Business Law Prof Blog

As a teaser to a forthcoming article I coauthored with two of my students (who co-presented with me) for the Business Law Prof Blog symposium back in the fall, I offer a short excerpt on business interruption insurance litigation resulting from governmental actions forcing business closures as a result of the pandemic, focusing on a recently decided Tennessee case.

In general, business lawyers got inventive in bringing legal claims of many kinds. A federal district court case recently decided in Tennessee, Nashville Underground, LLC v. AMCO Insurance Company, No. 3:20-cv-00426 (M.D. Tennessee, March 4, 2021), offers a notable example involving the interpretations of a business interruption insurance policy. The plaintiff in the action, a Nashville bar, restaurant, and entertainment venue, claimed coverage under the food contamination endorsement in its business interruption insurance policy for the damages suffered when it was forced to close its doors by governmental orders issued in March 2020 in response to the COVID-19 pandemic. The insurer denied coverage. The court held for the defendant insurer on its motion to dismiss for failure to state a claim, finding the contract language unambiguous. The court’s conclusion in its opinion noted sympathy, in spite of the outcome.

Like many Americans, the undersigned can sympathize with Plaintiff and so many of our other small to medium-sized businesses that seem to have borne much of the brunt of the effects of the COVID-19 pandemic. One could understand if Plaintiff (or anyone else) lamented that it simply is not right that this should be the case. But it also is not right, or lawful, for a business's insurer to be on the hook for coverage it simply did not contractually commit to provide. Presumably like a myriad of other enterprises throughout this nation, Plaintiff in retrospect perhaps would have bargained for broader coverage but simply did not foresee such need before the unprecedented pandemic conditions arose in 2020. Accordingly, Plaintiff was unfortunately left without the coverage it now asks this Court to find in an insurance policy that simply does not provide it.

Nashville Underground, supra. Sympathy notwithstanding, cases of this kind are decided on the basis of specific contract language. Although overall insurers tend to be winning in these contract interpretation battles, insureds are prevailing in some cases, at least in pretrial and summary judgment motion battles. See, e.g., Kenneth M. Gorenberg & Scott N. Godes, Update on Business Interruption Insurance Claims for COVID-19 Losses, NAT’L L. REV. (Oct. 29, 2020), https://www.natlawreview.com/article/update-business-interruption-insurance-claims-covid-19-losses; Richard D. Porotsky Jr., Recent Federal Cases in the N.D. Ohio Split on COVID-19 Business Interruption Insurance Coverage, NAT’L L. REV. (Jan. 26, 2021), https://www.natlawreview.com/article/recent-federal-cases-nd-ohio-split-covid-19-business-interruption-insurance-coverage; Jim Sams, Judge Rules in Favor of 3 Policyholders With COVID-19 Claims in Consolidated Case, CLAIMS J. (Feb. 21. 2021), https://www.claimsjournal.com/news/national/2021/02/24/302197.htm.

The opinions in these cases constitute an interesting emergent body of decisional law relevant to contract and insurance law and practice. Along with litigation relating to, e.g., force majeure and material adverse change/effect, the legal actions interpreting language in business interruption insurance contracts are bound to offer important lessons and tips for legal counsel and their clients--a legacy likely to affect practice and litigation for many years to come.

The article from which the above quoted text (reformatted for posting here) comes, Business Law and Lawyering in the Wake of COVID-19, is scheduled for publication later this spring in Transactions: Tennessee Journal of Business Law. I will promote the article here once the final version is available and has been posted to SSRN. In the meantime, you have a a short preview of one part of the article in this post!

March 30, 2021 in Contracts, Insurance, Joan Heminway | Permalink | Comments (2)

Sunday, March 28, 2021

Ethical Leadership and Legal Strategies for Post-2020 Organizations

This past Friday and Saturday, The Tobias Leadership Center at Indiana University, the Center for Legal Studies and Business Ethics at the Spears School of Business at Oklahoma State University, and the American Business Law Journal hosted the online symposium “Ethical Leadership and Legal Strategies for Post-2020 Organizations.” I wanted to share with readers the program slides Download 2021-Symposium-Slides for "details of the interesting topics and diverse approaches that were taken to the symposium’s theme."

The American Business Law Journal anticipates publishing a special issue on the symposium's theme. I’ll be sure to keep readers posted!

March 28, 2021 | Permalink | Comments (0)

Saturday, March 27, 2021

Grab Bag

This week, I offer brief comments on a couple of different things:

1. I’ve previously blogged about courts that stretch the definition of “forward-looking statement” in order to preclude defendants from claiming the protections of the PSLRA safe harbor. But probably the more common scenario runs in the other direction. Behold Police and Fire Retirement System of Detroit v. Axogen, 2021 WL 1060182 (M.D. Fla. Mar. 19, 2021), where the plaintiffs alleged that Axogen claimed that the potential demand for its medical products was very large because of the sheer number of nerve repair surgeries performed every year in the U.S. As it turned out, far fewer surgeries were performed annually; in effect, the plaintiffs argued that Axogen overstated the size of its market. Here’s what the court said in its dismissal order:

Plaintiff … [focuses] in particular on statements made in Axogen’s offering materials and elsewhere that a certain number of people in the United States “each year...suffer” traumatic PNI [peripheral nerve injuries], which “result in over 700,000 extremity nerve repair procedures,” and that “[t]here are more than 900,000 nerve repair surgeries annually in the U.S.” Plaintiff argues these statements refer to “present existing conditions.” But the number of injuries occurring “each year” reflects an ongoing state of affairs extending from the present into the future, rather than an observable state of affairs in existence at the specific point in time when the statement is made. Such a statement cannot be determined to be true or false by reference to “present existing conditions,” and is therefore analogous to other present tense statements the Eleventh Circuit has held to be forward-looking.

Thus is a representation about ongoing conditions - the number of nerve repair surgeries performed annually - transformed into a projection about future nerve repair surgeries. The court did not even appear to consider whether a reader would interpret Axogen’s statements as implying recent past annual figures in this range (a range that, according to the plaintiffs, was wildly inflated).

The problem here is that, in the Seventh Circuit’s words, “Investors value securities because of beliefs about how firms will do tomorrow, not because of how they did yesterday.” Wielgos v. Commonwealth Edison Co., 892 F.2d 509 (7th Cir. 1989); see also Glassman v. Computervision Corp., 90 F.3d 617 (1st Cir. 1996). Any representation of current conditions is relevant to investors because they will extrapolate from that to predict future conditions, but if that were enough to make the statement “forward-looking,” well, everything would be protected by the safe harbor.

2. Tesla is being sued again, this time by a stockholder who claims that Elon Musk’s … colorful … behavior on Twitter violates his settlement with the SEC, is a threat to corporate value, and that the Board’s failure to rein him in represents a violation of its duty of good faith (and hey, as I was drafting this very post Musk did it again). While I’m sure there are many things one could say about the lawsuit, the part that struck me was where the plaintiff alleged that the Board is dependent on Musk, in part, because Musk is indemnifying its members for any legal liability. As the plaintiff puts it:

the Board is insured, and thus indemnified, by Musk personally for a majority of the harm caused by Musk alleged herein. The Board cannot be considered independent in any way from Musk in these circumstances. Musk could refuse to pay out the ‘insurance policy’ if the Board elected to proceed with an investigation of him, and the Board would have every incentive to abandon that investigation.

It is my understanding from Tesla’s SEC filings that the personal indemnification arrangement ended in 2020 and the Board now has an ordinary insurance policy, but the plaintiff is, as I read it, claiming that Musk still provides the coverage for certain acts that occurred in 2020. The insurance arrangement raised a lot of eyebrows when it was first disclosed, and at the time I wondered what its legal significance would be for Board dependence. I now look forward to finding out.

(I should note that when the indemnification agreement was first disclosed, Tesla claimed that Musk’s performance was nondiscretionary, but that still raises questions about what Musk can and can’t dispute - and how interested the Board is in ensuring his solvency).

3. WeWork! In addition to the news that the plans to go public are back on – this time via SPAC – it’s the subject of another lawsuit, this time by the former shareholders of a private company that WeWork acquired, using its own stock as currency. Unsurprisingly, the former shareholders argue that various WeWork officers, including Adam Neumann, overstated the value of WeWork shares when negotiating the deal. What is surprising, to me anyway, is that the claims are solely brought under Section 10(b) of the Exchange Act. Section 10(b) claims are very difficult to bring – apart from the higher pleading standards of the PSLRA, they are also relatively narrow in terms of the type of conduct that is deemed prohibited. Their only real advantage over state claims – whether common law or even blue sky – is their availability for secondary market purchases, and the fraud-on-the-market presumption of reliance. So I’m wondering why the plaintiffs elected to bring claims solely under Section 10(b), in a case where neither of these advantages are relevant.

4. Insider trading! A guy named Jason Peltz was recently indicted for insider trading and related offenses, arising out of trades in companies rumored to be the subject of takeover interest. What makes this indictment unusual, however, is that it claims that an unnamed Reporter for a “financial news organization” was one of Peltz’s sources, providing Peltz with information about upcoming news stories. (The indictment tactfully declines to name the Reporter or the news organization, but the stories are identified with sufficient particularity that deducing his identity is a relatively simple task). So here’s the thing: Though Peltz is charged under 10b-5 for “misappropriating” confidential information, the indictment makes no reference to fiduciary obligations or the duty of trust and confidence. Meaning, it’s unclear whether the claim is that Peltz misappropriated information from the Reporter, or whether the claim is that the Reporter misappropriated from his publication and intentionally tipped Peltz (echoing the dispute at the heart of United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986)). On this point, I note that nothing in the indictment suggests any kind of longstanding close friendship between the Reporter and Peltz, but the indictment does mention that the scheme began when Peltz obtained inside information about a takeover bid, purchased the target’s stock, and then tipped the Reporter, who was able to publish a scoop (causing the target’s stock price to rise, and allowing Peltz to cash out).

And ... that’s all!

March 27, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, March 26, 2021

Women & Business Law

Yesterday, I had the honor of leading a roundtable discussion on women and the practice of business law. The roundtable was part of a series convened by UT Law's Student Council on Diversity and Inclusion, and this specific roundtable was hosted by our Black Law Student Association. Here's the promotional flyer from the event.

In preparing for the session, I had occasion to review two ABA reports from the past few years: Roberta D. Liebenberg & Stephanie A. Scharf, Walking Out The Door : The Facts, Figures, and Future of Experienced Women Lawyers in Private Practice (ABA 2019), and Destiny Peery, Paulette Brown & Eileen Letts, Left Out or Left Behind: The Hurdles, Hassles, and Heartaches of Achieving Long-term Legal Careers for Women of Color (ABA 2020). I was reminded of the fall-off in female lawyers in BigLaw over the course of their careers. Quoting from the first report:

BigLaw is no stranger to the loss of experienced women attorneys. While entering associate classes have been comprised of approximately 45% women for several decades, in the typical large firm, women constitute only 30% of non-equity partners and 20% of equity partners. Women lawyers face many other challenging hurdles as they seek to advance into senior roles: the number of lawyers named as new equity partners at big firms has declined by nearly 30% over the past several years, and firms are increasingly relying on the hiring of lateral partners, over 70% of whom are men.

At the event, I noted this data and the principal reasons why women self-reported that they left practice. These include: care-taking obligations, workplace stress levels, responsibilities for marketing/originating business, billable hour requirements, loss of the desire to practice law, work/life balance dissatisfaction, and concerns about personal or family health.

I also noted specific difficulties faced by women of color. In that regard, I referenced the following quote from a Black female lawyer in her late 40s (included in the second ABA report mentioned above).

Some of the barriers you can’t do [anything] about—like the(mis)perceptions people have in their own minds about your race or your sex or your background. So you start by having to overcome those negative assumptions, stereotypes, and presumptions. And then there’s the ‘black tax’ of having to demonstrate outsized achievements just to get the same opportunities as everyone else. It’s not by accident that at the firms at which I worked, every single black associate had at least two Ivy League degrees. Majority associates? Not so much.

There were no real surprises for me in these two reports. Having said that, I must note that they capture important data and reflections. I recommend that everyone read them.

Of course, only some female law graduates (a relatively small number/percentage) start their careers in business finance or governance. The number/percentage of female lawyers in large business law practices typically does not increase over time; it decreases. Therefore, the number/percentage of women in those practice areas at the partner/shareholder/senior leadership level is relatively small. (By the way, please let me know if you know where I can find some recent reliable data on all this.)

I noted the relatively small percentage of women who enroll in my upper division advanced business law courses (a maximum in any course of 33-1/3%, and that's pretty rare). I asked the student participants for their ideas on why more women do not take these courses or, in general, express a desire to practice business law. Among the responses were the following: not having been exposed to business lawyers or business operations, being intimidated by the subject matter, and being concerned that too much math may be involved. I also asked them how we might work to correct the imbalance in business law and more generally. Students volunteered their observations and ideas. The were thoughtful, reflecting on their own experiences while also working hard to appreciate the circumstances of others. One of the female students pressed her male colleagues to contribute. It was a super discussion. Several students contacted me after the roundtable to follow up on some points.

We only had an hour together, which was barely enough time to begin to scope out these issues. There was certainly more that could have been said had there been more time. I invited students to continue the conversation among themselves and with me and other faculty. I have hope they will do that. I want to ensure that business law knowledge and practice is accessible to all, and I could use their help in accomplishing that goal.

March 26, 2021 in Joan Heminway, Law School, Teaching | Permalink | Comments (2)

Thursday, March 25, 2021

Vanishing Investor Clinics and the Hope on the Horizon

By Benjamin P. Edwards

Earlier today, a number of law school securities clinics met online with the SEC thanks to its Office of the Investor Advocate to talk about what they have been seeing in their cases. By the most recent count, we're down to only about 12 securities clinics nationwide. Jill Gross has written about these disappearing clinics. In my role, I teach business organizations, securities regulation, professional responsibility, and also offer a clinic from time to time. At UNLV, clinics are not always offered every semester because our faculty also teach other courses. With the need to turn a clinic on and off, I can't run the kind of investor protection clinic I ran when I was at Michigan State because the cases just don't wrap up in a semester. Although we've done it in the past at UNLV with good results for clients and students, it's not something that works well without attorney support to carry the cases and provide broader assistance when we're not in session. With that in mind, we've offered a "Public Policy"clinic here this semester with a focus on helping non-profits in preparing comment letters and advocating for their own goals. This new offering focuses mostly on the advocacy work that other investor clinics do in their comment letters, only with a broader portfolio. We'll tackle a few things outside the securities realm as well. It's also been challenging because the federal rulemaking environment has been in flux with the Presidential transition.

Still, we've also been able to get students some real speaking experience. A few weeks ago, we had a student team represent a non-party customer in an expungement hearing within the FINRA forum. They were able to do openings, closings, and cross examinations--even cross examining the CEO of a brokerage firm. These matters are intense because they happen on an expedited basis. But they also don't require the kind of long-term commitment that an ordinary customer arbitration does. Today, that same student team was able to turn around and present to the SEC about the experience and interact with sitting SEC Commissioners. Although outside the securities realm, we also had another student team prepare a white paper and present at the Consumer Product Safety Commission, sharing views on how the CPSC might regulate consumer products with AI and machine learning technology embedded in the devices. This work gets us into some fascinating areas and gets the students writing, presenting, and having client experiences.

But there are still too few of these clinics and we need more of them. They play a vital role because the economics don't make sense for most ordinary securities attorneys to take cases with relatively smaller damages or take on matters where there isn't any money to recover. If you get swindled out of a million dollars, attorneys will fight for you. If you get taken for forty grand, many lawyers will pass because they have to put food on their own tables. Of course, this leaves bad actors free to continue to take people for significant amounts without much fear that they'll be held accountable for swindling investors.

A short time ago, the SEC's Investor Advisory Committee recommended financial support for law school clinics. I know that if we had funding, I could hire counsel, help more people, help a broader class of people, and provide more opportunities for our students. We might eventually get something similar for securities law to what already exists for tax clinics, but it's still uncertain whether we'll get there. Absent that, it seems likely that these kinds of clinics are going to continue to vanish.

March 25, 2021 | Permalink | Comments (0)

Wednesday, March 24, 2021

Professor Hill's Cannabis Banking: What Marijuana Can Learn from Hemp

I always learn a ton in reading Professor Julie Andersen Hill's banking articles. A TON! Hence, I'm excited to see that she recently posted her new piece, Cannabis Banking: What Marijuana Can Learn from Hemp (forthcoming 2021, Boston University Law Review). This is her second article on cannabis banking, the first being an excellent symposium piece, Banks, Marijuana, and Federalism. As both houses of Congress have recently reintroduced the SAFE Banking Act, these articles couldn't be more timely. Here's the abstract for Cannabis Banking:

Marijuana-related businesses have banking problems. Many banks explain that because marijuana is illegal under federal law, they will not serve the industry. Even when marijuana-related businesses can open bank accounts, they still have trouble accepting credit cards and getting loans. Some hope to fix marijuana’s banking problems with changes to federal law. Proposals range from broad reforms removing marijuana from the list of controlled substances to narrower legislation prohibiting banking regulators from punishing banks that serve the marijuana industry. But would these proposals solve marijuana’s banking problems?

In 2018, Congress legalized another variant of the Cannabis plant species—hemp. Prior to legalization, hemp-related businesses, like marijuana-related businesses, struggled with banking. Some hoped legalization would solve hemp’s banking problems. It did not. By analyzing the hemp banking experience, this Article provides three insights. First, legalization does not necessarily lead to inexpensive, widespread banking services. Second, regulatory uncertainty hampers access to banking services. When banks were unsure what state and federal law required of hemp businesses and were unclear about bank regulators’ compliance expectations for hemp-related accounts, they were less likely to serve the hemp industry. Regulatory structures that allow banks to easily identify who can operate cannabis businesses and verify whether the business is compliant with the law are more conducive to banking. Finally, even with clear law and favorable regulatory structures, the emerging cannabis industry still presents credit, market, and other risks that make some banks hesitant to lend.

March 24, 2021 in Colleen Baker, Financial Markets | Permalink | Comments (0)

Monday, March 22, 2021

2021 Emory Law Conference on the Teaching of Transactional Law and Skills

Registration is Open!

It is our great pleasure to announce that registration is now open for the seventh biennial transactional law and skills education conference to be held virtually on June 4, 2021. Please join us to celebrate and explore our theme – Emerging from the Crisis: The Future of Transactional Law and Skills Education with you. This year, we have reduced the registration fee to $50 per person. Secure your space today!

Call for Proposals

Please take a moment to review the Call for Proposals and submit your proposal here. Also, please share the CFP with your colleagues who may not have attended the Conference before. Consider forwarding it to adjuncts and professors teaching relevant subjects. Can you also think of any teachers who might be interested in attending or presenting?

The Call for Proposals deadline is 5 p.m. April 15, 2021. We look forward to receiving your proposals.

Last, but certainly not least, at this year’s Conference, we will announce the winner of the second Tina L. Stark Award for Teaching Excellence. Would you like to nominate yourself or a colleague for this award? More information will be forthcoming regarding award eligibility and the nomination process.

If you have questions regarding any of this information, please contact Kelli Pittman, Program Coordinator, at [email protected] or 404.727.3382.

We look forward to “seeing” you in June!

Sue Payne | Executive Director

Katherine Koops | Assistant Director

Kelli Pittman | Program Coordinator

March 22, 2021 in Conferences, Joan Heminway, Teaching | Permalink | Comments (0)

Saturday, March 20, 2021

SPACs and Voting

A speculative frenzy appears to have taken hold of markets, extending to everything from GameStop shares to sports cards and anything blockchain (again). Caught up in the mania are SPACs – specifically the blank-check firms trading before an acquisition target has been identified.

The difficulty, as the Financial Times recently reported, is that retail shareholders caught up in the SPAC craze aren’t necessarily interested in voting their shares when it comes time to consummate a merger. Worse, a large number of them may have sold their shares after the record date, leaving no one to actually cast the ballot.

Which is why Switchback Energy Acquisition Corporation recently issued the most extraordinary press release:

Stockholders as of the Close of Business on December 16, 2020 Should Vote Their Shares Even if They No Longer Own Them

…

Switchback Energy Acquisition Corporation (NYSE: SBE) (“Switchback”) today announced that it convened and then adjourned, without conducting any other business, its virtual Special Meeting of Stockholders to February 25, 2021 at 10:00 a.m., Eastern time (the “Special Meeting”), to allow for more time for stockholders to vote their shares to reach the required quorum and approve the required proposals….

Switchback has received overwhelming support for the Business Combination. At the time the Special Meeting was convened, approximately 99.9% of the proxies received had been voted in favor of the transaction. However, since holders of approximately 45% of the outstanding shares submitted proxies to vote, the necessary quorum of a majority of the outstanding shares was not present. Switchback requests that any investor who held shares of stock in Switchback as of the close of business on December 16, 2020 and has not yet voted do so as soon as possible in order to avoid additional delays….

Can I still vote if I no longer own my shares?

Yes, if you owned shares as of the close of business on December 16, 2020, the record date for the Special Meeting, you can still vote your shares even if you no longer own them.

This is, I must say, quite remarkable. I mean, there have long been concerns about “empty voting,” i.e., casting ballots for shares in which you have no economic interest, including casting ballots for shares that have since been sold. See, e.g., Henry T.C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. Cal. L. Rev. 811, 835 (2006). Here, everyone’s assuming that the vote was a mere formality and the reason the shares were not voted was that retail shareholders are indifferent, but what if some shareholders disfavored the merger? Pushing the deal through with the ballots of former shareholders would hardly be fair to them.

Which gets to the legal question of whether this is even okay. Delaware has vaguely suggested, you know, maybe not. For example, in In re Appraisal of Dell, 2015 WL 4313206 (Del. Ch. July 13, 2015), VC Laster held:

even the right to control how shares vote transfers with the shares, notwithstanding the legal expedient of the record date, because the subsequent holder can compel the seller to issue him a proxy (assuming the seller can be identified)

In support, he cited Commonwealth Assocs. v. Providence Health Care, Inc., 641 A.2d 155 (Del. Ch. 1993), where Chancellor Allen expressed “doubt” that a contract for the sale of shares that allowed the seller to retain the right to vote would be “be a legal, valid and enforceable provision, unless the seller maintained an interest sufficient to support the granting of an irrevocable proxy with respect to the shares.” See also In re Canal Construction Co., 182 A. 545 (Del. Ch. 1936) (“As between a transferror who has parted with all beneficial interest in stock and his transferee, the broad equities are all in favor of the latter in the matter of its voting. While the transferee may not himself be qualified to vote because he had not caused the stock to be registered in his name …, it does not necessarily follow that the transferror may exercise the voting right in defiance of the transferee's wishes. So far have courts recognized the equity of the true owner of stock to control its voting power as against the registered holder, that the latter has been required to deliver a proxy to the former.”); In re Giant Portland Cement Co., 21 A.2d 697 (Del. Ch. 1941) (“A mere nominal owner naturally owes some duties to the real beneficial or equitable owner of the stock; and even if the right to demand a proxy is not exercised, if the vendor exercises his legal right to vote in such a manner as to materially and injuriously affect the rights of the vendee, he is, perhaps, answerable in damages in some cases.”)

Those cases were about disputes between the transferor and the transferee regarding the manner in which shares would be voted, but it should also be noted that in the context of “vote-buying” allegations, Delaware has suggested that it is illegitimate to divorce economic interest in shares from the voting rights attached to them. See Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010).

Anyhoo, we can add this to the growing list of “concerns about SPACs,” which is why the SEC is reportedly taking a closer look. Of course, if the world is finally opening up post-covid, speculative trading may also subside, and the problem may take care of itself.

March 20, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, March 19, 2021

Chambers and Martin on a Foreign Corrupt Practices Act for Human Rights

By John P. Anderson

The University of Connecticut School of Business hosts The Business and Human Rights Initiative, which “seeks to develop and support multidisciplinary and engaged research, education, and public outreach at the intersection of business and human rights.” Professor Stephen Park, Director of the Business and Human Rights Initiative, invited me to be a discussant at the most recent meeting of the Initiative’s workshop series. The workshop focused on Rachel Chambers' and Jena Martin's excellent paper, A Foreign Corrupt Practices Act for Human Rights. Here’s an abstract:

The global movement towards the adoption of human rights due diligence laws is gaining momentum. Starting in France, moving to the Netherlands, and now at the European Union level, lawmakers across Europe are accepting the need to legislate to require that companies conduct human rights due diligence throughout their global operations. The situation in the United States is very different: on the federal level there is currently no law that mandates corporate human rights due diligence. Civil society organization International Corporate Accountability Roundtable is stepping into the breach with a legislative proposal building on the model of the Foreign Corrupt Practices Act to prohibit corporations from engaging in grave human rights violations and to give the Securities and Exchange Commission and the Department of Justice the power to investigate any alleged violations.

The draft law, called the Foreign Corrupt Practices Act – Human Rights (FCPA-HR) follows the general framework of the FCPA, but with certain enumerated human rights violations as the prohibited conduct rather than bribery and corruption. The FCPA-HR continues where the FCPA left off by requiring companies to engage in substantive conduct to prevent any human rights violations from occurring in their course of business and to make regular reports regarding their compliance and success. This paper situates the draft law within the current picture for business and human rights legislation both in the United States and in Europe, identifies the strengths of using the FCPA model, and analyzes the FCPA-HR proposal, addressing the likely critiques of the proposal.

Though I have been following developments in the area of business and human rights for years, I must admit that I have not paid sufficient attention to the movement in my classroom and scholarship. Chambers’ and Martin’s paper reminds us all of the need for reform, and of the reality that legislation in this area is imminent (at home and abroad). Imposing civil and criminal liability on corporations and individuals for their direct or indirect involvement in human rights violations would force dramatic changes in corporate compliance practices. If the SEC will have primary responsibility for enforcement (as it does for the FCPA), then we can expect dramatic organizational changes at the Commission as well. With so much at stake, there is a real need for collaboration among human rights experts, lawyers, scholars, regulators, and issuers to find the right model. There’s a lot of work to do, and Chambers’ and Martin’s paper offers an excellent start. The paper remains a work in progress, but it will be available soon—I look forward to its publication!

March 19, 2021 in Business Associations, Comparative Law, Compliance, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, March 16, 2021

2021 National Business Law Scholars Conference - Call for Papers

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

The University of Tennessee College of Law
Knoxville, Tennessee

Call for Papers

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 to submit an abstract or paper by April 9, 2021. 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)

March 16, 2021 in Conferences, Joan Heminway, Research/Scholarhip | Permalink | Comments (0)

Saturday, March 13, 2021

AT&T and Reg FD

By now, you’ve probably seen that the SEC filed a lawsuit against AT&T for, allegedly, violating Regulation FD by selectively leaking information about an upcoming earnings announcement in 2016. According to the complaint, in previous quarters, AT&T had disappointed the market by announcing earnings below analysts’ consensus expectations; when it realized it was going to do so again, its Investor Relations department began contacting the analysts with high expectations in order to dampen their optimism. The result was a lowered consensus estimate, and when AT&T did announce its 1Q2016 results, they actually came in slightly above expectations.

AT&T disputed the charges with a curious statement:

The evidence could not be clearer – and the lack of any market reaction to AT&T's first quarter 2016 results confirms – there was no disclosure of material nonpublic information and no violation of Regulation FD.

Well, yeah, genius, because the point of the scheme was to prevent a market reaction to AT&T’s first quarter 2016 results.

But what really strikes me about the whole situation is that it’s as clear an example as you can imagine of a company apparently violating the securities laws for the explicit purpose of trying to avoid a negative market reaction rather than to induce a positive one.

That’s important because in recent years, defendants in Section 10(b) actions have tried to cast doubt on the viability of the “price maintenance” theory of fraud, i.e., the theory that some fraudulent actions are designed not to push prices upward, but to withhold negative information so that prices can be maintained at existing levels. Defendants have argued that statements that merely maintain prices are not material to investors and/or have no impact on prices, and therefore cannot form the basis of a fraud claim. Happily, most courts have rejected that argument, but it’s getting a new workout now before the Supreme Court in Goldman Sachs v. Arkansas Teachers’ Retirement System (my most recent blog post on that case is here; it links to earlier ones). There, the defendants are not explicitly arguing that price maintenance theory is illegitimate, but they are suggesting there is something suspicious about it that warrants extra scrutiny:

Critically, respondents conceded that the challenged statements did not increase Goldman Sachs’ stock price when made. Instead, respondents relied on the increasingly popular “inflation-maintenance” theory—a theory this Court has never endorsed—to assert that the statements maintained the stock price at a previously inflated level….

The inflation-maintenance theory already seriously impedes a defendant’s ability to rebut the Basic presumption. The theory allows plaintiffs to rely on the presumption even if there is no evidence that a misstatement increased the stock price when it was made. Nor do plaintiffs need to identify what statement (if any) inflated the price in the first place.

Some of Goldman’s amici are attacking the theory more directly. To wit.

Happily, a group of former SEC officials have filed a brief in support of the plaintiffs that is almost entirely devoted to defending the inflation-maintenance theory, and highlighting how important it’s been to SEC enforcement actions.

(In case anyone cares, I also signed on to a law professors’ brief in support of the plaintiffs, here).

To bring this back to AT&T, obviously, AT&T is not accused of fraud, or doing anything to mislead the market, but its alleged conduct demonstrates the lengths to which companies will go in order to avoid negative market shocks; it should be utterly unsurprising that many frauds are designed precisely to minimize market reaction, and defendants in those cases shouldn’t be rewarded for success.

That said, as Matt Levine points out, in AT&T’s case specifically, the whole kerfuffle raises interesting questions about what kinds of information move the market or are material to it. If AT&T’s stock price stayed flat after its earnings announcement because the company had already lowered analysts’ expectations, you would expect to see a downward drift in the stock price before the announcement, when AT&T was quietly walking it down. I eyeballed its stock prices during that period and - without running a statistical analysis or comparing it to peer companies or anything - it doesn’t seem like the revisions to analyst estimates was having much of an effect. That could be for any number of reasons - my eyeballs may not be sensitive enough to the detect the pattern, or maybe these analysts were already known to get things wrong and their estimates weren’t baked into the stock price - but it’s amusing that (AT&T thought, at least) the difference between a negative market reaction and no reaction was not the earnings themselves, but what analysts had said about them the day before. In fact, the market appears to have been a lot more sanguine about analyst commentary than AT&T was.

Which, ahem, doesn’t mean that nonpublic information AT&T’s upcoming earnings was not material; just that it confirmed market expectations, no matter what analysts said. If anything wasn’t material here, it was the analysts.

The Goldman case is set for oral argument on March 29.

March 13, 2021 in Ann Lipton | Permalink | Comments (0)

Friday, March 12, 2021

The Business Case For Promoting Lawyer Well-Being

By Marcia Narine Weldon

It's been one year since the US declared a pandemic. It's been a stressful time for everyone, but this post will focus on lawyers.

I haven't posted any substantive legal content on LinkedIn in weeks because so many of my woo woo, motivational posts have been resonating with my contacts. They've shared the posts, and lawyers from around the world have reached out to me thanking me for sharing positive, inspirational messages. I hope that this care and compassion in the (my) legal community will continue once people return back to the office.

Earlier this week, I took a chance and posted about a particularly dark period in my life. I've now received several requests to connect and to speak to legal groups and law firms about mindset, wellness, resilience, and stress management. I've heard from executives that I used to work with 15 years ago asking to reconnect. Others have publicly or privately shared their own struggles with mental health or depression. I'm attaching a link to the video here. Warning- it addresses suicide prevention, but it may help someone.

I'm also sharing an article that my colleague Jarrod Reich wrote last year. He and I have just finished sitting on a panel on Corporate Counsel and Professional Responsibility Post COVID-19, and it's clear that the issue of lawyers and mental health could have been its own symposium. Here is the abstract for his article, Capitalizing on Healthy Lawyers: The Business Case for Law Firms to Promote and Prioritize Lawyer Well-Being.

This Article is the first to make the business case for firms to promote and prioritize lawyer well-being. For more than three decades, quantitative research has demonstrated that lawyers suffer from depression, anxiety, and addiction far in excess of the general population. Since that time, there have been many calls within and outside the profession for changes to be made to promote, prioritize, and improve lawyer well-being, particularly because many aspects of the current law school and law firm models exacerbate mental health and addiction issues, as well as overall law student and lawyer distress. These calls for change, made on moral and humanitarian grounds, largely have been ignored; in fact, over the years the pervasiveness of mental health and addiction issues within the profession have persisted, if not increased. This Article argues that these moral- and humanitarian-based calls for change have gone unheeded because law firms have not had financial incentives to respond to them.

In making the business case for change, this Article argues that systemic changes designed to support and resources to lawyers will avoid costs associated with lawyer mental health and addiction issues and, more importantly, create efficiencies that will increase firms’ long-term financial stability and growth. It demonstrates that this business case is especially strong now in light of not only societal and generational factors, but also changes within the profession itself well. As firms have begun to take incremental steps to promote lawyer well-being, lasting and meaningful change will further benefit firms’ collective bottom lines as it will improve: (1) performance, as clients are demanding efficiency in the way their matters are staffed and billed; (2) retention, as that creates efficiencies and the continuous relationships demanded by clients; and (3) recruitment, particularly as younger millennial and Generation Z lawyers—who prioritize mental health and well-being—enter the profession.

If you have any feedback on Jarrod's article or tips on how you are coping, surviving, or thriving in these times, please feel free to drop them in the comments.

Take care and stay safe.

March 12, 2021 in Current Affairs, Law Firms, Lawyering, Marcia Narine Weldon, Psychology, Wellness | Permalink | Comments (2)

Wednesday, March 10, 2021

Gensler and Michalski's The Million Dollar Diversity Docket

"I'm no civ-pro geek," I confessed today at a research presentation by OU College of Law colleagues Professors Steven Gensler and Roger Michalski on their recent article, The Million Dollar Diversity Docket. But I also shared having been immediately intrigued by their paper after reading its abstract. And I am even more so now after today's presentation. Diversity of citizenship jurisdiction is, of course, a tremendously important subject for both business lawyers and business litigation. So, even if like me, civil procedure generally isn't your thing, check out their fascinating project! Here's the article's Abstract:

What would happen if Congress raised the jurisdictional amount in the diversity jurisdiction statute? Given that it has been almost 25 years since the last increase, we are probably overdue for another one. But to what amount? And with what effect? What would happen if Congress raised the jurisdictional amount from the current $75,000 to $250,000 or, say, $1 million?

Using a novel hand-coded data set of pleadings in 2900 cases, we show that the jurisdictional amount is not a neutral throttle. Instead, different areas of law, different parts of the country, and different litigants are more affected by changes in the jurisdictional amount than others. Our findings thus provide new guidance for Congress to consider when evaluating proposed changes to the amount threshold.

We build from our data to explore different ways Congress could use the amount in controversy lever to adjust the diversity docket, ranging from traditional techniques like incremental inflation-adjustments to radical experiments with lotteries or replacing the amount in controversy minimum with a maximum. Our analysis of the options highlights the normative choices Congress makes when deciding which cases to bless and curse with a federal forum. Thus, our study also provides a new window into the longstanding debates about the existence and reach of diversity jurisdiction. We hope our empirical work will inform these debates and enable a new wave of scholarship on the basic functions and functioning of the federal diversity docket.

March 10, 2021 in Colleen Baker, Legislation, Litigation | Permalink | Comments (0)

Monday, March 8, 2021

Index Managers, the SEC, and Mutual Fund Investors. Oh, My!

Friend-of-the-BLPB Bernie Sharfman and his co-author Vincent Deluard recently posted their article, How Discretionary Decision-Making Has Created Performance and Legal Disclosure Issues for the S&P 500 Index, on SSRN. The article plays to several audiences, as noted by the authors. The SSRN abstract follows:

When investment funds track the S&P 500, the index becomes more than just a list of 500 companies. The focus then turns to the financial and regulatory issues that arise from the discretionary decision-making of its Index Committee. The discussion of these issues and their implications should be of extreme interest to both investors and regulators. This discussion involves: how Sharpe’s equality will hold in practice, what kind of companies may still be impacted by the index effect, how we are to understand the expected returns versus risk of a broad based market portfolio, whether funds that track the S&P 500 are to be considered actively managed or passive, the S&P 500’s suitability as an “appropriate” benchmark index, and what kind of legal disclosures are required in the use of the index. As a result of our discussion, including our empirical findings, we do not find the S&P 500 index to be desirable for either tracking or benchmarking purposes, even though our proposed legal disclosures should mitigate any potential legal liability for its continued use.

Our paper makes contributions to the literature on index managers and the SEC’s disclosure policy for open-end investment management companies. Most importantly, it will help guide the investment decisions of tens of millions of investors who are currently invested in, or are considering investing in, funds that track the S&P 500.

The abstract is thought-provoking. I am always interested in reading works that rely, illuminate, or comment on disclosure policy. And I believe my son has invested in at least one index fund that tracks the S&P 500. Other family members also may have investments in funds of that kind. So, I may need to read this . . . .

March 8, 2021 in Joan Heminway | Permalink | Comments (1)

Saturday, March 6, 2021

Shareholders, Stakeholders, and Nine West

Judge Rakoff’s decision in In re Nine West LBO Securities Litigation, 2020 WL 7090277 (S.D.N.Y. Dec. 4, 2020) is all the rage these days. The short version is that Nine West was taken private in a leveraged buyout by Sycamore; as part of the deal, allegedly the Sycamore buyers caused the company to sell the profitable subsidiaries to its own affiliates for less than they were worth, and the whole thing ended in Nine West’s bankruptcy. In the wake of all of this, the debtholders (many of whom held debt that predated the sale), via the litigation trustee, sued Nine West’s former directors – the ones who had approved the sale – for violating their fiduciary duties by negotiating a deal that would result in the company’s bankruptcy. Last year, Judge Rakoff refused to dismiss the claims, in a decision that spawned a thousand law firm updates about directors’ duties when selling the company.

But what I find interesting is how little anyone – including Judge Rakoff – seems to have interrogated the legal question of to whom the directors’ fiduciary duties were owed.

The classic Delaware formulation is that directors owe a duty to advance the best interests of the “corporation and its stockholders.” Firefighters’ Pension Sys. Of Kansas City v. Presidio, 2021 WL 298141 (Del. Ch. Jan. 29, 2021). Drill down a little further, and you discover that “the corporation” is equated with stockholders. See, e.g., North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) (“When a solvent corporation is navigating in the zone of insolvency…directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.”); Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986) (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders. However, such concern for non-stockholder interests is inappropriate when an auction among active bidders is in progress, and the object no longer is to protect or maintain the corporate enterprise but to sell it to the highest bidder.”). Under these precedents, the directors’ duties are to maximize stockholder wealth. Full stop.

Normally, it would be a proposition too obvious to articulate that of course if directors are to maximize shareholder wealth, a subsidiary obligation is to try to avoid bankruptcy. But that’s because normally, bankruptcy harms the stockholders – they’re the ones left with worthless stock. But, pace Revlon and Gheewalla, you’d think that if the stockholders themselves eagerly – nay, joyfully – court bankruptcy, because they’re being bought out at $15 per share and they don’t really care what happens after that, the directors have satisfied their duties and nothing more needs be said. The whole point of Revlon, after all, is that there is such a thing as a endgame transaction, after which shareholders exit the company and fiduciary duties cease.

But even in Delaware, where the law is probably clearest, I’m not sure that’s accurate. When a corporation is insolvent, the creditors have standing on behalf of the company to sue directors for breach of fidicuary duty. See Gheewalla, 930 A.2d at 101. And what precisely are the duties of the directors in this scenario? Per VC Laster, they are the same duties that directors always have, namely, “the fiduciary duties that directors owe to the corporation to maximize its value for the benefit of all residual claimants.” Quadrant Structured Products Co., Ltd. v. Vertin, 102 A.3d 155 (Del. Ch. 2014). If directors’ duties, generally, are to benefit residual claimants, that presumably means they have a duty to avoid bankruptcy in the first place even if shareholders would prefer it. But all that just highlights the difficulty with pinning fiduciary duties to residual claimants – all claimants are residual claimants, depending on the firm’s moment in its life cycle.

That’s Delaware.

But Nine West was not incorporated in Delaware; it was incorporated in Pennsylvania. And, among other things, Pennsylvania has a constituency statute, which states that in discharging their duties to “the corporation,” Pennsylvania directors may (but are not obligated) to consider the effects of an action on all corporate constituencies. See 15 Pa. Cons. Stat. § 1715. Meaning that whatever else directors’ duties are, they do not include a duty to maximize value to stockholders, whether in a sale scenario or at any other time. Which is why Nine West’s litigation trustee argued that Pennsylvania law does not require maximizing value to “short-term” shareholders (although that still leaves maddeningly vague what to do when even the interests of long-term shareholders conflict with those of creditors), and the director-defendants argued that no duty to creditors would attach until the actual point of insolvency (never mind that they themselves had allegedly occasioned the insolvency).

Which is how matters stood when the case came before Judge Rakoff.

Rakoff chose not to engage in any of this. Instead, he simply declared that the directors’ duties were to the company, but quite explicitly treated the company as having different constituencies, namely, stockholders and creditors. For example, the director defendants tried to argue that any claims against them were res judicata because when the buyout was first proposed, stockholders brought a derivative claim on the company’s behalf arguing that the deal undersold the company, and that claim was settled. Rakoff rejected the argument in part because the stockholder plaintiffs – though they had acted on the company’s behalf – had not adequately represented the interests of creditors, who were now represented on the company’s behalf by the bankruptcy litigation trustee

Having thus recognized that “company” interests may be represented either by stockholders or by creditors – but that these two groups are distinct and often at odds – Rakoff went on to conclude that the Nine West directors had neglected their duties to the company by failing to investigate the effects of the deal on the company, and, in particular, failing to investigate the possibility that the transactions would harm the company by leaving it insolvent. He further held that the Nine West directors had aided and abetted the fiduciary breaches of the Sycamore directors – who took over after the merger – by assisting them with their plan to sell off the profitable assets, which would bankrupt the company.

By focusing on the company, Rakoff obscured the implications of his holding regarding the true parties in interest. He did not say so explicitly, but the import is that if directors had investigated, and had recognized (correctly) that the deal would leave Nine West bankrupt, but also believed that the price would benefit Nine West’s shareholders, they would still have violated their duties to the company by consciously choosing to leave the company insolvent.

Thus, in this scenario, Rakoff believed the directors’ fiduciary duties prohibited them from elevating shareholders over creditors. But he didn’t cite any law for this point – not even Pennsylvania’s constituency statute (which by my read gives directors considerable discretion to decide which constituencies to favor). It’s just what necessarily follows from his reasoning.

Nine West is, then, a real-world example of the “two masters” problem that is frequently used to justify shareholder primacy. And Judge Rakoff’s opinion rejects shareholder primacy in favor of a stakeholder view of the corporation, with fiduciary duties that follow.

Here’s my take: Usually, we can avoid asking whether directors must take Action A or Action B because matters are not obviously a zero-sum game; directors are taking risks, and different constituencies may benefit more or less from those risks. Yes, shareholders may benefit from risk-taking more than creditors, but it is by no means obvious that the risk won’t pay off for everyone, and exercising business judgment means deciding how to act under conditions of uncertainty.

But the Nine West problem presents things in starker terms: Accepting the allegations as true, it was clear at the outset that the buyout would benefit shareholders at the expense of creditors, because part of the plan was to undersell the profitable Nine West assets to Sycamore affiliates, where they would be out of creditors’ reach. If that hadn’t been part of the plan, this might simply have been a gamble as to how much debt the company could support; because it was part of the plan, there was an unusually clear choice: cooperate in a scheme to remove assets from creditors’ grasp and pay off the shareholders for their participation, or – don’t.

So the question then becomes, do directors’ duties to shareholders include evading obligations to debtholders?

And I still don’t have a clear answer, but what is true is that on the one hand, directors (at least in Delaware) may not break the law even if it’s intended to benefit shareholders, In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011) (“Delaware law does not charter law breakers. Delaware law allows corporations to pursue diverse means to make a profit, subject to a critical statutory floor, which is the requirement that Delaware corporations only pursue ‘lawful business’ by ‘lawful acts.’), but on the other hand, in Delaware, directors may efficiently breach a contract if it benefits shareholders, see Frederick Hsu Living Trust v. ODN Holding, 2017 WL 1437308 (Del. Ch. Apr. 14, 2017) (“the fact that a corporation is bound by its valid contractual obligations does not mean that a board does not owe fiduciary duties when considering how to handle those contractual obligations; it rather means that the directors must evaluate the corporation’s alternatives in a world where the contract is binding. Even with an iron-clad contractual obligation, there remains room for fiduciary discretion because of the doctrine of efficient breach. Under that doctrine, a party to a contract may decide that its most advantageous course is to breach and pay damages. Just like any other decision maker, a board of directors may choose to breach if the benefits (broadly conceived) exceed the costs (again broadly conceived).”).

In other words, in a world where statutory law is “law” that the corporation may not break, but contract law is not “law” with a similar prohibition, I … do not know what to do with debt agreements subject to, among other things, bankruptcy’s prohibitions on fraudulent and preferential transfers, etc.

So really, it would be so much easier if bankruptcy law, tort law, and contract law were to solve this problem, and spare corporate law the trouble.

(For more discussion of consequences of shareholder primacy in the bankruptcy context, see Jared A. Ellias & Robert Stark, Bankruptcy Hardball, 108 Cal. L. Rev. 745 (2020)).

March 6, 2021 in Ann Lipton | Permalink | Comments (2)

Save the Date! March 13-Tulane's Corporate and Securities Roundtable

Just posting to let everyone know that Tulane will be hosting a virtual Corporate and Securities Roundtable on March 13, featuring a Zoom discussion of works-in-progress by professors from across the country. The full program is listed below; you can register for this (free) event by clicking here. (Sorry, no CLE for this one; join us for the love of scholarship!)

March 6, 2021 | Permalink | Comments (0)

Friday, March 5, 2021

GameStop and the Phenomenon of Expressive Trading

By John P. Anderson

In a prior post, I reflected on evidence that motives other than profit seeking may be driving some of the recent social-media-driven “meme” trading in stocks such as GameStop. Indeed, many of these traders have publicized that they are buying and holding their positions as a form of social, political, or aesthetic expression.

We typically classify retail traders as either investors or speculators. Investors are those who research a stock’s fundamentals and buy it with the expectation that it will perform well over time. Speculators are less concerned with a stock’s fundamentals than its potential for volatility in price (up or down). A speculator looks to anticipate how other traders in a stock will react to price movements or market events and trade accordingly, sometimes entering and exiting the same position in a single trading session. Though they employ different strategies, the principal goal for both the investor and the speculator is to profit from their trading.

The recent meme-trading phenomenon, however, suggests that a new category of retail trader has emerged, the “expressive trader.” An expressive trader is one who does not trade for profit, but rather to send a message or produce a social/aesthetic effect. Social media has made expressive trading practicable for retail market participants by allowing a large number of small investors to coordinate their trading in real time to deliver their desired message in the form of a measurable impact on the targeted stock’s price.

A consistent message from expressive traders in GameStop has been to protest the Wall-Street elitism that motivated the Occupy Wall Street movement in 2011. In contrast to the Occupy Wall Street movement, however, expressive trading has permitted this message to be brought home with very real economic consequences for the movement’s perceived hedge-fund villains.

Of course expressive trading comes at a price. Expressive traders know the price movement they generate does not reflect a stock’s fundamentals, and that they may incur losses when the likely correction takes place, but they consider the act of sending the message to be worth the cost. Indeed many GameStop traders have demonstrated just such an attitude. As one commentator notes, GameStop retail traders frequently quote Heath Ledger’s Joker character from “The Dark Knight” on their trade-related posts: "It's not about the money; it's about sending a message." Or as another commentator points out, "some investors have publicly said that as long as they can hurt the hedge funds, and hurt the system, that is a benefit to them; they don't care if they hurt themselves." Another retail trader admits to buying into the GameStop surge in the hope of a quick profit, but explains that "when individual investors like him managed to inflict some serious pain on hedge funds, it wasn't about money anymore." Similarly, a delivery driver in Central Florida described her purchase of GameStop shares as a "protest" and she explains that she’s “not selling” as the price declines.

The principal GameStop-related message may be anti-hedge-fund short selling, but future expressive trading may protest companies’ labor practices, lack of board diversity, controversial products, advertising, etc. As one Washington Post op-ed author suggests, "[i]f a corporation's stock plummeted 20-30 percent in a single day, that would send a clear and resounding message to its board of directors, principal shareholders, and senior leadership team, i.e., the decision makers." With all this in mind, we should expect more expressive trading in the future.

In future posts, I will address some potential risks and benefits of expressive trading, its consequences for our traditional understanding of market functioning, and how (if at all) regulators should address it. I am also working on an article concerning expressive trading with co-authors Jeremy Kidd and George Mocsary. We look forward to sharing a draft soon!

March 5, 2021 | Permalink | Comments (1)

Thursday, March 4, 2021

Cleaning Corporate Governance

By Benjamin P. Edwards

Four leading scholars (Jens Frankenreiter, Cathy Hwang, Yaron Nili, & Eric Talley) recently released a new paper, entitled Cleaning Corporate Governance. This is the abstract:

Although empirical scholarship dominates the field of law and finance, much of it shares a common vulnerability: an abiding faith in the accuracy and integrity of a small, specialized collection of corporate governance data. In this paper, we unveil a novel collection of three decades’ worth of corporate charters for thousands of public companies, which shows that this faith is misplaced.

We make three principal contributions to the literature. First, we label our corpus for a variety of firm- and state-level governance features. Doing so reveals significant infirmities within the most well-known corporate governance datasets, including an error rate exceeding eighty percent in the G-Index, the most widely used proxy for “good governance” in law and finance. Correcting these errors substantially weakens one of the most well-known results in law and finance, which associates good governance with higher investment returns. Second, we make our corpus freely available to others, in hope of providing a long-overdue resource for traditional scholars as well as those exploring new frontiers in corporate governance, ranging from machine learning to stakeholder governance to the effects of common ownership. Third, and more broadly, our analysis exposes twin cautionary tales about the critical role of lawyers in empirical research, and the dubious practice of throttling public access to public records.

The authors recognized a major problem underlying much of the past empirical research, namely that "several of the most heavily relied-upon governance datasets suffer from inaccuracies so extensive so as to call into question some of the landmark insights of the field." After putting in an enormous amount of work to get a more reliable dataset, they show that some of the most significant findings in the field, now need to be re-evaluated. They're also releasing the dataset so that others can work with it. They also explain that part of the reason why inaccuracies and poor datasets have lingered for so long is that notable jurisdictions (ahem Delaware) "actively throttle public access" to documents.

In the coming months and years, I expect that the dataset will be used to reevaluate much of what we now think we know about corporate governance. By making their data open -source, any errors inadvertently made in the collection appear unlikely to persist as others work with the data.

The authors explain that they are "deeply indebted to" an extensive team of assistants for their work. The Senior Research Assistants (JD students or recent grads) were: Nicole Banton, Matthew Cunningham, Deandra Fike, Channing Gatewood, Katie Gresham, Qifan Huang, Elisha Jones, Sami Kattan, Gabrielle Kiefer, Andrew Kim, Adam Mazin, Cameron Molis, Courtney Murray, Doriane Nguenang, Sneha Pandya, Emily Park, Olivia Roat, Bhargav Setlur, Tom St. Henry, Avi Weiss, Gretchen Winkel, Geoffrey Xiao, and Ben Zonenshayn. Research Assistants (undergraduate students) were: Nathaniel Barrett, Amanda Cooper, Elif Nazli Hamutcu, Alex Inskeep, Justen Joffe, Alexa Levy, Annabelle Liu, Noam Miller, Emily Moini,Stephen Rothman, Adrien Stein, Max Swan, and Agnes Tran.

March 4, 2021 | Permalink | Comments (0)

Wednesday, March 3, 2021

Macey on Fair Credit Markets: Using Household Balance Sheets to Promote Consumer Welfare