Business Law Prof Blog

Volcker Rule Data Collection Under Congressional Scrutiny

House Representative Carolyn B. Maloney, Democrat of New York, sent a formal request to a slew of federal agencies to share trading data collected in connection with the Volcker Rule. The Volcker Rule prohibits U.S. banks from engaging in proprietary trading (effective July 21, 2015), while permitting legitimate market-making and hedging activities.  The Volcker Rule restricts commercial banks (and affiliates) from investing investing in certain hedge funds and private equity, and imposes enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities.

Representative Maloney requested  the Federal Reserve, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and the Securities and Exchange Commission to analyze seven quantitative trading metrics that regulators have been collecting since 2014 including: (1) risk and position limits and usage; (2) risk factor sensitivities; (3) value-at-risk (VaR) and stress VaR; (4) comprehensive profit and loss attribution; (5) inventory turnover; (6) inventory aging; and (7) customer facing trade ratios.

Representative Maloney requested the agencies analyze the data and respond to the following questions:

• The extent to which the data showed significant changes in banks’ trading activities leading up to the July 21, 2015 effective date for the prohibition on proprietary trading. To the extent that the data did not show a significant change in the banks’ trading activities leading up to the July 21, 2015 effective date, whether the agencies believe this is attributable to the banks having ceased their proprietary trading activities prior to the start of the metrics reporting in July 2014.

• Whether there are any meaningful differences in either overall risk levels or risk tolerances — as indicated by risk and position limits and usage, VaR and stress VaR, and risk factor sensitivities — for trading activities at different banks.

• Whether the risk levels or risk tolerances of similar trading desks are comparable across banks reporting quantitative metrics. Similarly, whether the data show any particular types of trading desks (e.g., high-yield corporate bonds, asset-backed securities) that have exhibited unusually high levels of risk.

• How examiners at the agencies have used the quantitative metrics to date.

• How often the agencies review the quantitative metrics to determine compliance with the Volcker Rule, and what form the agencies’ reviews of the quantitative metrics take.

• Whether the quantitative metrics have triggered further reviews by any of the agencies of a bank’s trading activities, and if so, the outcome of those reviews

• Any changes to the quantitative metrics that the agencies have made, or are considering making, as a result of the agencies’ review of the data received as of September 30, 2015.

The agencies' response to the request may provide insight into Dodd-Frank/Volcker Rule, the role of big data in the rule-making process (and re-evaluation), and bigger issues such as whether systemic financial risk is definable by regulation and quantifiable in data collection.  I will post regulatory responses, requested by October 30th, here on the BLPB.

-Anne Tucker

Criminal LLC Law: Shares in a What?

So, I am very anti-fraud, and I think cheaters should not prosper.  But I also think courts should know what they are talking about, especially in criminal cases. The following is from a new Second Circuit case: 

Although we review claims of insufficiency de novo, United States v. Harvey, 746 F.3d 87, 89 (2d Cir. 2014), it is well recognized that “a defendant mounting such a challenge bears a heavy burden” because “in assessing whether the evidence was sufficient to sustain a conviction, we review the evidence in the light most favorable to the government, drawing all inferences in the government's favor and deferring to the jury's assessments of the witnesses' credibility.”  . . . 

[W]e reject Jasmin's challenge to her Hobbs Act conviction. The evidence presented at trial more than sufficiently describes the consideration received by Jasmin in exchange for her official actions as Mayor, including the $5,000 in cash from Stern, “advance” cash for their partnership, and shares in the limited liability corporation that would develop the community center.

United States v. Jasmin, No. 15-2546-CR, 2016 WL 4501977, at *2 (2d Cir. Aug. 29, 2016). 

 

I can't actually figure out exactly what's going on here, but I know a few things: (1) "advance" cash for a partnership probably needs to be assessed more closely because, what partnership? and (2) there should not be shares in a "limited liability corporation." Or maybe there should be, if they just mean "corporation." But I think they mean an LLC, which should provide membership interests.  At a minimum, I would love to see a court call people out in such situations for perpetrating frauds with incorrect entity forms. Yeah, I'm that kind of law nerd. 

First time this has happened in 16+ years of law teaching . . . .

Imagine this: Professor walks into Business Associations class Monday morning at 8:00 am having prepared to cover 14 pages of reading when she assigned only three (intending, when creating the syllabus, as she later recalled, to use the time to summarize, contrast, and compare agency law rules that will again come into play in partnership and other entity law--and to catch up, if need be).  OK.  The professor is me.  First lesson (which I thought I had learned many moons ago): always double-check the syllabus on what you've assigned.

 

So, what happened in class?  Well, the students didn't let on that the outline for the class plan that I scripted out on the whiteboard seemed to go beyond the reading.  But they might not have recognized that, since it was only an outline.  However, once I started covering the unassigned material, someone did alert me to my error.  Shocked (!), I told them that I had been too nice (weak response) and that--obviously--I had not checked the syllabus to confirm the day's reading assignment before scripting out the class plan and preparing for class.

 

I didn't then let the students go after learning of the mistake (having covered in summary fashion those three pages in about 15 minutes of class time). Instead, I constructed a hypothetical set of facts relating to a business conducted as a sole proprietorship from the facts of the partnership case on the syllabus for Wednesday (which I had prepared to cover for today) and asked the students to analyze contract and tort liability based on the hypothetical using the agency law rules we covered over the past four classes.  Detriment: people weren't prepared for this based on the prompts in the syllabus for today's class, and it took a while (and a board diagram) to establish the facts of the hypothetical with some (albeit far-from-perfect) clarity.  Benefit: many students learned that they don't yet know/understand agency law, and I got the opportunity to give the students a few pointers on how partnership law will be different from agency law.

 

Did I make the right choice?  I am following up with a post on the course TWEN site to capture the agency law rules we covered in class (to which the students did not have many salient citations).  What else can I do to take this lemon and turn it into lemonade?  All suggestions are welcomed.

ICYMI: Tweets From the Week (Aug. 28, 2016)

lowest-paid workers: "pay is rising..driven by..competition..minimum-wage increases & initiatives by cos" https://t.co/nlLWHiZWQb #corpgov

— Stefan Padfield (@ProfPadfield) August 23, 2016

"At th[is] time ..., there are no publicly traded public benefit corporations, but ...." https://t.co/xyq4DsI4KT #corpgov #socent

— Stefan Padfield (@ProfPadfield) August 23, 2016

"During the...financial crisis...th[e repo] market ground to a halt, triggering a severe liquidity crunch" https://t.co/TtczZwgq1R #corpgov

— Stefan Padfield (@ProfPadfield) August 23, 2016

"litigation risks..for companies that..should know..they may be benefiting from acts of human trafficking" https://t.co/zKQeObSXih #corpgov

— Stefan Padfield (@ProfPadfield) August 26, 2016

"the central bank confronts...growing self-doubt about its own understanding of how the U.S. economy works" https://t.co/F98oXOqmvz #corpgov

— Stefan Padfield (@ProfPadfield) August 26, 2016

"It's ridiculously tempting for the CEO of Mylan to keep hiking the price of EpiPen" https://t.co/gXOtMkgetw #corpgov #execcomp

— Stefan Padfield (@ProfPadfield) August 26, 2016

Free Speech, Securities Regulation, and Exxon (plus a video about Business Associations)

I’ve been fascinated by the efforts of various state attorneys general to investigate Exxon for securities fraud on the ground that its climate change denial misleads investors about the risks of investing in the company.  Exxon has filed a lawsuit in Texas to halt the inquiries, arguing that they infringe on its free speech rights, and Congressman Lamar Smith, head of the House science committee, has subpoenaed the attorneys general involved, to determine if this is a coordinated political attack on the company.  The dispute has even made it into the Democratic party platform, which states that “All corporations owe it to their shareholders to fully analyze and disclose the risks they face, including climate risk. …  Democrats also respectfully request the Department of Justice to investigate allegations of corporate fraud on the part of fossil fuel companies accused of misleading shareholders and the public on the scientific reality of climate change.”

An investigation by the Virgin Islands was dropped; as far as I know, both the New York and Massachusetts investigations continue, and investigations by other states.  Exxon’s lawsuit remains pending.

It’s not a new idea, to claim that securities regulation impinges on free speech rights – the DC Circuit struck down part of the SEC’s conflict minerals rule on just that ground – but usually these arguments are aimed at rules that require issuers to speak, or prohibit issuers from making truthful statements.  The Exxon case is unusual because it comes in the context of, well, false statements.

At the same time, though, one cannot help but suspect that the real concern isn’t investors, but the nature of Exxon’s participation in public political debates.

[More under the jump]

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Better Meetings, Better Teaching

During the past few days, I have participated in a lot of meetings.

This has led to some thinking on what makes a good meeting.

To me, a useful meeting is one that accomplishes things that could not be handled appropriately by an e-mail. Some meetings are held, I am convinced, because those calling the meetings are not sure that participants read and pay attention to e-mails. This worry could be best addressed, in my opinion, by making expectations regarding e-mail management clear, perhaps coupled with consequences for those who ignore the contents.

That said, e-mail is not appropriate in all cases and here are four categories where in-person meetings can work better than e-mail:

1. Inspire. Perhaps some can be inspired over e-mail, but it seems much easier to inspire in person. As such, I think some good meetings can be used to inspire participants to achieve organizational goals. But inspiring others, especially sometimes cynical professors, can be difficult to do.
2. Build Relationships. Sometimes the only times you see certain colleagues are at faculty meetings, so meetings can be a good way to build relationships, especially if folks hang around before and after meetings or if significant time is given for small group discussion.
3. Engage in Group Discussions. E-mail is pretty good for one-way communication, but as anyone who has been on a group e-mail with hundreds of replies knows, e-mail isn’t great for dynamic group conversation. As such, it may make sense to have meetings when a group needs to converse about working through an issue. That said, preparation for the meeting can often be done alone, and the lion-share of the conversation can be done in small groups.
4. Engage in Difficult Conversations. When tone is important, e-mail is often inadequate. Thus, in-person meetings may be important for communication of sensitive or controversial information.

When meetings focus on things that cannot be done remotely, I think meetings can be quite useful. Similarly, when teaching, we should think – what is it that students cannot get through an e-mail, the internet, or an online class? We should focus on those things. As such, I am trying to do even more interactive projects and small group discussions in class this semester.

Reflections on the First Two Weeks of School

I’m now in my third year of teaching on the tenure track after two years of a VAP. I still consider myself a newbie because despite over twenty years of practice experience, teaching is a whole different ball game.

This semester I am teaching Civil Procedure, which is now a one-semester 4-credit class instead of a two-semester class, and a 4-credit Business Associations class. Both are required at my institution and bar tested in Florida. I have taught them both before and thankfully get strong reviews from my students, but I am always looking to improve.

To that end, I recently took a look at Emily Grant’s essay, Beyond Best Practices: Lessons from Tina Stark About the First Day of Class. The abstract states:

This Article reviews and expands the literature on best practices in a narrow subset --- the first day of class. As the same time it seeks to convey words of wisdom from one of the most well-known and highly-regarded legal educators: Tina Stark, a giant in transactional drafting. The first day of any law school class can be fraught with tension and nerves, even for professors. This article presents advice from Professor Stark, supplemented with guidance from best practices research, so that professors can take advantage of the opportunities that the first day of class offers to set the tone for a successful semester.

I haven’t adopted all of the suggestions-- I don’t think it’s wise, for example, for an untenured professor to have students use my first name. However, I have used some variation of her techniques to make students more comfortable both before and during class. I continue to find value in the survey that I send to students prior to the semester so that I can ascertain their level of understanding of business concepts, their learning objectives, and their expected area of practice. For the first time this semester, I will send an anonymous survey after the midterm asking students what they think is working and what they think needs improvement. I may not take all of the students’ suggestions, but because I am trying new things this semester including more graded quizzes and a flipped classroom, I don’t want to waste time using ineffective techniques.

Like Stark, I also share a “humbling story” on the first day of class. This is especially important for many of my Business Associations students who fear anything related to math, numbers, or accounting. I explain my career path as a litigator and how it was naively designed to avoid interaction with complex business topics. I also discuss how what we learn will help the family, criminal, and litigation-minded students who don’t understand how this course will apply to them after the bar.

Stark focuses on a collaborative classroom and team grading, and I do as well. For the first time, I have flipped the classroom in both Civil Procedure and Business Associations, and therefore the students see my PowerPoints and helpful videos prior to class. During class we apply what they have learned. They work in law firms during class where they caucus to determine a team answer to the problems sets I have given them in advance or they work on new problems or drafting exercises based on what they have reviewed prior to class.

Stark brings in homemade brownies for her students. I’m too lazy for that so I will bring in energy bars and Vitamin C before midterms and finals, and buy lunch or bagels for students who show up to my marathon review sessions. I agree with Stark’s view that making the students feel comfortable in a supportive learning environment makes them more apt to ask questions both in class and during office hours.

I recommend the article even though many of you may be past the first day already or veteran educators. I also welcome any suggestions that you have found helpful in improving the learning environment. Please leave comments below or email me offline at [email protected]

 

"Business Law" Earn Spot as 2016 Law Job Hiring "Trend"

Increasing business demands are prompting companies to expand into new products and markets. Businesses also are engaging in mergers, acquisitions and joint ventures; issuing  securities; and performing other transactions associated with business growth, which results in larger corporate teams. Many companies have a need for additional in-house legal professionals who are readily available to help manage mounting financial and industry-related regulations. Moreover, corporate legal departments often prefer to handle more routine legal work in-house and retain the services of outside counsel for specialized legal work.

Real estate, IP, health care and compliance were also mentioned along with the noted strong growth in litigation.  The full report/study is available here:  Download Legal_2016_job_salary_guide.

 

-Anne Tucker

New Paper: Political Theories and Fiduciary Duities

I am still working my way through this new paper, Seeking an Angle of Repose in U.S. Business Organization Law: Fiduciary Duty Themes and Observations, from J. William Callison of Faegre Baker Daniels LLP. It's an interesting premise, and worth a look. Here's the abstract:

This article applies liberal, neoliberal, critical, feminist and communitarian political theories to limited liability company and partnership fiduciary duty law; discusses developments in that law over the last two decades by focusing on theory; suggests a pragmatic and balanced approach to fiduciary duty law that incorporates desirable features of different approaches; and suggests that law, as developed in uniform acts, has been moving toward a balanced approach.

The paper is available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827771

A Bit More Title III Crowdfunding Data . . . .

We are now more than three months into the Title III crowdfunding experiment.  I have been wanting to get back to posting on Title III crowdfunding since my "LIVE" post back in May, but so much other fun stuff has been going on!  So, to make me feel a bit better on that point, I will share some current crowdfunding data with you all in this post based on publicly available information obtained from a Westlaw search performed yesterday (Sunday, August 21, 2016).  [Note to the powers that be at the SEC:  EDGAR makes it hard to find the aggregated set of Form C filings unless you are collecting data on an ongoing basis.  I hope that changes as EDGAR continues to improve . . . .]  

At the outset, I will note that others have offered their own reports on Title III crowdfunding since I last posted (including here, here, and here).  These reports offer some nice summaries.  This post offers a less comprehensive data dump focusing in on completed offerings and withdrawn offerings.  At the end, I offer some limited observations from the information provided here about crowdfunding as a small-business capital-raising alternative, the need for EDGAR adjustments, inferences about the success of Title III crowdfunded offerings, and platform disclosure about withdrawn offerings.

First, however, the top-level Westlaw-based summary:

Total Form C filings: 85 (275 filings show on Westlaw, but only 85 are non-exhibit filings representing distinct offerings)
Total Form C/A filings (amendments, including exhibit filings): 153
Total Form C-U filings (updates): 4
Total Form C-W filings (withdrawals): 2

The remainder of this post takes a shallow dive into the updates and withdrawals.  Filings in each case are presented in reverse chronological order by filing date.  All referenced dates are in 2016.  Issuer names are copied from filings and may not be the actual legal names of the entities.

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ICYMI: Tweets From the Week (Aug. 21, 2016)

"the Obama administration & state agencies have signaled..growing hostility toward non-competition agrmnts" https://t.co/BNoTO74NXB #corpgov

— Stefan Padfield (@ProfPadfield) August 16, 2016

"Company Punished for Severance Agreements That [required waiver of monetary awards] for Whistleblowing" https://t.co/8hWZhxBSY6 #corpgov

— Stefan Padfield (@ProfPadfield) August 16, 2016

"stakeholder theory, team production, director...and shareholder primacy": "neither models nor...helpful" https://t.co/QzzvxonsUE #corpgov

— Stefan Padfield (@ProfPadfield) August 16, 2016

"Cities’ role as significant creators of corporate law is increasing" https://t.co/cgYzLGoO0E #corpgov

— Stefan Padfield (@ProfPadfield) August 16, 2016

"3 strands of heterodox economics...are leading the way...complexity, evolutionary & behavioural economics" https://t.co/uGDF9XeYjt #corpgov

— Stefan Padfield (@ProfPadfield) August 20, 2016

"the SEC's specialized disclosure rules can be characterized as federal benefit-corporation rules" 77 U. Pitt. L. Rev. 499 #corpgov #socent

— Stefan Padfield (@ProfPadfield) August 21, 2016

Three Things Make a Post

Upper level classes start next week, and I am scrambling to prepare.   So for my post, I’ll just drop some quick links to things I found interesting this week:

First, a nice long read for Saturday: How Lending Club’s Biggest Fanboy Uncovered Shady Loans. This is a deep dive into the story of a retail investor who dug into Lending Club’s loan data – and discovered that Lending Club was padding its loan data before the company confessed publicly.  He also seems to have discovered a pattern of repeat borrowers that the company has never disclosed.

Second, here is an editorial by a Deutsche Bank risk-officer-turned-SEC-whistleblower who says he is rejecting his reward, out of disgust that the company – and its shareholders – will be paying the fines that rightly should be charged to the company’s executives.  He blames the SEC's “revolving door,” pointing out that top SEC lawyers had formerly been employed by Deutsche Bank (though they were recused from the investigation).  The gesture would be slightly more impressive if it didn’t turn out that most of his reward is going to his lawyers, the experts he hired, and his ex-wife as part of his divorce settlement, and he doesn’t have the legal power to turn it down.  But he totally would if he could.*

Third, the jurors in the Sean Stewart insider trading trial report that their deliberations took a long time because they couldn't quite decide if the defendant received a "personal benefit" under United States v. Newman standards by passing tips to his father.  Obviously, whether a "benefit" is even necessary for a relationship this close is something that the Supreme Court is set to determine in Salman v. United States; in the meantime, it seems as though courts in New York are stuck asking about the quid pro quo between fathers and sons.  Harsh, man.  Couldn't the prosecutors have just argued that the father gave his son life?

 

*okay, I might be being unfair; his award is in excess of $8 million, so even after paying off everyone else, he may be rejecting a sizeable sum.  Still, it's funny that he's trying to turn down money that, um, belongs to his ex-wife.

A Look at Investor Risk and Community Risk In Private Prisons

The concept of private prisons has always seemed off to me.  Prisons have a role in society, but the idea of running such institutions for profit, it seems to me, aligns incentives in an improper way. The U.S. Justice Department apparently agrees and said yesterday that it plans to end the use of private prisons.  The announcement sent stocks tumbling for two private prison companies, Corrections Corp. of America (CCA) and GEO.  Both dropped as much as 40% and remain down more than 30% from where they were before the announcement.   

Obviously, this can't make shareholders happy, but I figured this had to be a known risk. I was right -- CCA's 10-K makes clear that such government decisions related to future contracts could lead to a reduction in their profitability.  So, the disclosure seems proper from a securities regulation perspective. Still, reading the disclosure raises some serious questions for me about the proper role of government.  I frankly find this kind of outsourcing chilling.  For example, CCA states: 

Our results of operations are dependent on revenues generated by our jails, prisons, and detention facilities, which are subject to the following risks associated with the corrections and detention industry.

We are subject to fluctuations in occupancy levels, and a decrease in occupancy levels could cause a decrease in revenues and profitability.  . . . We are dependent upon the governmental agencies with which we have contracts to provide inmates for our managed facilities.

. . . .

We are dependent on government appropriations and our results of operations may be negatively affected by governmental budgetary challenges. . . . [and] our customers could reduce inmate population levels in facilities we own or manage to contain their correctional costs. . . .

The idea of "customers" in this contest simply does not sit well with me.  It suggests a desire for something that is not a positive. CCA's 10-K continues: 

Competition for inmates may adversely affect the profitability of our business. We compete with government entities and other private operators on the basis of bed availability, cost, quality, and range of services offered, experience in managing facilities and reputation of management and personnel. While there are barriers to entering the market for the ownership and management of correctional and detention facilities, these barriers may not be sufficient to limit additional competition. In addition, our government customers may assume the management of a facility that they own and we currently manage for them upon the termination of the corresponding management contract or, if such customers have capacity at their facilities, may take inmates currently housed in our facilities and transfer them to government-run facilities. . . .

Competition is a good thing in many (I think most), but this is not one of them. These companies are responding to the existing demand for prison services, but there can be no question the real opportunity for market growth is to increase demand for such services (e.g., increase the number of prisoners, seek longer sentences).  This, too, is made clear in the disclosures:

Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional and detention facilities. This possible growth depends on a number of factors we cannot control, including crime rates and sentencing patterns in various jurisdictions, governmental budgetary constraints, and governmental and public acceptance of privatization. The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them. Immigration reform laws are currently a focus for legislators and politicians at the federal, state, and local level. Legislation has also been proposed in numerous jurisdictions that could lower minimum sentences for some non-violent crimes and make more inmates eligible for early release based on good behavior. Also, sentencing alternatives under consideration could put some offenders on probation with electronic monitoring who would otherwise be incarcerated. Similarly, reductions in crime rates or resources dedicated to prevent and enforce crime could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities. 

CCA does note that their "policy prohibits [them] from engaging in lobbying or advocacy efforts that would influence enforcement efforts, parole standards, criminal laws, and sentencing policies." These disclosures, though, sure make clear what kind of policies their shareholders would want to support.  

I don't have any illusion that government run prisons are much (if any) better, but I do think that government's incentives are at least supposed to be aligned with the public good when it comes to the prison system.  I often think government should take a more limited role than it does when it comes to regulations.  That is especially true when it comes to criminal law. But privatizing prisons is not reducing the role of government in our lives -- it is simply outsourcing one key portion of the government's role.  Private prisons do not equate to smaller government. Fewer laws, or relaxed enforcement and punishment, do. If the government is paying for it, it's still a government program.  

Here's hoping that the reduction in use of private prisons leads to a reduction in the use of all prisons.  Let's save those for truly the dangerous folks.  

Even More Advice for Students

Belmont University starts classes on Wednesday. Below I share a few tips for new students. Josh posted a good list earlier this week, but my list is a bit different, perhaps because I teach primarily undergraduate and graduate business students. None of these is new or earthshattering, but, like many simple things, they remain difficult to put into action.

1. Be Professional. As I often tell my students, you start building your reputation in school. I have declined business opportunities from former classmates because I remembered how they conducted themselves in school. Be on time, be prepared, be thoughtful, and be honest. We should recognize that people change over time and be open to giving second chances, but, unfortunately, not everyone will be quick to change an opinion they form of you while you are in school.
2. Get to Know Your Classmates and Your Professors. Building relationships is an important aspect of personal and professional life. It is tempting to just put your head down in school and not spend time trying to form strong bonds. An incredible number of students never meet with their professors or only meet with them right before a project or an exam. Professors and classmates are worth getting to know as an end in and of itself, but can also have tangible benefits like better recommendation letters and client referrals.
3. Use Laptops Carefully, If At All. There is a growing body of research that shows taking handwritten notes is better for learning the information than typing. For law students, I understand that it can be helpful to have your notes typed to jumpstart your outlines, but, at the very least, disable your internet connection while in class. We are not as good at multitasking as we think.
4. Outline Early and Do Practice Tests. Staying on top of your outlining will give you a bit of time later in the semester to do practice tests. In graduate school, most students can memorize the course materials, but practice applying the material properly is often what propels students into the "excellent" category.
5. Work Hard, but Schedule Breaks and Take Care of Yourself. It took me a while to learn this, but you actually perform better when you work hard and take care of yourself. For me, this means at least 7 hours of consistently placed sleep, nutritious meals (including breakfast), exercise at least 4x a week, and one day a week detached from work. Even during law school, I consistently put my books down for one 24-hour period during the week (with an exception for the exam period). Some students need to be reminded to work harder; law school should require the work of a full-time job in my opinion. Other students, however, get caught up in the competition and the rigor, and forget the importance of taking care of themselves.

Hope the fall semester is good to all our readers.

LochMess and Morals Clauses

There has been a lot of debate online about Ryan Lochte (#LochteGate or #LochMess) and whether he and his swimming friends were actually robbed in Rio after their Olympic events had finished. See here, here, and here for some of the commentary. 

Lawyer Dan Eaton opines that Ryan Lochte is unlikely to go to jail, even if he lied.

While I agree that jail time is unlikely based on the facts available at this time, Lochte's endorsements could be at risk. Earlier this year, I blogged about morals clauses in endorsement contracts. If Lochte's contracts include morals clauses (as many do), and if he lied about the robbery, it is possible that he may lose some lucrative endorsements deals. It is still not clear what the motive for lying was (if they did lie). I assume we will learn more in the next few days.   

Update: Speedo and Ralph Lauren dropped (or are not renewing) sponsorship of Ryan Lochte. Spokespeople for both companies cited Lochte's statements about the occurrence in Rio. My wife let me know that some are now calling Lochte "Swim Shaddy."

Guest Post: Tides May Be Slowly Turning in Delaware Appraisal Arbitrage

If it is true that “a good thing cannot last forever,” the recent turn of events concerning appraisal arbitrage in Delaware may be a proof point. A line of cases coming out of the Delaware Court of Chancery, namely In re Appraisal of Transkaryotic Therapies, Inc., No. CIV.A. 1554-CC (Del. Ch. May 2, 2007), In re Ancestry.Com, Inc., No. CV 8173-VCG (Del. Ch. Jan. 5, 2015), and Merion Capital LP v. BMC Software, Inc., No. CV 8900-VCG (Del. Ch. Jan. 5, 2015), have made one point clear: courts impose no affirmative evidence that each specific share of stock was not voted in favor of the merger—a “share-tracing” requirement. Despite this “green light” for hedge funds engaging in appraisal arbitrage, the latest case law and legislation identify some new limitations.

What Is Appraisal Arbitrage?

Under § 262 of the Delaware General Corporation Law (DGCL), a shareholder in a corporation (usually privately-held) that disagrees with a proposed plan of merger can seek appraisal from the Court of Chancery for the fair value of their shares after approval of the merger by a majority of shareholders. The appraisal-seeking shareholder, however, must not have voted in favor of the merger. Section 262, nevertheless, has been used mainly by hedge funds in a popular practice called appraisal arbitrage, the purchasing of shares in a corporation after announcement of a merger for the sole purpose of bringing an appraisal suit against the corporation. Investors do this in hopes that the court determines a fair value of the shares that is a higher price than the merger price for shares.

In Using the Absurdity Principle & Other Strategies Against Appraisal Arbitrage by Hedge Funds, I outline how this practice is problematic for merging corporations. Not only can appraisal demands lead to 200–300% premiums for investors, assets in leveraged buyouts already tied up in financing the merger create an even heavier strain on liquidating assets for cash to fund appraisal demands. Additionally, if such restraints are too burdensome due to an unusually high demand of appraisal by arbitrageurs seeking investment returns, the merger can be completely terminated under “appraisal conditions”—a contractual countermeasure giving potential buyers a way out of the merger if a threshold percentage of shares seeking appraisal rights is exceeded. The article also identifies some creative solutions that can be effected by the judiciary or parties to and affected by a merger in absence of judicial and legislative action, and it evaluates the consequences of unobstructed appraisal arbitrage.

The Issue Is the “Fungible Bulk” of Modern Trading Practices

In the leading case, Transkaryotic, counsel for a defending corporation argued that compliance with § 262 required shareholders seeking appraisal prove that each of its specific shares was not voted in favor of the merger. The court pushed back against this share-tracing requirement and held that a plain language interpretation of § 262 requires no showing that specific shares were not voted in favor of the merger, but only requires that the current holder did not vote the shares in favor of the merger. The court noted that even if it imposed such a requirement, neither party could meet it because of the way modern trading practices occur.

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Back to (Law) School: More Advice for New 1Ls

Whether we're ready or not (we mostly are), classes start tomorrow for West Virginia University College of Law. Orientation for new students started last week, and I had the chance to teach a group of our new students. I had three sessions with the group where we discussed some cases, how to brief a case, and did some writing exercises.  It's been a while since I worked with first-year students, and it was a lot of fun.  

In addition to the assigned work, I answered a lot of questions, in and out of the classroom.  Questions focused mostly on how to succeed as a law student. Although there's plenty of advice on the internet, and whole books dedicated to subject, and even my own blog posts.  Last year, I provided my Ten Promises For New Law Students to Consider.   This year, I had enough similarly themed questions, that I thought I'd add some detail to my basic advice for new law students. 

1) Do the work. 

Some students ask -- if I work law school like a job, is that a good idea?  As with everything, it depends.  I don't know how you work.  If you work regular hours, every day, where you focus on the task before you, then it can work well.  If you're someone who sits in front of a computer doing everything but your work until a deadline is looming, it's not so likely to work for you. 

So, if you work it like a job where you are the boss, and you have no employees.  And the work absolutely has to get done, then yes.  There will be days when you can work a normal 8 to 5 with a lunch break and get your work done, and there will be times when 80 hours a week is insufficient. If you work until the job is done, you'll be served well.  

1A) Doing the work does not mean looking at the cases.

Reading for class is not about checking the box. There may have been times when "looking" at all 40 pages that were assigned would do the trick. Maybe as an undergrad.  Of course, I was a mostly terrible undergrad, so I didn't even do that often enough.  But law school is about figuring out what matters. That means you need to read the cases more than once.  I have seen twice as the rule of thumb, though I think three times is the right place to start.  It's not just about recognizing that something happened.  It's knowing what happened and what that means, in the context of the case and beyond.  And that requires time and careful reading. And, by the way, class is far more interesting when you know what's being discussed. Seriously. 

2) Be a good classmate and be the best possible you.

You can be competitive without being a jerk.  Your competition is really with yourself.  UCLA basketball coach John Wooden always reminded his players to be the best they could be -- not to try to be better than someone else.  If you always use someone else as the bench mark, you may be holding yourself back, even if you do better than them.  Try to remember that. There will be people who are better than you, at some point, at everything.  Be the best you that you can be.  Good things will follow.  And if it doesn't go as well as you hoped, if you did the work the best you could, you will still be okay.  (See 1 and 1A above.) 

3) Most people aren't cheating, but if they are, turn them in.

Every once in a while, I hear some students who are convinced that there is rampant cheating. "Some people worked together on their memo." Maybe, but usually not.  "Someone's (uncle/sister/cousin) who is a (prosecutor/M&A lawyer/judge), wrote their memo!"  Probably not.   Most lawyers understand the ethical problems with that. And who wants to write another law school memo after you passed the bar exam?  It would take a pretty odd combination of work ethic and lack of basic morals to make that a common occurrence.   

But even worse -- give us some evidence if you do know something.  Or some names, and we will investigate.  I hate cheating, and I want it stopped.  I went to law school with my wife, and we didn't even leave out any of our legal writing materials in our home.  The rules matter.  And you need to practice following them from day one.  That said, I don't think most of my students are or were cheaters, and they have rarely given me any reason to doubt their integrity.  

More than once over the years, I have also heard students say, "well, I don't want to hurt anyone's career."  First, what?  If you know someone is not following the rules, they need to be turned in. Lawyers have such an obligation, though I think it is one that is not often enough fulfilled.  I have heard of attorneys who had opposing counsel forge their signature, and the attorney still did not turn them in.  If we allow it, it continues.  

In addition, I have also heard students say, "I can't prove it, but I KNOW they are cheating."  If you can't point to facts that show it it, you probably don't KNOW, anything.  Your strongly suspect. And might be wrong. Don't forget, lots of people posture when they are stressed or fearful.  Focus on your work, and good things are likely to follow. 

4) Everything is harder.

I wonder if poor grades are sometimes the reason some students decided others are cheating.  I suspect it is sometimes.  The numbers suggest that most of our students are used to getting good grades, so a B can seem like something went wrong.  But law school is the next step up.  I often use a sports analogy -- law school is like an athlete going from college to the pros (or the olympics).  The competition is better because everyone at the next level has a better skill set.  If there is a curve (and there usually is, official or unofficial, in the first year), then students are being compared to one another.  It's not just how well did you do -- it's how well did you do relative to others.  That may seem unfair, but those are (usually) the rules.  Be prepared to work hard, and know others will be, too.  There is room for everyone to succeed, but not everyone can be at the top.  

5) You are not your grades.

Don't let a grade define you.  Your paper may be a C+.  But you are not.  Your A* (which was how the highest grade in the course was noted when I was in law school), doesn't make you an A*, either.  Your work can be a reflection of you, but it is not you. Sometimes things don't go well. Sometimes you might not have worked hard enough.  Sometimes you're sick.  And, yes, sometimes the professor's view of the world is flawed.  Other times, a student might have studies three things all semester. And it's the three things tested on the exam.  You can only control your work and your effort.  You must react and respond to the rest.  

So, I know I am biased.  I loved law school. It's why I do what I do.  Not everyone will feel that way.  But give yourself a chance. Prepare. Engage. Ask questions. Be wrong.  And learn.  

Have a great year!  Oh, and by the way, take Business Organizations before your graduate.  It's pretty much essential.  

Do Clothes Make the Lawyer? Maybe They Do . . . .

As many of you know, I often like to post on issues relating to advising students (witness my cover letter posts, the most recent of which can be found here).  I also like to post from time to time on issues relating to fashion and the law (e.g., this post).  And sometimes, I fuse the two in a single post.  This post is one of those fusion posts.

Many of us intuitively understand that clothing affects not only the perceptions others have of us but also the perceptions we have of ourselves.  Some of us may even have done research to unearth evidence that these intuitions have some empirical traction.  But can what you wear affect your performance?  Research provides some evidence that it can.

Researchers at Northwestern University have identified a "systematic influence that clothes have on the wearer's psychological processes" that they term "unclothed cognition."  Their research, published in the Journal of Experimental Social Psychology in 2012, found that the attentiveness of the subjects was higher when wearing a lab coat than it was when they were not wearing a lab coat or were wearing a lab coat described as a painter's coat. The research was fairly widely reported at the time.  Although the study explored the effects of wearing a lab coat, one can see how the results may also hold for people wearing other performance-linked clothing, like athletic wear or other professional clothing, including business suits.  (A subsequent study on the cognitive effects of business suits can be found here.  More general commentary is available here and elsewhere.)

Admittedly, the results of these studies and others like them are qualified and the research in this field is at an early stage.  Having said that, as our students start interviewing for jobs and engaging in clinical practice and other experiential learning in the new semester, the possible effect of clothing on performance may be a relevant footnote for them.  I admit that I am not a fan of dress codes, as a general rule.  However, I may mention these studies to my students so that they can use the information in their decision-making, if they so choose.

ICYMI: Tweets From the Week (Aug. 14, 2016)

"contributions from big finance...meant that his promises of sweeping reforms...were not to be believed" https://t.co/RNvl9wLyAN #corpgov

— Stefan Padfield (@ProfPadfield) August 8, 2016

Philadelphia has "the..only..tax incentive program for certified social enterprises" 25 Temp. Pol. & Civ. Rts. L. Rev. 75 #corpgov #socent

— Stefan Padfield (@ProfPadfield) August 9, 2016

"Our results ... suggest M&As are a ... important driver of ... overall wage inequality." https://t.co/jQf5UsKGK0 #corpgov

— Stefan Padfield (@ProfPadfield) August 11, 2016

"The Rise of the Independent Director: A Historical and Comparative Perspective" https://t.co/rzXbKpj85a #corpgov

— Stefan Padfield (@ProfPadfield) August 12, 2016

"allowing a corporation to serve in Congress..consistent w/..broad interpretation of..Qualifications Clauses" 16 J. Bus.&Sec. L. 85 #corpgov

— Stefan Padfield (@ProfPadfield) August 14, 2016

Substance v. Procedure

One of the more interesting aspects of state corporate law – and Delaware law in particular - is the blurring of the line between substantive regulation and procedural regulation.  Delaware gives corporate directors a great deal of leeway ex ante to structure transactions as they see fit, but if they structure them in a way that arouses suspicions – like, for example, failing to create an independent committee to negotiate a deal with a controlling shareholder – Delaware increases judicial scrutiny of the transaction, which, in practical terms, means that when the inevitable class action is filed, the defendants cannot win a quick dismissal on the pleadings.  The “carrot” that Delaware offers directors to adopt best practices is the possibility of a quick, cheap dismissal of claims.  Delaware regulates, in part, via threats of civil procedure.

This particular mode of regulation was on full display in In re Trulia, Inc. Stockholder Litig., 129 A.3d 884 (Del. Ch. 2016).  There, Chancellor Bouchard held that Delaware would only approve disclosure-only settlements in deal class actions where the new disclosures were “plainly material.”  Note, this is not the substantive standard for disclosures – it is not the standard necessary to win at trial.  It is not the standard that an individual plaintiff would have to meet.  It is only the standard for the settlement of a merger class action.

Which immediately begged the question: What happens if another state is entertaining a merger case involving a Delaware company?  Does the Trulia standard count as a substantive rule of law, subject to the internal affairs doctrine, or a procedural one, that varies based on the forum?

It’s a critical issue, obviously, because if Trulia does not apply outside of Delaware, it will be very easy for plaintiffs and defendants to reach collusive settlements in foreign fora.

Well, we now have some answers, though they point in different directions:  In Vergiev v. Cooper, a New Jersey state court held that Trulia is a substantive rule of law, and thus it applies even for cases brought outside of Delaware.  (Opinion here; Alison Frankel blogs here).  And just a few days ago, the Seventh Circuit applied Trulia in a case involving an Illinois corporation - implicitly suggesting that Trulia is a procedural (but persuasive) rule.   Either way, it appears Trulia is on its way to general acceptance in the context of merger litigation.

That said, this only partly takes care of part of the problem of destructive competition among plaintiffs’ firms; as I’ve blogged before, there is still no real cure for the problem of plaintiffs who compete by racing to a settlement.  Forum selection bylaws are not necessarily a panacea, because defendants can waive them – which may allow them to strategically pick off stronger plaintiffs and settle with weaker ones.  The next step, therefore, is coming up with something like an MDL process for corporate litigation (a suggestion that others have made, see, e.g., Minor Myers, Fixing Multi-Forum Shareholder Litigation, 2014 U. Ill. L. Rev. 469; Elizabeth Cosenza, The Persistent Problem of Multi-Forum Shareholder Litigation: A Proposed Statutory Response to Reshuffle the Deck, 10 Va. L. & Bus. Rev. 413 (2016)).