Wednesday, July 8, 2020
Yesterday, Randal K. Quarles, the Vice Chair of the Board of Governors of the Federal Reserve System and Chair of the Financial Stability Board (FSB), gave a speech at the Exchequer Club entitled “Global in Life and Orderly in Death: Post-Crisis Reforms and the Too-Big-to-Fail Question” (here). As he notes, the catchy first part of this title harkens back to the 2010 words of Mervyn King, then Governor of the Bank of England, who stated that “most large complex financial institutions are global—at least in life if not in death.” Quarles asserts that “In this pithy sentence, he [King] summed up the challenge policymakers faced.”
The context of Quarles’ speech is the FSB’s recent consultation report: Evaluation of the effects of too-big-to-fail reforms (here). Two major challenges post-crisis banking reforms sought to address were: 1) the market’s assumption that big banks would not be allowed to fail, and the moral hazard this created, and 2) the absence of effective resolution frameworks for global banks, which lead to bank rescues. There’s lots of good news here, including that prior to the current crisis, globally systemically important bank capital ratios had doubled since 2011 to 14%. As a result of this and other reforms, such banks have fared much better in the current crisis, and “[t]his has allowed the banking system to absorb rather than amplify the current macroeconomic shock.” Good news indeed!
At the same time, the challenges of the current crisis are not over. The International Monetary Fund projects that the global economy will contract by 4.9% in 2020 (a steeper decline than with the 2007-08 financial crisis). And Quarles notes that “The corporate sector entered the crisis with high levels of debt and has necessarily borrowed more during the event. And many households are facing bleak employment prospects. The next phase will inevitably involve an increase in non-performing loans and provisions as demand falls and some borrowers fail.”
Corporate and consumer bankruptcies are almost certain to increase as a result of the current crisis. Should a wave of such bankruptcies materialize, this could lead not only to a broader financial crisis, but also to the overwhelming of bankruptcy courts, including a need for additional bankruptcy judges (here). In the U.K., banks have been told to “rethink handling of crisis debt” (here), and the need for related, effective dispute resolution systems has also been noted.
Once again, the necessity of effective resolution frameworks is likely to be front and center in banking regulation. However, this time, it is likely to be a need for effective dispute resolution frameworks so that banks can speedily deal with consumer and corporate bankruptcies to promote economic recovery.
Tuesday, July 7, 2020
As to the first element, the Court agrees that the Eastern District of Michigan would have subject matter jurisdiction pursuant to the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2). The Class Action Fairness Act vests federal courts with original jurisdiction over class actions that meet the following prerequisites: (1) “the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs”; (2) the parties meet minimal requirements for diversity such that “any member of a class of plaintiffs is a citizen of a State different from any defendant”; and (3) the class equals to or exceeds 100 individuals in the aggregate. 28 U.S.C. § 1332(d). Those requirements are satisfied here. ... [A]t least one class member is a citizen of a different state from Defendant: Plaintiff Esquer is a citizen of California, id. ¶ 17, whereas Defendant is a Michigan limited liability company with its principal place of business in Michigan, id. ¶ 26; Rollins Decl. ¶ 11. Accordingly, the Eastern District of Michigan would have subject matter jurisdiction under the Class Action Fairness Act.
As to the second element, Defendant StockX, LLC would be subject to personal jurisdiction in Michigan as a Michigan limited liability corporation with its principal place of business in Michigan, as set forth above.
Monday, July 6, 2020
The title of this post is the title of a panel discussion I organized for the 2019 Business Law Prof Blog symposium, held back in September of last year. (Readers may recall that I posted on this session back at the time, under the same title.) The panel experience was indescribably satisfying for me. It represented one of those moments in life where one just feels so lucky . . . .
Why? Because it fulfilled a dream, of sorts, that I have had for quite a while. Here's the story.
About ten years ago, I ended up in a conversation with two of my beloved Tennessee Law colleagues while we were grabbing afternoon beverages. One of these colleagues is a tax geek; the other is a property guy. Somehow, we got into a discussion about mergers and acquisitions. I was asked how I would define a merger as a matter of corporate law, and part of my answer (that mergers are magic) got these two folks all riled up (in a professional, academic, nerdy way). The conversation included some passionate exchanges. It was an exhilerating experience.
I have remembered that exchange for all of these years, vowing to myself that some day, I would work on publishing what was said. When the opportunity arose to hold a panel discussion to recreate our water-cooler chat at the symposium last fall, I jumped at the chance. I was tickled pink that my two colleagues consented to join me in the recreation exercise. They are good sports, wise lawyers, and excellent teachers.
My objective in convening the panel was two-fold.
First, I thought that students would find the conversation illuminating. "Aha," they might justifiably say. "Now I know why I am confused about what a merger is. It's because the term means different things to different lawyers, all of whom may have a role in advising on a business combination transaction. I have to understand the perspective from which the question is being asked, and the purpose of answering the question, before I can definitively say what a merger is." Overall, I was convinced that a recreation of the conversation through a panel discussion could be a solid teaching tool.
But that's not all. Faculty also can earn from our dialogue. It helped me in my teaching to know how my tax colleague (who teaches transactional tax planning and business taxation) and my property colleague (who teaches property and secured transactions) define the concept of a merger and what each had to say about his definition as it operates in practice. I like to think my two colleagues similarly benefitted from an understanding of my definition of a merger (even if neither believes in statutory magic) . . . .
Now, you and your students also can benefit from the panel. Although it is not quite as good as hearing us all talk about mergers and acquisitions in person (which one can do here), Transactions: The Tennessee Journal of Business Law, recently published an edited transcript of the panel discussion as part of the symposium proceedings. It also is titled "What is a Merger Anyway?" And you can find it here. (The entire volume of the journal that includes the symposium proceedings can be found here. Your friends from the BLPB are the featured authors!) I am sure that your joy in reading it cannot match my joy in contributing to the project, but I hope you find joy in reading it nonetheless.
What remains when the intoxicating distractions of life are removed?
I read both of these books on vacation at Ocean Isle, NC late last month; this was not exactly light, uplifting beach reading.
Before the plague engulfed the Algerian coastal town of Oran, Camus’ narrator notes that:
Our citizens work hard, but solely with the object of getting rich. Their chief interest is in commerce, and their chief aim in life is, as they call it, “doing business.” Naturally they don’t eschew such simpler pleasure as love-making, sea bathing, going to the pictures. But, very sensibly they reserve these past times for Saturday afternoons and Sundays and employ the rest of the week in making money, as much as possible . . . . Nevertheless there still exist towns and countries where people have now and then an inkling of something different. In general it doesn’t change their lives. Still they have had an intimation, and that’s so much to the good. Oran, however, seems to be a town without intimations; in other words, completely modern.
In sharp contrast to the citizens of Oran, Ben Ellis had steadier footing in advance of tragedy. Ben Ellis was a teacher at the private school connected to our church in Nashville (CPA). Our current pandemic has been clarifying for me in many ways, and it has convinced me that Saint Paul was correct when he wrote that faith, hope, and love are the things that remain. Ben Ellis was already building his life on those three things prior to his cancer diagnosis. As his condition worsened in September of 2016, over 400 students gathered outside of his home to sing worship songs with him. Ben Ellis died about 10 days later. Difficulties can clarify, and Ben’s death clarified that he spent his time focused on meaningful things outside of himself. Watch the clip below to see clear evidence of a man who loved God, his students, and his family well. (His daughter is so poised and thoughtful, and the headmaster obviously valued him).
But for many of the citizens of Oran, and many of us in the individualistic, materialistic United States, difficulties can also show that we rest on a shaky foundation. If we are focused primarily on financial success and personal status, something like a pandemic or cancer can destroy the entire endeavor in short order.
In terms of “success,” as it is typically defined in the United States, few could be said to surpass Doctor Paul Kalanithi. He followed an undergraduate and masters degree at Stanford University with medical school at Yale. At the time of his cancer diagnosis, he was in his last year of neurosurgical training as the chief resident back at Stanford University. But even with just a few months left to live, Paul went back to work. The purpose of work does not have to be centered on finances and status. In Paul’s case, he returned to work, I think, primarily because he was doing meaningful work with people he cared about. Impending death clarified that status was of little importance, and he turned down a prestigious and lucrative job offer far from family. I do wonder if he would have taken that job in Wisconsin, but for his diagnosis. From his writing, it sounds like he probably would and that may have been a mistake given his underlying priorities. We often lean toward finances and status, even if our highest priorities lie elsewhere. Hopefully, this pandemic can give us all some time for reflection and help us make decisions that elevate those things that are most important.
Saturday, July 4, 2020
It seems we’re all talking about VC Laster’s recent opinion in In re Dell Technologies Class V Stockholder Litigation. Stefan posted about Laster’s taxonomy of coercion earlier this week; for me, I want to focus on another aspect of the case, the one that Stephen Bainbridge latched onto as indicative of his “director primacy” view.
The basic set up in Dell was that controlling shareholders – Michael Dell and Silver Lake – engineered a transaction whereby Dell would redeem Class V stock from its holders, and they wanted to cleanse the deal using Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) procedures to ensure it would receive business judgment review. To that end, they conditioned the transaction on special committee approval and unaffiliated shareholder approval. Dissatisfied stockholders sued, claiming that despite those efforts, the MFW conditions were not satisfied, and, for the purposes of a 12(b)(6) motion, Laster agreed.
Laster actually found that, as alleged, the departures from MFW were many and varied, but there’s one aspect in particular I want to focus on, namely, the curious role of the “stockholder volunteers.” After months of negotiation, the special committee reached a deal with the company that met with immediate objection from Class V stockholders. Rather than go back to the committee, Dell instead started negotiating directly with a selection of six large investors until a new deal was struck. At least according to the plaintiffs, the committee perfunctorily approved the revised deal, and it was that deal that was finally presented to the stockholders generally for their vote. When Class V shareholders sued, Dell argued that the committee-plus-stockholder negotiations were sufficient to satisfy MFW. In their view, this set up presented the best of all worlds: independent committee protection with direct input from sophisticated shareholders bargaining in their own interests.
Laster disagreed. He observed that corporate directors are the ones charged with protecting shareholder interests, and that task cannot be delegated to individual shareholders who have no fiduciary obligations to the company and do not have the information available to insiders. In so doing, he cited several academic articles (including, umm, one of mine, Shareholder Divorce Court) discussing how individual shareholders have private interests that may not match those of the shareholders collectively.
It was this portion of the opinion that Stephen Bainbridge highlighted as endorsing his “director primacy” theory, which posits that shareholders have a very subordinate role in corporate managerial decisionmaking, even in the context of large transactions.
The part that I’m interested in, however, is Laster’s attention to the varying incentives of even the “disinterested” stockholders. That’s what I was discussing in Shareholder Divorce Court, namely, how large institutional shareholders are likely to have cross-holdings that affect their preferences, and lead them to favor nonwealth maximizing actions at a particular company if they benefit the rest of the portfolio (after the article was published, I posted about additional empirical work in this area here). Laster has historically been especially sensitive to these kinds of conflicts. He authored In re CNX Gas Corp. S’holders Litig., 4 A.3d 397 (Del. Ch. 2010) (which I highlight in Shareholder Divorce Court), where T. Rowe Price was found to be “interested” for cleansing purposes because, across its mutual funds, it held stock in both a target and the acquiring company. Laster also wrote the opinion in In re PLX Tech. Stockholders Litigation, 2018 WL 5018535 (Del. Ch. Oct. 16, 2018), which I discussed here, where he concluded that a hedge fund’s “short-term” outlook caused its interests to differ from the other shareholders (even though those other shareholders had voted to put the hedge fund’s representatives on the company’s board). In his Dell opinion, Laster mentions another relevant type of cross-holding, namely, the distinction between investors who own both debt and equity, and investors who own equity alone.
The problem, though – as I discuss in Shareholder Divorce Court and What We Talk About When We Talk About Shareholder Primacy– is that if you’re going to recognize the heterogeneity of shareholder interest due to these different types of portfolio-wide investments, it’s unclear why a majority vote should be permitted to drag along the minority in a particular deal. Which conflicts will we recognize as generating bias, and which will we ignore? That’s the problem that cases like Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) and MFW are forcing Delaware to confront. Laster’s far more willing to engage here; so far, other judges have, umm, avoided the issue. For example, Laster cites In re AmTrust Financial Services, Inc. Shareholder Litigation, 2020 WL 914563 (Del. Ch. Feb. 26, 2020), where a controller negotiated directly with Carl Icahn when it seemed shareholders were unlikely to approve a deal endorsed by the special committee, but, as Laster notes, Chancellor Bouchard refused to decide whether such actions forfeited MFW protection. Similarly – as I wrote about in Shareholder Divorce Court – VC Slights, entertaining a stockholder challenge to Tesla’s acquisition of SolarCity, failed to reach the question whether institutions like BlackRock who owned shares in both entities counted as “disinterested” votes for Corwin purposes.
In practical effect, it seems, Laster is less about director primacy than judicial primacy, in a way that often puts him at odds with other members of the Delaware judiciary. (See, e.g., my discussion of Salzberg v. Sciabacucchi, and the differing views of the nature of the corporation expressed by Laster and the Delaware Supreme Court). Because once you hold that shareholders are too biased to make decisions, that doesn’t necessarily lead to director primacy; instead, it creates more space for the judiciary to step in to protect the interests of the abstract notion of shareholder, distinct from the ones who actually cast ballots. Or perhaps, we should call it state primacy. Which was the point of my post last week (as well as the thesis of my post about the PLX case and my What We Talk About When We Talk About Shareholder Primacy essay. I do have a theme).
And that segues nicely into - happy July 4th, and the birth of the American government!
Friday, July 3, 2020
It seems that every day, more schools are announcing that they will re-open either totally or mostly online in the Fall. If you’re still debating whether opening face-to-face in the Fall is safe, I recommend that you read this compelling essay by my colleague, Bill Widen. I live in a COVID hotspot in Miami, Florida, and fortunately, I had already been assigned to teach online. Unlike many of you who may find out about your school’s plans at the end of July, I’ve already been focusing on upping my online game.
Last week, in Part II of this series, I promised to summarize what I have learned from some of my readings from Learning How to Learn, Small Teaching Online, and Online Learning and the Future of Legal Education. Alas, I haven’t even had time to look at them because I’ve been teaching two courses, watching webinars on teaching, and taking two online courses for my own non-legal certifications. But it wasn’t a waste of time because it allowed me to look at online learning from a student’s perspective. Next week, I’ll summarize the readings in the sources listed above, but this week, I’ll provide some insight from the experts and from my perspective as a student.
Visual (spacial) learners learn best by seeing
Auditory (aural) learners learn best by hearing
Reading/writing learners learn best by reading and writing
Kinesthetic (physical) learners learn best by moving and doing
I know there’s a lot of controversy on learning styles, but I believe that students do learn differently, and that we need to plan for multiple types of activities to accommodate for those differences. Accordingly, each year, I conduct an online survey before the semester starts to ask the students their learning style, among other things. The students appreciate my asking and it reminds me to use different teaching methods. According to the VARK site, teachers and students often have different styles and we tend to teach in the way that we like to learn. Teaching online will highlight the need to plan for the different learning styles as we compete with the distractions from home.
It’s also important to understand the difference between active and passive learning. In active learning, the student learns by doing. Students learn passively when they listen to lectures or read textbooks. Students engage in active learning when they are analyzing, defining, creating, and evaluating information. Students learn using both modalities, but as educators, we want them to retain the information. This learning pyramid provides a helpful illustration.
My university provided us with the following statistics, which look at active learning from a slightly different perspective, but still gets to the same conclusion – teachers need to focus more on active learning. Apparently, people remember:
10% of what they read- passive learning
20% of what they hear- passive learning
30% of what they see- passive learning
50% of what they see and hear- passive learning
70% of what they say and write- active learning
90% of what they do- active learning
My experiences as a learner and teacher over the past few weeks leads me to believe that learning styles and active learning really do make a difference. For example, even though I had some of the world’s experts as panelists over the past few weeks in my compliance and corporate governance online course, I found during my scans of the Zoom squares that students who weren’t asking questions often look distracted after a period of time. The more they interacted with the panelists, the more engaged the class was as a whole. Having students use the chat feature increased engagement with the speakers as well (just make sure to disable private chat). But even during the most interesting discussions, some students tended to drift away and were clearly doing other things online. On the other hand, when I did sessions with the same students using breakout groups or requiring them to act as board members in a mock meeting, their engagement level appeared higher, even though they always commented favorably on the guest speakers.
Similarly, when I’ve watched webinars or taken certification courses, I found that if I didn’t see a person’s face during a video at least part of the time, then I needed a more engaging presentation style and slides with embedded videos of people doing something. If I didn’t have activities to do to test my understanding or put in practice what I had learned, I quickly lost interest. Reading too much made my eyes glaze over, especially after a day of teaching and holding student meetings on Zoom. Zoom fatigue is real and we need to take that into account when designing our courses. Remember, we may be on Zoom for a few hours a day but our students will be on Zoom for many more hours with different professors using different teaching styles. If we thought they were exhausted after a day of face-to-face class, imagine how they will feel after a day on Zoom learning complex topics from teachers with varying degrees of online proficiency.
With that in mind, here are some things we should consider over the next few weeks:
- How do we break our modules down to chunks of learning activities? How do we tie those learning activities to our stated learning objectives? Even though it may seem like we’re dumbing it down, should we say “Read/Watch This Before Class” “Do This In Class” “Do This After Class” each week in the modules? I’ve learned that you can never make it too simple for students.
- How do we ensure that we have activities where students discover, discuss, and then do/demonstrate?
- Are we mixing things up in our synchronous class every 15-20 minutes with polls, breakout groups, or some other non-lecture activity?
- Are we using the tools that work in a synchronous, asynchronous, and combination environment such as team-based learning, peer review, retrieval practice, and asynchronous videos?
I use team-based learning by having students work in law firms throughout the semester on graded and ungraded assignments and then requiring them to evaluate themselves and each other on specific criteria. More formally, team-based learning can involve more complex features such as readiness assuredness testing, which I don’t do, so I can’t comment on the effectiveness. The Team-Based Learning Collaborative and InteDashboard both come highly recommended.
I have used peer review occasionally in live classes and on discussion boards for my transactional drafting course, but I plan to use it even more in the Fall, likely using Google docs. I’ve found that my students’ work product improves significantly after they’ve marked up someone else’s draft, and this corresponds with the learning pyramid assertion that students remember 75% of what they do and 90% of what they teach others. Other professors I know have used Peerceptiv, Eli Review, and other tools. I’ve watched demos and think they’re great, but I’m trying to keep things simple for myself this Fall.
Finally, I’ve found that polls and no-stakes quizzes are highly effective for keeping students engaged during class, especially in courses like Business Associations. I’ve used polls and test your understanding quizzes through Echo 360 in both synchronous and asynchronous class sessions. Requiring short answers in the Echo 360 quizzes ensures that the students aren’t just guessing. Using multiple choice questions shows me how many students are answering correctly and gives me an idea of where the knowledge gaps are. I also have a record by student of the number of questions they have answered correctly. The quizzes, which only count for class participation, also provide formative assessment, which the students really need in an online environment.
Students also really like polls. It wakes them up and gives me an idea of what they actually understand or think about the material. During class, I’ve tended to use Zoom polls or Echo 360, but in the Fall, I will use a variety of tools including Kahoot for polling and creating instant word clouds, Poll Everywhere, which has more features than Kahoot, and Mentimeter, which offers greater functionality than Zoom. Poll Everywhere has put together a chart comparing it to its competitors but the best way to determine what works for your teaching style and objectives is to test drive them yourself. I’ve been on webinars where presenters have used all four tools, and I liked them all. I will probably use them all during the semester, but no more than two different mechanisms during a synchronous class session. According to our instructional designers, students respond well when professors use one or more polling feature in a class session. Some of the tools require students to use their cell phones to participate and you may have concerns about that, but let’s face it, they may be on their phones anyway, especially if you don’t require them to keep cameras on, as I do.
I’ve now flooded you with information. Next week, the flooding continues. I’ll continue talking about student engagement focusing on evidence-based theories in learning and the do’s and don’ts of breakout rooms. If you have any suggestions or experiences with any of these tools, please leave your comment below.
Thursday, July 2, 2020
The states and XY Planning have failed in their bid to stop Regulation Best Interest. The Second Circuit found that the SEC had discretionary authority to enact a regulation short of a uniform fiduciary standard. It also found that the states lacked standing to sue because their theory that their tax revenue would decline was "speculative."
With Reg BI going into effect, states must decide whether to simply pass their own statutes and rules. As it stands, Nevada remains the nation's only state to have a state fiduciary statute. Other states, notably New Jersey and Massachusetts have pursued administrative rule making approaches. The next fight will likely be about the scope of state authority to regulate securities sales practices.
Industry lawyers will likely do all they can to forestall the promulgation of state regulation or, if that fails, seek to have it struck down as somehow preempted by federal law. Some academic work has begun to explore this issue. Columbia Law's Yerv Melkonyan has a forthcoming Note exploring the topic (it was also featured on Andrew Jennings's podcast here). In a symposium piece, I took a close look at one preemption argument industry representatives made in comment letters sent to state regulators here. If states do move forward on their own, I expect courts will ultimately have to sort out the scope of state power.
Wednesday, July 1, 2020
Yesterday, the Bank for International Settlements (BIS), whose ownership consists of 62 central banks, released its Annual Economic Report (here). It’s a treasure trove of information for banking and financial market regulation types (like me!) and includes a plethora of informative data and graphs. It’s divided into three main parts: 1) A global sudden stop, 2) A monetary lifeline: central banks’ crisis response, and 3) Central banks and payments in the digital era. Definitely well worth reading!
Tuesday, June 30, 2020
As many of you may know, I enjoy reading and writing about leadership. I am proud of the work that our law school has been doing for a number of years in highlighting the value of lawyers as leaders--through teaching, scholarship, and service--under the auspices of our Institute for Professional Leadership. I am privileged to have the opportunity to serve as Interim Director of that program effective as of August 1. I am grateful for the support of our incoming Interim Dean, Doug Blaze, and so many of my colleagues as I assume this new responsibility.
Among the service elements of the Institute is its weblog, Leading as Lawyers. Last year, I began writing occasional posts for the blog--first on Leading Without a Title and next on The Role of Process in Leadership. (I mentioned and linked to the latter in this BLPB post last summer.) I have continued my leadership blog post writing this spring, and the first of my spring posts, There is No Place for Schadenfreude in Leadership, was published late last week. Although my Leading as Lawyers posts may well have value for business lawyers and business law instructors, they are not specifically written with our BLPB audience in mind. Nevertheless, I will endeavor to bring them to your attention from time to time.
Given that my interest in leadership will happily soon become a more formal part of my job, I hope that many of you will bring to my attention things that you read or see or hear that relate to, e.g., teaching leadership to law students, lawyers and law professors leading through their work and in their communities, and law students assuming leadership roles. The Institute focuses on all of these things. I look forward to continuing this work in my new role.
I will end by offering two lines from my recent schadenfreude post as food for thought:
Leadership is, of course, about looking out for and lifting up those on your team—not just yourself, and especially not yourself at the expense of others. While individualism, diversity, independence, and self-pride are important aspects of a functional team, each team member must use these attributes for the collective good of the whole—not selfishly or with ego or malice.
Especially in the challenging environment in which we business lawyers now practice and teach, maintaining a positive, inclusive, collaborative, empowering workplace would seem to be critically important. It not only can help mitigate schadenfreude, but also can help lay a foundation of trust that enables projects, programs, organizations, and institutions to survive and progress in a dynamic social, economic, and political setting.
Monday, June 29, 2020
From In re Dell Techs. Inc. Class V Stockholders Litig., No. CV 2018-0816-JTL, 2020 WL 3096748, at *20–30 (Del. Ch. June 11, 2020) [Hat tip to Steve Bainbridge, who comments here.]:
Coercion is a multi-faceted concept in Delaware law. At least five strands of case law use the term ….
The first strand of coercion jurisprudence does not involve the conduct of fiduciaries. It rather addresses the ability of a non-fiduciary to offer a reward or impose a penalty as a means of inducing action in an arm’s-length setting. The seminal case is Katz v. Oak Industries, Inc., 508 A.2d 873 (Del. Ch. 1986)….
A second strand of jurisprudence involves a third party taking action that a fiduciary (typically the board of directors) believes could have a coercive effect on the fiduciary’s beneficiaries (typically stockholders). In that setting, the fiduciary has both the power and an affirmative duty to defend its beneficiaries from the coercive threat. See Unocal, 493 A.2d at 954….
A third strand of coercion jurisprudence examines whether a fiduciary has taken action to coerce its own beneficiaries. By doing so, the fiduciary acts disloyally and violates the standard of conduct expected of fiduciaries. The fiduciary may only avoid a finding of breach by proving that the transaction was nevertheless entirely fair, notwithstanding the fiduciary’s use of coercion. The seminal case in this line of authority is AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103 (Del. Ch. 1986)….
A fourth strand of coercion jurisprudence has developed in response to the powerful cleansing effect of stockholder votes under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015). Two decisions—Saba Software and Liberty Broadband—have held that forms of coercion that would not have supported claims for breach of duty were nevertheless sufficient to prevent stockholder votes from having a cleansing effect and changing the standard of review to the irrebuttable business judgment rule….
A final strand of coercion jurisprudence shifts the focus from the stockholder vote to the special committee. As with the stockholder vote, a controller’s explicit or implicit threats can prevent a committee from fulfilling its function and having a concomitant effect on the standard of review. The leading case … is Lynch I, where Lynch’s controller (Alcatel) offered to acquire Lynch at $14 per share. Lynch I, 638 A.2d at 1113….
Back in March, Richard Epstein published a new book, "The Dubious Morality of Administrative Law." Today, a review of that book by Michael S. Greve was published in Law & Liberty (here). The following excerpt from the review may be of interests to BLPB readers:
The book title, of course, invokes Lon L. Fuller’s famous account of The Morality of Law—in here-relevant part, an explication of the minimum conditions a legal system must satisfy, at least most of the time, to be called “legal” in a moral or rule-of-law sense.... Lon Fuller, Professor Epstein argues, omitted crucial rule-of-law conditions, especially the need for an impartial judge. At variance with Fuller, moreover, and on a Hayekian note, Professor Epstein argues that formal rule of law constraints work best in the context of a classical-liberal regime that rests on property rights, freedom of contract, and protection against uncompensated takings. Once those substantive commitments go by the boards, procedural rule-of-law requirements are bound to give way as well and, for that matter, may not be worth very much.... The APA says that the “administrative process” is an adequate substitute for regular legal procedures in an independent court and that it will have to do no matter what or how much is at stake for regulated parties. It so enshrines the very premises that Professor Epstein resists and contests.
Saturday, June 27, 2020
The Department of Labor has been a busy bee.
First, it approved the use of private equity investments in 401(k) plans. The idea would be that workers would be able to invest in funds that invest in private equity funds; apparently, some funds are already on offer, and they also hold a small amount of publicly traded stock to satisfy liquidity concerns. Jay Clayton at the SEC endorsed the move, saying it would “provide our long-term Main Street investors with a choice of professionally managed funds that more closely match the diversified public and private market asset allocation strategies pursued by many well-managed pension funds as well as the benefit of selection and monitoring by ERISA fiduciaries.”
Second, the DOL proposed new rules to discourage the use of ESG investing with respect to ERISA-regulated retirement plans (and because many state pension funds are not covered by ERISA but follow its lead, the rules could extend much further). The proposed rules are not exactly a surprise; they follow guidance that the Trump Administration put out in 2018, and which I blogged about at the time. And – as I also blogged– in 2019, the Administration warned the DOL was continuing to examine the issue with a view to more action on this front.
So what are the implications?
First, though the private equity rules are championed by those who argue they will allow retail investors access to higher profits, it’s ironic that they come just when a new study shows that private equity investments are no more profitable than public markets, and almost concurrently with a new SEC warning of pervasive conflicts in the private equity industry that lead to hidden fees and unequal allocation of investment opportunities. Institutional investors in private equity funds have long complained to the SEC of the lack disclosure of these matters, and rather than respond to that, we’re apparently … going to open the 401(k) spigot. That, I think, will make private equity managers less accountable to investors and the public (why bargain with a union pension fund when you’re getting billions from a bunch of different funds layered through so many intermediaries that no one’s able to monitor things?) and more opaque.
Second, as I’ve talked about before, ESG can have a bunch of different meanings. Some use it as a stockpicking technique like any other, on the theory that socially responsible companies are valuable companies. Others use it for moral/impact reasons; they are willing to sacrifice at least some returns in order to adhere to their ethical commitments. When it comes to ERISA plans, the past several presidential administrations have all agreed that fiduciaries must only use ESG to advance the economic interests of plan beneficiaries; they are not permitted to use beneficiaries’ money to advance unrelated social goals. What’s been different over the years, however, is the standard of proof that fiduciaries must meet in order to incorporate ESG factors into their decisionmaking. The new rule imposes a very high standard, by explicitly directing that fiduciaries using ESG analysis “examine the level of diversification, degree of liquidity, and the potential risk-return in comparison with other available alternative investments that would play a similar role in their plans’ portfolios.” That requirement, unique to ESG, betrays a deep distrust of ESG investing, and will very likely dissuade at least some fiduciaries from engaging in ESG activity at all for fear of being unable to adequately justify their decisionmaking. And, critically, the rule does not merely apply to buying and selling securities; it also applies to other types of plan administration, including voting and engagement decisions. Which means, among other things, it targets union involvement with shareholder proposals.
It’s worth pointing out that the US’s approach here is precisely the opposite of the European approach, where the default assumption is that ESG factors should be considered as a part of prudent asset management. Recently, the SEC Investor as Owner Subcommittee recommended that the SEC “begin in earnest an effort to update the reporting requirements of Issuers to include material, decision-useful, ESG factors,” and part of the rationale was that the US risks letting other jurisdictions set the pace on these issues. The DOL’s proposed rule, I believe, will only accelerate the process of ceding leadership to the European Union.
Notably, in recent years, several commenters have pushed institutional investors to look beyond simple financial returns and consider to the overall welfare of their human beneficiaries when making investment decisions. David Webber has argued that pension funds should be able to allocate dollars in a way that benefits labor and unionization, Nathan Atkinson has argued that institutional investors should be mindful of the overall interests of their clients (as consumers, employees, etc), and former Chief Justice Strine has argued that institutional investors should concern themselves with the health and welfare of their human beneficiaries when casting proxy votes (the latter piece with Antonio Weiss). The proposed DOL rule would put the kibosh on that, at least for ERISA plans, explicitly mandating that plan fiduciaries evaluate “investments and investment courses of action based solely on pecuniary factors that have a material effect on the return and risk of an investment based on appropriate investment horizons and the plan’s articulated funding and investment objectives…”
The new rule also discourages including ESG funds in 401(k) plan menus. If the rule takes effect, ERISA fiduciaries would only be permitted to include such funds if they are chosen for their financial returns, with a special requirement that they document their reasoning. Those special recordkeeping requirements, of course, will make it difficult to include ESG funds in 401(k) plans at all. According to the DOL release, there aren’t many 401(k) plans that offer ESG investments now – maybe 9% of them do – but ESG funds are a growing segment of the market and there has been a lot of advocacy to expand 401(k) ESG offerings. This rule, if enacted, will likely dampen that effort. More broadly, it could discourage the development of any ESG funds, because these funds would be functionally unavailable both to 401(k) plans and to ERISA-covered pension plans. Notably, the rule has a capacious definition of ESG – it encompasses any fund that includes “one or more environmental, social, and corporate governance-oriented assessments or judgments in their investment mandates … or that include these parameters in the fund name” – so the rule’s knock-on effect may be to dissuade mutual funds from considering these factors at all (or at least mentioning them in their prospectuses). Which is significant, given that Larry Fink has said that he plans to “mak[e] sustainability integral to portfolio construction” in BlackRock funds.
The DOL rules, then, are of a piece with new SEC proposals to limit shareholder use of 14a-8 and expand retail access to private offerings. The rules, collectively, favor minimizing corporate accountability to investors and the general public in favor of opacity and unfettered management discretion. And the Administration seems to be encouraging short-term business models – private equity – over the long-term risk mitigation strategy of ESG, which is odd, because as I previously blogged, the Administration, like a lot of Delaware caselaw, has explicitly stated that the purpose of the corporation is to maximize long-term shareholder welfare.
(That said, it appears the Chamber of Commerce objects to the ESG proposal, on the ground that the recordkeeping requirements may prove a tempting target for plaintiffs raising fiduciary duty claims, and with that kind of opposition, we may see some changes before a formal enactment.)
Stepping back, it should be obvious none of this has anything to do with investor choice. The true tell is the rule regarding ESG fund inclusion in 401(k) plans. As I said the first time I blogged about this issue:
It’s all well and good to require that ERISA fiduciaries act solely in the economic interests of beneficiaries, on the assumption that this is what beneficiaries would likely want, and on the assumption that wealth maximization functions as “least common denominator” for beneficiaries’ otherwise conflicting interests.
But this reductionistic approach to defining beneficiary interests, adopted for the purpose of making them more manageable, should not stifle opportunities to accommodate the actual preferences of beneficiaries, especially when it is feasible to allow beneficiaries to sort themselves – like, say, when ESG-focused funds can be made available to those beneficiaries who are willing to sacrifice some degree of financial return to advance social goals. Providing these opportunities to beneficiaries who choose them inflicts no damage on the interests of beneficiaries solely interested in financial return, and, in fact, the principle that investors should be able to control their own retirement planning is (supposedly) the reason these types of ERISA platforms are offered in the first place.
The new guidance, then, seems less about protecting beneficiaries from politically-motivated fiduciaries than it is about forcing beneficiaries to participate in the political goals of the Trump administration, namely, minimizing shareholder participation in corporate governance, particularly when those shareholders advance (what are usually) liberal policy priorities.
To be sure, we don’t have a whole lot of funds that openly advertise their plan to sacrifice returns in favor of social goals; it’s a real issue that funds billing themselves as “ESG-focused” are not clear about their strategies, and that’s something the SEC is legit investigating. But assuming we can get full disclosure, and there is a demand for such funds, the DOL is dictating the choices of millions of investors, many of whom will have no other exposure to the market.
Which brings me to my main point, which is, all of these proposed changes simply highlight that it is inaccurate to the point of absurdity to describe the American corporate governance system as “private law.” State choices dictate the build of the business form, its accessibility to the public, the structure of investors themselves, and their preferences when allocating capital. That’s the thesis of my latest Essay, Beyond Internal and External, which argues that corporate governance is subject to pervasive regulation in a manner that directly effectuates public policy. If we’re going to have the state make these kinds of choices, we should at least own them, rather than cloak them in the language of “private ordering.”
Friday, June 26, 2020
Last week, I wrote the first in a series of posts with tips for teaching online. I expect many more law schools to join Harvard and now UC Berkeley by doing all Fall classes online. I’m already teaching online this summer and will teach online in the fall. Our students deserve the best, so I’m spending my summer on webinars from my home institution and others learning best practices in course design.
Here are some tips that I learned this week from our distance learning experts. First, I need to adopt backward design. I have to identify the learning objectives for my courses, then decide how I will assess whether or not students successfully met the learning objective. Effective learning objectives are active, measurable, and focus on different levels of learning (e.g., remembering, understanding, applying, analyzing, evaluating, creating). Some people find Bloom's Taxonomy of Educational Objectives helpful.
Once I figure out my learning objectives, I will work backwards to determine what kinds of activities the students will work on either online or face to face (which for me will be Zoom). For more on this topic, see this guide to backward design from Vanderbilt University Center for Teaching. By the way, if you’re wondering why I’m not just saying click here, it’s because descriptive text is better for accessibility.
Then I will figure out the technology, which is important, but shouldn’t drive how or what I teach. Although we think our students are tech savvy, we still need to keep it simple and intuitive. We have to think about how to engage the students and facilitate learning without taking up too much bandwidth.
Finally, I need to ask myself some hard questions.
What do you want students to know when they have finished taking your blended course? What are the intended learning outcomes of the course?
- This actually takes some thought. We all have our mandated ABA learning objectives but what do they really mean, especially in today’s environment? How do I make sure that the learning objectives are pedagogically sound? What do students need to learn to be practical, strategic lawyers? What kinds of people, process, and tech skills do they need for the “new normal” when it comes to delivery of legal services? Yes, I want my students to know how to communicate more effectively to clients, counsel, and judges in my legal writing course. I want my students to know how to draft, edit, and negotiate contracts in my upper level skills courses. I want my compliance students to understand the law and the soft skills. But what other skills matter now? How will I communicate those over Zoom?
As you think about these outcomes, which would be better achieved in the online environment and which would be best achieved face-to-face in class?
- How much harder will it be to teach people skills and impart complex concepts online? I don’t have the option for face-to-face classes in the Fall and many of you won’t either, sorry to say. In the Fall, I will have one online asynchronous course and another hybrid. It will be all online but I will record some lectures and use the synchronous time for simulations, peer review, and discussions. I’m trying to determine how to make the synchronous time as engaging as possible – even more engaging than I would if I was standing in front of the room. I will have to compete with barking dogs, the comforts of a couch, and other electronic distractions that I would not have in an in-person environment. I’ll post more about keeping students engaged online in a subsequent post.
Blended teaching is not just a matter of transferring a portion of your existing course to the online environment. What types of learning activities do you think you will be using for the online portion of your course? For the face-to-face part of the course?
- Each week, I plan to use discussion boards and no-stakes short quizzes to ensure understanding for the asynchronous portions of my courses. My pre-recorded videos will be no longer than fifteen minutes, and ideally seven minutes or less. As stated above, for the synchronous Zoom sessions, I will use polls, breakout rooms, and panels of students. Because I will have a flipped classroom, the students will have learned the concepts so that we can apply them in class. As for class discussions, I have found that I sometimes have a more intimate connection with students in a class of fewer than 25 on Zoom than I did in the classroom, but large classes are much tougher. Professors appear to have mixed views on using the Socratic method on Zoom. Since my face-to-face classes are on Zoom, I require cameras on so that I can see their faces, unless they have permission in advance from me or temporary bandwidth issues.
Blended courses provide new opportunities for asynchronous online discussions. How will you use asynchronous discussions as part of the course learning activities? What challenges do you anticipate in using online discussions? How would you address these?
- I have used pre-class discussion boards and have required students to reply on two other submissions. These count for class participation so students can’t just write “great comment.” I have also experimented with post-class discussion board submissions. They key is to follow up and comment myself so that students don’t feel like they’re in a black hole. I also plan to have one or two students per week post a current event to the discussion board that relates to what we are doing in class. During class time, I will ask another student to discuss or summarize the current event.
How will the face-to-face, online and other “out of class” learning activities be integrated into a single course? In other words, how will all the course activities feed back into and support the other? How will you make the connections between the activities explicit to students?
- This will be tough and this is why I will spend weeks this summer planning. I need to make it clear what the students need to read, watch, and do pre-class, in-class, and post-class. Teaching online takes much more pre-work than most people realize. But this planning is critical to ensuring that the students have a seamless course experience.
When working online, students frequently have problems scheduling their work and managing their time. What do you plan to do to help your students address these issues and understand their own role and responsibility for learning in the course?
- Students really need structure, and even though they don’t like to admit it, they prefer it. Online learning means that students must have more discipline than they are used to. I plan to recommend a workload course estimator so that students can plan appropriately. I will also have to cut back on the work I give because economic and health issues will continue to plague my students during the pandemic. Our university and others have rolled out tools for students to manage their time, and more important, manage their stress. I also plan to do frequent check-ins and increase office hours.
Students can have challenges with using new instructional technologies to support their learning. What specific technologies will you use for the online and face-to-face portions of your course? What proactive steps can you take to assist students to become familiar with your course website and those instructional technologies? If students need help with technology later in the course, how will you provide support?
- As I mentioned in the last post, it’s best for all professors to use the same platforms for the learning management system. You can add bells and whistles for team communication or polling later. As for helping students get familiar with the website, our university has instructional designers and lots of webinars, but I plan to test drive my eventual set up with my research assistants over the summer and ask them to be brutally honest. Fortunately, we have several online resources for students as well.
There is a tendency for faculty to require students to do more work in a blended course than they normally would complete in a traditional face-to-face course. What are you going to do to ensure that you have not created a course and one-half? How will you evaluate the student workload (and your own) as compared to a traditional class?
- This is my biggest concern. I spend many more hours prepping my online courses than my traditional courses, and I haven’t even been doing anything particularly sophisticated. Now that I’m learning more tools and techniques, I anticipate that I will be spending more time prepping. In my zeal to make sure the students have a great experience and learn as much or more than in the traditional classroom, I will likely give them more work as well, if I’m not careful. The key is to use the findings from learning science to find a balance.
In my next post, I’ll talk about what I’m learning about how students learn. In case you can’t wait to see what I write, check out Learning How to Learn, Small Teaching Online, and Online Learning and the Future of Legal Education. If you have suggestions or comments, please leave them below so we can all learn from each other.
 Our instructional designers attributed these questions to the University of Wisconsin, Milwaukee.
Thursday, June 25, 2020
The CFPB recently proposed a whistleblower bounty program to enhance its enforcement efforts. Last week, Senator Cortez Masto introduced legislation to make it a reality. Although the Bill's text is not yet available, the press release explains its scope:
Specifically, the Financial Compensation for CFPB Whistleblowers Act would allow the Consumer Financial Protection Bureau to reward whistleblowers from the Civil Penalty Fund for between 10 – 30% of settlement awards. In cases involving monetary penalties of less than $1 million, the CFPB would be able to award any single whistleblower 10% of the amount collected or $50,000, whichever is greater. The proposal allows for a whistleblower to retain independent counsel, does not require the whistleblower to enter a contract with the Consumer Bureau and protects a whistleblower’s identity.
Interestingly, CFPB's proposed text does not include any reference to an anti-retaliation cause of action. If we really want whistleblowers to come forward, it may make sense to offer more than just a carrot. Employees may also need real protection from an employer's stick. Other existing and proposed whistleblower bounty statutes also include anti-retaliation provisions and causes of action for whistleblowers. Enhancing a cause of action here might cause trim away some risk and help employees find the courage to make a report to the CFPB.
Update: Thanks to Jason Zuckerman for pointing out that unlike the Dodd-Frank provision for the SEC which created a bounty and and anti-retaliation provision at the same time, the CFPB already has an anti-retaliation provision. It seems to resemble the Sarbanes-Oxley cause of action and require an initial report through the department of labor. My view is that it would probably be best to just allow whistleblowers alleging retaliation to go directly to court.
Wednesday, June 24, 2020
Tomorrow (6/25/20) at 9am EST, Colin Mayer (Oxford) will debate Lucian Bebchuk (Harvard) on the topic of stakeholder v. shareholder capitalism.
Oxford is streaming the debate for free here.
The Emory Corporate Governance and Accountability Review (ECGAR) is currently accepting submissions to be considered for publication in our next volume (8). Submissions are accepted and reviewed on a rolling basis until the end of September. ECGAR is a publication that welcomes articles and submissions that touch on corporate governance.
The full details of this call for submissions can be found here: Download ECGAR Call for Submissions .
Monday, June 22, 2020
Thanks to all of our readers who were able to come to the National Business Law Scholars Conference (NBLSC) last Thursday and Friday. It was lovely to see so many of you there, even though it was somewhat sad that we could not be with each other in person. The conference enjoyed record participation, and we have received a lot of useful informal feedback about our virtual format from folks who attended.
I was the beneficiary of many "teaching moments" in hosting and participating in the NBLSC this year. I later will post on some of the outtakes from the NBLSC teaching panel (to which co-blogger Marcia Narine Weldon--who blogged about teaching on Friday--contributed meaningfully). Today, however, I am focusing my post today on a few new things my fellow UT Law conference hosts and I learned about Zoom in the process of hosting the conference. A list follows.
- Although meeting participants should mute themselves on entering a meeting, it is best for a meeting host to set up the meeting so that all participants will be muted on entry, especially for large meetings. It can be challenging to track down and mute participants who join a meeting and bring background noise or conversations into a meeting that is already in progress.
- If you have set up a Zoom meeting with yourself as the host and you hand off the hosting to another meeting participant during the meeting, you may leave the meeting without ending the meeting for all. However, you cannot then initiate a second meeting as host until the first meeting has concluded. You cannot, in other words, host two concurrent meetings, even if you handed off hosting in the first meeting to someone else. See here. (Fix? Set up someone else as an alternative host of the first meeting. Also have that alternative host start the first meeting as host. Join the first meeting as a participant. Sign off any time and initiate the second meeting.)
- If you are hosting a meeting, consider assigning someone as a co-host so that, if your Internet connection fails, the meeting continues to proceed with the co-host as host until you can re-join. This was particularly welcome to me, since my power went out three separate times on Friday afternoon during conference sessions I was hosting.
- Have a telephone or data-enabled smart pad handy as a back-up connection device if you are hosting or participating in a Zoom meeting on a computer using the Zoom client. Although data rates may apply, you can easily reconnect using the Zoom app on your phone or smart pad if you lose your Internet connection. (This is how I reconnected those three times on Friday.)
- If the meeting host allows all participants to share screens at the outset of the meeting, if a presenter who is sharing slides drops out of the meeting because of, e.g., Internet hiccups, the presenter can immediately re-share the slides after re-joining the meeting (without having to be named as a host or co-host). A meeting host would not want to allow all participants to share screens, however, unless the participants are trusted.
- A host can kick a participant out of a meeting, but that participant can re-enter the meeting room unless the "Allow removed participants to rejoin" feature is disabled.
- A meeting host can report an aberrant user to Zoom if that feature ("Report participants to Zoom") is enabled in the host's settings.
- Some meeting participants like to communicate with other meeting participants privately through the chat feature of Zoom. See here. It approximates sitting next to (or close to) others in a physical room. If you want to allow this kind of background chatter, enable "Allow meeting participants to send a private 1:1 message to another participant" in your profile settings on Zoom.
- Although I did not use them for the NBLSC, meeting hosts should consider the desirability of using waiting rooms, password requirements, meeting locks and other security features, and breakout rooms to manage participants.
I am sure there is more I could say, but these were the main things I learned that were not necessarily things I had picked up in establishing and engaging Zoom meetings for classroom activities. While some of the above-listed items may be of limited utility in using Zoom to teach online (as opposed to using Zoom to host a two-day, 31-meeting conference), if you substitute "class" for "meeting" in the listed items, you can get a sense of how some of them may apply to class activities in general or in specific circumstances, too. In any event, i have come to the understanding that we all can benefit from knowing as much as possible about the technologies were are using as we continue to navigate the virtual conference and online teaching waters as business law professors.
Sunday, June 21, 2020
On p. 17 of Rules for Principles and Principles for Rules: Tools for Crafting Sound Financial Regulation (here), Heath P. Tarbert, the Chairman and Chief Executive of the Commodity Futures Trading Commission, provides a useful table that he notes “is intended to be a helpful reference point for regulators confronted with finding the appropriate balance between principles and rules.” I found myself thinking of how helpful a table like this – and the article in general – would have been when I was teaching courses focused on the regulation of financial markets!
I highly recommend this very readable work to BLPB readers, especially to those teaching in the area of regulation. In fact, I’d likely make this article assigned reading if I were teaching a course on financial regulation this fall. It does an excellent job of providing an overview of the strengths and weaknesses of principles-based versus rules-based approaches to regulation and discussing hybrid possibilities. It also examines four categories of factors that suggest taking one approach over the other (summarized in the p.17 table), and applies these factors to several areas (automated trading, position limits, cross-border regulations, and digital assets).
Saturday, June 20, 2020
I drafted this post before, well, the SEC got dragged into the middle of an SDNY meltdown and that’s obviously way more interesting than what I was going to say, but I have this whole post already here so... here goes.
One of the big business news stories of the past week has been Hertz and its failed stock offering. (N.B.: Well, it seemed like a big deal when this post was originally drafted)
During the pandemic, stock markets have gyrated wildly, apparently driven in part by retail traders who, left without the opportunity to bet on sports, have turned to trading as an alternative form of gambling. They’re apparently encouraged by free trading apps and especially Robinhood, which – unlike other platforms which treat trading as srs bzns– gameifies the experience. As one trader put it, “With sports, if I throw $1,000 at something, I lose the whole thing real quick, but here if things go south you can cut your losses.”
That particular theory was sort of tested when it came to Hertz, which is in bankruptcy. Despite that fact, its stock started to climb, in what has been described as the equivalent of a Jackass sketch. Everyone understood there was almost no chance of the company actually generating value for shareholders, but the coordinated attention acted as something of a combination dare, Ponzi scheme, market manipulation, and performance art.
Hertz tried to take advantage of it all by selling new stock, figuring hey, this might be an easy way to pay off its creditors, and that all by itself seems to have burst the bubble; traders weren’t expecting anyone to take them seriously. But the plan was scotched when the SEC raised questions about the sufficiency of Hertz’s prospectus disclosures.
We are in the process of a reorganization under chapter 11 of title 11, or Chapter 11, of the United States Code, or Bankruptcy Code, which has caused and may continue to cause our common stock to decrease in value, or may render our common stock worthless.
And also here:
The price of our common stock has been volatile following the commencement of the Chapter 11 Cases and may decrease in value or become worthless. Accordingly, any trading in our common stock during the pendency of our Chapter 11 Cases is highly speculative and poses substantial risks to purchasers of our common stock. As discussed below, recoveries in the Chapter 11 Cases for holders of common stock, if any, will depend upon our ability to negotiate and confirm a plan, the terms of such plan, the recovery of our business from the COVID-19 pandemic, if any, and the value of our assets. Although we cannot predict how our common stock will be treated under a plan, we expect that common stock holders would not receive a recovery through any plan unless the holders of more senior claims and interests, such as secured and unsecured indebtedness (which is currently trading at a significant discount), are paid in full, which would require a significant and rapid and currently unanticipated improvement in business conditions to pre-COVID-19 or close to pre-COVID-19 levels. We also expect our stockholders’ equity to decrease as we use cash on hand to support our operations in bankruptcy. Consequently, there is a significant risk that the holders of our common stock will receive no recovery under the Chapter 11 Cases and that our common stock will be worthless.
Note how these disclosures were reported in the media:
This does not, in short, seem like a disclosure problem at all. And that means there’s a lot to think about.
First, there have been a lot of comparisons to the dot com bubble, and I agree, but in a very specific way. The internet bubble featured anonymous commenters who’d engage in pump-and-dumps – recommend a stock, watch everyone pile in, and sell out – but it wasn’t necessarily the case that anyone was fooled. People used the comments as a coordinating mechanism – which stock they’d all buy now – and play musical chairs to see who could make money and cash out before the crash. That’s how Donald Langevoort viewed the SEC’s case against Jonathan Lebed, anyway, and it definitely is an element of what’s happening here. (See this article about a website devoted to tracking Robinhood trades). So all that raises the question of how much transparency markets can really bear. (Cf. Matt Levine, writing about a different kind of transparency, in Too Much Information Can Be Bad)
Beyond that, the SEC’s interference betrays a rather surprising lack of faith both in market efficiency and investor autonomy, and thereby illustrates the SEC’s Janus-faced (heh) approach to investor protection. Recently, the SEC has been fairly aggressive in its insistence that disclosure is a cure-all, that markets are efficient and no one needs to be told anything twice, and that retail investors should have more access to private capital. At the same time, the SEC has resisted and denigrated the demands of actual investors regarding the types of information they need to make intelligent decisions. And now, apparently, the SEC is willing to step in to save Hertz investors from themselves – even when they act with full disclosure on a widely traded, exchange-listed (for now), stock. It seems the SEC has complete faith in efficient markets and investor wisdom, except when it doesn’t.
Another aspect of this story has to do with market efficiency in – as William Fisher once put it – “a time of madness.” As I said, it wasn’t just Hertz; there have been reports of retail traders playing stocks like a roulette wheel and even manipulating prices for the lulz. There have also been several securities fraud lawsuits filed since the lockdowns, particularly ones pertaining to the coronavirus. These are fraud-on-the-market cases, and they depend at least on market informational efficiency, if not fundamental value efficiency, which implies some amount of rationality. Will the evident irrationality of markets at this time affect the plaintiffs’ ability to certify a class?
It’s not an entirely crazy question; there is some precedent for courts treating market irrationality as evidence of inefficiency. See In re Initial Public Offering Securities Litigation, 260 F.R.D. 81 (S.D.N.Y. 2009) (“there is insufficient evidence of efficiency to permit the use of the Basic presumption with respect to trading during the quiet periods. To the contrary, the evidence indicates that the quiet periods were marked by chaotic pricing, irrational purchases, and market inefficiencies. [Plaintiffs’] own evidence demonstrates that the markets for the focus case shares were inefficient during the first weeks of trading. A purchaser of these securities during the relevant quiet period could not reasonably rely on the market price to reflect the market’s judgment of the security’s value. Therefore, the Basic presumptions cannot apply to these periods.”)
That said, the Supreme Court’s Halliburton v. Erica P. John Fund, 573 US 258 (2014), may have established a more forgiving standard for evaluating market efficiency, so we shall see.
But my final observation is this: All of this is kind of hilarious until you read these kinds of stories, where some 20-year-old Robinhood trader may have killed himself because he – mistakenly – believed he’d lost $700K. Additionally, the Twitterati is ablaze with anecdotal reports of teens and even pre-teens trading stocks in Robinhood, treating it as an alternative to Fortnite – and I can’t wait to see what happens if those kids are trading on margin. Now, Robinhood purports to require that accountholders be at least 18, so we have a bunch of questions: (1) are there really a bunch of children trading, or are those isolated examples no matter what Twitter says?; (2) are parents are intentionally giving their kids access to brokerage accounts, or are children just lying their way in?; and (3) just how robust are Robinhood’s age and suitability checks? Robinhood has now promised to improve its interface regarding options trading, to consider “additional criteria and education for customers seeking level 3 options,” and to, umm, make a “$250,000 donation to the American Foundation for Suicide Prevention.” So, yay?
Friday, June 19, 2020
If you're like me, you're wondering how you can improve your teaching after last Spring's foray into online learning. I wasn't nearly as traumatized as many of my colleagues because I had already taught Transactional Drafting online asynchronously for several semesters. This summer, I'm teaching two courses -- Transactional Drafting asynchronously and a hybrid course on Regulatory Compliance, Corporate Governance, and Sustainability. I'm making a list of tips based on my experience and will post about that in the future. In the meantime, I've started to think about how I can improve next semester when I will be teaching all of my courses online. Since I know that so many students had a mediocre to poor experience with emergency online teaching, I've spent a lot of time on webinars learning how to do better. This will be the first in a series of posts on what I'm learning on course design, learning styles, and best practices. But let's start with the basic questions to ask yourself as you're preparing for next semester.
First, think about whether you want to teach synchronously or not. If you're looking for maximum flexibility for both you and the students, then asynchronous teaching makes sense. If you're teaching solely asynchronously, then you need to consider how to make your videos and content as engaging as possible. You also have to do something to build community within the class and a rapport between you and the student. If you're thinking of doing a hybrid, perhaps using a flipped classroom, recognize that it will take longer to prepare than you would think. For my summer compliance course, I record videos on substantive legal issues, monitor discussion on the class discussion board, prepare questions for students to answer prior to class using Echo 360, and then review those answers all prior to teaching the 2-credit course live on Zoom. This requires substantially more time than normal class prep, but it's well worth it because we can use class time to do simulations or interact with guest speakers from all over the world. More about these issues will come in a future post.
Second, learn everything you can about the platforms you will use next semester so that you can master all of the features that will make your class more engaging. Even if your institution does not require you to use one platform, try to come to some consensus anyway. Students do not want to learn three different systems so do what you can to make sure that the platforms are uniform and intuitive for them. Then think of whether all of the tools you're already using can integrate with that platform. Our university is using Blackboard, Echo 360, and Zoom. The students will have one place for logon and access everything from there. Next, think about whether you want to have students use discussion boards to interact or maybe develop Slack or Microsoft Teams instead. Since many students are uncomfortable speaking in class on video, we will have to work harder to foster classroom discussion. Teams and Slack channels can help, and many students will already use them for internships or business purposes. The more intentional you are, the better an experience your students will have, even if it takes some time to determine what works for you. If you have a research assistant or student you can contact, find out which tools did and didn't work from their Spring experience. See if your university will survey students for feedback on online learning,
Third, think about whether you have the right equipment. Do you need a separate headset, webcam, or microphone? I actually don't use any of those even though I have a separate microphone. How stable is your internet? Think about whether you might need an upgraded modem or even your own mesh network. One thing I absolutely recommend is a ring light. There are hundreds of YouTube videos on how to light yourself properly using your household lamps. But, I've found that having a separate ring light makes my videos brighter and more professional looking.
Finally, while you're designing your course, make sure you're thinking of the Americans with Disabilities Act. At UM, we've been told to do the following for presentations:
- provide wording for links and avoid using “click here” for the links;
- use sans serif fonts for easy readability;
- use dark font colors on light backgrounds;
- avoid extremely bright colors as a background color;
- use one font throughout the site;
- avoid overuse of all CAPS, bold or italics;
- avoid underlining words, as the screen reader can mistake it for a navigation link;
- make sure that images are clear and optimized for efficient loading;
- limit the use of animated and blinking images text, or cursors because they can cause seizures for some people;
- make sure that audio file lengths are adequate to meet the goals of the activity without being too large to restrict users’ ability to download the file on computers with lower bandwidths;
- provide a written transcript with all audio files; and
- provide closed-captioning or has accompanying text-based scripts for all videos.
After you've thought through some of these baseline issues, you can then turn to making your content as interesting and accessible for your students as possible. Future posts will cover tips for effective presentations, tools to increase engagement, and other best practices. In the meantime, if you have any tips to share or areas you want covered, please comment below.