Business Law Prof Blog

A More Positive 2014: Starting with Gender Equality in Business

Happy New Year!  2014 holds much promise and many challenges.  One such item: a recent World Bank report (key findings pdf) finds some things we all probably suspected: 

The report finds that economies with greater numbers of restrictions on women’s work have, on average, lower female participation in the formal labor force and have fewer firms with female participation in ownership. Conversely, economies which provide a greater measure of incentives for women to work, have greater income equality.

Here's hoping 2014 brings you all you seek.  More equality in the workplace, starting by removing legal barriers to gender equity, is high on my list.

Delaware Business Judgment Rule and Corporate Purpose Revisted

Lyman Johnson, Robert O. Bently Professor of Law at Washington & Lee, has a new article out in the Delaware Journal of Corporate Law titled, Unsettledness in Delaware Corporate Law: Business Judgment Rule, Corporate Purpose.

Abstract:  This Article revisits two fundamental issues in corporate law. One — the central role of the business judgment rule in fiduciary litigation — involves a great deal of seemingly settled law, while the other — is there a mandated corporate purpose — has very little law. Using the emergent question of whether the business judgment rule should be used in analyzing officer and controlling shareholder fiduciary duties, the latter issue having recently been addressed by Chancellor Strine in the widely-heralded MFW decision, this Article proposes a fundamental rethinking of the rule’s analytical preeminence. For a variety of reasons, it is suggested that fiduciary duties should be made more prominent and the business judgment rule should be dramatically deemphasized. The policy rationales for the rule are sound, but they have no relevance for shareholders and introduce needless complexity. For directors, those rationales do not apply in the loyalty setting, and in the care setting, can be achieved by recalling simply that there is no substance to judicial review in that context.

As to the corporate purpose, the Article advocates that Delaware law permit a pluralistic approach in the for-profit corporate sector. Long agnostic about ultimate corporate objective, Delaware law may have turned unnecessarily toward a strict shareholder primacy focus in the 2010 eBay decision. To bring clarification and to foster flexibility, Professor Johnson recommends a legislative default provision, with an opt-out feature. This feature should be in the business corporation statute itself. Delaware’s new benefit corporation law laudably advances the goal of institutional pluralism, but does so at the ironic risk of reinforcing a belief that business corporations themselves are legally permitted only to maximize profits. Judges in a democratic society should not dictate institutional goals.

Happy New Year!

-Anne Tucker

Upcoming Crowdfunding Conference

For those of you interested in crowdfunding and the new federal exemption for crowdfunded securities offerings, the University of Cincinnati College of Law is planning a symposium on crowdfunding, to be held on March 28. I and several leading crowdfunding scholars will be presenting papers, and those papers will eventually be published in the University of Cincinnati Law Review.

I will post more details when the official conference announcement is released.

Bebchuk & Ferrell on “Rethinking Basic”

Lucian A. Bebchuk & Allen Ferrell recently posted “Rethinking Basic” on SSRN.  Here is the abstract:

In the Halliburton case, the United States Supreme Court is expected to reconsider next spring the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory and has facilitated securities class action litigation. In this paper we seek to contribute to the expected reconsideration.

We show that, in contrast to claims made by the parties, the Justices need not assess, or reach conclusions regarding, the validity or scientific standing of the efficient market hypothesis; they need not, as it were, decide whether they find the view of Eugene Fama or Robert Shiller more persuasive. We explain that class-wide reliance should not depend on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price. Indeed, based on our review of the large body of research on market efficiency in financial economics, we show that, even fully accepting the views and evidence of efficiency critics such as Professor Shiller, it is possible for market prices to be distorted by fraudulent disclosures. Conversely, even fully accepting the views and evidence of market efficiency by supporters such as Professor Fama, it is possible that market prices were not distorted by a fraudulent disclosure. In short, the academic debate on market efficiency, even assuming the Court was somehow in a position to adjudicate the relative merits, should not be the focus in determining class-wide reliance.

We put forward and analyze the merits and applicability of a modified rule that would make class-wide reliance depend on the existence of fraudulent distortion of market prices. We further discuss (i) how such a rule would retain some of the key insights behind the Basic rule but would avoid key drawbacks of it (including those identified by Justice White in his critique of the Basic opinion); (ii) the tools that would enable the federal courts to apply it effectively; and (iii) the allocation of the burden of proof.

Sitkoff explains why “a mandatory fiduciary core is ... reconcilable with an economic theory of fiduciary law.”

Robert H. Sitkoff recently posted “An Economic Theory of Fiduciary Law” on SSRN.  Here is the abstract:

This chapter restates the economic theory of fiduciary law, making several fresh contributions. First, it elaborates on earlier work by clarifying the agency problem that is at the core of all fiduciary relationships. In consequence of this common economic structure, there is a common doctrinal structure that cuts across the application of fiduciary principles in different contexts. However, within this common structure, the particulars of fiduciary obligation vary in accordance with the particulars of the agency problem in the fiduciary relationship at issue. This point explains the purported elusiveness of fiduciary doctrine. It also explains why courts apply fiduciary law both categorically, such as to trustees and (legal) agents, as well as ad hoc to relationships involving a position of trust and confidence that gives rise to an agency problem.

Second, this chapter identifies a functional distinction between primary and subsidiary fiduciary rules. In all fiduciary relationships we find general duties of loyalty and care, typically phrased as standards, which proscribe conflicts of interest and prescribe an objective standard of care. But we also find specific subsidiary fiduciary duties, often phrased as rules, that elaborate on the application of loyalty and care to commonly recurring circumstances in the particular form of fiduciary relationship. Together, the general primary duties of loyalty and care and the specific subsidiary rules provide for governance by a mix of rules and standards that offers the benefits of both while mitigating their respective weaknesses.

Finally, this chapter revisits the puzzle of why fiduciary law includes mandatory rules that cannot be waived in a relationship deemed fiduciary. Committed economic contractarians, such as Easterbrook and Fischel, have had difficulty in explaining why the parties to a fiduciary relationship do not have complete freedom of contract. The answer is that the mandatory core of fiduciary law serves a cautionary and protective function within the fiduciary relationship as well as an external categorization function that clarifies rights for third parties. The existence of a mandatory fiduciary core is thus reconcilable with an economic theory of fiduciary law.

Klaassen v. Allegro Development: Will the Delaware Supreme Court reverse?

Over at The Race to the Bottom Blog, Jay Brown has posted a 3-part series reviewing Klaassen v. Allegro Development, a case currently pending before the Delaware Supreme Court, which deals with the issue of how much notice a board is required to provide a CEO before firing him or her.  What follows are brief excepts from each of the three parts, but you should definitely follow the links for the full discussion if this material is of interest to you.

Part 1

Increasingly … governance cases involve disputes among directors.  What does a management friendly approach mean in that context?  Most likely, it means an approach that favors management directors (i.e., the CEO) over non-management directors, particularly independent directors…. This hypothesis provides an interesting template for a review of Klaassen v. Allegro Development.  The case essentially involved a dispute between a CEO and the non-management directors…. At a meeting held on Nov. 1, 2012, the board voted to remove the CEO [Klaassen].  Klaassen eventually filed suit challenging the dismissal…. The board in turn asserted that the actions were at most voidable and subject to equitable defenses.  They argued for, and the Chancery Court found applicable, the equitable doctrines of laches and acquiescence. The case is now on appeal. 

Part 2

In Klaassen, the Chancery Court conducted a tutorial on the developpment of notice requirements for directors…. Beginning in the 1990s … the courts, as VC Laster put it, "took a very different approach to advance notice for special board meetings."  Unlike the 1980s, when shareholders could occasionally win a major governance case (recall Van Gorkom or Unocal), the 1990s began a period of decision making where this was less likely to occur…. In Klaassen, the Vice Chancellor described the [Fogel] decision as “dramatically expanding” the existing line of authority. The case essentially required advance notice to a CEO before termination.  “If Fogel is correct, then a board with a Chairman/CEO cannot fire its CEO without first giving the CEO explicit advance notice and an opportunity to call a special meeting of stockholders at which the composition of the board might change, regardless of how few shares the Chairman/CEO owns.”

Part 3

The management friendly nature of Delaware dictates that its Supreme Court will either reaffirm (or at least not overturn) the obligation of boards to notify the CEO in advance of an impending termination.  The Court will affirm (or at least not overturn) the obligation to provide this notice irrespective of the percentage of shares owned by the CEO.  In other words, the aftermath of the opinion will be that CEOs are entitled to advanced notice of their termination…. As a result, the instances of CEO removal will decline…. As to the actual decision in Klaassen, any prediction is a bit more problematic…. But, to go out on a limb, we predict that the Court will not just tamper with the reasoning but will actually reverse the Chancery Court opinion.  The case was written by a Vice Chancellor [Laster] that has shown significant independence.  Indeed, the decision in Klaassen was to uphold the dismissal of a CEO by a non-management board. Moreover, under the race to the bottom, management has incentive to find jurisdictions with favorable law….  Reversing a decision that permitted removal of the CEO without advance notice will be an outcome that management will see has highly favorable.

If law is a business, should law schools rethink the curriculum?

Once my son realized that the life of a lawyer bore no resemblance to the fun and games of Take Our Kids to Work Day, he quickly changed career paths. Now he’s applying to art and design schools to study visual arts, photography, and writing. Almost every school he wants to attend requires students to take a basic accounting course as a prerequisite for the Bachelors of Fine Arts degree. This led me to ask why law schools don’t require the same.

Two weeks ago I attended a local bar association luncheon during which several deans of Florida law schools informed the group of practicing lawyers and judges about the state of legal education. The deans also received an earful from the audience members about the kind of training they expect from the schools. More than one attorney bemoaned the lack of practical skills and business training from today’s law schools, which prompted one dean (not mine) to challenge the audience member’s hypothesis about the need for required courses beyond business associations. The dean asked why schools should force students to take additional courses if they want to litigate or do appeals. Some audience members disagreed with this response and so do I. When I was in law school I was convinced that I would become a public interest lawyer until I took tax and secured transactions and realized that there was another world out there that I had never considered.

As a commercial litigation associate in a large New York law firm I had the privilege of learning from the corporate partners about derivatives and mortgage-backed securities during mandatory firm-provided training. When I went in-house my company paid for me to attend a three-day course in accounting for lawyers, which enabled me to have more credibility with my internal clients. But the firm training was in the early 90’s and my general counsel had an incentive for me to understand the language of business. Most of today’s law firms don’t have the time or the inclination to provide that kind of training.

So should law schools have the time or the inclination for this kind of education? The second-year student who thinks she wants to be an appellate or family lawyer may change her mind after a few years (or months). Or, the only job that she can find may require her to advise small businesses, entrepreneurs, employers, nonprofits, divorcing spouses where a business is an asset, white-collar criminal defendants, or any number of clients for whom financial literacy would be required for her to provide competent legal advice. Co-blogger Anne Tucker discussed what the market wants in an earlier post here.

A number of law schools offer accounting or finance courses, but not many require them, and perhaps faculties should rethink that. Part of the reason that the arts schools require accounting courses is that art is a business. Of course, law is a business too. It would be a shame if my son, the aspiring artist knows more about a balance sheet and EBITDA after graduation than the lawyer he hires to represent him. 

Partnership Article Flashback: Who Owns the Christmas Trees?

This paper is a look back, but it seems appropriate for today. Happy holidays, all!  Who Owns the Christmas Trees? - The Disposition of Property Used by a Partnership, by Daniel S. Kleinberger.  Abstract: 

Abstract:      

Two partners form an enterprise. One (the K partner) supplies the assets used by the enterprise. The other partner (the L partner) supplies only labor. When the enterprise ends, the partners disagree about how to divide the property used in the partnership business. The K partner wants his or her property returned. The L partner wants his or her share of the business assets. If some of the property has appreciated while in partnership use, the dispute will be especially complicated. How do the partners divide the value of the property as originally brought into the business? Who benefits from the previously unrealized appreciation? 

This Article explores the property allocation issues that arise when the members of a K and L partnership lack a dispositive agreement. In such circumstances the default rules should provide clear guidance, and the Uniform Partnership Act (U.P.A.) seeks to do so. Unfortunately, many of the decided cases misapply or distort the U.P.A. As a body, the decided cases point in three different and mutually exclusive directions. Individually, they often ignore basic principles of partnership law. 

This Article takes those basic principles as its lodestar and seeks to determine how the law of partnership should analyze a K and L dispute over property disposition. Part II sets the context for the analysis, introducing partnership law as the applicable law. Part III explains the four basic partnership law concepts necessary to a proper analysis of the Christmas tree paradigm. Part IV describes the three different and mutually exclusive ways that courts have applied partnership concepts to evaluate the courts' incompatible approaches. 

The analysis presented in Part IV suggests outcomes that some readers may find unfair. Part V confronts the problem of unfairness and tries to determine why courts find K and L property disputes so troublesome. Part V begins by highlighting some of the unbalanced results produced by strict application of partnership law principles. Part V then explores the rationale behind those principles and suggests that courts sometimes disregard the letter of the law in order to serve that underlying, and largely hidden, rationale. Part V next identifies the philosophical and practical problems that arise when courts disregard the clear letter of the law in favor of hidden rationales and instead twist a generally applicable statute in order to avoid reaching a particular unpalatable result. Part V concludes by offering an approach to the Christmas tree problem that substantially alleviates the unfairness problem while remaining faithful to the law. Part VI exemplifies the suggested approach, using concepts developed in previous Parts to resolve correctly the actual Christmas tree case.

HHS Mandate and Social Enterprise Legal Forms

Here, Professor Bainbridge kindly asks for my thoughts on Keith Paul Bishop's article Would Hobby Lobby Stores, Inc. Have A Stronger Case As A Flexible Purpose Corporation?   

I agree with Bishop's conclusion that the question is still open.  Both the Flexible Purpose Corporation ("FPC") and the Benefit Corporation version of social enterprise legal forms are quite new and each became available in California as of January 1, 2012.  The FPC is only available in California (though Washington state's social purpose corporation is similar in many respects) and the Benefit Corporation legislation has passed in 20 U.S. jurisdictions (19 states and Washington D.C.), starting with Maryland in 2010.  As the name suggests, the FPC allows managers more flexibility in choosing their particular corporate purpose(s), whereas most of the Benefit Corporation statutes require a "general public benefit purpose" to benefit "society and the environment" when "taken as a whole" but also allow additional "specific public benefit purpose(s)."  Delaware's version of the benefit corporation law (called a "public benefit  corporation") requires the choosing of one or more specific public benefit purposes.  

Converting to an FPC or a Benefit Corporation, without more, likely would not be much help to companies fighting the HHS mandate.  The statutes are simply too broad, and I think courts would want more evidence regarding the corporation's stance on the issue.  Obviously, people would disagree on whether a "socially focused"  corporation would oppose certain types of contraceptives.  And it seems that the majority (though certainly not all) of those in the social enterprise area lean left of the political center. But, if an FPC or Benefit Corporation made its particular social/religious purpose(s) clear in its articles of incorporation, including enough information to determine a stance against certain types of contraceptives, I think the entity's argument could be strengthened.  

In some states, like Oregon and Texas, relatively recent amendments to their state corporation statutes make clear that a social purpose can be included in the articles of incorporation of a traditional corporation.  In other states, whether such a social purpose would be acceptable in a traditional corporation is a debatable question, and thus social enterprise legal forms would clear the way toward including a social/religious purpose that would suggest (or clearly state) opposition to the mandate.  

In short, the social enterprise forms, without customization, are likely insufficient, but use of a social enterprise form, with language in the articles of incorporation that suggest that the corporation would be opposed to the mandate, could strengthen the argument of those fighting the HHS mandate.  In some states, as mentioned above, a social enterprise form would likely be unnecessary, and a traditional corporation with customized language could be used.

I think the question posed by Keith Paul Bishop and Professor Bainbridge is an interesting one and would love to hear additional thoughts from others, especially any Constitutional Law scholars.     

What if Henry F. Potter Had Never Been Born?

My favorite Christmas movie is It’s a Wonderful Life. I have watched it at least 50 times, but the final scene never fails to bring a tear to the eye of this hopelessly sentimental romantic.

The basic premise, for those of you who have never seen the movie, is how much the good deeds we do affect those around us. George Bailey, on the brink of suicide, is shown by his guardian angel Clarence how Bedford Falls, George’s community, would have changed if George had never been born.

As much as I like the movie, I have always been a little bothered by its portrayal of Bailey’s nemesis, Henry F. Potter, played brilliantly by Lionel Barrymore. Potter is the personification of “heartless capitalism.” He mistreats people, eschews charity of any kind, and has only one goal in life: the accumulation of wealth. The idea of sacrificing profit to help others is foreign to him.

I wouldn’t want to be Potter and I wouldn’t want to work for Potter. But is the picture the movie paints totally fair to Potter or, more generally, to profit-seeking capitalism? The best way to answer the question is to ask same question the movie uses to evaluate George Bailey’s contributions: what would have happened to Bedford Falls if Henry Potter had never been born?

• The town’s bank would have failed in the depression. It survived only because Potter was there to bail it out. All of bank’s depositors, instead of getting 50 cents on the dollar, would have lost their money.

• The Bailey Building and Loan would have failed after George’s father died. George’s incompetent Uncle Billy was slated to take over the business when George’s father died. That didn’t happen only because Henry Potter convinced the board to close it unless George took over. Without Potter’s actions as director, Uncle Billy would have taken over and almost certainly would have ruined the institution.

• Poorer people who could not afford to build a house in George Bailey’s Bailey Park wouldn’t have rental housing available because Henry Potter wasn’t there to build it.

• Adults in Bedford Falls would have fewer entertainment choices because the downtown bars and dancing halls wouldn’t exist. Only the amoral capitalist Potter was willing to fund businesses like that.

• Most of the other businesses in town would not exist. They relied on Potter for capital; according to the movie, Potter controlled the entire town except for Bailey’s building and loan.

So don't be so quick to condemn Mr. Potter. Even heartless capitalists have value.

Happy holidays to all our readers from our resident Scrooge.

Manukyan on the Effectiveness of the ICESCR in Holding State and Non-State Actors Accountable for Environmental Degradation

Sofya Manukyan has published “Can the ICESCR Be an Alternative for Environmental Protection? Analysis of the Effectiveness of the ICESCR in Holding State and Non-State Actors Accountable for Environmental Degradation” on SSRN.  Here is an excerpt of the abstract:

[O]ne method for tackling the problem of environmental degradation is creating universal mandatory norms to which all corporations would adhere. Another method, however, which is considered in this work in more details, is the approach to the issue of environmental degradation from the human rights perspective, particularly from the perspective of each human being having the right to live in a healthy, clean environment. As the reflection of this right is found in the state binding UN Covenant on Economic, Social and Cultural Rights (ICESCR), we consider this indirect approach to the environmental protection as a possible effective method for addressing the issues of environmental degradation.

Therefore, in this work we first justify our choice of approaching the environmental protection from the perspective of state’s human rights obligations, rather than from the perspective of voluntary guidelines adopted by corporations and financial institutions. We then analyze how relevant articles of the ICESCR address the issue of environmental degradation. After this analysis we identify possible obstacles which may hinder the fulfillment of the Covenant provisions. Based on the observations, we summarize the extent to which the ICESCR can serve as an alternative for environmental protection, acting as a temporary measure, until the guidelines adopted by the corporations and financial institutions aimed at protecting human rights and the environment become universal and mandatory.

Brandstetter & Jacob: Do Corporate Tax Cuts Increase Investments?

Laura Brandstetter & Martin Jacob have posted “Do Corporate Tax Cuts Increase Investments?” on SSRN.  Here is the abstract:

This paper studies the effect of corporate taxes on investment. Using firm-level data on German corporations, we investigate the 2008 tax reform that cut corporate taxes by 10 percentage points. We expect heterogeneous investment responses across firms, since firms with a foreign parent have more cross-country profit shifting opportunities than domestically owned firms. Using a matching difference-in-differences approach, we show that, following the corporate tax cut, domestically owned firms increased investments to a larger extent than foreign-owned firms. Our results imply that corporate tax changes can increase corporate investment but have heterogeneous investment responses across firms.

Tuch on Financial Conglomerates and Chinese Walls

Andrew F. Tuch has posted, “Financial Conglomerates and Chinese Walls,” on SSRN.  Here is the abstract:

The organizational structure of financial conglomerates gives rise to fundamental regulatory challenges. Legally, the structure subjects firms to multiple, incompatible client duties. Practically, the structure provides firms with a huge reservoir of non-public information that they may use to further their self-interests, potentially harming clients and third parties. The primary regulatory response to these challenges and a core feature of the financial regulatory architecture is the Chinese wall or information barrier. Rather than examine measures to strengthen Chinese walls, to date legal scholars have focused on the circumstances in which to deny them legal effect, while economists have focused on demonstrating Chinese walls' practical ineffectiveness in a range of important contexts.

This paper discusses the phenomenon of failing Chinese walls, explains why it occurs, and proposes a regulatory solution. The paper argues that limits on market discipline and evidential difficulties in detecting and proving the use of non-public information account for the failures of Chinese walls. It shows how the Volcker Rule, a core plank of the Dodd-Frank Act, will likely reduce harms flowing from failing Chinese walls, despite the rule’s intended focus on financial stability. To address the ongoing regulatory challenges, the article proposes the use of statistical inference to both detect and prove trading by financial conglomerates using non-public information and thus the failure of Chinese walls. Employed in so-called forensic finance to detect wrongdoing, the analyses can be used to rule out benign rationales – including superior trading skill and mere coincidence – for financial conglomerates’ abnormal trading returns. The article designs a regulatory strategy based on the use of statistical analyses. Although recognizing limits with the strategy, the article argues that it nevertheless holds promise in addressing the regulatory challenges of financial conglomeration.

Changing Corporate Law to Make Companies More Sustainable- Perspectives from governments, academics and practitioners

On December 5^th and 6^th I attended and presented at the third annual Sustainable Companies Project Conference at the University of Oslo.  The project, led by Beate Sjafjell began in 2010 and attempts to seek concrete solutions to the following problem:

Taking companies’ substantial contributions to climate change as a given fact, companies have to be addressed more effectively when designing strategies to mitigate climate change. A fundamental assumption is that traditional external regulation of companies, e.g. through environmental law, is not sufficient. Our hypothesis is that environmental sustainability in the operation of companies cannot be effectively achieved unless the objective is properly integrated into company law and thereby into the internal workings of the company.  

Members of the Norwegian government, the European Commission, the Organisation for Economic Cooperation and Development (“OECD”), and the United Nations Environmental Programme  (UNEP) Finance Initiative also presented with academics and practitioners from the US, Europe, Asia and Africa.

I did not participate in the first two conferences, but was privileged this year to present my paper entitled “Climate Change and Company Law in the United States: Using Procurement, Pay and Policy Changes to Influence Corporate Behavior.” The program and videos of the entire conference (click on the link of the panel discussions) are here. I presented last and my paper, with the others, will appear in a special edition of the Journal of European Company Law in 2014.

Professors David Millon and Celia Taylor rounded out the US delegation. Millon, who I learned first coined the phrase “shareholder primacy,” proposed a constituency statute for Delaware, but acknowledged that his proposal (even if it were passed) might not have much impact because of the twin influence of inventive-based compensation for executives and the role of institutional investors, who also seek short-term profit maximization. Taylor discussed the SEC Guidance on climate change disclosures recommending that they be made mandatory, but cautioned against disclosure overload and potential greenwashing.

Others provided insight on shareholder primacy and board duties from the UK, Norway, and Indonesia, and Tineke Lambooy presented the results of a meta study regarding boards and sustainability.  Gail Henderson, from Canada, used the concept of "undue hardship" in human rights law to propose a new burden to reduce environmental impacts. Mark Taylor, who was one of the many attendees who like me came straight from the UN Forum on Business and Human Rights, explained due diligence provisions in EU member state laws and argued that due diligence is emerging as a standard for compliant businesses.  Carol Liao discussed "catalytic innovation" and hybrid entities. Her blog about the conference is here.

A number of presenters focused on: auditing; integrated reporting; insurance, bankruptcy, contract, and insolvency law; and the role of sustainable investors (there are 50 sustainable stock indices), particularly large sovereign pension funds.  One of the more interesting proposals came from Ivo Mulder of UNEP, who is conducting a study on a sovereign credit risk model.  Sovereign bond markets represent 40% of global bond markets but there is no integration of environmental, social or governance factors even though risk mitigation is a key factor in fixed-income investing. He called for a new way of thinking about how bond securities are valued in primary and secondary markets.

Perhaps one of the most innovative proposals came from Endre Stavang, who suggested an “environmental option.” Specifically he and his co-author recommend enacting legislation that will empower certain green companies to transfer a call option to buy a block of its shares to an established company of their choice. He stressed that the option is free and that the exercise price would be the price of the green company’s share at the time of the transfer. The non-green receiving company would have a period of five years to exercise.

The abstracts from all of the presenters are available here. It was an intense two days of creative presentations, but hopefully these kinds of substantive public policy discussions, which include government, intergovernmental organizations, stakeholders and academics will have an impact. It’s the reason I joined academia.

Happy Holidays to all, and to my new Norweigian colleagues, Gledelig høytid.

 

 

 

 

Regulation A+ Proposal

For those of you who haven't seen it, the SEC has issued its rules proposal for so-called Regulation A+. It's available here.

Section 401 of the JOBS Act required the SEC to exempt from registration public offerings of securities with an aggregate offering amount of up to $50 million per 12-month period. The Act does not go into much detail, but it does impose some conditions on the exemption the SEC is supposed to adopt:

• the securities may be offered and sold publicly
• the securities are not "restricted securities," meaning they may be resold freely
• the issuer must file an offering statement with the SEC and distribute that offering statement to prospective investors
• the issuer may solicit interest in the offering prior to filing an offering statement with the SEC
• the issuer must file audited financial statements annually
• certain issuers are disqualified
• the SEC may require the issuer to file periodic disclosures.

Section 401 does not mention Regulation A, but the statutory requirements are similar to the requirements in Regulation A, so everyone has been referring to it as Regulation A+. The SEC could have chosen to issue a new exemption completely separate from Regulation A, but it has not done so. The proposed rules create a two-tiered exemption within Regulation A: what was the old Regulation A exemption, with some updates; and the new exemption.

 

 

Year End Wrap up of Corporate/Campaign Finance Issues

In 13 Things We Learned about Money in Politics in 2013, written by Stetson Professor Ciara Torres-Spelliscy, numbers 9 and 10 highlight the intersection of corporate and campaign finance laws.

10. Disappointing nearly 700,000 members of the public who had asked for more transparency from public companies, the Securities and Exchange Commission (SEC) refused to require transparency for corporate political spending — for now.

9. Shareholder suits over corporate political spending bookended the year. In January, the Comptroller of New York sued Qualcomm, as a shareholder under Delaware law, to get their books and records of political spending. In December, the insurance giant Aetna was suedby a shareholder represented by Citizens for Responsibility and Ethics in Washington (CREW) for hiding its political spending.

To access the rest of the list and other campaign finance information provided by the Brennan Center for Justice, click here.

-Anne Tucker

End of an Era: Federal Reserve Chairman Ben Bernanke's Last Press Conference Today

The main question is whether or not the Fed will begin tappering its current bond buying policy which has been in place since 2008.  NPR did a quick and accessible print and radio story on the Fed and the issue of tappering.  Both versions of the story are available here.  I've also posted on this blog before on the issues facing the Fed as leadership is about to change hands.

Watch it live at 2:30 pm today here.  

[editted today at 3:15]-- Summary of Fed Policy Announcements:

• Fed will reduce (tapper) its bond buying program from $85 billion to $75 billion per month, with additional tapering expected as the economy continues to strengthen.

 

• The policy at the Fed is dependent, in part, upon the rate of inflation, which has been running below the 2% benchmark.  “The [Fed] recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, and it is monitoring inflation developments carefully for evidence that inflation will move back toward it objective over the medium term.”

 

• Short-term interest rates are expected to hold steady through 2014 with some anticipated increase in 2015, especially if the unemployment rate falls below 6.5% (as it is expected to do in 2014).

 

• Today’s announcements are consistent with the policy outlined in the September meeting of the Fed, and indicate a gradually strengthening economy with a rising gross domestic product and falling jobless rate.

-Anne Tucker

More Evidence the Future of Business is the Future of Energy

As someone who has focused his research, scholarship, and teaching on business law and energy law, it's long been my argument that energy is the key to long-term prosperity and quality of life.  Access to energy is critical, as are sustainable practices to ensure access to energy goes along with, and is not in lieu of, access to clean air and clean water.  See, e.g., my article: North Dakota Expertise: A Chance to Lead in Economically and Environmentally Sustainable Hydraulic Fracturing.

As I often do, this morning I visited the Harvard Business Law Review Online to see what topical issues were taking center stage.  A quick look reveals that three of the eight articles under the U.S. Business Law heading were energy related.  The articles are worth a look.  Here's a quick link to each:

The Regulatory Challenge Of Distributed Generation, by David B. Raskin

Investing in U.S. Pipeline Infrastructure: Could the Proposed Master Limited Partnerships Parity Act Spur New Investment?, by Linda E. Carlisle, Daniel A. Hagan & Jane E. Rueger

Why Are Foreign Investments in Domestic Energy Projects Now Under CFIUS Scrutiny?, by Stephen Heifetz & Michael Gershberg

As my friend and colleague Marie Reilly so elegantly stated nearly six years ago, Energy Policy is Everything Policy.  It really is.  

Crowdfunding Intermediaries' Duty to Protect Against Fraud

I have been pondering one of the provisions in the SEC's proposed crowdfunding rules, and I have decided that it's extremely dangerous to crowdfunding intermediaries.

Reducing the Risk of Fraud: The Statutory Requirement

Section 4A(a)(5) of the Securities Act, added by the JOBS Act, requires crowdfunding intermediaries (brokers and funding portals) to take steps to reduce the risk of fraud with respect to crowdfunding transactions. The SEC is given rulemaking authority to specify the required steps, although the statute specifically requires "a background and securities enforcement regulatory history check" on crowdfunding issuer's officers and directors and shareholders holding more than 20% of the issuer's outstanding equity.

Proposed Rule 301

Proposed Rule 301 of the crowdfunding regulation implements this requirement.

A couple of the requirements of Rule 301 don't really relate to fraud, even though the section is captioned "Measures to reduce risk of fraud." Rule 301(a) requires the intermediary to have a reasonable basis for believing that the issuer is in compliance with the statutory requirements and the related rules. Rule 301(b) requires the intermediary to have a reasonable basis for believing that the issuer has means to keep accurate records of the holders of the securities it's selling. Neither of these requirements is particularly onerous because, in each case, the intermediary may rely on the issuer's representations unless the intermediary has reason to doubt those representations.

Rule 301(c)(2) enforces the background check requirement, as well as the "bad actor" disqualifications in Rule 503. The intermediary must not allow any issuer to use its crowdfunding platform unless the intermediary has a reasonable basis for believing that the issuer, its officers and directors, and its 20% equity holders are not disqualified by Rule 503.  To satisfy this requirement, the intermediary "must, at a minimum, conduct a background and securities enforcement regulatory history check" on each such person.

The Problematic Provision

The part of Rule 301 that really troubles me is the final requirement, in Rule 301(c)(2). The intermediary must deny issuers access to its platform if the intermediary "[b]elieves that the issuer or the offering presents the potential for fraud or otherwise raises concerns regarding investor protection." If an intermediary becomes aware of such information after its has already granted access to the issuer, the intermediary "must promptly remove the offering from its platform, cancel the offering, and return (or, for funding portals, direct the return of) any funds that have been committed by investors in the offering."

If this was all the regulation said, it would make sense: an intermediary can't let known or suspected bad actors use its platform. But that's not all it says. Rule 301(c)(2) adds this little nugget:

"In satisfying this requirement, an intermediary must deny access if it believes that it is unable to adequately or effectively assess the risk of fraud of the issuer or its potential offering."

It's one thing to say an intermediary should shut down the issuer if it's aware of problems or if there are red flags that should reasonably cause concern. But this last provision requires the intermediary to refuse access to the issuer unless it can affirmatively determine that the issuer poses no risk of fraud. And, of course, the only way to "adequately or effectively assess the risk of fraud" is through a full investigation of the issuer and its principals. The cost of fully investigating every issuer on the platform would be prohibitive, and certainly too much for the returns likely to be generated by hosting offerings of less than $1 million.

Intermediaries should be required to deny their platforms to issuers who they know pose a risk of fraud and intermediaries should be required to pursue any red flags that arise. But that should be it. Crowdfunding intermediaries should not be insurers against fraud, which is what this provision is trying to make them.

Jay Brown on the Proxy Advisory Services Roundtable

Over at The Race to the Bottom, Jay Brown has compiled a series of post on the recent proxy advisory services roundtable.  Here are the relevant links:

• Introduction ("To be frank … roundtables do not often move the issue forward.  Comments can be random or incomplete. In a room full of experts, they can be woefully unprepared and tendentious. Statements can be predictable and provide little additional value to the debate.  This Roundtable, however, was different. It was very well done.").
• The Participants ("There was a good cross section of views to say the least.").
• The Data ("[T]he evidence presented at the Roundtable indicated that the largest asset managers (BlackRock for example) viewed the recommendations as an input, not a controlling influence.").
• Voting Decisions and the Need for Data Tagging ("Mutual funds must file voting data on Form N-PX…. [we should] require the filing of the data in an interactive format.").
• The Issue of Concentration (“Concentration is … a structural issue that exists in many places in the securities markets and the proxy process.”).
• Plumbing Problems (“Michelle Edkins from BlackRock … noted that BlackRock retained ISS not only for advice but for other services as well. Some of these services arose out of the ‘operating environment.’ She described the voting environment as ‘highly complex, terribly inefficient’ and ‘prone to error.’”).
• The View of Consumers (“The discussion brought home several points.  First, investors want the services provided by the proxy advisory firms, an obvious enough point given that they pay for it.  But the comments demonstrated the role that demand played in the structure of the proxy process.”).
• The View of Issuers (“Issuers and their allies raised a number of concerns about proxy advisory firms.  They ranged from industry concentration to conflicts of interest to the propensity to make mistakes in making recommendations.  The fact that the firms make recommendations yet seek business from issuers raised concerns, as Trevor Norwitz (2:37) said, about being 'shaken down when approached by the governance side . . .'”).
• The Regulatory Privilege (“An interesting issue that arose off and on during the day was the role played by the Commission in connection with the use of proxy advisory firms and the creation of the current market structure.”).