Business Law Prof Blog

ICYMI: Tweets From the Week (Nov. 30, 2014)

What’s a CEO Really Worth? Too Many Companies Simply Don’t Know http://t.co/92Vt2o6LfY

— Richard Leblanc (@DrRLeblanc) November 22, 2014

Disclosure Committees…Necessary Evil or Saving Grace? http://t.co/uEGP4gcX0F by @dailyfei

— Dennard Lascar (@DennardLascar) November 24, 2014

"New website uses crowdfunding to finance lawsuits" http://t.co/h8gav7j3kn

— Stefan Padfield (@ProfPadfield) November 25, 2014

"fraud-on-the-market’s evolution..has been driven..by a..series of contributions by Judge Easterbrook, Judge Posner" http://t.co/zlFYtwwkZ2

— Stefan Padfield (@ProfPadfield) November 26, 2014

#Germany will introduce 30 percent #quota for women on company boards from 2016 http://t.co/skogAE1gZP pic.twitter.com/IJ30nEdFvk #corpgov

— Estelle Metayer (@Competia) November 28, 2014

Nice little bond issuance you have there. Shame if anything were to happen to it.

When commenters look back at the financial crisis, many blame the ratings agencies, at least in part - and in particular, the dominance of a small number of firms (Moody's, S&P, and - distantly - Fitch).  This is why, for example, the SEC has been criticized for erecting barriers that prevent other agencies from earning the coveted NRSRO label. 

Which is why I found this story regarding an apparent effort by Moody's to eliminate a competitor so fascinating.  According to the WSJ:

Moody’s Corp. doesn’t often give away its thoughts free of charge.

But the ratings firm made an exception recently, issuing an unsolicited credit rating to National Penn Bancshares Inc., a small community bank it had never assessed before.

Moody’s grade was lower than one issued just weeks earlier by Kroll Bond Rating Agency Inc., which the bank had hired to rate a new bond.

Kroll contends Moody’s deliberately lowballed its rating—a move that could have ripple effects through the market for National Penn’s bonds—to scare other small banks into hiring it for future deals.

“It seems this was nothing less than intimidation,” said Kroll President Jim Nadler. “Investors and issuers are worried that Moody’s, if it’s not paid their ransom, will continue doing this until they bully their way into the market.”

A Moody’s spokesman said the firm’s unsolicited rating for National Penn was due to the relatively large size of the debt deal for a regional bank. “We thought our opinion would be helpful to market participants,” he said....

Moody’s never met with National Penn senior management. Instead, Moody’s analysts sifted through public disclosures, listened to earnings calls and read news articles, Mr. Tischler said. These types of situations, with no participation from the rated issuer, are “definitely the minority,” he added.

Moody’s hadn’t rated a U.S. bank with assets under $10 billion all year. In its eight-paragraph rating rationale from Oct. 31, Moody’s said National Penn’s “acquisition appetite” for troubled banks “poses risks for creditors,” calling into question the management’s strategy. Few detailed financials were mentioned in the initial Moody’s rating.

Now, this is not the first time Moody's has been accused of this kind of behavior.  In Jefferson County School District No. R-1 v. Moody’s Investor’s Services, Inc., 175 F.3d 848 (10th Cir. 1999), for example, the plaintiff alleged that Moody's publicized an unsolicited low-ball rating as punishment to an issuer for failing to hire Moody's to rate the deal.  In that case, the Tenth Circuit held that ratings are opinions subject to First Amendment protection, and dismissed state law tort claims as well as federal antitrust claims.

It raises really interesting questions, because on the one hand, many observers believe that "ratings shopping" - the practice of one issuer going to different agencies until it receives the rating it wants - corrupts ratings and contributed to the financial crisis.  So we want to encourage agencies to rate securities even when an issuer has chosen a different agency - which necessarily means protecting them from lawsuits by disgruntled issuers.  On the other hand, the last thing we want is for agencies to use ratings as a means to exclude competitors from the market. 

The reality is, the best system would be one in which the issuer itself did not get to choose the agency (or, more creatively, perhaps one in which the rater itself was forced to invest in the securities it rates) - but despite proposals, we haven't been able to adopt a workable system to make that happen (as demonstrated by the fact that investors will sue the agencies for issuing unreliable ratings even as they continue to rely on them as a cornerstone of their investment policy).

Education and Aesthetics

Earlier this week, I watched Ivory Tower: Is College Worth the Cost? on CNN, which was a somewhat depressing documentary for someone who hopes to spend the next 30+ years in higher education.

One of the things the documentary decries is the construction of more and more extravagant buildings and amenities on college campuses.

While the extent and type of building that should occur can be reasonably debated – and my own institution has almost doubled the number of buildings on campus in the past decade – I want to make a relatively modest claim here: aesthetics matter in higher education.

(Photo of a Belmont University building and fountain from my iPhone).

Perhaps some schools have gone overboard in creating beautiful campuses. However, at institutions that exist to illuminate for students something much more important than mere financial returns, I think it is fitting to invest in beautiful campuses, for their own sake.

Again, perhaps most schools do not need student recreation centers than costs hundreds of millions of dollars, but there is something inspiring about going to a school, and teaching at a school, that is breathtakingly beautiful. 

This post may surprise some people who know me because I tend to be a pretty practical person, and I still believe that campus buildings should be functional over fancy, if you have to choose. But I think we need to widen the lens when we look at the benefits college and graduate school experiences provide. Yes, the financial benefits are quite important, and most schools need to be actively looking at increasing the financial benefits and/or reducing the financial costs.

Hopefully, however, college is about much more than just paying money now for an opportunity to earn more money later. Hopefully, college is about building relationships, learning independence, learning to think critically, being inspired, being mentored, creating and appreciating beauty. Maybe this is wishful thinking from a professor, but I do regularly see students who seem to capture much more from college than just better job prospects. Granted, many students do not take full advantage of the meaningful opportunities available, but those meaningful opportunities exist and they are hard to capture on a balance sheet.

I don’t know what a beautiful building is worth. I guess we could measure its worth by counting the number of additional students it attracts to the school, but that seems cynical and narrow. Beautiful buildings may inspire. Inspiration is tough to quantify, but, nonetheless, I think it has value. Personally, I am thankful I work on a beautiful campus, and hope the campus inspires our students not only while they study here, but after they leave as well.     

Can a socially responsible person shop on Thanksgiving or Black Friday?

As regular readers know, I research and write on business and human rights. For this reason, I really enjoyed the post about corporate citizenship on Thanksgiving by Ann Lipton, and Haskell Murray’s post about the social enterprise and strategic considerations behind a “values” message for Whole Foods, in contrast to the low price mantra for Wal-Mart. Both posts garnered a number of insightful comments.

As I write this on Thanksgiving Day, I’m working on a law review article, refining final exam questions, and meeting with students who have finals starting next week (being on campus is a great way to avoid holiday cooking, by the way). Fortunately, I gladly do all of this without complaint, but many workers are in stores setting up for “door-buster” sales that now start at Wal-Mart, JC Penney, Best Buy, and Toys R Us shortly after families clear the table on Thanksgiving, if not before. As Ann pointed out, a number of protestors have targeted these purportedly “anti-family” businesses and touted the “values” of those businesses that plan to stick to the now “normal” crack of dawn opening time on Friday (which of course requires workers to arrive in the middle of the night). The United Auto Workers plans to hold a series of protests at Wal-Mart in solidarity with the workers, and more are planned around the country.

I’m not sure what effect these protests will have on the bottom line, and I hope that someone does some good empirical research on this issue. On the one hand, boycotts can be a powerful motivator for firms to change behavior. Consumer boycotts have become an American tradition, dating back to the Boston Tea Party. But while boycotts can garner attention, my initial research reveals that most boycotts fail to have any noticeable impact for companies, although admittedly the negative media coverage that boycotts generate often makes it harder for a companies to control the messages they send out to the public. In order for boycotts to succeed there needs to be widespread support and consumers must be passionate about the issue.

In this age of “hashtag activism” or “slacktivism,” I’m not sure that a large number of people will sustain these boycotts. Furthermore, even when consumers vocalize their passion, it has not always translated to impact to lower revenue. For example, the CEO of Chick-Fil-A’s comments on gay marriage triggered a consumer boycott that opened up a platform to further political and social goals, although it did little to hurt the company’s bottom line and in fact led proponents of the CEO’s views to develop a campaign to counteract the boycott.

Similarly, I’m also not sure of the effect that socially responsible investors can have as it relates to these labor issues. In 2006, the Norwegian Pension Fund divested its $400 million position (over 14 million shares in the US and Mexico operations) in Wal-Mart. In fact, Wal-Mart constitutes two of the three companies excluded for “serious of systematic” human rights violations. Pension funds in Sweden and the Netherlands followed the Fund’s lead after determining that Wal-Mart had not done enough to change after meetings on its labor practices. In a similar decision, Portland has become the first major city to divest its Wal-Mart holdings. City Commissioner Steve Novick cited the company’s labor, wage and hour practices, and recent bribery scandal as significant factors in the decision. Yet, the allegations about Wal-Mart’s labor practices persist, notwithstanding a strong corporate social responsibility campaign to blunt the effects of the bad publicity. Perhaps more important to the Walton family, the company is doing just fine financially, trading near its 52-week high as of the time of this writing.

I will be thinking of these issues as I head to Geneva on Saturday for the third annual UN Forum on Business and Human Rights, which had over 1700 companies, NGOs, academics, state representatives, and civil society organizations in attendance last year. I am particularly interested in the sessions on the financial sector and human rights, where banking executives and others will discuss incorporation of the UN Guiding Principles on Business and Human Rights into the human rights policies of major banks, as well as the role of the socially responsible investing community. Another panel that I will attend with interest relates to the human rights impacts in supply chains. A group of large law firm partners and professors will also present on a proposal for an international tribunal to adjudicate business and human rights issues. I will blog about these panels and others that may be of interest to the business community next Thursday. Until then enjoy your holiday and if you participate in or see any protests, send me a picture.

Writing (and grading) Exam Questions

This is the time of year when we craft exam questions and grading grids in anticipation of exams.

Aside from Teaching Law by Design (a fabulous resource that I recommend for all new teachers as a great continuing resource for even those grizzled from years in the trenches), I have used few formal resources to guide my exam writing and grading process. Fortunately, I work with creative, collaborative and generous colleagues who all shared lots of samples and tips when I first started writing exams.  Before committing myself to my Corporations exam this year, I decided to see what is out there to guide exam construction and grading. Finding little that was useful on SSRN or Westlaw, I turned to a broader search, which brought me to a general test instruction guideline produced by Indiana University, aptly titled: How to Write Better Tests.  It had the following information regarding essay exams that serve as a useful reminder about why we are so meticulous in constructing our grading rubrics and creating grading schemes that, to the greatest extent possible, reduce our individual biases.

Consider the limitations of the limitations of essay questions:

1. Because of the time required to answer each question, essay items sample less of the content.

2. They require a long time to read and score.

3. They are difficult to score objectively and reliably. Research shows that a number of factors can bias the scoring:

A) Different scores may be assigned by different readers or by the same reader at different times

B) A context effect may operate; an essay preceded by a top quality essay receives     lower marks than when preceded by a poor quality essay.

C) The higher the essay is in the stack of papers, the higher the score assigned.

D) Papers that have strong answers to items appearing early in the test and weaker answers later will fare better than papers with the weaker answers appearing first.

To combat these common issues the guidelines recommend:

• anonymous grading (check)
• grading all responses to question 1 before moving on to question 2, and so on (check)
• reorganizing the order of exams between questions (check)
• deciding in advance how to handle ambiguous issues (check, thanks to my grading rubric)
• be on the alert for bluffing (CHECK!)

If anyone has found a particularly useful resource regarding exam construction and grading, please share in the comments. I am sure everyone would benefit.

Happy Thanksgiving BLPB readers!

-AT

A Chance at the Top for Boys AND Girls

We want the best for both of our kids, and we are working to help them learn as much as they can about being good people and successful people. We're fortunate that we have a (relatively) stable life, we've had good health, and we're able to provide our children a lot of opportunities.  For my daughter, as I have noted before, I do worry about institutional limits that are placed on her in many contexts. 

She's in first grade, but expectations are already being set.  On her homework last week: a little boy in her reading comprehension story builds a tower with sticks and bricks and stones.  Next story: a little girl gets fancy bows in her hair instead of her usual ponytails.  I wish I were making this up.  

This is more pervasive than I think many people appreciate.  Take, for example, the Barbie computer science book that had people raising their eyebrows (and cursing).  NPR has a report explaining the basic issues here. The basics:

A book called Barbie: I Can Be A Computer Engineer was originally published in 2010. Author and Disney screenwriter Pamela Ribon discovered the book at a friend's house and was initially excited at the book's prospects, she tells guest host Tess Vigeland.

But then she continued reading.

"It starts so promising; Barbie is designing a game to show kids how computers work," Ribon says. "She's going to make a robot puppy do cute tricks by matching up colored blocks."

But then Barbie's friend Skipper asks if she can play it, and the book continues:

" 'I'm only creating the design ideas,' Barbie says, laughing. 'I'll need Steven's and Brian's help to turn it into a real game.' "

Sigh. 

Harvard Business Review recently published a piece, Research: How Female CEOs Actually Get to the Top, that offers some insights.  It's a good read, and is shows that success at the highest levels  is often limited to women pursuing a different path and in companies with a particular culture. At a minimum, the article suggest that the advice we give women about how to get ahead may not be useful. (Not shocking given that the advice is often coming from men.) Here's an excerpt with my biggest takeaways, but I recommend the whole things (it's a short read): 

The consistent theme in the data is that steady focus wins the day. The median long stint for these women CEOs is 23 years spent at a single company in one stretch before becoming the CEO. To understand whether this was the norm, we pulled a random sample of their male Fortune 500 CEO counterparts. For the men in the sample, the median long stint is 15 years. This means that for women, the long climb is over 50% longer than for their male peers. Moreover, 71% of the female CEOs were promoted as long-term insiders versus only 48% of the male CEOs. This doesn’t leave a lot of time for hopscotch early in women’s careers.

* * * 

It may be that the playbook for advising young women with their sights set on leading large companies needs to be revised. Just as important, there is something inspiring for young women in the stories of these female CEOs: the notion that regardless of background, you can commit to a company, work hard, prove yourself in multiple roles, and ultimately ascend to top leadership. These female CEOs didn’t have to go to the best schools or get the most prestigious jobs. But they did have to find a good place to climb.

To be clear, I am thankful things have progressed to the point that my daughter really does have a legitimate shot at the same success as my son. Things are better than they were, and I see that.  I'm just not satisfied that we're where we need to be, because her access to opportunities do not mean she has the same likelihood of success. We'll keep working on it, as I'd like to think we all should.  

Giving Thanks for Motivated and Motivating Students

Happy Thanksgiving you all!  With my co-blogger colleagues here on the BLPB writing various Thanksgiving posts on retail-related and other holiday-oriented business law issues (here and here), I find myself in a Thanksgiving-kind-of-mood.  I honestly have so much to be thankful for, it's hard to know where to start . . . .  But apropos of the business law focus of this blog, I am choosing today to be thankful for my students.  They make my job really special.

This semester, I have been teaching Business Associations in a new three-credit-hour format (challenging and stressful, but I have wanted to teach Business Associations in this format for fifteen years) and Corporate Finance (which I teach as a planning and drafting seminar).  I have 69 students in Business Associations and ten in Corporate Finance.  I have two class meetings left in each course.

The 69 students in Business Associations have been among the most intellectually and doctrinally curious folks to which I have taught this material.  I have talked to a lot of them after class about the law and its application in specific contexts.  Two stayed after class the other day to discuss statutory interpretation rules with me in the context of some problems I gave them.  This large group also includes a number of students who have great senses of humor, offering us some real fun on occasion in class meetings and on the class TWEN site.  They are not always as prepared as I would like (and, in fact, some of the students have expressed to me their disappointment in their colleagues' lack of preparedness and participation), but they pick up after each other when one of them leaves a mess in his or her wake (volunteering to be "co-counsel" for a colleague--a concept I introduce in class early in the semester).  I enjoy getting up on Monday mornings to teach them at 9:00 am.

Corporate Finance includes a more narrow self-selected group.  Almost all of these students have or are actively seeking a job in transactional or advocacy-oriented business law.  They handed in their principal planning and drafting projects a bit over a week ago, projects that they spend much of the semester working on.  (These substantial written projects are described further in this transcribed presentation.)  Now, each student is reviewing and commenting on a project drafted by a fellow student.  Both the project and the review are constructed in a circumscribed format that I define.  I am excited to read their work on these projects, given the great conversations I have had with a number of them over the course of the semester as they puzzled through financial covenants, indemnification provisions, antidilution adjustments, and the like.  Great stuff.  I teach this class from 1:00 pm to 2:15 pm two days a week--a time in the day when I generally am most sleepy/least enthusiastic to teach.  But these folks ask good questions and seem to genuinely enjoy talking about corporate finance instruments and transactions, making the experience much more worthwhile.

So, I am very thankful for each and all of these 79 students.  I may not feel that way after I finish all the grading I have to do, but for now, I am both grateful and content.  And I didn't consume a single calorie getting there (which is more than I will be able to say Thursday night . . .).  Just looking at the picture at the top of this post makes my stomach feel full and me feel heavier.  Ugh.

Should the Federal Government Subsidize Law School?

The federal government has a limited amount of money available for student financial aid. Many people believe the size of that financial aid pot should be increased. That may be true but, until that happens, the government should try to allocate the limited funds it has as efficiently as possible. So I ask, should the government be giving that money to law students?

I have great respect for my profession. I think lawyers serve an extremely important function. I’m a strong believer in individual liberty and many of our personal liberties have been preserved through the law and the efforts of lawyers. But it’s hard to argue that the most important issue in the United States today is a shortage of lawyers.

We need more scientists, engineers, mathematicians, and primary care physicians. So why is the government paying for students to major in fields like political science, sociology, and law, just to name a few? Wouldn’t we be better off allocating more money to math and the hard sciences, to give students an incentive to move into those areas? (Or, since many students aren’t prepared to move into those areas, perhaps some of that money needs to be used to improve primary and secondary education in science and math.)

I admit that I financed both my undergraduate political science degree and my law degree in part with federal funds. (When I went to college, I discovered that what I had always considered a liability—my family’s lack of money—was suddenly a benefit.) I was able to pursue my dream with the federal government’s help. But perhaps the government should have encouraged me to be a scientist or engineer. Or, if I really wanted to be a lawyer, to finance that dream myself.

There’s even less money available now than there was when I was a student, back in the days of Aristotle. (Not less in nominal dollars, but less as a percentage of the cost of a higher education.) Because of that, the need to allocate that financial aid money well is even stronger.

I’m a law professor, so even suggesting this is going against my own self-interest. But sometimes self-interest has to yield to national interest.

ICYMI: Tweets From the Week (Nov. 23, 2014)

Biggest corporate political interests spend billions, get trillions http://t.co/2SJoU5chOM via @sunfoundation #citizensunited #corpgov

— Nell Minow (@nminow) November 17, 2014

"The first libertarian intellectual was Lao-tzu, the founder of Taoism." http://t.co/pKP1gAOPYe

— Stefan Padfield (@ProfPadfield) November 18, 2014

"LLC Operating Agreements: Top 10 List of Material Terms" http://t.co/69BVC6RRZZ

— Stefan Padfield (@ProfPadfield) November 18, 2014

Ex-Chief of Iceland Bank Sentenced to Jail for Role in 2008 Crisis http://t.co/AnGJBUE0UL

— DealBook (@dealbook) November 19, 2014

MT: @VSKillingsworth: Advice to Directors: "Do I trust this situation?" [Board's Role in C-Suite Compliance] http://t.co/0jTzkjNQSK #CorpGov

— Stefan Padfield (@ProfPadfield) November 23, 2014

Call for Papers - Fourth European Research Conference on Microfinance

CALL FOR PAPERS

Fourth European Research Conference on Microfinance

1-3 June 2015

Geneva School of Economics and Management, University of Geneva

Geneva, Switzerland

Access to suitable and affordable finance is a precondition for meeting basic human needs in incomes and employment, health, education, work, housing, energy, water and transport. Microfinance – and more broadly, financial inclusion – will continue to be on the research and policy agenda. 2015 will be a special occasion to question received notions about the link between access to finance and welfare. In 2015 the Millennium Development Goals will make place for the Sustainable Development Goals. A broad debate and exchange on micro, macro and policy topics in financial inclusion will advance our knowledge and ultimately improve institutional performance and policy. This applies in particular to issues of financial market organization, but also patterns, diversity and trade-offs in institutional performance, scope for fiscal instruments, impact of technology on efficiency and outreach etc.

The European Research Conference on Microfinance is a unique platform of exchange for academics involved in microfinance research. The three former conferences organized by the Centre for European Research in Microfinance (CERMI) at the Université Libre de Bruxelles in 2009, by the University of Groningen in the Netherlands in 2011 and the University of Agder in Norway in 2013 brought together  several hundred researchers, as well as practitioners interested in applied research. The upcoming Fourth Conference is organized by the University of Geneva, in cooperation with the European Microfinance Platform (www.e-mfp.eu) and in association with the University of Zurich and the Graduate Institute of Geneva. 

To provide cutting-edge insights into current research work on microfinance and financial inclusion and to enrich the conference agenda we invite papers on the following topics:

• Client-related issues: consumer behavior, client protection, financial education, household-enterprises and entrepreneurship
• Financial products: credit, insurance, deposits, domestic and cross-border payments
• Non-financial services
• Microfinance adjacencies: Millennium Development Goals
• Institutional issues: management, governance, legal form, transformation, growth, mission drift
• Market: monopolies, competition, alliances and cooperation, mergers and acquisitions, crowding-in and crowding-out issues
• Funding: subsidies (smart and other), investments (public and private) in microfinance institutions
• Policy and regulatory issues
• Impact
• International governance

Papers will be selected for presentation at the conference by the Scientific Committee, based on criteria of academic quality.

Members of the Scientific Committee include, amongst others: Arvind Ashta (Burgundy School of Business), Bernd Balkenhol (U Geneva), Georges Gloukoviezoff (U Bordeaux and U College Dublin), Isabelle Guerin (IRD, Cessma), Begona Gutierrez-Nieto (U Zaragoza), Malcom Harper (Cranfield School of Management), Valentina Hartarska (U Auburn, USA), Marek Hudon and Ariane Szafarz (CERMI and Solvay School of Business Brussels), Susan Johnson (U Bath), Annette Krauss (U Zürich), Marc Labie (CERMI and University of Mons), Roy Mersland (U Agder), Christoph Pausch (European Microfinance Platform Luxembourg), Trond Randoy (U Agder), Daniel Rozas (European Microfinance Platform Luxembourg), Jean Michel Servet (Graduate Institute Geneva) and Adalbert Winkler (Frankfurt School of Finance and Management), Hans Dieter Seibel (U of Cologne).

Authors are invited to submit an abstract of their paper (not exceeding 2 pages) to [email protected] by December 20, 2014.  

The full paper needs to be sent in by March 31, 2015.

In anticipation of Thanksgiving

I have something of a follow-up to Haskell's earlier post. 

While companies like Wal-Mart will be open on Thanksgiving - a decision that has garnered no small amount of public criticism- others have conspicuously declared that they will be closed, in order to allow their employees to spend time with their families.

Now, you can call this a sincere commitment to employees' well-being if you like, but my cynical brain views this as a standard share value-maximizing decision - whether management has decided that adverse publicity would harm the brand, or that employees who get holidays off are less likely to agitate for higher wages, or that regulators are less likely to step in if the business makes some minimal concessions to employee welfare, it's still a decision that's about benefitting the bottom line.  If nothing else, it can be cast that way - which is precisely why, precisely as has been frequently argued on this blog, it's difficult to understand why the separate concept of a benefit corporation is necessary, except to the extent it represents the ultimate in marketing commitment.  Or maybe some corporate directors just don't want to have to come up with a shareholder-value-maximizing lie about the reasons for their decisions, even if it would be easy to do.

The Thanksgiving-holiday debate also fascinates me because of the way in which it calls to mind Hillary Sale's concept of corporate "publicness" - the idea that corporations, as large and powerful actors in society, are viewed as public institutions, and suffer when they fail to conduct their affairs with that understanding.  The corporations that have  declared that they will not be open on Thanksgiving seem to be responding to this "publicness" concept.

But that just raises the question, how much does "publicness" represent anything different than the types of pressures that have always existed to force corporations to behave as better corporate "citizens"?  Corporations have always had to fear that customers or employees would turn against them, or regulators would try to control them, if they did not behave appropriately; why are today's corporations any different?

Perhaps it's simply because modern corporations are too powerful to regulate via traditional mechanisms. Public shaming and appeals to (certian classes of) shareholders appear to be the only levers of control available - or, at the very least, in a world where it is expected that regulation is unnecessary, scrutiny of corporations as public actors is a natural response.  Mariana Pargendler argues that corporate governance has only arisen as an important issue in corporate theorizing as a result of the deregulatory bent of modern America - because there is no political appetite for direct regulation, people who would prefer direct regulation instead turn to corporate governance arguments as a second-best solution for controlling corporate behavior.

I suspect this is accurate.  Once upon a time, if we were concerned that workers were being unfairly pressured to work over the holidays, we might consider using direct regulation to remedy the problem.  Today, the idea seems extremely remote, if not utterly impossible.  Public shaming seems the only viable alternative, in hopes that either shareholders or customers will display enough distaste for corporate policies that managers decide to voluntarily reform.

 

Writing Retreat (a subtle plea for help)

I just booked my hotel for Sunday and Monday for a mini-writing retreat before the Thanksgiving holiday.  This has been an effective (although intimidating) format for me in the past to tackle big writing projects (and deadlines).  The idea is that you block 24-48 hours, remove yourself from your normal world and responsibilities and dig into the big thinking to make progress.  This is a popular format at Georgia State, and I know several colleagues who book a writing weekend by themselves or with a good friend.  This is my first solo endeavor, and I sorely wish I had my normal writing companion heading into battle with me.  No one likes to stress-eat chocolate covered almonds and wear sweat pants alone.  It feels indulgent and fun with someone else; desperate when you are alone.

My current confusion and lack of direction on how to write this article (is it a short piece? a full article? a response piece?) has lead to my postponing its writing since June (!!!) and is creating a considerable amount of anxiety.  I don't know what I fear most at this point:  the tailspin that will inevitably happen in that hotel room around midnight on Sunday or how shattered I'll feel if I emerge with nothing to show.  

As a final ploy of procrastination, I turn the question to you:  have you effectively used a writing retreat to get through a big project and/or do you have any writing/brainstorming tips that help you when you find yourself at a similar crossroads?

-Anne Tucker

Prices versus Process

Whole Foods recently launched its first national advertising campaign around the theme “Values Matter.” Some outlets claim that the campaign is a response to weak comparable store sales. Supposedly, Whole Foods is spending between $15 million and $20 million on this campaign in an attempt to convince customers that “value and values go hand in hand.” You can see some of the videos here.

Whole Foods has long been known for its high prices and healthy food. Whole Foods has been actively fighting the high price reputation, but at least in the places I have lived, Whole Foods is usually close to the richest neighborhoods, is entirely absent in less affluent areas, and still seems to have higher prices than most competitors. Whole Foods seems to use a premium product, sold mostly to the upper-class, to fund its commitment to employees, its purchasing from smaller local vendors, and its care for the environment.

Whole Foods seems to focus on impacting society and the environment mostly through the process by which they sell their products and distribute the profits to stakeholders.

Walmart seems to have a very different model. Walmart seems to care much more about low prices than about treating their non-customer stakeholders well. Walmart’s extreme pressuring of suppliers, often contentious relationships with the communities around its stores, and low wages/limited benefits for many of its employees [updated] has been widely reported. Walmart seems to be trying to fight its reputation, and it has certainly engaged in some positive activities for society, but its reputation remains.

In contrast to Whole Foods, Walmarts can be found in rural and less affluent areas, and Super-Walmarts are bringing fresh produce to former food deserts at prices that appear to be more affordable. Walmart could argue that it makes a positive impact on society through its low prices.

In short, Whole Food’s strategy seems to be – proper process, high prices – while Walmart may allow a poor process to obtain low prices. 

Should corporate law, especially social enterprise law such as the recent benefit corporation law, encourage one strategy over the other?  The benefit corporation laws appear flexible enough to embrace either, though a more traditional understanding of social enterprise might exclude both on the ground that the companies’ primary purpose does not seem to be producing products that serve the disadvantaged. Social enterprise’s definition, however, has become much broader over time, though there is currently no consensus.    

This struggle with process and prices can be a difficult one, and I am just glad more companies are attempting to find appropriate solutions. 

Will you be reading conflict minerals disclosure statements this holiday season?

The DC Circuit will once again rule on the conflicts minerals legislation. I have criticized the rule in an amicus brief, here, here, here, and here, and in other posts. I believe the rule is: (1) well-intentioned but inappropriate and impractical for the SEC to administer; (2) sets a bad example for other environmental, social, and governance disclosure legislation; and (3) has had little effect on the violence in the Democratic Republic of Congo. Indeed just two days ago, the UN warned of a human rights catastrophe in one of the most mineral-rich parts of the country, where more than 71,000 people have fled their homes in just the past three months.

The SEC and business groups will now argue before the court about the First Amendment ramifications of the “name and shame” rule that required (until the DC Circuit ruling earlier this year), that businesses state whether their products were “DRC-Conflict Free” based upon a lengthy and expensive due diligence process.

The court originally ruled that such a statement could force a company to proclaim that it has “blood on its hands.” Now, upon the request of the SEC and Amnesty International, the court will reconsider its ruling and seeks briefing on the following questions after its recent ruling in the American Meat case:

 (1) What effect, if any, does this court’s ruling in American Meat Institute v. U.S. Department of Agriculture …  have on the First Amendment issue in this case regarding the conflict mineral disclosure requirement?

(2) What is the meaning of “purely factual and uncontroversial information” as used in Zauderer v. Office of Disciplinary Counsel, …  and American Meat Institute v. U.S. Department of Agriculture?

(3) Is the determination of what is “uncontroversial information” a question of fact? 

Across the pond, the EU Parliament is facing increasing pressure from NGOs and some clergy in Congo to move away from voluntary self-certifications on conflict minerals, and began holding hearings earlier this month. Although the constitutional issues would not be relevant in the EU, legislators there have followed the developments of the US law with interest. I will report back on both the US case and the EU hearings.

In the meantime, I wonder how many parents shopping for video games for their kids over the holiday will take the time to read Nintendo's conflict minerals policy.

 

 

Stock Drop Cases, ERISA & Securities Laws

In June 2014, the Supreme Court decided Fifth Third Bancorp v. Dudenhoeffer holding that fiduciaries of a retirement plan with required company stock holdings (an ESOP) are not entitled to any prudence presumption when deciding not to dispose of the plan’s employer stock.  The presumption in question was referred to as the Moench presumption and had been adopted in several circuits.  You may have heard of these cases as the stock drop cases, as in the company stock price crashed and the employee/investors sue the retirement plan fiduciaries for not selling the stock.  The Supreme Court opinion didn’t throw open the courthouse doors for all jilted retirement investors, and limited recovery to complaints (1) alleging that the mispricing was based on something more than publically available information, and also (2) identifying an alternative action that the fiduciary could have taken without violating insider trading laws and that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than to help it.

The Supreme Court in Fifth Third recognized the required interplay between ERISA and securities laws stating:

 [W]here a complaint faults fiduciaries for failing to decide, based on negative inside information, to refrain from making additional stock purchases or for failing to publicly disclose that information so that the stock would no longer be overvalued, courts should consider the extent to which imposing an ERISA-based obligation either to refrain from making a planned trade or to disclose inside information to the public could conflict with the complex insider trading and corporate disclosure requirements set forth by the federal securities laws or with the objectives of those laws.

The Ninth Circuit decided Harris v. Amgen in October based upon the Fifth Third decision. In Harris, the plaintiffs’ claim alleged a breach of fiduciary duty based on the failure to stop buying additional stock in the ESOP based on non-public information.  The Ninth Circuit found that plaintiffs alleged sufficient facts to withstand a motion to dismiss that defendant fiduciaries were aware (1) of non-public information, which would have affected the market price of the company stock and (2) the stock price was inflated.  These same facts supported a simultaneously-filed securities class action case.

To understand the interplay between securities laws and ERISA fiduciary rules, as established in Fifth Third, one ERISA consulting firm observed that

The Ninth Circuit appeared to reach the conclusion that, if ‘regular investors’ can bring an action under the securities laws based on the failure to disclose material information, then ‘ERISA investors’ in an ERISA-covered plan may, based on the same facts, bring an action under ERISA:

"If the alleged misrepresentations and omissions, scienter, and resulting decline in share price ... were sufficient to state a claim that defendants violated their duties under [applicable federal securities laws], the alleged misrepresentations and omissions, scienter, and resulting decline in share price in this case are sufficient to state a claim that defendants violated their more stringent duty of care under ERISA." 

The Harris opinion invokes a sort of chicken and egg problem.  If the plan had dumped the stock it would have signaled to the market and pushed the share prices lower.  In addressing this concern, however, the Ninth Circuit stated that:

Based on the allegations in the complaint, it is at least plausible that defendants could have removed the Amgen Stock Fund from the list of investment options available to the plans without causing undue harm to plan participants. 

. . . The efficient market hypothesis ordinarily applied in stock fraud cases suggests that the ultimate decline in price would have been no more than the amount by which the price was artificially inflated. Further, once the Fund was removed as an investment option, plan participants would have been protected from making additional purchases of the Fund while the price of Amgen shares remained artificially inflated. Finally, the defendants' fiduciary obligation to remove the Fund as an investment option was triggered as soon as they knew or should have known that Amgen's share price was artificially inflated. That is, defendants began violating their fiduciary duties under ERISA by continuing to authorize purchases of Amgen shares at more or less the same time some of the defendants began violating the federal securities laws.

The argument, in part, is that if Amgen had stopped the ESOP stock purchases it would have signaled to the market regarding price inflation and perhaps prevented the basis for the securities fraud violations harm alleged in the separate suit.

For those who follow securities litigation, there is a potential for investors purchasing in an ESOP to have a secondary and perhaps superior claim for fiduciary duty violations based upon the same facts giving rise to company stock mispricing arising under securities laws.

This raises the question, as one ERISA consulting firm noted,

Are an issuer/plan fiduciary's disclosure obligations to participants greater than its disclosure obligations to mere shareholders? Isn't that letting the ERISA-disclosure tail wag the securities law-disclosure dog – will it not result in the announcement of market-moving material information to plan participants first, before it is announced to securities buyers-and-sellers generally?

I have long been interested in how what happens in the defined contribution (DC) context intersects with what we think of traditional corporate law and how, as the pool of DC investors grows, there will be an ever increasing influence of the DC investor in the corporate law arena.

-AT

Lady Volunteers: What's in a Name?

In my post yesterday on intellectual property law and The University of Tennessee's rebranding exercise, I noted my opposition to the abandonment of the Lady Volunteer brand.  Some have questioned my stand on this issue as (although not using these words) old fashioned, anti-feminist, etc.  Even my husband questioned me on the matter, asking: "How would you have felt if, in playing field hockey at Brown, the team was referred to as the Lady Bears?"  Of course, some team names are not meant to "go with" the moniker "Lady," in any event . . . .  :>)

Some do see this as a simple issue of shedding the "separate and unequal" status of women's athletics at The University of Tennessee.  I can see how an outsider might see things that way.  But the merger of the Knoxville men's and women's athletic departments two years ago (I will spare you the details) was accomplished in a way that is seen by some as sweeping inequality under the rug through homogenization that falsely signals equality to the outside world.  Suffice it to say, I am not persuaded that the issue is this simple.

Others have contacted me on Facebook and in private communications to point out additional aspects of the rebranding matter that relate to the word "Lady" in the women's athletics branding at The University of Tennessee.  On Sunday, Jack McElroy, the editor-in-chief of our local paper (whose son played soccer with my son back in the day) wrote an editorial [ed. note: this link is firewall protected and may only be available to subscribers] on this element of the branding controversy.  In the editorial, he traces the history of the word "lady" in reference to women--from a 25-year-old study finding its use demeaning to female athletes to its resurgence as "a comfortable term by which 21st-century women can address themselves" (citing to feminist writer Ann Friedman).  Today, I received an email noting this post by Bryan Garner, perhaps most well known to many of us as the editor of Black's Law Dictionary, on the "increasingly problematic" nature of the word "lady."  (Hat tip to Bryan Cave partner Scott Killingsworth for that reference.) These writings also do not point to a simple resolution of issues relating to the continued usage or abandonment of the Lady Volunteer moniker or brand.

The branding issue is, in truth, complex, even in our post-Title IX world.  Some of the complexities involve legal issues or have legal ramifications (as noted in my post yesterday); some do not.  Among other things, branding involves psychological and emotional reactions that are contextual.  Business lawyers involved in branding efforts will be of the most use to their clients if they take this complexity and context into account in engaging legal analysis and offering advice.  How would you, for example, advise a firm like Airbnb about legal issues relating to its branding challenges? The possibility of legal claims emanating from the non-intellectual property aspects of branding is something I hadn't earlier considered but now see as real.  I guess advising business clients on branding involves a lot more than trademark law . . . .

Bainbridge on Fee-Shifting Bylaws

Steve Bainbridge at ProfessorBainbridge.com has posted a couple of discussions of fee-shifting bylaws.

As many of you know, last spring, in the ATP Tour case, the Delaware Supreme Court upheld a bylaw requiring the losing party in shareholder litigation to pay the other side's attorneys' fees. The case involved a non-stock membership corporation, but there's no relevant distinction between non-stock corporations and ordinary corporations in either the opinion or the statute. A bill was introduced in the Delaware legislature to amend the statute to overturn the ATP Tour decision, but the legislature deferred any action pending further study.

Professor Bainbridge argues in favor of the ATP Tour result. His first post is here. The second post is here.

Good Grief! Courts Can Only Get So Much Right on LLC Law

I’m starting to think that courts are playing the role of Lucy to my Charlie Brown, and proper description of LLCs is the football.  In follow up to my post last Friday, I went looking for a case that makes clear that an LLC’s status as a disregarded entity for IRS tax purposes is insufficient to support veil piercing.  And I found one.  The case explains:

Plaintiff . . . failed to provide any case law supporting his theory of attributing liability to Aegis LLC because of the existence of a pass-through tax structure of a disregarded entity. Pl.'s Opp'n. [50]. Between 2006 and 2008, when 100% of Aegis LLC's shares were owned by Aegis UK, Aegis LLC was treated as a disregarded entity by the IRS and the taxable income earned by Aegis LLC was reflected in federal and District of Columbia tax returns filed by Aegis UK. Day Decl. Oct. 2012 [48–1] at ¶ 37. In the case of a limited liability corporation with only one owner, the limited liability corporation must be classified as a disregarded entity. 26 C.F.R. § 301.7701–2(c)(2). Instead of filing a separate tax return for the limited liability corporation, the owner would report the income of the disregarded entity directly on the owner's tax return. Id. Moreover, determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders. See United States v. Acambaro Mexican Restaurant, Inc., 631 F.3d 880, 883 (8th Cir.2011). Given the above analysis, the undersigned finds that there is no unity of ownership and interest between Aegis UK and Aegis LLC.

Alkanani v. Aegis Def. Servs., LLC, 976 F. Supp. 2d 1, 9-10 (D.D.C. 2013).

 As Charlie Brown would say, "Aaugh!" 

So the case makes clear, as I was hoping, that it is not appropriate to use pass-through tax status to find a unity of interest and ownership in a way that will support veil piercing.  But the court then screws up the description of the very nature of LLCs.  This is not a “case of a limited liability corporation!” It's a case of a limited liability company, which is a not a corporation. 

Moreover, to use the court’s language, while it is true that “determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders,” the premise of the case has to do with an LLC’s status. Thus, the court should, at a minimum, make clear it knows the difference.  The statement, then, would go something like this:  "Determining whether LLC formalities have been disregarded requires more than just recognizing the tax arrangements between an LLC and its members.” 

It’s worth noting the entity formalities for LLCs are significantly less that those of corporations, so the formalities portion of LLC veil piecing test should be minimal, but that's a different issue.

Anyway, like Charlie Brown, I will keep kicking at that football, expecting, despite substantial evidence to the contrary, that one day it will be there for me to kick. At least I don't have to go it alone.  

[Not] Abandoning the Lady Vols . . . ?

Readers who know me well understand that I am a die-hard fan of The University of Tennessee's athletics teams.  As a former college athlete and continuing college sports fan, I embraced the Tennessee Volunteers and Lady Volunteers as if they were my own when I moved to Knoxville in 2000.  I first became a Lady Volunteer basketball ticket holder.  Then, I donated to the university and got myself in the queue for football tickets.  Men's basketball followed once I began service as a member of the campus's athletics board.

A week ago, the campus administration announced that the university would be dropping the Lady Volunteer brand for all sports except women's basketball.  The press release is not a model of good communication to the multiple interested constituencies that could be expected to read it.  It manages to muddle the rationale for the change (citing to a campus rebranding effort, brand audits, and the campus's new allegiance with Nike), send mixed messages (citing a perceived need for consolidation, but leaving the women's basketball team out of the consolidation), and ignore the value of the Lady Volunteer brand to female athletes not playing on the basketball team (asserting that "[t]he Lady Vol logo . . . has long been the monogram of excellence and a tradition among our loyal basketball fans." (emphasis added))--somewhat denigrating those non-basketball Lady Volunteer athletes and their fans in the process.  As my Facebook friends know, I am not happy about this change.  I believe that university is effectively (but admittedly not totally) giving the shaft to a valuable brand--a brand that has taken many years to build--one that is distinctive and meaningful because of its association with empowered, successful female athletes in many sports.

Apart from my disagreement with the change, however, I wondered whether legal counsel had--or could or should have had--any involvement in this "brand transition."  I suspect so.  Among other things, I would expect that best practices would dictate that all press releases receive review from one of the university's lawyers in the General Counsel's office.

This realization led me to consider the possible role of trademark abandonment in the university's decision to keep the Lady Volunteer brand for the women's basketball team.  The university concedes in its press release that the Lady Volunteer brand, which includes its trademarked logo (reproduced above) has value--although it limits that contention to women's basketball.  Under the Lanham Act, if the university had determined to discontinue use of the Lady Volunteer logo without having an intent to resume its use, the logo would have become available for use by others after three years.  By continuing use of the trademark for women's basketball, the university may (in part) be endeavoring to protect the logo from expropriation by an opportunistic entrepreneur.

But maybe I am giving the university and its legal counsel too much credit . . . ?

For another (perhaps more interesting?) take on intellectual property law issues stemming from the university's Power T rebranding campaign, see this post from one of our UT Law alums, Kevin Hartley (who practices at Stites & Harbison in Nashville).

SEC Crowdfunding Regulations: Congress Should Stop the Current Exercise in Futility

Regular readers of this column know that I’m a strong supporter of a federal crowdfunding exemption, which would allow companies to sell securities online to ordinary investors without registration.

The SEC’s Foot-Dragging

The JOBS Act, passed in April 2012, included a crowdfunding exemption, but, 956 days later, the SEC still has not adopted rules to implement it. Last month, I complained about the SEC’s failure to adopt those rules. Now, I’m not so sure I want that to happen.

 A Little Legislative History

Why have I changed my mind? First, a little legislative history. The House originally passed a crowdfunding bill, sponsored by Representative Patrick McHenry, that was much less regulatory than the final law. Unfortunately, the Senate amended the JOBS Act to substitute the version that was eventually enacted into law. That final version is much more regulatory than Congressman McHenry’s version, and is riddled with errors and ambiguities. The House accepted that Senate substitution, probably because fighting would have risked everything else in the JOBS Act.

As I wrote shortly after the JOBS Act passed, the exemption that came out of the Senate is flawed and unlikely to be effective. If so, it’s not the SEC’s fault. The SEC has limited discretion to fix the problems in the statute.

A Better Way

Things have changed since my last post on crowdfunding. No, the SEC still has not acted. Things have changed in other ways.

The Republicans now control both houses of Congress, and the Republican-controlled Congress will undoubtedly be friendlier to small business and more concerned about the regulatory costs involved in raising capital. The new Congress is dominated by people like Congressman McHenry.

It might be better at this point to start over, instead of waiting for the SEC to finish its exercise in regulatory futility. And, this time, Congress shouldn’t wait for SEC action. It should put the final exemption in the statute itself, with SEC input. The SEC certainly can’t argue that they need more time to study the issue.

President Obama might threaten a veto and argue that we should wait to see if the existing provisions work. But keep in mind that the Obama administration endorsed the original House bill. Was that original endorsement mere political grandstanding, or does President Obama really want to provide an effective exemption?

Congress is unlikely to override a presidential veto, so if that happens, we’ll probably have to wait for a new President to get a workable crowdfunding exemption.