Business Law Prof Blog

Trump's Deregulatory Promises and Accomplishments

My essay, "Mr Toad's Wild Ride: Business Deregulation in the Trump Era," was recently published by the Mercer Law Review as part of a volume featuring works from a recent symposium on "Corporate Law in the Trump Era."  The symposium was held back in October and resulted from ideas shared at a discussion group on "Corporate and Financial Reform in the Trump Administration" convened for the 2017 Southeastern Association of Law Schools conference.  A portion of the introduction explaining the overall nature of the essay follows (footnote reference omitted).

This Essay identifies and takes stock of the Trump Administration’s deregulatory efforts as they impact business interests, with the thought that even incomplete or biased information may be useful to transactional business lawyering. What of significance has been done to date? With what articulated policy goals, if any? How may—or how should—the success of the administration’s business deregulatory plans and programs be judged? What observations can be made about those successes? For example, who may win and lose in the revised regulatory framework that may emerge? The Essay approaches these questions from a transactional business law perspective and offers related observations. Spoiler Alert: to date, the deregulatory journey is characterized by haphazardness not unlike the motorcar experience that is the subject of the beloved Disneyland attraction, Mr. Toad’s Wild Ride—a joyride that includes surprises and may sometimes feel like it is taking us “merrily, merrily, merrily, merrily, merrily on our way to nowhere in particular!”

This is the second essay in a pair that I wrote over the past year on deregulation and the presidency.  I posted on the first essay here, with a bit of information about the project as a whole (which had its genesis in BLPB posts by Anne Tucker and me).*  I also posted on this project back in September, here.  Thanks to those of you who responded with ideas in the comments and in private messages in response to these earlier posts.  

Although not all of those comments made it into my work implicitly or explicitly, they were nevertheless helpful as I researched and thought through my theses on these two short reflective pieces.  I do have many more ideas relating to this topic.  No doubt those ideas--and some of yours--will find their way into other work as time moves on.

_____

* In reviewing my prior posts for this post, I noted that the text of  this post has the year of the Southeastern Association of Law Schools discussion group wrong.  It did, in fact, occur in 2017, and it therefore preceded the Association of American Law Schools conference discussion group referenced in the post.  I left a postscript on that page, but I wanted to clarify the matter here also.

Reflections on the Life of a Smiling, Selfless Educator: Rivers Lynch

On Sunday morning, Rivers Lynch, a beloved member of my wife’s side of our family, died suddenly of natural causes. Rivers spent his professional life as an educator – over four decades as a teacher, an administrator, a driving instructor, and a coach of various sports. In 2007, he was inducted into the South Carolina Athletics Coaches Association Hall of Fame for his many successful seasons as a tennis coach, including 11 state championships. Even this year, at the age of 72, he continued to coach the Myrtle Beach High School tennis team.  

The outpouring of support on social media has been incredible to witness. Rivers, quite literally, positively affected the lives of thousands of students, colleagues, neighbors, and family members. A few of the countless posts include words like: “I’ve yet to meet anyone so kind and caring.” “Every single person was special to him.” “Truly humble…always greeting me with a smile and making me feel welcome.” “The truest most genuine person I’ve ever had the honor to know.” “A father like figure to all of us.” “A beautiful soul…that smile always brightened my day.” “Touched so many lives.” “Always championed students who were ‘underdogs.’” “My favorite teacher.” “The hero most of us didn’t deserve.”

How did Rivers make such a positive difference in the lives of so many people?

Three interrelated things spring to mind. A Genuine Smile. The headline for Myrtle Beach Online noted what so many people remember about Rivers – that he was “always smiling.” I can’t remember Rivers without his ear to ear smile that absolutely lit up every room he entered. Focused on Others. Rivers won numerous awards as an educator, but he always turned the attention to the success of others. He had well over 3000 Facebook friends (and many more in-real-life-friends), and he constantly celebrated the achievements of his students, colleagues, and family members. He was truly interested in the details of your life, had a remarkable memory for past conversations, and was always fully present. Relentlessly Positive. Rivers was an optimist. While I heard that he could be tough as a coach when the time called for it, he preferred to uplift. Sadly, at least one study shows that pessimism pays in the study of law, but Rivers’ approach to life always reminded me of the deeper benefits of focusing on the positive.

On June 22, 2010, I met Rivers for the first time. On that day, I drove from Charleston to North Myrtle Beach to meet my girlfriend’s extended family. I already knew Katie was the woman I wanted to marry, but I was a bit intimidated at the thought of walking into their family reunion at Rivers’ home. I convinced my youngest brother Sam to join me for support, and we stopped at an outlet mall where we bought him a respectable, collared shirt for the occasion. As I approached Rivers’ front door, I started to sweat even more than typical in the South Carolina summer heat. But, as soon as Rivers opened the door--beaming and offering some spectacular lemonade--I instantly felt welcomed. I remarked to my now mother-in-law that in just a few hours Rivers made me feel like his best friend. Reading over the Facebook comments again, it seems like Rivers made a lot of people feel that way, and he somehow managed to uplift thousands of people in a completely authentic manner.

I cannot fully explain how Rivers positively affected so many people during his time as an educator, but his life reminds me of the power of a genuine smile, the strength of selflessness, and the benefits of an optimist outlook. 

A Comment or Two on Lamps Plus v Varela

I’ve begun expanding my interest in the dispute resolution area to include research (I've been a practitioner and teacher). Along with my OU legal studies colleague, Professor Dan Ostas, I'm currently working on an arbitration article (readers, however, should take this post as expressing my views, and not necessarily his).  So, when the U.S. Supreme Court decided Lamps Plus, Inc., et al. v Frank Varela this past Wednesday, I immediately had some careful reading to do.           

Frank Varela was one of many Lamps Plus employees who upon beginning their employment with the company had signed an arbitration agreement and, as a result of a data breach, had had his tax information stolen.  After Varela’s information was used to file a false tax return, he filed a class action suit against Lamps Plus in a Federal District Court in California.  Lamps Plus motioned to compel bilateral arbitration, and to dismiss the suit.  The District Court dismissed Varela’s claims, ordered arbitration, and authorized it to proceed on a classwide basis.  Lamps Plus appealed.  The Ninth Circuit Court of Appeals affirmed (with one judge dissenting).  No language in the arbitration agreement explicitly addressed classwide procedures.  Nevertheless, the Ninth Circuit viewed the agreement as ambiguous because it argued that various phrases in the agreement could support both perspectives.  California, like most states, construes ambiguous contractual language against the drafter (Lamps Plus), especially in the case of adhesion contracts.  Therefore, the Ninth Circuit held that Varela’s interpretation prevailed, meaning that the arbitration could proceed on a classwide basis.  In a 5-4 decision, the U.S. Supreme Court (Court) reversed.            

The Court considered “whether the FAA …bars an order requiring class arbitration when an agreement is not silent, but rather ‘ambiguous’ about the availability of such arbitration.”  The Opinion of the Court (written by Roberts, C.J. and joined by Thomas, Alito, Gorsuch, and Kavanaugh, J.J.) held that just as Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp held that a court cannot compel classwide arbitration when an arbitration agreement is silent on the issue, it also may not do so when an arbitration agreement is ambiguous on the issue.  The Court’s opinion did not state whether it found the agreement to be ambiguous, but rather deferred to and accepted the Ninth Circuit’s determination (note: the Court’s opinion initially addressed jurisdiction.)  The Court reiterated that classwide arbitration is importantly distinct from traditional, individual arbitration and “undermines the most important benefits of that familiar form of arbitration” such as informality, speed, economy; “introduce[s] new risks and costs for both sides,” (quoting Epic Systems Corp. v. Lewis) particularly for the defendant; and creates significant due process issues.  Therefore, “[t]he… [FAA] requires more than ambiguity to ensure that the parties actually agreed to arbitrate on a classwide basis.”  Citing Stolt-Nielsen, the Court emphasized that the FAA made arbitration “a matter of consent, not coercion,” and that arbitrators only have the authority that the parties have agreed to give them.  Hence, to the extent that a state law contract interpretation rule – such as construing ambiguous contract language against the drafter – thwarts implementation of the purposes and objectives of the FAA, it is preempted. 

Justice Thomas also filed a concurring opinion.  Dissenting opinions were filed by Justices Sotomayor, Ginsburg, Kagan, and Breyer (the authors also joined other dissents).  

I’m new to this area of research and my views are developing.  Thus far, I agree that classwide arbitration is materially distinct from individual arbitration.  As a practical matter, I would think that unless parties had explicitly agreed to such procedures, widespread authorization of classwide arbitration would dramatically decrease the use of arbitration.  I don’t think this would necessarily always be helpful for employees or consumers, though in certain cases it likely would be.  I also agree with the Court's judgment itself because the arbitration provision did not seem ambiguous to me, but rather silent regarding classwide arbitration (a point in the concurrence).  At the same time, I also agree with several points made in three of the dissents. 

However, for now, if you’re interested in a more comprehensive explanation of and argument for my views on arbitration, you’ll have to wait for (and then read) my future scholarship in this area.  In the meantime, I’d love for readers who disagree with the perspective that classwide arbitration is importantly different from individual arbitration to share why and/or recommend helpful reading materials.        

 

The Audience for Sustainability Disclosure

Last year, I had the privilege of participating in ILEP's 24th Annual Symposium, Deconstructing the Regulatory State, where I served as a discussant on papers presented by Jill Fisch and Hillary Sale regarding the role of disclosure in the securities regulatory landscape.  Those papers, Making Sustainability Disclosure Sustainable and Disclosure's Purpose have now been published by the Georgetown Law Journal. 

Georgetown has also published my remarks on the two papers as part of their online series.  The title for my commentary is Mixed Company: The Audience for Sustainability Disclosure, and there's no formal abstract, but this is the introduction:

In their symposium articles, Professors Sale and Fisch offer mirror-image visions of the role of mandated disclosure. Professor Sale addresses information that is typically relevant to an investing audience and recognizes its importance to the wider public. Professor Fisch, by contrast, addresses information that is most relevant to a noninvestor audience but only contemplates its importance to corporate financial performance. The gulf between their approaches highlights one of the significant tensions in our system of securities regulation: the distance between its intended purpose and its current function.

Close readers of this blog will recognize that my comments follow a theme that I've frequently visited in this space, namely, the need for a corporate disclosure system that is not centered on investors.  I'm actually working on a much longer article on this topic where I explore these ideas in depth, but for those who are interested, the elevator-pitch version is now available at Georgetown Law Journal Online.

New Jersey Fiduciary Proposal

After soliciting initial comments, New Jersey has issued its draft fiduciary regulation.  The draft proposal makes clear that financial advisers will have duties of care and loyalty to clients and that mere disclosure may not be sufficient to satisfy the duty of loyalty.  This matters because many registered investment advisers now attempt to satisfy their fiduciary duties simply by disclosing conflicts and instances where they will act against client interests.

Consider the SEC's recent share class disclosure settlement.  Firms had been steering client assets into more expensive share classes because those classes paid the firms more money than less expensive share classes.  The SEC deemed these practices "fair" so long as they were disclosed to clients:

“An adviser’s failure to disclose these types of financial conflicts of interest harms retail investors by unfairly exposing them to fees that chip away at the value of their investments,” said Stephanie Avakian, co-director of the SEC’s enforcement division.

The words "unfairly exposed" strain under their burden there.  It's an odd notion of fairness which allows a fiduciary to fleece clients so long as some document contains the disclosure.  

New Jersey now looks to take a different approach.  Although disclosure makes sense for many securities law issues, it fails to meaningfully protect investors in their relationships with financial advisers.  Vast swaths of the public are financially illiterate.  They need help because they don't understand markets, portfolio allocation strategies, how fees impact portfolios over time, and a host of other issues.  People hire advisers because they want someone else to think about and handle these issues.  

ICYMI: #corpgov Midweek Roundup (Apr. 24, 2019)

"toward increasingly centralized and opaque censorship of the global internet" https://t.co/WlcXUj5A1g #corpgov

— Stefan Padfield (@ProfPadfield) April 20, 2019

"Republican representative Greg Walden ... said of the companies: 'If responsibility doesn’t flow, then regulation will.' But ... former Google CEO Eric Schmidt questioned the assertion that Americans are frustrated with the tech industry" https://t.co/OPlyY75W4L #corpgov

— Stefan Padfield (@ProfPadfield) April 22, 2019

"Squeezed by a tight labor market and shrinking pool of employees, big corporations like Starbucks and Disney are increasingly turning to a new tool for recruitment: education." https://t.co/EiKn8KWmal #corpgov

— Stefan Padfield (@ProfPadfield) April 22, 2019

"As Sri Lankan authorities scrambled amid a wave of bombings across the country on Easter morning, among their first responses was to block ... Facebook & ... WhatsApp... Instagram, YouTube, ... Snapchat & Facebook Messenger were also blocked ..." https://t.co/65YRCh7t6y #corpgov

— Stefan Padfield (@ProfPadfield) April 21, 2019

"The good news is that the Supreme Court ... rejected the notion that a company’s pre-deal share price is the most reliable indicator of its fair value.... the bad news in Aruba is that the Delaware Supreme Court now seems to regard the per-share deal price as a ceiling" #corpgov https://t.co/8eEuhm9kBz

— Stefan Padfield (@ProfPadfield) April 19, 2019

Can A Board's Knowing Violation of the Law Also Be Entirely Fair? How About Moral?

Prof. Justin Pace, Haworth College of Business,  Western Michigan University recently sent me his paper, Rogue Corporations: Unlawful Corporate Conduct and Fiduciary Duty. In it, he discusses Delaware's "per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm." 

In the paper, he considers this concept from a moral and ethical perspective, which are interesting in their own right, though I remain more interested in the doctrine itself.  The paper is worth a look.  A few comments of my own, after the abstract:

Abstract

On February 28, 2018, Dick’s Sporting Goods announced that it would no longer sell long guns to 18- to 20-year-olds. On March 8, 2018, Dick’s was sued for violating the Michigan Elliott-Larsen Civil Rights Act, which prohibits discrimination on the basis of age in public accommodations. Dick’s and Walmart were also sued for violating Oregon’s ban on age discrimination. In addition to corporate liability under various state civil rights acts, directors of Dick’s and Walmart face the threat of suit for breaching their fiduciary duties—suits that may be much harder to defend than the more usual breach of fiduciary duty suit.

Delaware corporation law appears to have an underappreciated per se doctrine where the board directs the corporation to violate the law. A knowing violation of positive law is bad faith, which falls under the duty of loyalty. The business judgment rule will not apply and exculpation will not be available under Section 102(b)(7). The shareholders may not even need to show harm.

This paper examines the relevant legal doctrine but also takes a step back to consider what the rule should be from an ethical and a moral standpoint. To do so, rather than apply traditional corporate governance arguments, this paper considers broader moral theories. In addition to the utilitarian calculus that is so ubiquitous in corporate governance scholarship via the law and economics movement, this paper considers the liberalism of both John Rawls and Robert Nozick. But liberalism may seem less persuasive given the rise of illiberalism politically on both the American right and left. Given that, this paper also considers two non-liberal models: one a populist modification of Charles Taylor’s democratic communitarianism and the other Catholic Social Thought.

Unsurprisingly, the proper rule depends on which moral theory is applied. If that theory is liberalism (of either form covered), then a per se approach is troubling. Harm to the corporation must be shown, and either the Delaware legislature or the corporate players, depending on the form of liberalism, must acquiesce to a per se rule. Counterintuitively, it is the per se rule that runs counter to basic democratic norms. It gives the power to litigate in response to harm not to the party harmed but to a third party. Given the divergent results from applying different moral theories, and given the democratic difficulty, the Delaware legislature should clarify the standard. It will likely find that a harsh, per se standard is unjustified.

First, I have always thought that some people read DGCL § 102(b)(7) too literally (or at least broadly).  The statute reads:

(b) In addition to the matters required to be set forth in the certificate of incorporation by subsection (a) of this section, the certificate of incorporation may also contain any or all of the following matters: 

. . . .

(7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director:  (i) For any breach of the director's duty of loyalty to the corporation or its stockholders;  (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;  (iii) under § 174 of this title;  or (iv) for any transaction from which the director derived an improper personal benefit.  No such provision shall eliminate or limit the liability of a director for any act or omission occurring prior to the date when such provision becomes effective.  All references in this paragraph to a director shall also be deemed to refer to such other person or persons, if any, who, pursuant to a provision of the certificate of incorporation in accordance with § 141(a)of this title, exercise or perform any of the powers or duties otherwise conferred or imposed upon the board of directors by this title.

I have never been one to believe that directors face potential liability for any type of "knowing violation of law."  Anyone who has seen a UPS or FedEx truck in New York City knows that the drivers knowingly park illegally and risk tickets (which they often get) for doing the job. It is a cost of doing business, and I find it hard to believe any court would hold directors liable for such a thing, though directors certainly know (or should) of the practice. That would make for one of the most absurd Caremark-like cases ever, in my view.

Prof. Pace argues in his paper:

A per se standard might prove lucrative. It opens up liability for losses normally insulated by business judgment rule. If Nike loses market share because it made Colin Kaepernick the face of a large marketing campaign, shareholders cannot successfully sue because that decision is protected by the business judgment rule. But if Dick’s Sporting Goods loses market share because it stops selling long guns to 18- to 20-year-olds, shareholders presumably can sue and recover based on that market share, even though civil liability for violating state bars on age discrimination may be negligible.

Perhaps, but I would still think that most courts would likely work around this. First, I think a court could easily calculate damages as the modest civil liability incurred, not the lost market share.  Second, in Dick's Sporting Goods situation, as I observed elsewhere, "it is worth noting that Dick's sales dropped, but profits rose after the decision because the company cut costs by replacing some guns with higher-margin items." If there is no harm, is there a foul? Or maybe better said, it is possible that there is no director liability unless one can show actual harm. 

I will concede that DGCL § 102(b)(7) likely eliminates business judgment rule protection for directors where one can show a knowing violation of the law. However, getting past the business judgment rule does not automatically lead to liability.  It simply allows the court to review the board's decision, but the plaintiff still must show harm. And I am not at all sure one can show harm in the Dick's gun sales circumstance. It is, in my view, entirely fair. I also gather that I am may be in the minority on this one.  But a good conversation, either way.  

The Internet & Business Disclosures: Observations

Co-blogger Ann Lipton has posted a number of times on Elon Musk's Twitter disclosures and their potential legal significance.  I chimed in once.  Unless I am mistaken, her most recent post (citing to our prior posts) on this subject is here.  Based on these posts, we both seem to understand that the Twitter Era has spawned some interesting disclosure-related legal questions.

I had these posts in the back of my mind when I got an email invitation yesterday from IPO Docs, a firm that sells "Regulation D Private Placement Memorandum Templates" to check into the firm's services.  I have never been a fan of online templates or form documents as drafting precedent, especially for investment disclosure documents.  In general, one-size-fits-all disclosure lawyering is just too far from my practice background (which involved reverse-engineering the work of my Skadden colleagues and others).  But I do tell students they should be familiar with these kinds of form/exemplar resources and that, after determining the quality and suitability of a resource for their purposes, they may want to use form documents as a cross-check for contents or phrasing.

These two examples of Internet-related disclosures (online commentary and disclosure forms) are two pieces of a larger disclosure regulation puzzle.  The puzzle?  How best to address challenges to disclosure regulation posed by our increased use of and reliance on the Internet.  Believe me; I am a fan of the Internet.  But having been engaged with disclosure regulation pre-Internet and post-Internet, I do see challenges.

Social media and blog posts or commentary, for example, raise issues about the nature of the speech and the identity of the speaker.  Are tweets made by firm managers disclosures of firm information or are they private statements?  Who is the person behind a social media or weblog account commenting on business affairs?  (I note that Ann's September 29, 2018 post on the Musk affair reports, based on information in the SEC's complaint, that analysts "privately contacted Tesla’s head of investor relations for more information and were assured that the tweet was legit."  And many may remember the dust-up--almost twelve years ago--around John Mackey's "anonymous" online posts.)

To the extent that we come to accept, from a disclosure compliance standpoint, business disclosures that are made through fractured online posts and commentary, we lose the benefits of standardization--including easy comparability--that comes from the traditional periodic and transaction-based disclosure regimes built into the Securities Act of 1933 and Securities Exchange Act of 1934.  While I understand the virtues of allowing for more customized business disclosures in certain circumstances (e.g., for Form S-8 registration statements, where a summary plan description geared to benefit-holders fulfills key prospectus disclosure requirements), should we be encouraging or mandating that investors of all kinds comb the Internet to find scraps of information to enable them to get comparable data?  (Of course, many investors do perform Internet searches, regardless.  But mandatory disclosure documents are the core elements of compliance, and they allow for relatively direct comparisons.)

What about disclosure challenges relating to Internet-available offering documents?  I admit that I have less concern here if these documents are purchased and used by a competent lawyer.  But I fear that will not be the dominant scenario.

In my view, a significant peril with disclosure templates is that people using them as drafting models may not be competent or skilled in their use.  Specifically, form end-users may not understand (or even consult) the legal rules relating to disclosures required to be made by a firm seeking capital under applicable federal and state securities law registration exemption(s).  The interpretation and interaction of some of these rules--and the preservation of arguments and remedies if an exemption is later found to be unavailable--can be complex.  It is too easy to use template text without questioning it.

Moreover, Internet forms may lull businesses into thinking they have met all attendant legal requirements relating to a financing transaction for which a form document has been purchased.  In a private placement, the existence of an accurate and complete disclosure document is but one of many legal compliance issues.  Private placements exempt under Regulation D have a number of moving parts, disclosure being only one.

I feel very "old school" in writing this post.  What are your views on these and other issues relevant to business disclosures made on or facilitated by the Internet?  As a person who has been known to describe herself as a "disclosure lawyer," I would appreciate any ideas you may have.  And tell me where I am wrong in the observations I make here.

Aruba: So There's a Lot To Talk About Here

It’s no secret to anyone paying attention to Delaware law that the Aruba decisions – both at the Chancery and Supreme Court levels – involved some apparently personal clashes, which have already been the subject of speculation from several quarters, and I can only assume there is more analysis to come.

I was going to weigh in on that as well but upon further reflection, I decided that it’s … boring.  And I’d rather talk about the substance of the law, because what we’re seeing here is the inevitable breakdown in appraisal actions given that no one knows why we even have them.

As a warning, I’ll say that reading over what I wrote on this, I realize it’s probably pretty impenetrable unless you already are versed in Delaware appraisal jurisprudence.  I’ve previously posted about recent developments in Delaware appraisal litigation here, here, here, and here, so that might provide some background, but otherwise - you know, read at your own risk:

[More below the jump]

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Are We Teaching Law Students The Wrong Things, The Wrong Way, or Both?

It's that time of year again. Many states have released February 2019  bar passage rates. Thankfully, the rates have risen in some places, but they are still at suboptimal levels. Indeed, the July 2018 MBE results sunk to a 34- year low. A recent article on law.com lists some well-known statistics and theories, explaining, in part:

Kellye Testy, president of the Law School Admission Council . . .  suspects the falling pass rates are the results of a combination of factors, the most obvious being the lower credentials of incoming students. The declining quality of public education—meaning an erosion of the reading and writing foundations children develop in elementary and high schools—may also be a contributor, she said. Moreover, the evolving way that law is taught may explain why today’s law graduates are struggling more on the bar exam, said Testy, whose organization develops the LSAT. Professors now put less emphasis on memorizing rules, and have backed off on some of the high-pressure tactics—like the Socratic method—that historically dominated the classroom. “The way we used to teach wasn’t as good for caring for the student, but it made sure you could take a closed-book exam,” she said. “You knew the doctrine. It was much more like a bar exam, in some ways. Today, when you go into a classroom, it’s all PowerPoint. The teachers give them an outline, the students are on computers. There’s a different student approach and a different faculty approach.” The fact that so many law graduates now take bar preparation courses online rather than in person is another avenue worth examining for a potential correlation to falling pass rates, said Judith Gundersen, president of the National Conference of Bar Examiners. “You used to have to go to a lecture and show up every day,” she said. “Now so much of it is online. People are wondering whether that’s changing how people prepare, because there just isn’t that communal aspect where, ‘I have to prepare in case I get called on.’”

I'm not sure how I feel about these assertions. I agree that many students lack some of the key critical thinking and writing skills needed to analyze legal problems. I also see far fewer professors using the strict Socratic method and more allowing computers in class. I allow computers for specific activities but not throughout the class. I also employ more of a modified Socratic method, use powerpoint, and often post it in advance with questions for students to answer prior to class so that we can spend time in class applying what the students have learned. Am I doing a disservice to my students with a flipped classroom? Do we need to go back to rote memorization and cold calling students for the bar passage rates to rise? And if so, will that make our students better lawyers?

I remember how difficult it was to take the Florida bar after three years of law practice in New York. The rote memorization helped me pass the bar exam while working a full time job and caring for an infant as a single mother. But it didn't make me a better lawyer. Having worked for three years, I remember slogging through bar study thinking that what I was learning in bar prep had little to do with what I actually did in practice. When I prepared for the New York and New Jersey bars, I went to classes live but some were in a classroom via video. I'm not even sure that purely online courses were an option back in 1992. When I moved to Florida and studied for that bar, I used tapes in my car (yes, it was 1996). I had tried the live courses for a few days and realized that my time was better spent reciting the rules of evidence to my son in lieu of nursery rhymes. I passed three bars using two different methods but I wonder how well I would have done with an online version, the way most students study for the bar now. 

I no longer teach courses tested on the bar, but when I did, I had the perpetual conflict-- how do I make sure that the students pass the bar while instilling them with the knowledge and skills they will actually need in the real world? I see now how some of my transactional lawyering students dread going to the bar prep classes offered during the semester. But they also consider these classes a necessity to pass the bar even through they will engage in full time bar prep upon graduation. Does the proliferation of these law school bar prep classes mean that the doctrinal professors aren't teaching the students the way we learned? Or does it mean that that the students are no longer learning the way we did? I don't have the answers. 

But these articles do have an effect on how and what I teach. Under ABA Standard 306,  law schools can offer up to one-third of their credits online, including up to ten credits for first-year coursework. As I prepare to teach my contract drafting and negotiation class asynchronously online for the first time this summer, I'm learning about presenting information in short, digestible chunks for the students- no more than 15-20 minutes per video, and preferably even shorter, I'm told. I'm also reviewing the conflicting evidence about whether online courses are a help or a hindrance.

Some of my students have taken many courses online as undergraduates. As a compliance officer, I required employees to take courses online and did live training. Personally, I like taking online courses. But I don't know enough about how well students retain the information and how well they learn to use key skills to serve clients. I'm fortunate, though, to have excellent instructional designers working with me who understand adult learning much better than I do. I'm convinced that more students will seek online courses and more schools will adopt them as a way of earning more revenue through developing programs for working professionals and JD students who need more flexible schedules. This means many more of us may need to prepare for this new way of teaching and learning.

Policing Potential Conflicts in Class Action Settlements

Anthony Rickey and I recently posted a new paper focusing on the settlement approval process in securities class and stockholder derivative actions.   These settlements are a fascinating world. In most instances, plaintiffs’ counsel urge a judge to find that a settlement is reasonable, and defendants either stay silent or join in supporting the deal.  At this stage, plaintiff and defense interests often align. The defendant wants to get out of the case at the negotiated price.  Plaintiff’s counsel want to get paid. 

In many instances the settlement will be perfectly reasonable and a court should just approve it.  But there will also be times when a court should not approve a settlement or should do a bit more digging before deciding whether to approve the settlement and how to apportion the recovery between the class and its counsel.

How do courts identify these instances?  Courts generally excel at deciding disputes after adversarial briefing.  They may not have the institutional resources to slog through hundreds of pages in settlement disclosures or canvas other public records to determine whether to approve a settlement.  We suggest some possible reforms to the settlement approval process to help bring relevant information to the court's attention.

Consider for example the information that came to light after the Boston Globe's Spotlight team cast a close eye on the settlement in a class action filed against State Street Bank and Trust Company.  For those that haven't followed the case, it settled for $300 million, with $75 million going to attorneys' fees. The Globe's review found that some attorneys billed out at $400 an hour or more for settlement purposes were, in reality, contract attorneys who were actually paid about $40 an hour or less for their work.  It also emerged that some hours had been double counted when the class counsel came to the court seeking to justify fee requests.  Troubled, the Court appointed a special master (Master) to investigate.

The Master soon found more cause for concern, including a $4 million dollar payment out of the attorneys' fees to an attorney who had not done any work on the case.  The Master unearthed an email raising concerns about whether any money had been spent in ways that would compromise the lead plaintiff's ability to act as a fiduciary for the class.  One particularly salient email read:

“We got you ATRS as a client after considerable efforts, political activity, money spent and time dedicated in Arkansas, and Labaton would use ATRS to seek legal counsel appointments in institutional investor fraud and misrepresentation cases. Where Labaton is successful in getting appointed lead counsel and obtains a settlement or judgment award, we split Labaton’s attorney fee award 80/20 period.”

Commenting about the dynamic to the Times, Columbia's John Coffee explained that the "case had shed an important light on the 'rather sordid market of buying and selling plaintiffs' in securities class actions."

We break down what happened in the State Street Litigation and explore some other potential hidden conflicts which might also cause some lead plaintiffs to have interests more aligned with their lawyers than the class they ostensibly lead.  Our article also suggests some reforms that courts and legislatures could undertake to surface otherwise hidden conflicts between plaintiffs and their legal representatives.

ICYMI: #corpgov Midweek Roundup (Apr. 17, 2019)

Delaware courts "are increasingly willing to permit stockholders to gain access to board documents, including emails (even, in some cases, personal emails and text messages) where there are gaps in the board’s minutes and other formal materials" https://t.co/CdfPKuHEYV

— Stefan Padfield (@ProfPadfield) April 12, 2019

"focus on pay ratio could encourage more automation instead of higher wages. By eliminating low wage jobs entirely, the median employee would represent a more senior or corporate-level employee with higher pay, thus lowering the CEO pay ratio." https://t.co/id9ikjKVRq #corpgov

— Stefan Padfield (@ProfPadfield) April 11, 2019

"David Beckworth: ... you propose, to ... teach lawyers some macroeconomics.... why ...?
Yair Listokin: ... a disproportionate number of politicians are trained as lawyers .... And ... in law school, they learn a lot of economics, and it's all microeconomics." #corpgov https://t.co/RZusZ7CAaE

— Stefan Padfield (@ProfPadfield) April 15, 2019

"researchers have conducted a series of computer simulations in which pricing algorithms learned, through trial and error and without communicating directly, to collude in maintaining prices above levels that would be expected in open competition" https://t.co/m2WgH0JJzM #corpgov

— Stefan Padfield (@ProfPadfield) April 12, 2019

"Notably missing is a Restatement on corporations, but that is set to change. In January, ALI announced that Martin Lipton Professor of Law Edward Rock will oversee the drafting of Restatement of the Law, Corporate Governance." #corpgov https://t.co/mNirL6cHWt

— Stefan Padfield (@ProfPadfield) April 15, 2019

Petition to Create AALS Section Community Economic Development

My friend and colleague, Priya Baskaran, asked me to post the following, which I am happy to do: 

Over the past year, a critical mass of law school faculty and staff have expressed interest in establishing an AALS Section on Community Economic Development (CED). The proposed section will provide a dynamic, collaborative environment to enhance the scholarship, activism, and direct legal work of CED-focused faculty and professional staff. Notably, the section will help bridge existing gaps between various actors in the CED universe by increasing opportunities for networking and enabling greater synergy and collaboration between scholars and experts in various substantive subjects and disciplines related to CED. Interested faculty and professional staff are invited to read the full petition.

I think this is a great idea, and I will be signing the petition (here).  I have been working with an interdisciplinary group on my campus, WVU Center for Innovation in Gas Research and Utilization (CIGRU). We are a multidisciplinary group of researchers who are experts in science, engineering, environmental, policy, law, and finance. The CIGRU conducts research and services relevant to gas, oil, and chemicals. Our experimental research includes broad areas covering catalysis, reaction engineering, material science, power generation, and gas turbine. The CIGRU undertakes U.S. government- and industry-funded research projects developing clean and renewable energy technologies. Our services include air emission control, regulatory and policy, law and finance relevant to shale gas.

I have been leading CIGRU's Economic and Community Development Group for the past few years.  About 18 months ago, CIGRU earned a five-year seed grant awarded by the West Virginia Higher Education Policy Commission, under its Research Challenge Grant program. The WVU gas utilization team includes eight CIGRU researchers, working in partnership with Marshall University, the WVU Energy Institute, the WVU Bureau for Business and Economic Research, the West Virginia Chemical Alliance Zone, Morgantown’s National Energy Technology Laboratory and the Mid-Atlantic Technology, Research and Innovation Center. So, this idea resonates with me. I think this is a great idea, and it has my support. If you agree, I hope you'll sign on, too.  

For anyone interested, CIRGUs grant announcement and a description of the program are available after the jump. 

Continue reading

Compliance!

Last Friday, I had the honor to participate in Rutgers Law School's Fourth Annual Corporate Compliance Institute, presented by The Center for Corporate Law and Governance.  I teamed up with Todd Cipperman, a lawyer and compliance professional who owns his own firm, in leading a discussion breakout session on current topics in financial services and securities compliance.  Todd is the author of The Compliance Advantage: Ten Must-Know Trends to Protect Your Investment Firm.  Our knowledge bases were complementary, and he was a great partner.

The Institute offered a super program, starting with a welcome lecture from Rutgers Law's own Hui Chen, former Compliance Counsel Expert for the U.S. Department of Justice Fraud Division.  She outlined four concerns for us to focus on over the course of the program:

• Variety - including the many taxonomies of compliance
• Use of Data - including disparities in a firm's treatment of other peoples' data and its own
• Measurements and Outcomes - including the importance of measuring outcomes in addition to processes
• Ethics and Compliance - including the relationship between the two--whether they are co-extensive and, if not, whether one can exist without the other

Following these threads throughout the day proved to be a useful task.

Another highlight of the day for me was the luncheon talk offered by Eugene Soltes, author of Why They Do It, a book about the motivations for white collar crime that I am using in my current insider trading research project.  Having said that, I also learned a bunch from the two morning panels--one on recent corporate compliance trends (focusing in on trade sanctions, antitrust, and immigration) and the other on data compliance issues (addressing governance, stewardship, and privacy, among other things).  All-in-all, the day was a great way to learn and share.  Thanks to Arthur Laby for inviting me.

Speaking To Influence

Leadership “must be in the air” as co-blogger Joan Heminway recently wrote (here and here).  I agree.  Last week, I had a chance to connect with Dr. Laura Sicola, a close friend from my days as a UPenn PhD student, and the founder of Vocal Impact Productions.  She shared that her second book on leadership, Speaking To Influence: Mastering Your Leadership Voice, would be released this Tuesday, April 16.  Exciting news! 

Many good books have been written on leadership.  What’s unique about Sicola’s work is her focus on the role of voice in building one’s executive presence.  In a highly-insightful TedxPenn talk with over 5.5 million views, Sicola notes that executive presence is thought to consist of: appearance, communication skills, and gravitas.  However, she argues that there’s a “missing link” uniting these considerations.  That link, according to Sicola, is vocal executive presence.   How one delivers information can reinforce and establish executive presence or undermine it.  She explains what it means for the voice to have both a cognitive and an emotional impact on listeners.  In sum, “if you want to be seen as a leader, you have to sound like one.” 

Here’s a blurb on Speaking To Influence:

“When you speak, whether on stage, in a meeting, or on the telephone, do you command the room confidently and naturally?  Are you seen as a true leader? Do you get the full respect you deserve and the results you want?

If you’re like most people, your response to many of these question is, “No, but I want to!” The reason is because we all have a “blind spot”: the gap between how we think we come across to others, and how we actually come across when we speak.

Have you ever had an argument in which someone angrily said to you, “It’s not what you said, it’s how you said it!”  That’s the blind spot, and if you’ve ever been there, then this book is for you.

Full of stories, examples, and exercises for you to try, Speaking To Influence helps you take the blinders off and see where you’re getting in your own way.  Discover the secrets to creating strong, positive relationships, establishing your best reputation, and achieving your greatest goals and purpose.”    

Netflix Bends

Every year, when we get to the section on shareholder voting in my Business Associations class, I assign this article about Netflix.  As it describes, Netflix has a staggered board and plurality voting and it takes a two-thirds vote of the stockholders to amend the bylaws.  Every year, shareholders submit proposals to change these matters; every year, a majority vote in favor, and every year, Netflix just ignores the vote and keeps on keeping on.

But now it seems there are some cracks in the wall. 

Last year, Netflix went on what I can only interpret as something of a charm offensive, publicizing what it claimed was unusually strong board oversight and transparency between the board and the management team.  I take this to mean that their shareholders had become sufficiently restive that the company felt it needed to respond.

But that apparently did not work as well as hoped.  This year, shareholders again submitted a series of governance reform proposals, seeking the right to call meetings, proxy access, the ability to act by written consent, the ability to amend bylaws by majority vote, and a bylaw amendment that would provide for director elections by majority rather than plurality voting.  All passed except the bylaw amendment, which did not reach the required two-thirds vote, but did get 57% of the vote of the outstanding shares and 72% of the voting shares.

But this time, instead of ignoring the vote, Netflix actually amended its bylaws to provide for proxy access. 

It seems that even Netflix cannot resist the pressure from investors forever.  And now I’ll have to give my students a different lesson.

Why Businesses Should Not Ignore the Operation Varsity Blues Scandal

As a former compliance officer who is now an academic, I've been obsessed with the $25 million Varsity Blues college admissions scandal. Compliance officers are always looking for titillating stories for training and illustration purposes, and this one has it all-- bribery, Hollywood stars, a BigLaw partner, Instagram influencers, and big name schools. Over fifty people face charges or have already pled guilty, and the fallout will continue for some time. We've seen bribery in the university setting before but those cases concerned recruitment of actual athletes. 

Although Operation Varsity Blues concerns elite colleges, it provides a wake up call for all universities and an even better cautionary tale for businesses of all types that think of  bribery as something that happens overseas. As former Justice Department compliance counsel, Hui Chen, wrote, "bribery. . .  is not an act confined by geographies. Like most frauds, it is a product of motive, opportunity, and rationalization. Where there are power and benefits to be traded, there would be bribes." 

My former colleague and a rising star in the compliance world, AP Capaldo, has some great insights on the scandal in this podcast. I recommend that you listen to it, but if you don't have time, here are some questions that she would ask if doing a post mortem at the named universities. With some tweaks, compliance officers, legal counsel, and auditors for all businesses should consider: 

1) What kind of training does our staff receive? How often?

2) Does it address the issues that are likely to occur in our industry?

3) When was the last time we spot checked these areas for compliance ? In the context of the universities, were these scholarships or set asides within the scope of routine audits or any other internal controls or reviews?

4) What factors or aspects of the culture could contribute to a scandal like this? What are our red flags and blind spots? Do we have a cultural permissiveness that could lead to this? In the context of the implicated universities, who knew or had reason to know?

5) How can we do a values-based analysis? Do we need to rethink our values or put some teeth behind them?

6) How are our resources deployed?

7) Do we have fundamental gaps in our compliance program implementation? Are we too focused on one area or another?

8) Are integrity and hallmarks of compliant behavior part of our selection/hiring process?

Capaldo recommends that universities tap into their internal resources of law and ethics professors who can staff  multidisciplinary task forces to craft programs and curate cultures to ensure measurable improvements in compliance and a decrease in misconduct. I agree. I would add that as members of the law and business community and as alums of universities, we should ask our alma maters or employers whether they have considered these and other hard questions. Finally, as law and business professors, we should use this scandal in both the classroom and the faculty lounge to reinforce the importance of ethics, internal controls, compliance with law, and shared values.

 

Ipse Dixit -- A Podcast on Legal Scholarship

I want to follow in Haskell's wake and also plug Ipse Dixit, a podcast on legal scholarship.  It recently featured the BLPB's own Joshua Fershee.  It's perfect for hearing authors that you've only read in the past.  Hearing them set out their ideas in their own voices is wonderful.  It's also available on iTunes and a number of other streaming platforms.  It's now up to about 212 episodes, and covers a broad range of ideas and scholars.  There should be something for everyone.

The podcast continues to evolve and expand.  It's begun adding additional co-hosts to the podcast to help produce new episodes.  I'm one of them and suspect I'll have a hard time keeping up with another new co-host, Luce Nguyen, a student at Oberlin College.  Luce interviewed Joshua for that episode and has already taken the lead in terms of co-host production.  Luce is the co-founder of the Oberlin Policy Research Institute, an undergraduate public policy organization based at Oberlin College.  You can also follow both Joshua and Luce on Twitter:

Thank you for a great interview (at least from your end). I appreciate your thoughtful questions and for your interest in my work. You were great to work with. Much appreciated! https://t.co/kT03PmUcP9

— Joshua Fershee (@jfershee) April 10, 2019

ICYMI: #corpgov Midweek Roundup (Apr. 10, 2019)

"A proposed Labor Department regulation released Monday could make it more difficult for a worker to claim to have two employers, a move that would likely limit liability for franchised brands and companies that use staffing firms." https://t.co/KAD4TFpItO #corpgov pic.twitter.com/h1e8l9nodx

— Stefan Padfield (@ProfPadfield) April 5, 2019

"Unlike statutes authorizing benefit corporations ... no one has articulated a legal justification for benefit LLCs. Indeed, no plausible legal justification can be articulated." Mohsen Manesh, Introducing the Totally Unnecessary Benefit LLC, 97 N.C. L. Rev. 603 #corpgov #socent

— Stefan Padfield (@ProfPadfield) April 7, 2019

"Some legal scholars—skeptics—question the conventional wisdom that corporations failed to provide adequate information to prospective investors before the passage of the Securities Act of 1933 .... primary-source documentation strongly suggests [otherwise]" #corpgov https://t.co/m9b1DtXl5l

— Stefan Padfield (@ProfPadfield) April 4, 2019

"Almost a decade ago, the 'benefit corporation' made its first appearance on American soil.... contrary to ... predictions ..., the benefit corporation has not, apparently, resulted in much change at all." https://t.co/LjNBA1bEwz #corpgov #socent

— Stefan Padfield (@ProfPadfield) April 4, 2019

"All five of the world’s largest companies by market capitalization are former venture-backed technology startups.... Longstanding theories of corporate ownership and governance do not capture the special features of startups." https://t.co/NrsvZVgeyv #corpgov

— Stefan Padfield (@ProfPadfield) April 4, 2019

Court Says No Successor Liability Attaches When There Was No Entity

A 2017 opinion related to successor liability just posted to Westlaw.  The case is an EEOC claim "against the Hospital of St. Raphael School of Nurse Anesthesia (“HSR School”) and Anesthesia Associates of New Haven (“AANH”), alleging gender discrimination and retaliation in violation of Title VII of the Civil Rights Act of 1964 . . . ." The plaintiff was seeking to join Yale New Haven Hospital (“YNHH”). MARGARITE CONSOLMAGNO v. HOSPITAL OF ST. RAPHAEL SCHOOL OF NURSE ANESTHESIA and ANESTHESIA ASSOCIATES OF NEW HAVEN, P.C., 3:11CV109 (DJS), 2017 WL 10966446, at *1 (D. Conn. Mar. 27, 2017). 

 

 

Apparently, the HSR School trained nurse anesthetists was owned and run by AANH a Connecticut “professional corporation.”  The plaintiff was in the HSR School for about six months before she was dismissed, she claimed, because of " gender discrimination and retaliation for reporting a staff member’s inappropriate sexual conduct." Id. The plaintiff sought to join YNHH because that entity took over running an anesthesia school that had been, in some form, the HSR school.  

 

The successor liability part is rather interesting, though largely devoid of facts from the transaction.  The court ultimately concludes that even though YNHH resumed a similar school, it was not a successor entity and could not be joined.  

 

A challenging part about the case is that entities are described, but often not clearly and with conflicting entity-type language.  For example, although AANH was a "professional corporation," the court explained that " [t]he AANH anesthesiologists, who were also partners in AANH, were responsible for deciding how the HSR School would operate." Id. at *2. One of the doctors was also referred to as an "ownership partner in AANH." Id. at *3. I suspect that anesthesiologists, like lawyers, traditionally created firms that were partnerships, so the principals often call themselves "partners," regardless of their actual entity type. Still, it would be nice for courts to clarify the actual roles of those involved.  

 

Furthermore, in describing the HSR School, the court states, 

 

There is no evidence that the HSR School had an existence that was independent of AANH. In fact, the HSR School was going to cease operating due to the fact that AANH was going to cease operating. The HSR School was not a limited liability corporation (“LLC”), private corporation (“P.C.”), or other legal entity registered with the Connecticut Secretary of State. (Tr. 141-142). There is no evidence that the HSR School had its own assets, bank account, or tax identification number. There is no evidence that the HSR School itself (as opposed to AANH) ever paid anyone for rendering services to the HSR School. There is no evidence that anyone other than AANH had operated the HSR School. Consequently, the Court finds that the predecessor in interest, for the purpose of assessing successor liability, is AANH.

Id. at *6. Ultimately, it appears the court has determined this was some version of an asset purchase  (even though neither party provided a copy of the asset purchase agreement), so the liability stayed with AANH.  This appears to be correct, but it's hard to know without that document.

 

And it is hard to know what the obligations are when additional relevant possible parties are.  The court further determined that the potential successor entities, "YNHH and Yale University are two separate corporate entities with separate governance structures."  Except there is no statement as to what types of entities they are, where they were formed, or anything else other than a reference to testimony from a witness who said YNHH was a separate entity from Yale University.  It would seem to me that some of the related documentation would be valuable, but the court has spoken.  

 

And fair enough. But I have to correct this: "The HSR School was not a limited liability corporation company (“LLC”), private professional corporation (“P.C.”), or other legal entity."