations of the Office of General Counsel.

Responsibilities

  • Directs, plans, and executes oversight of the day-to-day operations of the Office of General Counsel.
  • Provides legal interpretation and application of the Small Business Act and all related laws and regulations affecting the programs and operations of SBA.
  • Resolves novel and complex legal problems which become precedent opinions to guide operating and legal staffs at headquarters and in the field.
  • Serves as a liaison between SBA and top legal officers of other Government departments and agencies as well as with those on Congressional Committees, especially the House and Senate Small Business Committees.
  • Confers with individual Senators and Congressmen concerning the legal aspects of problems with their small business constituents.
  • Provides legal support to the Agency when responding to inquiries from Congress, other Federal agencies, state entities, and municipalities.

Benefits

In addition to an annual salary, a career with the U.S. Government provides employees with a comprehensive benefits package. As a federal employee, you and your family will have access to a range of benefits that are designed to make your federal career very rewarding. Please visit the posted announcement on USAJOBS for additional information.

How to Apply

If you are interested in the position, please visit the posted announcement on USAJOBS.gov (https://www.usajobs.gov/GetJob/ViewDetails/630142800) . Resumes will be accepted through February 7, 2022, so candidates are encouraged to apply immediately.

All applications must be submitted through the posting on USAJOBS. If you have questions, please submit your questions to the Agency contacts listed on the posted announcement.

 
 

January 15, 2022 in Jobs | Permalink | Comments (0)

Friday, January 14, 2022

The battle’s done, and we kinda won

Okay, here I go, diving into Seafarers Pension Plan v. Bradway, recently out of the Seventh Circuit.  The appeal was argued in November 2020, which means this opinion took about 100 years to come down in Seventh Circuit time, and, well, to be honest, I’m not sure they worked out all the kinks.

I blogged extensively about the district court decision in this case here (although in the interests of full disclosure I should probably mention I spoke with the plaintiffs’ attorneys about the appeal, after the blog post went up).  The too-short version is that Boeing had a bylaw purporting to require that all derivative actions be filed in Delaware Chancery.  Plaintiffs filed a derivative action in federal court alleging Exchange Act claims under Section 14(a).  According to the plaintiffs, the Boeing defendants solicited shareholder votes in favor of their own reelection and compensation with false statements in the corporate proxy about the development of the 737 Max.  Boeing moved to dismiss in favor of Chancery due to the bylaw.   This was awkward because state courts, like Delaware Chancery, do not have jurisdiction to hear Exchange Act claims, and so enforcement of the bylaw in this case would be tantamount to a waiver of the claim.  But the Exchange Act prohibits predispute waiver of claims, and so the plaintiffs argued that the bylaw was invalid as applied here.

The district court ruled in Boeing’s favor and dismissed.  The plaintiffs appealed to the Seventh Circuit and, simultaneously, filed an action in Delaware Chancery alleging that the bylaw, as applied here, violated Delaware law.  The Delaware case (Docket No. 2020-0556-MTZ) was stayed in favor of the Seventh Circuit, and last week, the Seventh Circuit reversed and remanded, by a 2-1 vote, with Judge Easterbrook dissenting.

[Warning: Very long discussion under the cut, which will get unfortunately into the legal weeds at times, can’t be helped]

Continue reading

January 14, 2022 in Ann Lipton | Permalink | Comments (2)

Thursday, January 13, 2022

William Moon on Anonymous Companies

Will Moon recently posted an article forthcoming in the Duke Law Journal to SSRN.  It's a fascinating, accessible read and thoughtfully explores privacy as a functional feature of modern business entities.  Many states, Nevada included, allow the principal of a business entity to conduct business without ever disclosing the principal's identity.  Most discussions about using business entities to cloak individual identity focus on how the wealthy and powerful use privacy to avoid accountability and evade responsibility.  Yet not enough attention has been paid to the other side of the coin, how privacy enables economic activity for persons with stigmatized identities or in areas where violent retaliation against a business's disclosed principals may functionally force it to close.

A few years ago, Ann McGinley and I wrote about how some entrepreneurs will trot out persons with favored identities to access capital.  Because white men tend to raise more money, some entrepreneurs will strategically affiliate with white men to raise capital.  A proposal to create an agency for these purposes recently circulated online:

 

While our article dealt with deploying identity as a facade to raise capital, Moon explores how obscuring identity facilitates business operations.  He showcases different examples of how privacy enables economic activity from incubating morally contestable enterprises such as operating clinical trials for abortion drugs to evading "racialized" market biases.  The article even details how survivors of intimate-partner abuse use business entities to protect their identities while working.  

The paper is a significant contribution to an often unexplored area of business law.  Most discussions of business entities focus on asset partitioning and limited liability.  These essential features matter.  Yet for many people, privacy may also be a significant concern.  Moon's paper provides a balanced exploration of the merits and risks of allowing people to shield their identities behind business entities.  

January 13, 2022 | Permalink | Comments (0)

Wednesday, January 12, 2022

Open Legal Studies Position - Georgia State University, Robinson College of Business

Dear BLPB Readers:

"GEORGIA STATE UNIVERSITY invites applications for a non-tenure-track appointment in Legal Studies, effective fall 2022 in the Department of Risk Management and Insurance at the J. Mack Robinson College of Business.  Rank is open, but we expect to hire at the level of Clinical Assistant Professor (non-tenure track) or Clinical Associate Professor (non-tenure track). The salary level and course load are competitive.

 JOB QUALIFICATIONS: Candidates must have a J.D. degree from an ABA accredited law school, the capability to publish research in refereed pedagogical and/or professional journals, and demonstrated potential to be an outstanding teacher. Significant professional experience as a lawyer is also highly valued.  While we welcome applications from candidates in all areas of business law, we would be especially interested to hear from applicants who have a background in insurance, innovation, or entrepreneurship, and those who could help advance the Robinson College of Business’s equity and inclusion initiatives and programs."

The full job posting is here: Download GSU Legal Studies Clinical Faculty Position

January 12, 2022 in Colleen Baker, Jobs | Permalink | Comments (0)

Monday, January 10, 2022

Can Business Law Profs Be Change Leaders?

Yesterday evening, the 2022 Association of American Law Schools Annual Meeting concluded.  Hosted on a platform using Zoom, the conference spanned five days.  It was a meeting filled with super papers and discussion, many worthy honorees, and a little bot of networking and fellowship (not as satisfactory over Zoom, of course).

I was invited by BLPB co-blogger John Anderson and Martin Edwards to be part of an exciting discussion group: A Very Online Economy: Meme Trading, Bitcoin, and the Crisis of Trust and Value(s) – How Should the Law Respond?  [Editor's note: a hypertext link to John's earlier blog post was added post publication.]  Participants were asked to write short papers on the topic and share their theses during the session at the meeting. Initially, I planned to write on something involving substantive doctrinal law stemming from the meme stock phenomenon or my work in crowdfunding, blockchains, or insider trading.  But the more I thought about it (and the topic), and with the conference's programs honoring the life and legacy of Deborah Rhode in the foreground of my mind, the more I became convinced that I wanted to write/speak about lawyer leadership in this area at this time.

The short paper that resulted from that thinking, Leading as Lawyers in an Era of Rapid Technological Change, Limited Trust, and Individualism, can be found here.  It is not worth an SSRN post; it is just a thought piece.  But I am interested in your feedback, so I am sharing a link to it here.  The essential thesis is summarized in my conclusion paragraphs, pasted in below:

Lawyers and legal academics who desire to be change leaders have unique knowledge and experience relevant to the creation of a vision for legal or regulatory change that responds to ongoing business transformations. We know the existing legal and regulatory landscape and can observe its application in day-to-day business dealings. As businesses rapidly evolve in an increasingly digital world, the expertise of business lawyers and business law scholars is important to legal and regulatory change as well as legal and regulatory compliance.

Yet, successful, sustainable change in U.S. law and regulation has proven somewhat difficult. Among other things, we are living in an era of limited trust and increased individualism. These socio-political attributes of current life in the United States appear to be barriers to implementing even the most swell-reasoned legal arguments for change.

A possible way forward involves the use of proven patterns of efficacious change leadership that have been observed in private businesses and documented in a robust body of literature—especially academic literature authored by business management scholars. This literature deserves our attention and study, as does its application to effective processes of legal and regulatory change. There is no magic recipe for leading change, especially in the current environment. But merely having and sharing solid ideas for positive legal and regulatory change has never been enough to ensure the adoption and entrenchment of that change. If we want to be change leaders in the current, rapidly evolving business ecosystem, business lawyers and business law academics must consider and engage process. The ideas shared here are offered as a means of encouraging that consideration and engagement.

The paper admittedly results in part from the feeling that many worthy ideas for legal or regulatory change never get implemented because the right process was not employed.  Perhaps you also have felt this frustration at some point . . . .  As a result, in the paper, I end up encouraging the implementation of specific, staged, sequenced steps to make sustainable legal or regulatory change.

Among other things, I share a few pieces of the referenced academic literature on change leadership--a literature that I have used in other work.  It is a growing body of work.  And it keeps drawing me back.

The paper is five pages.  If any of what I have said in this post piques your interest and you deign to read the paper, let me know if you have any thoughts.  My idea is a simple idea; perhaps too simple . . . .

January 10, 2022 in Conferences, Joan Heminway | Permalink | Comments (0)

Saturday, January 8, 2022

Tallarita on The Limits of Portfolio Primacy (Revised)

Roberto Tallarita has revised The Limits of Portfolio Primacy on SSRN (here). An excerpt of the abstract follows.

According to a theory that is gaining increasing support, we should expect large asset managers (and, in particular, index fund managers) to become “climate stewards” and force companies to reduce their impact on climate change. According to this theory, by maximizing the value of their entire portfolio (portfolio primacy) rather than the value of the individual company (shareholder primacy), index fund managers are incentivized to reduce climate externalities and therefore to steer companies toward decarbonization. This Article offers the first systematic critique of this theory and identifies four crucial limits that undermine its practical impact: mispricing of climate mitigation, portfolio biases, fiduciary conflicts, and insulation from index funds stewardship.... [C]limate stewardship would create unsolvable fiduciary conflicts on multiple levels: between fund managers and fund investors; between large asset managers and undiversified shareholders; and between corporate directors and the individual company....

January 8, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Corporate scienter: was that so hard?

Edit: After I drafted this post, the Seventh Circuit finally decided Seafarers Pension Plan v. Bradway.  I blogged about the district court decision in that case here, and maybe I will eventually find the strength to draft a full blog post on CA7’s new decision reversing the district court, but in case I don’t because I’m screaming on the inside and nothing matters anymore, here’s my tweet thread on the subject

Meanwhile, back to today's intended post: 

 

I’ve blogged here a couple of times about courts’ struggles to evaluate allegations of scienter against a corporate defendant in a securities fraud case, and in particular, the problem of conflating pleading standards with the substantive definition of scienter.

Which is why I was so happy to see the court get it right in Acerra v. Trulieve Cannabis Corp., 2021 WL 6197088 (N.D. Fla. Dec. 30, 2021); all the more impressively done because, as far as I can tell from the briefing, the plaintiff didn’t make much of a corporate scienter argument and instead focused on the scienter of individual defendants.

The essence of the plaintiffs’ claim was that a medical marijuana company misled investors about the quality of its grow facilities.  The court dismissed allegations based on certain statements for failure to allege falsity; when that was done, a single actionable statement remained, namely, that Trulieve’s website falsely represented that its products were “hand-grown and specially cultivated in a state-approved, climate-controlled environment to ensure purity and safety. We leave nothing to chance while letting nature do her work.”

At that point, the court turned to the question of scienter, and concluded that plaintiffs failed to show that the individual defendants – the company’s CEO and CFO – drafted or even knew about the website text; thus, the corporate defendant could not be held liable vicariously based on the officers’ misconduct.  But the court did not stop there; it added:

Trulieve could of course be held liable based on acts or omissions not just of the named individual defendants but also based on acts or omissions of another officer or employee, so long as the officer or employee acted with the requisite state of mind. But here, as in Mizzaro [v. Home Depot, Inc., 544 F.3d 1230 (11th Cir. 2008)], the plaintiffs have not alleged scienter of the corporate defendant based on the knowledge or intent of any other officer or employee. The second amended complaint does not allege the existence of any individual, whether known or unknown, who both drafted or approved the website’s “climate-controlled” statement and acted recklessly or with intent to defraud. And it is by no means obvious—there is no “strong inference”—that any such person exists. The second amended complaint gives no reason to believe any single person must both have been aware of the website’s precise language, on the one hand, and aware of precisely what kind of facilities were out in the field.

I don’t have an opinion on whether the court reached the right outcome on these facts, but the analysis is exactly what I’d hoped courts would undertake.  The court asked whether the complaint created a strong inference that any agent of Trulieve, acting with scienter, drafted the false statement; the court entertained the possibility that such an agent might not be a defendant, and might exist even if their identity was unknown to the plaintiffs at pleading; recognized that corporate liability might attach if such an agent did exist; but concluded that the complaint did not raise a strong inference of that possibility.

I’m so pleased.

January 8, 2022 in Ann Lipton | Permalink | Comments (0)

Friday, January 7, 2022

AALS Annual Meeting 2022 Discussion Group on "A Very Online Economy"

We just wrapped up a fascinating discussion group titled "A Very Online Economy: Meme Trading, Bitcoin, and the Crisis of Trust and Value(s)--How Should the Law Respond?" as part of the AALS 2022 Annual Meeting. I co-moderated the group with Professor Martin Edwards (Belmont University School of Law). Here's the description:

Emergent forces emanating from social and financial technologies are challenging many underlying assumptions about the workings of markets, the nature of firms, and our social relationship with our economic institutions. Blockchain technologies challenge our assumptions about the need for centralization, trust, and financial institutions. Meme trading puts pressure on our assumptions about economic value and market processes. Environmental and social governance initiatives raise important questions about the relationship between economic institutions and social values. These issues will certainly drive policy debates about social and economic good in the coming years.

The group gathered some amazing presenters and commentators for the discussion, including:

The discussion was lively and informative, and I look forward to seeing the final versions of these projects in print! 

January 7, 2022 in Corporate Governance, Corporations, Financial Markets, John Anderson, Securities Regulation, Technology, Web/Tech | Permalink | Comments (0)

Thursday, January 6, 2022

New Jersey Reevaluating Fiduciary Rulemaking

The New Jersey Bureau of Securities recently announced that it would let its state fiduciary rulemaking expire.  In its release, it indicated that it intended to shift focus to gamified digital brokerage practices:

Since the Bureau published its rule proposal in 2019, the securities industry has seen a dramatic rise in the use of digital platforms and digital engagement practices by broker-dealers and investment advisers. COVID-19 accelerated this trend, as millions of investors turned to trading applications and social media for investment advice. Meanwhile, the Bureau has been monitoring federal regulatory developments.

“Prior to finalizing a Fiduciary Rule, the Bureau intends to reassess the rapidly changing landscape of the financial industry and determine whether further modernization of the Bureau’s rules is necessary,” said Christopher W. Gerold, Chief of the New Jersey Bureau of Securities. 

The financial industry’s use of digital engagement practices, including digital marketing, has drawn new investors into the market, many of whom have little or no prior investment experience. These unsophisticated investors may be particularly susceptible to predatory tactics, including the use of gaming features (for example, point scoring and competition with other investors) to increase trading activity, a practice known as “gamification.”

Undoubtedly New Jersey has limited resources and must pick between approaches.   Still, New Jersey abandoning the field here will likely be seen as a major victory for brokerage houses.  New Jersey's proposed rule had more teeth than the SEC's Regulation Best Interest.  It would have required advice without regard to the broker's interest and also eliminated a presumption that disclosing a conflict satisfied the duty of loyalty.  

 

January 6, 2022 | Permalink | Comments (0)

Wednesday, January 5, 2022

Professor Wilmarth on Stablecoin Regulation

Yesterday, Professor Art Wilmarth posted on SSRN a new article, It's Time to Regulate Stablecoins as Deposits and Require Their Issuers to Be FDIC-Insured Banks.  As I've written about stablecoins (here) and am planning future research on this topic, I'm really looking forward to reading this piece.  Here's its abstract:

"In November 2021, the President’s Working Group on Financial Markets (PWG) issued a report analyzing the rapid expansion and growing risks of the stablecoin market. PWG’s report determined that stablecoins pose a wide range of potential hazards, including the risks of inflicting large losses on investors, destabilizing financial markets and the payments system, supporting money laundering, tax evasion, and other forms of illicit finance, and promoting dangerous concentrations of economic and financial power. PWG called on Congress to pass legislation that would require all issuers of stablecoins to be banks that are insured by the Federal Deposit Insurance Corporation (FDIC). PWG also recommended that federal agencies and the Financial Stability Oversight Council should use their “existing authorities” to “address risks associated with payment stablecoin arrangements . . . to the extent possible.”

At present, stablecoins are used mainly to make payments for trades in cryptocurrency markets and to provide collateral for derivatives and lending transactions involving cryptocurrencies. However, technology companies are exploring a much broader range of potential uses for stablecoins. In October 2021, Facebook launched a “pilot” of its Novi “digital currency wallet,” which uses the Pax Dollar stablecoin as its first digital currency and allows customers to make person-to-person payments within and across national borders. The launch of Novi indicates that stablecoins could potentially become a form of “private money” that is widely used in consumer and commercial transactions. PWG’s report calls on federal agencies and Congress to take immediate steps to establish a federal oversight regime that could respond effectively to the dangers created by stablecoins.

This paper strongly supports three regulatory approaches recommended in PWG’s report. First, the Securities and Exchange Commission (SEC) should use its available powers to regulate stablecoins as “securities” and protect investors and securities markets. However, the scope of the SEC’s authority to regulate stablecoins is not clear, and federal securities laws do not provide adequate safeguards to control the systemic threats that stablecoins pose to financial stability and
the payments system.

Second, the Department of Justice (DOJ) should designate stablecoins as “deposits” and should bring enforcement actions to prevent issuers and distributors of stablecoins from unlawfully receiving “deposits” in violation of Section 21(a) of the Glass-Steagall Act. Section 21(a) offers a promising avenue for regulatory action, but its provisions contain uncertainties and gaps and do not provide a complete remedy for the hazards created by stablecoins. The most significant gap in Section 21(a) allows state (and possibly federal) banking authorities to charter special-purpose depository institutions that could issue and distribute stablecoins without obtaining deposit insurance from the FDIC.

Third, Congress should adopt legislation mandating that all issuers and distributors of stablecoins must be FDIC-insured banks. That requirement would compel all stablecoin issuers and distributors and their parent companies to comply with federal laws that protect the safety, soundness, and stability of our banking system and obligate banks to operate in a manner consistent with the public interest. Requiring stablecoin issuers and distributors to be FDIC- insured banks would also maintain the longstanding U.S. policy of separating banking and commerce. It would prevent Facebook and other Big Tech firms from using stablecoin ventures as building blocks for “shadow banking” empires that would erode consumer protections, impair competition, subvert the effectiveness of financial regulation, and potentially unleash systemic crises across our financial and commercial sectors during severe economic downturns and financial disruptions."

January 5, 2022 | Permalink | Comments (0)

Tuesday, January 4, 2022

AALS 2022 Annual Meeting Programs - ICYMT

Perhaps you missed these interesting programs--with super speakers--among all the amazing business associations, securities regulation, business transactions, etc. sessions!  I know I did and was glad a friend highlighted them for my attention.

Wednesday, January 5, 2022, 12:35 PM to 1:50 PM
Climate Finance and Banking Regulation: Beyond Disclosure?
Financial Institutions and Consumer Financial Services

U.S. banking regulation has been slower than other forms of financial regulation (and slower than in Europe) to address climate-related financial risks. This panel explores the role of banking regulation in addressing the physical and transition risks from climate change. Possible measures include: mandatory climate risk disclosures by banks; supervisory assessments of climate-related financial risk; capital and liquidity regulation; scenario tests; determination of the appropriate role of banks in mitigating climate risk; financial stability oversight of climate risk; and action (through the Community Reinvestment Act and otherwise) to deter harms to disadvantaged communities and communities of color from climate change.

    • Patricia A. McCoy, Boston College Law School, Moderator
    • Christina Skinner, Wharton School of the University of Pennsylvania, Speaker
    • Graham Steele, Stanford Graduate School of Business, Speaker
    • Hilary J. Allen, American University, Washington College of Law, Speaker
    • Nakita Cuttino, Georgetown University Law Center, Speaker from a Call for Papers

Sunday, January 9, 2022, 3:10 PM to 4:25 PM
Workers, Boards, and the Global Corporation
Section on Economic Globalization and Governance

The appropriate role and status of employee voice in corporate governance is an evergreen issue for corporate law. In the US, the field has traditionally focused on the interactions between boards of directors, shareholders, and managers, but with an increased emphasis on corporate social responsibility, that view has expanded. Despite widespread embrace of CSR principles, however, many corporations still resist union organizing. The inclusion of worker voice in corporate governance has significant comparative law dimensions, encompassing co-determination and union representation on boards. With the recognition that work is increasingly remote, these issues will become even more salient.

    • Miriam Cherry, Saint Louis University School of Law, Moderator
    • Lenore Palladino, University of Massachusetts Amherst School of Public Policy, Speaker
    • Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law, Speaker
    • George S. Georgiev, Emory University School of Law, Speaker
    • Matthew T. Bodie, Saint Louis University School of Law, Speaker

Looking forward to seeing many of you on Zoom later in the week!

January 4, 2022 in Conferences, Corporate Governance, Corporations, Employment Law, Joan Heminway | Permalink | Comments (0)

Monday, January 3, 2022

Honoring the Memory of Betty White

Yes, like many, I was saddened by the loss of TV personality Betty White on New Year's Eve at the age of 99--just a few weeks shy of her 100th birthday.  I have been fascinated by the many tributes and, indeed, tuned in for the SNL reprise of her Mother's Day host night (from eleven years ago!) on Saturday night.  Why are so many of us intrigued by this near centenarian whom we have never met in person?  I have mulled this as I complete the calculation of my fall semester grades, ready myself for presentations, commentary, and attendance at the 2022 AALS conference (which starts later this week), and prepare to start teaching for the spring semester.

My colleague and friend Stuart Brotman gets a lot of it right, imv, in this short post.  I invite you to read it.  Stuart is a lawyer embedded in our School of Journalism and Electronic Media (part of the College of Communication and Information) and on the Advisory Board for our Institute for Professional Leadership.  Here's what I have culled from Stuart's piece and other articles I have read (and from just watching Betty "do her thing") over the past few days.

  • She showed up.
  • She brought her "A Game" to what she did.
  • She embraced challenge.
  • She was candid at the risk of showing herself to be less than perfect--even unattractive.
  • She brought a sense of humor to her craft (including a sense of humor about herself).
  • She loved people and life--or at least always made it look that way.

I am sure there is more.  I will keep thinking on it, for fun.  But as I assembled this list in my head, I realized it included a number of inspiring thoughts for the new year and the new semester.  So, I invite you to honor Betty White's memory by adopting her norms--or at least some of them--as you begin your work in 2022.  They are so positive and strong!

🎉 Happy New Year to all.  🎊 I hope 2022 brings you good health and joy.

January 3, 2022 in Joan Heminway, Teaching, Television | Permalink | Comments (0)

Saturday, January 1, 2022

Two SSRN Postings: "The Cost (and Unbenefit) of Conscious Capitalism" & "Mitigation of Reputational Risk via Responsive CSR"

Aswani, Bilokha, Cheng, and Cole have posted The Cost (and Unbenefit) of Conscious Capitalism on SSRN (here). The abstract:

This paper examines the costs and benefits of ‘stakeholder governance’ for shareholders and other stakeholders by using the adoption of constituency statutes as a quasi-exogenous shock to corporate governance. Constituency statutes permit board members to consider all stakeholder interests, relaxing fiduciary duty to only shareholders. Using a sample of U.S. publicly traded firms (1981-2010) and employing a difference-in-difference methodology, we find that the discretionary adoption of ‘stakeholder governance’ leads to managerial entrenchment and a reduction in institutional ownership and shareholder wealth with little to no ‘trade-off’ benefits to other stakeholders. As states adopted constituency statutes, signs of managerial entrenchment increased (proxied by significant declines in earnings transparency and jumps in CEO and Director compensation) as did harm to shareholder wealth and to governance through institutional ownership. At the same time, we do not observe potential ‘trade-off’ benefits to the non-shareholder stakeholders these statutes were intended to help; we find that labor, customers, and creditors only marginally benefited (if at all) from the introduction of these statutes. These results are robust to a battery of checks including the biasedness in the staggered DiD estimator.

Choi, Cook, Via, and Zhang have posted The Mitigation of Reputational Risk via Responsive CSR: Evidence from Securities Class Action Lawsuits on SSRN (here). The abstract:

We examine the strategic production of CSR as a post-shock damage control instrument (responsive CSR). We proxy for these shocks using securities lawsuits. Using hand-collected data to supplement our main CSR dataset, we find that responsive CSR is temporary and consists primarily of strategically placed news releases to blunt short-term effects from periodic negative news developments related to the litigation process. Firms use responsive CSR synergistically with advertising, and it is concentrated in firms headquartered in urban or liberal-leaning states that exert high ESG demands. We find that responsive CSR mostly represents window dressing – it does not add long-term value and is associated with board members that are faced with significant reputational concerns.

January 1, 2022 in Stefan J. Padfield | Permalink | Comments (0)