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Wednesday, February 28, 2018

ICYMI: #corpgov Midweek Roundup (Feb. 28, 2018)

By Stefan J. Padfield

February 28, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, February 27, 2018

State Laws Committed to Confusing Business Entities, Courts Happy to Help

By Joshua Fershee

Another unforced error on the LLC front, again with a limited liability company being called a corporation.   

This time, it is a recent Texas appellate court case where the court states: “In its pleadings, AMV contends that it is presently a limited liability corporation known as ArcelorMittal Vinton LLC.”  Wallace v. ArcelorMittal Vinton, Inc., 536 S.W.3d 19, 21 n.1 (Tex. App. 2016), review denied (Mar. 31, 2017).  As is so often the case, that is not accurate. 

In its brief, the entity AMV simply stated, that it was a Defendant-Appellee as named in the suit, ArcelorMittal Vinton, Inc., was “n/k/a [now known as] ArcelorMittal Vinton LLC.” Carla WALLACE, Plaintiff-Appellant, v. ARCELORMITTAL VINTON, INC., Defendant-Appellee., 2015 WL 7687420 (Tex.App.-El Paso), 1.  AMV’s counsel never said it was a corporation.  The court did that on its own.

Sigh.  Even in Texas, LLCs are not corporations. I swear!  I looked at the statute.

And yet, a close look at the statute shows why this gets confusing for some people.  The Texas statute provides specific cross-references to certain business provisions (emphasis added):

Sec. 101.002.  APPLICABILITY OF OTHER LAWS. 

(a)  Subject to Section 101.114, Sections 21.223, 21.224, 21.225, and 21.226 apply to a limited liability company and the company's members, owners, assignees, affiliates, and subscribers.

(b)  For purposes of the application of Subsection (a):

(1)  a reference to "shares" includes "membership interests";

(2)  a reference to "holder," "owner," or "shareholder" includes a "member" and an "assignee";

(3)  a reference to "corporation" or "corporate" includes a "limited liability company";

(4)  a reference to "directors" includes "managers" of a manager-managed limited liability company and "members" of a member-managed limited liability company;

(5)  a reference to "bylaws" includes "company agreement"; and

(6)  the reference to "Sections 21.157-21.162" in Section 21.223(a)(1) refers to the provisions of Subchapter D of this chapter.

Added by Acts 2011, 82nd Leg., R.S., Ch. 25 (S.B. 323), Sec. 1, eff. September 1, 2011.

As Ham Porter would say, "You're killing me, Smalls." 

February 27, 2018 in Corporations, Joshua P. Fershee, Legislation, LLCs | Permalink | Comments (0)

Monday, February 26, 2018

Professional Responsibility in an Age of Alternative Entities, Alternative Finance, and Alternative Facts

By joanheminway

Like my fellow editors here at the BLPB, I enjoyed the first Business Law Prof Blog conference hosted by The University of Tennessee College of Law back in the fall.  They have begun to post their recently published work presented at that event over the past few weeks.  See, e.g., here and here (one of several newly posted Padfield pieces) and here. I am adding mine to the pile: Professional Responsibility in an Age of Alternative Entities, Alternative Finance, and Alternative Facts.  The SSRN abstract reads as follows:

Business lawyers in the United States find little in the way of robust, tailored guidance in most applicable bodies of rules governing their professional conduct. The relative lack of professional responsibility and ethics guidance for these lawyers is particularly troubling in light of two formidable challenges in business law: legal change and complexity. Change and complexity arise from exciting developments in the industry that invite—even entice—the participation of business lawyers.

This essay offers current examples from three different areas of business law practice that involve change and complexity. They are labeled: “Alternative Entities,” “Alternative Finance,” and “Alternative Facts.” Each area is described, together with significant attendant professional responsibility and ethics challenges. The essay concludes by offering general prescriptions for addressing these and other professional responsibility and ethics challenges faced by business lawyers in an age of legal change and complexity.

I do not often write on professional responsibility issues.  However, I do feel an obligation every once in a while to add to the literature in that area addressing issues arising in transactional business law.  In essence, it's service through scholarship.  

I hope you read the essay and, if you do, I hope you enjoy it.  I also can recommend the commentary on it published by my UT Law faculty colleague George Kuney and my student Claire Tuley.  Both comments will be available electronically in the coming months.  I will try to remember to post links . . . .

February 26, 2018 in Business Associations, Corporate Finance, Crowdfunding, Ethics, Joan Heminway, Lawyering, Securities Regulation, Unincorporated Entities | Permalink | Comments (2)

Sunday, February 25, 2018

ICYMI: #corpgov Weekend Roundup (Feb. 25, 2018)

By Stefan J. Padfield

February 25, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, February 24, 2018

“Our findings also relate to the academic literature on corporate jets.”

By Ann Lipton

At this point, drawing inferences from corporate jet usage is its own mini-genre in the business literature.  There was David Yermack’s famous Flights of Fancy, which found that companies underperform when the CEO makes use of the company jet for personal business (often, apparently, golfing-related business); other studies have found that corporate jet use can enhance firm value, or detract from it, depending on whether the company has weak corporate governance, and that public firms have larger jet fleets than firms owned by private equity funds, suggesting the excessive fleet size is due to agency costs in public firms.

(And these studies, naturally, were conducted before everyone knew about GE’s now-discontinued practice of having its CEO travel with a jet and a spare.)

Now there’s a new contribution to the genre: Corporate Jets and Private Meetings with Investors, by Brian J. Bushee, Joseph J. Gerakos, and Lian Fen Lee. 

The authors begin with the previously-documented phenomenon that when investors have the opportunity to engage in private meetings with corporate management, their trading improves.   Regulation FD prohibits management from providing these investors with nonpublic material information, but somehow – whether through outright violations of the rule or simply subtle cues that the investors can synthesize with their own information – these meetings benefit investors who are fortunate enough to have the opportunity to participate in them.

The rest of the world, however, usually doesn’t know when these meetings are taking place.  If they occur at a publicized conference researchers can deduce their existence, but otherwise, there’s no obvious way to tell.

The authors figured out that they could deduce when private meetings were taking place by tracking corporate jet usage.  They found that when the corporate jets were used to rapidly fly to multiple cities where their investors are based, there are increases in the level of local institutional stock ownership, and detectable market reactions (which the authors attribute to investors acting on what they believe to be improved private information).  The authors also found that these trips were more likely to occur when the firm was undergoing various conditions that might increase investors’ demand for information. 

The part that I find interesting, though, is that evidence was mixed as to whether institutions were actually benefitting from these meetings in the form of trading gains – and they were more likely to do so when the trips were taken to large cities with finance industries rather than to other locations.  The authors don’t say it, but that piece makes me wonder if there’s a distinction in investor sophistication at play; all investors are not created equal, and some institutions may be better able to make use of the information revealed in private meetings than others. 

February 24, 2018 in Ann Lipton | Permalink | Comments (0)

Friday, February 23, 2018

How 18 Words from A Kardashian Cost a Company Over A Billion Dollars

By Marcia Narine Weldon

I love the Kardashians. I don't watch the reality show, but I do keep up with them because I use them in hypotheticals in class and in exams for entity selection questions. The students roll their eyes, but invariably most of them admit to knowing everything about them. When the students can relate to the topic, it makes my job easier. That's why I used the SNAP IPO last year as our case study on basic securities law. Every year I pick a "hot" offering to go through some of the key principles and documents, and Snap was the logical choice because the vast majority of the students love(d) the Snapchat app. The company explained as its first risk factor "... the majority of our users are 18-34 years old. This demographic may be less brand loyal and more likely to follow trends than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement." I used myself as an example to explain that risk factor in class. I have over 100 apps on my smartphone, and I have a son in the target demographic, but I  never open Snapchat unless my six-year-old goddaughter sends me something. I just don't get the appeal even though millions of celebrities and even mainline companies use it for marketing. My students were aghast when I told them that I wouldn't invest in any stock that depended on the vagaries of their ever-changing taste. 

Enter Kylie Kardashian. She's the youngest Kardashian (20 years old), is worth at least $50 million, runs a cosmetics empire on track to earn a billion dollars, has 95 million followers on Instagram, and has 24 million followers on Twitter.

Kylie

After she offhandedly tweeted that she doesn't really open Snapchat anymore yesterday, Snap lost $1.3 billion (6%) in value. This plunge added to an already bad week for Snap after Citi issued a sell rating and the company confirmed to 1.2 million change.org petition signers that its new redesign was here to stay. But it was Kylie's tweet that caused the real damage. Perhaps one of Kylie's lawyers or business managers alerted her to the fallout because she later tweeted out, "still love you tho snap... my first love." Kylie probably forgot how much power she really has. When she released a video about her pregnancy and childbirth, 24 million people watched in less than 24 hours because she had refused to allow any of her followers to see pictures of her belly. She knows marketing. 

Meanwhile, after seeing Kylie's first tweet, cosmetics competitor Maybelline went on Twitter to ask its users if it should stay on Snapchat, noting that its Snapchat views had dropped dramatically. The company later deleted the tweet, but users had already voted 81% to 19% to leave on the Twitter poll.

Snap appears determined to stick to its unpopular redesign, and its CEO received a $637 million bonus last year after the IPO. Perhaps the CEO should use some of that money to pay for a new Kylie tweet. In 2016, when Kylie earned only $18 million, 20% of that haul came from social media endorsements. It looks like the President isn't the only one who can move markets with a tweet. 

February 23, 2018 in Corporate Personality, Corporations, Current Affairs, Marcia Narine Weldon, Marketing, Securities Regulation, Teaching, Television | Permalink | Comments (0)

Thursday, February 22, 2018

Skip Your Compliance Department and Go Directly to the SEC

By Benjamin P. Edwards

The Supreme Court just released its opinion in Digital Realty Trust, Inc. v. Somers.  The case resolves a controversy over whether employees making internal reports of securities law violations qualify for Dodd-Frank's whistleblower protections. The Court ruled that internal reporters do not qualify because they are not "whistleblowers" under the statutory definition.  Writing for the Court, Justice Ginsberg focused on the the statutory provision specifically defining whistleblowers as persons that provide "information relating to a violation of the securities laws to the Commission."  Under this strict reading, a person that called a company's ethics hotline to blow the whistle on misconduct in their office would not qualify as a whistleblower unless she also went to the SEC with the information.

The Court read the definition and the Dodd-Frank provision in light of existing whistleblower protections.  Sarbanes-Oxley already protects internal reporters from retaliation.  Yet pursuing a Sarbanes-Oxley claim requires a whistleblower to jump through some quick procedural hoops.  The first step is filing a complaint with the Department of Labor within 180 days of the retaliation.  If Labor does not issue a decision within 180 days of the whistleblower's filing, the whistleblower can go to court for reinstatement, backpay with interest, and litigation costs. In contrast, Dodd-Frank provides a better remedy.  A qualifying whistleblower can go directly to federal court anytime within six years and seek double back pay plus interest.  

There is another piece to this puzzle.  Dodd-Frank also contains a bounty program. Whistleblowers that report information to the SEC may qualify for awards if the SEC recovers significant funds because of the information provided by a whistleblower's tip.  News reports indicate that the SEC may soon announce an eye-popping $48 million award for a whistleblower under that program.

A statutory definition limiting "whistleblowers" as persons that provide information to the SEC makes sense for the bounty program.  It makes less sense for the anti-retaliation provision.  To protect internal reporters from retaliation, the SEC had used its rule-making authority to craft a different definition for purposes of the anti-retaliation provision, covering persons that make internal reports.  The Supreme Court rejected that contextual definition and limited Dodd-Frank's more generous protections to persons that "tell the SEC" about their concerns.

What does this mean in practical terms?  It means that employees with concerns about actual or potential securities law violations should make reports to the SEC before (or in lieu of) reporting their concerns internally. If they do not report to the SEC, they'll lose the more significant Dodd-Frank protections.  

If reporting behavior shifts in the wake of this decision, the SEC's bounty program may receive more noise than signal.  If persons report to the SEC simply to secure protection from retaliation, the SEC may not receive as much targeted and useful information as it would otherwise. Increased volume may diminish the SEC's ability to focus on the most useful tips.

There is room to be skeptical about whether tip volume will materially increase after this decision.  A potentially culpable potential whistleblower faces a dilemma.  She has to consider whether blowing the whistle to the SEC would somehow serve as an admission of wrongdoing.  It'll be interesting to see if the SEC receives an increased volume of tips in the wake of this decision.

 

February 22, 2018 | Permalink | Comments (0)

Wednesday, February 21, 2018

ICYMI: #corpgov Midweek Roundup (Feb. 21, 2018)

By Stefan J. Padfield

February 21, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, February 20, 2018

Fellowship Announcement

By Ann Lipton

The Columbia Law School/Columbia Business School Program in the Law and Economics of Capital Markets is seeking a full time Capital Markets Research Fellow.  The incumbent would be appointed as a Postdoctoral Research Scholar.  The appointment will run from July 1, 2018 to June 30, 2020.

This position is intended for a person who expects to begin a law school teaching career at the start of the 2020-21 academic year and who desires an interim position that would help the person prepare for such a career by offering the time and facilities needed to do serious research and to develop further expertise.   More information is available here.

February 20, 2018 in Jobs | Permalink | Comments (0)

Law Teaching & Learning: Conference Announcements and Call for Proposal

By Joshua Fershee

Law Teaching for Adjunct Faculty and New Professors Conference

Law Teaching for Adjunct Faculty and New Professors is a one-day conference for new and experienced adjunct faculty, new full-time professors, and others who are interested in developing and supporting those colleagues. The conference will take place on Saturday, April 28, 2018, at Texas A&M University School of Law, Fort Worth, Texas, and is co-sponsored by the Institute for Law Teaching and Learning and Texas A&M University School of Law.

Sessions will include:

  • Course Design and Learning Outcomes – Michael Hunter Schwartz

  • Assessment – Sandra Simpson

  • Active Learning – Sophie Sparrow

  • Team-based Learning – Lindsey Gustafson

  • Technology and Teaching – Anastasia Boles

Details are here. 

 

CALL FOR PRESENTATION PROPOSALS

Institute for Law Teaching and Learning—Summer 2018 Conference Exploring the Use of Technology in the Law School Classroom June 18-20
Gonzaga University School of Law
Spokane, Washington

The Institute for Law Teaching and Learning invites proposals for conference workshops addressing the many ways that law teachers are utilizing technology in their classrooms across the curriculum. With the rising demands for teachers who are educated on active learning techniques and with technology changing so rapidly, this topic has taken on increased urgency in recent years. The Institute is interested in proposals that deal with all types of technology, and the technology demonstrated should be focused on helping students learn actively in areas such as legal theory and knowledge, practice skills, and guided reflection, etc. Accordingly, we welcome proposals for workshops on incorporating technology in the classrooms of doctrinal, clinical, externship, writing, seminar, hybrid, and interdisciplinary courses.

The Institute invites proposals for 60-minute workshops consistent with a broad interpretation of the conference theme. The workshops can address the use of technology in first-year courses, upper-level courses, required courses, electives, or academic support roles. Each workshop should include materials that participants can use during the workshop and when they return to their campuses. Presenters should model effective teaching methods by actively engaging the workshop participants. The Institute Co-Directors are glad to work with anyone who would like advice on designing their presentations to be interactive.

Second, our summer conference will be at Gonzaga Law, June 18-20 and will focus on the use of technology in the classroom.  We're currently accepting proposals for that conference (and the deadline has been extended to March 2).  More info here.  

February 20, 2018 in Joshua P. Fershee, Law School, Research/Scholarhip, Teaching, Technology | Permalink | Comments (0)

Monday, February 19, 2018

Social Enterprise and Impact Investing: 2018 Grunin Center Prize and Conference

By joanheminway

Mark your calendars!

March 1, 2018 is the deadline for nominations for the inaugural award of the Grunin Prize.

The Grunin Prize has been created to recognize the variety and impact of lawyers’ participation in the ways in which business, whether for-profit or not-for-profit, is increasingly advancing the goals of sustainability and human development.

Lawyers, legal educators, policymakers, in-house counsel, or legal teams that recently have developed innovative, scalable, and social entrepreneurial solutions using existing law, legal education, or the development of new legal structures or metrics are eligible for nomination. And self-nominations are encouraged!

The Grunin Prize will be presented on June 5, 2018 at the IILWG/Grunin Center conference. To learn more about the Grunin Prize and the nomination process, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship/grunin-prize.

June 5-6, 2018 are the dates of the Impact Investing Legal Working Group (IILWG)/Grunin Center for Law and Social Entrepreneurship’s 2018 Conference on “Legal Issues in Social Entrepreneurship and Impact Investing – in the US and Beyond.” This year’s IILWG/Grunin Center’s annual conference will take place at NYU School of Law in New York City.

The themes of this year’s conference include:

· Embedding Impact into Deal Structures and Terms
· Policy and Regulation of Impact Investing and Social Entrepreneurship
· Blending and Scaling Capital for Impact
· Building Investment-Ready Social Enterprises
· Mainstreaming Impact

Last year over 250 lawyers and other stakeholders attended this groundbreaking conference for lawyers working in the fields of social entrepreneurship and impact investing. In a post-conference survey of these conference attendees, we learned that:

· Over 99% of survey respondents rated the conference as “excellent” (over 76%) or “very good” (23%);
· Over 84% of survey respondents were very likely to recommend attending this conference to others; and
· Over 64% of survey respondents made 6 or more new connections at this conference.

Come join this growing community of legal practice!

Conference registration will open in April. For more information about the conference, go to http://www.law.nyu.edu/centers/grunin-social-entrepreneurship.

June 7, 2018 is the date of the first Grunin Center Legal Scholars convening. This convening, which is scheduled to take place immediately after the IILWG/Grunin Center Annual Conference, is intended to advance legal scholarship in the fields of social entrepreneurship and impact investing by bringing together legal scholars who are writing and researching in these fields and introducing them to the legal/policy challenges and opportunities that legal practitioners are facing in these fields.

Law school faculty (fulltime and adjunct), other academic personnel working fulltime in law schools who are engaged in legal scholarship, practitioners who are engaging in legal scholarship, and professors who are teaching law in other schools yet are engaging in legal scholarship are invited to join this convening.

If you are interested in joining this community of legal scholars, please contact the Grunin Center ([email protected]) and we will send you more information about the June 7, 2018 Legal Scholars convening.

Best Regards,

Helen Scott and Deborah Burand
Co-Directors, Grunin Center for Law and Social Entrepreneurship
New York University School of Law
245 Sullivan Street, 5th Floor
New York, NY 10012

February 19, 2018 in Conferences, Corporate Finance, Joan Heminway, Social Enterprise | Permalink | Comments (0)

Sunday, February 18, 2018

ICYMI: #corpgov Weekend Roundup (Feb. 18, 2018)

By Stefan J. Padfield

February 18, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, February 17, 2018

Dell's Other Shoe

By Ann Lipton

The possibility lurking in Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd,  2017 WL 6375829 (Del. Dec. 14, 2017), has now materialized.

For those of you just joining us, in Dell and DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017), the Delaware Supreme Court threw some cold water on the practice of appraisal arbitrage.  The two decisions suggest that in an appraisal action, courts should not try to conduct their own valuation of a company except in unusual circumstances; instead, where the deal was negotiated appropriately, the deal price itself represents the best evidence of fair value.

That alone would be enough to discourage would-be appraisers, absent evidence of significant dysfunction in the process by which the deal price was reached, but the decisions went further: both contained extensive endorsements of the efficient markets hypothesis and the accuracy of market pricing.   In the context of the opinions themselves, the market price discussions were puzzling, because they played little role in the Court's actual analysis.  In both cases, the Court ultimately suggested that the deal prices - which were above market price - were appropriate.  At the same time, however, in neither case did the defendants argue that the deal price included value arising from the merger itself (which is unavailable in an appraisal action) - a point that the DFC court in particular highlighted.

That left open the possibility that in future cases, defendants would be able to successfully argue that the market price of a publicly traded company is the best evidence of its value, and that any premium above that amount represents value arising out of the merger.  Such an argument would leave appraisal petitioners with, at best, market price - which is usually a figure less than the deal price, rendering the appraisal remedy itself not worth pursuing for most publicly-traded companies.  Worse, it would do so even in situations where there were significant problems in the deal negotiations.  After all, no matter how hair-raising the process by which the deal price was reached, if that price was above market price - and if market price is evidence of the standalone fair value of the target as a going concern - then appraisal provides no remedy.

Well, that's what just happened.  In Verition Partners Master Fund, Ltd., et al. v. Aruba Networks, Inc., C.A. No. 11448-VCL, memo. op. (Del. Ch. Feb. 15, 2018), VC Laster concluded that after Dell, he had no choice but to accept the market price as the best evidence of the target's fair value - even in the face of evidence that the acquirer made an employment offer to the target's CEO while negotiations were continuing (in violation of a prior agreement with the target, and without the Board's knowledge), and in the face of evidence that the target's financial advisors were trying to curry favor with the acquirer.  As a result, he awarded the dissenters the pre-deal market price of $17.13 per share, a figure significantly below the merger price of $24.67 per share.

It appears that unless the Delaware Supreme Court steps in to say this isn't what it meant in Dell and DFC, going forward, appraisal arbitrageurs will have to show both that there were dysfunctions in deal negotiations, and that there were significant reasons to distrust the pre-deal market price, before they can hope to come out ahead.  That'll be quite an uphill climb.

February 17, 2018 in Ann Lipton | Permalink | Comments (4)

Friday, February 16, 2018

Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era

By Marcia Narine Weldon

This may be obsolete by the time you read this post, but here are my thoughts on Corporate Governance, Compliance, Social Responsibility, and Enterprise Risk Management in the Trump/Pence Era. Thank you, Joan Heminway and the wonderful law review editors of Transactions: The Tennessee Journal of Business Law. The abstract is below:

With Republicans controlling Congress, a Republican CEO as President, a “czar” appointed to oversee deregulation, and billionaires leading key Cabinet posts, corporate America had reason for optimism following President Trump’s unexpected election in 2016. However, the first year of the Trump Administration has not yielded the kinds of results that many business people had originally anticipated. This Essay will thus outline how general counsel, boards, compliance officers, and institutional investors should think about risk during this increasingly volatile administration. 

Specifically, I will discuss key corporate governance, compliance, and social responsibility issues facing U.S. public companies, although some of the remarks will also apply to the smaller companies that serve as their vendors, suppliers, and customers. In Part I, I will discuss the importance of enterprise risk management and some of the prevailing standards that govern it. In Part II, I will focus on the changing role of counsel and compliance officers as risk managers and will discuss recent surveys on the key risk factors that companies face under any political administration, but particularly under President Trump. Part III will outline some of the substantive issues related to compliance, specifically the enforcement priorities of various regulatory agencies. Part IV will discuss an issue that may pose a dilemma for companies under Trump— environmental issues, and specifically shareholder proposals and climate change disclosures in light of the conflict between the current EPA’s position regarding climate change, the U.S. withdrawal from the Paris Climate Accord, and corporate commitments to sustainability. Part V will conclude by posing questions and proposing recommendations using the COSO ERM framework and adopting a stakeholder rather than a shareholder maximization perspective. I submit that companies that choose to pull back on CSR or sustainability programs in response to the President’s purported pro-business agenda will actually hurt both shareholders and stakeholders.

February 16, 2018 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Thursday, February 15, 2018

Massachusetts Alleges Scottrade Used Emotional Manipulation and Sales Contests for Retirement Accounts

By Benjamin P. Edwards

Earlier today, the Enforcement Section of the Massachusetts Securities Division filed an administrative complaint against Scottrade.  The complaint alleges that Scottrade "knowingly violated its own internal policies designed to ensure compliance with the United States Department of Labor ("DOL") Fiduciary Rule by running a series of sales contests involving retirement accounts."  It may be the first state enforcement action seeking to force brokerages to comply with the DOL Fiduciary Rule.

More specifically, Massachusetts took issue with Scottrade's sales contests because the DOL's Fiduciary Rule requires that "advice to retirement account customers must be based on the best interest of customers, not the best interests of the firm." On paper, Scottrade had enacted impartial conduct standards for its customers' retirement accounts.  The brokerage's compliance manual includes a subsection on incentives, saying:

The firm does not use or rely upon quotas, appraisals, performance, or personnel actions, bonuses, contests, special awards, differential compensation or other actions or incentives that are intended to reasonably expected to cause associates to make recommendations that are not in the best interest of Retirement Account clients or prospective Retirement Account clients.

Despite this provision and the DOL Fiduciary Rule, Scottrade allegedly ran national sales contests and offered rewards for selling customers and causing them to move their assets to Scottrade.  How much of an impact the sales contests had on employee behavior may be difficult to know.  An internal email from a Scottrade Divisional Vice President seems to indicate that the contest had an impact on employee behavior:

The first week of the Q3 "RUN-THE-BASSES" contest is done, and we have a few regions off to a SCREAMING start [] You certainly knocked the cover off the ball!  Some would say you knocked it out of the park!  Very soon, we will get an official count on how we did, and more exciting, a chance to see where we stack-up against our peers on our official scoreboard! [. . .]  Happy Selling!

In contrast to the intense internal focus on these sales contests, Scottrade's retirement customers were not always aware of the incentives that might be shaping the financial advice they received.  One representative told the Massachusetts enforcement section that the prizes and sales contests were not disclosed to clients during the conversations.

The Massachusetts complaint also contains troubling allegations that Scottrade trained its staff to identify customers' emotional needs and then use them to gather new assets, including a focus on emotional needs that "are not rational or logical."  The complaint alleges that "Scottrade's own internal-use materials instructed agents to target a client's 'pain point' and emotional vulnerability," with training sessions lauding "the use of emotion over logic in getting a client to bring additional assets to the firm."  It's difficult to square using customers emotional needs to manipulate them into using Scottrade with giving advice in the best interest of customers.  The Massachusetts complaint does not reveal whether the Scottrade compliance manual contains any provision about the appropriate level of emotional manipulation for retirement customers.

Now that Massachusetts has filed this administrative complaint, it opens up questions about what happens next.  Other states may follow after Massachusetts and file their own enforcement actions.  It's also possible that FINRA will bring its own enforcement proceeding.  FINRA Rule 3110 requires firms to "establish and maintain a system to supervise the activities of each associated person that is reasonably designed to achieve compliance with applicable securities laws and regulations."  FINRA might also consider whether Scottrade violated FINRA Rule 2010, requiring its member firms to "observe high standards of commercial honor and just and equitable principles of trade."

 

 

February 15, 2018 | Permalink | Comments (0)

Wednesday, February 14, 2018

I've Updated My SSRN Page

By Stefan J. Padfield

Recent (overdue) additions to my SSRN page:

A New Social Contract: Corporate Personality Theory and the Death of the Firm, 101 Minnesota Law Review Headnotes 363 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123349

Socio-Economics: Challenging Mainstream Economic Models and Policies, 49 Akron Law Review 539 (2016). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123817

The Role of Corporate Personality Theory in Opting Out of Shareholder Wealth Maximization, 19 Transactions: The Tennessee Journal of Business Law 415 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123795

The Inclusive Capitalism Shareholder Proposal, 17 UC Davis Business Law Journal 147 (2017). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3123823

February 14, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, February 13, 2018

These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind

By Joshua Fershee

I suspect click-bait headline tactics don't work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.

To be clear, my argument is not that I don't like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals.  I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale.  Anyway, I hope you'll forgive the self-promotion and give the paper a look.  Here's the abstract: 

Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead of helping, the emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. 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, all to the detriment of employees, society, and, yes, shareholders.

The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.

February 13, 2018 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joshua P. Fershee, Law and Economics, Lawyering, Legislation, LLCs, Management, Research/Scholarhip, Shareholders, Social Enterprise, Unincorporated Entities | Permalink | Comments (0)

Monday, February 12, 2018

Sending Advanced Business Law Students on Document "Treasure Hunts"

By joanheminway

Just a quick post today about a teaching technique I have been using that offers significant opportunities for exploration, especially in small class environments.

I am again teaching Advanced Business Associations this semester.  The course allows students to review and expand their knowledge of business firm management and control issues in various contexts (public corporations, closely held corporations, benefit corporations, and unincorporated business entities), mergers and acquisitions, and corporate and securities litigation.  I have reported on this course in the past, including in this post and this one.

At the conclusion of each unit, I have students locate (go off on a treasure hunt, of sorts) and post on the course management website (I use TWEN) a practice document related to the matters covered in that unit.  Today we concluded our unit on benefit corporations.  Each student (I only have five this semester) was required to, among other things, post the actual corporate charter (not a template or form) of a benefit corporation.  Although the Advanced Business Associations course features training presentations by representatives of Lexis/Nexis, Westlaw, and Bloomberg that include locating precedent documents of various kinds, the students have not yet had this training.

In our discussions about this part of today's assignment, we learned a number of things.  Here are a few:

  • New articles, blog posts, and other secondary materials can be a good starting place in locating firms with particular attributes.
  • The word "charter" can mean different things to different people.
  • Journalists do not understand the difference between a benefit corporation and a B corporation.
  • In research geared toward locating precedents for planning and drafting, googling descriptive terms is likely to yield fewer targeted results than googling the terms used an actual exemplar document.
  • Corporate charters for privately held firms can be difficult to find--especially in certain specific jurisdictions, even when you know the firm's name and other identifying attributes.
  • "If at first you don't succeed, try, try, again." Three of the five students posted more than one document before they found an appropriate example.
  • The corporate charters the students posted include exculpation and indemnification.
  • Patagonia's charter is pretty cool.  It has a detailed, specific benefit purpose, a prohibition on redemptions, and a right of first offer.  It also requires a unanimous vote on certain fundamental/basic corporate changes, redemptions, and bylaw amendments.
  • There is a law firm in California that is a professional corporation organized as a benefit corporation "to pursue the specific public benefit of promoting the principles and practices of conscious capitalism through the practice of law."  Also pretty cool.

The discussion was rich.  The students accomplished the required task and reflected responsibly and valuably on their individual search experiences during our class meeting.  They learned from each other as well as from me; benefit corporations seemed to come alive for them as we spoke.  We accomplished a lot in 75 minutes!

Do any of you use a similar teaching technique?  Have you adapted it for use in a large-class (over 50 students) environment?  If so, let me know.  I would like to evolve my "treasure hunt" for business law drafting precedents for use in a larger class setting.

February 12, 2018 in Business Associations, Joan Heminway, Research/Scholarhip, Social Enterprise, Teaching | Permalink | Comments (2)

Sunday, February 11, 2018

ICYMI: #corpgov Weekend Roundup (Feb. 11, 2018)

By Stefan J. Padfield

February 11, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, February 10, 2018

It's tough to be an asset manager these days

By Ann Lipton

Socially responsible investing is all in the news these days, as several large asset managers and advisors have publicly declared commitments, of one kind or another, to pressuring portfolio companies to act in socially responsible ways.

Commenters debate whether these managers genuinely believe social responsibility will improve value at portfolio companies, or whether they are trying to appeal to the preferences of clients who themselves favor socially responsible investing, either as a mechanism for improving value, or, more probably, as a matter of, essentially, “taste.”  If you’re going to invest an index fund, for example, you may as well invest in the one where you believe your dollars will also be used to push for your preferred agenda – even if little is actually being done in that direction.

The reason it’s so difficult to suss out anyone’s exact motive, of course, is that it’s tough to admit – as an asset manager or any kind of institutional investor – that you’re interested in anything other than financial returns.  Not simply because of the publicity you’ll generate, but because it’s not clear how far fiduciary obligations allow fund managers to go in pursuing social goals. 

(This is, of course, one of the ways in which reductionistic fiduciary duties strips out the real concerns of the ultimate humans the duties are designed to benefit).

Which is why I found the letter by Jana Partners announcing its new social activism fund – and targeting Apple – so intriguing.  In a partnership with the California State Teachers Retirement System (who is not, at least yet, an investor in the fund), Jana is urging Apple to institute stronger parental controls on the iPhone.  Now, there’s been a lot of commentary about Jana’s motivations - is Jana truly trying to profit via social activism? Or is this a loss leader so that it can cultivate relationships with kinds of institutions it needs to support its more traditional activist campaigns?– but what intrigues me are the interests of CalSTRS.

Because the letter spends most of its time talking about how better controls will ultimately prove profitable for Apple and thus Apple’s shareholders, but concludes by pointing out that the issue is “of particular concern for CalSTRS’ beneficiaries, the teachers of California, who care deeply about the health and welfare of the children in their classrooms.”

In other words, the subtext is that CalSTRS’ interest is for teachers as teachers – not necessarily for teachers as shareholders.

This is hardly the first time a pension fund has shown its hand in this way, but it does highlight how funds are even more constrained than businesses in terms of openly pursuing socially responsible goals, and the delicate tapdance they sometimes do around that fact.

February 10, 2018 in Ann Lipton | Permalink | Comments (0)

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