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Monday, July 31, 2017

Democratic Norms and the Corporation: The Core Notion of Accountability

By joanheminway

The corporate form has been compared and contrasted favorably and unfavorably with government.  The literature is broad and deep.  Having said that, there is, perhaps, no one who writes more passionately on this topic than Daniel Greenwood.  Set forth below are two examples of text from his work that illustrate my point.

We live in a democratic age, in which the sole legitimate source of political power is the consent of the governed. Yet our business corporations defy every norm of democracy.
 
Most fundamentally, corporate law and our major business corporations treat the people most analogous to the governed, those most concerned with corporate decisions, as mere helots. Employees in the American corporate law system have no political rights at all—not only no vote, but not even virtual representation in the boardroom legislature. Board members owe a fiduciary duty to the corporation, according to most of the statutes, and to the shareholders, according to the popular shareholder primacy narratives, but they owe no consideration at all to employees.
 
Daniel J.H. Greenwood, Essay: Telling Stories of Shareholder Supremacy, 2009 Mich. St. L. Rev. 1049, 1060 (2009).
 
The corporation as a state-within-the-state . . . cannot be justified under any democratic theory, because this state-like entity defies all democratic norms internally. No corporation operates by the principle of one person, one vote. All economically significant corporations disenfranchise a substantial portion of the affected populace, while even shareholders vote according to the number of shares they hold. Moreover, standard corporate law sharply limits the control that even the “voters” have over “their” entity. The law bars them, in the absence of unanimous consent, from making fundamental value choices, for example, from balancing the pursuit of profit against other potential corporate goals, such as quality products, interests of non-shareholder participants or even the actual financial interests of the real human beings who own the shares. Moreover, it even bars them from electing directors pledged to particular interests: directors, unlike ordinary politicians, are bound by law to pursue the interests of all (and only) shares, and courts will enforce this duty-subject to the often significant limitations of the business judgment rule-at the behest of any shareholder, regardless of election results. Theorists, therefore, usually resort to market-based explanations of why the corporation is unable to exert any power over its shareholders, employees and other participants.
 
Daniel J.H. Greenwood, Markets and Democracy: The Illegitimacy of Corporate Law, 74 UMKC L. Rev. 41, 54–55 (2005) (footnotes omitted).  Whether you agree with Daniel or not on the substance, his views are transparent and his belief and energy are palpable.
 
With politics in the news every day and corporations on my mind, I have been pondering certain elements of democracy as they play themselves out in corporate governance.  In particular, of late, I have focused in on accountability as a core democratic norm.  

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July 31, 2017 in Corporate Governance, Corporations, Current Affairs, Joan Heminway | Permalink | Comments (2)

Sunday, July 30, 2017

ICYMI: #corpgov Weekend Roundup (July 30, 2017)

By Stefan J. Padfield

July 30, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, July 29, 2017

Multiforum Litigation - Delaware's Next Move

By Ann Lipton

I’ve previously posted about the problem of multiforum litigation, and how it’s very much in Delaware’s interest to figure out a way to keep cases flowing to its courts.  In particular, Delaware’s recommendation that derivative plaintiffs seek books and records before proceeding with their claims simply invites faster filers to sue in other jurisdictions – and invites defendants to seek dismissals against the weakest plaintiffs, which will then act as res judicata against the stronger/more careful ones.   As VC Laster put it during a hearing in Avi Wagner v. Third Avenue Management, LLC, “The defendants want to get out of litigation, and the best way to do it is to fight the weak plaintiff . . . [T]hey have the plaintiff they want and the allegations they want….  This whole system of multi-forum litigation … creates a lot of systemic dysfunction. It's certainly true that things should be resolved in one forum and at one time, but it doesn't follow from that … that they should necessarily be followed under a system that incentivizes the filing of a fast complaint by a weak plaintiff so that defendants have the high ground.” (May 20, 2016).

Delaware’s latest proposal to deal with the problem came in the form of a suggestion from its Supreme Court: perhaps when derivative actions are dismissed for failure to allege demand futility, it would violate the constitutional due process rights of subsequent plaintiffs to bind them to that decision.   The theory is that until the demand requirement is satisfied, a plaintiff represents only him or herself, and not the corporate entity; therefore, any dismissal only extends to that plaintiff.  In January, the Supreme Court remanded to Chancery to make a determination of the constitutional law issues. See Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017).

Well, a few days ago, Chancellor Bouchard came back with an answer.  He concluded that an Arkansas court’s dismissal of a derivative case on the grounds that those plaintiffs failed to show demand futility should not bar similar claims by Delaware plaintiffs.

The reason I find this fascinating is because it once again highlights Delaware’s uneasy relationship with the substantive versus the procedural aspects of its law.

We begin with the principle that state courts must give full faith and credit to decisions in other jurisdictions, which means that they must give the same preclusive effect to a judgment that the rendering court would have given.  In this case, that meant determining what kind of preclusive effect Arkansas would have given to the original judgment.

Chancellor Bouchard concluded that – like most jurisdictions – Arkansas would have found the original judgment was res judicata against subsequent plaintiffs.  The obvious way out of that – suggested by the Delaware Supreme Court – was to find that preclusion would violate federal due process.

And that’s sort of what Bouchard held.  But he was clearly uncomfortable resting entirely on federal constitutional standards, especially given the near-universal agreement that preclusion is permissible in these circumstances.  So, rather than phrase his holding purely in terms of a constitutional holding (as the Delaware Supreme Court had asked him to do), he phrased it in terms of a recommendation to the Delaware Supreme Court of the rule they should adopt.  And his recommendation rested not only on federal constitutional standards, but also public policy– Delaware’s policy, and by extension Delaware’s control over its corporations.  He concluded by recommending that Delaware adopt Laster’s reasoning from In re EZCORP, Inc. Consulting Agreement Derivative Litigation – which itself was based both on Delaware law and federal law.  (It is significant to note at this point that when the Delaware Supreme Court remanded the case to him, it specifically held “Delaware law does not apply here, as the parties agree.” Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017)).

Which raises the same question that Trulia raises:  Is this a substantive issue, or a procedural one?  More specifically, do we treat the preclusive effect of derivative litigation as a matter of civil procedure, or as a matter of corporate internal affairs?  Bouchard kinda straddled the line; it will be interesting to see what the Delaware Supreme Court (and other jurisdictions) choose to do.

July 29, 2017 in Ann Lipton | Permalink | Comments (0)

Friday, July 28, 2017

Summer Reading: John Inazu - Confident Pluralism

By Haskell Murray

These days it is easy to get discouraged on how divided our nation seems to be on a number of issues. John Inazu, Distinguished Professor of Law, Religion, and Political Science at Washington University, maps a way forward in his book Confident Pluralism (2016).

The book is divided into two parts: (1) Constitutional Commitments, and (2) Civic Practices.

The first part “contend[s] that recent constitutional doctrine has departed from our longstanding embrace of pluralism and the political arrangements that make pluralism possible.” (8) Further, the first part offers guideposts for future decisions and political solutions. The first part argues for both inclusion and dissent, for the free formation of voluntary groups, for meaningful access to public forums, and for access to publicly available funding for diverse organizations. Provocatively, Inazu claims that Bob Jones case – which stripped tax-exempt status from Bob Jones University due to its prohibition of interracial dating/marriage – is “normatively attractive to almost everyone, [but] is conceptually wrong.” (75) Inazu claims that “[t]he IRS should not limit tax-exempt status based on viewpoint of ideology.” (79) He extends the argument to “generally available resources.” While the Trinity Lutheran case was decided by the Supreme Court after publication of Confident Pluralism the decision seems in line with Inazu’s argument about the provision of ”generally available resources” to all types of organizations. Inazu does concede “Neither [the inclusion of dissent] premise is absolute. Inclusion will stop short of giving toddlers the right to vote or legally insane people the right to bear arms. Dissent will not extend to child molester or cannibals.” (16) I fully never figured out how he draws these lines, as he discusses other controversial topics that the majority of people strongly object to, but perhaps he only seeks to exclude when virtually everyone in society agrees.

The second part “canvass[es] the civic practices of confident pluralism that for the most part lie beyond the reach of the law.” (10) The second part centers around civic aspirations of tolerance, humility, and patience. As defined by Inazu, “Tolerance is the recognition that people are for the most part free to pursue their own beliefs and practices, even those beliefs and practices we find morally objectionable. Humility takes the further step of recognizing that others will sometimes find our beliefs and practices morally objectionable, and that we can’t always “prove” that we are right and they are wrong. Patience points toward restraint, persistence, and endurance in our interactions across difference.” (11). In this part, he describes the “hurtful insult” and the “conversation stopper” as speech we should aspire to avoid. (97-100). The hurtful insult includes terms like “fat, ugly, stupid, friendless.” (97). The aim of the conversation stopper is not primarily used to wound (as the hurtful insult is) but rather to shut down the conversation. Terms like “close-minded, extremist, heretical, and militant” fall in the conversation stopper category. While Inazu admits that those terms can be hurtful, he claims that they are mainly used to shut down reasoned debate.

In conclusion, this is a timely book and is well worth reading. At under 170 pages (including the notes), it is an extremely quick read, but the book is also worth pondering for extended time. Inazu encourages relationships across differences, such as Dan Cathy (Chick-fil-A) and Shane Windmeyer (Campus Pride) and former President Barack Obama and former Republican senator Tom Coburn. (124) I’d add the friendships of the late, conservative justice Antonin Scalia with his liberal colleagues on the Supreme Court Ruth Bader Ginsburg and Elena Kagan. With Inazu, I suggest face-to face conversations with friends with different, strongly-held beliefs. While social media and electronic communication can sometimes suffice between in-person meetings, tough topics are best handled around a table and after trust has been earned. Personally, I count my friendships with those who see the world very differently than I do as some of my most valuable relationships, and those friendships make it difficult to construct the straw men we see so frequently in TV news “debates.”

For more, Paul Horwitz (Alabama) shares some thorough and thoughtful notes on the book here. 

July 28, 2017 in Books, Constitutional Law, Current Affairs, Ethics, Haskell Murray | Permalink | Comments (0)

Thursday, July 27, 2017

ICYMI: #corpgov Midweek Roundup (July 27, 2017)

By Stefan J. Padfield

July 27, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, July 26, 2017

Call for Papers and Features: Sustainable Development Law & Policy Brief - Animal Welfare

By joanheminway

As some of you know (and as I noted in a prior post), I have taught from time to time in the past (and will be teaching again this fall) a course focusing on nonhuman animals and the law.  The course reveals, among many other things, that business law doctrine and practice have a number of significant intersections with nonhuman animals.  Although I am likely to say more on that later, the earlier post linked in above notes a few things.

Yesterday, I received the "Call for Papers and Features" reproduced below.  Many of the suggested topics--and the overall theme of "animal welfare in the context of human development"--engage business law.  In particular, agricultural business seems to be on the ends of the editors . . . .  Accordingly, I am posting the call thinking that some of our readers would be interested in knowing about this.

[Aside: I do not subscribe to the citation policy of the journal for the "features" being sought through this call--e.g., "Almost every sentence must be cited" and "If a sentence does not have a citation, you should have a good reason (i.e., it is your concluding argument or a recommendation)."  Unless those who established these requirements are confident that "features" otherwise meeting their requirements do not contain novel legal or policy arguments or recommendations, that pair of citation "requirements" is absurd, imv.]

*          *          *

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CALL FOR PAPERS AND FEATURES

The Sustainable Development Law & Policy Brief (SDLP) is currently accepting submissions for its Fall 2017 edition on topics related to animal welfare in the context of human development. Development will not be sustainable if animal welfare and human-animal relationships are not included in development programs, policies, and laws. Therefore, it is important to highlight the commonality between animal welfare issues and human justice issues.

If you would like to submit an article or feature for consideration, please contact us at [email protected] immediately. We will accept submissions on a rolling basis. The deadline for submissions is Monday, September 25, 2017. We will select up to four articles and four features for publication, and we will notify the Authors by Monday, October 2, 2017. Article Requirements differ from Feature Requirements – see below.

Topics may include but are not limited to:

§ Consumption of Species Versus Ecotourism in Developing Nations
§ Exploitation of Natural Fisheries and the Associated Issue of Bycatch
§ Challenges in Regulating Offshore Aquaculture
§ The Effects of Anthropogenic Noise on Marine Life
§ Going Meatless and Securing Food Sources: Moving Away from Concentrated Animal Feeding Operations and Meat Consumption
§ Socio-Economic Challenges in Shifting from Animal-Based Agriculture to Plant- Based/Non-Animal Based Agriculture
§ Intersection Between Concentrated Animal Feeding Operations and Environmental Justice
§ Habitat Loss and Deforestation from Agriculture
§ The Role of Financial Institutions in Animal Agriculture Projects
§ How to Move Toward a Global Animal Welfare Policy
§ Human Health Implications Associated with the Production and Consumption of Animal Products
§ Balancing Wildlife and Continued Land Exploitation in National Parks and Preserves
§ The Effects of Deep Sea Bed Mining on Marine Life

SDLP is available online at LexisNexis, Westlaw, VLex, Hein Online, and on our website at www.wcl.american.edu/org/sdlp.

It is also widely distributed at law and graduate schools, and to representatives of international organizations worldwide.

We reserve the right to reject submissions at any time or for any reason. We also reserve the right to hold all submissions on file for later publication and reserve the right to revise submissions and/or cut text. Authors will have the opportunity to accept or reject any revisions. SDLP accepts submission of timely articles that have already been published elsewhere, so long as permission of the previous publisher is received.

[Click on the "Continue reading" button below for the requirements for articles and features.]

Continue reading

July 26, 2017 in Call for Papers, Joan Heminway, Law Reviews, Teaching | Permalink | Comments (0)

Tuesday, July 25, 2017

Priorities Matter: Energy and Beyond

By Joshua Fershee

I am speaking at a plenary session tomorrow during the the Energy Impacts Symposium at the Nationwide & Ohio Farm Bureau 4-H Conference Center in Columbus, Ohio. The program is exciting, and I look forward to being a part of it.  The program is described as follows: 

Energy Impacts 2017 is a energy research conference and workshop, organized by a 9-member interdisciplinary steering committee, focused on synthesis, comparison, and innovation among established and emerging energy impacts scholars from North America and abroad. We invite participation from sociologists, geographers, political scientists, economists, anthropologists, practitioners, and other interested parties whose work addresses impacts of new energy development for host communities and landscapes.

The pace, scale, and intensity of new energy development around the world demands credible and informed research about potential impacts to human communities that host energy developments. From new electrical transmission lines needed for a growing renewable energy sector to hydraulically fracturing shale for oil and gas, energy development can have broad and diverse impacts on the communities where it occurs. While a fast-growing cadre of researchers has emerged to produce important new research on the social, economic, and behavioral impacts from large-scale energy development for host communities and landscapes, their discoveries are often isolated within disciplinary boundaries.

Through facilitated interactive workshop activities, invited experts and symposium participants will produce a roadmap for future cross-disciplinary research priorities.

I will be talking about Community Development and the North Dakota Sovereign Wealth Fund, and we'll discuss the implications of the resource curse.  I am of the view that the resource curse is correlative, not causative, and that natural resource extraction can prove harmful to local communities, but that it doesn't have to be.  From North Dakota's $4.33 billion fund to Norway's Government Pension Fund Global, there are examples of funding that can provide for the future. But there are numerous examples of struggling communities and bankrupt local governments where funds benefited few. And even North Dakota and Norway provide stark contrasts in how the funds are used. The point, for me, is that generalizations overstate the role of the resource and understate the role of local decision making.  What we prioritize matters, and often, I think, we can do better.  It's not preordained.  We can do better, as long as we decide to do so. 

July 25, 2017 in Behavioral Economics, Conferences, Jobs, Joshua P. Fershee, Law and Economics, Legislation, Research/Scholarhip | Permalink | Comments (0)

Monday, July 24, 2017

Hot Off the Press: Russell and Heminway on Representing the Organizational Client on Environmental Matters

By joanheminway

ABABookCover

My good friend and long-time mentor Irma Russell and I wrote a chapter for the recently released ABA book, Ethics and the Environment: A Lawyer's Guide.  Irma also is a co-editor of the book (with Vicki Wright).  In our joint contribution, the chapter entitled "Representing the Organizational Client on Environmental Matters," Irma and I cover issues involving professional responsibility, corporate governance, and environmental compliance.  Guess which part was my primary responsibility . . . ?!)  Covering some 37 pages of the 242-page book, the rules we cover and the observations we make are fairly wide-ranging.  We hope, as we noted in our conclusion to the chapter, that we supply legal counsel representing corporations and other organizations with "foundational tools to assist them in providing advisory and advocacy-oriented services to organizational clients in the environmental law context."  Irma and I received our copies last week.  The book soon will be available through the ABA and other outlets.


  ABABookChapterPage

 

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July 24, 2017 in Books, Compliance, Ethics, Joan Heminway, Lawyering | Permalink | Comments (0)

Sunday, July 23, 2017

ICYMI: #corpgov Tweets From the Week (July 23, 2017)

By Stefan J. Padfield

July 23, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, July 22, 2017

Sometimes it almost seems like SEC Commissioners aren’t reading my articles

By Ann Lipton

So Michael Piwowar inspired a bit of heartburn in the plaintiffs’ bar this week when, during a speech to the Heritage Foundation, he encouraged corporations to add mandatory arbitration provisions in their charters prior to an IPO. This is a subject on which I’ve frequently posted, but since it’s in the news again I can’t let it go by without comment.

Mandatory arbitration is an idea that terrifies plaintiffs’ attorneys because arbitration clauses typically come with a class action waiver, and that could sound the death-knell for federal securities litigation.  Moreover, because the Supreme Court has interpreted the Federal Arbitration Act to bar most attempts at regulating contracts to arbitrate, see, e.g., AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), the fear is that once an arbitration clause makes it into the corporate governance documents, it’s pretty much game over.  The plaintiffs’ bar has long taken comfort in the fact that (at least until now) the SEC has taken the position that such provisions are impermissible, which is exactly why Piwowar's remarks raised concern.  Delaware, of course, recently amended its corporation law to prohibit the use of mandatory arbitration clauses in corporate charters and bylaws, see Del. Code tit. 8, § 115, but there’s some question as to whether the prohibition extends to federal securities claims, and, even if it does, whether Delaware’s law is preempted by the FAA.

But, as I explained in my article Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, 104 Geo. L.J. 583 (2016) (and, to a lesser extent, my chapter Limiting Litigation Through Corporate Governance Documents, in Research Handbook on Representative Shareholder Litigation (Sean Griffith et al., eds., forthcoming 2017)) - and as I previously posted here, here, and here - I don’t think existing law permits charters and bylaws to regulate federal securities claims.  And even if charters and bylaws do extend that far, I do not believe the FAA applies.  To summarize briefly (you can consult older posts or Manufactured Consent for the long version):

First, corporate charters and bylaws only govern internal governance matters, i.e., the matters typically governed by the internal affairs doctrine.  This makes sense; corporate law is intended to govern stockholders’ relationship to the corporation in their capacity as stockholders.  It does not govern matters outside the role of the stockholder as a member of the corporate polity, such as personal torts.  Federal securities law may be closely related to corporate law, but it’s a different animal, and therefore outside the scope of the state-constructed corporate entity.

Second, though it is fashionable to describe charters and bylaws as “contractual,” I do not believe they are, at least not in the manner envisioned by the FAA.  Within the corporate form, shareholders are not treated as autonomous counterparties bargaining with directors over terms.  Thus, the preconditions for contract envisioned by the FAA jurisprudence are not present.

All of which is to say – I don’t think Piwowar’s suggestion is viable, no matter whether the SEC has changed its views.  Of course, there’s always the chance it’ll take a lot of litigation to settle the matter.

July 22, 2017 in Ann Lipton | Permalink | Comments (0)

Friday, July 21, 2017

Summer Reading: Parker Palmer - Courage to Teach

By Haskell Murray

At the beach with my wife’s family, I read Parker J. Palmer’s Courage to Teach in a couple sittings. Palmer has a PHD in sociology from UC Berkeley, and has written extensively on education.

My mother-in-law was reading the book for her job at a private elementary school, and I brought a limited number of books (due to the weight of my hardcopy books), so I read this book too. Our teaching center at Belmont University has mentioned Palmer’s work a number of times, so I was interested in the book.

Simply stated, Palmer’s thesis is that “good teaching comes from the identity and integrity of the teacher.” He defines identity as “an evolving nexus where all the forces that constitute my life converge in the mystery of self," and he defines integrity as “whatever wholeness I am able to find within that nexus as its vectors form and re-form the pattern of my life.” (13) Teaching, he argues, comes from the heart and soul of the teacher, and not primarily from chosen techniques. 

Palmer makes a solid point about paradox and pedagogical design. “The space should be bounded and open….hospitable and charged….invite the voice of the individual and the voice of the group…welcome both silence and speech.” (76-77). The tendency in teaching, I think, is to swing from one side to the other, when we really need to be addressing all of these things simultaneously. Making space for silence in the classroom is something that is especially difficult for me.

He observed, “students who have been well served by good teachers may walk away angry—angry that their prejudices have been challenged and their sense of self shaken. That sort of dissatisfaction may be a sign that real education has happened. It can take many years for a student to feel grateful to a teacher who introduces a dissatisfying truth.” (96-97). This made me wonder if we should add teaching evaluations from alums 5+ years after the class.

I also liked his description of subject-centered classes (instead of teacher-centered or student centered). In the subject-centered class, the students are active and important participants, but they are not the focus of the time.

Palmer notes that he uses mastery grading, allowing students to revise their papers as many times as they like with only the final grade counting. I tried this once, in an MBA class, because many of my colleagues utilize it. I found mastery grading lacking. It encourages weak initial effort, as the students wait for comments, knowing that they can revise their poor product with more specific guidance.

Finally, I really liked the Quaker concept of a “clearness committee” that Palmer describes. The committee consists of four or five colleagues and a focus person. Before the meeting, the focus person writes a description of the problem (as professors, likely stemming from the classroom). Then, for two to three hours the colleagues of the focus person ask him/her open-ended questions about the problem, being careful not to offer advice, bring attention to themselves, or ask questions that are really advice in disguise (e.g., Have you considered seeing a therapist?) After the questions, the focus person has the option of continuing with mirroring (“reflecting to the focus person things he or she said or did but might not be aware of: 'When asked about A, you said B,' or 'When you spoke about X your voice dropped and you seemed tired.'”) (160). Confidentiality is pledged, not only to those outside of the committee, but also within the committee--meaning that the topic would not be raised again, even among the group members. The clearness committee would take a fair bit of time but seems like a great way to solves problems, as most solutions that stick seem to stem from personal realizations rather than merely outside advice.

There wasn’t all that much that surprised me in this book, but it was an easy read and had a few good reminders.

July 21, 2017 in Books, Haskell Murray, Teaching | Permalink | Comments (0)

Thursday, July 20, 2017

ICYMI: #corpgov SSRN & Law Review Roundup (July 20, 2017)

By Stefan J. Padfield

July 20, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, July 19, 2017

Making Friends with Entrepreneurs

By joanheminway

Last year, I was asked to contribute to a symposium on law and entrepreneurship hosted at the University of North Carolina.  Although I had to Skype in for my presentation from Little Rock, Arkansas (where I had just given a separate, unrelated CLE presentation), the panel to which I was assigned was fabulous.  Great scholars, with great ideas.

For my contribution to the symposium, I chose to reflect on the unfulfilled promise of the potentially mutually beneficial relationship between an entrepreneur and a business finance lawyer.  I recently posted the published work memorializing my thoughts on the topic, featured this spring with several other articles from the symposium in a dedicated edition of the North Carolina Law Review.  The brief abstract for my article follows:

Entrepreneurs have the capacity to add value to the economy and the community. Business lawyers—including business finance lawyers—want to help entrepreneurs achieve their objectives. Despite incentives to a symbiotic relationship, however, entrepreneurs and business finance lawyers are not always the best of friends. This Article offers several approaches to bridging this gap between entrepreneurs and business finance lawyers.

My hope in writing this article was to infuse some energy into conversations about the role of business finance and business finance lawyers in the start-up and small business environment.  Too many principals of emergent businesses with whom I interact think that business entity choice and formation are divorced--wholly or in major part--from finance.  Of course, governance and tax matters (as well as, e.g., intellectual property and employment law concerns) are key.  But my personal view is that entrepreneurs and promoters of new businesses should map out their plan for financing firms from the start and take that plan into account in choosing the form of legal entity for those businesses.  I may be fighting an uphill battle on this (for a variety of reasons, mostly relating to the limited resource environment in which start-ups and small businesses exist), but I hope the article gives both clients and lawyers in this space something to consider, at the very least.

July 19, 2017 in Corporate Finance, Entrepreneurship, Joan Heminway, Lawyering, Securities Regulation | Permalink | Comments (2)

Tuesday, July 18, 2017

Long Live Director Primacy: Social Benefit Entities and the Downfall of Social Responsibility

By Joshua Fershee

The more I read about social enterprise entities, the less I like about them.  In 2014, my colleague Elaine Wilson and I wrote March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well?  We observed:

Regardless of jurisdiction, there may be value in having an entity that plainly states the entity’s benefit purpose, but in most instances, it does not seem necessary (and is perhaps even redundant). Furthermore, the existence of the benefit corporation opens the door to further scrutiny of the decisions of corporate directors who take into account public benefit as part of their business planning, which erodes director primacy, which limits director options, which can, ultimately, harm businesses by stifling innovation and creativity.  In other words, this raises the question: does the existence of the benefit corporation as an alternative entity mean that traditional business corporations will be held to an even stricter, profit-maximization standard?

I am more firmly convinced this is the path we are on.  The emergence of social enterprise enabling statutes and the demise of director primacy threaten to greatly, and gravely, limit the scope of business decisions directors can make for traditional for-profit entities, threatening both social responsibility and economic growth. Recent Delaware cases, as well as other writings from Delaware judges, suggest that shareholder wealth maximization has become a more singular and narrow obligation of for-profit entities, and that other types of entities (such as non profits or benefit corporations) are the only proper entity forms for companies seeking to pursue paths beyond pure, and blatant, profit seeking. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, to the detriment of employees, society, and, yes, shareholders. 

I know there are some who believe that I see the sky falling when it's just a little rain. Perhaps. I would certainly concede that the problems I see can be addressed through law, if necessary.  I am just not a big fan of passing some more laws and regulations, so we can pass more laws to fix the things we added.  My view of entity purpose remains committed to the principle of director primacy.  Directors are obligated to run the entity for the benefit of the shareholders, but, absent fraud, illegality, or self-dealing, the directors decide what actions are for the benefit of shareholders. Period, full stop.  

July 18, 2017 in Corporations, Delaware, Joshua P. Fershee, Legislation, Management, Shareholders, Social Enterprise | Permalink | Comments (4)

Monday, July 17, 2017

Yale Private Equity Conference - Save the Date

By joanheminway

Save the Date!

The Yale Law School Center for Private Law will host a Private Equity Conference on November 17, 2017. The conference will bring leading theorists from law, economics, finance, and sociology into dialogue with people with experience at the highest levels of private equity, including from law practice, financial firms, and institutional investors.

Oliver Hart, winner of the 2016 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel, will give the keynote address.

Other speakers include:

Jon Ballis, Kirkland & Ellis
Rosemary Batt, Cornell University, ILR School
Neil Fligstein, UC Berkeley Sociology Department
Stephen Fraidin, Pershing Square Capital Management
Will Gaybrick, Stripe
Adam Goldstein, Princeton University Department of Sociology
Victoria Ivashina, Harvard Business School
Andrew Metrick, Yale School of Management
Meridee Moore, Watershed Asset Management
John Morley, Yale Law School
Alan Schwartz, Yale Law School
David Swensen, Chief Investment Officer, Yale University

Location: Yale Law School, 127 Wall St., New Haven, CT

Time: Approximately 9:45 a.m.-4:00 p.m.

Cost: There is no cost associated with this event, though pre-registration is required. Registration information will be available soon at this link.

The conference is sponsored by the Kirkland & Ellis Fund for the Study of Private Law.

July 17, 2017 in Conferences, Corporate Finance, Financial Markets, Joan Heminway, Private Equity | Permalink | Comments (0)

Sunday, July 16, 2017

ICYMI: #corpgov Tweets From the Week (July 16, 2017)

By Stefan J. Padfield

July 16, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, July 15, 2017

Twilight of the Event Study

By Ann Lipton

Could this be the beginning of the end for the event study in Section 10(b) class certification?

Yes, I’m probably overstating, but still, the Second Circuit’s opinion in In re Petrobras Securities, 2017 WL 2883874 (2d Cir. July 7, 2017), definitely takes a step in that direction.

As a recap, a private plaintiff alleging fraud claims under Section 10(b) of the Exchange Act must demonstrate that he or she “relied” on the defendant’s false statements.  In Basic Inc. v. Levinson, 485 U. S. 224 (1988), the Supreme Court held that reliance could be demonstrated via the fraud on the market doctrine – namely, the presumption that in an open and developed market, any material, public misstatement is likely to have impacted the market price of the security.  The fraud on the market doctrine is what allows Section 10(b) claims to be brought as class actions, since it eliminates the need for plaintiffs to demonstrate reliance on an individual basis.  Since Basic, then, battle has been joined between plaintiffs and defendants regarding what counts as an “open and developed” market for class certification purposes.

In recent years, it has become de rigueur for plaintiffs to use an event study to establish the necessary market conditions.  An event study is a statistical analysis comparing the change in a security’s price with an event, such as the release of new company-specific information.

The event study methodology, however, has come under heavy academic criticism, the thrust of which is that while it is a useful tool for studying markets generally, its utility is greatly diminished when deployed to examine a single company.  See, e.g., Alon Brav & J.B. Heaton, Event Studies in Securities Litigation: Low Power, Confounding Effects, and Bias, 93 Wash. U. L. Rev. 583 (2015).

In Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), the Supreme Court held that the Basic presumption represents merely a “modest premise” that public information affects prices.  Commenters (including your humble blogger) interpreted Halliburton to mean that courts should loosen their criteria for identifying an “open and developed” market for Basic purposes.

Judge Scheindlin was one of the first judges to take up Halliburton’s invitation.  Acknowledging the criticism of event studies, she held that plaintiffs need not submit an event study to prove the existence of an open and developed market, so long as they submit other types of evidence.

In Petrobras, the Second Circuit appeared to follow her lead.  Though the Second Circuit stopped just shy of holding class certification does not require an event study – the court claimed that the issue was not squarely presented – it did acknowledge the academic critiques of event studies, and (quoting its earlier caselaw) “explicitly declined to adopt any particular test for the market efficiency of stocks or bonds.”  As the court put it, “Event studies offer the seductive promise of hard numbers and dispassionate truth, but methodological constraints limit their utility in the context of single-firm analyses.”  The court also noted that the various factors that go into a finding of an open and developed market – analyst coverage, trading volume, and so forth – would be of little use if in fact event studies were required in all instances.

Petrobras could have an enormous impact on securities litigation.  If event studies are not required, it may be easier for plaintiffs to win certification in cases involving securities other than exchange listed stocks – such as the notes at issue in Petrobras, as well as preferred stock, over the counter stocks, and so forth.  Beyond that, event studies have been critical to proving damages and loss causation; if they are suddenly deemed unreliable, it may open the door to a much wider variety of evidence on these elements, as well.

July 15, 2017 in Ann Lipton | Permalink | Comments (0)

Friday, July 14, 2017

Summer Reading: Jayber Crow by Wendell Berry

By Haskell Murray

WB

I highly recommend Jayber Crow by Wendell Berry. 

Set in rural Kentucky, Jayber Crow is a story about small town life, community, love/hate, sustainability, and industrialization. The main character, Jonah "Jayber" Crow loses both his parents and his Aunt and Uncle by the age of ten. He spends the next few years in an orphanage before obtaining a scholarship to a local college as a "pre-ministerial" student. Doubting his calling to the ministry, Jayber drops out and returns to his hometown. He serves as the town's only barber, and he also picks up jobs as the local grave digger and church janitor. Jayber narrates, in vivid detail, the exodus from the small town by the younger generation and the invasion of large-scale, profit-focused, corporate farming.   

The author, Wendell Berry, warns that "persons attempting to explain, interpret, explicate, analyze, deconstruct, or otherwise 'understand' [this book] will be exiled to a desert island in the company only of other explainers" so I will simply end with a few of my favorite quotes below. I think one of the reasons I so liked this book is because it reminded me of my family's property and of my maternal grandfather, who lived at a pace unknown to most of us and who worked the land with his hands and simple tools. 

"You have been given questions to which you cannot be given answers. You will have to live them out--perhaps a little at a time." (54)

"The university thought of itself as a place of freedom for thought and study and experimentation, and maybe it was, in a way. But it was an island too, a floating or a flying island. It was preparing people from the world of the past for the world of the future, and what was missing was the world of the present, where every body was living its small, short, surprising, miserable, wonderful, blessed, damaged, only life." (71) 

"Instead of sitting out and talking from porch to porch on the summer evenings, the people sat inside rooms filled with the flickering blue light of the greater world." (258)

"We were, as we said again, making war in order to make peace We were destroying little towns in order to save them. We were killing children in order that children might sleep peacefully in their beds without fear." (294)

"On those weekends, the river is disquieted from morning to night by people resting from their work. This resting involves traveling at great speed, first on the roads and then on the river. The people are in an emergency to relax." (331)

"The Economy does not take people's freedom by force, which would be against its principles, for it is very humane. It buys their freedom, pays for it, and then persuades its money back again with shoddy goods and the promise of freedom." (332)

Update: Here is a trailer for a new film on Wendell Berry, Look & See. Powerful, especially if you grew up in a rural place that is now being "developed," or if have seen beautiful landscapes that you love ruined. "Those who had wanted to go home could never get there now...."

July 14, 2017 in Books, CSR, Ethics, Haskell Murray, Real Property | Permalink | Comments (0)

Thursday, July 13, 2017

ICYMI: #corpgov SSRN Roundup (July 13, 2017)

By Stefan J. Padfield

July 13, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, July 12, 2017

Should we be steering more law students to compliance careers?

By Marcia Narine Weldon

Prior to joining academia, I served as a compliance officer, deputy GC, and chief privacy officer for a Fortune 500 company. I had to learn everything on the job by attending webinars and conferences and reading client alerts. Back then, I would have paid a law school graduate a competitive salary to work in my compliance group, but I couldn’t find anyone who had any idea about what the field entailed.

The world has changed. Now many schools (including mine) offer relevant coursework for this JD-advantage position. I just finished teaching a summer skills course in compliance and corporate social responsibility, and I’m hoping that I have encouraged at least a few of the students to consider it as a viable career path. Compliance is one of the fastest growing corporate positions in the country, and the number of compliance personnel has doubled in the past 6 years. Still, many business-minded law students don’t consider it in the same vein as they consider jobs with Big Law.

This summer, my twelve students met twice a week for two hours at 7:30 pm. In the compressed six-week course, they did the following:

  • Heard from compliance officers and outside counsel for public companies and government entities
  • Read the same kinds of primary source material that compliance officers and counsel read in practice (such as the Federal Sentencing Guidelines, the Yates Memo, deferred prosecution agreements, and materials from the EU on the upcoming changes to data protection regulation)
  • Compared and contrasted CSR reports from WalMart and Target, and reviewed the standards for the Global Reporting Initiative and the UN Global Compact
  • Advocated before a board as a worker safety NGO for a company doing business in Bangladesh
  • Served as a board member during a meeting (using actual board profiles)
  • Wrote a reflection paper on the ideal role and reporting structure of compliance officers
  • Considered top employment law and data protection risks for fictional companies to which they were assigned
  • Looked at the 10-Ks and CDP report for climate change disclosures after examining the role of socially responsible investors and shareholder resolutions
  • Drafted industry-specific risk assessment questionnaires
  • Drafted three code of conduct policies
  • Wrote a short memo to the GC on health care compliance and the DOJ Yates memo
  • Did a role play during a crisis management simulation acting as either a board member, SEC or DOJ lawyer, the CEO, compliance officer or GC and
  • Conducted a 20-minute board presentation or employee compliance training (worth the biggest part of the grade).

Perhaps the most gratifying part of the semester came during tonight’s final presentations. The students could pick any topic relevant to the fictional company that they were assigned. They chose to discuss child labor in the supply chain for a clothing company, off-label marketing in the pharmaceutical industry, anti-money laundering compliance in a large bank, and environmental and employment law issues for a consumer product conglomerate. Even though I was not their BA professor, I was thrilled to hear them talk about the Caremark duty, the duty of care, and the business judgment rule in their presentations. Most important, the students have left with a portfolio of marketable skills and real-world knowledge in a fast growing field.

If you have your own ideas on how to teach compliance and CSR, please leave them below or email me at [email protected].

July 12, 2017 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Law School, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

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