Business Law Prof Blog

This IS my costume

Corporate social responsibility is a perennial topic of interest here at BLPB, and, in particular, the question whether corporations – especially publicly-traded ones - can in fact credibly commit to a non-profit-seeking goal.

Which is why I found this Financial Times column so hilarious.  Lucy Kellaway gathered the “values” statements from 24 different British companies – you know, statements like “We stand for innovation and integrity!” – read them aloud at a conference of the companies’ managers, and asked the managers to identify the statements from their own companies.  Only 5 were able to identify their own company, and in 3 cases, it was because they’d been the ones to draft them in the first place.  The remaining nineteen managers picked the wrong one.

From this, Kellaway concludes that values statements are useless – and she notes that among FTSE100 companies, not having a values-statement is correlated with higher share prices. 

I’d reframe it, though, and say that a values statement – or any corporate declaration of commitment to values – is useless unless it’s backed by real content.  It has to be operationalized in specific terms that are credibly communicated to employees.  The problem with the values statements that Kellaway describes is that they are so generic as to be meaningless – suggesting that the companies themselves were simply using them as PR, to cloak themselves in good feelings without any actual change in the underlying business (and ineffective PR, if you can’t tell one from the other - the companies should at least borrow from Google's playbook and choose something more memorable, like "Don't Be Evil").

And on another note, in honor of the season, here is Sally Richardson, the winner (loser?) of Tulane Law's Halloween costume drive - the professor with the most student donations has to teach class in costume:

Prof. Sally Richardson @TulaneLaw does Halloween right! pic.twitter.com/SQN701ktUV

— Tulane Law Profs (@TLSProfs) October 29, 2015

SEC Adopts Title III Crowdfunding Rules

I am relying on this report.  More on this as news emerges.

Postscript: the SEC's press release has been posted.

Shareholder Empowerment, Economic Regulation, or Other Solution?

Jill Fisch (Penn) recently posted an essay entitled The Mess at Morgan: Risk, Incentives and Shareholder Empowerment.

The entire essay is worth reading, but I think her argument can be summed up with this quote: 

This essay argues that the effort to employ shareholders as agents of public values and, thereby, to inculcate corporate decisions with an increased public responsibility is misguided. The incorporation of publicness into corporate governance mistakenly assumes that shareholders’ interests are aligned with those of non-shareholder stakeholders. Because this alignment is imperfect, corporate governance is a poor tool for addressing the role of the corporation as a public actor. (pg. 651)

Jill Fisch argues that economic regulation may be a better solution to the problem of protecting the public than shareholder empowerment. (pg. 684).

While I acknowledge the essay's mentioned limitations on shareholder empowerment, I don't think economic regulation is the only alternative solution to the problem of protecting public values. As Jill Fisch notes "shareholder empowerment might be defended on the basis that it is less intrusive than direct regulation." Corporate governance mechanisms other than shareholder empowerment may be both less intrusive and more effective than direct regulation. For example, (non-shareholder) stakeholder empowerment may make sense, as I plan to explain in a future article that is currently in its very early stages. 

Georgetown Law Graduate Clinical Teaching Fellowship

I recently received information about this social enterprise & nonprofit clinical teaching fellowship position at Georgetown University Law Center. My friend, Georgetown law professor Alicia Plerhoples, is the director of the clinic, and the fellowship sounds like an excellent opportunity.

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Georgetown Law Graduate Clinical Teaching Fellowship

Description of the Clinic 

The Social Enterprise & Nonprofit Law Clinic at Georgetown University Law Center offers pro bono corporate and transactional legal services to social enterprises, nonprofit organizations, and select small businesses headquartered in Washington, D.C. and working locally or internationally. Through the Clinic, law students learn to translate theory into practice by engaging in the supervised practice of law for educational credit. The Clinic’s goals are consistent with Georgetown University's long tradition of public service. The Clinic’s goals are to:

• Teach law students the materials, expectations, strategies, and methods of transactional lawyering, as well as an appreciation for how transactional law can be used in the public interest.
• Represent social enterprises and nonprofit organizations in corporate and transactional legal matters.
• Facilitate the growth of social enterprise in the D.C. area.

The clinic’s local focus not only allows the Clinic to give back to the community it calls home, but also gives students an opportunity to explore and understand the challenges and strengths of the D.C. community beyond the Georgetown Law campus. As D.C. experiences increasing income inequality, it becomes increasingly important for the Clinic to provide legal assistance to organizations that serve and empower vulnerable D.C. communities. Students are taught how to become partners in enterprise for their clients with the understanding that innovative transactional lawyers understand both the legal and non-legal incentive structures that drive business organizations.

Description of Fellowship

The two-year fellowship is an ideal position for a transactional lawyer interested in developing teaching and supervisory abilities in a setting that emphasizes a dual commitment—clinical education of law students and transactional law employed in the public interest. The fellow will have several areas of responsibility, with an increasing role as the fellowship progresses. Over the course of the fellowship, the fellow will: (i) supervise students in representing nonprofit organizations and social enterprises on transactional, operational, and corporate governance matters, (ii) share responsibility for teaching seminar sessions, and (iii) share in the administrative and case handling responsibilities of the Clinic. Fellows also participate in a clinical pedagogy seminar and other activities designed to support an interest in clinical teaching and legal education. Successful completion of the fellowship results in the award of an L.L.M. in Advocacy from Georgetown University. The fellowship start date is August 1, 2016, and the fellowship is for two years, ending July 31, 2018.

Qualifications

Applicants must have at least 3 years of post J.D. legal experience. Preference will be given to applicants with experience in a transactional area of practice such as nonprofit law and tax, corporate law, intellectual property, real estate, or finance. Applicants with a strong commitment to economic justice are encouraged to apply. Applicants must be admitted or willing to be admitted to the District of Columbia Bar. 

Application Process 

To apply, send a resume, an official or unofficial law school transcript, and a detailed letter of interest by December 15, 2015.  The letter should be no longer than two pages and address a) why you are interested in this fellowship; b) what you can contribute to the Clinic; c) your experience with transactional matters and/or corporate law; and d) anything else that you consider pertinent. Please address your application to Professor Alicia Plerhoples, Georgetown Law, 600 New Jersey Ave., NW, Suite 434, Washington, D.C. 20001, and email it to [email protected]. Emailed applications are preferred. More information about the clinic can be found at www.socialenterprise-gulaw.org.

Teaching fellows receive an annual stipend of approximately $53,500 (taxable), health and dental benefits, and all tuition and fees in the LL.M. program.  As full-time students, teaching fellows qualify for deferment of their student loans. In addition, teaching fellows may be eligible for loan repayment assistance from their law schools.

Have progressives flipped on corporate governance?

Kent Greenfield, Professor of Law and Dean’s Research Scholar at Boston College Law School, recently posted a provocative piece on the CLS Blue Sky Blog (here) in which he argues, among other things, that progressives have “flipped” from supporting “corporate citizenship” pre-Citizens United, to supporting “shareholder primacy” post-Citizens United.  (Kent has stressed to me that he does not believe this characterization extends to progressive corporate law scholars.) The piece is short, so I recommend you go read it before continuing on to my comments below, because I will simply be taking some short excerpts from his post and providing some responses, which will likely benefit from the reader having reviewed Kent’s post first. As just one disclaimer, Kent’s post is based on his article, “Corporate Citizenship: Goal or Fear?” – and I have not yet read that paper. Also, I consider the following to be very much an in-progress, thinking-out-loud type of project, and thus welcome all comments.

1. In 2010, the Supreme Court decided Citizens United v Federal Election Commission, ruling that corporations had a First Amendment right to spend money from general treasury funds in support of political candidates. Though seen as victory for political conservatives, the decision was in some ways based on a progressive view of the corporation. In the Court’s reasoning, corporations act as “associations of citizens” with rights of free speech.

Kent argues that the historical divide between progressives and conservatives can be viewed as one of “shareholder primacy” versus “corporate citizenship,” with progressives advocating for corporate citizenship while conservatives advance the cause of shareholder primacy. A couple of caveats are in order here. First, we must distinguish “shareholder primacy” as an assertion that shareholders should have the dominant (or at least more) controlling power within the corporation, from “shareholder wealth maximization,” which posits that the goal of corporate control is shareholder wealth maximization, independent of where the decision-making power resides. Second, we should keep in mind the competing corporate personality theories: aggregate theory, artificial entity (concession) theory, and real entity theory. I have argued in the past (see, e.g., here) that both aggregate theory and real entity theory tend to view the corporation as more private than public, with aggregate theory equating the relevant “association of citizens” with shareholders, while real entity theory looks to the board of directors – in either case positing a group of natural persons who can assert constitutional rights against government regulation. Artificial entity theory, on the other hand, views corporations as more public, at least in part because it is essentially impossible to mimic the corporate form solely through private contracting, and thus the state is entitled to more leeway in regulating corporations than natural persons acting in their purely private capacity. In light of all this, it may be better to view progressives as opposing shareholder wealth maximization as the sole goal of corporate governance, while being flexible as to the means used to achieve that end – be it shareholder primacy, director primacy, or “state primacy.” (I am not suggesting that a shift to shareholder primacy as the favored means of achieving the ends of progressive corporate governance is insignificant. Rather, I argue merely that a shift in means is less dramatic than a shift in ends, and thus less appropriately characterized as an ideological flip.) To the extent Citizens United is viewed as having merely strengthened the associational, private view of corporations without challenging the shareholder wealth maximization norm – it is hard to view it as advancing a progressive view of the corporation. In fact, it arguably stands simply as an opinion that gives more political power to corporations to pursue shareholder wealth maximization (or for managers to use shareholder wealth maximization as a justification for self-dealing) at the expense of other stakeholder concerns.

2. The biggest impediment to using the Citizens United moment to change corporate governance for the better is the progressive left.

In light of my comments above, I think there is a stronger argument to be made that the biggest impediment to changing corporate governance for the better is the continuing identification of corporations as purely private entities. It has been said that the greatest trick the devil played was convincing the world he didn’t exist. In this context, we might say the greatest trick played on progressives was convincing them their only viable choices are contractarian.

3. Justice John Paul Stevens’s dissent in Citizens United …. (perhaps unwittingly) bolsters shareholder supremacy by arguing that corporate speech should be limited in order to protect shareholders’ investments.

It may be better to view this part of Justice Stevens’s dissent as challenging the majority’s view that opening the corporate political contribution floodgates is not problematic because “corporate democracy” will address any problems. Meanwhile, Justice Stevens quotes Dartmouth College approvingly, and states that “corporations have been ‘effectively delegated responsibility for ensuring society's economic welfare,’” both of which place him squarely in the concession theory camp – despite his protestations to the contrary.

4. The irony runs the other way as well. In the 2014 Hobby Lobby case, the Court granted corporations the statutory right under the Religious Freedom Restoration Act to object to otherwise applicable regulations on religious grounds. Writing for the Court, Justice Samuel Alito recognized that corporations need not maximize the bottom line ….

Go here for my take on whether Hobby Lobby changed anything in terms of the ability of those who control corporations to pursue “socially responsible” ends.  It is worth noting that a corporation’s ability to pursue “socially responsible” ends as part of an overall shareholder-wealth-maximizing strategy in light of the business judgement rule is not necessarily the same thing as concluding corporations will pursue some optimal level of “corporate citizenship,” which may rather require recognizing state power to require such activity or prohibit related harmful activity.

5. The world is flipped. Progressives are championing shareholder rights. Conservatives are planting their ideological flag on the summit of corporate citizenship.

As noted above, to the extent one views progressives as seeking more corporate social responsibility, and being willing to consider alternative methods to that end – be it shareholder primacy, director primacy, or state primacy – I do not see a significant flip here. Meanwhile, to the extent conservatives can be viewed as having supported shareholder wealth maximization as the optimal, but not sole, means to the end of lifting all ships via a rising tide, in addition to being consistently united against government regulation, there is also arguably nothing here that constitutes a significant “flip.”

Of course, generalities like “progressive” and “conservative” typically suffer from significant amounts of imprecision, and it may be that the “flip” characterization is more or less appropriate given the strand of progressive or conservative one is considering.

Nice Award, But . . .

. . . are you sure I qualify?

From a spam email I recently received:

Dear Steve,

On behalf of The International Women’s Leadership Association, it is my distinct pleasure to notify you that, in consideration of your contribution to family career, and community, you have been selected as a woman of outstanding leadership.

Preventing Client Executives from Violating Compliance Policies and the Law

I had the honor of being invited to speak at the annual symposium for the Wayne Law Review two weeks ago.  The event, which focused on Corporate Counsel as Gatekeepers, was well organized and attended--and also very stimulating.  Speakers included Tony West as a keynote, a few of us academics, and a bunch of current and former practitioners--prosecutors, in-house counsel, and outside counsel.

My presentation focused on a story that bugs me--a story built on an experience I had in practice.  In the story (which modifies the true facts), an executive flagrantly violates a securities trading compliance plan that I drafted in connection with a subsequent transaction that I worked on for the executive's firm.  Specifically, the executive informs a friend about the transaction the day before it is announced, believing that the friend will never trade on the information.  The friend trades.  The incident results in a stock exchange and Securities and Exchange Commission (SEC) inquiries.  No enforcement is undertaken against the firm.  However, the executive signs a consent decree with--and pays a cash penalty to--the SEC and, together with the firm, suffers public humiliation via a front-page article in the local newspaper (since the SEC would not agree to forego a press release).  This fact pattern gnaws at me because I wonder whether there is anything more legal counsel can do to prevent an executive from violating a compliance policy to the detriment of himself and the firm . . . .

Continue reading

Delaware Affirms "Effective" Control Standards for Non-Majority Shareholders

Earlier this month BLPB editor Ann Lipton wrote about the Delaware Supreme Court opinion in Sanchez regarding director independence (Delaware Supreme Court Discovers the Powers of Friendship).  On the same day as the Del. Sup. Ct. decided Sanchez, it affirmed the dismissal of KKR Financial Holdings shareholders' challenge to directors' approval of a buyout.  The transaction was a stock-for-stock merger between KKR & Co. L.P. (“KKR”) and KKR Financial Holdings LLC (“Financial Holdings”). Plaintiffs alleged that the entire fairness standard should apply because KKR was a controlling parent in Financial Holdings.  The controlling parent argument hinged on the facts that:

Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee.

Chief Justice Strine, writing an en banc opinion for the Court,  upheld Chancellor Bouchard's finding that KKR could not be considered a controlling parent where "KKR owned less than 1% of Financial Holdings's stock, had no right to appoint any directors, and had no contractual right to veto any board action."

The Delaware Supreme Court upheld the familiar standard of effective control, absent a majority, which focuses on "a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock."

Chancellor Bouchard had noted that plaintiff's complaint stemmed from dissatisfaction at the contractual relationship between KKR and Financial Holdings which limited the growth of Financial holdings.  Chancellor Bouchard wrote:

At bottom, plaintiffs ask the Court to impose fiduciary obligations on a relatively nominal stockholder, not because of any coercive power that stockholder could wield over the board's ability to independently decide whether or not to approve the merger, but because of pre-existing contractual obligations with that stockholder that constrain the business or strategic options available to the corporation.

 

 

Sometimes a "nothing new" case provides a good reminder of an established standard and provides clear language for recapping the concept to students.  This will become a note case on "effective" control in my ChartaCourse corporations casebook and also a good illustration of the role of private agreements in shaping how legal standards are applied.  

You can read the opinion at: Corwin et al. v. KKR Fin. Holdings et al., No. 629, 2014, 2015 WL 5772262 (Del. Oct. 2, 2015). 

-Anne Tucker

 

For the Love of All that Is Holy, LLCs Are Not Corporations

So, my rants about the problem of courts (and others) conflating LLCs and corporations are not new.  Unfortunately for the proper evolution of the law, but good fodder for my posts, I continue to get examples.  We now have a new one that raises the bar a bit.

 A recent case from the United States District Court for the Western District of Pennsylvania continues the trend. The beauty, if one can call it that, of the case is that there are failures to recognize the difference between LLCs and corporations at multiple levels. 

 First, though, let’s recap what LLCs are.  LLCs are limited liability companies, and they are creatures of statute. See, e.g., 6 Del. C. § 18-101, et seq.  As such, they are not corporations, which are creatures of other statutes. Cf., e.g., 8 Del. Code § 101, et. seq. In contrast, LLCs, like corporations and other associations, can be people.  See, e.g.,  Dictionary Act, 1 U.S. Code § 1 (“[The wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.").

Back to our newest example, which I think of as a strikeout. The case was filed by the Pennsylvania General Energy Company, LLC, (PGE), which challenged the “constitutionality, validity and enforceability of an ordinance adopted by Grant Township that established a so-called Community Bill of Rights.” Penn. Gen. Energy Co., LLC, v. Grant Township, C.A. No. 14-209ERIE, at 1 (Oct. 14, 2015, W. Dist. Pa.), available here.   As Judge Baxter explains, “The Ordinance lays out the framers' beliefs that corporations should not have more rights than the people of its community and that the people have the right to regulate all activities pursuant to a right of local self government.” Id. at 2-3.    

The framers are our first group that does not appear to know that corporations are not the same as LLCs.  Strike one.  Here’s the ordinance (emphasis added): 

Section 3 - Statements of Law -Prohibitions Necessary to Secure the Bill of Rights

(a) It shall be unlawful within Grant Township for any corporation or government to engage in the depositing of waste from oil and gas extraction. 

(b) No permit, license, privilege, charter, or other authority issued by any state or federal entity which would violate the prohibitions of this Ordinance or any rights secured by this Ordinance, the Pennsylvania Constitution, the United States Constitution, or other laws, shall be deemed valid within Grant Township. 

So, unless the city has some definition or the other basis to say that an LLC is a corporation (which I did not see), this Bill of Rights does not apply to LLCs, partnerships, or other unincorporated entities.   

As such, the plaintiff’s first argument, I think, should have been that the statute does not cover us as an LLC at all.  The complaint (here) shows only an argument that LLCs are people  -- the argument that PGE was not a corporation was not made.  In fact, the complaint says LLCs are corporations. "The Community Bill of Rights Ordinance purports to strip corporations, such as PGE, of their status as natural persons and declares that corporations do not possess any other legal rights, privileges, power, or protections." Complaint ¶ 99.  Strike two.  

Finally, Judge Baxter, in what is mostly a reasonable opinion, skips right to equating LLCs and corporations, too. She explains, 

Defendant provides no precedential statute or constitutional provision authorizing its action other than its assertion that Plaintiff has no rights -- from contracting to do business in Grant Township to bringing a lawsuit to complain about an ordinance -- because it is not a person. This view is contrary to over one hundred years of Supreme Court precedent that establishes that corporations are considered "persons" under the United States Constitution.

Id. at 7-8. An arguably true statement of the law that is wholly irrelevant because plaintiff is not a corporation.  Plaintiff is an LLC, and the this is not transitive. That is, just because both LLCs and corporations can be persons, it does not mean that, therefore, LLCs are corporations.  Strike three.  

All in all, if the Grant Township ordinance has included all entities (or limited the options only to natural persons), then most, if not all, of Judge Baxter’s opinion would be correct.  As it is, it’s just wrong. Absent some other analysis, the ordinance at issue did not apply to the plaintiff at all. I, for one, hope Judge Baxter amends the opinion or the case is appealed so that the court can get it right.  The language here could set a terrible precedent. 

Who am I kidding? It just continues the long line of other terrible precedent. But it should still be fixed.

SEC to Vote on Crowdfunding Rules

This hit my mailbox this morning.  If the report is correct, we'll know in a few days whether we have a path to unregistered, broad-based securities crowdfunding in the United States.  More as news is reported . . . .

[Additional information:  Based on the link to the SEC's notice of meeting in Steve Bradford's comment to this post, it also appears that the SEC is considering amendments to Rules 147 (intrastate offerings) and 504 (limited offerings under Regulation D of up to $1,000,000).]

Entrepreneurship and Employees in Germany

I recently spoke at a crowdfunding conference in Germany. One of the professors there made a comment about entrepreneurship in Germany that I thought was interesting.

He indicated that small business entrepreneurs in Germany avoid hiring any employees for as long as possible, to avoid all of the (expensive) rights given to employees under German law.

Another example of the possible unintended consequences of regulation. Regulations intended to protect employees actually keep them from being hired.

The title of my talk at the conference was Regulating Investment Crowdfunding: Small Business Capital Formation and Investor Protection. I discussed how crowdfunding should be regulated, using the U.S. and German regulations as examples. The talk will eventually be posted online; I'll supply a link when it's available.

Chiarella: The Launch of the Supreme Court's Insider-Trading Jurisprudence

The Second Circuit decision in the Newman case has provoked much discussion of the Supreme Court’s opinion in Dirks and how to interpret the requirements it lays out for tippee liability. But it’s important to remember that Dirks was not writing on a clean slate. This year is the 35th anniversary of the case that preceded Dirks and laid the foundation for the Supreme Court’s insider-trading jurisprudence, Chiarella v. United States.

I realize that this was not the Supreme Court’s first look at insider trading. That honor, arguably, goes to Strong v. Repide, 213 U.S. 419 (1909). But Chiarella was the court’s first discussion of insider trading under Rule 10b-5.

The facts of the Chiarella case are relatively simple. Vincent Chiarella, the defendant in the case, was an employee of Pandick Press, a financial printer. His company was hired to print announcements of takeover bids. Although the identities of the target corporations were concealed in the announcements, Chiarella was able to figure out who they were. He bought stock in the target companies and made a profit of roughly $30,000. He was convicted of a criminal violation of Rule 10b-5, but the Supreme Court overturned his conviction.

It’s important to remember the basic problem Chiarella had to deal with (or perhaps it’s fairer to say the problem as the Chiarella majority constructed it). Rule 10b-5 prohibits securities fraud. People engaged in insider trading don’t usually make false statements and, under the common law, mere silence is not usually fraud. Because of that, the majority in Chiarella rejected the notion that a mere failure to disclose nonpublic information prior to trading violates Rule 10b-5. There’s no fraud.

However, the majority pointed out that a failure to disclose can be fraudulent when the non-disclosing party has a duty to disclose to the other person “because of a fiduciary or other similar relation of trust and confidence between them.” That fiduciary duty, the majority indicated in dictum, does exist in the case of corporate insiders. But Vincent Chiarella was not an insider of the corporations whose stock he traded. Since the government had not otherwise shown that Chiarella violated a fiduciary duty by not disclosing to anyone, he was not liable under Rule 10b-5.

That’s the essence of Chiarella: nondisclosure violates Rule 10b-5 only if there’s a fiduciary duty to disclose. No fiduciary duty, no liability.

Everything that followed—Dirks; O’Hagan; the Second Circuit’s decision in Newman; even the SEC’s Rule 10b5-2—depends on Chiarella. How different things would have been if Justice Blackmun’s dissent had carried a majority. His view was that “persons having access to confidential material information that is not legally available to others” could not trade without liability under Rule 10b-5.

The ultimate irony of Chiarella is that, if the case were tried today, Vincent Chiarella would without a doubt be liable under Rule 10b-5. The Supreme Court’s subsequent decision in United States v. O’Hagan, 521 U.S. 642 (1997) makes it crystal clear that one can be liable for trading on the basis of nonpublic information obtained from one’s employer or client. But the majority in Chiarella refused, on procedural grounds, to reach that question.

ICYMI: Tweets From the Week (Oct. 25, 2015)

"standard assumption of market efficiency": "there is no heterogeneity in shareholder valuations" https://t.co/GjjPk5SAoo #corpgov

— Stefan Padfield (@ProfPadfield) October 20, 2015

"Courts are divided": "SLUSA...to completely eliminate states' concurrent jurisdiction over Securities Act claims"? https://t.co/aFpcnLLxXX

— Stefan Padfield (@ProfPadfield) October 25, 2015

"the court held the reference to 'very strong' sales was not puffery" https://t.co/vwYvuSDZk3 #corpgov

— Stefan Padfield (@ProfPadfield) October 22, 2015

Cunningham: "RULLCA contains many fine provisions, but ... I don’t think states should adopt it" https://t.co/npxH5Tl4uW #corpgov

— Stefan Padfield (@ProfPadfield) October 21, 2015

"civil law based jurisdictions put less emphasis on the disclosure of conflicts of interest" https://t.co/ZOsngfuaha #corpgov

— Stefan Padfield (@ProfPadfield) October 20, 2015

What could possibly go wrong?

On the one hand:

Tech Startups Feel an IPO Chill

Dropbox Inc. had no trouble boosting its valuation to $10 billion from $4 billion early last year, turning the online storage provider’s chief executive into one of Silicon Valley’s newest paper billionaires.

But the euphoria has begun to fade. Investment bankers caution that the San Francisco company might be unable to go public at $10 billion, much less deliver a big pop to recent investors and employees who hoped to strike it rich, according to people familiar with the matter.

BlackRock Inc., which led the $350 million deal that more than doubled Dropbox’s valuation, has cut its estimate of the company’s per-share value by 24%, securities filings show.

Dropbox responds that it is continuing to increase its business, added 500 employees in the past year, including senior executives, and has no need for additional capital from private or public investors.

Still, the company is a portent of wider trouble for startups that found it easy to attract money at sky’s-the-limit valuations in the continuing technology boom.  The market for initial public offerings has turned chilly and inhospitable, largely because technology companies have sought valuations above what public investors are willing to pay....

Many U.S. based companies that went public this year have seen their stock prices suffer, posting a median return of zero compared with their IPO price.....

Since going public in December, online-lending marketplace LendingClub Corp., located 10 blocks from Zenefits in the trendy SoMa district of San Francisco, has seen its valuation shrink from $8.5 billion after its first day of trading to $5.4 billion. The share price has fallen amid concern that competition and regulation threaten LendingClub’s business model of matching borrowers with lenders.

New York City firefighter Brian Gitman bought 250 shares of LendingClub during the IPO and held on to them as the price slid. He regrets it.

Knowing that big-name investors put money into LendingClub when it was private gave Mr. Gitman, 33 years old, a false sense of security, he says. “It feels like that should be like the bumper in bowling,” he says.

meanwhile, in entirely unrelated news:

J.P. Morgan, Motif to Give the Little Guy a Taste of the IPO

A new effort is under way to put the public back in the initial public offering.

J.P. Morgan Chase & Co. and Motif Investing Inc., an online brokerage, are joining in a program to allow individuals to invest as little as $250 in IPOs.

It is the latest of several efforts by banks and brokerage firms—including startup online broker Loyal 3 Holdings Inc., Fidelity Investments andMorgan Stanley—to make the IPO market more accessible to the smallest investors, who can find it almost impossible to buy into new stock offerings.

Since late 2013, at least 17 companies, including four billion-dollar-valued startups, have offered small portions of their IPOs to the public or customers through new online platforms. And more deals of this kind are in the works.

 

Thank Law Review Editors and Thoughts on the Law Review Submission Process

This week I thanked the law review editors at the West Virginia Law Review for their hard work on my forthcoming article. They seemed truly grateful for the thanks, which was well deserved, and it made me think that I should thank law review editors more often.

Law review editors put in a tremendous amount of time working on our articles, often well after-hours given all of their other commitments. Even when the process is frustrating, I think we need to be thankful and professional. Also, given that I have had a few rough editing experiences, I now state my preferences up front, which (at least this time) led to better results. 

Somewhat related, over at PrawfsBlawg, Andrew Chongseh Kim has a couple posts on the law review process: one on exploding offers and one on peer review of law review articles.

Personally, I don't have a problem with exploding offers, and I actually think more law reviews should use them. The submission game incentivizes submission to many journals and trading up multiple times. This process wastes an incredible amount of student editor time and they have every right to effectively shut down the expedite process.

As I have mentioned before, the exclusive submission window is an elegant solution to the expedite problem. Under this strategy, the law review promises a prompt decision and the professor promises to accept the offer if made. The only downside to the exclusive submission window is that the professor usually cannot shop the article during that window, so it slows the submission process. 

Maybe the solution is to allow multiple submissions, but prevent professors from trading-up. If that were the rule, professors would be incentivized to submit only to journals where they would be happy to publish and the process would be faster.

Finally, I can't have a post about law reviews without asking, again, why more law reviews have not moved to blind review. I cannot think of a good reason, but am I missing something? 

Trick or Treat- A New Scary California Lawsuit Claims Failure to Disclose

Regular readers know that I write a lot about business and human rights and that I have posted about a number of lawsuits brought in California alleging violations of consumer protection statutes and false advertising claiming that companies fail to disclose the use of child slavery on their packaging. The complaints allege that consumers are deceived into "supporting" the child slave labor trade. The latest class action has been filed against Hershey, Mars, and Nestle. Back in 2001, these companies and several others signed the Engel-Harkin Protocol (drafted by Congressman Engel) in an effort to avoid actual FDA legislation regarding "slave-free" labeling. Nestle has touted its work with some of the world's biggest NGOs to help clean up its supply chain for all of its human rights issues, not just in the cocoa industry. Nestle denies the allegations and actually has an extensive action plan related to child labor. Mars and Hershey also denied the allegations.

I am curious as to whether shareholders demand action from the boards of these companies or if the steady stream of litigation being filed in California causes companies to invest more in supply chain due diligence or to change where and how they source their materials. The real question is whether consumers actually care. Today I conducted an unscientific poll. I asked my business associations and civil procedure students to vote on whether they would continue to buy their favorite chocolate if they knew that child slaves were used in the cocoa harvesting. I made them close their eyes so they wouldn't feel self-conscious about their answers and asked for their honest feedback. About 90% of students in both classes said that they wouldn't buy the products. We will see what happens to their moral outrage if I bring in Halloween candy next week. My business associations students also believed that shoppers who saw signs in grocery stores about child slaves wouldn't buy the candy either. This is in fact the theory behind many of the name and shame campaigns such as Dodd-Frank conflict minerals. 

Maybe it does work. I am against the Dodd-Frank legislation for a variety of reasons, but when one of my students came in my office a few minutes ago and pointed out my Soda Stream bottle she said "you know that there is a huge conflict with that company and Israel, right"? I admitted that I knew. And yes, I am going to Bed, Bath, and Beyond this weekend to buy another brand. I have been shamed, even if she didn't intend to so do. 

 

 

Jane, Jane, stop this crazy thing!

Just as I was in the middle of preparing for my class on shareholder proposals - for which I have assigned the opinion in Trinity Wall Street v. Wal-Mart Stores, Inc. - I got an email notification that the Division of Corporate Finance Staff had issued a new legal bulletin announcing that it disagrees with the majority opinion in Trinity, and instead agrees with the concurring opinion.

I discussed the Trinity opinion here, but basically, the issue was whether Walmart could exclude a shareholder proposal, submitted by Trinity Wall Street, requesting that Walmart develop a policy for oversight of sales of guns with high capacity magazines (the proposal was framed to encompass harmful products broadly, but the narrative made clear it was aimed toward gun sales).  In the Third Circuit opinion, the majority and the concurrence disagreed regarding the proper interpretation ordinary business exclusion for social-responsibility proposals.  The majority held that to determine whether a proposal is excludable, the court must first analyze whether it concerns ordinary business, next determine whether it involves a significant issue of social policy, and finally determine whether - despite involving ordinary business - the social policy issue is so important as to "transcend" day to day business operations.  The majority ultimately concluded, essentially as what appears to be a bright line rule, that certain "core" matters of business operations can never be transcended in this manner.

The concurring judge, however, believed that social policy = transcendence - i.e., that the proper inquiry is whether the social policy raised is of such significance that it inherently transcends the day to day business operations.

In its legal bulletin, the Staff agreed with the concurrence.

But that only raises more questions than it answers.  As I previously posted, the concurring judge also believed that the proposal at issue in the Trinity case was not sufficiently significant to "transcend" ordinary business operations for a variety of reasons, including that the proposal was framed in terms of benefits to Walmart.  I criticized this analysis because, among other things, most social responsibility proposals are framed in terms of benefits to the company - they might fail as improper under state law otherwise.  The concurrence also faulted the proposal for discussing harmful products generally instead of guns specifically - a fact that did not bother the majority.

Now we know the Staff agrees with the concurrence that the inquiry hinges on the significance of the social policy itself; but we also know that the Staff earlier issued a no-action letter concluding that Trinity's proposal was excludable.  So I'm left a bit baffled as to the Staff's basis for that conclusion.  Did the Staff agree with the concurrence that Trinity should have framed the proposal in terms of societal benefits?  That the proposal failed because it was framed in terms of harmful products rather than guns specifically?  The Staff's no-action letter did not mention the significance of the social policy at all - instead, it focused solely on the business operations to which it was directed.  Does that make the no-action letter inconsistent with the Staff's new bulletin?

Moreover, what is the precedential effect of Trinity now?  In its opinion, the Third Circuit majority stated that only a binding SEC ruling could overrule it; the Staff's bulletin is not binding.  Does this mean courts in the Third Circuit are bound by Trinity while courts outside of the Third Circuit are free to rely on the Staff bulletin as persuasive authority?

Only time will tell - but surely this adds at least some fuel to Trinity's pending cert petition.  I note, however, that Walmart ultimately caved and removed assault rifles from its shelves - even without including the proposal in its proxy.

In any event, I guess this means in addition to the Third Circuit opinion, my students will be reading the Staff bulletin and the original no-action letter.

On another note - the Staff bulletin also deals with the problem of shareholder proposals that are excludable because they conflict with management proposals in the same proxy under Rule 14a-8(i)(9).  Recently, some companies (*cough*Whole Foods*cough*) have tried to exclude shareholder proxy access proposals by including management-sponsored proposals with much higher - nay, unachievable - threshold ownership levels, and then arguing that the shareholder proposal conflicts with management.  The Staff bulletin seems to put the kibosh on these efforts, adopting a new rule that a "conflicting" proposal is one that is irreconcilable with the management proposal, such that a reasonable shareholder could not support both.

 

Haugh on Overcriminalization’s New Harm Paradigm

BLPB guest-blogger Todd Haugh (Indiana University - Kelley School of Business) has a new article in the Vanderbilt Law Review entitled Overcriminalization's New Harm Paradigm. The abstract is reproduced below:

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The harms of overcriminalization are usually thought of in a particular way—that the proliferation of criminal laws leads to increasing and inconsistent criminal enforcement and adjudication. For example, an offender commits an unethical or illegal act and, because of the overwhelming depth and breadth of the criminal law, becomes subject to too much prosecutorial discretion and faces disparate enforcement or punishment. But there is an additional, possibly more pernicious, harm of overcriminalization. Drawing from the fields of criminology and behavioral ethics, this Article makes the case that overcriminalization actually increases the commission of criminal behavior itself, particularly by white collar offenders. This occurs because overcriminalization, by lessening the legitimacy of the criminal law, fuels offender rationalizations. Rationalizations are part of the psychological process necessary for the commission of crime—they allow offenders to square their selfperception as “good people” with the illegal behavior they are contemplating, thereby allowing the behavior to go forward. Overcriminalization, then, is more than a post-act concern. It is inherently criminogenic because it facilitates some of the most prevalent and powerful rationalizations used by would-be offenders. Put simply, overcriminalization is fostering the very conduct it seeks to eliminate. This phenomenon is on display in the recently decided Supreme Court case Yates v. United States. Using Yates as a backdrop, this Article presents a new paradigm of overcriminalization and its harms.

Issue Highlight: A Jury Not the SEC

Home court advantage alleged in SEC securities cases brought before administrative judges rather than a jury.  Read this recent thought provoking article in the NYT DealB%k, A Jury Not the SEC, by Suja A. Thomas, a Univ. of Illinois law professor, and Mark Cuban, billionaire investor.  

After losing several cases before juries, the S.E.C. went to a place where it generally cannot lose: itself. When it accuses a person of a securities violation, the S.E.C. has often brought the case in an administrative hearing where one of its own judges decides the case, not a jury. Rarely does the agency lose such cases before its judges

Thomas and Cuban refute the argument that after the financial crisis securities issues are considered public rights questions and can constitutionally be transferred to an administrative judge. 

Despite the persistence of this public rights doctrine, there is no constitutional authority for it. First, Article I does not give Congress any authority to determine who decides civil cases. Second, the Seventh Amendment itself tells us who should decide these cases. Under it, juries decide money issues and federal judges decide other matters.

-Anne Tucker

Crowdfunding and Venture Capital - A Response

As Steve Bradford mentioned in his post on Monday (sharing his cool idea about mining crowdfunded offerings to find good firms in which to invest), our co-blogger Haskell Murray published a nice post last week on venture capital as a follow-on to capital raises done through crowdfunding.  He makes some super points there, and (although I was raised by an insurance brokerage executive, not a venture capitalist), my sense is that he's totally right that the type of crowdfunding matters for those firms seeking to follow crowdfunding with venture capital financing.  I also think that, of the types of crowdfunding he mentions, his assessment of venture capital market reactions makes a lot of sense.  Certainly, as securities crowdfunding emerges in the United States on a broader scale (which is anticipated by some to happen with the upcoming release of the final SEC rules under Title III of the JOBS Act), it makes sense to think more about what securities crowdfunding might look like and how it will fit into the cycle of small business finance.

Along those lines, what about debt crowdfunding as a precursor to venture capital funding?  Andrew Schwartz has written a bit about that.  Others also may have taken on this topic.  Professor Schwartz may be right that issuers will prefer to issue debt than equity--in part because it may prove to be less of an impediment to later equity financings.  But I don't necessarily have a warm feeling about that . . . .

And what about the crowdfunding of investment contracts (e.g., what I have previously called "unequity" in this article (and elsewhere, including in this further article) and perhaps even the newly popular SAFEs)?  There is no equity overhang with unequity and some other types of investment contract, but crowdfunded SAFEs, which are convertible paper, may be viewed negatively in later financing rounds--especially if the conversion rights are held by a wide group of investors.  While part of me is surprised that people are not taking the investment contract part of the potential securities crowdfunding market seriously (since folks were crowdfunding investment contracts before the JOBS Act came along--not knowing it was unlawful), the other part of me says that crowdfunded investment contracts would have a niche market at best.

So, thanks, Haskell, for the food for thought.  No doubt, more will be written about this issue as and if the market for crowdfunded securities develops.  Coming soon, says the SEC . . . .