Saturday, June 30, 2018

Red Sky At Morning

One of the odd things about teaching business and securities in the Trump era is that it’s been one of the few areas of law that’s been left largely unchanged by this singularly, umm, disruptive presidency.

That may be about to change.

As most readers are likely aware, the Supreme Court recently ruled in Lucia v. SEC that SEC ALJs are inferior officers, and therefore must be appointed by the Commission directly (instead of, as has been traditional, by the SEC staff).  The SEC, anticipating this holding, altered its procedures to have the Commission ratify the staff’s selection.  But – even assuming the ratification is sufficient – the next obvious question is whether, as inferior officers, ALJs must have fewer restrictions on their removal – an issue that, it should be noted, the Solicitor General’s office urged the Court to resolve against the SEC.  This is a much bigger deal, because leaving aside questions about how such a deficiency would be remedied as a technical matter, without such protections, the impartiality of the ALJs – and thus the fairness and, I suspect, the constitutionality of the entire administrative adjudicative process – would be open to question.  Cf. Kent Barnett, Resolving the ALJ Quandary, 66 Vand. L. Rev. 797 (2013) (anticipating these issues).

But that’s only the beginning.

In Janus v. AFSCME and NIFLA v. Becerra, the Supreme Court held that speech that was previously viewed as regulable – namely, required disclosures in the provision of health related services, and dues for union representation – instead would be subject to heightened scrutiny.  In both cases, the dissents pointed out that the Court’s reasoning would jeopardize a wealth of ordinary consumer – and securities – regulation.  As Justice Breyer put it, “In the name of the First Amendment, the majority today treads into territory where the pre-New Deal, as well as the post-New Deal, Court refused to go.”  Justice Kagan was even more blunt in her Janus dissent: “Speech is everywhere—a part of every human activity (employment, health care, securities trading, you name it).  For that reason, almost all economic and regulatory policy affects or touches speech. So the majority’s road runs long. And at every stop are black-robed rulers overriding citizens’ choices.”

And then there’s Masterpiece Cakeshop v Colorado Civil Rights Commission.  There, the Court largely avoided the free speech claim, but the majority opinion stated, “The free speech aspect of this case is difficult, for few persons who have seen a beautiful wedding cake might have thought of its creation as an exercise of protected speech. This is an instructive example, however, of the proposition that the application of constitutional freedoms in new contexts can deepen our understanding of their meaning.” – suggesting, again, the Court is inviting creative new First Amendment challenges to business regulation.  Indeed, a couple of years ago, John Coates empirically demonstrated the increasing use of the First Amendment to challenge business regulation.

As readers are likely aware, the SEC regulates in large part via required (and prohibited) speech.  After Citizens United, Larry Ribstein argued that some proposals for corporate governance and securities regulation might violate the First Amendment.  And, as it turns out, it was only three years ago that the SEC found itself in First Amendment crosshairs with respect to conflict minerals disclosures (umm, that link is to my post on the subject, and it anticipated that the DC Circuit would reconsider the matter en banc, which it … did not, so that only shows how seriously you should take my prognostications).  Rebecca Tushnet has more in-depth discussion of the conflict minerals case.  It seems to me that the SEC is long overdue for a First Amendment reckoning, and the climate has never been more ripe. 

Meanwhile, the Supreme Court has already granted cert to consider whether to reinvigorate the non-delegation doctrine, Justice Gorsuch has ostentatiously cast doubt on the viability of Chevron,* and Trump is expected to appoint a new conservative justice in the coming months – which will only encourage more aggressive litigation.  All of which suggests we’re about to see a rather dramatic dismantling of the regulatory state – including the SEC’s authority.

*although, to be fair, no one ever deferred much to the SEC anyway – which is like the Rodney Dangerfield of agencies – so Chevron’s fate may not end up making much difference to it.

June 30, 2018 in Ann Lipton | Permalink | Comments (0)

Thursday, June 28, 2018

Retailers Are Amazed By Non GAAP Metrics

If you're teaching securities regulation and touch on GAAP v. Non-GAAP metrics, you may catch millennial attention by talking about National Beverage Corp., notable to millennial audiences as the maker of LaCroix.  National Beverage's CEO put out a press release saying that:

National Beverage employs methods that no other company does in this area – VPO (velocity per outlet) and VPC (velocity per capita)… Unique to National Beverage is creating velocity per capita through proven velocity predictors. Retailers are amazed by these methods.

If you're looking to evaluate the company's financial situation, more clarity on these metrics might help.  The SEC reached out to ask for that information and got an odd response from a company executive, claiming that the "information is as secretive as the formulas of our beverages and should not be disclosed to our competition."

It's odd to tell the market that it should get excited about particular metrics and then refuse to provide information about what the metrics mean.  This little tempest may also be a good way to touch on puffery again.

June 28, 2018 | Permalink | Comments (0)

Wednesday, June 27, 2018

UC Hastings Law Opening - Contracts/Private Law (Plus)

The University of California Hastings College of the Law in San Francisco seeks to hire a tenured or tenure-track faculty member. We seek someone who is, or who promises to be, an innovative and productive scholar, an exemplary teacher, and a role model for our students, and who will contribute as a dynamic and engaged institutional citizen. We will accord priority in consideration to candidates who teach and produce scholarship in the areas of state and local government law or contracts/private law. We are particularly interested in recruiting someone who will contribute to our vibrant and diverse community of interdisciplinary scholars. Entry-level and lateral candidates should send a cv, statement of interest, and representative publications in .pdf format to Professor Chimène Keitner, Appointments Committee Chair, [email protected], with the subject heading “Faculty Position.” We will conduct interviews on campus and at the 2018 AALS Faculty Recruitment Conference.

UC Hastings prohibits discrimination against any person employed; seeking employment; or applying for or engaged in a paid or unpaid internship or training program leading to employment with UC Hastings College of the Law on the basis of race, color, national origin, religion, age, sex, gender, sexual orientation, gender expression, gender identity, gender transition status, sex- or gender-stereotyping, pregnancy, physical or mental disability, medical condition (cancer-related or genetic characteristics), genetic information (including family medical history), ancestry, marital status, citizenship, or service in the uniformed services, including protected veterans. This policy applies to all employment practices, including recruitment, selection, promotion, transfer, merit increase, salary, training and development, demotion, and separation.

June 27, 2018 in Joan Heminway, Jobs | Permalink | Comments (0)

ICYMI: #corpgov Midweek Roundup (June 27, 2018)

June 27, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, June 26, 2018

Call for Papers: Respecting the Entity: The LLC Grows Up (AALS 2019)

Call for Papers for

Section on Agency, Partnership, LLCs and Unincorporated Associations on

Respecting the Entity: The LLC Grows Up

at the 2019 AALS Annual Meeting

The AALS Section on Agency, Partnership, LLCs and Unincorporated Associations is pleased to announce a Call for Papers from which up to two additional presenters will be selected for the section’s program to be held during the AALS 2019 Annual Meeting in New Orleans on Respecting the Entity: The LLC Grows Up.  The program will explore the evolution of the limited liability company (LLC), including subjects such as the LLCs rise to prominence as a leading entity choice (including public LLCs and PLLCs), the role and impact of series LLCs, and differences in various LLC state law rights and obligations. The program will also consider ethics and professional responsibility and governance raised by the LLC. The Section is particularly seeking papers that discuss the role of the LLC as a unique entity (or why it is not).

The program is tentatively scheduled to feature:

  • Beth Miller, M. Stephen and Alyce A. Beard Professor of Business and Transactional Law, Baylor Law
  • Tom Rutledge, Member, Stoll Keenon Ogden PLLC, Louisville, KY

Our Section is proud to partner with the following co-sponsoring sections:

  • AALS Section on Business Associations
  • AALS Section on Transactional Law and Skills

Submission Information:

Please submit an abstract or draft of an unpublished paper to Joshua Fershee,[email protected] on or before August 1, 2018. Please remove the author’s name and identifying information from the paper that is submitted. Please include the author’s name and contact information in the submission email.

Papers will be selected after review by members of the Executive Committee of the Section. Authors of selected papers will be notified by August 25, 2018. The Call for Paper presenters will be responsible for paying their registration fee, hotel, and travel expenses.

Any inquiries about the Call for Papers should be submitted to: Joshua Fershee, West Virginia University College of Law, [email protected] or (304) 293-2868.

June 26, 2018 in Agency, Call for Papers, Conferences, Joshua P. Fershee, LLCs, Writing | Permalink | Comments (0)

Monday, June 25, 2018

LSU Law: Tenure-Track or Tenured Business Law Faculty Opening

LOUISIANA STATE UNIVERSITY, PAUL M. HEBERT LAW CENTER seeks to hire a tenure-track or tenured faculty member in business and commercial law, with particular attention in corporate, partnership, and other areas of tax law. We may consider applications from persons who specialize in other areas as additional needs arise. Applicants should have superior academic credentials and publications or promise of productivity in legal scholarship, as well as a commitment to outstanding teaching. The Paul M. Hebert Law Center of LSU is an Equal Opportunity/Equal Access Employer and is committed to building a culturally diverse faculty. We particularly welcome and encourage applications from female and minority candidates.

Applications should include a letter of application, resume, references, and teaching evaluations (if available) to:

Melissa T. Lonegrass
Chair, Faculty Appointments Committee
c/o Pam Hancock (or by email to [email protected])
Paul M. Hebert Law Center
Louisiana State University
1 East Campus Drive
Baton Rouge, Louisiana 70803-0106

June 25, 2018 in Joan Heminway, Jobs, Law School | Permalink | Comments (0)

2018 National Business Law Scholars Conference - Wow!

The close of business on Friday, June 22 marked the end of the 9th National Business Law Scholars Conference.  With Paul Mahoney and Cindy Schipani as our keynote speakers, two featured plenary panels (revisiting, respectively, the 2008 financial crisis and salient business crime issues), and 30 academic paper and author-meets-readers panels, this year's conference was packed with activity.  Maggie Sachs, who retired from an illustrious business law teaching career effective May 31, and the University of Georgia hosted the event.  I am proud to have had a role in planning the conference and am relieved that our all-volunteer planning committee was able to (again) carry off a successful event.  A mostly final (!) event program is available here.  Thanks to Eric Chaffee for his usual Herculean efforts in organizing and reshuffling (up through the last day of the conference) the program.

I moderated the financial crisis plenary panel, offered comments on David Webber's The Rise of the Working-Class Shareholder: Labor’s Last Best Weapon, (as shown in the picture below), presented a two-paper project on business deregulation that I am working on this summer, and introduced Cindy's Friday keynote luncheon presentation on corporate board independence and diversity. [Note that BLPB co-blogger Ann Lipton also was on the book commentary panel with me (on the right in the photo below), as was fellow NYU Law alum Mehrsa Baradaran (on the left in the photo below).]

NBLS2018(BookPanelPicture)

Each of these programs, as well as the plenary sessions and concurrent panels that I attended as an audience member, was an educational experience for me.  Among other things, I got four super-helpful comments on my deregulation presentation.  That alone was worth the four-hour-plus drive from Knoxville to Athens.

The conference included (as speakers and audience members) business law faculty from both law schools and business schools as well as others (including corporate counsel and government officials) who work in business law from a governance, policy-making, or rule-making perspective.  The breadth of business law scholarship featured at the conference was inspiring.  I heard about ongoing academic research on board composition, financial regulation, technology/business law interactions, and more.

Next year, we will meet at the U.C. Berkeley School of Law, with Steven Davidoff Solomon hosting.  More on that soon.  For now, I will enjoy the warm glow of a stimulating conference in which we served over 100 business law scholars from around the world.

June 25, 2018 in Conferences, Joan Heminway | Permalink | Comments (2)

Sunday, June 24, 2018

ICYMI: #corpgov Weekend Roundup (June 24, 2018)

June 24, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, June 23, 2018

These days, a knotty Janus problem almost seems like a comfort

The Supreme Court just granted cert in Lorenzo v. Securities & Exchange Commission to decide the scope of primary liability/scheme liability under the federal securities laws.  It’s an important issue and I’m glad that the Court seeks to clarify the law, but I have to say that procedurally speaking, this strikes me as an odd grant.

Below is way too long a post; it’s so much easier to write long than take the time to edit down, so forgive the extended backstory.  (Also, for the record, I pulled a lot of the citations from my  - very first! - real law review article, Slouching Towards Monell: The Disappearance of Vicarious Liability Under Section 10(b), which contains a long discussion of Janus, primary liability, and secondary liability, so, you know, enjoy if you’re into that).

[More under the jump]

Continue reading

June 23, 2018 in Ann Lipton | Permalink | Comments (0)

Friday, June 22, 2018

Call for Papers: 2018 Midwestern Law & Economics Association Annual Meeting

Call for Papers: Midwestern Law & Economics Association Annual Meeting
The University of Alabama School of Law
September 14-15, 2018

 

Dear colleagues,

Please note that the deadline for submitting papers to the Midwestern Law & Economics Association has been extended to July 20, 2018. 

The University of Alabama School of Law (UASL) is pleased to host the Eighteenth Annual Meeting of the Midwestern Law & Economics Association (MLEA) September 14-15, 2018 in Tuscaloosa, Alabama. This year’s meeting will be co-sponsored by the UASL and the UASL¹s Cross Disciplinary Legal Studies Program.

We invite participants from across the nation (not just the Midwest) and abroad. There are no registration or membership fees. Participants will finance their own travel and hotel costs.

Papers can be on any topic that touches on law and economics. This includes, for example, papers with empirical analysis and economic modeling, as well as papers that address legal doctrine or theory that have been informed by economic thought.

To apply, submit a paper or abstract to Shahar Dillbary ([email protected]) and Yonathan Arbel ([email protected] ) no later than Friday, July 20th. 

A block of rooms at Hotel Indigo has been reserved for conference participants at a rate of $119 (excluding tax). You can book by calling the hotel directly at 205.469.1660 or via the website at Hotel Indigo Reservations. Use Group ID Bama Law to receive the special conference rate.  You will need to reserve your room by September 3, 2017 to receive this conference rate.

Contact Shahar Dillbary ([email protected]) and Yonathan Arbel ([email protected]) with any questions.

June 22, 2018 in Call for Papers, Conferences, Joan Heminway | Permalink | Comments (0)

Wednesday, June 20, 2018

Making Disclosures Useful

A few days ago, the SEC's Investor Advisory Committee convened at Georgia State University's law school.  They took testimony from the AARP about how to structure disclosures about financial professionals for use with retail customers.  Retirement security will be a bigger and bigger issue as more and more Baby Boomers enter retirement.

The AARP pointed out that effective disclosure needs to be short, simple, and clear:

We believe that the current four page relationship is too long, technical, and therefore too onerous for the average investor and household to process. The text of the relationship summary should be simply written and should avoid technical terms like “fiduciary” and “asset‐based fee” unless such complex terms are clearly defined. Behavioral science has shown that when faced with a complicated choice, people often simplify by focusing on only two or three aspects of the decision. The less they are able to frame the decision in narrow terms, the more likely they will end up overwhelmed, undecided or procrastinating. As with other disclosure statements, it is best if key information can be included on one page – additional secondary information can be attached as supplemental information. A good disclosure statement will highlight the information most important to the consumer.

As the SEC thinks about how to make disclosure actually useful, it should probably test to see how different disclosures actually perform.  My framework for thinking about this is heavily informed by Lauren Willis's work.  She laid out the need for consumer disclosures to be informed by research about how consumers actually behave instead of some fantasy of a calm, well-educated person with the time to read and carefully consider pages of boilerplate.  The SEC has a chance to get these disclosures right.  Hopefully it crafts disclosures that actually help consumers.

June 20, 2018 | Permalink | Comments (0)

ICYMI: #corpgov Midweek Roundup (June 20, 2018)

June 20, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, June 19, 2018

Respecting Time and Space May Lead to Better Management and Better Outcomes

An interesting new article appears in the Chronicle of Higher Education:  What Happened When the Dean’s Office Stopped Sending Emails After-Hours, by Andrew D. Martin, dean of the College of Literature, Science, and the Arts at the University of Michigan and a professor of political science and statistics, and Anne Curzan associate dean for humanities and a professor of English. Interesting concept, and an idea worth considering.  Here's what they tried: 

What if we experimented with a policy that set some limits in the dean’s office? Here’s what we came up with:

  • Limit email traffic to working hours. Except for emergencies, work emails are to be sent between the hours of 7 a.m. and 6 p.m., Monday through Friday. Use the delayed-send function to ensure that emails to and from people working in the dean’s office arrive only within that window.
  • Try to communicate in person. Whenever possible, associate and assistant deans should communicate with one another and with other professional staff employees in person or by telephone during the business day. Our administrative assistants can help us find quick drop-in times.
  • Avoid email forwarding. Refrain from forwarding an email to chairs and directors and asking them to forward it to others. When possible, send it yourself directly to the audience you want to communicate with.
  • Respect working hours. The dean and the associate and assistant deans should not expect — or request — support from professional staff employees outside of the 7 a.m. to 6 p.m. window. An exception is for emergencies, and then only from salaried staff members.

The authors say the rules became part of the dean's office's culture, and although it was not enforced, it is largely followed and has led to more efficient and effective work.  

I have to admit, I think it would be hard, and I am notoriously bad for being almost tethered to my email. But I can also see why it would help.  I feel absolutely compelled to reply to inquiries and requests. Sometimes I resist the urge to do so, but even then, my mental space has been taken up by obligations.  It's not ideal. More important, it means that when I am sending emails after hours, I am getting into other people's space when it is not necessary.  Emergencies are one thing, and they happen, but I can definitely do a better job of staying out of people's personal time, and I am going to give it a try. 

June 19, 2018 in Jobs, Joshua P. Fershee, Management | Permalink | Comments (2)

Monday, June 18, 2018

Late Spring Business Law Prof Escapades (Of Sorts . . .)

June has been a busy month for me.  I look forward to catching my breath after the National Business Law Scholars Conference this coming Thursday and Friday at the University of Georgia School of Law.  Today, having already written about the biennial transactional law and skills conference at Emory Law a few weeks ago, I will briefly outline three of my more recent forays: (1) a conference on Legal Issues in Social Entrepreneurship and Impact Investing—in the US and Beyond organized by the Impact Investing Legal Working Group and NYU Law's Grunin Center for Law and Social Entrepreneurship; (2) the Law and Society Association Annual Meeting and Conference, Law at the Crossroads: Le Droit à la Croisée des Chemins; and (3) a town hall meeting of the U.S. Securities and Exchange Commission at the Georgia State University College of Law.

Grunin2018

I had a super opportunity to speak at the Grunin Center conference this year, helping to construct and guide a discussion on whether definitions matter to the developing fields of impact investing and social entrepreneurship.  Sadly, my travel got bolloxed up by a plane with mechanical difficulties, and I missed the first half of the panel discussion at the conference.  But I was glad (and truly lucky under the circumstances) to get the chance to participate for the last half.  My co-panelists and I are featured in the photo above.  What a great group, featuring varied perspectives.  The entire conference program was fabulous.  A highlight for me was a panel on social enterprise acquisitions featuring an NYU Law alum who is retiring from the board of directors of Ben & Jerry's Homemade Holdings Inc this year having seen the firm through from independent private ownership to its acquisition by Unilever.


LSA2018(moderating)
At the Law and Society Association conference, I used up almost every ounce of my remaining energy for the week participating in two author-meets-reader panels, delivering a talk on a paper panel, and serving as a moderator/discussant on a fourth panel (pictured here--note the jerry-rigged "podium" since we were stuck in a hotel room for this panel).  But it was all great work!  Our Collaborative Research Network (CRN) featured ten programs on corporate and securities law this year, spread over a three-day period.  Kudos to our program coordinator, Darren Rosenblum, for getting and keeping us organized.

  SECTownHall2018

The SEC town hall meeting was a real treat.  All five commissioners were in attendance and spoke, both as part of a public plenary session and as featured panelists on various subjects ranging from cryptocurrencies to small business finance.  Several hundred members of the public were in attendance.  I had the privilege and honor of visiting with four of the five commissioners after the town hall meeting at a private reception.  I had met Commissioner Stein at UT Law two years ago and Commissioner Jackson a number of years ago, but I had not personally met the others--although I follow Commissioner Peirce on Twitter (@HesterPeirce).  Each of them offered time and attention to so many people that day.  Three of them have academic experience of one kind or another in law or economics and offered special time and attention to those of us in the academy that day as well.  Hats off to them all.  They are working hard to resolve some tough issues and deserve our support.  Thanks to BLPB Contributing Editor Anne Tucker, her dean, and her colleagues for their hospitality at Georgia State Law that day.

That's it for my report for the past two weeks.  Working as a business law professor is truly my calling and my privilege.  I feel that when I have the opportunity to walk among the likes of our industrious colleagues in academia and government, as I did these past two weeks.

June 18, 2018 in Anne Tucker, Conferences, Joan Heminway | Permalink | Comments (0)

Sunday, June 17, 2018

ICYMI: #corpgov Weekend Roundup (June 17, 2018)

June 17, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Possible Items for your Summer Reading List: Insider Trading and Legal Writing

Two law scholar/teacher friends have recently published books that deserve attention.  The first is a labor of scholarly love from my Association of American Law Schools and Southeastern Association of Law Schools co-conspirator John Anderson.  The second represents the hard work of Antonio Gidi, who visited at Tennessee Law a number of years ago.  I have read neither book, but I know the quality of the work that went into both of them.

Here is the summary of John's book, Insider Trading: Law, Ethics, and Reform:

As long as insider trading has existed, people have been fixated on it. Newspapers give it front page coverage. Cult movies romanticize it. Politicians make or break careers by pillorying, enforcing, and sometimes engaging in it. But, oddly, no one seems to know what’s really wrong with insider trading, or - because Congress has never defined it - exactly what it is. This confluence of vehemence and confusion has led to a dysfunctional enforcement regime in the United States that runs counter to its stated goals of efficiency and fairness. In this illuminating book, John P. Anderson summarizes the current state of insider trading law in the US and around the globe. After engaging in a thorough analysis of the practice of insider trading from the normative standpoints of economic efficiency, moral right and wrong, and virtue theory, he offers concrete proposals for much-needed reform.

It comes with advance praise from many of our business and criminal law colleagues--Jill Fisch, Don Langevoort, Ellen Podgor, Kelly Strader, and Andrew Vollmer.  If you order from Cambridge University Press before May 1, 2019, you can get a 20% discount using code JPANDERSON2018 at checkout.  I just ordered my copy.

Gidi's book (coauthored with Henry Weihofen), Legal Writing Style (Third Edition), is described as follows:

Legal Writing Style promotes the art of good writing by teaching students and practitioners the tools to make their prose clear, precise, simple, and forceful. With examples of what works and what doesn’t, this short but comprehensive treatise provides an invaluable resource for recasting writing for maximum impact and ultimate success.

It is classified as a hornbook, so you may not think it is a page-turner worthy of summer reading.  And it is a third edition.  But this topic is so crucial to what we do, and this edition is, I understand, a substantial re-write.  So, I draw attention to it here.

Happy Father's Day to all who are celebrating as or with fathers today.  Put the summer reading list aside to honor those important folks in our lives--something we should do every day.

June 17, 2018 in Joan Heminway | Permalink | Comments (0)

Friday, June 15, 2018

Beware of the Warning

Last week, a district court in California denied a motion to dismiss a securities fraud lawsuit brought by Snap shareholders.  See In re Snap Inc. Secs. Litig., 2018 U.S. Dist. LEXIS 97704 (C.D. Cal. June 7, 2018).  The shareholders alleged that the Snap IPO prospectus omitted certain critical information in violation of Sections 10(b) and 11, namely, information about the effect of competition from Instagram, and information about the risks posed by a lawsuit filed by an ex-employee – a lawsuit that I previously blogged about here (prior to the IPO, it should be noted).  There was also an additional claim regarding post-IPO statements, brought only under Section 10(b).

Among other things, the defendants argued that there was sufficient information in the public domain about both the Instagram risk, and the lawsuit risk, to render any nondisclosure immaterial as a matter of law.  The district court rejected that argument because Snap’s own prospectus contained the following language:

You should rely only on statements made in this prospectus in determining whether to purchase our shares, not on information in public media that is published by third parties.

Thus, in the district court’s view, Snap's own statements “counteracted” any contrary information made publicly available.

This is an issue that comes up with surprising frequency.  For example, when shareholders sued Facebook in the wake of its IPO, Facebook argued that information allegedly omitted from its prospectus had in fact been heavily publicized in the media.  At that point, the court hoist Facebook on its own petard, highlighting prospectus language that said, “In making your investment decision, you should not rely on information in public media that is published by third parties.  You should rely only on statements made in this prospectus in determining whether to purchase our shares.”  In re Facebook, Inc. IPO Sec. & Derivative Litig., 986 F. Supp. 2d 487 (S.D.N.Y. 2013).  This point also tripped up the defendants in Fresno Cty. Emples. Ret. Ass'n v. comScore, Inc., 268 F. Supp. 3d 526 (S.D.N.Y. 2017), and S.E.C. v. Bank of Am. Corp., 677 F. Supp. 2d 717 (S.D.N.Y. 2010).

What’s interesting in the Snap example, though, is that all of the prior cases involved claims that did not require proof of relianceFacebook involved Section 11 alone; comScore decided the issue in the context of Section 14; and Bank of America was a government enforcement action.  Snap represents the first time (that I’m aware) that this argument has prevailed even in the fraud-on-the market context – i.e., the context where you could imagine that disclaimer or no, some investors would price the extraneous information into the stock, thereby correcting any artificial inflation in the market price and defeating any allegation of reliance by most public purchasers. 

In any event, I gather that at least some companies have gotten wise and omitted or altered these kinds of non-reliance instructions.  I couldn’t find comparable language in the prospectuses for Roku and Dropbox at all (did I miss it?), and the Twitter prospectus – issued before the Facebook opinion, but in the midst of the Facebook briefing – says:

In making your investment decision, you should understand that we and the underwriters have not authorized any other party to provide you with information concerning us or this offering.

You should carefully evaluate all of the information in this prospectus. We have in the past received, and may continue to receive, a high degree of media coverage, including coverage that is not directly attributable to statements made by our officers and employees, that incorrectly reports on statements made by our officers or employees, or that is misleading as a result of omitting information provided by us, our officers or employees. We and the underwriters have not authorized any other party to provide you with information concerning us or this offering.

Note the distinction: It’s not telling investors not to rely on extraneous information, or even that all such information is false; it’s just saying some might be false, and none of it was authorized by Twitter.

Point being, I assume that whatever law firms haven’t gotten the message will soon enough.

June 15, 2018 in Ann Lipton | Permalink | Comments (0)

Thursday, June 14, 2018

Presidential Tweets Tipping Economic Information

A few weeks ago, President Trump tweeted that he was "looking forward" to seeing the Labor Department's employment report.  I put together an op-ed for The Hill arguing that this type of executive action forces the market to closely watch his Twitter feed because it sets a precedent that it may reveal significant clues about economic information before the official release.  The sudden change may impact overall confidence.  If the President selectively discloses economic information through Twitter, it raises concern that there might be selective disclosures through other channels:

Trump’s leaky administration and sudden decision to disseminate market-moving information through Twitter may cause many to fear that confidential economic information may be selectively released by the administration.

If investors fear that the president’s favored few have more information, they may hesitate to take the other side of trades or discount the amount they are willing to pay to account for the risk. Ordinary investors may not get fair value for their savings when they need to sell.

Some may discount these concerns as mere hand-wringing by pointing to numbers indicating strong job growth. Although those numbers matter, they cannot capture the value of investor confidence in our system’s integrity and the rule of law. 

When we think about how to set policy and disclose economic information, it's worth thinking about the long-term consequences of changing practices.  Although the market might rally at an early release of positive numbers, these types of changes create new risks.  Consider the folks on the West Coast that set their alarm clocks to be up at the scheduled release time.  If their frustration causes them to step back from the market, it might reduce trading activity and liquidity for investors.

We're not at a point now where that seems to be any real risk.  But the important thing is to always think about the long-term and how to maintain a solid foundation for a market that will continue to generate prosperity for generations to come.

June 14, 2018 | Permalink | Comments (0)

Wednesday, June 13, 2018

ICYMI: #corpgov Midweek Roundup (June 13, 2018)

June 13, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, June 12, 2018

A Private Ordering and Dual Class Share Structures in IPOs (and Beyond)

Bernie Sharfman's paper, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, was just published, and I think he has a point. In fact, as I read his argument, I think it is consistent with arguments I have made about the difference between restrictions or unconventional terms or practices that exist at purchase versus such changes that are added after one becomes a member or shareholder.  Here's the abstract: 

The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

Unless there are significant sunset provisions, a dual class share structure allows insiders to maintain voting control over a company even when, over time, there is both an ebbing of superior leadership skills and a significant decline in the insiders’ ownership of the company’s common stock. Yet, investors are willing to take that risk even to the point of investing in dual class shares where the shares have no voting rights and barely any sunset provisions, such as in the recent Snap Inc. IPO. Why they are willing to do so is a result of the wealth maximizing efficiency that results from the private ordering of corporate governance arrangements and the understanding that agency costs are not the only costs of governance that need to be minimized.

In this essay, Zohar Goshen and Richard Squire’s newly proposed “principal-cost theory,” “each firm’s optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control,” is used to argue that the use of dual class shares in IPOs is a value enhancing result of private ordering, making the movement’s renewed advocacy unwarranted.

The recommended citation is Bernard S. Sharfman, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, 63 Vill. L. Rev. 1 (2018).

I find his argument compelling, as I lean toward allowing contracting parties to enter into agreements as they so choose. I find this especially compelling at start-up or the IPO stage.  I might take a more skeptical view of changes made after start-up. That is, if dual-class shares are voted created after an IPO by the majority insiders, there is a stronger bait-and-switch argument. Even in that case, if the ability to create dual-class shares by majority vote was allowed by the charter/bylaws, it might be reasonable to allow such a change, but I also see a self-dealing argument to do such a thing post-IPO. At the outset, though, if insiders make clear that, to the extent that a dual-class share structure is self-dealing, the offer to potential purchasers is, essentially, "if you want in on this company, these are our terms." I can work with that. 

This is consistent with my view of other types of disclosure. For example, in my post: Embracing Freedom of Contract in the LLC: Linking the Lack of Duty of Loyalty to a Duty of Disclosure, I discussed the ability to waive the duty of loyalty in Delaware LLCs:

At formation . . . those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty.  This is part of the bargain, and any member who does not agree to the terms need not become a member.  Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated.

It was my view, and remains my view, that there some concerns about such changes after one becomes a member that warrant either restrictions or at least some level of clear disclosures of the possibility of such a change after the fact, though even in that case, perhaps self-dealing protections in the form of the obligations of good faith and fair dealing would be sufficient. 

Similarly, in my 2010 post, Philanthropy as a Business Model: Comparing Ford to craigslist, I explained: 

I see the problem for Henry Ford to say, in essence, that his shareholders should be happy with what they get and that workers and others are more his important to him than the shareholders. However, it would have been quite another thing for Ford to say, “I, along with my board, run this company the way I always have: with an eye toward long-term growth and stability. That means we reinvest many of our profits and take a cautious approach to dividends because the health of the company comes first. It is our belief that is in the best interest of Ford and of Ford’s shareholders.”

For Ford, there seemed to be something of a change in the business model (and how the business was operated with regard to dividends) once the Dodge Brothers started thinking about competing. All of a sudden, Ford became concerned about community first. For craigslist, at least with regard to the concept of serving the community, the company changed nothing. And, in fact, it seems apparent that craiglist’s view of community is one reason, if not the reason, it still has its “perch atop the pile.”

Thus, while it is true craigslist never needed to accept eBay’s money, eBay also knew exactly how craigslist was operated when they invested. If they wanted to ensure they could change that, it seems to me they should have made sure they bought a majority share.  

I understand some of the concern about dual-class shares and other mechanisms that facilitate insider control, but as long as the structure of the company is clear when the buyer is making the purchase decision, I'm okay with letting the market decide whether the structure is acceptable.  

June 12, 2018 in Corporate Finance, Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Securities Regulation | Permalink | Comments (1)