Saturday, September 25, 2021
Sometimes, there’s not a whole lot new to blog about – and other times you get the Slack decision, the Brookfield decision, an SEC investigation of Activision, and Aronson’s demise all in a single week. So in this post, I am going to tackle the first three and save United Food and Commercial Workers Union v. Zuckerberg for maybe another time, but if you really want to know my immediate reaction to the Zuckerberg case, I tweeted a thread here. Professor Bainbridge also has a long blog post on the Zuckerberg decision here.
I previously blogged about this case here, and the short version is that Slack went public via direct listing, and filed a Securities Act registration statement for slightly fewer than half of the shares that became available to trade on the opening day, because the rest of the shares did not need to be registered in order to trade under Rule 144. Stock purchasers claimed that the registration statement contained false statements in violation of Section 11 of the Securities Act; the question was whether they’d need to establish that theirs were the registered shares before they’d be able to bring a claim – an impossible task, which would functionally prevent any shareholders from bringing any Section 11 claims at all. The district court said no, they did not have to do that, and earlier this week, the Ninth Circuit affirmed by a 2-1 vote.
The Ninth Circuit’s logic was unexpected, to say the least. The Court interpreted NYSE Listed Company Manual, Section 102.01B Footnote E, to mean that NYSE direct listings are legally not possible unless a Securities Act registration statement is filed. According to the court:
Per the NYSE rule, a company must file a registration statement in order to engage in a direct listing. See NYSE, Section 102.01B, Footnote E (allowing a company to “list their common equity securities on the Exchange at the time of effectiveness of a registration statement filed solely for the purpose of allowing existing shareholders to sell their shares”) (emphasis added).... As indicated, in contrast to an IPO, in a direct listing there is no bank-imposed lock-up period during which unregistered shares are kept out of the market. Instead, at the time of the effectiveness of the registration statement, both registered and unregistered shares are immediately sold to the public on the exchange. See NYSE, Section 102.01B, Footnote E. Thus, in a direct listing, the same registration statement makes it possible to sell both registered and unregistered shares to the public.
Slack’s unregistered shares sold in a direct listing are “such securities” within the meaning of Section 11 because their public sale cannot occur without the only operative registration in existence. Any person who acquired Slack shares through its direct listing could do so only because of the effectiveness of its registration statement….
Slack’s shares offered in its direct listing, whether registered or unregistered, were sold to the public when “the registration statement . . . became effective,” thereby making any purchaser of Slack’s shares in this direct listing a “person acquiring such security” under Section 11.
Now, the reason this is surprising is that the argument almost seems to have come out of nowhere. It was not the basis for the district court’s decision, and though it was alluded to by the plaintiffs in their Ninth Circuit briefing, neither the defendants, nor their amici, seems to have addressed it, and the issue was only barely mentioned at oral argument. And no one cited Section 102.01B Footnote E of the NYSE Listed Company Manual at all.
Plus, I gotta say, this is not the most convincing reading of the NYSE rules. Here’s what the NYSE Listed Company Manual, Section 102.01B Footnote E, actually says:
Generally, the Exchange expects to list companies in connection with a firm commitment underwritten IPO, upon transfer from another market, or pursuant to a spinoff. However, the Exchange recognizes that some companies that have not previously had their common equity securities registered under the Exchange Act, but which have sold common equity securities in one or more private placements, may wish to list their common equity securities on the Exchange at the time of effectiveness of a registration statement filed solely for the purpose of allowing existing shareholders to sell their shares, where such company is listing without a related underwritten offering upon effectiveness of a registration statement registering only the resale of shares sold by the company in earlier private placements. …Consequently, the Exchange will, on a case by case basis, exercise discretion to list [such] companies …
That doesn’t sound like the NYSE is prohibiting direct listings in the absence of a Securities Act registration; it sounds more like the NYSE has not contemplated that an issuer might want to list without one.
Now, to be fair, maybe that doesn’t matter. The NYSE, in creating its rules (which had to be approved by the SEC), only contemplated direct listings accompanied by a Securities Act registration statement, so that’s all that’s currently authorized. Still, the legal effect of the registration statement was not, despite the Ninth Circuit’s holding, that it allowed the unregistered securities to trade publicly. Rule 144 allowed them to trade publicly without any registration statement at all. What the registration statement arguably allowed was for them to trade publicly on the Exchange, which is not the same thing.
Which gets to what I think was really the driving force behind the Ninth Circuit’s decision: policy. As the Ninth Circuit explained:
interpreting Section 11 to apply only to registered shares in a direct listing context would essentially eliminate Section 11 liability for misleading or false statements made in a registration statement in a direct listing for both registered and unregistered shares. While there may be business-related reasons for why a company would choose to list using a traditional IPO (including having the IPO-related services of an investment bank), from a liability standpoint it is unclear why any company, even one acting in good faith, would choose to go public through a traditional IPO if it could avoid any risk of Section 11 liability by choosing a direct listing. Moreover, companies would be incentivized to file overly optimistic registration statements accompanying their direct listings in order to increase their share price, knowing that they would face no shareholder liability under Section 11 for any arguably false or misleading statements. This interpretation of Section 11 would create a loophole large enough to undermine the purpose of Section 11 as it has been understood since its inception.
And this is why the dissent is dissenting; in Judge Miller’s view, these policy considerations should not override the plain text of Section 11, which only permits claims by “any person acquiring such security,” meaning, “such security” as was registered on the faulty registration statement.
Now, I suspect we’re not done here, because defendants will likely seek rehearing and/or certiorari, but if this is the final word, I note that the Ninth Circuit’s decision may have implications for ordinary IPOs, when issuers forego the traditional 180-day lockup and instead allow insiders to trade unregistered shares right away. I previously blogged about this problem in connection with Robinhood’s IPO; per Law360, a lot of companies are now eliminating the traditional lockup. Under prior law, one would expect the immediate trading of unregistered shares to bar, or at least inhibit, Section 11 claims, but by the Ninth Circuit’s logic, as I understand it, for these companies, the Securities Act registration statement is a necessary step to allow the unregistered shares to trade on the Exchange, and that might be enough to eliminate the tracing requirement. The Ninth Circuit distinguished situations where shares were issued pursuant to more than one registration statement, see op. at 12, 14, but it also suggested – as other courts have held – that tracing is not an issue when the two registration statements contain identical misstatements, see op. at n.5; see also In re IPO Sec. Litig., 227 F.R.D. 65 (S.D.N.Y. 2004). Point being, this decision, if it stands, could become the basis for eliminating the tracing requirement for exchange-traded shares so long as there has only been either one registration statement, or all registration statements contain identical misstatements.
What the Ninth Circuit decision does not resolve, though, is how losses/damages would be calculated in these kinds of situations, which – as I blogged in connection with Slack and Robinhood – remains an issue.
My final observation is that the SEC could make most of this go away by refusing to accelerate the effectiveness of a registration statement for any issuer that does not agree to waive tracing defenses for shares purchased in the first 180 days.
Short version: Ordinarily, if a corporation issues new shares in exchange for inadequate consideration, this is a derivative harm to existing shareholders, but Gentile v. Rossette created an exception to that rule by holding that if the shares are issued to a controlling shareholder, who thereby increases his/her/its level of control, the harm is both direct and derivative. Gentile sat uneasily amongst Delaware precedent for a long time, as Delaware courts increasingly narrowed its application, until finally, in Brookfield Asset Management v. Rosson, the Delaware Supreme Court eliminated it. As the court put it:
Gentile is premised on the presence of a controlling stockholder that allegedly used its control to “expropriate” and extract value and voting power from the minority stockholders. Controlling stockholders owe fiduciary duties to the minority stockholders, but they also owe fiduciary duties to the corporation. The focus on the alleged wrongdoer deviates from Tooley’s determination, which turns solely on two central inquiries of who suffered the harm and who would receive the benefit of any recovery. That shift has led to doctrinal confusion in our law. The presence of a controller, absent more, should not alter the fact that such equity overpayment/dilution claims are normally exclusively derivative because the Tooley test does not turn on the identity of the alleged wrongdoer.
Still, this direct/derivative problem is not entirely settled because – as the Delaware Supreme Court pointed out – “To the extent the corporation’s issuance of equity does not result in a shift in control from a diversified group of public equity holders to a controlling interest, (a circumstance where our law, e.g., Revlon, already provides for a direct claim), holding Plaintiffs’ claims to be exclusively derivative under Tooley is logical and re-establishes a consistent rule that equity overpayment/dilution claims, absent more, are exclusively derivative …. we see no practical need for the ‘Gentile carve-out.’ Other legal theories, e.g., Revlon, provide a basis for a direct claim for stockholders to address fiduciary duty violations in a change of control context.”
In other words, if you’re a shareholder in a company without a controller, and directors sell enough of an interest to create a controller, then, even if there was no change in the character of the shares you personally hold, you can still bring a direct, Revlon-standard review challenge to that action. Which to be honest I was not, until now, sure was a clear thing, though there have been some decisions that suggested as much. See In re Coty Stockholder Litigation, 2020 WL 4743515 (Del. Ch. Aug. 17, 2020). But I will say, given the malleability of the standard for what counts as control – see my numerous blog posts on the subject – any cases that arise will be hilarious to watch. On the one hand, plaintiffs will want to argue that the party receiving the new stock was a controller already, so that the MFW standards for cleansing apply; on the other, plaintiffs will want to argue that the party receiving the new stock was not a controller already, in order to be able to bring claims directly. And defendants will have the opposite incentives.
I’ll also note that in Brookfield itself, plaintiffs offered the alternative argument that they had a direct claim because the company undersold shares to a 51% controller, in a manner that brought the controller’s holdings to 65%. This was significant, claimed the plaintiffs, because certain charter provisions could only be amended upon a 2/3 vote, so increasing the controller’s power to that level gave the controller even more substantive control.
And the Delaware Supreme Court did not reject the argument as a theoretical matter! Meaning, it’s not only a direct claim if the company goes from no control to control; it’s a direct claim if the company goes from control to next-level control. But, the Supreme Court said, the plaintiffs had not made their factual case here because 65% < 2/3.
Which I have to say is pretty unconvincing; I mean, Delaware will accept that someone with 49% of the vote in a public company is a controller, because that additional 1% it needs will come from somewhere; I don’t see why the same argument couldn’t be used to say that 65% is functionally the same as 66% when it comes to public companies. But that only highlights the problem here: once legal significance is attached to going from no control to control, or from control to next-level control, defining what we mean by control becomes very hard to do.
A final note on this: I previously blogged that in the Tesla trial, VC Slights could theoretically resolve the entire matter without ever deciding whether Elon Musk is, or is not, legally a controlling shareholder; as I said at the time, the only wrinkle that might force such a decision on him were the plaintiffs’ direct claims brought under a Gentile theory. Now that that theory is kaput, it will be even easier for Slights to avoid the is-he-or-isn’t-he question, if the facts allow it and that’s something he wants to.
Activision Blizzard, according to reports, has a very serious sexual harassment/sex discrimination problem. So serious that the California Department of Fair Employment and Housing filed a lawsuit after a 2-year investigation. The EEOC has also been investigating the company since 2020.
Given all this, it’s no surprise that when the news broke, a shareholder lawsuit was filed against Activision, generally alleging that the company misrepresented its employment policies to investors.
What was more surprising, though, was the news that the SEC was investigating Activision, because usually that’s not the kind of fraud that the SEC gets involved with. It’s hard to exactly articulate the difference, but the SEC tends to stay its hand when the allegation is that the company was doing non-financially bad things and did not disclose those bad things to investors.
I have no special insight, of course, but if I had to guess, this is about the fact that the SEC only recently made the following addition to Item 101 of Regulation S-K:
(c) Description of business….
(2) Discuss the information specified in paragraphs …[(c)(2)(ii)] of this section with respect to, and to the extent material to an understanding of, the registrant's business taken as a whole, except that, if the information is material to a particular segment, you should additionally identify that segment….
(ii) A description of the registrant's human capital resources, including the number of persons employed by the registrant, and any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant's business and workforce, measures or objectives that address the development, attraction and retention of personnel).
And indeed, in its 2020 10-K, filed in February 2021, Activision included these statements under the heading “Human Capital”:
Activision Blizzard takes an active role in the entirety of the employee lifecycle, from candidates to alumni. Recognizing that ours is a rapidly changing industry with constant technological innovation, we remain focused on attracting, recruiting, enabling, developing, and retaining a diverse and innovative employee population.
Diversity, Equity, and Inclusion (“DE&I”): We believe that a culture of inclusion and diversity enables us to create, develop, and fully leverage the strengths of our workforce to exceed players' and fans' expectations and meet our growth objectives. We remain committed to building and sustaining a culture of belonging, built on equitable processes and systems, where everyone thrives. By embedding DE&I practices and programs in the full employee lifecycle, we work to recruit, attract, retain, and grow world-class talent. Our employee resource groups play an active role in our DE&I efforts by building community and awareness. We also offer leadership and management development opportunities on the topics of unconscious bias and inclusive leadership and train our recruiting workforce in diverse sourcing strategies….
Compensation and Benefits: The main objective of our compensation program is to provide a compensation package that attracts, retains, motivates, and rewards top-performing employees that operate in a highly competitive and technologically challenging environment. We seek to do this by linking compensation (including annual changes in compensation) to overall Company and business unit performance, as well as each individual’s contribution to the results achieved. The emphasis on overall Company performance is intended to align our employee’s financial interests with the interests of our shareholders. We also seek fairness in total compensation by reference to external comparisons, internal comparisons, and the relationship between development and non-development, as well as management and non-management, remuneration. We believe in equal pay for equal work, and we continue to make efforts across our global organization to promote equal pay practices….
Employee Experience: We capture and act on the voice of our employees through regular company-wide pulse surveys. We emphasize to employees that this is their chance to “provide honest, candid feedback about their experience working for the company.” Our survey participation rates (regularly 75% or higher) demonstrate our collective commitment that Activision Blizzard remains a great place to work. The survey—and other forms of employee feedback—result in actionable steps that lead to positive improvements to the employee experience at the company-wide, business unit, and team levels. Our employee feedback is dynamic and relevant to our employees’ immediate needs. …
That … sounds rather at odds with a company that is alleged to have tolerated extreme levels of sexual harassment, discriminated against women in pay and promotion opportunities, and actively discouraged women from reporting their complaints to HR. Notably, the California DFEH and EEOC investigations were well underway when this 10-K was filed, but I can’t find mention of either.
So if I had to guess, the SEC views this situation as potentially a way of communicating that no, it’s actually not kidding when it says that human capital disclosure is a required line item under Item 101 of Regulation S-K.
Assuming my speculations are correct, this is not about the SEC demanding that companies preemptively accuse themselves of uncharged wrongdoing; it’s not even about whether Activision’s practices ultimately turn out to be legal or illegal under California or federal law. This is about the SEC, having recognized that in the knowledge economy, workforce management is an important contributor to corporate wealth, responded to investor demand by requiring a new level of transparency surrounding it. And in the very first year after those requirements took effect, one digital company – exactly the type of knowledge/skills-based company that inspired the new requirements – may have blatantly misdescribed to investors the facts surrounding its internal policies. And that possibility is what the SEC is looking into.
And - that’s as much as I can handle this week!
Friday, September 24, 2021
I'm so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here's the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren't the only ethical traps, of course, but there's only so many things you can talk about in a 45-minute slot.
All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.
Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing with an unrepresented person), 7.1 (communications about a lawyer’s services), 8.3 (reporting professional misconduct); and 8.4 (dishonesty, fraud, deceit).
Discussion topics will include:
- Do lawyers have an ethical duty to take care of their wellbeing? Can a person with a substance use disorder or major mental health issue ethically represent their client? When can and should an impaired lawyer withdraw? When should a lawyer report a colleague?
- What ethical obligations arise when serving on a nonprofit board of directors? Can a board member draft organizational documents or advise the organization? What potential conflicts of interest can occur?
- What level of technology competence does an attorney need? What level of competence do attorneys need to advise on technology or emerging legal issues such as SPACs and cryptocurrencies? Is attending a CLE or law school course enough?
- What duties do lawyers have to educate themselves and advise clients on controversial issues such as business and human rights or ESG? Is every business lawyer now an ESG lawyer?
- What ethical rules apply when an in-house lawyer plays both a legal role and a business role in the same matter or organization? When can a lawyer representing a company provide legal advice to an employee?
- With remote investigations, due diligence, hearings, and mediations here to stay, how have professional duties changed in the virtual world? What guidance can we get from ABA Formal Opinion 498 issued in March 2021? How do you protect confidential information and also supervise others remotely?
- What social media practices run afoul of ethical rules and why? How have things changed with the explosion of lawyers on Instagram and TikTok?
- What can and should a lawyer do when dealing with a businessperson on the other side of the deal who is not represented by counsel or who is represented by unsophisticated counsel?
- When should lawyers barter with or take an equity stake in a client? How does a lawyer properly disclose potential conflicts?
- What are potential gaps in attorney-client privilege protection when dealing with cross-border issues?
If you need some ethics CLE, please join in me and my co-bloggers, who will be discussing their scholarship. In case Joan Heminway's post from yesterday wasn't enough to entice you...
Professor Anderson’s topic is “Insider Trading in Response to Expressive Trading”, based upon his upcoming article for Transactions. He will also address the need for business lawyers to understand the rise in social-media-driven trading (SMD trading) and options available to issuers and their insiders when their stock is targeted by expressive traders.
Professor Baker’s topic is “Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis.” Professor Baker will provide an overview of the regulation of Texas’ electric power system and the severe outages in February 2021, explaining why Texas is on the forefront of challenges that will grow more prominent as the world transitions to cleaner energy. Next, it explains competing electric power business models and their regulation, including why many had long viewed Texas’ approach as commendable, and why the revealed problems will only grow more pressing. It concludes by suggesting benefits and challenges of these competing approaches and their accompanying regulation.
Professor Heminway’s topic is “Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.” Professor Heminway will discuss how for many small business projects that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, and maintaining a tax-exempt nonprofit corporation may be daunting (or even prohibitive). Yet there would be advantages to entity formation and federal tax qualification that are not available (or not easily available) to unincorporated business projects. Professor Heminway addresses this conundrum by positing a third option—fiscal sponsorship—and articulating its contextual advantages.
Professor Moll’s topic is “An Empirical Analysis of Shareholder Oppression Disputes.” This panel will discuss how the doctrine of shareholder oppression protects minority shareholders in closely held corporations from the improper exercise of majority control, what factors motivate a court to find oppression liability, and what factors motivate a court to reject an oppression claim. Professor Moll will also examine how “oppression” has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief.
Professor Murray’s topic is “Enforcing Benefit Corporation Reporting.” Professor Murray will begin his discussion by focusing on the increasing number of states that have included express punishments in their benefit corporation statutes for reporting failures. Part I summarizes and compares the statutory provisions adopted by various states regarding benefit reporting enforcement. Part II shares original compliance data for states with enforcement provisions and compares their rates to the states in the previous benefit reporting studies. Finally, Part III discusses the substance of the benefit reports and provides law and governance suggestions for improving social benefit.
All of this and more from the comfort of your own home. Hope to see you on Zoom today and next year in person at the beautiful UT campus.
September 24, 2021 in Colleen Baker, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Ethics, Financial Markets, Haskell Murray, Human Rights, International Business, Joan Heminway, John Anderson, Law Reviews, Law School, Lawyering, Legislation, Litigation, M&A, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Teaching, Unincorporated Entities, White Collar Crime | Permalink | Comments (0)
Thursday, September 23, 2021
Although we had hoped to be together again in person this year, our annual gathering of bloggers from the BLPB is back on Zoom again this year. [sigh] The good news for all of you readers is that you do not have to travel to Knoxville, TN to "see" and hear us! This year's edition of "Connecting the Threads" will be held tomorrow (Friday) from 9:30 am to 4:30 pm, Eastern time. The full schedule is available here and this is the Zoom connection for the entire day.
Here is the basic schedule, so you can get a quick lay of the land:
Schedule of Events
Registration / 9 - 9:30 a.m.
Introduction / 9:30 - 9:45 a.m.
Interim Dean Doug Blaze
Panel I - Insider Trading in Response to Expressive Trading / 9:45 - 10:30 a.m.
Panel II - Ten Ethics Traps for Business Lawyers / 10:30 - 11:30 a.m.
Marcia Narine Weldon
Break / 11:30 - 11:45 a.m.
Panel III - Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis / 11:45 - 12:30 p.m.
Colleen Baker and James Coleman
Lunch / 12:30 - 1 p.m.
Keynote Speaker - Securities Regulation and the Supreme Court / 1 - 1:45 p.m.
Panel V - Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation / 1:45 - 2:30 p.m.
Break / 2:30 - 2:45 p.m.
Panel VI - An Empirical Analysis of Shareholder Oppression Disputes / 2:45 - 3:30 p.m.
Panel VII - Enforcing Benefit Corporation Reporting / 3:30 - 4:15 p.m.
Closing / 4:15 - 4:30 p.m.
Each panel also features brief commentaries from a member of the UT Law faculty (full-time or adjunct) and a current UT Law student. We hope that many of you can join us for all or part of the day to listen in. Please contact me if you have any question.
[Editor's Apologia: I had planned to post on tomorrow's symposium earlier in the week. But Monday (my normal blogging day for the BLPB) came and went; Tuesday and Wednesday, too. At least I have a decent excuse. I have somehow strained my shoulder and this is the first day this week that I can type comfortably with my right hand. I finally gave in and saw a doctor on Tuesday evening. No broken bones, but the mobility in my right upper arm is very limited, and movement in some directions and in some tasks is painful. I am taking prednisone and a muscle relaxant (the latter only when needed) and the pain is significantly reduced unless I try to move my arm up or back. That is a huge improvement over where I was on Tuesday. More news when I have it. Physical therapy starts Monday. I am not looking forward to that!]
Wednesday, September 22, 2021
Dear BLPB Readers:
The Law and Taxation Department at Bentley University invites applicants for a tenure track position to begin fall 2022. The chosen candidate will teach both undergraduate and graduate law courses with a business focus. The standard teaching load for the tenure-track years is 2-2 (two courses per semester), with an expectation of an increased teaching load of 3-3 upon successful achievement of tenure. The chosen candidate will be expected to publish high quality and impactful scholarship in respected academic and/or practitioner journals.
The complete job posting is here.
Saturday, September 18, 2021
There’s been so much interest in SPACs recently, I figured everyone should be aware of this new paper by Usha R. Rodrigues and Michael Stegemoller, SPACs: Insider IPOs. One of the main points the authors make is that de-SPAC transactions represent a kind of “empty voting” scenario, where you can both vote in favor of the deal and redeem your shares for $10 – which is in fact what overwhelmingly occurs; the actual funds for the merger typically come from the simultaneous PIPEs. As the authors point out, the regulations and practice governing SPACs did not always allow this; when SPACs first began to list on the NYSE, only shareholders who voted against the deal could redeem, and if redemptions exceeded a certain threshold, the deal would not close. Shortly thereafter, however, regulations and practice evolved to allow all shareholders to redeem and to eliminate the conversion threshold. The authors argue that the new practices are damaging to markets by allowing companies to go public on major exchanges before they are ready to do so.
Anyhoo, here is the abstract:
Proponents have hailed special purpose acquisition companies (SPACs) as the democratization of capitalism. In a SPAC, a publicly traded shell corporation acquires a private target, thereby taking it public in a manner that circumvents the rigors of a traditional initial public offering (IPO). Known as the “poor man’s private equity,” SPACs have been touted for giving the masses an otherwise rare chance to invest in private companies, and thereby reap the high returns usually reserved for the wealthy. Our original hand-collected data tell a different story.
We focus on two harms that SPACs present. First, they are singularly illiquid investments—even when nominally public, SPACs are generally owned and traded by the very few. Second, SPACs evolved to eliminate meaningful shareholder voice on the acquisition of a private target, using instead a species of “empty voting,” meaning that any such vote had no economic impact. By rendering the shareholder vote a nullity, SPACs can now virtually guarantee that a target will go public. This laxity of process creates the risk that subpar firms will trade side by side with quality public companies, tarnishing the market as a whole.
We are the first to examine this absence of liquidity and shareholder power, both of which are products of SPACs’ domination by insiders. This Article’s original data on SPACs’ empty voting, delinquent public filings, and thin-to-nonexistent trading provide empirical evidence that a small group of insiders use SPACs to manipulate the merger process, free of traditional IPO safeguards. We conclude with a reform proposal to reunite shareholders’ economic interest with voting power. This potential reform addresses the concerns of liquidity and lack of selectivity, while also providing a viable alternative to the traditional IPO.
Friday, September 17, 2021
The Securities and Exchange Commission’s (SEC) Chairman, Gary Gensler, recently directed the staff to present recommendations to "freshen up" and tighten some provisions in Exchange Act Rule 10b5-1. In response, the SEC’s Investor Advisory Committee proposed new restrictions on the use of 10b5-1(c) trading plans as an affirmative defense against insider trading liability. The proposed changes are designed to address concerns that "some plans are used to engage in opportunistic trading behavior that contravenes the intent behind the rule," and they are consistent with recommendations outlined in the Promoting Transparent Standards for Corporate Insiders Act that passed the House of Representatives in April 2021.
But any proposed restrictions to trading plans must be considered in light of the broader context of Rule 10b5-1, and the motivation behind the affirmative defense’s adoption.
The courts have interpreted Section 10b of the Exchange Act as prohibiting insiders from trading in their own company’s shares only if they do so “on the basis” of material nonpublic information. This element of intent for insider trading liability can be difficult for regulators and prosecutors to satisfy because insiders who possess material nonpublic information at the time of their trade can often claim that they did not use the information to trade. They may claim, for example, that they only sold stock to pay their child’s college tuition bill, and the material nonpublic information had nothing to do with the trade.
Prior to 2000, the SEC and prosecutors sought to defeat this defense strategy by taking the position that knowing possession of material nonpublic information while trading satisfies the “on the basis of” element of insider trading liability. But when pressed, this strategy met with only mixed results in the courts. In an attempt to settle a circuit split over this “use-versus-possession” issue, the SEC adopted Rule 10b5-1, which defines trading “on the basis of” material nonpublic information for purposes of insider trading liability as trading while “aware” of such information.
The SEC anticipated two problems for its new awareness test: (1) It anticipated concern from the courts that imposing liability on a person who is merely aware of material nonpublic information while trading (without a causal relation between the information and the trade) would exceed the commission’s statutory authority by failing to satisfy the requirement of scienter under the general antifraud provisions of Section 10(b) of the Exchange Act. (2) There was also a concern that the broad awareness test may chill legitimate trading by insiders (e.g., for portfolio diversification), which would negatively impact the value of firm shares as a form of compensation. The 10b5-1 trading plan as an affirmative defense to insider trading liability was designed to mitigate these concerns.
Now, the SEC is considering significant new restrictions on the use of trading plans that include (a) a “cooling off” period of at least four months between plan adoption and trading or modification; (b) a prohibition on overlapping plans; and (c) new disclosure requirements.
In two recent articles, Anticipating a Sea Change for Insider Trading Law: From Trading Plan Crisis to Rational Reform and Undoing a Deal with the Devil: Some Challenges for Congress's Proposed Reform of Insider Trading Plans, I argue that additional restrictions on trading plan use like those being proposed by the SEC risk defeating the very purposes for which the affirmative defense was adopted. For example, new restrictions on 10b5-1(c) trading plans may force courts to conclude that the SEC exceeded its authority with the adoption of its broad 10b5-1(b) awareness test. Moreover, since new restrictions on trading plans will make it more difficult for employees to sell shares issued to them as equity compensation, those shares will be less valuable to employees. Firms will therefore have to offer more shares to employees to achieve the same remunerative effect. This will impose new costs on shareholders. Will the anticipated benefits of the new restrictions offset these costs?
My hope is that the SEC will take these considerations (and others I have raised) into account as it mulls the question of 10b5-1(c) trading plan reform. After all, the Commission cannot have its cake and eat it too!
Thursday, September 16, 2021
Earlier, I posted a copy of the abstract to my new law review article, Supreme Risk here. Since that time, I've spun out two different summaries of it elsewhere. The first, you can find at the CLS Blue Sky Blog here. The other, you can find at the Duke FinReg Blog here. The two summaries are different, but they're both great introductions to the article, which has now been placed with the Florida Law Review.
Fortunately, Florida has given me until early October to continue refining the piece. I'd be grateful for any comments or thoughts on the draft if you're able to send them my way.
Wednesday, September 15, 2021
Professors Houser and Baker on Sovereign Digital Currencies: Parachute Pants or the Continuing Evolution of Money
Dear BLPB Readers,
I'm delighted to share that my recent article written with Professor Kimberly Houser, Sovereign Digital Currencies: Parachute Pants or the Continuing Evolution of Money (forthcoming, NYU Journal of Law & Business) is now posted to SSRN.
Here's its abstract:
Facebook’s Diem proposal, the growing interest in cryptocurrencies, and the decreasing use of cash have all raised concerns regarding the government’s ability to enact monetary policy and retain monetary sovereignty. While China has already launched their own sovereign digital currency (SDC), the U.S. Federal Reserve (the Fed) appears to be more concerned with getting an SDC “right rather than quickly.” As money and payment systems keep evolving, and the divergence between money and legal tender becomes greater, there is a need to investigate not only what effect any potential SDC would have on the financial system, including the possible disintermediation of banks, but also its impact on privacy and data security.
In this article we delve into the evolution of money and why the government finds itself at a crossroads with regard to the establishment of an SDC. Although numerous reasons have been given for establishing a SDC, the one aspect that must be acknowledged is the potential for a global stablecoin to displace any potential SDC due to the network effect. We explore money alternatives, types of sovereign digital currencies, and the design decisions involved with creating an SDC. Whether direct or indirect, token-based or account-based, there are risks that must first be discovered and addressed. After discussing the global impact of SDCs, including the potential first-mover advantage and impact on reserve currency, we explore the future of money alternatives concluding policymakers in the U.S. have an unbelievably difficult series of decisions to make. This article endeavors to highlight some of the most pressing issues.
Tuesday, September 14, 2021
Campbell University's Norman A. Wiggins School of Law in Raleigh, NC is hiring for two positions. They are especially interested in candidates in the following areas: (1) business organizations, (2) commercial law (including sales law), and/or contracts. Details here or after the break.
Monday, September 13, 2021
The Section on Transactional Law & Skills has extended its deadline for paper proposals for its program at the 2022 Annual Meeting to Friday, September 17. Submissions can be sent directly to Megan Shaner at email@example.com. I cribbed the following from a message she wrote to the section membership last week. (Thanks, Megan!)
The topic of the section's program this year is "Transactional Lawyering at the Intersection of Business and Societal Well-Being" and, according to the preliminary program for the conference, the program is tentatively scheduled for 11 a.m. to 12:15 p.m. on Friday, January 7, 2022. The first part of the program focuses on how to incorporate ESG issues and impact topics across the transactional curriculum, including in clinics and other experiential courses, as well as in doctrinal courses. The second part of the program consists of scholarly presentations to be selected from the Call for Papers set forth below. If you incorporate ESG, corporate social responsibility, impact investing or governance, or related topics into your scholarship in any way, you should consider submitting your paper in response to the Call for Papers.
CALL FOR PAPERS
AALS SECTION ON TRANSACTIONAL LAW AND SKILLS
Transactional Lawyering at the Intersection of Business and Societal Well-Being
2022 AALS Annual Meeting
The AALS Section on Transactional Law and Skills is pleased to announce a call for papers for its program, “Transactional Lawyering at the Intersection of Business and Societal Well-Being,” at the 2022 annual meeting of the AALS. This program will explore how ESG and broader societal considerations are increasingly influencing the flow of capital in the global marketplace, corporate governance planning, merger and acquisition activity and structures, as well as other transactional topics. The events of 2020, for example, have shifted the focus of business entity governance, equality and access in securities markets, and transactional planning and deal structures in significant and lasting ways – questioning whether current structures and systems are working well for all stakeholders and society more broadly. COVID-19 and social movements have broadened ESG efforts to include previously overlooked issues such as human resource policies (e.g., sick leave, parental leave), workplace health and safety, supply chain management, continuity and emergency planning, and diversity and inclusion hiring practices and training. In addition, proposals are being considered (and some adopted) to require gender diversity on boards of directors as well as additional disclosures related to human capital. This program will look at how transactional lawyering in a variety of contexts can address/respond to recent calls for increased consideration and balancing of ESG issues and impact topics.
The annual meeting will be held virtually from January 5-9, 2022, with the Section on Transactional Law and Skills panel scheduled for Friday, January 7, from 11 a.m.-12:15 p.m. (EST). In addition to the paper presentation, the program will feature a panel focusing on how to incorporate these topics and issues across the transactional curriculum, including in clinics and other experiential courses, as well as in doctrinal courses.
The Section on Transactional Law and Skills invites any full-time faculty member of an AALS member school who has written an unpublished paper, or who is interested in writing a paper on this topic, to submit a 1 or 2-page proposal or full draft to Megan Shaner, Chair of the Section, at firstname.lastname@example.org on or before September 17, 2021. Papers accepted for publication but that will not yet be published as of the 2022 meeting are also welcome. Please remove the author’s name and identifying information from the submission and instead include the author’s name and
contract information in the submission e-mail.
After review and selection by the Section’s Executive Committee, the authors of the selected papers will be notified in mid-September 2021. The Call for Paper presenters will be responsible for paying their registration fee for the conference.
Any inquiries about the Call for Papers should be submitted to the Section Chair Megan Shaner, University of Oklahoma College of Law, at email@example.com or (405) 325-6619.
On behalf of the Section on Transactional Law and Skills
Chair: Megan W. Shaner (University of Oklahoma)
Chair-Elect: Eric Chaffee (The University of Toledo)
Past Chair: Matthew Jennejohn (Brigham Young University)
Members of the Executive Committee:
Andrea Boyack (Washburn University)
Patience Crowder (University of Denver)
Cathy Hwang (University of Virginia)
Jay Kesten (Florida State University)
Praveen Kosuri (University of Pennsylvania)
Greg Shill (University of Iowa)
Saturday, September 11, 2021
So, Coinbase has made a lot of noise recently about the SEC’s warning that its “Lend” product may be a security and thus subject to registration under the securities laws.
The Lend product, as I understand it, would allow Coinbase to lend certain cryptocurrency held by its clients to other actors; the borrowers will pay an interest rate to Coinbase, which Coinbase will share with clients, resulting in a guaranteed minimum 4% interest payment to the client. Essentially, Coinbase wants to be a bank, and to treat its clients as depositors, without the bother of banking regulation. Per Coinbase’s blog post, the SEC is “assessing our Lend product through the prism of decades-old Supreme Court cases called Howey and Reves.... These two cases are from 1946 and 1990.” Leaving aside the baffled tone (Howey? Reves? What is this sorcery?), and the language designed to make me feel old (I still wear clothes I bought in 1990), what is interesting to me is that the SEC is using both tests.
This is an unsettled area when it comes to the definition of a security. Howey is used to determine whether an instrument is an “investment contract” as that term is used in the definition of a security contained in the Securities Act of 1933 and the Exchange Act of 1934; Reves is used to determine whether a “note” is a security as defined in those Acts. And it’s not always clear which test applies when. Technically, a “note” is a definite promise to pay a particular sum. But in SEC v. Edwards, 540 U.S. 389 (2004), the Supreme Court used the Howey test for a sale-and-leaseback arrangement that included a promise to pay $82 per month, rather than the Reves test. That leaves a fair degree of uncertainty as to how to determine whether new instruments count as “notes” in the first place so that the Reves test is appropriate. Are the two tests alternatives? Is one preferable to the other in some situations? The answer isn’t clear.
And it matters because the tests themselves are similar but not identical. Both consider whether the product is sold to many people or to a single person; both consider the purposes of the transaction, but Reves is a fuzzy multifactored balancing test whereas Howey requires that all elements be met.
Why is the law like this?
It’s actually, as far as I can tell, the product of the sometimes dysfunctional development of the common law. (Something I previously discussed in the context of United Food and Commercial Workers Union v. Zuckerberg. In that blog post, I talked about a different example of the common law creating an unnecessary multiplicity of tests: Aronson and Rales. I should add, though, that in that post, I was wrong in predicting what the plaintiffs would do; Zuckerberg is currently pending before the Delaware Supreme Court and the plaintiffs are arguing for a reinterpretation of Aronson that would distinguish it from Rales.).
So, back to securities: In 1946, the Supreme Court had to decide if interests in an orange grove constituted an investment contract/security, and it came up with the four-factored Howey test: investment of money, in a common enterprise, with the expectation of profit, due to the managerial efforts of others. See SEC v. W.J. Howey Co., 328 U.S. 293 (1946).
Nearly 30 years later, in 1975, the Supreme Court decided United Housing Foundation, Inc. v. Forman, 421 U.S. 837 (1975). In Forman, a New York City co-op was created as part of a program of low income housing. To get an apartment in the co-op, you had to buy a share of “stock” in the corporation, but the stock itself had none of the features of traditional stock and mainly was used as a security payment for the apartment. When the residents/stockholders sued, claiming they had been sold securities, the Supreme Court held that the stock was not “stock” as that term was meant in the securities laws, and then further held that it was not even an investment contract under the Howey test. Why? Among other things, there was no expectation of profit as Howey envisioned. As the Supreme Court put it:
By profits, the Court has meant either capital appreciation resulting from the development of the initial investment . . . or a participation in earnings resulting from the use of investors’ funds. . . .
Lower courts did two things with this. First, they decided that all instruments allegedly subject to the securities laws – stock, notes, anything else – would get the Howey test. Second, they read Forman’s concept of profit narrowly, to mean that the expectation of profit had to be something like profits generated specifically from the success of the enterprise. Fixed rates of return, especially at a market rate, would not count as “profit” because those amounts would be due to the investor regardless of whether the enterprise was a success or failure.
And then came Reves v. Ernst & Young, 494 U.S. 56 (1990), with the question whether a demand note was a security. The Eighth Circuit applied Howey and concluded that the fixed rate of return excluded it from the security definition. See Arthur Young & Co. v. Reves, 856 F.2d 52 (8th Cir. 1988) (“the interest rate was fixed by an established market rate. The demand noteholders did not participate in the Co-op's earnings by virtue of their ownership of the demand notes, nor was there any prospect of capital appreciation. Therefore, the demand noteholders did not expect a ‘profit’ as that term is defined in Howey.”)
But debt instruments often have fixed rates of return!! It’s kind of the point! If you do this, you end up with a lot of debt instruments being entirely uncovered by the securities laws!
So, off it goes to the Supreme Court. And the Court – rather than interrogate the lower courts’ interpretation of Forman, see Reves, 494 U.S. at 68 n.4 – decides that notes should have an entirely different test.
Now there are two tests. Howey and Reves. (Okay, three, if you think of Forman, and subsequently Landreth Timber Co. v. Landreth, 471 U.S. 681 (1985), as setting forth a definition of whether something is “stock”).
But we’re not done. Because in SEC v. Edwards, the Court finally did confront the narrow definition of “profit” that courts were using for Howey. And there, applying Howey, it held that fixed rates of return can in fact be “profits.”
But if the instrument has a fixed rate of return, there’s going to be a specific payment due at a particular time, and that might make it a note!
The whole point of Reves, I submit, was to get around an unduly narrow interpretation of Howey. Once that interpretation changed, we’re left with two tests, no clear reason for them, and no clear guidance when one should apply and when it should be the other.
And that’s why the SEC is testing Coinbase’s Lend product – which involves a fixed rate of return – under both Reves and Howey.
Friday, September 10, 2021
Dear BLPB Readers:
Assistant Professor for Legal Studies in Business
Department of Management
Spears School of Business
Oklahoma State University – Stillwater, Oklahoma
Position: The Management Department in the Spears School of Business at Oklahoma State University invites applications for one tenure track position in Legal Studies at the assistant professor rank to begin as early as August 2022.
Candidates should demonstrate an interest in and a capacity for both conducting high-quality scholarly research and working with colleagues, as well as a high level of teaching competence. Assistant professors are given minimal service assignments and course preps as well as summer support to allow them to focus on their research programs. Salary and teaching loads are commensurate with a R1 comprehensive research university. Our preference is to hire research active faculty members with a 2:2 teaching load (12 credits).
The complete job posting is here: Download 2022 Fall Job Ad - LSB Asst Prof
Wednesday, September 8, 2021
Dear BLPB Readers:
Duties include teaching undergraduate and graduate business law courses; conducting research leading to scholarly publications as recognized by the college in the area of business law; and providing service to the students of Texas State University, the department, the college, and the profession. All positions are subject to availability of funds.
The complete job posting announcement is here.
Monday, September 6, 2021
It is hard to believe (at least for me), but the official calendar marker for the end of the summer now is upon us. It is a time for smoking pork, backyard barbecues, and enjoying the pool and the beach like a kid. It is time after which we are admonished to stop wearing white (until Memorial Day), according to conservative traditions ignored in the breach by me. It is Labor Day.
According to the U.S. Department of Labor website:
Observed the first Monday in September, Labor Day is an annual celebration of the social and economic achievements of American workers. The holiday is rooted in the late nineteenth century, when labor activists pushed for a federal holiday to recognize the many contributions workers have made to America’s strength, prosperity, and well-being.
That history seems so important to remember today, given significant labor dislocations in the United States since the beginning of 2020. The significant amount of illness and death attributable to COVID-19 is just the beginning of the story. Complex social, economic, and legal factors have combined to make for volatility and dissonance in U.S. labor markets. The U.S. Bureau of Labor Statistics recently released its August 2021 report on the national employment situation, describing trends and supplying relevant data.
The news media has offered ongoing commentary. I was especially drawn to an article published by The Washington Post on Saturday entitled "Why America has 8.4 million unemployed when there are 10 million job openings." Misalignments between the available jobs, on the one hand, and the obtainable, qualified labor, on the other hand, have become apparent. "There is a fundamental mismatch between what industries have the most job openings now and how many unemployed people used to work in that industry pre-pandemic," the article offers. The article also mentions that people are resigning and retiring in larger numbers and earlier than projected, at least in some sectors of the economy. Entrepreneurship also is on the rise.
There has been informal and formal debate about the effect that law has had and may continue to have on our labor markets. The mandatory shutdowns (through lockdown and stay-at-home orders) imposed by state governors in 2020, for example, certainly played a role in separating businesses from their workers. Congressionally approved federal unemployment benefits have been blamed for slower-than-expected returns to work, but as Saturday's Washington Post article notes, "in 22 states that already phased out those benefits, workers didn’t flood back to jobs." A September 1 article in The Wall Street Journal entitled "States That Cut Unemployment Benefits Saw Limited Impact on Job Growth" (behind a paywall) offers similar observations. "Economists who have conducted their own analyses of the government data say the rates of job growth in states that ended and states that maintained the benefits are, from a statistical perspective, about the same."
Both business and law (and the lawyers that serve them) may be part of the solution as much as they are part of the problem. Workplaces are changing and workers are changing. The changes in each may foster changes in the other. A June article in The New York Times notes the role of pay and benefits in the return-to-work equation, citing "the proliferation of low-paid jobs with few prospects for advancement and too little income to cover essential expenses like housing, food and health care." Others note that, to attract qualified, desirable candidates, businesses will have to focus core attention not only on worker pay and benefits, but also on other terms and conditions of employment, including the possibility of mandating, promoting, or permitting employees to engage in more remote work (whether for the benefit of the employer or the employee--or both). But government also can refocus its efforts to support sustainable business in this changed and changing socio-economic environment. An opinion piece from back in June in The Washington Post addressing impediments to full employment notes that: "[a]ccess to reliable child care remains a significant obstacle. So does the availability of public transit. Workers may continue to worry about risks to their own or their family’s health if they take public-facing jobs . . . ." A May article in The Washington Post also mentions childcare availability and health care risks as factors in the decision of unemployed people to return to work. If employers are not facilitating access to affordable and appropriate child care and transportation and are not voluntarily providing adequate protections from health care risks in the workplace, then legal or regulatory solutions may be useful if we want those businesses to survive. The coming months will be telling as we continue to address the ongoing pandemic and its direct and indirect effects on productivity.
I have always valued work. Years ago, I found a quote (apparently misattributed, with related quotes, to the Buddha) that resonated with me: "Your work is to discover your work and then with all your heart to give yourself to it." Yes. I certainly have done that to great satisfaction. I am fortunate to hold a position that has survived the effects of the pandemic to date. I feel needed and wanted in my workplace. I am lucky and privileged, indeed.
Congress instituted labor day as a national legal holiday on June 28, 1894, following on the adoption of similar municipal ordinances and state legislation. The Department of Labor's website notes this and concludes its history of the national holiday by highlighting the role that workers have played in the history of the United States.
American labor has raised the nation’s standard of living and contributed to the greatest production the world has ever known and the labor movement has brought us closer to the realization of our traditional ideals of economic and political democracy. It is appropriate, therefore, that the nation pays tribute on Labor Day to the creator of so much of the nation's strength, freedom, and leadership – the American worker.
Today, I hope that we can reflect on this rich history and celebrate both these aggregate contributions and our own individual work notwithstanding current uncertainties in our labor markets.
Saturday, September 4, 2021
Happy Labor Day Weekend!
It's time to relax and recharge. If you're a professor or a student, you've likely just started class again. If you're like me, you're already behind and a bit overwhelmed. If you're a practicing lawyer, you may be working at home, in an office, or both. With all of the uncertainty about office re-openings, the economy, wildfires, hurricanes, and COVID, you may be a bit stressed, and not in a good way (yes, there is "good" stress). Lawyers, as we know, have high rates of burnout, chronic stress, suicide, depression, substance use disorders, and other maladies that could affect the way we practice law and our level of fulfillment while practicing.
I've been a happy lawyer for thirty years. But I've had personal and health challenges, so I've spent most of the past eighteen months learning healing modalities to help me physically and mentally. I've become certified in meditation facilitation, NLP (neurolinguistic programming), EFT (emotional freedom technique)/tapping, reiki, mental health first aid, and hypnotherapy.
Below are some of the quick fixes that work for me. I've also conducted CLEs for lawyers on stress management, and have received feedback that the methods below work. I've even taken some students through some of these breathing exercises during office hours to help them calm down (admittedly, sometimes I cause that stress).
Don't worry, I won't ask you to sit in a lotus position chanting "om" or do any yoga poses (although I do that too).
I just want you to breathe. You do this all the time, but are you breathing in a shallow way? Probably. How many breaths are you taking a minute? How are you oxygenating your blood and brain?
As you do more breathwork, try to imagine the breathing coming from your heart (try the HeartMath coherence technique), and make the exhale longer than the inhale.
Remember, if you feel lightheaded or dizzy, please stop. I'm not a doctor, so please check with a healthcare provider before trying anything in this post. Once you receive the go-ahead, try them all and see which works for you. Better yet, get your family involved. If you have children, have them participate or count the seconds while you breathe. Soon they may join in. Imagine a world where children grow up with tools to regulate their emotions.
All of the tips below take 5 minutes or less. If you can go on for longer, that's great. If you only have 1-2 minutes, that works too. But if you say you don't even have a minute for deep breathing, then you need to stop and breathe more than anyone else.
Tip #1- Breathe through your nose for a count of 4 seconds. Make sure that y
our stomach expands on the exhale (imagine a baby sleeping with the belly rising and falling). Hold your breath for 2 seconds. Breathe out for 6 seconds through your mouth. Repeat for 3-5 minutes.
Tip #2- Alternate nostril breathing. Close your eyes. Put your thumb over your right nostril. Put your ring finger on your left nostril. Exhale slowly and deeply through your right nostril. Repeat for 3-5 minutes. Longer is better.
Tip #3- Close your eyes. Put one hand on your heart. Put the other hand on your belly. Take a deep breath in through your nose for 6 seconds. Your hand on your belly should rise. Exhale fully through your mouth. Let out a sound like a big sigh. As you breathe, you can say to yourself, "I breathe in peace, I breathe out stress." Repeat for 3-5 minutes.
Tip #4- Sit, stand, or lie down. Imagine there is a white column of light 300 feet above your head showering you with light. Imagine your feet are roots going to the center of the earth. Take deep breaths in through your nose and exhale through your mouth. On the inhale, say "peace" and on the exhale, say "calm" or another word. Repeat the breathing and calming phrases for 3-5 minutes while you imagine the light around you.
Tip #5- 5-4-3-2-1- Take 3, long, deep, slow breaths. With your eyes open, notice 5 things you can see. With eyes open or closed, think of 4 things you can touch, 3 things you can hear, 2 things you can smell, and one thing you can taste. Take 3 deep breaths. This is especially helpful when you're feeling anxious because it forces you to focus on the present, even for a few moments.
Tip #6- If the breathing is too much, find your favorite song. Pick a song you would dance to or sing to no matter where you were. Dance like no one is watching. Sing loudly and badly. Try this for one or two songs. This can both energize and calm you. I often do this between calls and meetings.
If you want to try something more advanced, try the Wim Hof breathing method. With Wim Hof, you will be lightheaded. You will tingle. It may be scary. But there are science-based reasons for all of those sensations, and people have seen remarkable results. You can also take cold showers, which have great health benefits. Start at 15 seconds in cold water and then build your tolerance.
If you really want to push yourself, try an ice bath. All of my breathwork and meditation training made it a breeze to sit in a tub of ice for over six minutes. Maybe you don't want to do an ice bath. You just want to make it through the next meeting. You have nothing to lose by trying some of these tips. I'll close with a quote from Oprah Winfrey. "Breathe. Let go. And remind yourself that this very moment is the only one you know you have for sure."
Have a safe and healthy holiday. And remember to breathe.
Friday, September 3, 2021
I suggested in my last two posts (here and here) that as Congress and the SEC contemplate reforms to our current insider trading regime, it is important for us all to explore our intuitions about what we think insider trading is, why it is wrong, who is harmed by it, and the nature and extent of the harm. If we are going to rethink how we impose criminal and civil penalties for insider trading, we should have some confidence that the proscribed conduct is wrongful and why. One way to do this is to place ourselves in the shoes of traders and ask, “What would I do?” or “What do I think about that?” With this in mind, I developed some scenarios designed to test our attitudes regarding trading scenarios that distinguish the four historical insider trading regimes (laissez faire, fiduciary-fraud, equal access, and parity of information).
In the previous post, I offered a scenario that would result in liability under equal-access and parity-of-information regimes, but not under the fiduciary-fraud and laissez-faire models. Those of you who were not convinced that the trading in that scenario was wrongful may favor one of the less restrictive models.
In today’s post, I offer two scenarios to test our attitudes regarding trading under the fiduciary-fraud model. This model recognizes a duty to disclose material nonpublic information or abstain from trading on it, but only for those who share a recognized fiduciary or similar duty of trust and confidence to either the counterparty to the trade (under the “classical” theory) or the source of the information (under the “misappropriation” theory). The trading in the following scenario would incur liability under the classical theory of the fiduciary-fraud model (as well as under the more restrictive parity-of-information and equal-access models), but not under the misappropriation theory:
A senior VP at BIG Corp., a publicly traded company, took the lead in closing a big deal to merge BIG Corp. with XYZ Corp. The shares of BIG Corp will skyrocket when the deal is announced in seven days. The senior VP asks the CEO and board of Big Corp if he can purchase shares of BIG Corp for his personal account in advance of the announcement. The CEO and board approve the senior VPs trading. The senior VP buys Big Corp. shares in advance of the announcement and he makes huge profits when the deal is announced.
Note the difference between this scenario and the scenario in last week’s post. Here the counterparties to the trade are existing Big Corp shareholders who (if they had the same information as the senior VP) presumably would not have proceeded with the trade at the pre-announcement price. The theory assumes that such trading on the firm’s information (even with board approval) breaches a fiduciary duty of loyalty to the firm’s shareholders (fair assumption?). In last week’s post, the counterparties to the trade were XYZ Corp.’s shareholders, so the board-approved trade did not breach any fiduciary duty. Do you agree that the senior VP’s trading in the scenario above is deceptive, disloyal, or harmful to shareholders? If so, do you think such trading should be subject to civil or criminal sanction (or both)?
The trading in the next scenario would incur liability under the misappropriation theory of the fiduciary-fraud model (as well as under the more restrictive parity-of-information and equal access models), but not under the classical theory:
A senior VP at BIG Corp., a publicly traded company, took the lead in closing a big deal to merge BIG Corp and XYZ Corp. The shares of BIG Corp and XYZ Corp will both skyrocket when the deal is announced in seven days. At the closing party, the CEO and Board of BIG Corp explain to everyone on the deal team that they would like to keep the deal confidential until it is announced to the public the following week. Immediately after the party, the senior VP goes back to his office and buys shares of XYZ Corp for his personal online brokerage account. The senior VP makes huge profits from his purchase of XYZ Corp shares when the deal is announced a week later.
Here the senior VP at BIG Corp. trades in XYZ Corp. shares, so he does not breach any fiduciary duty to his shareholders. Assuming a reasonable person would conclude that a request of confidentiality includes a request not to trade (fair assumption?), the VP’s trading does, however, breach a duty of loyalty to BIG Corp. Is this trading wrongful? If so, is it more/less/equally wrongful by comparison to the trading in the classical scenario above? Finally, if you do think this trading is wrongful, should it be subject to civil or criminal sanction?
Again, the hope is that walking through these scenarios will help bring some clarity to our shared understanding of when trading on material nonpublic information is wrong and harmful—and (given our answers to these questions) the nature and extent to which it should be regulated.
Wednesday, September 1, 2021
Last spring, I blogged about a University of Colorado Law School Symposium honoring Professor Art Wilmarth (here). Professor Jeremy C. Kress recently posted his symposium-related piece, Who's Looking Out For The Banks? It addresses an important bank governance issue that thus far has received too little attention. Here's its abstract:
When the Gramm-Leach-Bliley Act authorized financial conglomeration in 1999, Professor Arthur Wilmarth, Jr. presciently predicted that diversified financial holding companies would try to exploit their bank subsidiaries by transferring government subsidies to their nonbank affiliates. To prevent financial conglomerates from taking advantage of their insured depository subsidiaries in this way, policymakers instructed a bank’s board of directors to act in the best interests of the bank, rather than the bank’s holding company. This symposium Article, written in honor of Professor Wilmarth’s retirement, contends that this legal safeguard ignores a critical conflict of interest: the vast majority of large-bank directors also serve as board members of their parent holding companies. These dual directors are therefore poorly situated to exercise the independent judgment necessary to protect a bank from exploitation by its nonbank affiliates. This Article proposes to strengthen bank governance — and better insulate banks from their nonbank affiliates — by mandating that some of a bank’s directors must be unaffiliated with its holding company. As long as banks are permitted to affiliate with nonbanks, this reform is essential to ensure that someone is looking out for the well-being of insured depository institutions.
Tuesday, August 31, 2021
Dr. Anne R. Bromberg of Dallas has committed $2 million to SMU for the creation of The Alan R. Bromberg Centennial Chair in Corporate, Partnership, Business and Securities Law in honor of her late husband, a renowned professor in the SMU Dedman School of Law. The new chair will support the Law School in strengthening research and coursework in corporate, partnership, business and securities law, honoring Professor Bromberg’s prolific scholarship and mentoring style of leadership. We anticipate appointment at the rank of full professor beginning in Fall 2022. J.D. degree required. To ensure full consideration for the position, the application submitted by October 1, 2021, but the committee will continue to accept applications until the position is filled.
Applications must be submitted electronically via Interfolio (https://apply.interfolio.com/91455). These materials should include a cover letter, resume, research agenda, writing sample(s) and a list of references. Reference Position No. and (Area of Law): 00053425 (Bromberg Chair).
SMU will not discriminate in any program or activity on the basis of race, color, religion, national origin, sex, age, disability, genetic information, veteran status, sexual orientation, or gender identity and expression. The Executive Director for Access and Equity/Title IX Coordinator is designated to handle inquiries regarding nondiscrimination policies and may be reached at the Perkins Administration Building, Room 204, 6425 Boaz Lane, Dallas, TX 75205, 214-768-3601, firstname.lastname@example.org.
Monday, August 30, 2021
Friend of the blog Bernard Sharfman has posted The Problem of Three In the Voting of Public Company Shares over at RealClearMarkets. A brief excerpt follows.
The problem of the Big 3’s concentration of voting power is illustrated in Engine No. 1’s proxy fight at ExxonMobil …. Engine No. 1’s stated objectives in seeking the election of its own nominees was to: 1) enhance the value of ExxonMobil’s common stock; 2) reduce ExxonMobil’s carbon emissions; and 3) transition ExxonMobil into a global leader in profitable clean-energy production. Yet Engine No. 1 never provided specific recommendations on how it was going to accomplish these objectives. This was odd, as one would expect Engine No. 1 to present such recommendations if it were to convince shareholders that its director nominees were worthy of being elected.
The inability to provide such recommendations must have been a clear indication to the shareholders of ExxonMobil, including the Big 3, that Engine No. 1 was not truly informed about the operations of ExxonMobil or how it was going to achieve its stated objectives. Nevertheless, Engine No. 1 succeeded in getting three of its four nominated directors elected to Exxon’s board. How in the world was it able to do this?
…. I argue in my writing that Engine No. 1 was able to get the Big 3’s support by appealing to their desire to be perceived as investment advisers who are making a difference in mitigating climate change…. Such opportunistic shareholder voting by investment advisers is arguably a breach of an investment adviser’s fiduciary duties under the Investment Advisers Act of 1940. If so, it is up to the SEC to provide the necessary investor protection through enforcement actions. Alternatively, there is a potential market solution for mitigating the “Problem of Three.” This market solution … is for index funds to provide investors with some policy control over their proportional voting interest, as represented by their percentage of ownership in a specific fund.
SOUTH TEXAS COLLEGE OF LAW HOUSTON
Location: Houston, TX
Subjects: Criminal Law; Criminal Procedure; Evidence; Professional Responsibility; Business Associations
Start Date: August 1, 2022
South Texas College of Law Houston invites applications from entry-level or lateral faculty for up to three full-time, tenure-track positions at the assistant or associate professor level beginning in the 2022-23 academic year. Our curricular needs include criminal law, criminal procedure, evidence, professional responsibility, and corporations, with additional areas of potential interest in health, international, energy, and environmental law. We seek candidates with outstanding academic records who are committed to excellence in teaching and sustained scholarly achievement. Members of minority groups and others whose backgrounds will contribute to the diversity of the faculty are especially encouraged to apply.
South Texas College of Law Houston is committed to fulfilling our mission of providing a diverse body of students with the opportunity to obtain an exceptional legal education, preparing graduates to serve their community and the profession with distinction. The school, located in downtown Houston, was founded in 1923 and is the oldest law school in the city. South Texas is a private, nonprofit, independent law school, fully accredited by the American Bar Association and a member of the Association of American Law Schools, with 60 full-time and 60 adjunct professors serving a student body of 900 full and part-time students. South Texas is known for its collegial culture and commitment to student success. The school is home to the most decorated advocacy program in the U.S. and the nationally recognized Frank Evans Center for Conflict Resolution. Additional information regarding South Texas is available at http://www.stcl.edu.
Applications may be directed to Professor Joe Leahy, email@example.com.
South Texas College of Law Houston is an Equal Opportunity/Affirmative Action Employer. All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, national or ethnic origin, ancestry, age, disability, sexual orientation, gender identity, veteran status, or any other characteristic protected by law.