Business Law Prof Blog

Gonzaga Law - VAP Opening: Center for Law, Ethics, and Commerce

This comes to us from friend-of-the-BLPB, Agnieszka McPeak:

Gonzaga Law is seeking a visiting assistant professor (VAP) for its Center for Law, Ethics, and Commerce, a centerpiece of Gonzaga Law School’s identity and mission. Persons with strong academic records, a dedicated commitment to teaching, and the potential for outstanding scholarship are encouraged to apply. The position is a full-time, 9-month, visiting position beginning in August 2021, with the potential to renew for one (but no more than one) additional year (contingent upon funding). The fellow may be permitted to work entirely remotely.

The successful candidate will teach up to three courses in the academic year in areas related to the Center and its mission, including at least one upper-level Business Law elective. Experiential and clinical teaching are also optional. The candidate will work closely with the Director of the Center for Law, Ethics, and Commerce to plan and participate in activities related to the Center’s goals and mission. In addition, the VAP will be invited to participate in faculty workshops and will be offered a budget for scholarship and travel. More information here: https://gonzaga.peopleadmin.com/postings/15150

I know Agnieszka (who directs the Center for Law, Ethics, and Commerce) is excited to hire for this position, which is likely to be attractive to aspiring law professors who may have a business/innovation interest and expertise.  Please send folks her way!

Simmons on Delaware as a De Facto Federal Agency

Last week, I blogged about the dominance of Delaware organizational law and its implications for the laws of other states.  Which is why I was so interested to when Omari Scott Simmons posted his new paper, The Federal Option: Delaware as De Facto Agency, which takes a (sort of) different view.  He argues that Delaware has become de facto federal agency, delegated by the federal government the power to make corporate law nationally, and that this system works well for now, though there might be circumstances where federal chartering – and the structural oversight that would come with it – might be appropriate.  These could include situations where companies have received governmental bailouts, or where companies have committed significant wrongdoing and subject themselves to federal oversight as part of their settlement.

Of course, the concerns I’ve expressed in my posts are of a slightly different order – they’re about Delaware organizational law extending beyond the boundaries of internal affairs (and Delaware’s ability to define those boundaries in the first place) – but still, it’s an interesting holistic look at Delaware’s role in the corporate governance ecosystem.  Here is the abstract:

Despite over 200 years of deliberation and debate, the United States has not adopted a federal corporate chartering law. Instead, Delaware is the “Federal Option” for corporate law and adjudication. The contemporary federal corporate chartering debate is, in part, a referendum on its role. Although the federal government has regulated other aspects of interstate commerce and has the power to charter corporations and, pursuant to its Commerce Clause power, preempt Delaware, it has not done so. Despite the rich and robust scholarly discussion of Delaware’s jurisdictional dominance, its role as a de facto national regulator remains underdeveloped. This article addresses a vexing question: Can Delaware, a haven for incorporation and adjudication, serve as an effective national regulator? Following an analysis of federal chartering alternatives, such as the Nader Plan, the Warren Plan, the Sanders Plan, and other modes of regulation, the answer is yes, but with some caveats and qualifications. Delaware’s adequate, if imperfect, performance as a surrogate national regulator of corporate internal affairs argues against the upheaval of the existing corporate law framework federal chartering would bring. Even in the contemporary moment where longstanding concerns about corporate power, purpose, accountability, and the uneasy relationship between corporations and society are amplified, Delaware can continue to perform an important agency-like role in collaboration with federal regulators, and regulated firms. A deeper examination comparing the merits of federal corporate chartering with Delaware’s de facto agency function illuminates the potential of existing and future reforms. This article concludes that federal chartering proposals have an important impact despite not being adopted for centuries. First, federal chartering proposals encourage policymakers to look beyond the status quo toward greater hybridization in regulatory design. Second, elements of previous federal chartering proposals have historically become successful “à la carte” reforms or part of other successful reform measures. Third, federal chartering proposals provide value as a bargaining tool where the threat of more intrusive federal regulation makes other reform methods more palatable to diverse corporate constituencies.

My Thoughts on "The Marxism In Your Diversity Training"

This isn't the post I had planned to write. In fact, I had two other ideas. But I feel compelled to write this, knowing that it may cause more controversy than it's worth. 

My colleague Stefan Padfield wrote a post called "The Marxism In Your Diversity Training" that some would call provocative. Others would call it offensive. I had planned to comment on it, but he's taken it down. Did I agree with everything he said? No. Did I disagree with everything he said? Also no. 

I have a unique perspective. I'm a Black female. I protested about race and gender issues in college and law school. I've been a management-side employment lawyer for 25 years both as outside counsel and in house. I still consult with companies, deliver training on EEO laws and polices, conduct discrimination investigations, and advise plaintiffs. I work hard to make sure that companies do the right thing. I've posted here before about my skepticism about certain diversity mandates. Not that we don't need MUCH more work in this area, but I'm not sure the approaches that some states and companies are taking will have long-term benefits.

My law school, like all others, is trying to figure out how to deal with race and social justice in the classroom. My conversations with some students and certain faculty members have been painful, draining, and exhausting. Closer to home, I have a 25-year old Black son. He's a gifted artist, has gone to school in Paris, has visited almost 20 countries, and wouldn't hurt a fly, but he's more likely to get stopped, frisked, arrested, or shot by police than his friends because of his skin color and hair style. If I don't hear from in within a 24-hour period, I panic. 

So I have lots of thoughts about Stefan's post. Right or wrong, Stefan said what a lot of people that our students will encounter think. We owe it to them and each other to use our analytical skills and face volatile issues. 

I've listened to presentations by outside speakers at my law school in the face of protests by some of our students because I believe in teaching and learning through reasoned debate, when possible. But I can't comment on Stefan's post because he took it down in the face of criticism. So I'm sad, but not for the reason that most would think. I'm sad because I think we could have had a thoughtful dialogue on some uncomfortable topics and been an example on how to disagree without being disagreeable. And that's a loss for everyone. 

Chatman & Peters on Academic Hiring

Carliss Chatman and Najarian Peters recently posted The Soft-Shoe and Shuffle of Law School Hiring Committee Practices, which is forthcoming in the UCLA Law Review Discourse.  The piece presents their perspective on the hiring process for legal academics and how many students currently experience the academy.  Since it was posted, it has averaged well over a hundred downloads a day.

The abstract also captures attention:

“We have too many Black and Brown faculty,” said no one ever in any law school. Each year we sit in appointments discussions and hear the same things. The classics-oldies but goodies from appointments committees are:

“We can’t find any qualified Black candidates.”

“There weren’t any in the Faculty Appointments Register (FAR), we scoured websites and emailed our Black friend yet found no one.” One of our colleagues actually lifted a large binder filled with leaflets from the FAR from one year over her head with both hands and waved it side to side to punctuate this very point in a faculty meeting. Everyone around the room including the Brown and other non-white faculty shook their heads in agreement co-signing. Seeing this made one of us wonder whether the FAR binder was some kind of Bible or holy text the girth of which triggered some kind of irrational response or hypnosis to accept the rhetorical fuckery that proceeded the lift. Like that table of manilla folders filled with paper that Trump used in his press conference to prove he had turned over control over his businesses to his sons or that weird blank book that Kayleigh McEnany gave “60 minutes” reporter Leslie Stahl more recently.

The piece has resonated and some scholars are sharing stories about their experiences in the hiring market and with fielding questions that no one would ask someone like me.  For example:

 

Since we’re telling horror stories: I was asked by a dean at the meat market what I would do to improve the school’s relationship with the Black community and the BLM movement. I said “do they need to form an LLC? Cause I teach business law.” I did not receive a fly back. https://t.co/hmQXY2d7gT

— Carliss Chatman (@carlissc) February 21, 2021

 

Klausner, Ohlrogge & Ruan's "A Sober Look at SPACs"

Truth be told, I don't know a whole lot about SPACs.  HOWEVER, I've been encountering this topic frequently these days, whether I'm following clearing and settlement news such as Ex-Cosmo editor teams up with ice hockey owner in Spac deal or doing my daily glance at the FT and reading about Why London should resist the Spac craze.  Wanting to be more in the know, I've just added Michael Klausner, Michael Ohlrogge & Emily Ruan's "A Sober Look at SPACs" to my reading list.  Here's the abstract:

A Special Purpose Acquisition Company (“SPAC”) is a publicly listed firm with a two-year lifespan during which it is expected to find a private company with which to merge and thereby bring public. SPACs have been touted as a cheaper way to go public than an IPO. This paper analyzes the structure of SPACs and the costs built into their structure. We find that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized. Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share. We find, first, that for a large majority of SPACs, post-merger share prices fall, and second, that these price drops are highly correlated with the extent of dilution, or cash shortfall, in a SPAC. This implies that SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public. We question whether this is a sustainable situation. We nonetheless propose regulatory measures that would eliminate preferences SPACs enjoy and make them more transparent, and we suggest alternative means by which companies can go public that retain the benefits of SPACs without the costs.       

Lateral Hiring Announcement: Iowa Law - Health Law/Policy and Environmental Law

The University of Iowa College of Law anticipates hiring one lateral faculty member in the Health Law and Policy area and one lateral faculty member in the Environmental Law area.

QUALIFICATIONS: Consistent with the mission and responsibilities of a top-tier public research university, we are interested in candidates who are (or have the potential to become) recognized scholars and teachers and who will participate actively in the life of the College of Law.

APPLICATION PROCEDURE: To apply, candidates should submit a letter of interest, CV, a list of three references, and a law school transcript through Jobs@UIOWA, https://jobs.uiowa.edu, refer to Requisition #74104.  The University of Iowa College of Law is deeply committed to a community of excellence, equity, and diversity and welcomes applications from women, underrepresented minorities, persons with disabilities, LGBTQI+ individuals, and other candidates who will contribute to the diversification and enrichment of ideas and perspectives. Candidates who can contribute to these goals are encouraged to apply and to identify their strengths in this area.

ABOUT UIOWA: Iowa Law provides the ideal setting for professional growth as a law teacher and legal scholar. As a small school within a Big Ten university, we offer an environment that values community and civility, maximizes collaboration, and encourages exploration across legal fields. As a result, Iowa Law produces graduates who are grounded, collegial, and quietly effective leaders. Iowa Law students learn how to work together and communicate effectively with one another—crucial skills in the legal profession. And as part of a world-class research university, our students and faculty can partner with experts across campus in fields as varied as engineering, public policy, health care, and more—a significant advantage in preparing for legal issues that cross fields of expertise and global borders.

The University of Iowa is a comprehensive public research university known for excellence in research, teaching, and engagement at all levels. A member of the Association of American Universities since 1909 and the Big Ten Conference since 1899, the University of Iowa is home to one of the most acclaimed academic medical centers in the country, as well as globally recognized leadership in the study and craft of writing. Iowa is known for excellence in both the arts and sciences, offering world-class undergraduate, graduate, and professional academic programs in a wide variety of fields. Importantly, the University of Iowa is committed to recruiting and retaining the most talented and diverse faculty and staff, which involves providing opportunities for employees to “Build a Career | Build a Life.” For more information about local work/life resources, including dual-career support, please see: https://worklife.uiowa.edu.

The University of Iowa is an equal opportunity/affirmative action employer. All qualified applicants are encouraged to apply and will receive consideration for employment free from discrimination on the basis of race, creed, color, national origin, age, sex, pregnancy, sexual orientation, gender identity, genetic information, religion, associational preference, status as a qualified individual with a disability, or status as a protected veteran.

ABOUT IOWA CITY: Founded in 1847, the Universe of Iowa is located alongside the picturesque Iowa River in Iowa City. The town has a rare combination of urban, metropolitan offerings and affordable, tree-lined neighborhoods. You’ll find people here who are genuinely interested in each other and their community. It’s invigorating—and a wonderful place to live. Iowa City routinely receives top rankings in multiple categories: one of the best small metropolitan areas for doing business; one of the best cities in America for singles; and one of the top smart places to live. In Iowa City there’s always something to do. The city is home to numerous Big Ten sporting events. Known for renowned authors and up-and-comers from all over the globe, UNESCO has designated Iowa City a “City of Literature”—one of only seven in the world. And of course, Iowa City is a site of presidential politics. Various points around town are regular stops for candidates during the Iowa Caucuses. For more information about Iowa City, visit Think Iowa City: https://www.thinkiowacity.com.

For questions, please contact Faculty Appointments Committee at: [email protected].

Dreher: "How is Wells Fargo going to double black leadership in five years without actively hiring and firing people on the basis of race?"

I found the following in my inbox this morning: Facebook, Twitter, United Airlines and other large companies pledge to boost numbers of diverse leaders ("Nowhere in corporate America have I seen these metrics or an initiative with these types of metrics," said SVLG CEO Ahmad Thomas in an interview with MarketWatch before the announcement of the initiative.).

That reminded me of some commentary Rod Dreher posted last year in response to similar initiatives by Microsoft and Well Fargo (here):

Nadella didn’t say that Microsoft will attempt to do that; he said that Microsoft will do that. You can only double the number of blacks at the company through discriminatory hiring and firing. If you are white, Asian, or Hispanic, and work at Microsoft, you will not have the same chance at promotion, or perhaps you will even have to be laid off to make room for black managers…. How is Wells Fargo going to double black leadership in five years without actively hiring and firing people on the basis of race? ....

According to theorists of “antiracism” like Ibram X. Kendi, any time you see fewer blacks within an institution …, that is conclusive evidence of racism. Racial discrimination is the only explanation. It could not possibly be that, for example, fewer blacks chose to study finance (Wells Fargo), tech (Microsoft) or in related fields that would have brought them into the workplace at those particular companies. Only racism explains it…. This is what Microsoft apparently believes. This is what Wells Fargo apparently believes. This is what they are committed to doing: discriminating against non-black employees to fit this ideological idea of antiracism.

Relatedly, Ed Whelan had the following to say about Coca-Cola's new diversity guidelines for outside counsel (here):

Title VII of the Civil Rights Act of 1964 broadly prohibits employers from discriminating on the basis of race, including in assigning work. But that’s exactly what Coca-Cola would have law firms do. It’s often thought that the Supreme Court’s anti-textual ruling in United Steelworkers v. Weber (1979) gives a green light to racial preferences that favor blacks. But the Court’s actual holding is much narrower than that …. While declining to “define in detail the line of demarcation between permissible and impermissible affirmative action plans,” the Court emphasized that the plan at issue was “a temporary measure” and was “not intended to maintain racial balance, but simply to eliminate a manifest racial imbalance” resulting from the systematic exclusion of blacks from craft unions…. Far from adopting its guidelines as “a temporary measure” to “eliminate a manifest racial imbalance,” Coca-Cola contemplates that the guidelines will operate in perpetuity to achieve and “maintain racial balance.” Indeed, the guidelines explicitly state that their “minimum commitments will “be adjusted over time as U.S. Census data evolves.” In short, there is little reason to think that the employment discrimination that Coca-Cola’s guidelines call for would fall within the Weber exception to Title VII.

Richard Epstein makes the further point (here) that if there is a known pipeline problem (i.e., based purely on the current number of Black attorneys, the quotas appear to require reaching further into the talent pool) then a breach of duty claim might also be possible: It is also worth asking whether a shareholder could succeed with a derivative legal action that held that the adoption of Coke’s decision to hire weaker minority workers was a breach of its fiduciary duty.

It is easy to find at least some of the foregoing analysis offensive and/or just plain wrong, but the question remains for discrimination law experts: In terms of surviving a motion to dismiss in a reverse-discrimination case, how much (if at all) do these corporate diversity commitments help plaintiffs?  In terms of Epstein's fiduciary duty point, I find it very difficult to imagine a set of facts that would preclude management from claiming a pro-corporate cost-benefit analysis sufficient to dismiss a fiduciary duty claim.  You'd basically need "smoking gun" evidence of decision-makers having a Henry Ford or Tim Cook moment to even have a chance of avoiding that as a plaintiff (i.e., some version of "we have reason to believe this might destroy shareholder value but we don't care").

Delaware Law Continues to Eat the World

I’ve previously expressed concern about Delaware organizational law intruding into other states’ spaces.  A new entry into the genre is VC Slights’s opinion in AG Resource Holdings, LLC, et al. v. Thomas Bradford Terral.

In AG Resource Holdings, Thomas Terral cofounded an LLC called AG Resource Management.  The business was eventually bought out by a private equity firm and restructured as a holding company, AG Resource Holdings LLC, that wholly owned the operating subsidiary, AG Resource Management LLC.  Terral was designated as one of several managers of the LLCs, and also was an officer.

Terral’s contractual obligations were embodied in separate agreements.  First, he had an Employment Agreement, which had various noncompetes, and a Delaware choice of law clause.  Second, the LLC agreements themselves required him to act in good faith and not compete, and chose Delaware law, and Delaware forums, to resolve any disputes. 

Terral was fired after it was discovered he was planning to compete with the companies, and he filed a complaint in Louisiana seeking to have the noncompete in the Employment Agreement declared unenforceable.  Terral’s argument – which a Louisiana court accepted on a motion for a preliminary injunction – was that because the work was performed in Louisiana, Louisiana law naturally governed the Employment Agreement, and under Louisiana law both the noncompete and the Delaware choice of law clause were unenforceable. 

The companies then sued in Delaware seeking to enforce the agreements.

Examining all of this, Slights agreed that, in the absence of the choice of law clause, Employment Agreement was governed by Louisiana law as the state with the greatest interest.  Louisiana would not have permitted employees to waive Louisiana law, or waive the right to compete (at least not in the way the agreement was drafted), therefore, those provisions were unenforceable.  For that reason, the Louisiana court action took precedence over the Delaware action.  So, the companies’ action to enforce the Employment Agreement was stayed in favor of the Louisiana action.

But the LLC agreements were a different story.  First, Terral had not sued under those agreements in Louisiana, so those issues were not before the Louisiana courts.  More importantly, though, those agreements were part of “the constitutive documents of a Delaware entity,” and even in the absence of choice of law/forum clauses, Delaware law would control by default.  And under those agreements, Terral had agreed to act in good faith and not to compete, and the companies had the right to enforce those agreements in Delaware.  As Slights put it:

Moreover, while Louisiana may possess a public policy interest in regulating the actions of employers toward employees within that state, Louisiana has no interest in regulating the governance or internal affairs of a Delaware entity. And, while LA. STAT. ANN. § 23:921(L) provides that, under Louisiana law, non-competes within LLC agreements will be subject to nearly identical restrictions as those within employment contracts, there is no indication that Louisiana purports to extend those restriction to fiduciaries acting within Delaware LLCs.

To state the distinction most directly, the claims under the Employment Agreement rest on Terral’s conduct as employee (regardless of whether he occupied a fiduciary status), while the claims under the LLC Agreement rest on Terral’s status as a member of the Company’s Board of Managers. In drawing this distinction, I acknowledge there may be some overlap in the litigation and adjudication of claims arising under the Employment Agreement on the one hand, and the LLC Agreements on the other, and further acknowledge there is at least some risk of inconsistent outcomes. Nevertheless, as discussed here, Terral is alleged to have engaged in wrongful conduct as a “manager” and “officer” of a Delaware entity. The Company is entitled to litigate that claim in this Court.

All of that contains a surface level appeal, but the problem is – at least as described in the opinion (it’s possible there’s more nuance to the underlying documents) – the LLC Agreements obligated Terral to basically do the same things as the Employment Agreement, as part of a relationship that substantively would be characterized as an employment relationship.  If that’s right, then it shouldn’t matter whether the LLC Agreements are labeled “LLC Agreements” or “Employment Agreements” or “Ishkabibble,” they are substantively contracts for employment and should carry with them the same restrictions.  If Terral, as someone who performs management services for the companies, is legally barred from waiving his right to compete under Louisiana law, then it shouldn’t matter what document the impermissible restriction is contained in. 

I mean, it’s absolutely possible that Terral had different responsibilities and legal rights as a member of the LLCs Board of Managers, and as an employee of the company, making it possible to distinguish between the different contracts, but if so, nothing in the opinion itself explains what the differences would be.

To put it another way, if someone is labeled an LLC “manager,” does that mean their relationship with the LLC is necessarily a question of Delaware organizational/entity law, or is there some particular type of relationship that is more appropriate for regulation under business organizational law rather than employment law, and if so, what is the scope of that relationship?

Interestingly, VC Laster confronted a somewhat similar situation a few months ago in Focus Financial Partners v. Holsopple.  There, an employee working out of California received as compensation certain units of a Delaware LLC.  As a condition of his employment, he signed “unit agreements” regarding the transfer of the units, which contained various noncompete/nonsolicit clauses, and stated they were governed by Delaware law with a Delaware forum selection clause.   Additionally – and I’m simplifying, there were amendments over time, it was a whole thing – the LLC itself had an operating agreement with a Delaware forum selection clause.

There was eventually a dispute over whether Holsopple had violated the noncompetes, and Focus Financial sued in Delaware.  The only way that Delaware would have personal jurisdiction over Holsopple was through the choice of forum/law provisions of the unit agreements and the operating agreement.  Holsopple, however, claimed that these provisions were all part of his employment contract, his employment contract (in the absence of these agreements) would be governed by California law, and California law would render them unenforceable.  Laster agreed.  Notwithstanding the fact that the provisions did not appear in the employment agreement per se – they appeared in unit transfer agreements and the LLC operating agreement – they were functionally part of his employment contract. 

Now, Laster had an easier time of it than did Slights in AG Resource Holdings, because Holsopple was not a manager of the LLC.  In fact, as Laster pointed out, “the units generally did not have ‘any voting or other consent or approval rights.’ Focus Parent is a manager-managed LLC in which holders of units have minimal rights.”  But that only begs the question whether – going back to to AG Resource Holdings – Slights should have conducted a more searching inquiry of Terral’s powers and responsibilities to determine if even his “manager” role was functionally that of an employee.

Notably, in Focus Financial, Laster had a very interesting footnote where he anticipated the corner into which Delaware had boxed itself:

Delaware court have confronted with increasing frequency situations in which parties have attempted to use choice-of-law provisions selecting Delaware law to bypass the substantive law of sister states. In this court, the conflicts most often involve agreements containing restrictive covenants.  … This court has also confronted a conflict between agreements selecting Delaware’s contractarian regime and the substantive law of a foreign jurisdiction. … Other Delaware courts have confronted similar issues in other contexts. …Because Delaware’s role as a chartering jurisdiction depends on other states deferring to the application of Delaware law to the internal affairs of entities, the increasing frequency with which parties use Delaware law to create conflicts with the substantive law of other jurisdictions raises significant public policy issues for this state. See Diedenhofen-Lennartz v. Diedenhofen, 931 A.2d 439, 451–52 (Del. Ch. 2007) (“If we expect that other sovereigns will respect our state’s overriding interest in the interpretation and enforcement of our entity laws, we must show reciprocal respect.”).

The point is, Delaware’s increasingly contractual approach to entity is organization is putting pressure on the boundaries of the internal affairs doctrine.  Also relevant here is the growing prevalence of shareholder agreements – studied by Gabriel Rauterberg in this paper and Jill Fisch in this one – which may very well select a law other than Delaware’s, so that the entity is organized under Delaware law but crucial governance matters are controlled by the law of another state.  See, e.g., KT4 Partners v. Palantir Technologies (shareholder may obtain books and records under Section 220 to investigate violations of stockholder agreements governed by California law).  These are going to create thorny choice-of-law issues going forward and, I worry, undermine the utility of the internal affairs doctrine itself.

Regulatory Ritualism and other Lessons from the Global Experience of Insider Trading Law

I just posted a new article, Regulatory Ritualism and other Lessons from the Global Experience of Insider Trading Law, on SSRN. This article is the culmination of a five-year research project. It offers a comprehensive comparative study of insider-trading regimes around the globe with an eye to much-needed reform in the United States. It is the first article to consider global insider trading enforcement in light of the problem of regulatory ritualism. Regulatory ritualism occurs where great attention is paid to the institutionalization of a regulatory regime without commitment to, or acceptance of, the normative goals that those institutions are designed to achieve. The article develops and expands upon some themes and arguments that were first sketched out in Chapters 5 and 11 of my book, Insider Trading: Law, Ethics, and Reform. Here's the article's abstract:

There is growing consensus that the insider-trading regime in the United States, the oldest in the world, is in need of reform. Indeed, three reform bills are currently before Congress, and one recently passed the House with overwhelming bipartisan support. As the U.S. considers paths to reforming its own insider trading laws, it would be remiss to ignore potential lessons from global experimentation and innovation, particularly in light of the fact that so many insider trading regimes have been recently adopted around the world.

Any such comparative study should, however, be cautious in drawing its conclusions. Reformers should pay close attention to the political, social, and economic motivations that might explain the recent trend toward near-universal adoption of insider trading regulations around the globe. Evidence suggests that at least some countries have adopted their insider trading regimes ritualistically. Regulatory ritualism occurs where great attention is paid to the institutionalization of a regulatory regime without commitment to or acceptance of the normative goals that those institutions are designed to achieve. If countries' insider trading regimes are adopted only ritualistically (e.g., to receive geopolitical carrots or to avoid geopolitical sticks), then comparative analysis should account for the fact that these regimes may not reflect its citizens' (or markets') lived experience or normative commitments.

This Article aids the effort of reforming our insider-trading laws here in the United States by considering lessons that can be learned from the global experience. Part I makes the case that the insider-trading regime in the U.S. is in need of reform. Part II charts the global rise of insider trading regulation in the twentieth century. Part III summarizes important features of representative regimes around the globe (e.g., in Japan, Europe, China, Russia, India, Canada, Australia, and Brazil). Part IV notes the trend toward universality in insider trading regulations and considers some of the moral and economic conclusions scholars and regulators have drawn from this trend. Part V identifies the problem of regulatory ritualism, and its implications for global enforcement and compliance. Part VI then turns to the constructive exercise of determining what can be learned from the global experience of regulating insider trading with an eye to reforming the American regime.

A $900 Million Banking Blunder

In August 2020, Citibank, as administrative agent for a syndicated loan to Revlon, Inc., accidently wired nearly $900 million to lenders.  It had intended to send a $7.8 million interest payment.  Some of the lenders refused to return the money.  Not surprisingly, Citibank was not happy about this.  Yesterday, U.S. District Judge Jesse M. Furman issued a ruling denying Citibank's attempt to recoup the funds.  As it turns out, under NY law, keeping money wired by mistake generally amounts to conversion or unjust enrichment. However, under the discharge-for-value defense, “The recipient is allowed to keep the funds if they discharge a valid debt, the recipient made no misrepresentations to induce the payment, and the recipient did not have notice of the mistake.”  

Here's coverage of the ruling in the NY Times, WSJ, and Reuters.

UK Law Market & Tech Conference - This Thursday and Friday!

The following news of a virtual conference (hosted by the University of Kentucky Rosenberg College of Law, with support from the John S. and James L. Knight Foundation) comes to us from Ramsi Woodcock at UK Law/Business & Econ:

 

Please join us as we think through antitrust, data, taxation, consumer welfare, property, bigness, and tech policy from the perspective of the distribution of wealth at Inframarginalism & Internet: A Conference on Markets as Wealth Distributors, and the Implications for Tech Policy, which will be held online on Thursday, February 18 and Friday, February 19.

 

RSVP:  https://bit.ly/2KVXIn4

 

 

Speakers include:

 

-Herbert Hovenkamp

-Fiona Scott Morton

-A. Douglas Melamed

-Thomas Philippon, author of The Great Reversal: How America Gave Up on Free Markets

 

-Katharina Pistor, author of The Code of Capital: How the Law Creates Wealth and Inequality

 

-Chris Sagers, author of United States v. Apple: Competition in America

-David J. Teece

-Susan Crawford, author of Fiber: The Coming Tech Revolution--and Why America Might Miss It

-Gerrit De Geest, author of Rents: How Marketing Causes Inequality

 

Panels include:

Antitrust Futures

The Meaning and Control of Bigness

Redistribution Through Antitrust and Consumer Law

Taxation and Tech

Data and Power

Rent Theoretic Approaches to Property Law

A New Rent Theory?

 

 

Full program: https://inframarginalism.net/

 

Please share with your communities:https://twitter.com/Inframarginali2/status/1354870374350127104

Duquesne VAP Openings (Technology & Heath Law Among the Needs . . .)

Visiting Assistant Professor in Law

Faculty Posting Date: February 12, 2021

To Apply: apply.interfolio.com/84257

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Duquesne University School of Law, located in Pittsburgh, Pennsylvania, invites applications to fill up to two full-time visiting assistant professors beginning 2021-2022 academic year. Each position will have a one-year appointment that may be renewable for a second year. VAP will teach courses in legal education. We seek colleagues who can contribute to the diversity of our campus community and wish to advance diversity, equity, and inclusion through teaching and service.

DUTIES AND RESPONSIBILITIES:

Teach Up to 12 credit hours for the year. Assigned courses will vary, but likely curricular needs include: torts, professional responsibility, technology, privacy, and health law.

REQUIRED QUALIFICATIONS:

Juris Doctorate from an ABA-accredited law school.

Preferred Qualifications

Experience teaching legal education.

Evidence of significant practical experience in an area of curricular need.

APPLICATION INSTRUCTIONS:

Catholic in its mission and ecumenical in spirit, Duquesne University values equality of opportunity as an educational institution and as an employer. We aspire to attract and sustain a diverse faculty that reflects contemporary society, serves our academic goals that enriches our campus community. We particularly encourage applications from members of underrepresented groups and support dual-career couples through our charter membership in this region's HERC.

We invite applicants for this position to learn more about our University and its Spiritan heritage by visiting our Mission Statement. http://www.duq.edu/about/mission-and-identity/mission-statement. Those invited to campus for an interview may be asked about ways in which they see their talents contributing to the continued growth of our community and furthering its mission.

Application review will begin immediately and will continue until the position is filled. Duquesne University uses Interfolio to collect all faculty job applications electronically. Applicants should submit a letter of intent, a curriculum vitae, and contact information for three professional references via Interfolio http://apply.interfolio.com/84257. The letter of intent should include comments on ability to teach in flexible environments, including online, hybrid, and in-person classroom settings. Applicants are encouraged to describe in their letter of intent how their scholarship contributes to building and supporting a diverse and inclusive community. Applicants with questions about the position may contact Ann Marie Schiavone at [email protected].

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Duquesne University was founded in 1878 by its sponsoring religious community, the Congregation of the Holy Spirit. Duquesne University is Catholic in mission and ecumenical in spirit. Motivated by its Catholic identity, Duquesne values equality of opportunity both as an educational institution and as an employer.

An Opinion About Nothing

Almost exactly one year ago, I blogged about an unusual books and records lawsuit involving Facebook.  The plaintiffs were seeking documents pertaining to Facebook’s $5 billion settlement with the FTC, on the theory that Facebook had improperly agreed to pay larger fines in order to protect Mark Zuckerberg, personally, from liability.  That, the plaintiffs claimed, was an interested transaction involving a controlling shareholder, subject to entire fairness review if not cleansed using MFW procedures.

As I said at the time, the reason this struck me as novel was because the entire lawsuit depended on Delaware’s slow evolution of thinking surrounding controlling shareholder transactions, and highlighted the box Delaware has put itself in.  Is it true that any controlling shareholder transaction gets entire fairness review absent MFW procedures?  Because if the controlling shareholder involved in day-to-day operations, that’s a very broad rule, and if that’s not the rule, what kinds of transactions qualify?

Anyhoo, VC Slights just issued his opinion in the 220 action and the remarkable thing about it is that it says … nothing.

I mean, it says something, obviously, it holds that (1) plaintiffs may obtained non-privileged electronic communications pertaining to the settlement and (2) plaintiffs have not – yet – shown a need for privileged communications, though I gather that may change depending on what comes of the electronic production.  But none of that strikes me as breaking new ground in Section 220 law, or anything; what leaps out is how very. carefully. nothing in the opinion weighs in on the merits of the potential claim here, i.e., how Delaware should review the FTC settlement itself.

To some extent, I suppose, that’s probably because Facebook never made any arguments in its briefing about the merits, i.e., whether the plaintiffs had actually identified a potential breach of fiduciary duty.  Which is, you know, correct – the Delaware Supreme Court recently said in no uncertain terms that a 220 action is not the place to litigate the merits of a potential claim, and VC McCormick suggested she might impose fee-shifting as a sanction for companies stonewalling on that issue.

But Facebook’s brief was filed before those cases were handed down, at a time when most companies were trying to use Section 220 to obtain a back door merits dismissal.  Yet Facebook … did not.

Which suggests to me that everyone – VC Slights, Facebook, and certainly the plaintiffs – recognize what a hot potato they have here.  Which is why I’m keeping a close eye on this one.

(We can save for another time a discussion of the value of a system where you litigate for a year to get the documents that you may use to file a complaint.)

Fleischer on "Corporate Purpose: A Management Concept and its Implications for Company Law"

Holger Fleischer has posted Corporate Purpose: A Management Concept and its Implications for Company Law on SSRN (here).  I like the idea of distinguishing (1) a "management concept" of identifying a corporate purpose "beyond mere profit" from (2) a corporate law conception of the for-profit corporation as a profit-maximizing entity.  Here is the abstract:

Many companies have recently been following the so-called corporate purpose concept that is recommended by leading management scholars. To this end, they identify a raison d'être for their enterprise that goes beyond mere profit making and they anchor it in the entire value chain. This paper puts the corporate purpose concept in perspective by linking it to the larger debate on corporate social responsibility and by outlining its theoretical foundations and practical application. It then goes on by explaining how this management concept fits into the company law framework, looking to France and the UK as well as to the US and Germany. Finally, this paper assesses various policy proposals made by leading purpose proponents, ranging from mandatory purpose clauses in the articles of association to say-on-purpose shareholder voting and dual-purpose business organisations.

Statutory vs. Regulatory Exemptions

Nevada legislators recently introduced legislation to create a statutory exemption from licensure for the investment advisers for certain qualifying private funds.  The language appears nearly identical to the model regulation released by the North American Securities Administrators Association (NASAA). Notably, NASSA explained that its regulatory approach would be "contingent in many respects on how the SEC moves forward on implementation in this area. Consequently, if the SEC makes significant alterations to its proposals NASAA may be required to reevaluate the provisions in any proposed model rule or rules."  Nevada's own Securities Division also recently released a proposed regulatory update which includes NASAA's model regulatory exemption.

There are really two questions here.  The first is whether an appropriately tailored exemption from licensing requirements should exist for certain private funds.  Nevada’s own securities regulators support the exemption and included it in their draft regulations. As it stands, putting the exemption into place does not require the Nevada Legislature to do anything.  The exemption appears highly likely to be embodied in the final regulatory code at the conclusion of the ordinary regulatory process.  I filed a comment letter on this with the Nevada legislature and have reviewed the letters filed by supporters of the legislation.  Although they all seem like well-intentioned people who are enthusiastic about the exemption, none appear to be securities lawyers.

There isn't any real debate over whether the exemption should exist.  The real question is whether to situate the exemption within the statute or regulatory code.  Enacting this legislation would calcify the exemption in statutory language and require additional legislative acts to address any later-discovered flaws with it or to modify it to conform to changing circumstances. In contrast, allowing state regulators to situate the exemption within their regulatory code will avoid these problems.  Indeed, most states who provide for such an exemption do so through their regulations and not through a statute.

Situating the exemption in the statute instead of the regulations presents real problems.  Nevada’s legislature does not meet on an annual basis.  It will not be well-positioned to respond to changing circumstances.  Moreover, the proposed legislation references federal regulations which may be changed by the SEC.  Will the content and meaning of Nevada’s statutes change when federal securities regulations change (as they often do) or become recodified with slightly different language or different citations?  How readily will people be able to understand Nevada's statute if federal regulations change and Nevada’s unchanging statute refers to an outdated regulatory code?  I don't know the answer to this but can see that it will create questions and likely require private funds to obtain expensive opinions from securities lawyers about what the statutory exemption means and whether they qualify for it. When other states update their regulatory code, Nevada’s statute will likely sit unchanged.

Putting the exemption in the statute seems likely to generate problems over time because statutes cannot be changed as readily as regulations.  In effect, this approach could raise the cost of capital formation and frustrate the goal of facilitating capital formation in Nevada.  These issues could avoided entirely by allowing state regulators to update their own exemptions to conform to the constantly-changing federal securities laws. To be sure, the variance between statute and regulations might not be great in the the first year.  Yet with each additional year, the probability that the statute will become outdated and diverge from model state securities regulations will increase.  

There is a real danger here that seeking positive economic development by passing legislation will, over time, make economic development more difficult.  If legislators want to support the exemption and also ensure that access to capital remains robust, they should take a different approach which would preserve regulation’s essential flexibility in the face of changing circumstances. The legislation might be amended to direct the Nevada Securities Division to periodically consider whether to amend its regulations to keep them up to date.  For example, the Legislature might direct the Securities Division to solicit public comments and review existing exemptions every three years and determine whether to initiate rulemaking to appropriately rebalance capital formation and investor protection.  The Legislature could also specify criteria for the Securities Division to consider, such as: (i) the cost and burden of existing regulation; (ii) the amount of capital raised under existing exemptions; (iii) the Securities Division’s experience overseeing particular exemptions; and (iv) any public comments received about the existing exemptions.  A structured prod to update could accomplish the same goal and avoid the problems which will likely flow from cluttering up the statute with something that belongs in regulations.

 

Robinhood, GameStop, and Clearinghouses

Co-blogger Joan Heminway predicted that GameStop Will Be 2021's Great Gift To Business Law Professors.  Totally agree.  I think it’s also a great gift to those of us who research financial market infrastructure, particularly clearing and settlement.  This episode has highlighted the importance of clearinghouses.  In the past, I’ve written several posts on clearinghouses (for example, here, here, here).  In preparing to speak on this topic during the UT Law roundtable last week, I came across several great articles about the role of clearinghouses and margin calls in the Robinhood/GameStop story.  I share a few of these below with readers. 

Keep in mind that the DTCC’s clearinghouse, the National Securities Clearing Corporation (NSCC), was designated in 2012 by the Financial Oversight Stability Council (FSOC) as one of eight designated financial market utilities under Dodd-Frank's Title VIII.  These designated FMUs are single points of failure in financial markets.  I've written extensively about Title VIII, beginning with The Federal Reserve as Last Resort.

Jeff John Robert’s Fortune article:  The real story behind Robinhood’s decision to restrict GameStop trading – and that 4 a.m. call to put up $3 billion.

Telis Demos’ WSJ article: Why Did Robinhood Ground GameStop? Look at Clearing

Stephen G. Cecchetti & Kim Schoenholtz’s blog post, GameStop: Some Preliminary Lessons

Robinhood’s post on “What Happened this Week”

Tomorrow In Securities Regulation: Investors

I tell my students that the participants in securities transactions are "the three Is" or  "I³": issuers, intermediaries, and investors.  Tomorrow morning, having covered the definition of a security and the concept of materiality, I offer some foundational words on investors. 

What to tell?  Of course, I will talk a bit about investment theory, the investor protection policy and mechanisms of federal securities law, the composition/demographics of the typical equity ownership of a public company, etc.  But what do I say about GameStop Corp.?  Set forth below is a chart summarizing the trading in GameStop common stock for the past five days: (courtesy of Google Finance):

Who are the investors in the market for GameStop common stock, options, and short positions now?  Who will they be in a month or six months or a year (assuming a trading market can be sustained)?  And what do the changes in GameStop's investor profile say about the firm itself, about the New York Stock Exchange, and about various related aspects of securities regulation?  

There remain few answers to the fundamental question of who owns or is trading in GameStop's publicly traded common stock.  Nevertheless, there are many worthy conversation starters around the GameStop phenomenon that raise interesting opportunities for longer-term exploration.  More on all this as time marches on.  "Once more unto the breach, dear friends, once more . . . ."

[Editorial note (2/9/2021): I should have mentioned that I do plan to use John Anderson's post from Saturday (which echos points he made in our UT Law roundtable last week) to talk about whether some of the people he mentions or alludes to (thrill-seekers, political speech purveyors, trading gamers, populist performers, nostalgic market-watchers) are or should be considered to be investors.]

Northern Illinois Law is Hiring (and Has Business Law Needs . . .)

POSITION ANNOUNCEMENT

NORTHERN ILLINOIS UNIVERSITY COLLEGE OF LAW invites applications for an anticipated opening for an entry-level tenure-track faculty position beginning August 2021. Duties include engaging in high quality research and teaching, as well as being an active participant in law school and university service. Applicants must hold a J.D. degree from an ABA accredited law school, or a foreign law school equivalent, and must provide evidence of the potential for engaging in high quality research and teaching.

Preferred qualifications include record of scholarly publication, teaching experience (particularly in a law school), legal practice experience, strong law school record, law journal membership, and clerkship experience.

We will consider candidates with a broad range of teaching and research interests, but the successful candidate will be expected to teach at least one first-year course (which may include Constitutional Law I: The Federal System). Our upper-level needs include, but are not limited to, Business Law, Commercial Law, Criminal Law and Procedure, Tax, Trusts and Estates, and skills courses. Applications are encouraged from women, members of minority groups, and others whose background and experience would contribute to the diversity of the law school community.

If you wish to apply, please go to the position posting at the NIU applicant tracking system at https://employment.niu.edu/postings/55269 where you will find a full description of the position (including preferred qualifications) along with a list of documents you will need to submit for the search committee’s consideration.

Please direct questions to the search committee chair, Professor Marc Falkoff, at [email protected], or to Tita Kaus, Administrative Assistant to the Dean, at 815-753-1068 or [email protected]. For full consideration, applications should be received by March 1, 2021.

GameStop and Retail Securities Trading as Political, Social, or Aesthetic Speech

    Commenters have likened the recent retail “meme” trading in stocks such as GameStop Corp. to buying a ticket on a roller coaster—“You don’t go on a roller coaster because you end up in a different place, you go on it for the ride and it’s exciting because you’re part of it.” See, Bailey Lipschultz and Divya Balji, Historic Week for Gamestop Ends with 400% Rally as Shorts Yield, Bloomberg (January 29, 2021).

    The comparison is apt in a number of respects. These retail traders, led by some members of the “WallStreetBets” group on the Reddit social media platform, “got on” GameStop a couple weeks ago at just under $20 a share, and, despite its rapid rise to a high of just under $500 a share, I think most people expect (including the meme traders) that the price at which this turbulent ride will end is somewhere around where it began. After all, GameStop’s fundamentals have not changed. It remains a brick-and-mortar business that was devastated by the pandemic, and it is expected to steadily lose market share to online vendors.

    For anyone interested in the mechanics of the “short squeeze” and how these traders managed to move price of GameStop so far out of whack with its presumed value, see some helpful articles here, here, and here. For some thoughts on the controversial limitations on trading by retail brokerage firms such as Robinhood, see my Co-bloggers Ben Edwards’ and Anne Lipton’s recent posts here and here. And see some other interesting takes from my Co-blogger Joan Macleod Heminway here. My purpose in this post is to highlight one aspect of the meme-trading phenomenon that has, I think, been underappreciated.

    Given that we all have a pretty good idea of how this roller-coaster ride is going to end, why did many retail traders (along with others) continue to pile on? One answer is that these traders were just blinded by greed and FOMO. Indeed, concern that amateur traders are being led astray in this way by social media influencers and "game-like" trading interfaces has led some to call for paternalistic trading restrictions by brokerage firms and/or regulatory intervention. But it seems to me that something quite different may be going on here as well. There is evidence to suggest that at least some of the meme traders who have taken the markets by storm over the last couple weeks are not (and never were) buying these heavily-shorted stocks simply to make money, but rather to make a point.

    The “points” being made by these traders are not necessarily coordinated or consistent. They range from the oft-expressed goal of “taking it to” Wall-Street hedge funds to "hurt the big guys" in the same vein as the Occupy Wall Street movement of 2008, to protesting the demise of bricks-and-mortar businesses by Big-Tech and mega online vendors, to the populist rejection of perceived top-down elitism (private and public) that elevated Donald Trump to the Presidency in 2016. Indeed, former SEC Commissioner, Laura Unger, recently compared the recent social-media-driven short squeezes to the Capitol Hill riots on January 6. Some have even gone so far as to suggest that some meme traders are buying stocks on aesthetic grounds, to bring back retro companies like Blackberry and Blockbuster as “nostalgia plays.”

    If retail traders are trading as a form of political, social, or aesthetic expression, then what are the implications? What does this mean for the Efficient Market Hypothesis? What (if anything) should (or can) regulators and/or legislators do about it? These are some questions my co-authors Jeremy Kidd, George Mocsary, and I plan to explore in a forthcoming article. I plan to post some more thoughts on the possibility of retail securities trading as a form of speech (and its social, market, and regulatory implications) in the coming weeks.

Robinhood's Interface

After Ben posted about the GameStop Affair last week, Joan predicted that the saga would be a “great gift to law professors.”  That seems about right, because here I am with a post about the subsidiary issue of Robinhood, or rather, Robinhood’s platform.

FINRA just issued a report on its current Risk Monitoring and Examination Activities, which highlights certain areas that FINRA will be investigating going forward.  It doesn’t mention Robinhood by name, but it flags some of Robinhood’s practices for special attention and, in particular, its game-like user interface.  In specific, it says:

we are increasingly focused on communications relating to certain new products, and how member firms supervise, comply with recordkeeping obligations, and address risks relating to new digital communication channels. This focus includes risks associated with app-based platforms with interactive or “game-like” features that are intended to influence customers, their related forms of marketing, and the appropriateness of the activity that they are approving clients to undertake through those platforms (e.g., under FINRA Rule 2360 (Options)).

…

While such features may improve customers’ access to firm systems and investment products, they may also result in increased risks to customers if not designed with the appropriate compliance considerations in mind. Firms must evaluate these features to determine whether they meet regulatory obligations to…comply with any Reg BI and Form CRS requirements if any communications constitute a “recommendation” that requires a broker-dealer to act in a retail customer’s “best interest”…

Brokers must act in the customer’s best interest when making investment recommendations.  Interfaces that encourage more trading simply to generate revenue for the platform – rather than based on a personalized assessment of the customer’s needs – aren’t going to comply with that standard, so the question is whether these kinds of encouragements are, in fact, recommendations.

This is an issue more broadly for electronic platforms that use algorithms to do everything from bringing certain items to the customer’s attention to providing responses to customer-initiated searches.  For example, Regulation Crowdfunding creates a new kind of entity known as a Funding Portal; basically, a website where investors can browse available offerings by issuers.  Funding Portals are exempt from broker-dealer registration as long as they limit their activities, including refraining from giving investment advice or making any investment recommendations.

The problem is that when you’re talking about a website, where algorithms determine the order in which investments appear on a page and which ones are highlighted at a particular time and which ones pop up when you type in search words, it’s very hard to tell what counts as “investment advice.”  Is it “advice” to say “These investments are trending”?  To say “These companies have been profitable for a year”?  Does it matter if the customer first searched for these criteria, or if they just popped up on the screen, unprompted?  What if the platform itself contains suggested search criteria?

The SEC tried to address this problem in Regulation CF Rule 402(b), which permits portals to highlight particular offerings based on “objective criteria.”  The adopting release contains a long discussion of the issues, and as you can see, this is ... not easy to resolve.

Back to Robinhood.  As readers are probably aware, Massachusetts is currently suing Robinhood over its interface, and that’s the gravamen of the complaint as well: That Robinhood’s interface is functionally making recommendations to customers when it highlights particular securities based on purportedly objective criteria, like “100 most popular,” “Food and Drink,” and so forth.  The app even says things like “Can’t decide which stocks to buy? Check out the most popular stocks.” 

And then, of course, there’s the question whether more subtle aspects of the platform – like confetti graphics congratulating customers on a trade – are encouraging more trading and therefore are also, in a sense, making recommendations (i.e., a recommendation of churning).

All of which is to say, this is apparently what FINRA plans to confront going forward.

Finally, I’ll add, if it turns out the Robinhood interface was designed with little regard for FINRA’s rules, it might turn out to be relevant that Robinhood’s CEO is not registered with FINRA, and there’s a legitimate question whether he’s improperly managing Robinhood’s operations.  Per CNN:

Unless granted an exemption, FINRA generally requires that the CEOs of registered broker-dealers be registered with the agency….

The CEO of a parent company that owns a broker-dealer does not necessarily need to be registered. ​

In this case, Tenev is the CEO of Robinhood Markets, the parent company that is not registered with FINRA. Robinhood Markets owns a broker-dealer and a clearing broker.

Robinhood told CNN Business that Tenev does not directly manage the FINRA-registered leaders of the broker-dealer or clearing broker — but declined to say who does. None of Tenev's direct reports appear to be registered with FINRA. ​…

So, we can perhaps put that on the list of issues as well.