Saturday, November 28, 2020

Litigation Limits in Corporate Constitutive Documents – the Uber Case

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.

November 28, 2020 in Ann Lipton | Permalink | Comments (2)

Friday, November 27, 2020

Edwards on Shareholder Wealth Maximization as a Schelling Point

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!

November 27, 2020 in Business Associations, Corporate Governance | Permalink | Comments (0)

Wednesday, November 25, 2020

Hiring Announcement: Lecturer in Business Law, UNT College of Business

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

November 25, 2020 | Permalink | Comments (0)

ICYMI: Flugum and Souther on "Stakeholder Value [as] an Excuse for Underperforming Managers"

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.

https://clsbluesky.law.columbia.edu/2020/11/25/is-stakeholder-value-an-excuse-for-underperfoming-managers/

November 25, 2020 in Stefan J. Padfield | Permalink | Comments (0)

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.

https://www.sec.gov/news/press-release/2020-293

November 24, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Monday, November 23, 2020

Teaching Through the Pandemic - Part X: Hollywood Squares and Giving Thanks!

BA(MasonJones-1)

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. 

#HollywoodSquares 
#GiveThanks

November 23, 2020 in Joan Heminway, Teaching | Permalink | Comments (0)

Saturday, November 21, 2020

Case Western Reserve Symposium: "Equity Holdings in the Three Index Funds"

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:



 

 

 

 

November 21, 2020 in Ann Lipton | Permalink | Comments (2)

Friday, November 20, 2020

The Friday non-post

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. 

November 20, 2020 in Human Rights, Marcia Narine Weldon | Permalink | Comments (0)

Thursday, November 19, 2020

New Article -- Financing Minority Entrepreneurship

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.

November 19, 2020 | Permalink | Comments (1)

Sanjai Bhagat on "Economic Growth, Income Inequality, and the Rule of Law"

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.

November 19, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, November 18, 2020

New FSB Report: Holistic Review of the March Market Turmoil

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.   

November 18, 2020 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Monday, November 16, 2020

Relational Contracts in a COVID-19 World

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.

November 16, 2020 in Contracts, Joan Heminway, M&A | Permalink | Comments (2)

Reading in Fall 2020

Despite a pretty busy and different semester, I managed to read a decent bit. Some of this is because of our neighborhood book club and some is from an emerging habit of reading a bit before bed.

-----

Kwame Anthony Appiah - Cosmopolitanism: Ethics in a World of Strangers (2006) (Philosophy). Author in philosophy professor at NYU. Mother is English; father from Ghana. Tolerance and plurality. “Citizens of the World.” 

Compassion (&) Conviction - Chris Butler, Justin Giboney, and Michael Wear (2020) (Religion, Politics). Advocates for Christian engagement with politics that transcends party. 

Gooseberries - Anton Chekhov (1898) (Fiction, Short Story).  “Think of the people who go to the market for food: during the day they eat; at night they sleep, talk nonsense, marry, grow old, piously follow their dead to the cemetery; one never sees or hears those who suffer, and all the horror of life goes on somewhere behind the scenes. Everything is quiet, peaceful, and against it all there is only the silent protest of statistics; so many go mad, so many gallons are drunk, so many children die of starvation. . . . And such a state of things is obviously what we want; apparently a happy man only feels so because the unhappy bear their burden in silence, but for which happiness would be impossible. It is a general hypnosis. Every happy man should have some one with a little hammer at his door to knock and remind him that there are unhappy people, and that, however happy he may be, life will sooner or later show its claws, and some misfortune will befall him ­­illness, poverty, loss, and then no one will see or hear him, just as he now neither sees nor hears others. But there is no man with a hammer, and the happy go on living, just a little fluttered with the petty cares of every day, like an aspen ­tree in the wind ­­and everything is all right.” Some thoughts on this story and conceptions of happiness by George Saunders. (Both recommended to me by my youngest sister.)

Your Money Made Simple - Russ Crosson (Finance) (2019). Financial planning from a Christian perspective. “Spend less than you make and do it for a long time” -- reminds me of the classic Steve Martin skit “Don’t Buy Stuff”. Liked the formula to work backwards to minimum income needs. ((Living Expenses+Debt)/(1-(Giving %+Effective Tax Rate)). Budgeting non-monthly expenses has always been tough for us, but there are some nice rules of thumb here, like 1.5-2% of home value per year for home repair and maintenance. The suggestion to make gifts is one I want to take up (though I need to develop talent first!). Challenges the retirement savings first mentality and emphasis on giving. 

Siddhartha - Hermann Hesse (Novel) (1992). Journey to find true self. Metaphor of the river. Learn from vastly different circumstances. Poverty and wealth. Another of our book club books.

Living an Examined Life - James Hollis (Psychology/Self-Help) (2018). Weak book. Read for our book club; we alternate choosing books. My objections include: (1) his condescending tone throughout (“all thoughtful people think….”), (2) the odd genre of the book (it was a flawed mix of self-help and academic psychology. Hollis somehow managed to get the weaknesses of both forms without the strengths); (3) his stereotypes of religion (Christians as either fundamentalists or prosperity gospel peddlers. In reality, there are huge groups that are neither); (4) his incomplete suggestions (confronting your interior self is a fine thing to do, but to what end?); (5) his lack of discussion of community as important (the focus was on the individual and discovering who you are; seemed narcissistic).

All the Pretty Horses - Cormac McCarthy (Novel) (1992). Coming of age story. Beautifully rendered. 

1984 - George Orwell (Novel) (1949). Dystopia. Big Brother is watching. Re-read for book club.

Let Your Life Speak: Listening for the Voice of Vocation - Parker Palmer (2000) (Psychology/Self-Help). Hits similar notes to Dr. Hollis above, but Palmer displays endearing humility. Also for book club. 

What Money Can’t Buy: The Moral Limits of Markets - Michael Sandel (Moral Philosophy) (2012). Can’t buy friendship, love, virtue, rights. Markets actually degrade these things. 

One World: The Ethics of Globalization - Peter Singer (Moral Philosophy) (2002). Moral considerations and obligations in a shrinking world. Spends significant time of climate change, foreign aid, trade, and human rights. 

The Life You Can Save - Peter Singer (Moral Philosophy) (2009). Available for free at the link. “Most of us are absolutely certain that we wouldn’t hesitate to save a drowning child, and that we would do it at considerable cost to ourselves. Yet while thousands of children die each day, we spend money on things we take for granted and would hardly notice if they were not there.” (12)  Reflection here. Survive v. thrive. 

The Death of Ivan Ilyich - Leo Tolstoy (Short Story) (1886). A reflection on dying, and its implications for life. Materialism and self-centeredness. Emptiness in de-prioritizing selfless relationships.

November 16, 2020 in Books, Current Affairs, Haskell Murray | Permalink | Comments (0)

FIRE on "How parents and educators can push back against chilled speech and thought conformity in K-12 education."

The Foundation for Individual Rights in Education (FIRE) was founded in 1999 in response to "hundreds of communications and pleas for help from victims of illiberal policies and double standards that violated their rights and intruded upon their private consciences."  Now, FIRE reports that from "partisan lessons, to schoolwide 'belief' statements, to demands for performative activism, we have never seen such intense ideological orthodoxy and compelled speech at the K-12 level." Thus, FIRE is hosting a virtual event: "How parents and educators can push back against chilled speech and thought conformity in K-12 education." The event is scheduled for Nov 19, 2020, at 01:00 PM, and you can register here.

November 16, 2020 in Stefan J. Padfield | Permalink | Comments (1)

Sunday, November 15, 2020

Epstein on “The Civil Rights Juggernaut”

The following is excerpted from Richard A. Epstein, The Civil Rights Juggernaut, 2020 U. Ill. L. Rev. 1541, 1542–44 (2020).

[T]he expansions in the 1970s and early 1980s of the various provisions of the Civil Rights Act of 1964 were done to advance the purpose of ending segregation and promoting integration. I continue to feel much uneasiness about these decisions, in part because they move away from the initial “colorblind” standard by creating preferences for protected classes and allowing affirmative action in their favor. But none of these cases, whatever their merits, had the effect of targeting small and isolated businesses and individuals for powerful government sanctions. Instead, the earlier string of successes were targeted to make sure that powerful groups did not themselves engage in various forms of invidious discrimination--here the word “invidious” is used to allow for affirmative action programs but only in favor of protected groups. Today, all too many civil rights commissions especially at the state level function only to pressure small businesses and individuals to conform to a powerful and overriding vision of the “right” view of the evils of discrimination across the board. The situation marks a powerful change from the landscape that existed at the start of the civil rights movement in 1938, when Justice Harlan Fiske Stone warned that lax standards of review would not be sufficient to protect what he termed in Carolene Products the “discrete and insular minorities” of today. Today those minority groups are in fact the dominant power-brokers on matters of civil rights, and their influence is all-pervasive, dealing not only with matters of race and sex discrimination, but also with freedom of speech and religion for groups that are not members of the dominant coalition.

It is important to understand that the pervasive modern references to “diversity and inclusion” are not renewed calls to heed the lesson of Dr. Martin Luther King Jr., who proclaimed that what matters is the content of one's character and not the color of one's skin. Nor do such references refer to reaching out to make sure that individuals from all groups and all walks of life are included in modern social discourse. Rather, it is evident from the constant insistence that diversity and inclusion are compelling state interests that any other concern, including freedom of speech and conscience, must take a subordinate place when pitted against them, if only so that people whose views do not fit this modern conception can be shouted down with the justification that their views are so odious that they do not require refutation. One general theme in this discourse is a strong distaste for capitalism and an embrace of controversial causes as though they embody eternal truths….

This creeping orthodoxy is not confined to any single subject matter. As is evident from the pronouncements of once great institutions like Harvard University and the University of California, that same authoritarian impulse now guarantees that the phrase “diversity and inclusion” is transformed into a commitment to establish, in both hiring and admissions, systematic preferences in favor of women and some minority groups, with the deliberate intention of reducing and marginalizing the position of those who do not share that common vision.

Thus, forty-seven years after Professor Baum's early death, both the agenda and the players in the civil rights movement are far different from what they were in those distant times. I often say to myself, virtually every day, that the news will contain some disturbing story about how it is that the civil rights movement has deviated from its original mission. In this lecture I shall talk about some of the cases that I think should give pause to the way in which we think about civil rights.

November 15, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, November 14, 2020

DoorDash’s Forum Selection Clause and the Exercise of Some Restraint – For Now

Very quick post this week as I comment on DoorDash’s recently-publicized S-1, and the forum selection clause contained in its current certificate of incorporation:

Unless this corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) shall, to the fullest extent permitted by law, be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of this corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of this corporation to this corporation or this corporation’s stockholders, (iii) any action arising pursuant to any provision of the General Corporation Law or this Restated Certificate of Incorporation or the Bylaws of this corporation (as either may be amended from time to time), or (iv) any action asserting a claim governed by the internal affairs doctrine, except for, as to each of (i) through (iv) above, any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten (10) days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of this corporation shall be deemed to have notice of and consented to the provisions of this Article XIV. Unless this corporation consents in writing to the selection of an alternative forum, the federal district courts of the United States of America shall be the exclusive forum for the resolution of any complaint asserting a cause of action arising under the Securities Act.

As I understand it, upon the completion of the offering, DoorDash will move this clause from the charter into the bylaws.  Though (as I’ve previously said) I have questions about the charter vs. bylaw issue, the substance of the clause will remain the same.

What’s notable here is how DoorDash could have – but did not – choose to go much further than it did.

As I previously blogged, Boeing has a forum selection bylaw that requires all “derivative” claims to be filed in Delaware Chancery.  I strongly suspect that Boeing only intended the clause to apply to traditional fiduciary claims, but after the Delaware Supreme Court’s decision in Salzberg v. Sciabacucchi – permitting corporate constitutive documents to limit claims brought under the federal Securities Act – Boeing sought to have its bylaw applied to a derivative claim alleging violations of Section 14 of the Exchange Act.  Because state courts do not have jurisdiction over Exchange Act claims, in practical effect, Boeing’s argument meant that the derivative Section 14 claim against it needed to be dismissed.  A district court bought that argument, and the case is now on appeal to the Seventh Circuit.  Separately, the plaintiffs have filed a declaratory judgment action in Delaware challenging the bylaw as contrary to Delaware law.

Facebook is currently making a similar argument.  Facebook, like several companies, was hit with a derivative lawsuit in California federal court challenging its lack of diversity (which Marcia blogged about here).  Among other claims, the plaintiff is alleging false proxy statements in violation of Section 14 that induced shareholders to vote in favor of Facebook’s directors and approve its executive pay packages.  But because Facebook has a charter provision requiring that “derivative” actions be filed in Chancery, Facebook is moving to have the case dismissed, using Boeing as precedent.

Thus, it is striking to me that DoorDash chose not to push the envelope here, and is explicitly permitting claims to be filed in federal court if Delaware Chancery does not have jurisdiction.  This is, by current standards, a remarkable show of restraint.

One thing that does occur to me, though: In general, plaintiffs cannot bring federal claims for damages from a false proxy statement if they cannot show that the proxy statement was an “essential link” in accomplishing the challenged transaction.  In practical effect, the proxy statement must have solicited necessary shareholder votes.  But DoorDash – and, for that matter, Facebook – have dual-class share structures that give one person a controlling stake. Under those circumstances, the votes of the minority shareholders will rarely be necessary to legally effect a transaction.  Thus, DoorDash may feel that allowing Section 14 claims (derivative or direct) to be filed in federal court presents a fairly minimal risk of liability, when weighed against the headaches associated with trying to bar them.

November 14, 2020 in Ann Lipton | Permalink | Comments (0)

Friday, November 13, 2020

One Simple Strategy for Addressing Race Relations in Your Class, at the Law School, and in the Firm

Some time ago, one of my students reached out to me about strategies for improving race relations at our law school. After some discussion, we arrived at the idea of starting an informal brown-bag lunch group that would discourse on race. The student invited 10 students, taking care that the group would be diverse as to race. He explained that the goals of the group would be to:

(1) Gain some new appreciation of racial diversity;

(2) Gain some new understanding of people with a different racial identity;

(3) Learn about ways of using diversity to the advantage of your legal practice/business/personal life/community;

(4) Change negative assumptions about race to positive assumptions; and

(5) Motivate every participant to leave his/her comfort zone and take some positive step towards change and reconciliation.

We developed a simple exercise for the first meeting. We put together a questionnaire (in Microsoft Word) and emailed it to all the participants in advance of the meeting. We asked them to complete the questionnaire in the word document (so no identifying handwriting), print it out, and bring it to the lunch. We explained that the questionnaires were to be anonymous, and we asked students to take care not to leave any names or other identifying information on their printed answers. When the students arrived for lunch, we asked them to drop them in a box at the entrance. Once everyone had arrived, we (a) shuffled up the papers in the box, (b) pulled them out, (c) picked one question, (d) read ALL the answers back to back, and then (e) discussed.

We thought we would get through all or most of the questions at the first lunch. We ended up only getting through two! The discussion was so rich, honest, and enlightening. I left feeling like I had just experienced something very special—like the scales had fallen from my eyes. The anonymity offered an opportunity for every participant to really let loose! They had no fear of offending others, or of being judged. It was a free space—and there was real, authentic discourse—not debate or argument. We ended up meeting every other week for the rest of the year. We never did finished all the questions on the questionnaire, but we sure grew closer and gained a better understanding of one another.

Here are some sample questions we included on the questionnaire:

  • Use one word to describe the current state of race relations in the U.S. today.
  • Use one word to describe the current state of race relations here at the law school/at this firm/at this company.
  • What is most likely to frustrate/anger you when conversation turns to race?
  • How do you explain race?
  • What does “diversity” mean to you?
  • What does “inclusion” mean to you?
  • List one positive impact someone of another race has had in your life.
  • List one misconception you think people of other races have about members of your race.
  • When are you most uncomfortable talking about race? (With family? With friends? Among members of another race? With strangers?)
  • How could those around you make it easier to talk about race?
  • What generalizations/stereotypes about your race upset you most?
  • Are there any generalizations/stereotypes about your own race that you think have validity?
  • What is a question you have always wanted to ask someone of another race, but would be afraid or embarrassed to ask?
  • What is your most optimistic vision for race relations in the future?

The exercise developed out of a lunch group, but it can be employed in the classroom as well. It can also be an effective instrument for improving race relations in law firms and businesses.

November 13, 2020 in Teaching | Permalink | Comments (0)

Thursday, November 12, 2020

A 10b5-1 Plan in Action | Pfizer's CEO

Pfizers's CEO sold about 60% of his stake in the company on the same day that Pfizer announced vaccine trial results.  These sales reportedly occurred pursuant to a pre-arranged 10b5-1 plan, which Pfizer adopted on August 19, 2020.  Pfizers's stock rallied over 14% on the release of vaccine trial information on the day the CEO liquidated nearly two-thirds of his holding.

Of course, Pfizer is not the only company to release curiously positive results in periods coinciding with their pre-arranged 10b5-1 plans.  Moderna also released positive information on a similar schedule.  Wharton's Daniel Taylor provided context:  

Taylor, of the Wharton business school, said the stock sales by Pfizer's CEO brought to mind similar concerns with another coronavirus vaccine-maker, Moderna. As NPR reported in September, multiple executives at Moderna adopted or modified their stock-trading plans just before key announcements about the company's vaccine. Those executives have sold tens of millions of dollars in Moderna stock, even though the company has not completed its vaccine trials.

"It's troubling to me that the general counsel or the internal controls of these companies would consider it legitimate to adopt a 10b5-1 plan one day before a major vaccine announcement," said Taylor. "If this isn't a wake-up call for the SEC and a wake-up call that we need to reform these 10b5-1 plans, I don't know what it is."

The SEC may need to take a close look at 10b5-1 plans if the research indicates that companies are manipulating information flow to the markets in order to maximize their personal returns around pre-determined trading dates.  I'm not certain whether these plans must now be publicly disclosed in advance or not, but that could be a simple place to look first.

Update:

Thanks to Haskell Murray, Kurt Wolfe and others for contributing and pointing out that these plans are not currently mandatory disclosure items:

There are also doubts out there about whether or not we should require these plans to be disclosed and whether the SEC or Congress should make that decision. My tentative opinion is that SEC may want to mandate disclosure and continue to study the issue. Others, including Max Schatzow, think it's probably best for Congress to make that determination.

UPDATE #2:  John Anderson has written about the challenges with these trading plans.  Much more informed thinking available here.

November 12, 2020 | Permalink | Comments (0)

How a college campus free speech zone case could impact labor unions.

Over at Law & Liberty (here), David Osborne argues that Uzuegbunam v. Preczewski could impact "attack and retreat" strategies employed by labor unions.  Here is a brief excerpt:

Attack, retreat. Attack, retreat. Unfortunately, this is the tactical offensive increasingly used by the country’s biggest public-sector unions to keep dues money flowing. They “attack” by imposing unconstitutional, restrictive policies on public employees but “retreat” whenever they are challenged in court. Historically, it has allowed union officials to avoid important court rulings that would otherwise allow public employees to choose whether to become or remain union members.

But the Supreme Court may put an end to it this term....

The Court will hear a free speech case, Uzuegbunam v. Preczewski, that could have profound implications for public-sector union members who want to resign their union membership but keep their jobs. On its face, the case [involving two college students who distributed religious literature outside their college campus’s “free speech zones”] has nothing to do with public-sector unions. But Uzuegbunam has turned into a case about an important justiciability issue called “mootness”—and about the courts’ willingness to protect constitutional rights.

November 12, 2020 | Permalink | Comments (0)

Wednesday, November 11, 2020

Greene & Youssef on "Human Rights after Corporate Personhood"

First: To all the veterans -- thank you for your service!  As an immigrant who became a U.S. citizen in college and served 6 years of active duty in the U.S. Army before attending law school, I am proud to have joined you in taking the oath to support and defend the Constitution of the United States against all enemies, foreign and domestic.

Second: Jody Greene and Sharif Youssef have published "Human Rights after Corporate Personhood: An Uneasy Merger" (you can order an examination copy here or pre-order via Amazon here).  I am grateful to have had the opportunity to contribute a chapter: "Killing Corporations to Save Humans: How Corporate Personhood, Human Rights, and the Corporate Death Penalty Intersect."  Here's the University of Toronto Press pitch:

Human Rights after Corporate Personhood offers a rich overview of current debates, and seeks to transcend the "outrage response" often found in public discourse and corporate legal theory. Through original and innovative analyses, the volume offers an alternative account of corporate juridical personality and its relation to the human, one that departs from accounts offered by public law. In addition, it explores opportunities for the application of legal personality to assist progressive projects, including, but not limited to, environmental justice, animal rights, and Indigenous land claims.

Presented accessibly for the benefit of non-specialist readers, the volume offers original arguments and draws on eclectic sources, from law and poetry to fiction and film. At the same time, it is firmly grounded in legal scholarship and, thus, serves as an essential reference for scholars, students, lawmakers, and anyone seeking a better understanding of the interface between corporations and the law in the twenty-first century.

November 11, 2020 in Stefan J. Padfield | Permalink | Comments (1)