Business Law Prof Blog

Professor of Business and Human Rights - University of Connecticut School of Business

BLPB Readers, below is an announcement about an open faculty position at the University of Connecticut School of Business:

 

Assistant, Associate or Full Professor of Business & Human Rights at the University of Connecticut

The School of Business at the University of Connecticut invites applications for a tenure-track or tenured position at the rank of Assistant Professor, Associate Professor, or Professor of Business and Human Rights to begin in Fall 2021.

This faculty position will focus on the intersection of business and human rights broadly understood, including, but not limited to, environmental and social sustainability, corporate social responsibility, social innovation, and social entrepreneurship. The position will reside in the department/discipline of the successful candidate’s research and teaching domains, including Accounting, Finance, Management, Marketing/Business Law, and Operations and Information Management. The successful candidate will collaborate on the development and implementation of research, curricular, and public engagement activities with faculty affiliated with the Human Rights Institute and the Business and Human Rights Initiative at the University of Connecticut. See the following links for more information about the Human Rights Institute (https://humanrights.uconn.edu) and the Business and Human Rights Initiative (https://businessandhumanrights.uconn.edu). 

Preference will be given to applications received by September 18, 2020. For a full description of the position and to apply online, go to: https://academicjobsonline.org/ajo/jobs/16575.

The Department of Labor's Test for "Investment Advice" Should Be Changed

On June 29, 2020, the Department of Labor reinstated it’s “five-part test” for determining what constitutes investment advice under the Employee Retirement Income Security Act (ERISA).  The test first went into effect in 1975 and remained the governing standard as financial products and the investment advice industry changed significantly.  In 2016, as part of its fiduciary rulemaking, Labor embraced a broader test which was later invalidated by the Fifth Circuit.

The reinstated five-part test governs when someone giving investment advice for a fee will be classified as a fiduciary under ERISA and subject to its obligations. To be subject to ERISA, the person must:

• render advice with respect to the plan [or IRA] as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
• on a regular basis;
• pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that,
• the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and that
• the advice will be individualized based on the particular needs of the plan or IRA.

The five-part test should be modified to better cohere with the current economic environment.  When Labor promulgated the five-part test in 1975, Congress had not yet modified the tax code to allow for employees to contribute a portion of their salary to 401(k) plans and most retirement assets were in defined-benefit pension plans.  That change came in 1978 and eventually ushered in the current defined-contribution era.  At present, the test does not cohere with the current legal and business environment and should be modified. 

Remove the Regular Basis Requirement

Labor could do substantial good by removing second part of the test, the requirement that advice must be given “on a regular basis.”  Single-shot events, such as the sale of annuities or other insurance products or a decision about whether to “roll over” assets from one account type to another have substantial impacts on a person’s retirement.   Labor previously recognized this issue in its 2016 rulemaking and found that trillions of dollars shifted each year with rollover transactions.  The “regular basis” requirement now excludes these transactions from ERISA’s scope and allows assets accumulated under ERISA’s protection to be dissipated without protection.

The “regular basis” requirement results in applying different standards to identical activities with identical effects.  A consultant who regularly provides advice about small issues would be subject to fiduciary requirements when giving advice about the disposition of an entire pool of assets.  Yet if a different consultant were hired to invest an entire pool of assets in a single transaction, the second consultant would not be bound by fiduciary obligations even though she would do the exact same thing with the same effects.  Maintaining the “regular basis” requirement effectively allows single-shot transactions to misallocate ERISA-protected assets with impunity.

Remove Requirements That an Investor and Advisor
Mutually Agree That Advice Will Serve as the Primary Basis for an Investment

Labor should also reaffirm its prior conclusion the “mutual agreement” and “primary basis” requirements should be modified because it does not cohere with the current defined-contribution plan environment.  Under the five-part test, a person may escape fiduciary status by arguing that there was no “mutual agreement” that their advice would be the “primary basis” for an investment decision.  Fine print in sales contracts disclaiming any mutual agreement and claiming that the purchaser warrants that they have made their own decision by signing the agreement may be proffered to rebut the existence of any mutual agreement.

This requirement allows salespeople to exploit the wide financial sophistication gap between Americans and the financial services industry.  Americans often struggle to understand even rudimentary financial concepts.  Labor should not abdicate its responsibility to protect retirement assets by allowing simple disclaimers to greenlight profiting from shoddy advice.

Moreover, Labor should not allow any financial professional to give substandard or self-serving advice merely because it may not be the “primary basis” for an investment decision.  Consider one scenario where a retirement saver hears from an uncle that his assets have been placed inside some complex annuity contract.  The saver may meet with an insurance company’s representative to inquire about the product because an uncle purchased it.  Here, the representative should not be free to give low-quality advice simply because the primary basis for exploring the option was the uncle’s purchase.

Identifying whether financial advice, independent research, or some other reason served as the “primary basis” for an investment decision may be impossible.  In any event, persons giving financial advice for a fee should not be able to dispense lower-quality advice on the theory that an investor should not rely on that advice as the primary basis for their investment.  This approach debases investment advice and turns it into a predatory trap.

Siedel & Ladwig's "Ethical Dilemma: The Burger Murders"

So, I knew about TEDx and TED Talks, but I just learned about TED-Ed today in viewing Professors George Siedel & Christine Ladwig’s “Ethical Dilemma: The Burger Murders” (here).  If you’re planning to incorporate an ethics module into your business law courses this year, including their video and accompanying teaching materials could be a great, entertaining addition to your class that I think students would love.  Along with their fun, short video, Siedel and Ladwig have provided teaching materials (here) that include multiple choice and open ended questions; a “dig deeper” piece; and, a guided discussion section.  They posted only yesterday, and have already had 152,224 views and 744 comments!  Check it out!  And if you didn’t see my prior post on Siedel’s negotiation materials, check that out too (here)!      

M&A In The Business Law News!

As I have been working on a few projects involving law firms and legal education in the pandemic, I have come across a number of fun business law items involving mergers and acquisitions.  The news reports I have noted cover regulatory changes, case law, and planning/drafting.  Both small and large transactions are receiving attention.  I shared these with Business Law Section colleagues in the Tennessee Bar Association about a week ago.  I got some positive response.  So, I am sharing them here, too.  Feel free to post what you are seeing in this regard in the comments.

In the small business arena, a recent American Bar Association (ABA) Business Law Today article focuses in on clawback provisions in equity sale agreements.  These provisions, the article avers, “enable the former owner to participate in the consideration received in a subsequent sale of the business by the remaining owner or owners.” The article lists a number of key things to consider in drafting these kinds of provisions.

Another ABA Business Law Today piece notes the trend toward glorifying deal price in valuation determinations, as evidenced in recent Delaware court opinions on appraisal rights.  The article cites to three leading cases, two in 2017 and one in 2019, that address fair value determinations under Delaware law.  As to the most recent case, Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Apr. 16, 2019) (per curiam), the article importantly notes that “the Delaware Supreme Court sides with the Chancery Court’s position—and reinforces recent Delaware jurisprudence—by holding that the deal price should act as a ceiling for a valuation, a result that will likely reinforce the trend in place since 2016 toward decreasing numbers of appraisal petitions.”

Another noteworthy M&A news item is the recent release by the Federal Trade Commission (FTC) and Department of Justice (DoJ) of final Vertical Merger Guidelines.  As multiple sources report (see, e.g., here and here), formal guidelines for non-horizontal mergers were last issued in 1984.  The most recent articulation of the FTC and DoJ Horizontal Merger Guidelines occurred in 2010.

Finally, an article in the National Law Review reminds us that it may be a good time to review client charters and bylaws to ensure that anti-takeover protections are up-to-date and adequate.  A helpful list of possible anti-takeover devices is included in the article.  The article also covers general corporate governance upgrades that may be warranted at this time.  Specifically, the article recommends “that boards evaluate potential revisions to their bylaws to allow for greater flexibility and clarity relating to shareholder meetings and board actions.”  Suggestions for shareholder meeting enhancements include ideas relating to virtual meetings and meeting procedures.  Advice on board action provisions relates to remote meetings and emergency bylaws.

Why should we care about these developments, observations, and recommendations?  Changes in the economy and in specific client circumstances relating to the COVID-19 pandemic may make M&A a more significant part of corporate governance and transactional activity for the next year or two.  As a result, it will be important for business lawyers to remain up-to-date on current M&A activity as well as related regulatory pronouncements and practice points.  As academics, we, too, may be engaged in related activities for the same reason.  Food for thought . . . .

Hovenkamp on Antitrust and Platform Monopoly

Herbert Hovenkamp has posted "Antitrust and Platform Monopoly" on SSRN.  The abstract is below.  I was particularly struck by: "The history of antitrust law is replete with firms that are organized as single entities under corporate law, but that function as competitors and [are] treated that way by antitrust law."

This article first considers an often-discussed question about large internet platforms that deal directly with consumers: Are they “winner take all,” or natural monopoly, firms? That question is complex and does not produce the same answer for every platform. The closer one looks at digital platforms they less they seem to be winner-take-all. As a result, we can assume that competition can be made to work in most of them.

Second, assuming that an antitrust violation is found, what should be the appropriate remedy? Breaking up large firms subject to extensive scale economies or positive network effects is generally thought to be unwise. The resulting entities will be unable to behave competitively. Inevitably, they will either merge or collude, or else one will drive the others out of business. Even if a platform is not a natural monopoly but does experience significant economies of scale in production or consumption, a breakup can be socially costly. In the past, structural relief of this type has led to higher prices or business firm failure. If breakup is not the answer, then what are the best antitrust remedies? One possibility is to break up ownership and management rather than assets. The history of antitrust law is replete with firms that are organized as single entities under corporate law, but that function as competitors and treated that way by antitrust law. This permits productive assets to remain intact, but forces decision makers to behave competitively.

Finally, this paper takes a look at the problem of platform acquisition of nascent firms, where the biggest threat is not from horizontal mergers but rather from acquisitions of complements or differentiated technologies. For these, the tools we currently use in merger law are poorly suited. Here I offer some suggestions.

Lipshaw on The False Dichotomy of Corporate Governance Platitudes

Jeffrey Lipshaw has posted "The False Dichotomy of Corporate Governance Platitudes" on SSRN.  I have set forth the abstract below.  I had the pleasure of reading an early draft, and I highly recommend the paper.  Among other things, Jeff brings a level of practical experience to the topic ("more than a quarter century as a real world corporate lawyer and senior officer of a public corporation") that makes his views a must-read.  Having said that, my own view is that the “shareholder vs. stakeholder” debate is meaningful even if it only really matters in "idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised."

In 2019, the Business Roundtable amended its principles of corporate governance, deleting references to the primary purpose of the corporation being to serve the shareholders. In doing so, it renewed the “shareholder vs. stakeholder” debate among academic theorists and politicians. The thesis here is that the zero-sum positions of the contending positions are a false dichotomy, failing to capture the complexity of the corporate management game as it is actually played. Sweeping and absolutist statements of the primary purpose of the corporation are based on arid thought experiments and idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised. In the real world, management regularly commits itself to multiple competing constituencies, including the shareholders.

There are three arguments. The first is from reality, borne out by a survey of pre-amendment CEO annual report letters to shareholders (2017) and post-amendment responses (2020) to the COVID-19 pandemic. The second is from economics. Neo-classical economic theory supporting the doctrine is misplaced; transaction cost analysis under the New Institution Economics does a far better job of explaining the primacy of wide corporate discretion in allocating surplus among the corporate constituencies. The third is from jurisprudence. Doctrinal dicta like “corporations exist primary to maximize shareholder wealth” are not so much right or wrong as meaningless. Rather, the business judgment rule, which justifies almost any allocation of corporate surplus having an articulable connection to the best interest of the enterprise, subsumes all other platitudes posing as rules of law.

Rumpelstiltskin and the Securities Laws

I’m finding the district court’s decision in Marcu v. Cheetah Mobile, 2020 WL 4016645 (S.D.N.Y. July 16, 2020) fascinating, not because it’s wrong on the law – it isn’t, in my view, at least with respect to its falsity determination – but because it illustrates the artificiality of a lot of securities fraud litigation.

Cheetah Mobile is a Chinese company that develops apps that used to be downloadable from Google Play.  It went public on the NYSE in 2014, and quickly developed a reputation for poor quality products that used intrusive advertisements and interfered with the functioning of users’ phones.  In 2017, a short-seller accused it of fabricating revenue and clicks, and in 2018, Buzzfeed exposed that 7 of its 18 apps were engaged in a type of clickfraud scheme that improperly credited Cheetah Mobile with referrals to other apps.  Google removed the offending apps, and earlier this year, apparently fed up with Cheetah’s behavior, booted it from its platform entirely.

A putative class of Cheetah investors brought Section 10(b) claims shortly after the Buzzfeed expose, alleging that Cheetah misled investors about its business practices.  The district court dismissed the case in large part because the plaintiff could not identify any false statements.  The company accurately described its revenues – even if some portion of those revenues were generated through the clickfraud scheme – and accurately described its users’ experiences with its products.  As the court put it:

Nor do Plaintiffs plausibly allege that the challenged statements regarding revenue and profit derived from the apps are misleading. “[A] violation of federal securities laws cannot be premised upon a company’s disclosure of accurate historical data.” In re Sanofi Sec. Litig., 155 F. Supp. 3d 386, 404 (S.D.N.Y. 2016). …That said, a statement may be misleading if it describes the factors that influence the reported figures but omits the fact that one such factor is the alleged misconduct.  For example, in In re VEON Ltd. Securities Litigation, No. 15-CV-8672 (ALC), 2017 WL 4162342 (S.D.N.Y. Sept. 19, 2017), the plaintiffs alleged securities fraud on the ground that the defendant had concealed that it had paid bribes to receive favorable treatment in Uzbekistan. Notably, the court held that “references to sales and subscriber numbers in Uzbekistan” were not, in themselves, misleading. Id. at *6. By contrast, assertions that growth in the Uzbekistani market was due to “the improving macroeconomic situation, product quality and efficient sales and marketing efforts” were misleading because the “growth also was due to bribe[ry].” Id.; see also In re Braskem S.A. Sec. Litig., 246 F. Supp. 3d 731, 758-61 (S.D.N.Y. 2017) (holding that a list of reasons for the low price the defendant had paid for a good was plausibly misleading because it omitted a “key factor, the bribery-affected side deal” with the supplier and therefore amounted to “a classic half-truth”)…

…[Cheetah’s] disclosures did “not put the source of [Cheetah Mobile’s] success at issue.” In re KBR, Inc. Sec. Litig., No. CV H-17-1375, 2018 WL 4208681, at *5 (S.D. Tex. Aug. 31, 2018) (emphasis added). That is, they did not “put the circumstances surrounding” the means by which Cheetah Mobile’s apps generated revenue “‘in play’ — by, for instance, touting some legitimate competitive advantage or specifically denying wrongdoing — but instead merely report[ed] the facts that some of the reported revenue and income came from ‘increased progress,’ or ‘increased activity’ . . . and the like — reports that Plaintiffs do not contend were false.” Id.

Plaintiffs come closer to the mark with respect to Defendants’ disclosures explaining the drivers of revenues and profits from mobile apps, but here too they ultimately fall short.  Specifically, Plaintiffs take issue with Cheetah Mobile’s representations that it “generate[d] online marketing revenues primarily by referring user traffic and selling advertisements on our mobile and PC platforms.” SAC ¶ 49 (emphasis omitted). Cheetah Mobile also articulated its “belie[f] that the most significant factors affecting revenues from online marketing include[d],” inter alia, “a large, loyal and engaged user base,” which “results in more user impressions, clicks, sales or other actions that generate more fees for performance-based marketing,” and “the fee rate [Cheetah Mobile] receive[d] per click or per sale.” Id.; see also id. ¶¶ 63, 72, 79 .… At first glance, these statements appear akin to those found actionable in In re VEON Ltd. … But there is a critical difference: The disclosures here did not, explicitly or implicitly, rule out other factors playing a role in generating revenue. To the contrary, by using words such as “primarily” and “most significant,” Defendants overtly acknowledged that other factors might play a role. To be sure, the statements did unmistakably imply that any unstated factors played a minor role relative to the stated factors. But Plaintiffs allege no facts suggesting, let alone showing, that implication to be false. 

2020 WL 4016645, at *5 (some quotations omitted).

The court here is correctly summarizing existing caselaw: Accurate reporting of past financial results – even if those results were achieved by illegal or improper means – is not misleading, but it becomes misleading if those results are falsely attributed to legitimate factors.  Here, Cheetah hedged just enough to make its disclosures technically truthful; Cheetah did not rule out clickfraud, it just, you know, emphasized everything else.

Except.

That is insane.

Does anyone seriously think that investors were any less misled because Cheetah only said its loyal user base was mostly responsible for its revenues?  Are we to believe that there is such a big difference between mostly responsible and just, responsible, full stop, that it would have made a difference to a single trader?

I call this kind of thing a Rumpelstiltskin game; it only counts if the exact magic words are used; if not, case dismissed.  Like the Supreme Court’s decision in Omnicare, Inc. v. Laborers Dist. Council Const. Indus. Pension Fund, 575 U.S. 175 (2015) – which invited issuers to couch every statement with the phrase “I believe” in order to have it treated legally as a matter of opinion rather than a representation of fact – these decisions allow defendants to escape liability with a slight rephrase that, in context, is unlikely to have much substantive impact on the listener.

That said, Cheetah is an example of a broader issue I frequently revisit here, which is the doctrinal distortion caused by courts’ continued attempts to distinguish between fraud claims – covered by federal law – and governance claims, which are supposed to be the purview of state law.  Companies are allowed to engage in bad behavior under the federal securities laws; they’re just not permitted to lie about it.  By contrast, poor management is policed by state fiduciary standards.  The line between the two is often very difficult to parse, especially when a fairly anodyne statement conceals pervasive corporate dysfunction.

So in Cheetah’s case, the problem for the court was, yes, there’s little difference between statements like “our success is mainly attributable to our loyal user base” and “our success is attributable to our loyal user base,” but in reality, it’s not clear that investors would care about either statement.  It’s an app company; of course it makes money from users.  Investors are looking at the revenue stream, and if they’re fooled, it’s because they’re making certain assumptions about business regularity.  As I wrote in my article, Reviving Reliance, in these cases, “it is not so much the company’s statements, but its business model that acts as a fraud on shareholders; its mere existence on the market in the guise of a legitimate investment” is the fraud. 

And yeah, we have a concept for that: “Fraud-created-the-market.” But most courts have rejected that theory, so plaintiffs are stuck hunting for isolated misstatements.

But – and here’s the rub – consider Cheetah Mobile in another light.  If we’re going to be honest about it, do we think that any investor really assumed a Chinese mobile app developer distributing programs like “Battery Doctor” and “Speed Booster” operated regularly?  Just how fooled were they likely to be?  Yes, Google kicked them off the platform, but there’s a good argument that this was less because Google suddenly discovered problems than because Google changed, especially in an altered political environment.  We might say that anyone who invests in a skeevy mobile app company notorious for crapware pretty much knows what they’re getting. Which is, in a sense, exactly why the fraud-created-the-market theory proved unmanageable, and we’re stuck playing Rumpelstiltskin.

Do Black Entrepreneurs Matter?

Yesterday, I had the pleasure of moderating a panel of Black entrepreneurs sponsored by the Miami Finance Forum, a group of finance, investment management, banking, capital markets, private equity, venture capital, legal, accounting and related professionals. When every company and law firm was posting about Black Lives Matter and donating to various causes, my colleague Richard Montes de Oca, an MFF board member, decided that he wanted to do more than post a generic message. He and the MFF board decided to launch a series of webinars on Black entrepreneurship. The first panel featured Jamarlin Martin, who runs a digital media company and has a podcast; Brian Brackeen, GP of Lightship Capital and founder of Kairos, a facial recognition tech company;  and Raoul Thomas, CEO of CGI Merchant Group, a real estate private equity group.

These panelists aren't the typical Black entrepreneurs. Here are some sobering statistics:

• Black-owned business get their initial financing through 44% cash; 15% family and friends; 9% line of credit; 7% unsecured loans; and 3% SBA loans;
• Between February and April 2020, 41% of Black-owned businesses, 33% of Latinx businesses, and 26% of Asian-owned businesses closed while 17% of White-owned business closed;
• As of 2019, the overwhelming majority of businesses in majority Black and Hispanic neighborhoods did not have enough cash on hand to pay for two weeks worth of bills;
• The Center for Responsible Lending noted that in April, 95% of Black-owned businesses were tiny companies with slim change of achieving loans in the initial rounds of the Paycheck Protection Program;
• Only 12% of Black and Hispanic business owners polled between April 30-May 12 had received the funding they requested from the stimulus program. In contrast half of all small business had received PPP funds in the same poll.

Because we only had an hour for the panel, we didn't cover as much as I would have liked on those statistics. Here's what we did discuss:

• the failure of boards of directors and companies to do meaningful work around diversity and inclusion- note next week,  I will post about the spate of shareholder derivative actions filed against companies for false statements about diversity commitments;
• the perceptions of tokenism and "shallow, ambiguous" diversity initiatives;
• how to get business allies of all backgrounds;
• the need for more than trickle down initiatives where the people at the bottom of the corporation/society don't reap benefits;
• the fact that investing in Black venture capitalists does not mean that those Black VCs will invest in Black entrepreneurs and the need for more transparency and accountability; 
• whether the Black middle class still exists and the responsibility of wealthier Black professionals to provide mentorship and resources;
• why it's easier for entrepreneurs to get investments for products vs. services, and a hack to convince VCs to invest in the service;
• whether a great team can make up for a so-so product when a VC hears a pitch; 
• why there are so many obstacles to being a Black LGBTQ entrepreneur and how to turn it to an advantage when pitching; and
• whether reparations will actually help Black entrepreneurs and communities.

If you want to hear the answers to these questions, click here for access to the webinar. Stay safe and wear your masks!

Ethics of Legal Astuteness and Banking on the Cloud

I wanted to share with BLPB readers that two of my articles that I've mentioned in previous posts (here and here) have now been published.  I've posted them to SSRN.  Comments welcome!

An abstract for Ethics of Legal Astuteness: Barring Class Actions Through Arbitration Clauses, written with Daniel T. Ostas and published in the Southern California Interdisciplinary Law Journal is below, and the article is here.

Recent Supreme Court cases empower firms to effectively bar class
action lawsuits through mandatory arbitration clauses included in
consumer adhesion and employment contracts. This article reviews
these legal changes and argues for economic self-restraint among
both corporate executives and corporate lawyers who advise them.
Arbitration has many virtues as it promises to reduce transaction costs
and to streamline economic exchange. Yet, the ethics of implementing
a legal strategy often requires self-restraint when one is in a position
of power, and always requires respect for due process when issues of
human health, safety, and dignity are in play.

An abstract for Banking on the Cloud, written with David Fratto and Lee Reiners, and published in Transactions: The Tennessee Journal of Business Law is below, and the article is here.

Cloud computing is fast becoming a ubiquitous part of today’s
economy for both businesses and individuals. Banks and financial
institutions are no exception. While it has many benefits, cloud
computing also has costs and introduces risks. Significant cloud
providers are single points of failure and, as such, are an important
new source of systemic risk in financial markets. Given this reality,
this article argues that such institutions should be considered critical
infrastructures and designated as systemically important financial
market utilities under Dodd-Frank’s Title VIII

 

 

Sanjukta Paul on Antitrust As Allocator of Coordination Rights

One of my Westlaw alerts contained a link to a recently published article I thought BLPB readers might find of interest.  Here is the abstract:

The reigning antitrust paradigm has turned the notion of competition into a talisman, even as antitrust law in reality has functioned as a sorting mechanism to elevate one species of economic coordination and undermine others. Thus, the ideal state idea of competition and its companion, allocative efficiency, have been deployed to attack disfavored forms of economic coordination, both within antitrust and beyond. These include horizontal coordination beyond firm boundaries, democratic market coordination, and labor unions. Meanwhile, a very specific exception to the competitive order has been written into the law for one type of coordination, and one type only: that embodied by the traditionally organized, top-down business firm.

This Article traces the appearance of this legal preference and reveals its logical content. It also explains why antitrust's firm exemption is a specific policy choice that cannot be derived from corporate law, contracts, or property. Indeed, because antitrust has effectively established a state monopoly on the allocation of coordination rights, we ought to view coordination rights as a public resource, to be allocated and regulated in the public interest rather than for the pursuit of only private ends. Intrafirm coordination is conventionally viewed as entirely private, buoyed up by the contractarian theory of the firm. But the contractarian view of the firm cannot explain antitrust's firm exemption and is inconsistent with the conventional justifications for it. This Article also briefly sketches policy choices that flow from the recognition that coordination rights are a public resource, focusing upon expanding the right to engage in horizontal coordination beyond firm boundaries.

Sanjukta Paul, Antitrust As Allocator of Coordination Rights, 67 UCLA L. Rev. 378 (2020).  A version of the paper is available via SSRN here.

Benefit Corporations Go Public

A few of us have blogged about benefit corporations here from time to time; they’re a controversial business form, in part because there are disputes about whether they actually are materially different from the ordinary corporate form, and in part because of flaws in states’ adopting legislation.

The basic issue here is that, as we all know, the business judgment rule is robust enough that corporate directors are perfectly free, as a practical matter, to pursue a stakeholder-oriented mission without the need of any special form.  The reason they do not has little to do with their formal legal obligations, and everything to do with the market for corporate control: If directors do not put shareholders first, their companies may become ripe for a takeover and they may be voted out of office.

In theory, benefit corporations could solve a shareholder collective action problem. Let’s assume, as some theorize, that given the choice, many shareholders would actually prefer not to maximize their own welfare but instead to share those gains with other stakeholders.  The problem is, they may experience defection in their own ranks.  Over time, some shareholders may change their minds and prefer to keep all excess profits; or, they may fear other shareholders will do so.  As a result, at any given time, individual shareholders may sell their shares to a profit maximizer (a hedge fund, etc), who ultimately takes control and abandons the stakeholder-oriented mission.

The benefit corporation form, then, could theoretically precommit shareholders to remaining true to their original purpose.  But that only works if there are credible bonding mechanisms.

In Delaware, one bonding mechanism was the statutory requirement that companies could only adopt, or abandon, benefit corporation status by a 2/3 vote of the shareholders (more on that below).  This requirement ensured a hedge fund would have to acquire a supermajority stake before abandoning a benefit corporation’s altruistic mission.  But locking shareholders into the form wouldn’t have much of an effect unless the form itself offered a meaningful commitment to stakeholderism.

That’s why Delaware has an additional bonding mechanism, namely, that directors are legally required to balance the interests of all stakeholders when managing the corporation.  The problem – and this is well discussed in the literature – is that the mechanisms for enforcing this requirement are rather meager.  Many states, Delaware included, also require directors of benefit corporations to issue reports on the actions they have taken to advance public benefits, but Haskell Murray has found that many benefit corporations simply don’t issue the reports.

So, if you assume a rapacious hedge fund wanted to take over a benefit corporation and profit by abandoning its social mission, the 2/3 vote requirement might impede the fund from obtaining enough shares to formally convert the company’s status, but the fund could still gain enough votes to steer decisionmaking in a more rapacious direction, with very little to fear in terms of legal reprisal.

As a result, some companies have chosen to obtain certification as a B-Corp.  B-Lab is a private organization that certifies that companies have complied with its standards for pursuing a stakeholder oriented mission, i.e., B-Corp certification.  This third-party certification does not create legal obligations for directors, but may serve as some kind of assurance to shareholders that a particular company remains committed to its social purpose.

The reason I’m mentioning all of this now is that given the weaknesses inherent in benefit-corporation status, we have not seen many standalone publicly-traded benefit corporations, especially ones organized in the United States.  (Or, for that matter, B-Corps – Etsy famously abandoned its B-Corp status not long after going public, exactly as the theory of shareholder defection would predict).  Laureate Education is one of the very few publicly-traded benefit corporations, and it maintains its status with dual-class stock that gives control to a single entity, Wengen Alberta (that entity, however, is controlled by several private equity firms and, well … you get the feeling Laureate’s benefit-corp status is less about stockholders deciding to share profits than a recognition that, given Laureate’s business model, publicly doing good really is necessary to do well).  There’s also Amalgamated Bank, which – as a bank incorporated in New York – cannot formally adopt benefit-corporation status but recently amended its articles of incorporation to make the same kind of commitment.  Amalgamated, like Laureate, is also not depending on its charter to enforce that commitment, though; it’s 40% owned by unions.

And now, two new companies are joining this list.

First up is the insurance company Lemonade, which went public earlier this year.  Lemonade is an odd duck; one would not ordinarily think of an insurance company as a natural fit for benefit corporation status, but it describes its public mission thusly:

This corporation’s public benefit purpose is to harness novel business models, technologies and private-nonprofit partnerships to deliver insurance products where charitable giving is a core feature, for the benefit of communities and their common causes.

In short, Lemonade donates some of the premiums it receives to charities designated by policyholders.  And how does Lemonade expect to be able to maintain its commitment to this benefit once its shares are freely-tradeable?  With a combination of extensive inside ownership and antitakeover devices.  The co-founders control more than half the votes, and they’ve reached an agreement with Softbank – which controls another 21% – to decide with Softbank how Softbank’s shares will be voted.  There’s a staggered board and various other garden-variety antitakeover provisions (advance notice procedures, no written consent, shareholders can’t call meetings, directors can adopt poison pills, 2/3 vote requirement for shareholders to amend bylaws and various charter provisions).  Lemonade also has regulatory protections:

Under applicable state insurance laws and regulations, no person may acquire control of a domestic insurer until written approval is obtained from the state insurance commissioner following a public hearing on the proposed acquisition.

Second, we have Vital Farms, which just unveiled its S-1 last week.  Vital Farms is an “ethical food company that is disrupting the U.S. food system,” and is also incorporated as a Delaware public benefit corporation:

The public benefits that we promote, and pursuant to which we manage our company, are: (i) bringing ethically produced food to the table; (ii) bringing joy to our customers through products and services; (iii) allowing crew members to thrive in an empowering, fun environment; (iv) fostering lasting partnerships with our farms and suppliers; (v) forging an enduring profitable business; and (vi) being stewards of our animals, land, air and water, and being supportive of our community

But again, Vital Farms is not relying on PBC status to commit to its purpose; instead, insiders own 61.7% of the company and, like Lemonade, it has a staggered board and similar antitakeover provisions.

My point here is that benefit-corporation status is not, in fact, serving as a commitment device for any of these companies; instead, to remain true to their mission, these companies are relying on more mundane types of insulation from the market for corporate control.  But that kind of insulation carries the same risk as any other entrenchment device; the companies will pursue stakeholder interests only so long as their managers feel it in their interests to do so.  The benefit-corporation form is not doing much work.

Notably, Delaware is adopting amendments to the DGCL that eliminate benefit corporations’ only real commitment device, namely, the 2/3 vote requirement necessary to shed benefit corporation status.  With these amendments – which were, I believe?, only just signed into law – we really may as well just call them “corporations” and be done with it.

One final observation: it’s interesting to compare the risk factors in the prospectuses of Lemonade and Vital Farms – especially since publicly-traded benefit corporations are so rare that there isn’t much of a template.  Lemonade notes the dual risks that its pursuit of stakeholder-oriented goals may diminish profits, and the fact that it may fail to achieve those goals may result in reputational harms that diminish profits.  As Lemonade puts it, “There is no assurance that we will achieve our public benefit purpose or that the expected positive impact from being a public benefit corporation will be realized, which could have a material adverse effect on our reputation, which in turn may have a material adverse effect on our business, results of operations and financial condition.”  Benefit-corp status is thus treated at least in part as a mechanism for pursuing shareholder wealth maximization on the “do well by doing good” theory.

Vital Farms, by contrast, while warning of the risk that it may fail to achieve its stakeholder benefits and suffer related reputational harm, mostly just highlights that benefiting stakeholders may ultimately result in some sacrifice of shareholder welfare: “While we believe our public benefit designation and obligation will benefit our stockholders, in balancing these interests our board of directors may take actions that do not maximize stockholder value.”  Vital Farms does not, in other words, treat benefit corp status as itself contributing to shareholder value (via marketing or otherwise).

Focusing on Law Faculty in Extraordinary Times

This coming week, the Association of American Law Schools will host its seventh week of special summer webinars geared to providing assistance to under-supported law faculty in our current unusual circumstances.  The series, dubbed "Faculty Focus," is described in the following way on the program website (which also includes information about upcoming programs):

COVID-19 has affected the normal rhythms of the legal academy in ways that may be particularly disruptive for early-career faculty.

AALS invites tenure-track, clinical, and legal writing faculty to join us on Tuesday afternoons for “Faculty Focus,” a series of weekly webinars organized around issues these individuals may be facing as well as challenges affecting higher education and the profession in general.

Each 60-minute webinar will feature expert advice from law school leaders followed by shared experiences from early career law faculty. The sessions will be structured to encourage conversation and connection, with opportunities for participants to crowdsource solutions and discuss common issues across schools and teaching areas.

Although I am not in the target audience, I have enjoyed several of these programs.  Here is a list of the programs held to date:

Week 1: Work-Life Balance and the Demands of Scholarship
Tuesday, June 9, 2020

Week 2: Meeting the Needs of All Students Online
Tuesday, June 16, 2020

Week 3: Excellence in Online Instruction
Tuesday, June 23, 2020

Week 4: Racism, Justice, and Your Fall Classes
Tuesday, June 30, 2020

Week 5: A Perspective from the Dean’s Offices
Tuesday, July 7, 2020

Week 6: Effective Use of Research Assistants
Tuesday, July 14, 2020

Week 6: How to Become an Excellent Teacher While Starting Your Career in a Pandemic
Thursday, July 16, 2020

I was honored to be asked to participate in the panel discussion, convened last Tuesday, on Effective Use of Research Assistants.  The recording for that session and the other past programs is available here.  This coming week, the session focuses on What Every Faculty Member Should be Doing This Summer. You can register for it here.

Applications Open for Wharton's Ethics and Legal Studies Doctoral Program Incoming Class of 2021

In a past post (here), I mentioned stumbling (thankfully!!) into teaching in the area of Negotiation and Dispute Resolution while a PhD student focused on financial regulation.  For so many reasons, the opportunity to pursue doctoral studies in the Ethics & Legal Studies Program at the Wharton Business School was truly a great blessing!  So, I’m delighted to share with BLPB readers that applications for the Program’s incoming class of 2021 are now being accepted.  If you – or someone you know – might be interested in learning more, an quick overview is provided below and an informational flyer here: Download Ethics&LegalStudiesDoctoralProgram

The Ethics & Legal Studies Doctoral Program at Wharton focuses on the study of ethics and law in business. It is designed to prepare graduates for tenure-track careers in university teaching and research at leading business schools, and law schools.

Our curriculum crosses many disciplinary boundaries. Students take a core set of courses in the area of ethics and law in business, along with courses in an additional disciplinary concentration such as law, management, philosophy/ethical theory, finance, marketing, or accounting. Students can take courses in other Penn departments and can pursue joint degrees. Additionally, our program offers flexibility in course offerings and research topics. This reflects the interdisciplinary nature of our Department and the diversity of our doctoral student backgrounds.

Faculty and student intellectual interests include a range of topics such as:

• legal theory • normative political theory • ethical theory • firm theory • law and economics • private law theory • penal theory • constitutional law • bankruptcy • corporate governance • corporate law • financial regulation • administrative law • empirical legal studies • blockchain and law • antitrust law • fraud and deception • environmental law and policy • corporate criminal law • corporate moral agency • corruption • behavioral ethics • negotiations.

"Reopening Justly or Just Reopening?"

Earlier today (July 14), Fordham University hosted a webinar entitled Reopening Justly or Just Reopening: Catholic Social Teaching, Universities & COVID-19.   

Speakers on the topic of the ethics of reopening schools include the following theology professors: 

• Christine Firer Hinze (Fordham)
• Gerald Beyer (Villanova) 
• Craig Ford (St. Norbert) 
• Kate Ward (Marquette) 

Christine Firer Hinze discussed Catholic Social Thought, human dignity, and solidarity. She reminded us that reopening universities is literally a question of life and death, but is also a question of livelihood. Gerald Beyer stressed looking to the the latest science and considering the common good (the flourishing of all). Craig Ford commented on the reality that some universities may be facing financial collapse, that the pandemic is likely to be with us for a long while, and that there are no perfect solutions. Ford also suggested a focus on protecting those who are most vulnerable. Kate Ward talked about moral injury, lamentation, and redemption. A question and answer period --- including on the topics of racial justice, transparency, shared sacrifices and mental health --- followed opening remarks.

U.S. Securities Crowdfunding: A Way to Economic Inclusion for Low-Income Entrepreneurs in the Wake of COVID-19?

Earlier today, I submitted a book chapter with the same title as this blog post.  The chapter, written for an international management resource on Digital Entrepreneurship and the Sharing Economy, represents part of a project on crowdfunding and poverty that I have been researching and thinking through for a bit over two years now.  My chapter abstract follows:

The COVID-19 pandemic has exacerbated and created economic hardship all over the world.  The United States is no exception.  Among other things, the economic effects of the COVID-19 crisis deepen pre-existing concerns about financing U.S. businesses formed and promoted by entrepreneurs of modest means.

In May 2016, a U.S. federal registration exemption for crowdfunded securities offerings came into existence (under the CROWDFUND Act) as a means of helping start-ups and small businesses obtain funding.  In theory, this regime was an attempt to fill gaps in U.S. securities law that handicapped entrepreneurs and their promoters from obtaining equity, debt, and other financing through the sale of financial investment instruments over the Internet.  The use of the Internet for business finance is particularly important to U.S. entrepreneurs who may not have access to funding because of their own limited financial and economic positions. 

As the pandemic continues and the fifth year of effectiveness of the CROWDFUND Act progresses, observations can be made about the role securities crowdfunding has played and may play in sustaining and improving prospects for those limited means entrepreneurs.  A preliminary examination indicates that, under current legal rules, securities crowdfunding is a promising, yet less-than-optimal, financing vehicle for these entrepreneurs.  Nevertheless, there are ways in which U.S. securities crowdfunding may be used or modified to play a more positive role in promoting economic inclusion through capital raising for the innovative ventures of financially disadvantaged entrepreneurs and promoters.

I value the opportunity to contribute to this book with scholars from a number of research disciplines and countries.  I have been looking for ways to concretize some of my ideas from this project in a series of shorter publications, and this project seems like a good fit.  Nevertheless, I admit that I have been finding it challenging to segment out and organize my ideas about how securities crowdfunding may better serve entrepreneurs and investors, especially in the current economic downturn.  As always, your ideas are welcomed.

"Teaching Law Online: A Guide for Faculty"

Helpful article here (on SSRN) by Nina Kohn. (H/T to Jessica Erickson on Twitter).

As law school classes move online, it is imperative that law faculty understand not only how to teach online, but how to teach well online. This article therefore is designed to help law faculty do their best teaching online. It walks faculty through key choices they must make when designing online courses, and concrete ways that they can prepare themselves and their students to succeed. The article explains why live online teaching should be the default option for most faculty, but also shows how faculty can enhance student learning by incorporating asynchronous lessons into their online classes. It then shows how faculty can set up their virtual teaching space and employ diverse teaching techniques to foster an engaging and rigorous online learning environment. The article concludes by discussing how the move to online education in response to COVID-19 could improve the overall quality of law school teaching.

The Science of Well-Being Recap

A few months ago, I mentioned taking the free Yale University online course The Science of Well Being taught by Professor Laurie Santos.

Before jumping into the substance of the course, I wanted to talk a bit about the format. The course was likely filmed with better equipment than most of us will have in the fall. The videos were mostly under 15 minutes each, and the videos usually had quiz questions to keep you engaged. Then there were longer quizzes at the end of sections and discussion boards.

Even though this was a Yale course, on an interesting subject, with a gifted professor, I probably would not have paid even $1 for this course. The material was surely worth more than $1, but there is simply too much good free information online, in this format, for me to pay anything for it. This fact is sobering to me as a professor, given that at least some of my students will be online-only this fall. The real value, I think, springs from interaction – between professor and student, and between the students themselves. As such, I need to plan my courses with a fair bit of this interaction.

Moving to the substance, Professor Santos noted eight things that the science shows improves well-being:

1. Sleep
2. Exercise
3. Gratitude
4. Meditation
5. Social Interaction
6. Savoring
7. Kindness
8. Meaningful Goals

Professor Santos' ReWi application helps you track these things.

Think all of us know that those eight things are good for us, even if we do not always prioritize them.

Most helpful for me was the discussion of savoring. Previously, I simply had not paused long enough to dwell on the many good things in life. In The Plague, Dr. Rieux and his friend Tarrou savor nature before swimming during a brief break fighting disease. Camus describes it as follows:

Once they were on the pier they saw the sea spread out before them, a gently heaving expanse of deep-piled velvet, supple and sleek as a creature of the wild. They sat down on a boulder facing the open. Slowly the waters rose and sank, and with their tranquil breathing sudden oily glints formed and flickered over the surface in a haze of broken lights. Before them the darkness stretched out into infinity. Rieux could feel under his hand the gnarled, weather-worn visage of the rocks, and a strange happiness possessed him. (256)

Pausing long enough to watch the sea and feel the rocks on his hand is what Professor Santos is talking about when she describes savoring. Think we could all benefit by stopping, noticing, and savoring more  I am committed to doing so  

(Photo taken savoring the scene at Bass Lake in Blowing Rock, North Carolina)

Tips for Teaching Online- Part IV

Greetings from Miami, Florida, COVID19 hotspot. Yesterday, 33% of those tested had a positive result. Although my university still plans to have some residential instruction as of the time of this writing, most of us are preparing to go fully online at some point. In Part I,   Part II, and Part III, I provided perspectives from experts in learning. I'm still gathering that information.

This week, however, I spoke to the real experts -- students. Yesterday, I had the opportunity to hear from students studying business and human rights from all over the world courtesy of the Teaching Business and Human Rights Forum. I've also been talking to research assistants and other current and former students. Here's a summary of their conclusions:

• We know that Spring was hard for everyone and that everyone is still learning how to teach online. Do not be worried about making mistakes. 
• Don't assume that we are all digital natives. Some of us are older students or not used to the technology that you have decided to use. Make sure that the interface is intuitive and use tech in fun and interesting ways. (One professor used Jeopardy online and students loved it).
• Be flexible with assignments. Many of us are dealing with health and financial issues and we will need extensions. Some students will be in different time zones if you're requiring group work. It's not business as usual.
• If you have teaching assistants, have them monitor the chat functions if you use it and have them pop into breakout rooms (if you're using Zoom). TAs can be very helpful, especially in large classes.
• Add a COVID component to the lessons if you can. It helps us make sense of things and provides real-world context to what we are doing.
• Offer breaks. Time moves much slower in an online class.
• Use guest speakers who wouldn't be able to visit class. It makes class more interesting and allows us to hear from thought leaders from around the world. 
• Consider using Slack or other tools other than for communications and group work.
• Use screen sharing during synchronous classes and allow others to share when appropriate.
• Make use of the chat function during synchronous classes. It keeps our attention and makes sure that we are engaged. 
• Do not just talk over powerpoint slides. Many students simply download the slides if they found that professors were reading the slides word for word without adding new content.
• Make sure the slides have enough information to be useful. Some professors put only a few words on a slide and this doesn't facilitate learning.
• Use breakout rooms often and appoint a reporter to inform the class of the room's conclusions. Make sure that everyone understand the assignment before sending students off to breakout rooms. 
• Breakout rooms help build community and encourage shy students to speak more. 
• Communicate rubrics for assignments clearly and often. Let us know exactly what you expect us to learn in each module. Make the objectives clear. 
• Try to forecast what you're going to teach and do a summary at the end of the lesson, if possible. 
• Require us to keep our cameras on. We will pay more attention.
• Keep us engaged with polls, quizzes, and surveys.
• Post slides in advance if you can for synchronous classes so that we can take better notes or annotate them.
• Consider a WhatsApp group or other communication mechanism to share newspaper articles or current events. Make it optional for students to participate.
• Consider having the class watch a movie in class instead  of on our own. It helped build community.
• Please do not do a 6 hour lecture over powerpoint. 
• Make sure to use powerpoint. Even a short lecture is hard to watch if it's just the professor sitting there. 
• Pay special attention to your foreign students, who may be living in a different reality. Consider having small group office hours for them. 
• Depending on the time of the day, invite students to have a coffee hour via Zoom.
• Make sure to have virtual office hours. Students will need to feel a connection outside of class. Also consider coming to class early and opening the Zoom (or other room) early and staying after class as you would in person. 
• Videos should not be longer than 10 minutes.
• The length of the video matters less if the professor is engaging. Some of the most engaging professors in person look dead on camera. Their lack of enthusiasm for teaching online comes through. 
• It's nice to have good looking slides, but if the professor isn't enthusiastic, it doesn't matter how good the slides look.
• Use whiteboards, graphs, or diagrams if possible if you're explaining complex topics. This is really important for visual learners. If you used to use the board in person, try to find a way to do it online. 
• Group projects are ok as long as there is built in accountability. We are ok working with others but it's harder online and worse if everyone gets the same grade and there is no penalty for students who don't do any work. 
• Show videos within videos for asynchronous and synchronous classes. You can stop the video in class and ask questions, just as you would if we were in person. 
• Make sure to stop for questions regularly. Remember there's a lag when people unmute or as you look to see who is raising a hand. 
• Ask for our feedback. We all want to make online learning work.

Next week, I will add more from the teaching experts. Everyone stay safe and healthy. 

Schrodinger’s Efficiency

The Delaware Supreme Court has, shall we say, an uneven relationship with the concept of market efficiency.

For many years, it entirely ignored or even disdained the concept.  See Verition Partners Master Fund Ltd. v. Aruba Networks, Inc, 2018 WL 922139, at *30 n.305 (Del. Ch. Feb. 15, 2018).  However, beginning with DFC Glob. Corp. v. Muirfield Value P’rs, L.P., 172 A.3d 346 (Del. 2017), the Court began to endorse the concept in the context of appraisal proceedings, though the significance it placed on efficiency was not entirely clear.  When Vice Chancellor Laster relied entirely on market efficiency to value shares for appraisal purposes, the Delaware Supreme Court rejected his analysis, emphasizing that market price is but one aspect of an appraisal valuation, and that “informational” market efficiency is not equivalent to “fundamental value” efficiency.

The Delaware Supreme Court’s new decision in Fir Tree Value Master Fund LP et al. v. Jarden Corporation seems to muddy the waters further.

Originally, VC Slights held that a target’s market price was the best evidence of standalone value, mainly because the other potential measures were lacking.  The deal price was flawed because the target CEO had arguably run an inadequate process, and in any event, there were likely synergies to which the petitioners were not entitled.  It was impossible to determine exactly how those synergies had influenced the deal price, so they could not simply be deducted, and the parties had wildly divergent DCF analyses.  Under these conditions, VC Slights awarded petitioners the unaffected market price – which was, unsurprisingly, below the deal price.

On appeal, the Delaware Supreme Court affirmed.  Most of the opinion emphasizes that Chancery courts have broad discretion to consider multiple valuation methods – including deal price and market price – and Slights did not abuse his when he determined that market price was most appropriate in this case.  The court quoted its earlier holding in DFC, explaining, “Like any factor relevant to a company’s future performance, the market’s collective judgment of the effect of regulatory risk may turn out to be wrong, but established corporate finance theories suggest that the collective judgment of the many is more likely to be accurate than any individual’s guess.”

We might ask how well Jarden squares with Aruba.  After all, in Aruba there were also synergies to discount, an unreliable sales process, and a concern about DCF calculations, but the Delaware Supreme Court rejected VC Laster’s reliance on market price.  The Delaware Supreme Court explained itself in Aruba by saying that VC Laster erred by holding that he was compelled to rely on market price, when, in fact, other evidence was available.  What really seemed to be troubling the court, though, was discomfort with a blanket endorsement of market efficiency, particularly because of the likelihood that acquirers have better information than the market in general.  VC Slights’s Jarden opinion, by contrast, did not seem to the Supreme Court as categorical, and thus did not, ahem, take Delaware out of the public-company appraisal business entirely.

But the court didn’t leave things there.

In affirming VC Slights, the Delaware Supreme Court also cited an article by Jonathan Macey and Joshua Mitts, Asking the Right Question: The Statutory Right of Appraisal and Efficient Markets, 74 Bus. Law. 1015 (2019).  This was an odd choice, because that article strongly endorses the use of market price as a starting point for virtually all appraisal proceedings, and offers an extreme defense of market efficiency.  In the section of the article quoted by the Delaware Supreme Court, Macey and Mitts write, “[B]ecause informational efficiency and fundamental efficiency are not the same thing, the share price of a company’s stock, even when informationally efficient, may diverge occasionally from the stock’s fundamentally efficient price. This divergence occurs, however, only when and to the extent that there is material nonpublic information that is not impounded in a company’s share prices.”

That is… not the same analysis as the one in DFC.  The Mitts and Macey quote suggests that if a market is informationally efficient, courts should assume the market price reflects fundamental value unless there’s identifiable material nonpublic information, in which case price is adjusted accordingly.  By contrast, DFC holds that market judgments can be wrong even if everyone’s working off the same information, though the collective judgment is probably right.  DFC, in other words, allows for the possibility that markets may misapprehend the significance of the information with which they are supplied; in practical effect, it gives courts more wiggle room.  And in Aruba, of course, the Delaware Supreme Court did not suggest that VC Laster should have awarded market price adjusted for nonpublic information.

More perplexingly, a second Jarden footnote quotes Mitts and Macey’s pronouncement that “Delaware Courts are correct in affording primacy to the [efficient capital market hypothesis] in valuation cases,” while contrasting with Lynn Stout on problems with the ECMH.  Is the court … endorsing Mitts and Macey’s interpretation of its own caselaw, that market prices have “primacy”?  I can’t really tell, but other aspects of the decision seem to take the Mitts and Macey view, because, in rejecting the petitioner’s challenge to the use of market prices, the court highlights (1) petitioners did not identify material nonpublic information and (2) differences among analysts reflected mere judgment differences rather than informational differences, which - in the court’s view - made them irrelevant.  (See, e.g., op. at 32-33).

There are, of course, well-known difficulties with assuming that informationally-efficient markets reflect fundamental values.  First, it’s hard to tell when you’re actually in such a market in the first place.  That’s a longstanding problem in the fraud-on-the-market context, which is why the Supreme Court recently explained that perfect efficiency is not necessary for fraud-on-the-market plaintiffs.  Mitts and Macey acknowledge this point in their article, and suggest that courts simply start with the inefficient prices and adjust them for any unaccounted-for information, but that presupposes that courts can detect such inefficiencies, detect the missing information, and make the appropriate adjustment. 

The other problem is that of the irrational market, even when all information is clearly available.  As I previously posted, we’re seeing precisely these kinds of markets right now, as retail traders turn to RobinHood to get their gambling fix and apparently engage in price manipulation for the lulz.  As pandemic-related uncertainties cause wild gyrations in stock price, this is, perhaps, not the best moment for a full-throated endorsement of market efficiency.  Mitts and Macey largely suggest that if markets are irrational in general, investors don’t deserve an appraisal remedy anyway, but I am not certain that view accords with Delaware precedent.

In any event, I don’t want to overstate things; in general, I think the takeaway from Jarden is likely to be that Chancery judges have leeway to use the evidence they think most appropriate to the situation, and unaffected market price is acceptable at least when deal-price-minus-synergies is incalculable.  It’s just striking that, in support of this holding, the court quoted an article making, umm, the opposite argument, which may create uncertainty with respect to the great “deal price versus market price” debate.

Quarles on Post-Crisis Banking Reforms, a New FSB Consultation Report, and the Current Crisis

Yesterday, Randal K. Quarles, the Vice Chair of the Board of Governors of the Federal Reserve System and Chair of the Financial Stability Board (FSB), gave a speech at the Exchequer Club entitled “Global in Life and Orderly in Death: Post-Crisis Reforms and the Too-Big-to-Fail Question” (here).  As he notes, the catchy first part of this title harkens back to the 2010 words of Mervyn King, then Governor of the Bank of England, who stated that “most large complex financial institutions are global—at least in life if not in death.”  Quarles asserts that “In this pithy sentence, he [King] summed up the challenge policymakers faced.” 

The context of Quarles’ speech is the FSB’s recent consultation report: Evaluation of the effects of too-big-to-fail reforms (here).  Two major challenges post-crisis banking reforms sought to address were: 1) the market’s assumption that big banks would not be allowed to fail, and the moral hazard this created, and 2) the absence of effective resolution frameworks for global banks, which lead to bank rescues.   There’s lots of good news here, including that prior to the current crisis, globally systemically important bank capital ratios had doubled since 2011 to 14%.  As a result of this and other reforms, such banks have fared much better in the current crisis, and “[t]his has allowed the banking system to absorb rather than amplify the current macroeconomic shock.”  Good news indeed!

At the same time, the challenges of the current crisis are not over.  The International Monetary Fund projects that the global economy will contract by 4.9% in 2020 (a steeper decline than with the 2007-08 financial crisis).  And Quarles notes that “The corporate sector entered the crisis with high levels of debt and has necessarily borrowed more during the event.  And many households are facing bleak employment prospects.  The next phase will inevitably involve an increase in non-performing loans and provisions as demand falls and some borrowers fail.” 

Corporate and consumer bankruptcies are almost certain to increase as a result of the current crisis.  Should a wave of such bankruptcies materialize, this could lead not only to a broader financial crisis, but also to the overwhelming of bankruptcy courts, including a need for additional bankruptcy judges (here).  In the U.K., banks have been told to “rethink handling of crisis debt” (here), and the need for related, effective dispute resolution systems has also been noted. 

Once again, the necessity of effective resolution frameworks is likely to be front and center in banking regulation.  However, this time, it is likely to be a need for effective dispute resolution frameworks so that banks can speedily deal with consumer and corporate bankruptcies to promote economic recovery.