Friday, December 4, 2020
I am delighted to announce that Professor Lécia Vicente from LSU Law is joining us as a guest blogger at the BLPB this month. Her posts will be on Sundays through the end of the month. You can find her work on SSRN here.
Professor Vicente teaches Business Associations, a Comparative Corporate Law Seminar, the Louisiana Law of Obligations, and Western Legal Traditions (a comparative and legal methodology course). Her recent scholarship focuses on the several dimensions of property rights within the firm’s contractual framework. She is also expanding her research to include law and development as a result of her consultancy work with developing countries and various other professional engagements, including her roles as:
- a delegate to the 74th Session of the United Nations General Assembly in 2019;
- the Head of Delegation of the African Union at the United Nations’ High-Level Political Forum on Sustainable Development under the auspices of the United Nations Economic and Social Council in 2016; and
- an advisor of the African Union at the United Nations Sustainable Development Summit for the adoption of the Post-2015 development agenda.
Professor Vicente holds an LL.M. in Comparative, European and International Laws and a Ph.D. from the European University Institute, Florence, Italy. Her undergraduate degree was earned at the Faculty of Law, Catholic University of Portugal. She beings unique interdisciplinary perspectives to her scholarship and teaching--and now to our blog! Please join me in welcoming her to our pandemic "virtual pod" as she posts over the next few weeks.
Thursday, December 3, 2020
Sarah Haan recently posted a new detailed and meticulously documented draft article that we'll likely be talking about for years to come. In it, she presents a forgotten history of an era when women came to outnumber men as the stockholders of public corporations. At the time, many corporations disclosed the gender breakdowns for their stockholders. Early on, the Wall Street Journal covered the rise of women as shareholders, revealing that more women than men held stock in American Express, Western Union, and Eastman Kodak as of 1916. Women bought stock at a robust clip for years afterward as well and gained clear per capita majorities at many public companies.
Haan points out that women likely sought stock ownership and participation earnestly because it allowed them a much greater measure of equality than the labor market. Each share received the same dividend, regardless of the owner's gender. In contrast, the labor markets reduced (and continue to reduce) women's returns.
Women began to outnumber men as shareholders around the time Berle and Means shaped the course of corporate law and theory with their distinction between dispersed, uninformed, and passive shareholders and active management. Haan explains that modern scholars have largely forgotten that this was a gendered distinction. "Passive" women were shareholders while "active" men served as managers.
As corporate law swallowed this distinction, it shaped corporate law's development. Many corporate law rules now complicate shareholder participation and defer to market-based solutions over empowering shareholder perspectives. (This is a subject Haan has explored in another article.). Some early corporate law scholars such as William W. Cook had first pushed for vigorous roles for shareholders in corporate governance. Yet these theorists changed their minds about shareholder participation as women began to hold stock, vote, and affect corporate affairs.
But the reality is far more complex. These dispersed shareholders were somewhat active and did actively press for women to receive board seats at companies where women owned a majority of the stock. Although they were, on occasion, successful when men needed to ally with them in fights for control, women failed to win equality in the boardroom with men continuing to dominate board positions. This continues today, with the NASDAQ pushing its listed companies to have at least two board members who are not white, heterosexual men.
Early reaction to the draft has been significant and may shift how some present the early development of large public corporations.
I just finished reading this paper and ...— Sam Brunson (@smbrnsn) December 2, 2020
This has me rethinking how I'm going to frame and teach my BizOrg class this semester. It's both a fascinating historical look at gender and corporate governance and a great normative frame for looking at corporate control. https://t.co/iA0Cagjnfa
After reading it, it seems inescapable that a great bulk of corporate scholarship has missed the gendered history and the gender politics behind the development of modern corporate law. The paper also puts the rise of institutional shareholders into a different, gendered perspective. The development had the effect of shifting voting power from dispersed women and concentrating it in the hands of a small number of predominantly male asset managers.
As Haan explained, the article opens a door to more conversations "about gender, power, and the evolution of corporate law."
The world lost an intellectual giant this week when the economist Walter E. Williams passed away. Williams was the John M. Olin Distinguished Professor of Economics at George Mason University, an economist’s economist, a scholar’s scholar, and an unparalleled communicator of economic wisdom and ideas. He loved liberty, defended it eloquently, and went to great lengths to show how good intentions don’t readily translate into good outcomes.
Thomas Sowell, as quoted by his Twitter tribute account:
There was a time when the black conservative community would have consisted of me and Walter Williams. I know Walter used to say the two of us should never fly on the same plane otherwise the whole movement will disappear if the plane goes down.
Here are some prominent Conservative Black Intellectuals who have written extensively on race/ethnic relations. Many have argued, with evidence, that affirmative action does not largely help its intended beneficiaries, and that statistical disparities do not imply discrimination[: Thomas Sowell, Walter E. Williams, Shelby Steele, Jason Riley, Candace Owens, Clarence Thomas, Ben Carson, John McWhorter, Larry Elder, Star Parker.] Will any of their books and articles be included in the enhanced efforts to study and reduce "racial injustice?" Probably not.
Williams was an Army veteran, a Ph.D. economist published in numerous peer-reviewed journals, an author of 11 books, a syndicated columnist whose work appeared in newspapers across the country, a substitute radio host whose voice was heard by millions, a subject of two documentaries, a former chair of the Mason Economics department and a professor at Mason since 1980....
As Williams persisted well beyond retirement age, his passion for economics undimmed, he was the kind of man that made you say, “He’s going to teach until the day he dies.” On Dec. 1, he taught his last class of ECON 811 to complete the semester, ending the 7:20-10:00 p.m. block around 30 minutes early, as was typical. Fewer than 12 hours later, he died, aged 84. R.I.P.
Walter Williams’s last syndicated weekly newspaper column:
Several years ago, Project Baltimore began an investigation of Baltimore's school system. What they found was an utter disgrace. In 19 of Baltimore's 39 high schools, out of 3,804 students, only 14 of them, or less than 1%, were proficient in math. In 13 of Baltimore's high schools, not a single student scored proficient in math. In five Baltimore City high schools, not a single student scored proficient in math or reading. Despite these academic deficiencies, about 70% of the students graduate and are conferred a high school diploma -- a fraudulent high school diploma.
The Detroit Public Schools Community District scored the lowest in the nation compared to 26 other urban districts for reading and mathematics at the fourth- and eighth-grade levels. A recent video captures some of this miseducation in Milwaukee high schools: In two city high schools, only one student tested proficient in math and none are proficient in English. Yet, the schools spent a full week learning about "systemic racism" and "Black Lives Matter activism." ....
Should we blame this education tragedy on racial discrimination or claim that it is a legacy of slavery? Dr. Thomas Sowell's research in "Education: Assumptions Versus History" documents academic excellence at Baltimore's Frederick Douglass High School and others.
Some say that educational expenditures explain the gap, but is that true? Look at educational per pupil expenditures: Baltimore city ranks fifth in the U.S. for per pupil spending at $15,793. The Detroit Public Schools Community District spends more per student than all but eight of the nation's 100 largest school districts, or $14,259.... There appears to be little relationship between educational expenditures and academic achievement.
Wednesday, December 2, 2020
Over the summer, I had the good fortune of hearing Professor Christina Parajon Skinner present her important and timely work on Central Banks and Climate Change. I was thrilled to see that this article was recently posted to SSRN (here) and I'm reading it now! Here's the abstract:
Central banks are increasingly called upon to address climate change. Proposals for central bank action on climate change range from programs of “green” quantitative easing, to increases in risk-based capital requirements to deter banks from lending to climate-unfriendly business. Politicians and academics alike have urged climate risk as both macroeconomic and financial stability risk. Nevertheless, in the U.S., the Federal Reserve has been measured in its response to climate change.
This article considers the scope of the Fed’s policy and legal authority to address climate change. Drawing on insights from corporate finance and macroeconomics, the article first considers how climate risk presents risks that are policy problems for the Fed. From that policy basis, the article constructs a legal framework — stitching together a variety of Fed laws, regulations, and precedents of practice — to discern where the Fed can legitimately move forward on climate change and the areas that, at present, sit outside the Fed’s legal remit.
The article concludes that the Fed’s authority to address climate change is strongest in a responsive posture — that is, to respond to climate-related economic shocks and to tailor supervision to better account for encroaching operational risks and asset-quality deterioration. However, the Fed lacks a solid legal basis for seeking to proactively make the financial system greener. Ultimately, the article prompts some reflection on the ideal role of the Fed vis-à-vis the fiscal authority of the Treasury, the political actors in Congress, and the Executive.
Tuesday, December 1, 2020
In September of 2015, I did a Westlaw search, which returned 4575 cases referring to a "limited liability corporation," rather than the proper "limited liability company" or LLC. That search followed one that I had done on May 2011, and the 2015 search showed a jump of 1802 new cases. Today's search returned 5,211 such cases, an increase of 636 cases in five and a half years. That's still more than 100 cases per year, but it's a reduction of about half the rate we were seeing between 2011 and 2015. (I concede this is not especially scientific, but it's still instructive.)
It appears, then, that we're making progress, but two steps forward, one step back. Even Jeopardy -- Jeopardy! -- recently got this wrong. I thank Professor Samantha Prince at Penn State Dickinson Law for bringing this to my attention, upsetting as it is.
In addition, a recent tax court opinion followed suit: "All limited liability corporations, or LLCs, mentioned in this opinion are entities treated as partnerships for federal tax purposes." Padda v. Comm'r of Internal Revenue, T.C.M. (RIA) 2020-154, at n.3 (T.C. 2020) (emphasis added).
So, there's clearly a lot of work left to do, but I remain hopeful that we're trending in the right direction. LLCs are still not corporations, and we need to keep reminding folks. Stay vigilant, good people!
A job posting that may be of interest to some of our readers.
BOSTON UNIVERSITY SCHOOL OF LAW, a top-tier law school with an international reputation, is a community of leading legal scholars, teachers, students, and alumni, dedicated to providing one of the finest legal educations in the world. The breadth and depth of our curriculum, especially our clinical program, as well as our innovative spirit are distinctive in American legal education.
Boston University School of Law is seeking to hire a full-time attorney in its Startup Law Clinic (the “Clinic”). The Clinic is part of BU Law’s Entrepreneurship, Intellectual Property, and Cyberlaw Program, which is a unique collaboration between BU Law and the Massachusetts Institute of Technology. The School of Law believes that the cultural and social diversity of our faculty, staff, and students is vitally important to the distinction and excellence of our academic programs. To that end, we are especially eager to hear from applicants who support our institutional commitment to BU as an inclusive, equitable, and diverse community.
The Clinic represents current students at MIT and BU on matters related to a wide range of legal issues faced by early-stage business ventures. The attorney would be expected to help law students counsel clients and represent students in transactional settings. Clients often present questions of law involving for-profit and nonprofit entity formation, allocations of equity, startup financing, employment and independent contractor issues, ownership of intellectual property, privacy policies, terms of service and other third-party contractual relationships, and trademark and copyright matters. Experience representing startup ventures is considered a plus.
The attorney’s primary responsibility will be to supervise and assist students with direct client representation matters. The attorney will also assist the Clinic Director and Assistant Director in preparing and teaching a year-long seminar for students enrolled in the Clinic, including developing materials, performing research, and coordinating classroom activities and guest presentations. The position is a year-round position and the attorney also would work with student fellows hired to continue the work of the clinic during the summer. As time allows, the attorney would also work with the Clinic Director and Assistant Director to develop generalized legal resources and informational material to inform MIT and BU students on the legal aspects of forming and operating for-profit and nonprofit entities.
The ideal candidate is a member of the Massachusetts bar or is eligible for membership via admission by motion, with at least two years of experience advising clients in a transactional setting, and a willingness to support the work of creative and innovative young clients. Teaching experience or a strong interest in developing as a clinical faculty member is also considered a plus. Exceptional writing, editing, organizational, and managerial skills are required.
The attorney will be hired as a Visiting Clinical Assistant Professor to a two-year contract. The ideal start date is May 24, 2021.
Since we opened our doors in 1872, Boston University School of Law has been committed to admitting and building our classes without regard to race, gender, or religion. We are dedicated to building a just, inclusive, and engaged community of faculty and students. We have more work to do to make our environment more just. Boston University School of Law is committed not only to the ideals of faculty diversity and inclusion but also to the work of creating and implementing practices that combat exclusion and inequity by race, gender, gender identity, disability status, religion, or other identities subject to historical subordination. We strive to foster a more inclusive intellectual culture that represents and encourages a broad range of intellectual traditions and approaches to the law. We welcome expressions of interest from applicants of all identities, intellectual traditions, and perspectives.
DO NOT APPLY THROUGH THE BU WEBSITE:
Applicants should send a letter of interest and a resume to Jim Wheaton, Clinical Associate Professor and Director of the Startup Law Clinic. Email applications are encouraged and should be sent to email@example.com. Applications received on or before January 31, 2021 will be given full consideration.
To learn more about the law school, visit our website at www.bu.edu/law, and to learn more about the Clinic, please visit https://sites.bu.edu/startuplaw/. If you have specific questions about the position, contact Jim Wheaton at firstname.lastname@example.org.
We are an equal opportunity employer and all qualified applicants will receive consideration for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, disability status, protected veteran status, or any other characteristic protected by law. We are a VEVRAA Federal Contractor.
BOSTON, Massachusetts, United States
Monday, November 30, 2020
Elisabeth Haub School of Law Faculty Hiring Announcement
The Elisabeth Haub School of Law at Pace University invites applications to fill up to two full-time, academic tenure-track/tenured faculty positions at the rank of assistant professor, associate professor, or professor. The positions will begin in August 2021. Applicants must be committed to providing excellent legal training both in person and online, engaging in meaningful service within the law school and in the broader community, and producing excellent scholarship. Applicants should have teaching and research interests in any of the following areas: environmental law, natural resources law, sustainable business law, energy and climate law, public health law, contracts law, business law, and tax law. Applicants whose interests cover multiple of these areas are particularly encouraged to apply. We welcome applications from candidates interested in doctrinal, experiential, and/or clinical teaching.
Applicants seeking the rank of assistant professor should hold a J.D. from an accredited law school or an equivalent degree from a non-U.S. law school. A successful candidate will have an excellent academic record and demonstrated potential for accomplishment in teaching, scholarship and research, and service.
Applications are encouraged from people of color, individuals of varied sexual and affectional orientations, individuals who are differently-abled, veterans of the armed forces or national service, and anyone whose background and experience will contribute to the diversity of the law school. Pace is committed to achieving completely equal opportunity in all aspects of University life.
Pace University’s Elisabeth Haub School of Law (Pace Law) offers J.D. and Masters of Law degrees in both Environmental and International Law, as well as a series of joint degree programs including a Doctor of Juridical Science (SJD) in Environmental Law. The school, housed on the University’s campus in White Plains, NY, opened its doors in 1976 and has over 8,000 alumni around the world. The school maintains a unique philosophy and approach to legal education that strikes an important balance between practice and theory. For more information visit http://law.pace.edu.
Please apply via https://careers.pace.edu/postings/16869. Applications will be considered on a rolling basis. Direct any questions via email to Appointments Committee Chair, Professor Margot Pollans, email@example.com.
Sunday, November 29, 2020
Came across the abstract below as part of my WestClip Alerts, you can find the SSRN version here.
The approaching anniversary of E.I. duPont deNemours & Co. v. Christopher is the impetus for this exploration and evaluation of the role of “commercial morality” in trade secret misappropriation doctrine. Christopher is the well-known industrial espionage case in which the U.S. Court of Appeals for the Fifth Circuit held that flying an airplane over an under-construction manufacturing facility to take photos of briefly-but-inevitably exposed trade secrets was an “improper means” of accessing a trade secret and was contrary to standards of “commercial morality.”
Commercial morality has played a significant but shifting role in trade secret law over the past seven decades and has become an important part of the contemporary trade secret doctrine lexicon, yet courts and commentators have not explored the meaning of this term. This study fills that gap in the literature by analyzing the origins of the commercial morality doctrine and its proper application in trade secret law. The development of U.S. commercial morality doctrine breaks down into four distinct time periods that illustrate the evolution of the doctrine in trade secret law over time, including the shift from the doctrine's initial use as a way to justify nascent trade secret law and its liability expansion to the doctrine's modern equitable role in structuring injunctive relief for misappropriation.
The analysis also shows that while courts invoke commercial morality when adjudicating misappropriation claims, they do not define the meaning of the term or provide reasoned analysis of its application. This is problematic when courts use the term in lieu of careful analysis of the facts and reasoning underlying their decision. Explicit recognition of the equitable nature of commercial morality doctrine would facilitate judicial application of the concept in a principled and effective manner.
Lynda J. Oswald, The Role of "Commercial Morality" in Trade Secret Doctrine, 96 Notre Dame L. Rev. 125 (2020).
Saturday, November 28, 2020
This holiday weekend, I continue my blog series on the March of Litigation Limits in Corporate Constitutive Documents (most recent prior posts here, here, and here – and those link back to earlier entries).
In Salzberg v. Sciabacucchi, 227 A.3d 102 (Del. 2020), the Delaware Supreme Court held that corporate charters may contain provisions selecting federal courts as the forum for Securities Act/Section 11 claims under the federal securities laws. That, of course, raised the question whether non-Delaware courts would treat these provisions as enforceable.
We have two rulings on that so far: In September, there was Wong v. Restoration Robotics, Case No. 18CIV02609 (Cal. Sup. Ct. Sept. 1, 2020), and then, earlier this month, we got In re Uber Technologies Securities Litigation, Case No. CGC19579544 (Nov. 16, 2020) (more details on the Uber case available at Kevin LaCroix’s blog post).
Both courts, correctly in my view, recognized that the enforceability, or not, of these provisions is not a matter of internal affairs and is therefore not governed by Delaware law. Instead, both applied California law. After that, both courts examined California contract doctrine and concluded that the provisions were not unconscionable or otherwise unreasonable/void as against public policy, and therefore were enforceable against the plaintiffs.
What both courts skimmed over, however, is whether corporate charters and bylaws should be treated as contracts in the first place. As regular readers know, I have argued that there are major differences between the legal regime that governs corporations, and the legal regime that governs contracts. See Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, 104 Geo. L.J. 583 (2016). Corporate law is entangled with state imposed fiduciary obligations that place limits on directors’ ability to propose, and enforce, forum provisions, and corporate law also places sharp limits on the ability of shareholders to act. Both of these aspects of corporate doctrine render it a poor analogy to contract law. For example, corporate law specifies the manner by which bylaws and charters may be amended; contract doctrine has no such strictures. Corporate law cares about conflicts of interest; contract doctrine expects each party to act selfishly. So there are all kinds of questions raised when corporate provisions are treated as contractual, like: Do directors operate under a conflict of interest when they invoke a litigation limit against a plaintiff? Should holders of nonvoting shares be treated as equally bound as holders of voting shares? If the provision is in a director-enacted bylaw, does that affect the analysis of whether a binding contract has been formed? What if there are supermajority voting requirements, or other limits on shareholder governance rights, which inhibit shareholders’ ability to modify a forum provision imposed by directors? What if those limits, while legal in the state of incorporation, would be prohibited under the corporate law of the state whose contract law is being applied?
Crucially, neither the Wong nor the Uber courts tried to engage these questions. Uber briefly cited to a California case for the proposition that “whether a set of bylaws constitutes a contract turns on whether the elements of a contract are present,” which is true as far as it goes, but (1) Uber’s forum provision was not in the bylaws – it was in the charter; (2) the case on which the Uber court relied – O'Byrne v. Santa Monica-UCLA Medical Center, 94 Cal. App. 4th 797 (2001) – involved associational bylaws, not corporate bylaws, a difference that apparently escaped the court; and (3) the court’s only examination of whether the “elements of a contract” were met involved a fleeting reference to consent, rather than a full-blown analysis of how the corporate legal framework differs from the contractual one.
All of which is to say, I’m afraid that courts’ failure to grapple with this issue is sleepwalking us into a regime where contract law and corporate law really will collapse, in a manner that will render the latter incoherent.
Friday, November 27, 2020
In his forthcoming article, “Shareholder Wealth Maximization: A Schelling Point,” my MC-Law colleague, Professor Martin Edwards, offers a new contribution to the long-standing debate concerning shareholder wealth maximization and corporate purpose. (See, e.g., here, here, here, and here.) Professor Edwards is not simply offering a rehearsal of the principled justifications for shareholder wealth maximization as the preeminent corporate purpose. Instead, he proposes a descriptive explanation for why it happened to become the received norm. Though Professor Edwards notes that reformers have offered compelling arguments for why shareholder wealth maximization may be suboptimal, he suggests that, as a Schelling point, it continues to function as a value-creating equilibrium term in the corporate bargain. The article will appear in Volume 74 of the St. John’s Law Review (forthcoming, 2021). Here’s the abstract:
Legal scholars have long debated the nature, meaning, efficacy, and even the very existence of the shareholder wealth maximization norm. Those who model the corporation in terms of its economic efficiency tend to defend it, while those skeptical of it have made a formidable case that corporate governance might be better if managers and directors focused more on worker wealth, environmental sustainability, and various other matters of social importance. If nothing else, the shareholder wealth maximization norm has been a persistent feature of corporate law and governance. This Article proposes that one reason for the norm’s persistence is that shareholder wealth maximization is a Schelling point. A Schelling point is a contextually intuitive way for bargainers to coordinate simply by both acting consistently how each would expect the other to act.
A Schelling point emerges as the solution in bargains where there is more than one value-creating outcome. Confronted with these multiple equilibria, the bargainers often choose the one that is the most contextually unique or intuitive, even if that solution is not optimal. Shareholder wealth maximization is the Schelling point for public investment in corporations because it is a simple and intuitive way to construct the bargain between the managers and directors on one side and the shareholders on the other. When the corporate bargain consists of the shareholders exchanging their capital for nothing more than the surplus value of the corporation, the most intuitive solution to the bargain is a tacit agreement to maximize that surplus value. Like any Schelling point, shareholder wealth maximization may not always be optimal, but it is reliably useful.
I look forward to seeing this in print!
Wednesday, November 25, 2020
Dear BLPB Readers:
The Department of Finance, Insurance, Real Estate and Law, at the University of North
Texas G. Brint Ryan College of Business, invites applications for the appointment of Lecturer
in Business Law starting in the spring 2021 semester or possibly fall 2021. The lecturer will
teach four business law courses per semester, advise students and provide service to the
department, college and university. Teaching will be at the Denton main campus and Frisco
branch campus (face-to-face and/or online/remote) and will include courses such as the
Legal Environment of Business, International Business Law, Real Estate Law, Corporation
Law, and Law for Accountants and Managers. Complete announcement is here: Download UNT lecturer job ad
For the one BLPB reader who doesn't also check in on The CLS Blue Sky Blog:
Based on an analysis of public communications around earnings announcements, we find that managers are 34 to 43 percent more likely to cite stakeholder value maximization during periods following earnings announcements that fall short of market expectations. This finding is consistent with concerns that the inability to measure stakeholder value may reduce managers’ accountability for firm performance....
Managers seem to be aware that stakeholder-oriented goals may reduce their accountability for performance, but does the manager’s push for stakeholder objectives sway the board’s evaluation of an underperforming manager? We use CEO turnover-performance sensitivity, a measure used in numerous prior studies of CEO evaluation, to determine whether this behavior produces any observable benefit to the manager. Indeed, we find that it does; CEOs that cite stakeholder value maximization as an objective are less likely to see turnover following poor performance.
Tuesday, November 24, 2020
ICYMI: "SEC Proposes Temporary Rules to Facilitate Measured Participation by Certain 'Platform Workers' in Compensatory Offerings"
The Securities and Exchange Commission today voted to propose rules that, on a temporary basis and subject to percentage limits (no more than 15% of annual compensation), dollar limits (no more than $75,000 in three years) and other conditions, would permit an issuer [to] provide equity compensation to certain "platform workers" who provide services available through the issuer's technology-based platform or system.
The proposed rules reflect the significant evolution that has taken place in the composition and participation of the workforce since the Commission last substantively amended Rule 701 or Form S-8, particularly the development of the so-called "gig economy," which has resulted in new work relationships.
Monday, November 23, 2020
I wanted to get there first, but friend, co-blogger, and Nova Southeastern Law colleague Jim Levy beat me to it. In a blog post for Legal Skills Prof Blog, Jim wrote about the incredible similarities between the game show Hollywood Squares and Zoom teaching. As I teach my last classes of the semester today--all online (thanks to our dean's promotion of online teaching for the last two class days of the semester)--I continue to be stuck on and struck by this similarity. We are not the only ones to note this comparison, of course. See, e.g., here and here and here.
I have called the Zoom squares the Hollywood Squares more than once during my class sessions this semester. Unlike Jim, however, I have not yet endeavored to "play host" in a way that mimics the show. He recalls (as do I) Peter Marshall's lengthy stint as the show's host. But it does turn out there were others.
As I bid goodbye to the Fall 2020 semester, I leave you with a picture (above) of one of my class meetings earlier this fall. UT Law alum and entrepreneur Mason Jones (founder of Volunteer Traditions, Inc.) visited our class to talk about the formation and basic governance attributes of the corporation he organized to conduct his business. It's a super-fun story--very instructive, too--and he is a humble and entertaining guy. We were delighted to have him join our Hollywood Squares (and even be spotlighted, as he is here!) for this class day. (Note that I was wearing a hat and t-shirt from his collection that afternoon while teaching. Go Vols!)
I am still formulating some additional substantive thoughts on my first full semester of pandemic teaching. I will post those reflections on a later date or dates. For today, however, in this Thanksgiving week, I merely want to express gratitude--for the Hollywood Squares that are our Zoom teaching world and, more importantly, for my continued good health, my supportive family, my hardworking students, and my student-focused faculty and staff colleagues. Without these blessings in my life, teaching through the pandemic would be so very much harder, if not impossible.
Happy Thanksgiving, y'all.
Saturday, November 21, 2020
On November 6, I had the privilege of participating in Case Western Reserve Law School's George A. Leet Business Law Symposium, "Equity Holdings in the Three Index Funds: Anti-Competitive Effects, Fiduciary Duties and Environmental, Social and Governance Issues." The agenda for the full symposium is here; I spoke on the first panel, "Fiduciary Obligations of Index Fund Managers," alongside Jill Fisch, Darren Rosenblum, and Bernard Sharfman (moderated by Anat Beck). The entire symposium is now online at YouTube, so you can watch and, in particular, admire the care I took with my Zoom background:
Friday, November 20, 2020
Today is my birthday and the last thing I want to do is blog or work. So I'm off to take care of myself in this beautiful Florida sunshine. Tomorrow, I'm going to delve into these materials and all of the briefs about the Nestlé USA, Inc. v. Doe I and Cargill Inc. v. Doe I cases that the Supreme Court will hear on December 1. These cases will revisit the applicability of the Alien Tort Statute and extraterritoriality. This case could change the game in terms of corporate responsibility for human rights abuses abroad. Having spent the past three days listening to the virtual UN Forum on Business and Human Rights, I know that the issue is ripe for resolution. I'll post about it in two weeks. In the meantime, have a safe, healthy, and Happy Thanksgiving.
Thursday, November 19, 2020
Carlos Berdejó recently posted a fascinating new article to SSRN, entitled Financing Minority Entrepreneurship. In it, he examines the reasons why minorities struggle to access capital when starting businesses and takes a close look at how existing programs have not succeeded at increasing access to capital. He argues that a successful program will increase equity and hybrid investment while also addressing informational asymmetry issues.
He proposes that a new type of Small Business Investment Company (SBIC) -- a Local Impact Small Investment Company (LISBIC) might offer a way to address many of the barriers faced by minority-owned businesses. A LISBIC would do much of what a SBIC does, but with a more localized focus. This local focus would allow the LISBIC to better evaluate soft-information about investment opportunities while its structure and design would generate credibility with investors.
The article also explores many practical and technical challenges to implementing such a program. It left me with the sense that this sort of program would be achievable and might even pass through a divided Congress. Hopefully, policymakers and legislators will consider this approach to increase access to capital.
Over at the Harvard Business Law Review, Sanjai Bhagat has posted Economic Growth, Income Inequality, and the Rule of Law (here). Here's what caught my eye:
Besides the size of the national pie, which is measured by GDP, senior policy makers and the media across the globe are increasingly concerned about how this pie is sliced, that is, about income inequality. We find that countries with greater adherence to Rule of Law are characterized by less income inequality. Additionally, we find that countries with greater GDP per capita are characterized by less income inequality; however, once we control for Rule of Law in the country, we do not observe this negative correlation between GDP per capita and income inequality. This further highlights that adherence to the Rule of Law relates to reducing income inequality.
Wednesday, November 18, 2020
Yesterday, the Financial Stability Board (FSB) released a report: Holistic Review of the March Market Turmoil (Report). It contains lots of really interesting information and is well worth a read (for a quick overview, there’s an Executive Summary and a two minute YouTube video of Randal K. Quarles, FSB Chair and a Governor of the Federal Reserve System, discussing the Report).
I thought its emphasis on the increasingly central role of market liquidity to financial market resilience particularly important. Today, both the traditional, highly regulated banking system and the market-based credit system provide credit to the economy. These systems are interconnected and roughly equivalent in size. Although the market-based credit system – non-bank financial intermediation (NBFI) – looks, smells, and acts like banking, it is not similarly regulated nor does it have access to deposit insurance or the Federal Reserve’s lender of last resort liquidity facility. Nevertheless, in the financial crisis of 2007-09 and this past March, the Federal Reserve provided extraordinary liquidity and other support to the NBFI to promote financial stability and address bank-like runs.
On p.2, the Report notes that “The need to intervene in such a substantial way has meant that central banks had to take on material financial risk. This could lead to moral hazard issues in the future, to the extent that markets do not fully internalise their own liquidity risk in anticipation of future central bank interventions in times of stress.” The Report explains on p.33 just how extensive this recent central bank support was: “Overall, these measures lead to a US$7 trillion increase in G7 central bank assets in just eight months (Graph 5.1). In contrast, G7 central bank assets only rose by about US$3 trillion in the year following the collapse of Lehman Brothers in 2008.”
The market-based credit system underprices liquidity risk. Measures must be taken to address this significant issue. As I wrote in The Federal Reserve As Last Resort (footnotes removed from quote):
Liquidity is not free. Liquidity risk is one of the fundamental risks in financial markets. All else being equal, liquid financial assets are less risky than illiquid ones and, therefore, worth more. Financial investors generally expect to receive a "liquidity premium" for illiquid financial assets. In the past, however, both economic and financial theories have sometimes treated liquidity as costless. And international financial institutions have long mismanaged and mispriced liquidity risk. Not surprisingly, liquidity assistance emerged as one of the most sought-after remedies provided by the Federal Reserve and central banks around the world during the financial crisis.
On p.50, the Report states that “Taken together, the measures introduced [by central banks] essentially removed risk from investors and transferred it to the balance sheet of central banks and hence of the public sector as a whole.” I’m excited for the FSB’s upcoming “work programme” on NBFI (see p.3 of the Report for details), and hope that in the future, investors will be required to retain more of their contracted for risk and that the resilience of this sector greatly improves.
Monday, November 16, 2020
A number of years ago, I became acquainted with Kate Vitasek, a colleague in The University of Tennessee's Haslam College of Business. She introduced me to a way of supply contracting called "vested." Vested relationships are characterized by the following attributes that may differentiate them from traditional contractual relationships (as identified in the FAQs on the vested website):
- "Uses flexible Statements of Objectives, enabling the service provider to determine 'how'”
- "Measures success through a limited number of Desired Outcomes"
- "Uses a jointly designed pricing model with incentives that optimize the overall business and fairly allocates risk/reward"
- "Focuses on insight, using governance mechanisms to manage the business with the supplier"
When I first talked to Kate and her colleagues about vested, I remember noting for her that the vested approach sounded like a specific type of relational contract . . . .
Recently, Kate and I reconnected. She informed me about her recent coauthored Harvard Business Review article. It merits promotion here.
The main point of the article is to highlight the possible advantages of relational contracting in the current environment. Here's the crux:
For procurement professionals at large multinational companies, the temptation is to use their company’s clout to pressure suppliers to reduce prices. And when the supplier has the upper hand, it is hard to resist the opportunity to impose price increases on customers. Witness how the shortage of personal protective equipment (PPE) and ventilators led to skyrocketing prices. . . .
A better alternative is formal relational contracts that are designed to keep the parties’ expectations continuously aligned. This kind of agreement is a legally enforceable written contract (hence “formal”) that puts the parties’ relationship above the specific points of the deal. The parties embrace the fact that all contracts are incomplete and can never cover all the contingencies that may occur. This time it is a pandemic. Next time it will be something else.
The coauthors conclude:
Given the uncertainty that lies ahead, it is especially important now that companies try to avoid antagonizing the members of their ecosystems. Formal relational contracts, which can turn adversarial relationships into mutually beneficial partnerships, is a proven means to such an end.
This all makes great sense to me, especially for contracting parties who have long-term relationships or are repeat players in the same market. The article both explains the concept and offers several examples of how relational contracting can foster more collaborative relationships that enable contracting parties to "ride the bumps" in their relationship. Specifically the parties are incentivized to work together to devise solutions to transactional problems as they arise.
The article reminded me about the relational aspects of M&A contracting and, more specifically, Cathy Hwang's Faux Contracts as well as her work with Matthew Jennejohn--including their Deal Structure article. In Deal Structure, Cathy and Matthew write that "[r]elational contracts blend formal contract terms, which are enforceable in court, with informal constraints, such as reputational sanctions, to create strong relationships between parties." [p. 311]
Law folks and business folks should talk more often. As the pandemic continues, parallel avenues of work like this in business and law can have important practical implications for business. This collective body of business and legal scholarship may have significant value to both business managers and the legal advisers who represent them. Collaboration between business and law experts can only enhance that value.