Business Law Prof Blog

Social Media, Securities Markets, and Expressive Trading

I’ve addressed the recent social-media-driven retail trading in stocks like GameStop in prior posts (here and here). In both posts, I focused on evidence that at least some of this trading seems to pursue goals other than (or in addition to) profit. For example, some of these retail traders claim that they are buying and holding stocks as a form of social, political, or aesthetic expression. My coauthors Jeremy Kidd, George Mocsary, and I recently posted a forthcoming article on this subject, Social Media, Securities Markets, and the Phenomenon of Expressive Trading, to SSRN. The article introduces the emerging phenomenon of expressive trading. It considers some of the challenges and risks expressive trading may pose to issuers, markets, and regulators--as well as to our traditional understanding of market functioning. Ultimately, the article concludes that while innovations like expressive trading "can be disruptive and demand a reimagining of the established order," market participants, issuers, and regulators would be wise to pause and observe before rushing to adopt defensive strategies or implement reforms. Here’s the abstract:

Commentators have likened the recent surge in social-media-driven (SMD) retail trading in securities such as GameStop to 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.” The price charts for GameStop over the past few months resemble a theme-park thrill ride. Retail traders, led by some members of the “WallStreetBets” subreddit “got on” the GameStop roller coaster at just under $20 a share in early January 2021 and rode it to almost $500 by the end of that month. Prices then dropped to around $30 dollars in February before shooting back to $200 in March. But, like most amusement park rides that end where they start, many analysts expect market forces will ultimately prevail, and GameStop’s share price will soon settle back to levels closer to what the company’s fundamentals suggest it should. Conventional wisdom counsels that bubbles driven by little more than noise and FOMO—fear of missing out—should eventually burst. There are, however, signs suggesting that something more than market noise and over-exuberance is sustaining the SMD retail trading in GameStop.

There is evidence that at least some of the recent SMD retail trading in GameStop and other securities is not only motivated by the desire to make a profit, but rather to make a point. This Essay identifies and addresses the emerging phenomenon of “expressive trading”—securities trading for the purpose of political, social, or aesthetic expression—and considers some of its implications for issuers, markets, and regulators.

Diversity and Inclusion in the Brokerage Industry

FINRA recently released a new regulatory notice seeking comments on how to support diversity and inclusion efforts in the brokerage industry.  The notice asks for commenters to identify any FINRA rules or regulations which might be having a disparate impact on certain groups within the industry.

My sense is that the diversity and inclusion struggles industry firms face may be driven more by firm and industry culture than particular FINRA rules.  Susan Antilla wrote about the challenges women face in the industry.  Brokers of color have also faced real challenges. As Forbes covered, the numbers in asset management are particularly stark:

But in one industry, diversity numbers seem like they're straight out of the 19th century: Firms owned by white men manage a stunning 98.7% of the $69 trillion managed by the U.S. asset management industry. That's according to a 2019 Knight Foundation analysis, and includes hedge funds, mutual funds, real estate funds, and private equity funds. 

The FINRA notice also seems consistent with the SEC initiative on ESG reporting.

Professor Baker's The Federal Reserve As Collateral's Last Resort

I’m delighted to share with BLPB readers that my new Essay, The Federal Reserve As Collateral’s Last Resort, 96 Notre Dame L. Rev. 1381 (2021) is now available (here).  Its focus is central bank collateral frameworks, a critical and timely topic that has thus far received scant attention from legal scholars.  I recently blogged about Professor Skinner’s Central Bank Activism.  Regardless of one’s perspective on this issue, it’s crucial to realize that a central bank’s collateral framework is the mechanism that promotes or limits such activism.  The institutional features of these frameworks are a combination of legislation and central bank policy, with the latter arguably being the most important influence on the Fed’s framework.   

As the first paragraph of my Essay explains “Central bank money or liquidity is at the heart of modern economies.  It is issued against collateral designated as eligible by, and on terms defined by, central bank collateral frameworks…what is often underappreciated is that the ultimate practical difference between an illiquid and insolvent firm is whether a firm has assets a central bank, such as the Federal Reserve, will accept as collateral for lending or for purchase, and at what valuation.  What ultimately constitutes “good” or central bank “eligible” collateral, how best to assess its value, and whose perspective on these questions matters most are critical issues at the heart of central bank collateral frameworks.” (footnotes in Essay omitted throughout this post). 

In the financial crisis of 2007-09, the Fed rescued both Bear Stearns and American International Group, but not Lehman Brothers.  Fed officials explained that Lehman did not have collateral sufficient to secure its lending assistance.  Some economists have disagreed with this assessment.  Yet regardless of who is right about this issue, “the respective histories of these firms attest to the centrality of collateral and central bank collateral frameworks in modern credit markets.”

Central bank collateral frameworks also impact “the production, liquidity and pricing of assets that markets use as collateral…[and] market discipline and enable indirect bailouts of firms and governments.”  In other words, central bank collateral frameworks can potentially incentivize the production of junk assets. 

Much of my research has focused on clearinghouses.  If the Fed were to provide funding assistance under Dodd-Frank’s Title VIII to a distressed, designated clearinghouse, an important consideration would be the collateral securing such funding.  The loan might be “fully collateralized,” but the type of collateral actually securing the loan and its valuation would bear upon whether the assistance amounted to emergency liquidity provision or a bailout.  As I note in The Federal Reserve As Last Resort, it's curious that while Dodd-Frank added collateral related provisions to the Fed's longstanding Section 13(3) emergency authority, it included no such provisions with the Fed's new liquidity authority in Title VIII for designated financial market utilities such as clearinghouses. 

As the importance of the shadow banking system has increased, so too has the role of collateral in financial markets.  The Fed provided extensive assistance to the shadow banking system in the financial crisis of 2007-09 and in the ongoing COVID-19 pandemic.  Although economists and legal scholars have written about the shadow banking system and the Fed’s emergency liquidity facilities, there has been little focus on central bank collateral frameworks.  More work is needed in this area.  Manmohan Singh’s Collateral Markets and Financial Plumbing and Kjell G. Nyborg’s Collateral Frameworks: The Open Secret of Central Banks are important (and some of the only) contributions in this general area.   

In sum, my Essay is meant to be a “first step in a broader normative project analyzing the proper balance between legislation and central bank policy—between architecture and implementation—in shaping the Federal Reserve’s collateral framework to best promote market discipline and to minimize credit allocation.  Its modest aim is twofold. First, it provides the first analysis of central bank collateral frameworks in the legal scholarship. Second, it analyzes the equilibrium between legislation and central bank policy in the Federal Reserve’s collateral framework in the context of its section 13(3) emergency liquidity authority, lending authority for designated financial market utilities, and swap lines with foreign central banks, and general implications of these arrangements.”        

My article, The Federal Reserve’s Use of International Swap Lines, was the first law review piece to analyze the Fed’s central bank swap lines.  It started with the following quote from an article by John Dizard in the Financial Times: “Always define every issue as just a technical problem.”  Central bank swap lines are anything but a mere technical issue.  Similarly, BLPB readers should understand that the collateral framework of the Fed and other central banks is much more than just a technical central banking problem.  It is a topic that should be of interest to all.

Finally, I’d like to thank NYU School of Law's Classical Liberal Institute and the Notre Dame Law Review for the opportunity to participate in their workshop on The Public Valuation of Private Assets (additional articles here).  And I’d also like to thank Zachary Pohlman, Editor-in-Chief, Lauren Hanna, Symposium Editor, and all of the other members of the Notre Dame Law Review who edited my Essay for their superb work!

ESG and the Discipline of Secrecy

The ESG movement (or EESG, if you want to follow Leo Strine on this) has been in the business and legal news quite a lot recently.

In a Bloomberg article about the tax perks of trillions of dollars in Environmental, Social, and Governance investing by Wall Street banks, tax specialist Bryen Alperin is quoted as saying: “ESG investing isn’t some kind of hippie-dippy movement. It’s good for business.”

This utilitarian approach to ESG, and social enterprise in general, has made me uncomfortable for a while. The whole “Doing Well by Doing Good” saying always struck me as problematic.

ESG and social enterprise are only needed when the decisions made are not likely to lead to the most financially profitable outcomes. Otherwise, it is just self-interested business.

Over my spring sabbatical, I have been reading a fair bit about spiritual disciplines and the one that is most relevant here is “Secrecy.” The discipline of secrecy is defined as “Consciously refraining from having our good deeds and qualities generally known, which, in turn, rightly disciplines our longing for recognition.” In The Spirit of the Disciplines, Dallas Willard (USC Philosophy) writes, “Secrecy at its best teaches love and humility…. and that love and humility encourages us to see our associates in the best possible light, even to the point of our hoping they will do better and appear better than us.”

As a professor with active social media accounts, the discipline of secrecy is not an easy one for me. But I do think it is a good aspiration for all of us. Not every good deed has to be kept in secret. There can be good reasons for broadcasting good deeds (for example, to encourage others.) However, regularly performing good deeds in secret can help us build selfless character.

Similarly, socially conscious businesses and investors should be focused on the broader good being done, not on the personal benefits. Granted, I don’t think investors can blindly trust the ESG funds or benefit corporations --- the screens are simply unreliable. Also, it may be difficult to determine which companies are really doing social good if they are practicing much of it in secret. But the truth has a tendency of leaking out over time and investors can focus on companies they see doing the right thing without excessive marketing.

As for the companies themselves, I remain optimistic that there are at least a few businesspeople who truly want to benefit society for mostly selfless reasons. Combatting selfishness is not easy, but the discipline of secrecy is one way to fight it.  

More On "Insider Giving"

Ten days ago, co-blogger John Anderson posted about a new insider trading paper co-authored by  Sureyya Burcu Avci, Cindy Schipani, Nejat Seyhun, and Andrew Verstein,  A revised version of the paper, entitled Insider Giving, was recently posted on SSRN.  In the interim, I have been in communication with two of the co-authors, both friends of the BLPB (and of mine), Cindy Schipani and Andrew Verstein.  This paper, forthcoming in the Duke Law Journal, has a lot to offer.

As an insider trading nerd, I was pulled into this paper from the get-go.  Having written my own insider trading piece about gifting information a few years ago, I was intrigued by the ides of looking at the gifting of the subject securities themselves as possible violative conduct.  Of course, what Insider Giving starkly portrays is a situation in which stock is not donated wholly “from a ‘detached and disinterested generosity,’ ... ‘out of affection, respect, admiration, charity or like impulses.’” Commissioner v. Duberstein, 363 U.S. 278, 285 (1960) (citations omitted) (defining a gift for federal income tax purposes).  The article presents significant information about insider gifts, including background on the motivation for these transactions, empirical data on abnormal returns, and relevant legal principles and analyses.  #recommend!

Although I support reform of the nation's insider trading laws (as do the article's co-authors), my principal interest in the article relates to its analysis of the legality under § 10(b) and Rule 10b-5 (of and under, respectively, the Securities Exchange Act of 1934, as amended) of a charitable gift of a publicly traded firm’s stock made by a clear insider (officer or director) of the firm to a recognized IRC § 501(c)(3) entity while the insider is in possession of material nonpublic information.  Specifically, I am focused on a gift that is made at a time when negative material facts about the issuer of the gifted security remain undisclosed.  Although in various places the article refers to a gift of this kind as manipulative, my understanding of that term (as used in the Section 10(b)/Rule 10b-5 context) is that it relates to conduct that alters markets (e.g., for securities, trading price or volume).  Instead, I conceptualize these gifts (as portrayed in the article), as potentially deceptive conduct in connection with the purchase or sale of a security--the general basis for insider trading liability under § 10(b)/Rule 10b-5.  I provide a brief analysis below.

The deception in insider trading occurs through the breach of a fiduciary or fiduciary like duty of trust and confidence by someone holding that duty. In the posited scenario, that duty holder is the corporate insider.  A person with that duty of trust and confidence must refrain from trading while aware (in possession) of material nonpublic information, unless that information is disclosed (and, as applicable, fully disseminated in relevant trading markets).  Accordingly, leaving aside the applicable scienter requirement, the legality of the charitable gift as a matter of § 10(b)/Rule 10b-5 insider trading law would depend on whether the insider breached their duty and whether the gift constitutes, or otherwise is in connection with, a sale of the subject securities.

The breach of duty seems clear. The stock gift was not made for the firm’s purposes/in the firm’s best interest. It was made for the insider’s purposes/ for their self-interest, which may include both altruism and a tax benefit (among other things).  The resulting excess benefits inuring to the insider may be seen to be "secret profits," as referenced by the U.S. Securities and Exchange Commission in In re Cady, Roberts & Co., 40 S.E.C. 907, 916 n.31 (1961).

But what about the requisite connection to the "sale" of a security that is essential to a successful insider trading claim under § 10(b)/Rule 10b-5?  Under § 3(a)(14) of the 1934 Act, "[t]he terms 'sale' and 'sell' each include any contract to sell or otherwise dispose of."  Admittedly, I have not yet taken the time to  look at any rule-making or decisional law on the definition of “sale” under the 1934 Act.  However, it seems from the statute that the term “sale” is even more broad under the 1934 Act than it is under § 2(a)(3) of the Securities Act of 1933, as amended (where there is a “for value” requirement—although there is a disposition for value on these facts because of the tax benefit to the donor), but for the fact that the 1934 Act statutory definition appears to necessitate a “contract” for sale or disposition. If the determination of a contract relies on common law, one might well find one in this situation, since there is an offer and acceptance and, likely(?), consideration . . . . In fact, stock donors also often sign gift agreements with charitable nonprofits that are binding at least as to some terms (and may be seen as a contract to dispose of the securities). Of course, as the article's co-authors point out, the transaction itself does not need to be a sale; but there must be some connection to a purchase or sale. I agree with that observation and note also that the “in connection with” requirement has been read relatively broadly. The co-authors also accurately indicate that charities often sell donated stock (in my experience, as soon as possible after securing record ownership), making the gift transaction look a lot like a sale of the security by the insider and a subsequent gift of the proceeds by the insider to the charity.  (As the co-authors note, the U.S. Supreme Court has found that type of substance-over-form argument persuasive in the breach of duty analysis in another insider trading context--tippee liability--in Dirks v. SEC, 463 U.S. 646, 664 (1983).  I also note the repetition of that language and reliance in the more recent Salman v. United States, 580 U.S. ___ (2016).)

Bottom line? I see a relatively clear path to § 10(b)/Rule 10b-5 liability here, assuming the insider has the requisite state of mind (scienter). Overall, my argument tracks the related argument in the article.  I am not saying the argument is a decisive winner or that there would or should be enforcement activity. Tracking these transactions for enforcement purposes will depend on the accurate filing of a Form 5 (or a voluntary Form 4).  The article describes the role that these disclosure forms serve. 

Based on the analysis provided here (which is not based on research--just general knowledge), I would advise the insider that there is a real insider trading liability risk in making a gift in circumstances where the insider cannot make a sale.  Do you agree?  If not, what am I missing?

Paper from Prof. Haneman: Menstrual Capitalism, Period Poverty, and the Role of the B Corporation

My friend and colleague Prof. Victoria Haneman has shared her paper, Menstrual Capitalism, Period Poverty, and the Role of the B Corporation.  Here is the abstract: 

A menstruation industrial complex has arisen to profit from the monthly clean-up of uterine waste, and it is interesting to consider the way in which period poverty and menstrual capitalism are opposite sides of the same coin. Given that the average woman will dispose of 200 to 300 pounds of “pads, plugs and applicators” in her lifetime and menstruate for an average of thirty-eight years, this is a marketplace with substantial profit to be reaped even from the marginalized poor. As consciousness of issues such as period poverty and structural gender inequality increases, menstrual marketing has evolved and gradually started to “go woke” through messaging that may or may not be genuine. Companies are profit-seeking and the woke-washing of advertising, or messaging designed to appeal to progressively-oriented sentimentality, is a legitimate concern. Authenticity matters to those consumers who would like to distinguish genuine brand activism from appropriating marketing, but few objective approaches are available to assess authentic commitment.

This Essay considers the profit to be made in virtue signaling solely for the purpose of attracting customers and driving sales: pro-female, woke menstruation messaging that may merely be an exploitative and empty co-optation. Feminists should be expecting more of menstrual capitalists, including a commitment that firms operating within this space address the diapositive issue of period poverty, one of the most easily solved but rarely discussed public health crisis of our time, and meaningfully assist those unable to meet basic hygiene needs who may never be direct consumers. This Essay serves as a thought piece to explore the idea of B Corporation certification as an implicit sorting device to distinguish hollow virtue signaling from those menstrual capitalists committed to socially responsible pro-womxn business practices.

It is well-known that I am not fond of benefit corporation statutes, but given that they are a thing (along with B Corp certification), we have to deal with them.  I still feel strongly that they benefit entity type, as it currently exists, is not helpful and potentially counterproductive.  And I really don't like that B Corp certification has moved to include mandating entity type.  But that's just facts, for now, anyway.  

My opposition to benefit entities, though, is not anti-signaling by an entity of their values, and there's little doubt in my mind that a benefit entity (if it must exist) certainly makes sense for nonprofits (thought I still think the nonprofit thing told us all we needed to know).  We're stuck with benefit entities, so Professor Haneman is probably correct that choosing the entity type could have value in marketing and signaling to consumers shared values.  I still think companies should signal through acts, not entity choice, and that all entity types should have the latitude to do such signaling. But in the world we live in, this just may be how it is.  Regardless, I recommend taking a look -- even when I disagree, Professor Haneman is always thoughtful, smart, and entertaining.  

Corporations and Cancel Culture

Cancel culture has been a hot topic for years, so when the University of Miami Law Explainer podcast asked me to talk about it, I had some reservations. I'm not shy, but I'm also not looking to be a headline in our campus newspaper, a meme, or a topic on Fox News. But I have strong feelings about this, and I agreed to speak.

I'm providing the link to the 20-minute interview here. I talked about my history as a radical protestor in college and law school (and my run in with Rush Limbaugh),  the effect of boycotts and buycotts, whether Teen Vogue missed a teachable moment after firing an editor for tweets she made as a teenager, whether corporations are doing the right thing when they bow to pressure from vocal consumers, the uproar over the 1619 project, and more. If you want a break from drafting contracts or writing exams, take a listen and let me know what you think. 

Using Negotiation Exercises in an Asynchronous Business Law Course

I’m finishing my second semester of teaching Legal Environment of Business, an introductory undergraduate business law course, asynchronously.  One of the challenges of an asynchronous course is creating a sense of community among students.  I’ve previously blogged about using negotiation exercises in my business law courses (here and here).  In this post, I want to share with readers how I’ve continued to use such materials in my asynchronous courses to promote experiential learning and to create a sense of community.

Canvas is the learning management system for my courses.  My asynchronous courses are organized into weekly modules.  Students can find all materials for a specific week (assigned readings, videos, assignments etc.) in that week’s module.  The feedback I’ve received indicates that students find this an easy to follow format.  So, for any week in which there is a negotiation exercise, the students’ role assignments, the negotiation materials, and the assignment itself will be posted in that week’s module.  For each exercise, I use Canvas groups to randomly organize students into negotiation teams.  Use of Canvas groups also facilitate students’ ability to contact each other, coordinate their negotiation, and complete their assignment.  I group students into a different team for each negotiation.  Students can negotiate by Zoom or in person.  I recommend that a date be set by which students must have a date/time arranged for the negotiation and the completion of the assignment.  In the related assignment, students are generally asked to reflect upon the negotiation and to apply the related chapter materials to the negotiation context.  Readers are welcome to reach out to me for additional logistical details/advice/assignment information.  In the remainder of this post, I’ll mention a bit about each negotiation exercise that I’ve used in my asynchronous courses this semester.

House on Elm Street.  I use this negotiation with the chapter on business ethics.  It’s a great exercise and its free (thank you, Professor George Siedel)!  It not only raises ethical issues, but it also powerfully demonstrates the importance of creative thinking and of understanding your negotiation counterparty’s underlying interests.

Waltham Construction Supply Corp. v. Foster Fuels, Inc. In this negotiation, Waltham trucking alleges that antifreeze purchased from Foster Fuels had a corrosive impact on its trucks.  I use this negotiation with the chapter covering alternative dispute resolution because the materials themselves include both a bilateral negotiation and a video mediation of the case.  Students can watch the video after the exercise to learn about mediation.  Another great thing about this exercise is that once the video is purchased from Harvard’s Program on Negotiation (PON), you can use the accompanying negotiation materials without paying additional fees.

DirtyStuff II.  In this negotiation, a variety of stakeholders are negotiating the text for an administrative agency rule set for proposal about the regulation of an industrial by-product.  Naturally, I use this six-student negotiation in covering administrative law.  I think it’s a great way to promote students’ understanding of the administrative rulemaking process.

Super Slipster.  I love this negotiation because it reminds me of using backyard water slides when I was a kid!  From a quick Google search, I see that these slides are way fancier now than back then (well, I guess it has been a few years…)!  Fortunately, I don’t recall anyone becoming seriously injured from such products.  Unfortunately, Adam Sidwell suffers serious injuries after using the Super Slipster, making this negotiation exercise a perfect accompaniment in covering tort law/products liability.

Finally, Harborco, a six-player negotiation about the building of a new port, is one of PON’s most popular exercises and generally a student favorite.  It’s a great capstone exercise (I use it at the end of the course) and way to have students apply contract law in an experiential context.

The Corporate Transparency Act - A Useful Guide

Business Law Today, the American bar Association's business law magazine, has published a super guide to The Corporate Transparency Act, which became effective earlier this year.  The guide comes in the form of an article, "The Corporate Transparency Act – Preparing for the Federal Database of Beneficial Ownership Information," co-authored by Robert W. Downes, Scott E. Ludwig, Thomas E. Rutledge, and Laurie A. Smiley.  The article reviews the act and clarifies a number of its key provisions.  The following background is excerpted from the introduction of the article:

The Corporate Transparency Act requires certain business entities (each defined as a “reporting company”) to file, in the absence of an exemption, information on their “beneficial owners” with the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury (“Treasury”). The information will not be publicly available, but FinCEN is authorized to disclose the information:

- to U.S. federal law enforcement agencies,

- with court approval, to certain other enforcement agencies to non-U.S. law enforcement agencies, prosecutors or judges based upon a request of a U.S. federal law enforcement agency, and

- with consent of the reporting company, to financial institutions and their regulators.

The Corporate Transparency Act represents the culmination of more than a decade of congressional efforts to implement beneficial ownership reporting for business entities. When fully implemented in 2023, it will create a database of beneficial ownership information within FinCEN. The purpose of the database is to provide the resources to “crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals.” Prior to the implementation of the Corporate Transparency Act, the burden of collecting beneficial ownership information fell on financial institutions, which are required to identify and verify beneficial owners through the Bank Secrecy Act’s customer due diligence requirements. The Corporate Transparency Act will shift the collection burden from financial institutions to the reporting companies and will impose stringent penalties for willful non-compliance and unauthorized disclosures.

The Secretary of the Treasury is required to prescribe regulations under the Corporate Transparency Act by January 1, 2022 (one year after the date of enactment).  It is expected that any implementing regulations will be promulgated by FinCEN pursuant to a delegation of authority from the Secretary of the Treasury. The effective date of those regulations will govern the timing for filing reports under the Corporate Transparency Act.

I am grateful to the co-authors (two of whom are friends and ABA colleagues) for providing this helpful resource.  Now that business firms, rather than financial institutions, are bearing the burdens of disclosure in this space, it will be important for business lawyers to become familiar with the law and begin to develop best practices for its effective implementation.  I intend to provide updates in this space.

2021 Emory Law Conference - Extension of Deadlines for Proposals and Nominations

ANNOUNCEMENT Proposal and Nomination Deadline Extension

It is our pleasure to announce that the proposal and award nomination deadlines for Emory Law’s seventh biennial transactional law and skills education conference have been extended to 5 pm EDT May 7, 2021. Registration is open for the conference, which will be held virtually on June 4, 2021. 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! 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. EDT May 7, 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? We are currently accepting nominations for the 2021 Tina L. Stark Award for Excellence in the Teaching of Transactional Law and Skills. You may submit your nomination here. The nomination deadline is 5 p.m. Friday, May 7, 2021. Please see here for more information about the nomination and selection process. If you have questions regarding any of this information, please contact Kelli Pittman, Program Coordinator, at [email protected] or 404.727.3382.

Sue Payne | Executive Director Katherine Koops | Assistant Director Kelli Pittman | Program Coordinator

COVID-19 and Lawyers Returning to the Workplace

Just a quick follow-up to my April 12 post on COVID-19 and Lawyers Working from Home.  In that post, I indicated that law firms had been slow to adopt work from home before COVID-19 hit.  I also raised a question about the extent to which work-at-home solutions would survive the pandemic.  And I noted that "[t]here is so much I could say about all this."

I learned this week that property security solutions provider Kastle Systems International LLC has created an online "Back to Work Barometer" that tracks real estate occupancy.  Based on data reported for last week (April 12 & 13), "[t]he legal industry is returning to work at a much higher rate than other industries."  The average reported occupancy rate for all industries was 24%.  But for the legal industry, the reported average rate was 37.2%. 

Earlier this year, it was predicted that many law firms would begin to return to work in earnest in the spring.  See here.  But reports also note later return dates and continued work from home for some.  See here and here.

Culture considerations also may interact with post-COVID-19 returns to the workplace, as I briefly indicated in my April 12 post.  Maureen Naughton, Goodwin Procter's Chief Innovation Officer, recently wrote a piece published by Bloomberg Law that offers some important reflections and wise advice on the culture issue:

While a commitment to a more flexible, work-from-anywhere workplace is welcome and overdue, consider its effect on your organization’s culture and sense of community.

Culture takes a long time to build but can dissipate quickly. And culture is certainly stronger when people can spend time together; spontaneous meetings and interactions increase our sense of community, foster development and mentorship, and spark innovative ideas at a moment’s notice.

Such meetings are at the foundation of an innovative and collaborative culture and we must make a concerted effort to preserve what makes us unique while maintaining a healthy, safe environment for our clients and colleagues.

As we evaluate the post-Covid-19 workplace, we must balance the flexibility afforded by remote work with its cultural implications. It is a careful balance, which—if calibrated properly—can benefit rather than harm your culture.

I may be wrong, but I do see office culture as a key concern for law firms--and, in all honesty, for law schools, too.  The autonomy of law professors is well known.  Even before the pandemic, many had decreased their time in the office.  Weaker cultural bonds as among faculty may have impacts on faculty shared governance.

I still may have more to say on this, but I wanted to note these points while they were still fresh on my mind . . . .

Benefit Corporations Are Still Going Public

I previously blogged about benefit corporations going public, with my main point being that the legal requirements in the benefit corporation statute are so weak that they do not, as a practical matter, bind companies to adhere to their social purpose.  As a result, publicly traded benefit corporations are vulnerable to market pressures to favor shareholders over other stakeholders.  The newly-public benefit corporations have therefore chosen to adopt more mundane devices to insulate them from the market for corporate control – high inside ownership, staggered boards, etc – to stay on mission.  The drawback, however, is the same as exists for all antitakeover devices: managers may use their power to advance social purposes, but they may also use it to seek personal rents.

Anyway, I mention all of this because I noticed that another company recently went public as a benefit corporation, namely, Coursera, a provider of online education.  Coursera is in some ways following the path charted by Laureate Education, which is a for-profit university system that is also organized as a benefit corporation.  Both are also certified B-Corps (which provides a bit more reassurance of staying on mission; B-Corp status does not impose legal obligations but it functions as an independent monitor of corporate social performance), and both use inside ownership to insulate the company from public shareholder pressure.  Laureate has dual-class stock, and Coursera, well:

Our directors, executive officers and principal stockholders beneficially own a substantial percentage of our stock and will be able to exert significant control over matters subject to stockholder approval.

Upon completion of this offering, our existing directors, executive officers, greater than 5% stockholders and their respective affiliates will beneficially own in the aggregate approximately 56.3% of our outstanding common stock, assuming no exercise of the underwriters’ option to purchase additional shares of our common stock. Therefore, these stockholders will continue to have the ability to influence us through their ownership position, even after this offering

Additionally, Coursera does not allow shareholders to call special meetings or act by written consent, has a staggered board, an advance notice bylaw, and a supermajority voting requirement for certain bylaw and charter amendments.

One thing I find interesting – and I remarked on this in my earlier post – companies are still figuring out how they talk about benefit corporation status in their prospectuses.  That is, they can’t quite decide whether they want to say that benefitting stakeholders is itself a way of maximizing value to stockholders, so that benefit corporations are really just no different than any other corporation, or whether they want to say that they may sacrifice shareholder wealth to benefit other constituencies.  In my prior post, I pointed out that Lemonade goes more in the shareholder wealth maximization direction, while Vital Farms focuses on stakeholders.

Coursera seems to be in the former category, which makes sense to the extent that, as an educational institution in particular, creating at least the appearance of a stakeholder focus might really be necessary for profit maximization.  Anyway, this is what Coursera says in its prospectus:

There is no assurance that we will achieve our public benefit purpose or that the expected positive impact from being a PBC will be realized, which could have a material adverse effect on our reputation, which in turn may have a material adverse effect on our business, results of operations and financial condition…

As a PBC, we are required to publicly disclose at least biennially on our overall public benefit performance and on our assessment of our success in achieving our specific public benefit purpose. If we are not timely or are unable to provide this report, or if the report is not viewed favorably by parties doing business with us or by regulators or others reviewing our credentials, our reputation and status as a PBC may be harmed.

If our publicly reported B Corp score declines, our reputation could be harmed and our business could suffer

We believe that our B Corp status enables us to strengthen our credibility and trust among our customers and partners. Whether due to our choice or our failure to meet B Lab’s certification requirements, any change in our status could create a perception that we are more focused on financial performance and no longer as committed to the values shared by B Corps. Likewise, our reputation could be harmed if our publicly reported B Corp score declines and there is a perception that we are no longer committed to the B Corp standards. Similarly, our reputation could be harmed if we take actions that are perceived to be misaligned with B Corp values. …

[W]e may take actions that we believe will be in the best interests of those stakeholders materially affected by our specific benefit purpose, even if those actions do not maximize our financial results. While we intend for this public benefit designation and obligation to provide an overall net benefit to us and our partners and learners, it could instead cause us to make decisions and take actions without seeking to maximize the income generated from our business, and hence available for distribution to our stockholders. Our pursuit of longer-term or non-pecuniary benefits may not materialize within the timeframe we expect or at all and may have an immediate negative effect on any amounts available for distribution to our stockholders. Accordingly, being a PBC and complying with our related obligations could harm our business, results of operations, and financial condition, which in turn could cause our stock price to decline….

Our focus on the long-term best interests of our company as a PBC and our consideration of all of our stakeholders, including our shareholders, learners, partners, employees, the communities in which we operate, and other stakeholders that we may identify from time to time, may conflict with short- or medium-term financial interests and business performance, which may negatively impact the value of our common stock.

We believe that focusing on the long-term best interests of our company as a public benefit corporation and our consideration of all of our stakeholders, including our shareholders, learners, partners, employees, the communities in which we operate, and other stakeholders we may identify from time to time, is essential to the long-term success of our company and to long-term shareholder value. Therefore, we have, and may in the future, make decisions that we believe are in the long-term best interests of our company and our shareholders, even if such decisions may negatively impact the short- or medium-term performance of our business, results of operations, and financial condition or the short- or medium-term performance of our common stock. Our commitment to pursuing long-term value for the company and its shareholders, potentially at the expense of short- or medium-term performance, may materially adversely affect the trading price of our common stock…

This is not to say it entirely ignores the possibility that it may favor nonshareholder constituencies – it’s more like, Coursera emphasizes the shareholder-centric view of PBC status while also warning shareholders that Coursera’s Board is, you know, unaccountable:

[B]y requiring the boards of directors of PBCs consider additional constituencies other than maximizing stockholder value, Delaware public benefit corporation law could potentially make it easier for a board to reject a hostile bid, even where the takeover would provide the greatest short-term financial yield to investors.

Our directors have a fiduciary duty to consider not only our shareholders’ interests, but also our specific public benefit and the interests of other stakeholders affected by our actions. If a conflict between such interests arises, there is no guarantee such a conflict would be resolved in favor of our shareholders.

I also note that under its “Description of Capital Stock,” Coursera says:

We believe that an investment in the stock of a public benefit corporation does not differ materially from an investment in a corporation that is not designated as a public benefit corporation. Further, we believe that our commitment to achieving our public benefit goals will not materially affect the financial interests of our stockholders.

That’s almost word-for-word what Lemonade says as well:

We do not believe that an investment in the stock of a public benefit corporation differs materially from an investment in a corporation that is not designated as a public benefit corporation. We believe that our ongoing efforts to achieve our public benefit goals will not materially affect the financial interests of our stockholders.

But not Vital Farms, which doesn’t say anything like that in its Description of Capital Stock; instead, it simply redescribes what was then the existing legal regime for public benefit corporations, and adds “We believe that our public benefit corporation status will make it more difficult for another party to obtain control of us without maintaining our public benefit corporation status and purpose.”

 

Avci, Schipani, Seyhun & Verstein on "Insider Giving"

With recent studies suggesting that insiders are availing themselves of SEC Rule 10b5-1(c) trading plains to beat the market by trading their own company’s shares based on material non-public information, Congress may be poised to act. In March of 2021, Representative Maxine Waters reintroduced a bill entitled the Promoting Transparent Standards for Corporate Insiders Act. The same bill passed the house in the 116^th Congress, but died in the Senate. If passed, the bill would require the SEC to study a number of proposed amendments to 10b5-1(c), report to Congress, and then implement the results of that study through rulemaking. I identified some problems with the bill in my article, Undoing a Deal with the Devil: Some Challenges for Congress's Proposed Reform of Insider Trading Plans. But if significant reforms are in store for insider trading plans, then insiders may look to other creative “loopholes” that permit them to monetize access to their firms’ material nonpublic information.

Professors Sureyya Burcu Avci, Cindy Schipani, Nejat Seyhun, and Andrew Verstein, have identified “insider giving” as another strategy for hiding insider trading in plain sight. Here’s the abstract for their article, Insider Giving, which is forthcoming in the Duke Law Journal:

Corporate insiders can avoid losses if they dispose of their stock while in possession of material, non-public information. One means of disposal, selling the stock, is illegal and subject to prompt mandatory reporting. A second strategy is almost as effective and it faces lax reporting requirements and legal restrictions. That second method is to donate the stock to a charity and take a charitable tax deduction at the inflated stock price. “Insider giving” is a potent substitute for insider trading. We show that insider giving is far more widespread than previously believed. In particular, we show that it is not limited to officers and directors. Large investors appear to regularly receive material non-public information and use it to avoid losses. Using a vast dataset of essentially all transactions in public company stock since 1986, we find consistent and economically significant evidence that these shareholders’ impeccable timing likely reflects information leakage. We also document substantial evidence of backdating – investors falsifying the date of their gift to capture a larger tax break. We show why lax reporting and enforcement encourage insider giving, explain why insider giving represents a policy failure, and highlight the theoretical implications of these findings to broader corporate, securities, and tax debates.

This Friday: Wharton Financial Regulation Conference

Dear BLPB Readers:

Wharton Professors David Zaring and Peter Conti-Brown share that:

We're delighted to host the annual Wharton Financial Regulation Conference this coming Friday, April 16, from 10 am to 5pm. All are welcome to come--we don't expect record crowds, so we will use a Zoom room. Our keynote speaker will be Greg Ip from the Wall Street Journal. Attached is the program. Zoom link is here. Papers are here. 

 

We're especially keen to see our junior colleagues--anyone pre-market or pre-tenure--and will ensure that their questions and participation receive priority, so please circulate to your own colleagues. 

 

I'm looking so forward to this event!!  Hope to "see" many of you there!  Here's the agenda: Download Agenda-Wharton-Finreg-2021-April 13

Spring 2021 Reading

On sabbatical, so this was a pretty good semester of reading (for me). 23 books and two online courses. A good bit about contemplation and religion with some philosophy and fiction. The Remains of the Day and A River Runs Through It were probably my two favorite, though the Merton and Willard books were meaningful too.  

Private Government: How Employers Rule Our Lives (and Why We Don’t Talk About it) - Elizabeth Anderson (2017)  (Philosophy). Tanner Lectures on Human Values at Princeton University. Four commenting essays by different professors follow, then Professor Anderson responds. Her main claim is that Adam Smith and others envisioned a free market with large amounts of self-employment. But powerful modern employers have become “unaccountable communist dictators” who use the rhetoric of freedom, but provide very little of it within their firms. Many employees have no “dignity, standing, or autonomy” in their firms and Anderson calls for more of an employee role in governance, perhaps along the German codetermination model. 

Invitation to Solitude and Silence- Ruth Haley Barton (2004) (Religion). “We are starved for quiet, to hear the sound of sheer silence that is the presence of God himself.”

The Stranger - Albert Camus (1942) (Novel). Death, relationships, crime, and the absurd. “I opened myself to the gentle indifference of the world.” 

The Shallows: What the Internet Is Doing to Our Brains - Nicholas Carr (2011) (Culture). Extending Marshall McLuhan’s Understanding Media (1964) and Neil Postman’s Amusing Ourselves to Death (1985) to the Internet. Since reading Postman’s book, I’ve been curious about what he would say about the Internet, and Carr attempts to do some of that work, looking especially at our diminished attention spans. 

My Name is Hope - John Mark Comer (2011) (Religion). Faith, anxiety, and depression. A bit memoir and a bit self-help. Admits that he is not a doctor or a therapist, but posits that there are root situational or historic causes under most cases of anxiety and depression. Makes calls for attention to the mind/body connections, prayer and meditation, and transparency and forgiveness. 

Garden City - John Mark Comer (2015) (Religion). Faith, work, and rest. “The American Dream...has devolved over the years into a narcissistic desire to make as much money as possible, in as little time as possible, with as little effort as possible, so that we can get off work and go do something else.”

Happy Money - Elizabeth Dunn and Michael Norton (2013) (Behavioral Science). Buy experiences, not stuff. Make it a treat, not daily indulgence. Savor. Buy time;  outsource dreaded time-consuming tasks. Time affluence tied to greater happiness. Stay present. The slow movement. Buy now, consume later (“delaying consumption allows spenders to reap the pleasures of anticipation without the buzzkill of reality, vacations provide the most happiness before they occur.”) Invest in others; people who donate to charity report feeling wealthier. 

The Happiness Hypothesis - Jonathan Haidt (2006) (Psychology). Happiness and meaning and positive psychology through the lens of ancient wisdom. Elephant (desire) and the rider (reason). Happiness = Set Point (Meditation, Cognitive Therapy, Prosac) + Living Conditions ($70K, commute, relationships) + Voluntary Activities (gratitude, building community, being useful).

The Remains of the Day - Kazuo Ishiguro (1988) (Novel). British butler ponders duty, dignity, family, love, bantering, and tradition on a few days of countryside driving and reminiscing. 

How to Be an Antiracist - Ibram X. Kendi (2019) (Race). The expectations and comments of his teachers struck me. I have known about the powerful positive potential of our words as professors, but Kendi’s work reminds me that we can do great harm as well. Kendi writes “ I internalized my academic struggles as indicative of something wrong not just with my behavior but with Black behavior as a whole, since I represented the race, both in their eyes - or what I thought I saw in their eyes-and in my own.” He noted that “Black students who have at least one Black teacher in elementary school are 29 percent less likely to drop out of school.” He did a nice job showing problems with standardized testing, but did not have much in terms of detailed proposals in changing college admissions. 

The Practice of the Presence of God - Brother Lawrence (1895) (Religion). “His only thought was about doing little things for the love of God, since he was not capable of doing great things. Afterward, whatever happened to him would be according to God’s will, so he was not at all worried about it.” “Our sufferings will always be sweeter and more pleasant when we are Him, and without Him, our greatest pleasure will be but a cruel torture.” “I would like to be able to persuade you that God is often nearer to us in our times of sickness and infirmity than when we enjoy perfect health.” 

Abolition of Man - C.S. Lewis (1943) (Education). Short book on education, truth, the doctrine of objective value, recognizing our flaws (Lewis did not like being around small children). justice, and valor. 

Extraterrestrial: The First Signs of Intelligent Life Beyond Earth- Avi Loeb (2021) (Space). Harvard astronomy professor discusses Oumaumua, an odd interstellar object, sighted for 11 days in October of 2017 and the possibility that we are not alone in the universe. He bemoans the closed mindedness of some academic disciplines and argues for humility (even as he brags a bit about his accomplishments). 

A River Runs Through It - Norman Maclean (1989) (Novel). Family and fishing. Younger brother, troubled and beautiful. Supposedly first novel published by University of Chicago Press.  

No Man is an Island- Thomas Merton (1955) (Religion). OK to be ordinary. “All things are at once good and imperfect. The goodness bears witness to the goodness of God. But the imperfection of all things reminds us to leave them in order to live in hope. They are themselves insufficient. We must go beyond them to Him in Whom they have their true being.” “Everything in modern city life is calculated to keep man from entering into himself and thinking about spiritual things. Even with the best of intentions a spiritual man finds himself exhausted and deadened and debased by the constant noise of machines and loudspeakers, the dead air and the glaring lights of offices and shops, the everlasting suggestions of advertising and propaganda.” (108-09). “The cornerstone of all asceticism is humility.” (113). “A [person] who is not at peace with himself projects his interior fighting into the society of those he lives with, and spreads a contagion of conflict all around him….In order to settle down in the quiet of our own being we must learn to be detached from the results of our own activity. We must withdraw ourselves, to some extent, from effects that are beyond our control and be content with the good will and the work that are the quiet expression of our inner life...Our Christian identity is, in fact, a great one; but we cannot achieve greatness unless we lose all interest in being great.” 

New Seeds of Contemplation- Thomas Merton (1964) (Religion). "There is no true peace possible for the man who still imagines that some accident of talent or grace or virtue segregates him from other men and places him above them" “Hate in any form is self-destructive, and even when it triumphs physically it triumphs in its own spiritual ruin.”  “Hurry ruins saints as well as artists.” “If we were incapable of humility we would be incapable of joy, because humility alone can destroy the self-centeredness that makes joy impossible.” “A humble man can do great things with an uncommon perfection because he is no longer concerned about incidentals, like his own interests and his own reputation, and therefore he no longer needs to waste his efforts in defending them.” 

In the Name of Jesus - Henri Nouwen (1989) (Religion). From Harvard to working with people with mental challenges at L’Arche. Brought Bill with him to talk to aspiring ministers in Washington D.C. - “we did it together.”

Can You Drink the Cup? - Henri Nouwen (1996) (Religion). “Joys are hidden in sorrow.” "We want to drink our cup together and thus celebrate the truth that the wounds of our individual lives, which seem intolerable when lived alone, become sources of healing when we live them as part of a fellowship of mutual care.” 

The Tyranny of Merit - Michael Sandel (2020) (Philosophy). Even if we had a level playing field, the talented would win and talent is not deserved or earned. A bit short on solutions, but suggests a lower bar for elite college admissions and then lottery to select who goes. Thinks this would inject a bit of humility into the process and dispel that elite college admissions is earned by the individual. 

The Ethics of Authenticity - Charles Taylor (1991) (Philosophy). Searches for a nuanced view of authenticity--exploring subjectivism, narcissism, apathy, horizons of significance, dialogue, and social traditions. (Lectures entitled “Malaise of Modernity”)

The Spirit of the Disciplines - Dallas Willard (1988) (Religion). Disciplines of Abstinence (solitude, silence, fasting, frugality, chastity, secrecy, sacrifice). Disciplines of Engagement (study, worship, celebration, service, prayer, fellowship, confession, submission).

The Great Omission - Dallas Willard (2014) (Religion). The great commission is not just about conversions, but about making *disciples* of all kinds of people. 

Called to Business - Dallas Willard (2019) (Religion) Extremely short book. A few articles on faith and work; serving others while making a living. 

Selected Listening.

The Promise Podcast (2020) - ~5 hours. Season 2. East Nashville public schools, diversity, wealth, and school choice. 

Justice. Professor Michael Sandel (Harvard) (edX Online).

Philosophy and Science of Human Nature - Tamar Gendler (Yale) (Open Online).

COVID-19 and Lawyers Working from Home

A few weeks ago, I posted on COVID-19 and business interruption insurance, quoting from part of a forthcoming coauthored article presented at the Business Law Prof Blog symposium last fall.  This week, I am posting a few more teaser paragraphs from that same article, which focuses overall on business law issues, practice changes, and professional responsibility challenges emanating from the pandemic.  Today's excerpts focus on lawyers working from home.  Second-year UT Law student Anne Crisp is the primary author of the part of the paper that includes these paragraphs (from which footnotes have been omitted).

 . . . While the work-from-home movement was already taking off in many sectors prior to COVID-19, the legal sector had been slow to adopt this working model. Leaving aside multijurisdictional practice challenges, lawyer resistance to remote work has been attributed in large part to the perceived relationship-based nature of lawyering and the perception that at least some clients expect to meet with their legal counsel in well-appointed offices. But along came COVID-19, and lawyers could no longer avoid the pull of the work-from-home movement. If lawyers wanted to bill hours, they were going to have to work from home.

As lawyers began working from home, law offices were forced to enhance their technological resources and capabilities to meet the needs of the firm and to confront the technological challenges associated with such developments. Issues around laptop-versus-desktop use, home Wi-Fi capacity and security, and virtual private networks emerged as pressing problems to address. Lawyers, like everyone else in the world, began using videoconferencing and telecommunication platforms such as Zoom to meet with clients, colleagues, and the courts on a regular basis, rather than in specific circumstances. Lawyers adapted to the work-from-home model not by choice, but out of necessity.

Law firms also had to address security concerns that arise as a result of remote working. Malware infections, hacking, and other challenges are more difficult to prevent once workers are no longer regularly connected to a law office’s computer network. Firms with appropriate cybersecurity systems in place had to ramp up their availability to cover more workers; those without appropriate security technologies needed to acquire and implements them on an urgent basis.

Moreover, communication complications became manifest, and the need to address them holistically became important. “In a remote working world, everyone’s delegation/supervision/feedback skills must be even better—more frequent, more clear and more realistic—than usual.” For example, in a private firm, a practice group leader may need to intentionally ask how an individual is doing because the leader can no longer gauge this based on their interaction with the individual in the office. Junior lawyers in office settings must be more transparent and realistic about their own constraints as their home environments change. It has also become more important for junior lawyers to take clear ownership of the work they are doing so that senior lawyers, whose focus is on more directly helping clients navigate the issues arising, can more easily monitor who is working on what and keep track of the status of projects. Before the pandemic, communication challenges of the kinds mentioned here may have been barriers to lawyers working from home. Now, lawyers have no choice but to overcome them.

While the work-from-home movement has presented new challenges surrounding security and communication, it has also produced some positive effects. Working from home often creates a more relaxed work environment that has been shown to lead to more creativity. Additionally, lawyers are enjoying the benefits of having no commute. Many lawyers have liked working from home so much that they hope to continue to do so once the pandemic is over. It remains to be seen whether law firms will allow them to continue to do so in a post-pandemic world.

There is so much I could say about all this.  But I will confine myself here to two points, both stemming from the text of that last quoted paragraph. The positive aspects of lawyers' adaptive work-from-home lives generate their own set of challenges. 

First, law firms are making decisions about the extent to which they will allow work-from-home after the pandemic.  (So are law schools.)  The managing shareholder of a regional law firm's Knoxville office participated in my Advanced Business Associations class last week, and he indicated his concern that new and junior associates be physically present in the office in order to ensure that they are exposed and acclimate to the firm's culture. 

Second, return-to-the-workplace mandates will result in some bumpy transitions back to full in-person operations.  Child, elder, and general family care routines devised for use during the pandemic may be as (or more) difficult to unwind than they were to create.  For many, it is not an option to merely go back to the way things were before COVID-19.

I suspect that, as we come out of the pandemic, different firms will handle 2021 work location transitions in different ways based on their size, market, reputation, culture, and more.  The type of work being performed by the lawyers and client preference are likely to play specific guiding roles in the analysis.  This certainly will be an area to watch.

Future Imperfect

The Eastern District of Pennsylvania recently issued a lengthy opinion, largely refusing to dismiss a Section 10(b) complaint alleging that Energy Transfer LP made a series of misstatements about certain pipelines that were under construction.  See Allegheny County Employees’ Ret. Sys. v. Energy Transfer LP, 2021 WL 1264027 (E.D. Pa. Apr. 6, 2021). There’s probably a lot worth examining here but I’m actually just going to use it as a jumping off point to talk about the PSLRA safe harbor.

The safe harbor insulates forward-looking statements from private securities fraud liability if:

(A) the forward-looking statement is—

(i) identified as a forward-looking statement, and is accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those in the forward-looking statement; or…

(B) the plaintiff fails to prove that the forward-looking statement--

(i) if made by a natural person, was made with actual knowledge by that person that the statement was false or misleading; …

(2) Oral forward-looking statements

In the case of an oral forward-looking statement …the requirement set forth in paragraph (1)(A) shall be deemed to be satisfied--

(A) if the oral forward-looking statement is accompanied by a cautionary statement—

…(ii) that the actual results might differ materially from those projected in the forward-looking statement; and

(B) if--

(i) the oral forward-looking statement is accompanied by an oral statement that additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statement is contained in a readily available written document, or portion thereof;

(ii) the accompanying oral statement referred to in clause (i) identifies the document, or portion thereof, that contains the additional information about those factors relating to the forward-looking statement; and

(iii) the information contained in that written document is a cautionary statement that satisfies the standard established in paragraph (1)(A).

15 U.S.C 78u-5.

There are certain preconditions, then, for safe harbor protection based on cautionary language: first, that the statements be identified as forward-looking explicitly, and second, that the cautionary language be included in a written document, or incorporated by reference if made orally.

In Energy Transfer, the court concluded that while some of defendants’ forward-looking statements qualified for safe harbor protection based on cautionary language, some did not meet the preconditions, see 2021 WL 1264027, at *5, *9, and went on to conclude that the plaintiffs had adequately alleged claims based on some of the unprotected ones.

The reason this intrigues me is that, as far as I know, courts have been rather free with allowing defendants to claim the protection of the safe harbor even if they fail to meet the preconditions (for example, if they fail to incorporate the warnings by reference in an oral statement, or try to incorporate by reference for a written one), so long as the cautionary language appears somewhere in a public document.  The Seventh Circuit laid out the rationale in Asher v. Baxter Int’l, 377 F.3d 727 (7th Cir. 2004).  (Disclosure: I was one of the attorneys representing the plaintiffs in Asher v. Baxter).  In that case, the Seventh Circuit said:

When speaking with analysts Baxter’s executives did not provide them with …directions to look in the 10–K report for the full cautionary statement. It follows, plaintiffs maintain, that this suit must proceed with respect to the press releases and oral statements even if the cautionary language filed with the SEC in registration statements and other documents meets the statutory standard.

…[T]his is not a traditional securities claim. It is a fraud-on-the-market claim. None of the plaintiffs asserts that he read any of Baxter's press releases or listened to an executive's oral statement. Instead the theory is that other people (professional traders, mutual fund managers, securities analysts) did the reading, and that they made trades or recommendations that influenced the price. In an efficient capital market, all information known to the public affects the price and thus affects every investor. …

When markets are informationally efficient, it is impossible to segment information as plaintiffs propose. They ask us to say that they received (through the price) the false oral statements but not the cautionary disclosures. That can’t be; only if the market is inefficient is partial transmission likely, and if the market for Baxter's stock is inefficient then this suit collapses because a fraud-on-the-market claim won't fly.

The problem with that logic, though, is that PSLRA safe harbor protection is not predicated on the idea that cautionary statements will impact prices in the same way as the initial false statement and thereby nullify the effects of the lie.  True, the common law bespeaks caution doctrine insulates all forward looking statements if cautionary language renders them immaterial, Harden v. Raffensperger, Hughes & Co., 65 F.3d 1392 (7th Cir. 1995), but the PSLRA standards are more forgiving.  Defendants need only identify “important factors that could cause actual results to differ materially from those in the forward-looking statement,” 15 U.S.C. § 78u-5(c)(1)(A)(i), and “[f]ailure to include the particular factor that ultimately causes the forward-looking statement not to come true will not mean that the statement is not protected by the safe harbor.” H.R. Conf. Rep. No. 104-369, at 44 (1995).

Under the PSLRA, then, courts rarely, if ever, test whether the cautionary language was sufficient to offset the misleading effects of the projection.  This is precisely why some courts have described the safe harbor as a “license to defraud,” In re Stone & Webster, Inc., Sec. Litig., 414 F.3d 187 (1st Cir. 2005) – because even if the cautionary language is insufficient to nullify the effects of the false statement – so that, by hypothesis, markets were actually misled by the projection – defendants may still be protected.

Given that, the Seventh Circuit’s invocation of the fraud-on-the-market doctrine seems inapposite, because the cautionary language that suffices to trigger safe harbor protection isn’t really about ensuring that prices fully incorporate the risks associated with false projections, or at least, that’s not its primary function. Plus, Congress enacted the PSLRA in response to what it perceived as abusive class actions - if it wanted to distinguish between the preconditions for fraud-on-the-market actions and other actions, it certainly could have done so.

If all that’s right, then what does the safe harbor do? 

Well, I’m not a fan of the safe harbor but if I am going to justify it, I’d say the formalities associated with the safe harbor could prompt mindfulness on the part of corporate actors.  They have extra protection for projections – so they’ll be more inclined to make them – but they also know they can’t simply speak off-the-cuff; they must take care to include the warnings.  That enforced thoughtfulness may itself serve as some kind of protection against statements that aren’t rooted in reality, and it’s why the Seventh Circuit, in my view, was wrong to ditch the formalities.  Also, if defendants were truly held to the requirement that they identify which exact statements they believed to be forward-looking as a precondition of claiming protection via cautionary language, I think that would spare everyone a lot of litigation and force corporate speakers to be clearer about their claims. 

Anyway, in related news, Acting Corp Fin Director John Coates recently delivered a speech on the safe harbor and SPACs.  Going public via SPAC, rather than traditional IPO, is all the rage right now, apparently at least in part because while traditional IPOs are excluded from safe harbor protection entirely, the de-SPAC merger is not.  Specifically, the safe harbor says:

this section shall not apply to a forward-looking statement… that is… made in connection with an initial public offering...

15 U.S.C. 78u-5(b)(2)(D).

That regulatory distinction has led to some companies to offer wildly optimistic projections about SPAC acquisitions, a lot of which do not, ahem, come true.

Coates’s speech was notable in that he not only objected to the differential regulatory treatment on policy grounds – as he explained, companies going public for the first time pose particular risks to investors no matter what method they use to do so – but he also suggested that, read broadly, the existing safe harbor exclusion for initial public offerings might also be read to exclude de-SPAC transactions.  Full quote:

[T]he PSLRA’s exclusion for “initial public offering” does not refer to any definition of “initial public offering.” No definition can be found in the PSLRA, nor (for purposes of the PSLRA) in any SEC rule. I am unaware of any relevant case law on the application of the “IPO” exclusion. The legislative history includes statements that the safe harbor was meant for “seasoned issuers” with an “established track-record.”…

The economic essence of an initial public offering is the introduction of a new company to the public. It is the first time that public investors see the business and financial information about a company….

If these facts about economic and information substance drive our understanding of what an “IPO” is, they point toward a conclusion that the PSLRA safe harbor should not be available for any unknown private company introducing itself to the public markets. Such a conclusion should hold regardless of what structure or method it used to do so. The reason is simple: the public knows nothing about this private company. Appropriate liability should attach to whatever claims it is making, or others are making on its behalf...

[A]ll involved in promoting, advising, processing, and investing in SPACs should understand the limits on any alleged liability difference between SPACs and conventional IPOs. Simply put, any such asserted difference seems uncertain at best.

It should be noted that Commissioner Hester Peirce tweeted her (tentative) disagreement with his reading of the statute, but if he’s right, it would mean that all these companies who thought their cautionary language insulated them from liability … were, you know, wrong.

New ABA Model Contract Clauses

As regular readers of the blog know, my passion is business and human rights, particularly related to supply chain due diligence and disclosure. The ABA has just released thirty-three model clauses  based on the United Nations Guiding Principles on Business and Human Rights, and the OECD Due Diligence Guidance for Responsible Business Conduct. The ABA committee's reasoning for the model clauses is here:

The human rights performance of global supply chains is quickly becoming a hot button issue for anyone concerned with corporate governance and corporate accountability. Mandatory human rights due diligence legislation is on the near-term horizon in the E.U. Consumers and investors worldwide are increasingly concerned about buying from and investing in companies whose supply chains are tainted by forced or child labor or other human rights abuses. Government bodies such as U.S. Customs and Border Protection are increasingly taking measures to stop tainted goods from entering the U.S. market. And supply chain litigation, whether led by human rights victims or Western consumers, is on the rise. There can therefore be little doubt that the face of global corporate accountability for human rights abuses within supply chains is changing. The issue is “coming home,” in other words. ... Some of the key MCCs 2.0 obligations include: (1) Human Rights Due Diligence: buyer and supplier must each conduct human rights due diligence before and during the term of the contract. This requires both parties to take appropriate steps to identify and mitigate human rights risks and to address adverse human rights impacts in their supply chains. (2) Buyer Responsibilities: buyer and supplier must each engage in responsible sourcing and purchasing practices (including practices with respect to order changes and responsible exits). A fuller description of responsible purchasing practices is contained in the Responsible Buyer Code of Conduct (Buyer Code), also developed and published by the Working Group. (3) Remediation: buyer and supplier must each prioritize stakeholder-centered remediation for human rights harms before or in conjunction with conventional contract remedies and damage assessments. Buyer must also participate in remediation if it caused or contributed to the adverse impact.

Even if you're not obsessed with business and human rights like I am, you may find the work product provides an interesting context in which to discuss contract clauses such as representations, warranties, and damages either in a first-year contract course or a transactional drafting course. 

AALS Section on Business Associations | Two Sessions “Race and Teaching Business Associations” & "New Voices in Business Law"

The AALS Section on Business Associations has two calls for papers.  Both are below.

 

Call for Papers for the

Section on Business Associations Program on

Race and Teaching Business Associations

January 5-9, 2022 AALS Annual Meeting

The AALS Section on Business Associations is pleased to announce a Call for Papers for its program at the 2022 AALS Annual Meeting, which will be held virtually. The topic is Race and Teaching Business Associations. Up to two presenters will be selected for the section’s program.

Business Associations classes taught in most law schools spend little if any time on issues relating to racial discrimination and inequity. But as important social institutions, businesses have long had a significant impact on racial equity. The increasing scrutiny of the lack of diversity on public company boards is one of several fronts where businesses are facing both legal and social pressure to address racial inequity. Students are increasingly interested in understanding how the law governing business organizations reflects or contributes to racial injustice. Many law professors want to do more to cover topics relating to race in their Business Associations course and are seeking guidance on how to do so. This panel will provide a forum where teachers of Business Associations can share ideas for incorporating the subject of racial discrimination and inequity into their classes. 

Submission Information:

Please submit an abstract or a draft of an unpublished paper to Jim Park, [email protected], on or before Friday, August 20, 2021.  Authors should include their name and contact information in their submission email but remove all identifying information from their submission.  Papers will be selected after review by members of the Executive Committee of the Section. Presenters will be responsible for paying their registration fee, if applicable. 

We recognize that the past year has been incredibly challenging and that these challenges have not fallen equally across the academy.  We encourage scholars to err on the side of submission, including by submitting early stage or incomplete drafts.  Scholars whose papers are selected will have until December to finalize their papers.   

Please direct any questions to Jim Park, UCLA School of Law, at [email protected].  

 

This is the second:

 

Call for Papers

AALS Section on Business Association

New Voices in Business Law

January 5-9, 2022, AALS Annual Meeting

The AALS Section on Business Associations is pleased to announce a “New Voices in Business Law” program during the 2022 AALS Annual Meeting, which will be held virtually. This works-in-progress program will bring together junior and senior scholars in the field of business law for the purpose of providing junior scholars with feedback and guidance on their draft articles. To complement its other session at the Meeting, this Section is especially interested in papers relating to race and business law, but it welcomes submissions on all business-related topics.

FORMAT:  Scholars whose papers are selected will provide a brief overview of their paper, and participants will then break into simultaneous roundtables dedicated to the individual papers.  Two senior scholars will provide commentary and lead the discussion about each paper.

SUBMISSION PROCEDURE:  Junior scholars who are interested in participating in the program should send a draft or summary of at least five pages to Professor Eric Chaffee at [email protected] on or before Friday, August 20, 2021.  The cover email should state the junior scholar’s institution, tenure status, number of years in his or her current position, whether the paper has been accepted for publication, and, if not, when the scholar anticipates submitting the article to law reviews.  The subject line of the email should read: “Submission—Business Associations WIP Program.”

Junior scholars whose papers are selected for the program will need to submit a draft to the senior scholar commentators by Friday, December 10, 2021.

ELIGIBILITY:  Junior scholars at AALS member law schools are eligible to submit papers.  “Junior scholars” includes untenured faculty who have been teaching full-time at a law school for ten or fewer years.  The Committee will give priority to papers that have not yet been accepted for publication or submitted to law reviews. 

Pursuant to AALS rules, faculty at fee-paid non-member law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit.  Please note that all presenters at the program are responsible for paying their own annual meeting registration fees and travel expenses.  

Professor Skinner's Central Bank Activism

Professor Christina Parajon Skinner recently posted her new article, Central Bank Activism (forthcoming, Duke Law Journal).  The topic couldn't be more timely or important.  Here's the abstract:

Today, the Federal Reserve is at a critical juncture in its evolution. Unlike any prior period in U.S. history, the Fed now faces increasing demands to expand its policy objectives to tackle a wide range of social and political problems—including climate change, income and racial inequality, and foreign and small business aid.

This Article develops a framework for recognizing, and identifying the problems with, “central bank activism.” It refers to central bank activism as situations in which immediate public policy problems push central banks to aggrandize their power beyond the text and purpose of their legal mandates, which Congress has established. To illustrate, the Article provides in-depth exploration of both contemporary and historic episodes of central bank activism, thus clarifying the indicia of central bank activism and drawing out the lessons that past episodes should teach us going forward.

The Article urges that, while activism may be expedient in the near term, there are long-term social costs. Activism undermines the legitimacy of central bank authority, erodes its political independence, and ultimately renders a weaker central bank. In the end, the Article issues an urgent call to resist the allure of activism. And it places front and center the need for vibrant public discourse on the role of a central bank in American political and economic life today.