Business Law Prof Blog

Happy New Year & Four Bank Supervision Literature Reviews

BLPB readers, I hope that everyone is enjoying the holiday season and the semester break!  I also want to get an early start on wishing everyone a HAPPY NEW YEAR!!! 

Before we leave 2020, I wanted to share that if you missed Bank Supervision: Past, Present, and Future, a stellar virtual conference hosted by the Federal Reserve Board of Governors, Harvard Law School, and the Wharton School on December 11, you can still access the conference materials here.  There's lots of great stuff, including four literature reviews (below) that banking law profs researching in this area are certain to find helpful.  Enjoy!  And a big shout-out to the hosts for such a successful event!

Literature Review on Economics: Beverly Hirtle, Banking Supervision: The Perspective from Economics

Literature Review on Law: Julie Andersen Hill, Bank Supervision: A Legal Scholarship Review

Literature Review on History: Sean H. Vanatta, Histories of Bank Supervision

Literature Review of Supervisory Practices: Jonathan Fiechter and Aditya Narain, Enhancing Supervisory Effectiveness –Findings from IMF Assessments

Recent Part-Time and Visiting Law Faculty Postings: Temple Law and Boston University Law

This post catches up on a few recent position listings that may be of interest to business law faculty and have not yet been posted here.

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TEMPLE UNIVERSITY BEASLEY SCHOOL OF LAW

LOW INCOME TAXPAYER CLINIC DIRECTOR
AND VISITING PRACTICE PROFESSOR OF LAW

Position Summary: The Temple University Beasley School of Law was recently notified that it will receive funding from the IRS to open and operate a Low Income Taxpayer Clinic (LITC) on its Main Campus in North Philadelphia which will also serve taxpayers in northeastern Pennsylvania. It is therefore soliciting applications for the position of Visiting Practice Professor of Law and Director of the LITC, which is expected to operate on a part-time basis during 2021. The position will begin on January 15, 2021 or as soon thereafter as practicable, and will run through the end of the calendar year. The Clinic Director will be expected to establish and operate the LITC, including developing a panel of pro bono attorneys and performing community outreach, and to take a leadership role in applying to the IRS for a multi-year grant, which will likely need to be submitted in June, 2021. In addition, the Clinic Director will be expected to develop and teach a course through which students can enroll to participate in the LITC for academic credit in 2021.

It is anticipated that this part-time, visiting position will be enhanced and converted into a clinical faculty position upon receipt of a multi-year grant from the IRS. A national search for an individual to fill the clinical faculty position will be conducted if the multi-year grant is received; the individual selected to fill the part-time visiting position will be eligible for consideration for the clinical faculty position.

Minimum Qualifications: Candidates must have an excellent academic record and a J.D. degree, as well as experience working in an LITC or equivalent organization, either as a student or practicing lawyer, or other tax practice experience. Candidates must have sufficient tax law expertise to perform and oversee the substantive and procedural aspects of client representation, and be either admitted to practice before the U.S. Tax Court or eligible for such admission.

Temple University values diversity and is committed to equal opportunity for all persons regardless of age, color, disability, ethnicity, marital status, national origin, race, religion, sex, sexual orientation, gender identity, veteran status, or any other status protected by law; it is an equal opportunity/affirmative action employer, and strongly encourages veterans, women, minorities, individuals with disabilities, LGBTQI individuals, and members of other groups that traditionally have been underrepresented in law teaching to apply.

To Apply: Potential candidates are encouraged to contact the selection committee’s Chair, Professor Alice Abreu, at [email protected] with the following: 1) cover letter and/or statement of interest; 2) resume or CV; 3) the names, affiliations, and contact information for at least three individuals who can serve as professional references; and 4) any other material that demonstrates the candidate’s ability to succeed in the position, such as a publication, brief, or similar document.

Applications should be submitted as soon as possible; interviews, which will be conducted online, could begin as early as January 4, 2021. The position will remain open until filled. 

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BU/MIT TECHNOLOGY LAW CLINIC

VISITING CLINICAL ASSISTANT PROFESSOR

BU Law is hiring for a Visiting Clinical Assistant Professor to teach in the BU/MIT Technology Law Clinic, part of BU Law’s unique collaboration with MIT to provide legal assistance to current MIT and BU students. This is a two-year position, for the 2021–22 and 2022–23 academic years.  

BU Law believes that the cultural and social diversity of our faculty, staff, and students is vitally important to the distinction and excellence of our academic programs. To that end, we are especially eager to hear from applicants who support our institutional commitment to BU as an inclusive, equitable, and diverse community.

More information and application instructions are available at https://sites.bu.edu/techlaw/2020/12/14/vcap/. Applications received before January 31, 2021 will be given full consideration.

Should We Call it Moral Money?: Ownership Matters and Commitment Too

In my previous post on the "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") that Ernst & Young prepared for the European Commission (Commission), I focused on the transformative power of corporate governance. I said that stakeholder capitalism would have a practical value if supported by corporate governance rules based on appropriate standards such as the ones provided by the Sustainable Development Goals (SDGs).

Some of my pointers for the Commission were the creation of a regulatory framework that enables the representation and protection of stakeholders, the representation of “stakewatchers,” that is, non-governmental organizations and other pressure groups through the attribution of voting and veto rights and their members’ nomination to the management board (similar to German co-determination). I also suggested expanding directors' fiduciary duties to include the protection of stakeholders’ interests, accountability of corporate managers, consultation rights, and additional disclosure requirements.

In my last guest post in this series dedicated to the Study on Directors’ Duties, I ask the following questions. Do investors have a moral duty to internalize externalities such as climate change and income inequality, for example? Do firm ownership and investor commitment matter? Should investors’ money be “moral” money? 

In their study Corporate Purpose in Public and Private Firms, Claudine Gartenberg and George Serafeim utilize Rebecca Henderson’s and Eric Van den Steen’s definition of corporate purpose, that is, “a concrete goal or objective for the firm that reaches beyond profit maximization.” In their paper, Gartenberg and Serafeim analyzed data from approximately 1.5 million employees across 1,108 established public and private companies in the US. In their words:

[W]e find that employee beliefs about their firm’s purpose is weaker in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among private firms, purpose is lower in private equity owned firms. Among public companies, purpose is lower for firms with high hedge fund ownership and higher for firms with long-term investors. We interpret our findings as evidence that higher owner commitment is associated with a stronger sense of purpose among employees within the firm.

With institutional investors on the rise, these findings are important because they redirect our attention from the board of directors’ short-termism discussion to shareholders' nature, composition, ownership, and long-term commitment. When it comes to owner commitment, Gartenberg and Serafeim say:

Owner commitment could lead to a stronger sense of purpose for multiple reasons. First, to the extent that commitment translates to an ability to think about the long-term and avoid short-term pressures, this would enable a firm to focus on its purpose rather than on solely short-term performance metrics. Second, committed owners may invest to gain and evaluate more soft information about firms, which in turn may allow managers to invest in productive but hard to verify projects that otherwise would not be approved by less committed owners (e.g., Grossman and Hart, 1986). Third, committed owners might mitigate free rider problems inside the firm, allowing employees to make firm-specific investments with greater confidence that they will not be subject to holdup by firm principals (Alchian and Demsetz 1972; Williamson 1985), which in turn could enhance the sense of purpose inside the organization. A similar argument could hold for customers, suppliers, and other stakeholders, who could see a strong sense of corporate purpose from owner commitment as a credible signal that enables the development of trust or ‘relational contracts’ (Gibbons and Henderson 2012; Gartenberg et al. 2019).

Gertenberg’s and Serafeim’s paper also discloses other findings. They found that firms are more likely to hire outside CEOs when less committed investors control the firms. Additionally, those firms are more likely to pay higher executive compensation levels, particularly relative to what they pay employees. Those firms also engage more frequently in mergers and acquisitions and other corporate restructuring processes. A simple explanation for this would be that such firms have higher agency costs since their ownership is more dispersed.

If we understand the company’s ownership structure, we know the purpose of the company. Therefore, there must be an underlying mechanism to better understand the company’s ownership structure because it will help us understand the company's purpose better. 

Besides, Gertenberg’s and Serafeim’s findings spell out that financial performance and corporate ownership positively impact corporate culture, employees' satisfaction, and employee work meaningfulness. Putting it differently, the corporate culture, employees' satisfaction, and employee work meaningfulness can be standards for evaluating the impact of corporate ownership, governance, and leadership.

Now that the focus is on investors, what can they do to change corporate behavior and consequently impact stakeholders like employees? They can be actively engaged through proxy voting. In their paper Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance, Barzuza, Curtis, and Webber explain that index funds often are considered ineffective stewards. The authors also explain how index funds have claimed an active role by challenging management and voting against directors to promote board diversity and sustainability.

Still, institutional investors manage their companies’ portfolios depending on the market, which is heavily impacted by systemic shocks we know will eventually occur. The Covid-19 pandemic has shown us how volatile markets are and our current economic model is.

Corporate laws of most European Union (EU) countries determine that the board of directors must act in the company's interest (e.g., Unternehmensinteresse in Germany, l'intérêt social in France, interesse sociale in Italy, etc.). Defining what the interest of the company is has shown to be a rather tricky endeavor. Gelter explains that, in all cases, one side of the debate claims that the company's interest is different from the interest of shareholders. In the US, the purpose of the company is commingled with the idea of shareholder wealth maximization.

To overcome the tension between prioritizing shareholders' wealth maximization and corporate purpose that considers shareholders' and stakeholders' interests, the Commission should take into account the following dimensions in developing policies in corporate law and corporate governance. 

1. Investors’ ownership and their impact on intangibles like employees’ satisfaction and employee work meaningfulness.
2. Governance structure and how it relates to the company’s ownership structure.
3. Governance structure and how it integrates stakeholders’ interests in the decision-making process.
4. Board diversity and recruitment.
5. Institutional investors’ financial resilience.

Finally, investors should demand CEOs and boards of directors show how they are changing the game and moving the needle toward a more sustainable and resilient conception of the corporation. Why? Because ownership matters and commitment too.

The I in We

I am fascinated by Chancellor Bouchard’s opinions in the WeWork dispute, available here and here.

The backstory: In the wake of WeWork’s collapsed IPO, SoftBank – which was one of WeWork’s significant investors – agreed to buy additional equity from the company, to complete a tender offer for a large amount of WeWork’s outstanding equity, and to lend WeWork $5.05 billion.  It ended up buying the equity and the debt, but the tender offer fell through.  At that point, WeWork – on the authority of the 2-person Special Committee who had negotiated the SoftBank deal – filed suit against SoftBank for breaching its obligations under the contract.  The Board of WeWork – by then consisting of 8 people: the 2 members of the Special Committee, 4 others designated by and obligated to Softbank, and 2 more with SoftBank affiliations – appointed two new, ostensibly independent directors to serve as a new committee to investigate the litigation.  One of the Special Committee members objected to the appointment; the other abstained from the vote.

The new committee was charged with determining whether the Special Committee had authority to sue SoftBank.  To the utter shock of absolutely no one, they concluded that, in fact, the Special Committee had no such authority, that the Special Committee could not continue the lawsuit due to certain conflicts, and that in any event continuing the lawsuit was not in the best interests of the company.  Critically, one of the conclusions that the new committee reached was that WeWork – the company – had little to gain from the litigation because it was the tendering stockholders, and not the company, who would benefit from the completion of SoftBank’s tender offer.  Thus, the new committee sought to terminate the litigation. Bouchard was therefore confronted with warring committees, and had to decide whether the litigation against SoftBank would continue.

Probably the least interesting aspect of Bouchard’s decision was his determination that the test of Zapata Corp. v. Maldonado, 430 A.2d 779 (Del. 1981) – originally developed to determine the propriety of allowing a special committee to terminate derivative litigation – would be used to evaluate the new committee’s decision here.  That test requires that the court evaluate whether the new committee was independent acted in good faith, and conducted a reasonable investigation of the issues.  Assuming it did so, the court must evaluate whether in its own “business judgment” the motion to terminate the litigation should be granted.

Here, Bouchard held that assuming the new committee was independent and acted in good faith, its investigation was not reasonable, because it ignored several facts that suggested the Special Committee had the authority to litigate against SoftBank and did not properly weigh the benefits against the burdens of completing the litigation.  Bouchard also held that under Zapata’s second prong, in his judgment, the litigation should continue.  Thus, he refused to allow the new committee to terminate the lawsuit.

In a companion opinion, he evaluated SoftBank’s motion to dismiss the WeWork/Special Committee complaint against it.  Among other things, he held that WeWork had standing to sue over the failed tender offer, even though – as the new committee had also emphasized – the proceeds of the tender offer would go to tendering stockholders and not to the company itself.

What stands out here?

First, though Bouchard said he had “no reason to doubt” the good faith and independence of the new committee, I am not operating under such constraints.  The 2-man committee was appointed for a two month term, for which each was paid $250K, and the expected outcome of their investigation was undoubtedly known to each of them.  As Bouchard pointed out, they acted under significant constraints: not only were they on a clock, their limited mandate meant they could not, for example, take control of the litigation themselves and thus eliminate any purported conflicts under which the Special Committee acted.  Truly independent directors, who were acting in good faith, might have refused such a charge, but these directors had no such qualms, and they reached exactly the conclusions that their patrons expected of them.

The entire circumstances of their appointment should, I would think, raise questions about their good faith and independence, and honestly, I wonder how often courts are willing to take at face value the conclusions of directors who are appointed for a particular purpose in the expectation they will reach a particular result.  For example, I recall In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003), where two new ostensibly independent board members were appointed for the sole purpose of investigating claims against the incumbent board and concluded (again, shockingly) that the claims had no merit.  The court decided – controversially – that the new board members were not independent, but did so because of preexisting ties to the company, and not because of the circumstances of their appointment. 

There have previously been studies of how often board special committees conclude that derivative litigation against defendant board members has merit, and usually (but not always), they recommend dismissal.  But what has not been studied, as far as I know, is how often new directors are appointed to create a special committee, whether they are more likely to recommend dismissal than incumbent directors, and whether courts are more or less likely to take their recommendations seriously.  It’s possible sample sizes are just not big enough to draw conclusions, but I personally would be interested in an analysis of how new directors differ from incumbent directors in terms of their conclusions and/or the terms of their appointment.

I also note this: Delaware courts start with the presumption that corporate directors are so conscious of their fiduciary duties and so constrained by reputational concerns that they would not lightly betray their obligations for the crass material benefits that a board position can provide.  But if that’s going to work, reputations have to mean something, and once damaged, they should not lightly be rehabilitated.  Which is why I was so concerned by VC Zurn’s opinion in Rudd v. Brown.  There, the plaintiffs alleged that an activist shareholder appointed a compliant director to a company’s board in order to force a merger.  The plaintiffs claimed that this particular director lacked independence, because he had developed a sort of gun-for-hire reputation: activists had repeatedly appointed him, knowing he would champion acquisitions they favored.  Zurn rejected the argument in a footnote:

Plaintiff also asserts in briefing that Brown had “a long history of being appointed to companies’ boards to push a merger or acquisition for short-term profit, including other companies that Engaged had targeted for a sale in the past.” Pl.’s Answering Br. at 37. Insofar as Plaintiff asserts that this gives rise to conflict, that assertion fails. Plaintiff provides no support for the proposition that a director is conflicted purely by virtue of his track record, and I am aware of none.

With this kind of precedent in hand, the newly-appointed WeWork directors had no worries that they were accepting a quarter-million dollars at the expense of their reputations with respect to future opportunities.  But what if they had such concerns?  What if appointing stockholders, as well, had to worry about directors’ past history of compliance?  What if a past history of noncompliance helped burnish directors’ credentials as independent monitors?  Wouldn’t that create a better system, where courts and minority stockholders had more faith in the special committee process?

Second, there’s the standing/harm issue.  Both of Bouchard’s opinions – the one dealing with the new committee’s attempt at dismissal, and the one dealing with SoftBank’s dismissal motion – had to address the argument that WeWork the company was not harmed by SoftBank’s abandonment of the tender offer, since it was the individual stockholders, and not the company, who missed out.  And this interests me because, in a roundabout way, it touches on the issue I raised a couple of weeks ago – namely, when a merger agreement falls through, is the harm to selling stockholders direct or is it derivative?

In this case, the new committee and SoftBank argued that the tendering stockholders did not have a direct claim against SoftBank for breach of contract because they were not parties to SoftBank’s contract with WeWork, and the contract itself specified there were no third party beneficiaries.  They also argued that if the tendering stockholders had a problem with the termination of WeWork’s litigation, their remedy was a derivative action.  See Op. at fn 253.  And then they argued that WeWork was not in fact harmed by the termination of the tender offer because WeWork would not have collected the proceeds.

That is … quite the paradox.

Rather than fully engage this thorny question of who suffers a harm from a terminated stock sale, Bouchard concluded that WeWork as a company suffered a harm because if SoftBank increased its equity stake, it would have more of an interest in monitoring WeWork’s performance.

That is, I have to say, unsatisfying.  I mean, by that logic, SoftBank would have the greatest interest in monitoring WeWork’s performance if it was planning to buy the whole company.  But we know from Revlon that when there’s an offer to sell the whole company for cash, it’s an endgame transaction – we’re not worried about the company’s future after that point; instead, we’re worried about the selling stockholders. 

Anyway, all of this just highlights to me that it’s a blip in the law, and perhaps unresolvable.  At the end of the day, in a shareholder-wealth-maximization world, all harms to the company matter because they are harms to stockholders, and the direct/derivative distinction is not a fact of nature, but a policy judgment as to which types of claims should be handled by the board in the first instance and which should not.  So it stands to reason there wouldn’t be complete doctrinal coherence for the edge cases.

More Controversy Concerning Blaszczak, Insider Trading, and the "Personal-Benefit" Test

    With so much recent controversy and uncertainty surrounding the personal benefit test for tipper-tippee liability pursuant to Section 10b insider trading liability (see, e.g., here, and here), prosecutors have recently looked to other statutory bases for obtaining convictions. As part of the Sarbanes-Oxley Act of 2002, Congress enacted 18 U.S.C. § 1348, Securities and Commodities Fraud. This general anti-fraud provision provides that:

Whoever knowingly executes, or attempts to execute, a scheme or artifice…[t]o defraud any person in connection with…any security…or [t]o obatain, by means of false or fraudulent pretenses, representations, or promises, any money or property in connection with the purchase or sale of any…security… shall be fined under this title, or imprisoned not more than 25 years, or both.

    While the language of §1348 is similar to Section 10b, relatively few insider trading cases have been brought under it. It looked as though this might, however, be changing in the wake of a recent Second Circuit decision holding that the controversial personal-benefit test does not apply to tipper-tippee actions brought under §1348. In United States v. Blaszczak, 947 F.3d 19 (2d Cir. 2019), the court held that §1348 and Section 10b were adopted for different purposes. According to the court, “Congress enacted [Section 10b’s] fraud provisions…with the limited ‘purpose of eliminate[ing] [the] use of inside information for personal advantage,” and the personal benefit test is consistent with this purpose. Id. at 35. By contrast, §1348 was adopted “to overcome the ‘technical legal requirements’ of [Section 10b],” so the personal-benefit test should not be read into the latter’s elements. Id. at 36-37. The Blaszczak decision raised a number of important questions. See, e.g., Karen E. Woody, The New Insider Trading, 52 Arizona State L. J. 594 (2020). For example, going forward, why would a prosecutor ever bring a tipper-tippee case under Section 10b if they can simply bypass the personal-benefit element by bringing it under §1348? Commentators have also noted the problem that the test for criminal insider trading liability under §1348 (with a maximum penalty of 25 years imprisonment) is easier to satisfy under the Blaszczak rule than the test for civil liability (which must be brought under Section 10b because the SEC has no enforcement authority under §1348).

    Highlighting these and other concerns, the Blaszczak defendants petitioned the Supreme Court for writ of certiorari in September 2020. In an unusual move, the government responded by asking the Court to grant the petitioners’ writs, vacate the Second Circuit’s decision, and remand the case for consideration in light of the Court’s recent wire-fraud decision, Kelly v. United States, 140 S.Ct. 1565 (2020). In Kelly, the Court held that “a scheme to alter ... regulatory choice is not one to take the government’s property.” Id. at 1572. Since the defendants in Blaszczak tipped and traded on confidential government information concerning proposed medical treatment reimbursement regulations, the government conceded that the Second Circuit should revisit the question of whether such regulatory information is “property” for purposes of a § 1438 prosecution after Kelly. The government only proposed a remand on the limited issue of what constitutes “property,” not on the question of whether the personal benefit test applies to insider trading prosecutions under § 1348. Nevertheless, if the Court vacates Blaszczak, then the Second Circuit’s controversial personal benefit holding will no longer be law unless it is embraced on remand or in some other case. See, e.g., Robert J. Anello & Richard F. Albert, Days Seem Numbered for Circuit's Controversial Insider Trading Decision, 264 New York Law Journal (Dec. 9, 2020).

Hiring Announcement: University of Oklahoma College of Law

Dear BLPB Readers:

The University of Oklahoma College of Law

Associate Professor of Law  

The University of Oklahoma College of Law seeks outstanding applicants, either entry level or pre-tenure lateral, to fill a full-time tenure-track position to begin fall semester 2021. Successful applicants must have a J.D. or equivalent academic degree, strong academic credentials, a commitment to excellence in teaching, and demonstrably outstanding potential for scholarship. We welcome candidates in all subject matter areas, with particular interest in filling curricular needs that include criminal law, family law, constitutional law, wills and trusts, bankruptcy, and real estate transactions.  Complete announcement is here: Download OULaw_TenureTrackHiringAnnouncement

 

National Business Law Scholars 2021 - Save the Date; Paper Submissions Accepted Starting in January

2021 National Business Law Scholars Conference
June 17-18, 2021

The University of Tennessee College of Law
Knoxville, Tennessee

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 17-18, 2021.  The 2021 conference is being hosted by The University of Tennessee College of Law.  The conference will be conducted in a hybrid or online format, as determined by the NBLSC planning committee in the early part of 2021.

This is the twelfth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission.  We expect to be in a position to offer separate programming for aspiring law professors and market entrants, as we have done in the past, likely on a separate date after the conference concludes.

Please use the conference website, which will be available at https://law.utk.edu/ in January, to submit an abstract or paper by April 9, 2021. An announcement will be made on the Business Law Prof Blog when the conference site becomes available.  If you have any questions, concerns, or special requests regarding the schedule, please email Professor Eric C. Chaffee at [email protected]. We will respond to submissions with notifications of acceptance shortly after the deadline. We anticipate the conference schedule will be circulated in May.

Conference Planning Committee:

Afra Afsharipour (University of California, Davis, School of Law)
Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Emory University School of Law)
Elizabeth Pollman (University of Pennsylvania Carey Law School)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)
Megan Wischmeier Shaner (University of Oklahoma College of Law)

“T” is for Transformative (Corporate Governance)

In my first post on the "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") prepared by Ernst & Young for the European Commission, I said that corporate boards are free to apply a purposive approach to profit generation. I added that:

[a]pplying such a purposive approach will depend on moral leadership, CEOs' and corporate boards' long-term vision, clear measurement of the companies' interests and communication of those interests to shareholders, and rethinking executive compensation to encourage board members to take on other priorities than shareholder value maximization. Corporate governance has a significant transformative role to play in this context. 

This week, I focus on corporate governance’s enabling power. Therefore, “T” is for transformative corporate governance. Market-led developments can and do precede and inspire legal rules. Corporate governance rules are not an exception in this regard. To illustrate these rules’ transformative potential, I dwell on the ongoing debate around stakeholder capitalism.

First question. What is stakeholder capitalism? In a recent debate with Lucian Bebchuk about the topic, Alex Edmans explained that “stakeholder capitalism seeks to create shareholder welfare only through creating stakeholder welfare.” The definition suggests that the way to create value for both shareholders and stakeholders alike is by increasing the size of the pie.

In his book, Strategic Management: A Stakeholder Approach, R. Edward Freeman defines “stakeholder” as “any group or individual who can affect or is affected by the achievement of the organisation’s objectives.” (1984: p. 46). The Study on Directors’ Duties is concerned with the negative impact of corporate short-termism on stakeholders such as the environment, the society, the economy, and the extent to which corporate short-termism may impair the protection of human rights and the attainment of the sustainable development goals (SDGs). I am not going to discuss whether there is a causal link between short-termism and sustainability. In my previous post, I say that we need to take a step back to determine short-termism and whether it is as harmful as it sounds. Instead, I am interested in finding an answer to the following question. Has stakeholder capitalism practical value?

Edmans points out that “in a world of uncertainty, stakeholder capitalism is practically more useful.” It is more challenging to put a tag on various things in a world of uncertainty, and the market misvalues intangibles. Therefore, in this context, stakeholder capitalism would be a better decisional tool that improves shareholder value and profitability and shareholders' welfare.

Still, how do we measure CEO’s and directors’ accountability toward shareholders and the corporation for the choices they make? Can CEOs and directors be blamed for not caring about social causes? Is stakeholder capitalism, or as Lucian Bebchuk calls it “stakeholderism,” the right way to force managers to make the right decisions for the shareholders and the corporation?

While Edmans stays firmly behind stakeholder capitalism because he considers it has practical value in increasing shareholder wealth while increasing shareholders’ welfare, Bebchuk maintains that “stakeholderism” is “illusory” and costly both for shareholders and stakeholders. Clearly, they disagree.

However, both Edmans and Bebchuk agree on this – we need a normative framework that goes beyond private ordering and prevents companies from subjecting stakeholders to externalities such as climate change, inequality, poverty, and other adverse economic effects.

Corporate managers respond to incentives such as executive compensation, financial reporting, and shareholders' ownership. The challenge is to understand what type of corporate governance rules are more likely to nudge CEOs and managers to value other interests than shareholder wealth maximization. Would a set of principles suffice, or do we need a regulatory framework?

Freeman's definition of a stakeholder is telling because it allows us to think of corporations and governments as stakeholders for sustainable development. I am also inspired by the distinction that Yves Fassin makes in his article The Stakeholder Model Refined, between stakeholders (e.g., consumers), stakewatchers (e.g., non-governmental organizations) and stakekeepers (e.g., regulators). I suggest that the way to ensure stakeholder capitalism’s practical value is to create corporate governance rules based on appropriate standards. The SDGs afford the propriety of those standards.

Within this regulatory setting, corporate governance will fulfill its transformative potential by enabling, for example, the representation and protection of stakeholders, the representation of “stakewatchers” through the attribution of voting and veto rights and nomination to the management board (similar to German co-determination by which stakeholders like employees are appointed to the supervisory board). Corporate governance will show its transformative potential by enabling the expansion of directors' fiduciary duties to include the protection of stakeholders’ interests, accountability of corporate managers, consultation rights, and additional disclosure requirements.  

The authors Onyeka K. Osuji and Ugochi C. Amajuoyi contributed an interesting piece, titled Sustainable Consumption, Consumer Protection and Sustainable Development: Unbundling Institutional Septet for Developing Economies to the book Corporate Social Responsibility in Developing and Emerging Markets: Institutions, Actors and Sustainable Development. The book was edited by Onyeka K. Osuji, Franklin N. Ngwu, and Dima Jamali. The piece addresses the stakeholder model from the emerging economies perspective. It goes to show how interconnected we are.

FTC, Common Ownership, and Investor Power

I’ve previously discussed the common ownership problem in this space, and it basically comes down to the fact that common ownership – institutional investors who own stock in a broad swath of companies, including competing companies – is a mixed bag.  On the one hand, it may incentivize investors to address systemic risks, like climate change.  On the other, it operates in tension with a corporate governance framework predicated on shareholder wealth maximization, and may incentivize anticompetitive behavior to the extent investors care less about competition within an industry than maximizing profits for the industry as a whole.  And on the third hand, the mere fact that this kind of vast power over our economic system is exercised by only a handful of private players – whether used for good or for ill – may represent a political/democracy problem.

As a result, there have been proposals to break up the power of the largest fund families.  For example, Lucian Bebchuk and Scott Hirst have proposed that fund families be limited to investing in 5% of any particular target company.

That’s not what’s on the table, however.

In two new releases, the FTC has proposed reinterpreting the Hart Scott Rodino Act.  That Act requires pre-review by the government whenever an acquirer proposes to obtain a significant amount of the voting securities of another company to ensure that the acquisition would not be anticompetitive.  How significant?  It’s a numerical test that varies every year.  For our purposes, though, what’s critical is that the requirements are softened when the investor is obtaining the securities “solely for the purpose of investment,” meaning, the acquirer “has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.”  Institutional investors like mutual fund companies are exempt from HSR reporting if they obtain securities “solely for the purpose of investment” and hold less than 15% of the target.

The FTC is looking into whether it should redefine what “solely for the purpose of investment” means.  Among other things, it is considering whether shareholders who participate in activities like “discussions of governance issues, discussions of executive compensation, or casting proxy votes” should no longer count as passive (and related rulemaking would ensure that holdings are considered at the family, rather than fund, level). 

What the FTC is looking into, then, is whether the ordinary engagement activities of index funds (or indeed, any shareholder) would make them active holders subject to the full range of HSR reporting.  They would not be prohibited from acquiring stock in companies that compete with each other.  They would simply be required to file paperwork with the government and await the outcome of a review before they could complete sizeable transactions.  Unless, of course, they agree to cease all attempts to engage with management.

Now, in general, I support the FTC’s attention to the problem of common ownership.  But I think the level on which we need to be thinking is consolidation in the asset management industry, and to some extent, the statutory framework may not be well-suited to deal with that problem.  I.e., from a consumer/retail investor standpoint, there are more mutual fund choices than ever, and fees are often quite low, so there may not be room for regulators to attack the problem by claiming asset management consolidation is itself anticompetitive.  Which means, regulators may be stuck with focusing on how asset managers deal with portfolio companies, and the HSR Act itself draws a distinction between acquisitions “solely for the purpose of investment” and acquisitions for other purposes, so it’s a natural avenue for the FTC to pursue.

That said, though much of the research into common ownership does not try to explain why or how common ownership results in anticompetitive behavior by portfolio companies, at least one explanation is that shareholders in such companies are passive – i.e., they don’t prod management to improve their competitive position, leading to a lack of competition.

If that’s right, narrowing the definition of “solely for the purpose of investment” could be the opposite of a solution.  It could reward the very disengagement that facilitates the antitrust problem, and disincentivize mutual funds from participating in the kind of oversight that might prod greater competition. 

Plus, I really cannot help but notice, it would also take mutual funds out of the business of policing executive pay, and ESG issues like climate change and diversity.  Which would be well in keeping with the general Trump Administration hostility to these kinds of shareholder interventions.

Ten Business Questions for the Biden Administration

If you read the title, you’ll see that I’m only going to ask questions. I have no answers, insights, or predictions until the President-elect announces more cabinet picks. After President Trump won the election in 2016, I posed eleven questions and then gave some preliminary commentary based on his cabinet picks two months later. Here are my initial questions based on what I’m interested in -- compliance, corporate governance, human rights, and ESG. I recognize that everyone will have their own list:

1. How will the Administration view disclosures? Will Dodd-Frank conflict minerals disclosures stay in place, regardless of the effectiveness on reducing violence in the Democratic Republic of Congo? Will the US add mandatory human rights due diligence and disclosures like the EU??
2. Building on Question 1, will we see more stringent requirements for ESG disclosures? Will the US follow the EU model for financial services firms, which goes into effect in March 2021? With ESG accounting for 1 in 3 dollars of assets under management, will the Biden Administration look at ESG investing more favorably than the Trump DOL? How robust will climate and ESG disclosure get? We already know that disclosure of climate risks and greenhouse gases will be a priority. For more on some of the SEC commissioners’ views, see here.
3. President-elect Biden has named what is shaping up to be the most diverse cabinet in history. What will this mean for the Trump administration’s Executive Order on diversity training and federal contractors? How will a Biden EEOC function and what will the priorities be?
4. Building on Question 3, now that California and the NASDAQ have implemented rules and proposals on board diversity, will there be diversity mandates in other sectors of the federal government, perhaps for federal contractors? Is this the year that the Improving Corporate Governance Through Diversity Act passes? Will this embolden more states to put forth similar requirements?
5. What will a Biden SEC look like? Will the SEC human capital disclosure requirements become more precise? Will we see more aggressive enforcement of large institutions and insider trading? Will there be more controls placed on proxy advisory firms? Is SEC Chair too small of a job for Preet Bharara?
6. We had some of the highest Foreign Corrupt Practices Act fines on record under Trump’s Department of Justice. Will that ramp up under a new DOJ, especially as there may have been compliance failures and more bribery because of a world-wide recession and COVID? It’s more likely that sophisticated companies will be prepared because of the revamp of compliance programs based on the June 2020 DOJ Guidance on Evaluation of Corporate Compliance Programs and the second edition of the joint SEC/DOJ Resource Guide to the US Foreign Corrupt Practices Act. (ok- that was an insight).
7. How will the Biden Administration promote human rights, particularly as it relates to business? Congress has already taken some action related to exports tied to the use of Uighur forced labor in China. Will the incoming government be even more aggressive? I discussed some potential opportunities for legislation related to human rights abuses abroad in my last post about the Nestle v Doe case in front of the Supreme Court. One area that could use some help is the pretty anemic Obama-era US National Action Plan on Responsible Business Conduct.
8. What will a Biden Department of Labor prioritize? Will consumer protection advocates convince Biden to delay or dismantle the ERISA fiduciary rule? Will the 2020 joint employer rule stay in place? Will OSHA get the funding it needs to go after employers who aren’t safeguarding employees with COVID? Will unions have more power? Will we enter a more worker-friendly era?
9. What will happen to whistleblowers? I served as a member of the Department of Labor’s Whistleblower Protection Advisory Committee for a few years under the Obama administration. Our committee had management, labor, academic, and other ad hoc members and we were tasked at looking at 22 laws enforced by OSHA, including Sarbanes-Oxley retaliation rules. We received notice that our services were no longer needed after the President’s inauguration in 2017. Hopefully, the Biden Administration will reconstitute it. In the meantime, the SEC awarded record amounts under the Dodd-Frank whistleblower program in 2020 and has just reformed the program to streamline it and get money to whistleblowers more quickly.
10. What will President-elect Biden accomplish if the Democrats do not control the Congress?

There you have it. What questions would you have added? Comment below or email me at [email protected]. 

AALS Panel: Perspectives on Shareholder and Stakeholder Primacy (Friday, January 8, 2021, 1:15 - 2:30 pm)

If you are attending the AALS Annual Meeting, I hope to see you here (Zoom link details forthcoming):

For Whose Benefit Public Corporations? Perspectives on Shareholder and Stakeholder Primacy
Sponsored by the Section on Socio-Economics
Co-Sponsored by the Sections on Business Associations and Securities Regulation 
Friday, January 8, 2021, 1:15 - 2:30 pm
(Papers drawn from this program will be published in the University of the Pacific Law Review)

Program Description

On August 19, 2019, the Business Roundtable, a self-described “association of chief executive officers of America’s leading companies,” issued a statement seeking to redefine the purpose of the corporation by moving away from shareholder primacy and towards a “commitment to all stakeholders.” Since that time, corporate governance experts have continued to vigorously debate the merits of shareholder primacy and stakeholder primacy. Focusing on tensions and synergies among the financial and other socio-economic interests of the corporation and its fiduciaries, shareholders, and other stakeholders, this panel seeks to provide relevant perspectives on the current state of this debate.

Panelists

Robert Ashford (Syracuse)
Lucian Bebchuk (Harvard)
Margaret Blair (Vanderbilt)
June Carbone (Minnesota)
Joshua Fershée (Dean, Creighton)
Sergio Gramitto (Monash)
Stefan Padfield (Moderator, Akron)
Edward Rubin (Vanderbilt)
Marcia Narine Weldon (Miami)

ICYMI: SEC v. Robinhood

From the SEC press release (here):

The Securities and Exchange Commission today charged Robinhood Financial LLC for repeated misstatements that failed to disclose the firm’s receipt of payments from trading firms for routing customer orders to them, and with failing to satisfy its duty to seek the best reasonably available terms to execute customer orders. Robinhood agreed to pay $65 million to settle the charges.

According to the SEC’s order, between 2015 and late 2018, Robinhood made misleading statements and omissions in customer communications, including in FAQ pages on its website, about its largest revenue source when describing how it made money – namely, payments from trading firms in exchange for Robinhood sending its customer orders to those firms for execution, also known as “payment for order flow.” As the SEC’s order finds, one of Robinhood’s selling points to customers was that trading was “commission free,” but due in large part to its unusually high payment for order flow rates, Robinhood customers’ orders were executed at prices that were inferior to other brokers’ prices. Despite this, according to the SEC’s order, Robinhood falsely claimed in a website FAQ between October 2018 and June 2019 that its execution quality matched or beat that of its competitors. The order finds that Robinhood provided inferior trade prices that in aggregate deprived customers of $34.1 million even after taking into account the savings from not paying a commission.

New DOL Rule on Investment Advice

Near the end of the term, the Trump Department of Labor recently announced its rule for investment advice accompanied by a WSJ op-ed from Jay Clayton and Eugene Scalia.  While there is much to digest, the rule largely aligns Labor with SEC Regulation Best Interest.  Much like the SEC's approach under Chair Clayton, the DOL proposal takes the "eliminate or disclose" approach to conflicts as well. 

Ultimately, the new regulation isn't likely to significantly improve outcomes for retail investors.  It leaves financial advisers free to continue operating with significant conflicts even when providing advice about retirement assets.  

Applications for 2021-22 Markets, Ethics, and the Law Post-Doctorate Fellowships Now Open

Dear BLPB Readers:

The Edmond J. SafraCenter for Ethics at TelAviv University is accepting applications for its 2021-22 post-doctorate fellowship program. The Center offers grants to outstanding researchers who study the ethical, moral and political aspects of markets, local or global, real or virtual. The Center encourages applications from all disciplines and fields, including economics, social sciences, business, the humanities, and the law.  Complete call for applications here: Download Call for Post-Doc 2021-22

"$20,000 in scholarships are available to the high school students who best answer why 'free speech is a better idea than censorship.'"

For the high school student in your life:

The mission of FIRE is to defend and sustain individual rights at America’s colleges and universities. These rights include freedom of speech, legal equality, due process, religious liberty, and sanctity of conscience—the essential qualities of individual liberty and dignity. In addition to defending the rights of students and faculty, FIRE works to educate students and the general public on the necessity of free speech and its importance to a thriving democratic society.

The freedom of speech, enshrined in the First Amendment to the Constitution, is a foundational American right. Nowhere is that right more important than on our college campuses, where the free flow of ideas and the clash of opposing views advance knowledge and promote human progress. It is on our college campuses, however, where some of the most serious violations of free speech occur, and where students are regularly censored simply because their expression might offend others....

In a persuasive letter or essay, convince your peers that free speech is a better idea than censorship.

Details here.

Teaching Through the Pandemic - Part XI: The Online Written Final Exam

Few of the ten preceding posts I have offered on teaching during the COVID-19 pandemic (links provided at the end of this post) have even mentioned assessment.  Given that the semester's classes have ended almost everywhere, now seems like a good time to say a few words on that topic, focusing in on written final examinations.  As with everything else in the COVID-19 era, the traditional written, timed final (f/k/a "in class") examination has received some serious scrutiny and reconsideration in 2020.  The UT Law faculty shared ideas and opinions on the topic of online examinations in a number of faculty meetings and forums.  Perhaps predictably, faculty members teaching in different parts of the curriculum (substantively and otherwise) had individualized views about how their own learning objectives could best be met in an online assessment environment.

After much discussion, UT Law ended up offering multiple options to instructors.  For essay questions, we had the choice of using our proprietary portal's exam feature (with download/upload capabilities and full use of all computer functionality, including the Internet) or exam software.  We had the choice of engaging monitoring or not.  Multiple choice questions could be submitted electronically on the portal and hand-graded by the instructor or submitted electronically using exam software and machine-graded.  Bonus: in the end, our Dean of Students offered us the opportunity to have our exams printed--an unexpected (and, in my case, welcomed) addition to the mix.

My Business Associations students took my two-hour written final exam twelve days ago.  I chose a portal-based essay exam with machine-graded multiple choice questions.  I had the exams printed out.  I have not heard back yet from students on the exam process or anything else (for obvious reasons).  But from my standpoint, the exam submission and transmission process seemed to work smoothly.  It differed little, in the end, as a matter of process, from exams I have given in person in the past.  I am so grateful to our academic deans (and the rest of the faculty), our Dean of Students, and the staff from our student records office for all they did to make this exam period safe, manageable, and (yes) possible.

Of course, until I finish grading and can talk to students about their part of the experience, this is about all I can say.  Student views may be wildly different.  I did learn (in the process of working through the exam details with them) that they are not fond of using our exam software for essay questions, since they cannot be looking at the question as they type their answer.  In any event, I will look forward to sharing anything I hear in a later post.

What were your experiences with online written exams this semester?  What are your preferences as to how they are best set up and managed--and why?  I am interested in what others are doing in this regard and what they are learning from those experiences.  Post comments or send me an email message if you have thoughts on any of this.

+++++

Links to prior posts on Teaching Through the Pandemic
(Note: Since I only began adding subtitles after the fourth post, I have added parenthetical topic information for the first four posts.)

Teaching Through the Pandemic - Part I (early distance education and Zoom tips)

Teaching Through the Pandemic - Part II (Zoom connectivity tips)

Teaching Through the Pandemic - Part III (questions about a greater movement to online education)

Teaching Through the Pandemic - Part IV (advanced Zoom tips)

Teaching Through the Pandemic - Part V: First Impressions of a Hybrid Classroom

Teaching Through the Pandemic - Part VI: Labor Day

Teaching Through the Pandemic - Part VII: Technology Experiments

Teaching Through the Pandemic - Part VIII: A Three-Ring Circus

Teaching Through the Pandemic - Part IX: Students Teaching Themselves, Each Other, and Us

Teaching Through the Pandemic - Part X: Hollywood Squares and Giving Thanks!

First Things First: Is Short-Termism the Problem?

This is my second post in a series of blog posts on the "Study on Directors' Duties and Sustainable Corporate Governance ("Study on Directors' Duties") prepared by Ernst & Young for the European Commission.

In 2015, the world gathered at the United Nations Sustainable Development Summit for the adoption of the Post-2015 development agenda. That Summit was convened as a high-level plenary meeting of the United Nations General Assembly. At this meeting, Resolution A/70/L.1, Transforming our World: The 2030 Agenda for Sustainable Development, was adopted by the General Assembly. In 2016, the Paris Agreement was signed. In my last post, I called both the United Nations 2030 Agenda and the Paris Agreement trendsetters because they kicked-off a global discussion on sustainable development at so many levels, including at the financial level.

During the 2015 United Nations Sustainable Development Summit, I recall that the Civil Society representatives called for a UN resolution on sustainable capital markets to tackle the absence of concrete actions regarding global financial sustainability following the 2008 Great Recession.

At the end of 2016, the European Commission (Commission) created the High-Level Expert Group on Sustainable Finance (HLEG). In early 2018, the HLEG published its report. Shortly after, in 2018, the European Union (EU) published the Action Plan: Financing Sustainable Growth (EU's Action Plan) based on the HLEG’s report. I want to focus for a bit on Action 10 of the EU's Action Plan: Fostering Sustainable Corporate Governance and Attenuating Short-Termism in Capital Markets. Action 10 sets forth the following:

1.To promote corporate governance that is more conducive to sustainable investments, by Q2 2019, the Commission will carry out analytical and consultative work with relevant stakeholders to assess: (i) the possible need to require corporate boards to develop and disclose a sustainability strategy, including appropriate due diligence throughout the supply chain, and measurable sustainability targets; and (ii) the possible need to clarify the rules according to which directors are expected to act in the company's long-term interest.

2.The Commission invites the ESAs to collect evidence of undue short-term pressure from capital markets on corporations and consider, if necessary, further steps based on such evidence by Q1 2019. More specifically, the Commission invites ESMA to collect information on undue short-termism in capital markets, including: (i) portfolio turnover and equity holding periods by asset managers; (ii) whether there are any practices in capital markets that generate undue short-term pressure in the real economy.

Under the EU's Action Plan, in 2019, the Commission called the three European Supervisory Authorities (ESAs) to collect evidence of undue short-term pressure from the financial sector on corporations. These supervisory authorities include the European Banking Authority (EBA), the European Securities and Markets Authority (ESMA), and the European Insurance and Occupational Pension Authority (EIOPA). The reports from EBA, ESMA, and EIOPA reviewed the relevant financial literature and identified potential short-term pressures on corporations.

In 2019, the European Commission Directorate-General Justice and Consumers organized a conference on "Sustainable Corporate Governance" that reunited policy-makers to discuss policy developments on corporate governance within Action 10 of the EU's Action Plan.

The Study on Directors' Duties builds on Action 10. As it reads in the Study:

[T]he need for urgent action to attenuate short-termism and promote sustainable corporate governance is clearly identified in the Action Plan on Financing Sustainable Growth, 137 put forward by the European Commission in 2018. The Action Plan recognises that, despite the efforts made by several European companies, pressures from capital markets lead company directors and executives to fail to consider long-term sustainability risks and opportunities and be overly focused on short-term financial performance. Action 10 of the Action Plan is therefore aimed at "fostering sustainable corporate governance and attenuating short-termism in capital markets." The present study implements Action 10, together with other studies aimed at investigating complementary aspects of short-termism,138 which shows European Commission's commitment to explore this complex problem from different angles and find an integrated response.

Before moving forward, it is pressing to define short-termism. In this context, obtaining empirical evidence to infer causation is important for policy advice. When it comes to defining short-termism, in a recent Policy Workshop on Directors' Duties and Sustainable Corporate Governance, Zach Sautner defined short-termism as a reflection of actions (e.g., investment, payouts) that focus on short-term gains at the expense of the long-term value of the corporation. The concept of short-termism encompasses a certain form of value destruction, an undue focus on short-term earnings or stock price, and a notion of market inefficiency. Suppose a CEO favors short-term earnings or makes decisions (e.g., buybacks) to the detriment of the corporation's long-term value. Then, if the market is efficient, it should signal that something is not right.

Still, I cannot avoid asking: is short-termism the right problem that needs fixing? The discussion around short-termism is puzzling because there is a vehement academic debate whether there even exists short-termism or whether it is as harmful as it sounds. For example, in their paper, Long-Term Bias, Michal Barzuza & Eric Talley explain how corporate managers can become hostages of long-term bias, which can be as damaging for investors as short-termism.

If short-termism and its effects are as negative as they sound, what kind of incentives do managers have to overcome it? Corporate managers act based on incentives such as executive compensation, financial reporting, and shareholders' ownership. Is this bad news for those who firmly stand behind stakeholders who can be undoubtedly impacted by the corporation's performance?

The bottom line is this. We need a clearer perspective on short-termism. Suppose one says that excessive payouts are not the problem. They are the symptom. However, even this bold statement needs to be taken with a grain of salt. It is difficult to assess if payouts (e.g., dividends, buybacks) are excessive if we do not know if there is a short-termism problem.

The Allergan Mess

In 2018, a securities class action was filed against Allergan, alleging that the company concealed risks associated with breast implants.  Boston Retirement System was appointed lead plaintiff, and the case survived a motion to dismiss.  The court refused to certify the class, however, because of perceived misconduct by lead counsel Pomerantz.  See In re Allergan PLC Sec. Litig., 2020 WL 5796763 (S.D.N.Y. Sept. 29, 2020).

Specifically, Judge McMahon held that Pomerantz had defied her original order appointing it as lead counsel by taking on another firm – Thornton – as a kind of shadow co-lead counsel.  When Pomerantz was appointed, McMahon specifically rejected its request to name Thornton as co-lead because, in her words, “the involvement of multiple firms tends to inflate legal fees.”  Despite her order, well:

Thornton has not only remained involved in this litigation, albeit under the rubric of “additional counsel,” but that it has effectively played the role of co-lead counsel – to the point that BRS’ corporate representative has testified under oath that Thornton’s responsibilities did not change at all in response to the lead plaintiff order. It is clear that Thornton has been fully involved in every aspect of this case to date. It has duplicated the efforts of Pomerantz by working on the CAC (it signed the pleading, so it has to have worked on it) and the motions to dismiss and for class certification (ditto), by joining in meet and confer sessions with defense counsel, participating in depositions, and by getting (and so obviously reviewing) all correspondence.

Moreover, I have learned, in connection with the prosecution of this motion, that the Pomerantz and Thornton firms have entered into an agreement to split any fee earned from the prosecution of this lawsuit almost down the middle. The agreement calls for the fee earned by lead counsel to be split with 55% going to Pomerantz and 45% to Thornton – a division that is so close to the firms’ original agreement of a 50-50 split, reached at a time when they anticipated being appointed co-lead counsel as to be a rather transparent substitute for co-lead counsel status.  This amended agreement between the two firms was dated six days after BRS designated Pomerantz as lead counsel.  The court was not informed about this arrangement, by BRS or anyone else.

This Court is not fooled by the rebranding of Thornton as “additional counsel.”

So, McMahon refused to allow Pomerantz and Boston Retirement System to continue to represent the class, and she reopened applications for lead plaintiff.

In response, one of the original movants – DeKalb County Pension Fund, represented by Faruqi & Faruqi – renewed its petition, along with several new movants, including Union Asset Management Holding AG represented by BLBG and the General Retirement System of Detroit represented by Abraham, Fruchter & Twersky. 

On December 7, McMahon granted the DeKalb petition – despite the fact that other movants had larger losses, which is the typical requirement for lead plaintiff status – because she believed it would be improper to appoint a plaintiff who had not moved for lead status when the case was originally filed.  And in her order, she specified:

DeKalb’s motion to have Faruqi and Faruqi appointed as lead class counsel is granted, on the condition that the Faruqi firm and none other serve as lead counsel and perform all services for which recompense may some day be sought.

So.

Here’s the thing.

The way McMahon describes it, it does sound like Pomerantz and Thornton defied her original order, and that is certainly a legitimate grounds for refusing to appoint Pomerantz as class counsel.

But the fact is, in securities cases, plaintiffs’ firms always coordinate with other firms.  Not necessarily as co-lead, but to perform tasks like routine discovery, or depositions in other cities, or smaller motion practice.  Plaintiffs’ firms tend to have fewer attorneys than defense firms, and they often don’t have the staff to maximize the value of a large case without getting at least some additional assistance.  And while I won’t deny that these arrangements, like any billing arrangement, may be abused, that isn’t necessarily the case; much of the work is legitimate, and takes some of the burden off the lead firm.  When it comes to co-leads specifically, they may ultimately be valuable – I have no opinion on their general worth – but at least one way they may inflate fees is that every decision has to get approval from partners on both sides, which, while done in good faith, may add to the hours billed.  But that isn’t a concern if additional counsel are brought on to handle discrete tasks.

Point being, even among the best plaintiffs’ firms, a complete bar on enlisting other firms could be burdensome.

Faruqi & Faruqi is … not among the best plaintiffs’ firms.  In the merger context, they’ve been repeatedly accused of filing nuisance cases and settling for immaterial disclosures without engaging in meaningful discovery.  Their recoveries in securities class actions, specifically, are less than spectacular. 

That doesn’t mean they can’t prosecute the Allergan action effectively, but it does suggest they’d derive significant benefit from being able to obtain at least some assistance from other firms.

McMahon’s decision, in other words, may represent an appropriate rebuke to Pomerantz, but it is not in the best interests of the class.

And to me, it all highlights the fallacy of California Public Employees’ Retirement System v. ANZ Secs., Inc (which I blogged about here).  There, the Supreme Court held that the filing of a securities class action does not toll the repose period for subsequently filed individual actions.  Which means that any Allergan class member who trusted Pomerantz, but not Faruqi, to lead the litigation will have to worry about the clock if they want to file their own individual suit.  And down the line, if Faruqi ultimately seeks to settle the action on the class’s behalf, dissatisfied class members can object but by then, they may not have any realistic chance of opting out; they’ll be stuck with whatever deal the court approves – a fact that will be known to both Faruqi and to the Allergan defendants at the outset of negotiations.

The Supreme Court issues a very important order!

That's right - it's the moment we've all been waiting for.  The Court has granted cert in Goldman Sachs v. Arkansas Teachers Retirement System.  (Oh, I think there was some other stuff about not throwing out 20 million presidential votes in four states).

In any event, here are the questions presented by the petition:

(1) Whether a defendant in a securities class action may rebut the presumption of classwide reliance recognized in Basic Inc. v. Levinson by pointing to the generic nature of the alleged misstatements in showing that the statements had no impact on the price of the security, even though that evidence is also relevant to the substantive element of materiality; and (2) whether a defendant seeking to rebut the Basic presumption has only a burden of production or also the ultimate burden of persuasion.

I may or may not have more to say later but for those interested, my blog post about the Second Circuit opinion is here, and you can read all of the cert briefing here.

 

 

 

Podgor on Whether Being Gay Mattered in Carpenter v. United States

Many of us have been looking for new opportunities to raise and discuss issues of diversity and inclusion (including, but not limited to, race, gender, and LGBTQ issues) in our Business Associations and Securities Regulations classes. Along these lines, I’ve been inspired by a number of my BLPB co-editors’ recent posts. (See, e.g., here, here, and here—just in the last week!) With these thoughts in mind, and as we start preparing our course syllabi for the spring semester, I recommend you read Professor Ellen Podgor’s forthcoming article, Carpenter v. United States, Did Being Gay Matter?, 15 Tenn. J. L. Pol’y 115 (2020). Here’s the abstract:

Carpenter v. United States (1987) is a case commonly referenced in corporations, securities, and white collar crime classes. But the story behind the trading of pre-publication information from the "Heard on the Street" columns of the Wall Street Journal may be a story that has not been previously told. This Essay looks at the Carpenter case from a different perspective - gay men being prosecuted at a time when gay relationships were often closeted because of discriminatory policies and practices. This Essay asks the question of whether being gay mattered to this prosecution.

This article was written for the same symposium on insider trading stories held at the University of Tennessee College of Law that my BLPB co-editor Joan Heminway wrote about here and here.

Oh, and while I’m touting the excellent work of Professor Podgor, I should note another of her forthcoming articles recently posted to SSRN: The Dichotomy Between Overcriminalization and Underregulation, 70 Am. U. L. Rev. __ (forthcoming 2021). Here’s an edited version of the abstract:

The U.S. Securities and Exchange Commission (SEC) failed to properly investigate Bernard Madoff’s multi-billion-dollar Ponzi scheme for over ten years. Many individuals and charities suffered devastating financial consequences from this criminal conduct, and when eventually charged and convicted, Madoff received a sentence of 150 years in prison. Improper regulatory oversight was also faulted in the investigation following the Deepwater Horizon tragedy. Employees of the company lost their lives, and individuals were charged with criminal offenses. These are just two of the many examples of agency failures to properly enforce and provide regulatory oversight, with eventual criminal prosecutions resulting from the conduct. The question is whether the harms accruing from misconduct and later criminal prosecutions could have been prevented if agency oversight had been stronger. Even if criminal punishment were still necessitated, would prompt agency action have diminished the public harm and likewise decreased the perpetrator’s criminal culpability? …

This Article examines the polarized approach to overcriminalization and underregulation from both a substantive and procedural perspective, presenting the need to look holistically at government authority to achieve the maximum societal benefit. Focusing only on the costs and benefits of regulation fails to consider the ramifications to criminal conduct and prosecutions in an overcriminalized world. This Article posits a moderated approach, premised on political economy, that offers a paradigm that could lead to a reduction in our carceral environment, and a reduction in criminal conduct.