Business Law Prof Blog

New Year's Resolution for Lawyers

People rarely keep resolutions, much less ones they don’t make for themselves, but here are some you may want to try.

1. Post information about the law and current events that lay people can understand on social media. You don’t need to be a TikTok lawyer and dance around, but there’s so much misinformation out there by “influencers” that lawyers almost have a responsibility to correct the record.
2. Embrace legal tech. Change is scary for most lawyers, but we need to get with the times, and you can start off in areas such as legal research, case management, accounting, billing, document automation and storage, document management, E-discovery, practice management, legal chatbots, automaton of legal workflow, contract management, artificial intelligence, and cloud-based applications. Remember, lawyers have an ethical duty of technological competence.
3. Learn about legal issues related to the metaverse such as data privacy and IP challenges.
4. Do a data security audit and ensure you understand where your and your clients’ data is and how it’s being transmitted, stored, and destroyed. Lawyers have access to valuable confidential information and hackers know that. Lawyers also have ethical obligations to safeguard that information. Are you communicating with clients on WhatsApp or text messages? Do you have Siri or Alexa enabled when you’re talking about client matters? You may want to re-think that. Better yet, hire a white hat hacker to assess your vulnerabilities. I'll do a whole separate post on this because this is so critical. 
5. Speaking of data, get up to speed on data analytics. Your clients use data every day to optimize their business performance. Compliance professionals and in-house lawyers know that this is critical. All lawyers should as well.
6. Get involved with government affairs. Educate legislators, write comment letters, and publish op-ed pieces so that people making the laws and influencing lawmakers can get the benefit of your analytical skills. Just make sure you’re aware of the local, state, and federal lobbying laws.
7. Learn something completely new. When you do your CLE requirement, don’t just take courses in your area of expertise. Take a class that has nothing to do with what you do for a living. If you think that NFTs and cryptocurrency are part of a fad waiting to implode, take that course. You’ll either learn something new or prove yourself right.
8. Re-think how you work. What can you stop, start, and continue doing in your workplace and family life?
9. Be strategic when thinking about diversity, equity, and inclusion. Lawyers talk about it, but from what I observe in my lawyer coaching practice and the statistics, the reality is much different on the ground and efforts often backfire.
10. Prioritize your mental health and that of the members on your team. Do you need to look at billable hours requirements? What behavior does your bonus or promotion system incentivize? What else can you do to make sure that people are valued and continually learning? When was the last time you conducted an employee engagement survey and really listened to what you team members are saying? Whether your team is remote or hybrid, what can you do to make people believe they are part of a larger mission? There are so many resources out there. If you do nothing else on this list, please focus on this one. If you want help on how to start, send me an email.

Wishing you a safe, healthy, and happy 2022.

Now Available: FinTech: Law and Regulation (2nd edition)

As the year quickly draws to a close, I want to wish BLPB readers a Happy New Year and a wonderful start to 2022!  I also wanted to share some exciting end of the year news: the 2nd edition of FinTech: Law and Regulation (ed. Jelena Madir) is now available (here and here)!  I’m honored to have contributed a chapter, Blockchain in Financial Services, with coauthor Professor Kevin Werbach.  Below, I provide a summary of the book and its contents from the publisher's (Edward Elgar) website.

“This fully updated and revised second edition provides a practical examination of the opportunities and challenges presented by the rapid development of FinTech in recent years, particularly for regulators, who must decide how to apply current law to ever-changing concepts driven by continually advancing technologies. It addresses new legislative guidance on the treatment of cryptoassets and smart contracts, the European Commission’s Digital Finance Strategy and FinTech Action Plan, as well as analysing significant recent case law.”

Continue reading

Being a Business Law Prof: Transitioning to the New Year

As the Interim Director of UT Law's Institute for Professional Leadership (IPL), I have the privilege of working with a student fellow. Both last year's fellow (chosen by the founder and Director of the IPL) and this year's fellow (selected by me) have been advanced business law students. I have had the pleasure of getting to know both well, inside and outside the classroom. 

Our Hardwick Fellows have a number of roles in the IPL. They often involve collaborative tasks. One of the most fun components is our work co-editing guest posts for the IPL's Leading as Lawyers blog. We read and revise posts authored by students, alumni, faculty, staff, and sometimes others. We endeavor to publish a post about every two or three weeks. Click on the "follow" button on our WordPress home page to receive email notices of new posts.

The IPL's 2021-22 Hardwick Fellow is Stefan Kostas. As we sat down to do some semester-end planning, we somehow came to the idea of co-creating a holiday season post--a dialogue capturing some of our relevant reflections. We conducted the "conversation" by e-mail and then edited it. The end result is a post entitled: "Leadership Musings, Goal-Setting, and the New Year: A Colloquy."

It struck me that our holiday season/year-end post might be of interest to BLPB readers, too. So, feel free to click on the link and give it a read. It exemplifies many of the conversations business law profs--and other law profs--have with students whom they mentor and with whom they collaborate. This kind of give-and-take--part social conversation, part mentoring and career development--is a wonderfully joyful part of our job as instructors in the law school setting. We are, indeed, blessed.

Sending out wishes to all for a very happy, healthy new year.  No doubt surprise challenges in legal education will continue to arise in the lingering pandemic environment.  But the rich professional and academic relationships our jobs allow us to have will be part of what sustains me in 2022. 🎉

If it’s too good to be true…

In recent years, there’s been a lot of talk about the macro effects of consolidation in the asset management industry, whereby a handful of managers own stock in just about everything.  In particular, several scholars have argued that these massive investors “own the economy,” and therefore internalize any externalities generated by the antisocial behavior of an individual portfolio company.  Therefore, the theory goes, these firms have an interest in reducing sources of systemic risk, like climate change, or potentially racial inequality.  See, e.g., Madison Condon, Externalities and the Common Owner, 95 Wash. L. Rev. 1 (2020); John C. Coffee, The Future of Disclosure: ESG, Common Ownership, and Systematic Risk; Jim Hawley & Jon Lukomnik, The Long and Short of It: Are We Asking the Right Questions? Modern Portfolio Theory and Time Horizons, 41 Seattle U. L. Rev. 449 (2018).

There were always some kinks in the theory.  Most obviously, concerns have been raised that asset managers encourage less competition among portfolio firms, to the detriment of customers and labor.  See, e.g., Miguel Anton, Florian Elder, Mireia Gine, & Martin C. Schmalz, Common Ownership, Competition, and Top Management Incentives; Zohar Goshen & Doron Levit, Common Ownership and the Decline of the American Worker.  I’ve written about how the theory sits uneasily with our concepts of corporate governance, and glosses over the fact that these investments are held in different funds which may not all have identical interests.

Still, law professors like myself find it attractive because at the end of the day, it provides a justification for more stakeholder-focused business practices without challenging the underpinnings of shareholder primacy or the structure of the modern corporation.  We get to have our cake and eat it too.  No wonder, then, that the Chair of MSCI said that ESG investing is a mechanism to “protect capitalism. Otherwise, government intervention is going to come, socialist ideas are going to come.”  At the end of the day, ESG investing is an incredibly mild intervention that leaves our corporate regulatory system intact.

Which is why two new papers, The Limits of Portfolio Primacy, by Roberto Tallarita, and Systemic Stewardship with Tradeoffs, by Marcel Kahan and Edward Rock, are so important.  Both take a hard look not only at the ways in which this theory is out of sync with current corporate governance standards, but also at more practical realities – namely, the actual investments of large asset managers, and the ways in which they do not, in fact, own the economy, while many of the worst corporate actors are beyond their influence.

And on that note … happy Christmas to everyone who celebrates (and to those of us who just enjoy the festive atmosphere)!  I hope everyone is having a wonderful (safe, healthy!) holiday season.

ESG in 2022- Pt 1

I’ve been thinking about environmental, social, and governance issues (“ESG”) for almost twenty years -- long before they became mainstream. As an in-house lawyer at a public company prior to joining academia, I had no choice. I teach, research, and consult on these issues now and have a whole lot of thoughts about them, which I'll share in coming posts. 

I had the honor of presenting on "ESG and India in 2022" yesterday. ESG is a hot topic in India, as it is everywhere - - I have either attended or spoken on half a dozen panels on ESG this year to introduce the topic to lawyers. If you're not familiar with the term or think it's completely irrelevant to what you do for a living, here are some common classifications for investors that integrate ESG into their portfolio selection and investment process. 

Environmental: climate change, water, alternative energy, pollution & waste management

Social: human rights, workplace standards, worker health safety, diversity & equal opportunity, labor relations, land grabs

Governance: bribery & corruption, board diversity, corporate political contributions, executive compensation, disclosure & transparency, board independence, tax avoidance

If you're a transactional lawyer, chances are you or your clients deal with at least one these issues directly or indirectly.

Here are some interesting statistics from the 2021 RBC Global Asset Management Responsible Investment Survey, which had over 800 respondents from all over the world. For context, almost half of the respondents had over one billion in assets under management:

• 72% of global investors integrate ESG principles in their investment approach and decision-making.
• 96% of respondents in Europe, 81% in Canada (down from 89%), and 65% in US say they use ESG in decision making.
• 83% of global investors said ESG-integrated portfolios are likely to do as well or better than non-ESG-integrated portfolios, about the same as last year.
• 97% of EU and 75% of US investors believe ESG-integrated portfolios perform as well as or better than non-ESG integrated portfolios.

During my talk, I focused on the following topics at the audience's request:

1. What is Environmental Social Governance (ESG) and why is sustainability is important?

2. How can investors apply these non-financial factors as a part of their analysis process to identify material risk and growth opportunities?

3. What is sustainable investing? How does it differ from ESG integration?

4. Co-relation between a smart investment and sustainable innovation.

5. Did this pandemic teach us a lesson about ESG? How is it going to affect the call for the climate change issue?

6. Responsibility, sustainability, and diversity are the pillars of ESG. How are MNCs are adopting this?

7.What do ESG practitioners do and what is the scope for growth/ global career opportunities in ESG?

It was an honor to talk about ESG to an audience from a country where these issues are a literally a matter of life and death. For example, almost 20% of deaths in India in 2019 were attributable in part to pollution. I’ve also been thrilled to introduce my law students to these concepts and help them discern the facts from the hype. If they are any indication, the next generation of lawyers will think of ESG as a matter of course and not as a special category of legal or business issues. 

 

 

 

 

ICYMI: 23 states file comment opposing DOL's proposed rule that "promotes a social activist agenda over the interests of employees, retirees, and other retirement fund beneficiaries."

You can read the full comment letter here.  For additional background on the proposed rule, go here.  An excerpt from the letter:

It is our position that social and political issues should not be considered by fiduciaries in employee retirement savings investment decisions. We are not opposed to any person or entity considering ESG or other social factors when investing their own money; individuals and companies may promote social causes through their investments to the extent they desire. But we are opposed to investment managers and employers being encouraged or mandated to consider ESG factors and protected from legal action when they do. Adopting this Proposed Rule and allowing employers and investment managers to consider ESG factors makes what should be a financial decision into a political one....

Under the Proposed Rule, plan fiduciaries will more often choose ESG investments, employers can serve their political agendas, and investment managers are protected from adverse consequences of their social investment decisions. Indeed, the government may also exert pressure on plan sponsors who do not offer ESG defaults as a way of driving capital to achieve desired social outcomes. But it is the employees and beneficiaries—whose retirement savings are affected—who will suffer. The Proposed Rule encourages fiduciaries to favor social causes to the potential detriment of employees’ retirement savings. Moreover, retirement plans that consider ESG factors will incur higher investment costs. As a result, less of each employee’s retirement savings is available for investment and the return may be much less. A fiduciary cannot sacrifice investment returns or assume greater investment risks as a means of promoting collateral social justice policy goals....

The consensus background on sub-regulatory guidance in this area across the political spectrum highlights one critical point of agreement: the longstanding view that the fiduciary duty under ERISA requires an objective assessment of an investment’s economic risk and return when evaluating whether it is appropriate for a plan. Fiduciaries remain bound by statute to manage investments with an ‘‘eye single’’ to maximizing the funds available to pay retirement benefits. Yet, the Proposed Rule promotes ERISA fiduciaries to subordinate those interests in favor of other objectives. The Proposed Rule does not protect employee retirement savings but increases the risk of loss and costs by encouraging investments that are often misleading, administratively costly, and historically untested. While it is never appropriate to encourage plan sponsors to take such risks, it is particularly indefensible in a time when Americans struggle with inflation and financial uncertainties. The Proposed Rule risks the economic security of retirees to further a political agenda. The Department should not adopt the Proposed Rule.

FSOC Releases 2021 Annual Report

Amid exam grading and the hustle and bustle of the holiday season, don't overlook the FSOC's recently released 2021 Annual Report.  Even if you don't have time for a thorough reading (I didn't!), its 10 page Executive Summary provides a really comprehensive overview. 

Of course, I did read the section about clearing (pp. 116-119) and particularly appreciated its helpful graphs and discussion of intraday margin calls related to the trading of GameStop shares in January 2021 (see BLPB posts on this topic here and here).  I also liked that the short section on clearing in the Executive Summary mentioned the possibility of both clearinghouse default and non-default losses.  I hope the increasing focus on the latter issue continues, as much remains unsettled in this area.  Were a clearinghouse to experience both types of losses, it is unlikely that it would be able to separate them out completely.  This short section ends with the statement: “Finally, the Council encourages regulators to continue to advance recovery and resolution planning for systemically important FMUs [clearinghouses are FMUs] and to coordinate in designing and executing supervisory stress tests of multiple systemically important CCPs.” (p.14). As 2022 starts soon, I also want to encourage such action.  It’s disappointing that over eleven years after Dodd-Frank’s passage, this area has yet to be finalized. I wrote about this issue in Incomplete Clearinghouse Mandates.

Stay tuned if you want more on clearing.  A slightly delayed post, Part II: Turing’s Clearing and Settlement, is coming to the BLPB soon!

AALS Section on Business Associations - 2022 Leadership Slate

Following up on my December 6 post, I include below an update from AALS Section on Business Associations Chair (and friend-of-the-BLPB) Jessica Erickson relating to the upcoming AALS annual meeting elections for the Section on Business Associations.  I am impressed by the slate and know our section leadership will remain in capable hands!  I hope to see many of you on Zoom at one or more of the section programs, including the main program (described in my December 6 post) at which the voting for next year's leadership will take place.  

+++++

Dear members of the AALS Business Associations Section:

I am emailing to update you on the proposed slate for the AALS Business Associations Section's Executive Committee. We have a great list of people who will be joining the section's leadership. I am rotating off as chair at the end of the annual meeting, and Jim Park (our chair-elect) will automatically become the new chair. Mira Ganor has agreed to serve as next year's chair-elect. Thanks to both Jim and Mira for their service to our section!

We also have three members rotating off the Executive Committee - Matt Jennejohn, Dana Brakman Reiser, and Andrew Verstein. We are very thankful for their service as well! As a result of these changes, we have four openings on the Executive Committee. After soliciting nominations from our membership, we have a slate of four new members that we will vote on in a brief business meeting at the end of our main session at the annual meeting. This slate includes:

* George Georgiev of Emory University School of Law;
* Summer Kim of the University of California, Irvine School of Law;
* Christina Sautter of the Paul M. Hebert Law Center, Louisiana State University; and
* Omari Scott Simmons of Wake Forest Law School

Thanks to all of you for your work on behalf of the section, and I hope you all have a fabulous break.

Best,
Jessica Erickson
Chair, AALS Business Associations Section

Lee on Prosocial Fraud

Julia Y. Lee has published Prosocial Fraud in 2 Seton Hall L. Rev. 199.  Here is an excerpt:

This Article identifies the concept of prosocial fraud--that is, fraud motivated by the desire to help others. The current incentive-based legal framework focuses on deterring rational bad actors who must be constrained from acting on their worst impulses. This overlooks a less sinister, but more endemic species of fraud that is not driven by greed or the desire to take advantage of others. Prosocial fraud is induced by prosocial motives and propagated through cooperative norms. This Article argues that prosocial fraud cannot be effectively deterred through increased sanctions because its moral ambiguity lends itself to self-deception and motivated blindness. The presence of a beneficiary other than the self allows individuals to supplant one source of morality (honesty), with another (benevolence), providing a powerful source of rationalization that weakens the deterrent impact of legal sanctions.

After examining the types of motives that typify prosocial fraud, this Article identifies structural and situational factors--definitional ambiguity, incrementalism, and third-party complicity--that increase its prevalence. Given the cognitive and psychological biases at play, this Article suggests that any efforts to curb prosocially motivated fraud focus less on adjusting sanctions and more on exploring alternative mechanisms of ex ante, private enforcement....

Empathy and altruism may ... play a role in dishonest helping behavior motivated by the desire to restore equity. Whereas negative inequity produces feelings of envy, positive inequity induces feelings of guilt, which motivates individuals to dishonestly help others. Particularly where the risks of being caught are low, individuals are more prone to act on emotions such as envy, guilt, and empathy. Moreover, when individuals act dishonestly to restore equity, they subjectively “discount the immorality of their actions.”

Punctilio of Honor Most Sensitive

Today I’m posting to call everyone’s attention to In re Kraft-Heinz Co. Derivative Litigation, decided by Vice Chancellor Will earlier this week.

This is a demand excusal case and there may be a lot that’s interesting about it but I’m focusing on one specific aspect.

Kraft-Heinz was 27% owned by Berkshire Hathaway, 24% owned by 3G (which had operational control), and 49% owned by public shareholders.  Berkshire and 3G each got to nominate 3 members of the 11 member board, and they had a shareholder agreement whereby they promised to vote for each other’s designees, and not take action to “to effect, encourage, or facilitate” the removal of the other’s designees.

Kraft-Heinz started to perform poorly and 3G sold 7% of its stake just before a disappointing earnings announcement.  Shareholders filed a derivative lawsuit alleging that 3G traded on nonpublic information, naming 3G and its board designees as defendants, and the critical question was whether the 11-person board was majority disinterested for demand purposes. That question, in turn, turned on whether Berkshire’s nominees – one of whom was a Berkshire director, one of whom was a director of several Berkshire subsidiaries and the CEO of one  – could objectively consider whether to bring a lawsuit against 3G. 

The plaintiffs alleged that Berkshire and 3G together formed a control group, but the court did not consider that relevant one way or another; i.e, whether they were or they weren’t, the critical question was the disinterestedness/independence of Berkshire’s board nominees vis a vis 3G, and that question did not turn on their control group status.

The court said the Berkshire members were disinterested and independent, notwithstanding the shareholder agreement.  Per the court, the agreement did not bind Berkshire not to sue 3G and its board nominees – only to refrain from removing them – and the Berkshire nominees were not themselves parties to that agreement anyway.   Plus, Berkshire Hathaway does not exactly need to rely on 3G to have access to investment opportunities.

Okay, so why is this interesting?

Conceptually, it’s not dissimilar from the problem that faced the court in Patel v. Duncan, which I blogged about here.  That case also involved a publicly traded company controlled by two private equity firms that had a shareholder agreement to select 60% of the board nominees.  One of the firms engaged in an interested transaction with the company, and the way the case was framed, the critical question was whether the firms jointly consisted a control group such that the transaction could only be cleansed via MFW procedures, but substantively what it came down to was whether the court believed that the first PE firm could be objective about transactions in which the second firm had a financial interest.  The court believed objectivity was possible, and though the plaintiff argued that the two firms had a tacit quid pro quo – where each would approve the other’s interested transactions – the court found no evidence of such an agreement other than the existence of an interested transaction with the first firm, approved a year earlier, and dismissed the case.

As I blogged at the time, shareholder agreements in publicly-traded firms are increasingly common, and one very popular structure involves agreements among PE firms with respect to a company that they take public but retain continuing control over.  Which means we can expect to see more questions arise concerning how disinterested one firm can truly be when it comes to matters involving its co-venturer.

I mean, sure, in one sense, each firm may have an incentive to police the behavior of the other (unless, as alleged in Patel, they have a joint agreement to loot the company), but if we take the more nuanced approach to dependence that the Delaware Supreme Court has recently pursued, it seems much more likely that one firm will try, within at least some limits, to placate  the other rather than allow disagreements to spill into litigation and boardroom friction, especially if they expect to do future deals together.

Vice Chancellor Will believed that Berkshire didn’t need 3G to do future deals – and so that would not be a factor in assessing Berkshire’s objectivity – but Berkshire’s brand is being a nondisruptive shareholder; the last thing it wants to do is get a reputation for public squabbles with co-investors.  Plus, 3G had substantive control of the company; Berkshire may have worried about its ability to find a replacement with whom it could also partner if 3G’s malfeasance were established.  And that doesn’t even get into the question whether VC Will correctly evaluated the effect of the shareholder agreement on the behavior of the Berkshire nominees (at least one of whom, as a Berkshire subsidiary CEO, is functionally a Berkshire employee).

Anyway, this is a problem that’s going to recur, which means Delaware needs to offer more considered guidance about the appearance of bias that may stem from shareholder agreements, and the legal consequences that follow.

Part I: Turing's Clearing and Settlement

Yesterday in reading the minutes from the FOMC’s November 2021 meeting, I noticed that once again (see previous post), some participants expressed concern about “the risk of a sudden reduction in the liquidity of collateral used at central counterparty clearing and settlement systems.” (p.9)  I’ve been wanting to read Dermot Turing’s Clearing and Settlement (3^rd ed.) since receiving a review copy (for which I’m very grateful!).  So, given comments about clearinghouses in recent FOMC meeting minutes, I thought this would be a great time to get started! Robust clearinghouses remain critical to global financial market stability.  

Until 2014, Dermot Turing was a partner at Clifford Chance, specializing in “financial sector regulation, particularly the problems associated with failed banks, and financial market infrastructure.”  He’s also the nephew of famed computer scientist Alan Turing and has written books about his uncle (here) and historical works about computing (for example, here ).  I’ve read several of Turing’s articles related to financial market infrastructures (for example, here and here) and have always learned a lot.  So, I’ve decided to start reading through Clearing and Settlement (the book) and to invite interested BLPB readers to come along with me!  The book is divided into three parts.  I’ll share some comments on Part I (Processes) today and Parts II (Regulation) and III (Risk and Operations) in subsequent posts.

Before arriving at Part I, the book provides a number of helpful tables, some examples include a Table of Cases, Table of Statutes, and a Table of Abbreviations.  I had to chuckle in seeing this last one as I’m often asked to create a table of acronyms for my financial market infrastructure articles!  As Turing states “Acronyms Abound.”  As this sentence illustrates, Turing’s writing is concise, clear, and accessible.  On the first page of Part I, he provides one of the best analogies for the clearing and settlement process that I’ve seen by using an example we’re all familiar with: online shopping.  We know that these transactions are only complete when the package arrives (after postage and packaging, of course!) and “the payment is in the bank.” (p.3). He explains to the reader that “This book is about the ‘postage and packaging’ of financial transactions.” (p.3)  Or as the Foreward to the book’s first edition explains “It is the first piece of work tackling all legal and regulatory aspects of post-trading and, as such, it represents a valuable contribution.”   

Turing’s profound interest in history is apparent from the beginning of Part I, entitled “Clearing and Settlement in Historical Perspective.”  Indeed, one of my favorite things about the book so far is its deep historical perspective.  For me, one of the most helpful aspects of Part I has been its painstaking attention in providing definitions of post-trade processes.  As Turing notes, “ ‘Clearing’ is the most over-used and least-understood term in post-trade services.” (p.7)  As we lawyers know, definitions are fundamental!  Part I reviews the steps in the post-trade process (trade matching and confirmation, clearing, and settlement).  Throughout Part I, Turing also uses helpful case studies, diagrams, and illustrative examples.             

Another feature of the book that I really appreciate - and think isn’t adequately captured in its title - is its incredibly comprehensive coverage of the post-trade world.  The depth with which Turing covers what I’ll call the “post-trade ecosystem” is astonishing.  When I say “covers,” I mean that he provides an overview of the ecosystem, describing and explaining in detail various aspects, and discusses relevant legal considerations.  Example aspects that he covers include: trading structures, portfolio compression services, all kinds of payment systems, central and commercial bank money, central securities depositories, trade repositories, ownership of cash, ownership of securities, securities as collateral, different types of securities accounts, finality of payments, rehypothecation, and even a bit on distributed ledger technology!  Reading the book has significantly augmented my knowledge of this entire area!  It has also broadened my familiarity with U.K and EU law in this area as Turing focuses on the relevant law in these jurisdictions.     

We’ll have to wait until January 5, 2022, to see if the FOMC minutes from this week’s meeting again mention participant concerns about the liquidity risk of clearinghouse collateral.  However, interested readers will only need to wait until next Wednesday for Part II of this post! 

Classifying and Labeling Standard M&A Contract Provisions

I spent a bunch of the day today reading an excellent draft paper written by one of my 3L students.  The paper is about fraud carveouts in no seller indemnity deals backed by representations and warranties insurance.  But this post is not about that.  It is about a question I asked the student (and myself) in connection with my review of the paper about how to classify or label certain provisions she was describing.

The standard structure of an M&A agreement includes articles clearly labeled as including representations and warranties, covenants, and conditions.  However, other articles are not as transparent in advertising their contents.  An article entitled "Indemnification" typically does include an express agreement (sometimes mutual agreements) to indemnify that would easily be classified as a covenant.  But that article also may include an exclusive remedy provision, restricting recourse for a breach of representation or warranty to the indemnification.  An example would be as follows (courtesy of Law Insider):

Sole and Exclusive Remedy. From and after the Closing, the indemnification provisions of this Article XII shall be the sole and exclusive remedy of each Party (including the Seller Indemnified Parties and the Purchaser Indemnified Parties) (i) for any breach of any Party’s representations, warranties, covenants or agreements contained in this Agreement or (ii) otherwise with respect to this Agreement or the transactions contemplated hereby with respect to the Company, other than in the case of (i) and (ii) instances of fraud or intentional misconduct or claims for non-monetary relief with respect to the enforcement of Section 6.02 or 8.03. In furtherance of the foregoing, each Party hereby waives, to the fullest extent permitted under Applicable Law, any and all rights, claims and causes of action it may have against another Party hereunder or under Applicable Law with respect to the claims described in clauses (i) and (ii) above, other than instances of fraud or intentional misconduct or claims for non-monetary relief with respect to the enforcement of Section 6.02 or 8.03.

The first part of this provision is treated as an enforceable agreement between the parties even though it reads somewhat more like an acknowledgement, affirmation, or promise. Indeed, the provision expresses an understanding between the parties.  So it also is likely best classified as a covenant.  The last part is a waiver.

But what about some of the provisions included in the M&A article entitled "Miscellaneous" (or sometimes "General" or the like)?  Let's take an integration clause like this one (also courtesy of Law Insider):

Integration Clause. This Agreement, including all attachments and exhibits hereto, supersede[s] all prior oral or written agreements, if any, between the parties and constitutes the entire agreement between the parties with respect to the work to be performed.

Or an non-reliance provision like this one (again, courtesy of Law Insider):

Non-Reliance. Each Party acknowledges that in agreeing to this Agreement it has not relied on any oral or written representation, warranty or other assurance, except as otherwise set forth in this Agreement, and waives all rights and remedies which might otherwise be available to it in respect thereof, except that nothing in this Agreement will limit or exclude any liability of a Party for fraud.

How might we classify and label those provisions?  Neither reads like a covenant--an actionable, enforceable, agreement or promise.  Each provides atmosphere or context.

Are these provisions acknowledgments?  (The non-reliance provision even uses that word instrumentally!)  Or maybe they are representations, affirmations, or even warranties . . . .

All of this worry about classification and labeling may not be worth much in the end.  Apart from accurate descriptions in expository writing, do we really care how these contract provisions are classified and labeled?  Certainly, it helps us to have labels that we can attach to performance and compliance descriptors in discussing contract enforcement (e.g., representations and warranties are accurate and complete or breached; covenants are complied with or there is a failure of compliance).  But maybe there is not much else in a label . . . .  Admittedly, I have not researched the matter or thought through any significant legal ramifications; I am just sharing reactions and impressions based on my review of a student paper.  As a result (and as always), your views and ideas are welcomed.

Third Time's the Charm?

Whenever I want to complain about my boredom with blogging the latest developments in Arkansas Teachers’ Retirement System v. Goldman, I think to myself, at least I’m not as bored as Judge Crotty of the SDNY.  And Judge Crotty made that clear this week in his opinion re-certifying the class (for a third time).

The history, as I’ve previously blogged, was that plaintiffs alleged Goldman violated Section 10(b) with anodyne statements about its ethics and ability to manage conflicts among its varied client base, and these were revealed to be false in a few financial-crisis-era scandals about conflict-ridden CDO sales.  The plaintiffs’ theory was that Goldman had a reputation for managing its conflicts well, which was baked into the stock price, and these statements maintained its stock price at those inflated levels, until the truth was disclosed and the stock price dropped.  Goldman’s main defense has been that the statements were too vague, generic, content-less, etc to matter to investors.  It tried that argument on a motion to dismiss, and then a motion for reconsideration of the motion to dismiss, and then on a motion for interlocutory appeal of the denial of the motion for reconsideration, and then at class cert, and then on an appeal of the class cert decision to the Second Circuit – where it finally won a remand! – and then at the remanded class cert hearing, and then before the Second Circuit again on an appeal of the second class cert opinion, and then before the Supreme Court – where it won again! – and then on remand back to the Second Circuit – score! – and then back to Judge Crotty where … this week, it lost again.

Throughout all of this, Goldman’s argument morphed.  At first, the argument was that its statements were so vague that they could not, as a matter of law, have impacted stock prices.  When that failed before Judge Crotty, Goldman instead offered factual evidence via expert reports that these particular statements were so generic that shareholders ignored them.  When Judge Crotty rejected the expert’s evidence as unpersuasive, Goldman went back to arguing before the Second Circuit that the statements were legally incapable of impacting stock prices.  By the time the case was actually before the Supreme Court, the argument was that the Second Circuit had erroneously held that genericness cannot be part of the factual inquiry when examining price impact, and therefore the Circuit had failed to take into account the generic nature of the statements, in addition to other factual evidence, when it reviewed Judge Crotty’s class cert decision.  The Supreme Court held that it was not clear whether the Second Circuit had so held – and if the Second Circuit had held that, it shouldn’t have have – and kicked it back down.

The Supreme Court’s decision was … maddening.  As I blogged at the time, it seemed to shift the burden of proof to plaintiffs in cases involving “price maintenance” theories, and introduced loss causation into the class certification decision – even though in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011), the Court had held that loss causation should not be considered at class certification.

Which is what Judge Crotty had to deal with when the same evidence was before him, again, and his exasperation was clear.

First, he emphasized that nothing in any of the appellate opinions had overruled his prior factual determinations about the strength of the expert evidence, and he reiterated those findings: namely, that Goldman’s price drops were associated with revelations of the truth about its conflicts, that market commentary at the time reiterated the importance of Goldman’s ability to manage its conflicts, and that the revelations that caused the price drops were far more specific and credible than earlier purported disclosures that had not caused any price drops.  As he put it, “Since the updated direction from the Supreme Court and Second Circuit has no bearing on these factual findings, the Court here reiterates, and restates, its grounds only in brief.” Op. at 17.

Second, pace Vivendi, he held that to determine whether Goldman’s statements maintained the artificial inflation in its stock price, the proper comparator was not what would have happened if Goldman had remained silent, but what would have happened if it had told the truth.  If it had told the truth about its inability to manage conflicts, investors would have devalued the stock.

Third, he even looked to what would have happened if Goldman had remained silent, and found the statements still maintained the stock price because “in a marketplace where, according to Defendants, dozens of Goldman competitors and other blue-chip corporations routinely make statements ‘indistinguishable’ from some of the alleged misstatements, it seems unlikely that Goldman's conspicuous failure to conform-…would be irrelevant to investors.”  Op. at 24-25.

I’ve made that argument before; in my paper, Reviving Reliance, I said:

The articulated rationale for many puffery holdings—that the statements are too similar to those offered by other companies to carry much weight in the minds of investors—is not only unpersuasive, but is something of a self-fulfilling prophecy. Corporations frequently make disclosures similar to those of other companies, from representations that their financial statements comply with Generally Accepted Accounting Principles to declarations that a merger price is “fair” to shareholders, and yet none of these statements are declared to be puffery on grounds of ubiquity. Moreover, in a world where computer programs analyze corporate SEC filings so as to instantly trade on even minute data changes, if a corporation did not, for example, proclaim itself to exhibit “financial discipline” when all of its competitors did, investors would likely take the absence seriously.  As
a result, when courts treat all such statements as equally meaningless, they provide no incentive for corporations to refrain from making them when they are no longer truthful.

Along these lines, as I pointed out in a previous post, Goldman was making statements about its integrity and conflicts management long before the class period – at a time when, by hypothesis, the statements were true.  Can you even imagine how the market would have reacted if those statements suddenly disappeared?

Judge Crotty went further, though.  Displaying extreme skepticism of the idea that corporations generally issue happy talk that has no effect on investors, he added: “This Court is hard-pressed to understand why statements such as those at issue here would have achieved such ubiquity in the first place were they incapable of influencing (including by maintaining) a company’s stock price.” Op. at 24.

And now I have to pause and note how radical Crotty’s holdings are, even if, ahem, they make perfect sense.  That’s because the inquiry into materiality/puffery/genericness what-have-you in securities cases is usually divorced from any honest attempt to assess the role these statements actually play in the market; as I’ve repeatedly blogged, materiality inquiries often seem more like backdoor attempts to distinguish claims based on poor governance from claims based on fraud than empirical evaluations of evidence. (Which is also a point I’ve also made in both Reviving Reliance and my paper Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation.)  Quoting, ahem, me, “what we call ‘harm’ and ‘damage’ for the purpose of private securities fraud lawsuits have become so artificial that it no longer seems as though we’re even trying to measure the actual real-world effects of fraud.”; see also Fact or Fiction (describing “the cavernous distance between judicial measures of harm and the underlying reality”).  So it is genuinely striking to see a judge examine actual market behavior instead of pursuing some broader policy regarding what Section 10(b) ought to be about.

Which is why I fully expect Goldman’s next 23(f) appeal to argue that Crotty’s analysis contradicts the Supreme Court because he treated genericness as a point in favor of price impact instead of against it.

Anyway, the final striking aspect of Judge Crotty’s opinion is this:  Even though technically, plaintiffs are meant to have a presumption of price impact, and defendants have the responsibility of rebutting that presumption, Crotty took the Supreme Court at its word and seemed to place an initial burden on plaintiffs to establish a connection between the final stock price drop and the earlier false statements in order to win that “presumption.”  To wit, he began his analysis with the heading “Plaintiffs’ Persuasive Evidence of Price Impact,” explained that evidence, and concluded, “The Court credits Dr. Finnerty’s conclusions, and finds that Plaintiffs have presented compelling evidence that the alleged misstatements in fact impacted Goldman's stock price.”  Op. at 16-17.  Only after finding plaintiffs had established price impact did he turn to defendants’ evidence, concluding they had “failed to rebut the Basic presumption… Neither [of defendants’ experts] persuasively undermine these findings”  Op. at 17.

See what he did there?  He made the plaintiffs prove price inflation and only then turned to whether defendants’ had met their burden of rebuttal, all while paying lipservice to the idea that there was some kind of “presumption” in plaintiffs’ favor at work.  And I can’t say he’s wrong, precisely, because that was in fact the Supreme Court’s suggestion.

More than anything else, though, what offends me aesthetically about this case and makes me want to scream “IT’S NOT FAIR!!” at the top of my lungs – before I remember that we live in a cold, cruel world and fairness is a fairytale – is how Goldman was permitted to change its argument before the Supreme Court in order to revive a claim that it had made before the district judge, lost, and then abandoned on appeal – and instead of dismissing the writ as improvidently granted, the Court rewarded Goldman for that bait-and-switch with yet another bite at the apple. 

The other notable thing: The factual evidence, at least as Judge Crotty describes it, presents a pretty compelling case that yes Goldman’s statements mattered: Goldman did have a strong reputation, the truth did damage that reputation and make people worried for Goldman’s future, and the statements at the very least maintained that reputation because Goldman couldn’t suddenly have been silent on the topic without raising questions.  And that’s evidence we probably would never have seen but for Crotty’s denial of the original motion to dismiss, when another judge likely would have granted it.  Which you would think would make future courts hesitant to casually dismiss claims based on a seat-of-the-pants judgment that no reasonable investor would have taken certain statements seriously.

But it won’t.

New Challenges for Insider Trading Compliance (SEALS 2022)

It is an exciting time for insider trading law. BLPB coblogger Joan MacLeod Heminway and I will be moderating a discussion group, New Challenges for Insider Trading Compliance,  at the upcoming Southeastern Law Schools (SEALS) Annual Conference (July 27-August 3, 2022). The conference is scheduled to be held in person in Sandestin, Florida. Here's the description for our discussion group:

Insider trading law in the United States is in a state of flux and uncertainty. In May of 2021, the House of Representatives passed the Insider Trading Prohibition Act. If this bill becomes law, it will impose an entirely new statutory regime for civil and criminal enforcement. Moreover, Securities and Exchange Commission (SEC) Chairman Gary Gensler recently directed the staff to present recommendations to "freshen up" and tighten the operative provisions in Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. In response, in August of 2021, the SEC's Investor Advisory Committee proposed extensive new restrictions on the use of 10b5-1(c) trading plans as an affirmative defense for insider trading. Meanwhile, prosecutors and regulators continue to employ novel theories of liability in insider trading enforcement actions. Criminal enforcement actions under 18 U.S.C. § 1348 and civil enforcement under the novel "shadow trading" theory of liability are just two examples. How will these and other impending changes affect compliance departments at public companies and in the financial industry? How should the lawyers in these and other organizations prepare? Should market participants welcome these potential changes to our insider trading laws, or are there grounds for concern? This discussion group is designed to address these and other related questions.

There may still be room for additional participants. If you are a law (or business law) professor who is interested in joining the discussion in sunny Florida, don't hesitate to reach out to me at [email protected].

AALS Section on Transactional Law & Skills - Annual Meeting Main Program and Call for Nominations

From friend-of-the-BLPB Megan Shaner:

• The Transactional Law & Skills Section main program, "Transactional Lawyering at the Intersection of Business and Societal Well-Being," will be held Friday, January 7th at 11am-12:15 EST.

  Description:

  * Presenters from Call for Papers:

  Michael Blasie, Penn State Dickinson Law, “The Rise of Plain Language Laws”
  George Georgiev, Emory University School of Law, “The Law and Economics of Materiality”

  * Moderator: Eric Chaffee, University of Toledo College of Law

  * Invited Speakers
  Praveen Kosuri, University of Pennsylvania Carey Law School

  Amelia Miazad, UC Berkeley School of Law

  Jennie Morawetz, Kirkland & Ellis (strategy and operations partner for Kirkland’s ESG and Impact practice)

  Faith Stevelman, New York Law School

  *Moderator: Megan Shaner, University of Oklahoma College of Law

• At the end of the program we will hold a brief business meeting to elect the membership of next year's executive committee. If you would like to nominate yourself or another member, please email me at [email protected] by December 13, 2020.

 

Three SSRN Postings: "Empty Voting", "Stakeholder Syndrome", and "Surveillance State Capitalism"

Jill E. Fisch, Mutual Fund Stewardship and the Empty Voting Problem ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3939112 ):

The exercise of institutional voting power is by fund managers or governance teams, people who have “little or no economic interest in the shares that they vote,” This “empty voting” has the potential to undermine the legitimacy of the shareholder franchise. It is of particular concern when the assets committed to a broad-based index fund are voted to support initiatives that have the potential to sacrifice economic value in favor of social or societal objectives about which the shareholders invested in that index fund may not agree.

Matteo Gatti & Chrystin D. Ondersma, Stakeholder Syndrome: Does Stakeholderism Derail Effective Protections for Weaker Constituencies? ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3793732 ):

Because available evidence suggests that corporations will seek to undermine any proposal that meaningfully shifts power and resources to workers, it is unlikely stakeholderism could provide equivalent protections that can actually improve workers’ position; assuming it could, its implementation would be no more feasible than direct regulation. Neither do we believe that stakeholderism can provide a fertile landscape for direct regulation, because corporations are likely to use stakeholderism as a pretext to wield greater political power and to shape the debate in their own favor, thus interfering with direct regulation. Ultimately, given the risks of allowing managers and directors wield stakeholderism in their own interests, political capital should be spent on achieving direct regulation rather than on a stakeholderist corporate governance reform.

Lauren Yu-Hsin Lin & Curtis J. Milhaupt, China's Corporate Social Credit System and the Dawn of Surveillance State Capitalism ( https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3933134 ):

Chinese state capitalism is transitioning toward a panoptic, technology-assisted variant that we call “surveillance state capitalism.” The mechanism driving the emergence of this variant is China’s corporate social credit system (CSCS) .... The CSCS is linked to a system of corporate rewards and punishments, representing a futuristic strategy of automated screening to determine which enterprises are allowed market access and benefits.... A key finding is that while the CSCS is a facially neutral means of measuring legal compliance, politically connected firms (regardless of their status as state-owned or private enterprises, or the extent of state equity ownership) receive higher overall scores .... The channel for this result is a “social responsibility” category that valorizes awards from the government and contributions to Chinese Communist Party (CCP)-sanctioned causes.

Some Highlights From the Federalist Society's 2021 National Lawyers Convention

Fair to say, corporate governance was very much a theme:

• Showcase Panel I: Social Activism and Corporate Leadership ( https://youtu.be/jOBTM2CBEhw )
• "Progressive" HR in 2021: The Solution or the Problem? ( https://youtu.be/xYJ2khao_e4 )
• Showcase Panel II: Private Control Over Public Discussion ( https://youtu.be/rRd1SOTzP1s )
• Cancel Culture Comes to Financial Services ( https://youtu.be/seU4zMRPRAg )
• Fireside Chat with Vivek Ramaswamy ( https://youtu.be/V00tPA7IIkg ) (Ramaswamy is the author of Woke, Inc.: Inside Corporate America's Social Justice Scam, which is currently the #1 best selling book in the "Theory of Economics" category on Amazon ( https://www.amazon.com/Woke-Inc-Corporate-Americas-Justice/dp/1546090789 )).

The full convention schedule can be found here: https://fedsoc.org/conferences/2021-national-lawyers-convention .

To Our Email Subscribers

Hi, all.  If you subscribe to emails from this blog, you may have noticed they've been erratic lately.  Soon, if not immediately, we expect emails to halt altogether, because Google will no longer be supporting the email service.  We appreciate you as devoted blog readers but sadly you will likely need to find another way to follow our posts.  I personally follow blogs through the Feedly service.

Sorry for the inconvenience; it is unfortunately out of our hands, but we hope you will stick with us.

 

AALS Section on Business Associations - 2022 Annual Meeting & Call for Leadership Nominations

This in from friend-of-the-BLPB Jessica Erickson:

+++++

Dear AALS Business Association Section Members,

I hope the end of your semester is going well! I'm writing with programming details for the January 2022 AALS Annual Meeting and to invite you to nominate yourself or others for Executive Committee positions next year.

January 2022 Annual Meeting

1. Registration is still open, and you can register here https://aals.secure-platform.com/a/organizations/main/submissions/details/7094 . As you may know, most law schools have paid school-wide registration fees again this year, which makes registration simpler, but you still have to register to attend any of the sessions.

2. The Business Associations Section main program, "Race and Teaching Business Associations," will be held Friday, January 7th at 12:35 to 1:50 EST. Many thanks to James Park, the section's chair-elect, for organizing this panel!

Description: 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.

* Invited Speakers
Thomas Joo, UC Davis School of Law
Steven Ramirez, Loyola University Chicago School of Law
Cheryl Wade, St. John's University School of Law

* Presenter from Call for Papers: Harwell Wells, Temple University School of Law, presenting Shareholder Meetings and Freedom Rides: The Story of Peck v. Greyhound

* Moderator: James Park, UCLA School of Law

3. The section's Works-in-Progress Program will be held Thursday, January 6th at 4:45 - 6:00 pm EST. Many thanks to Eric Chaffee for organizing a terrific panel of the following presenters and commentators!

* Paper #1: William J. Moon (University of Maryland Carey School of Law), Anonymous Companies

* Commentators: Frank Gevurtz, Joan Heminway, Eric Chaffee


* Paper #2: Trang (Mae) Nguyen (Temple University Beasley School of Law), Norm Assembly in Global Value Chains

* Commentators: Michael Malloy, Kish Parella, Veronica Root


* Paper #3: Alexander I. Platt (University of Kansas School of Law), Beyond "Market Transparency": Investor Disclosure and Corporate Governance

* Commentators: Afra Afsharipour, Michael Guttentag, and Donna Nagy


* Moderator: Eric Chaffee

Nominations for Next Year's Executive Committee

Finally, following past practice, we will hold an electronic business meeting later this month to determine the membership of next year's executive committee. If you would like to nominate yourself or another member, please email me at [email protected] by December 13, 2020.

We hope to see you (virtually) at the Annual Meeting!

Best,

Jessica Erickson


On behalf of the Executive Committee:

Jessica Erickson, University of Richmond School of Law (Chair)
James J. Park, University of California, Los Angeles School of Law (Chair-Elect)
Dana Brakman Reiser, Brooklyn Law School
Eric Chaffee, University of Toledo College of Law
Carliss Chatman, Washington & Lee School of Law
Gina-Gail S. Fletcher, Duke University School of Law
Mira Ganor, University of Texas School of Law
Cathy Hwang, University of Virginia School of Law
Matt Jennejohn, BYU Law School
Michael Malloy, University of the Pacific McGeorge School of Law
James Nelson, University of Houston Law Center
Andrew Verstein, University of California, Los Angeles School of Law
Cheryl Wade, St. John's University School of Law
Manning G. Warren, III, University of Louisville, Louis D. Brandeis School of Law

GWU Law - Non-Faculty Business Law Opening

From our friend Art Wilmarth at GWU Law:

George Washington University Law School is seeking to hire a new Assistant Dean (and program director) for our Business and Finance Law Program.

Following is the link for the job posting:

https://www.gwu.jobs/postings/88506

If you know of well-qualified candidates who might be interested in this
position, please share this information and encourage them to apply.
Applications should be submitted ASAP, and preferably by December 15, 2021.

Many thanks, and best regards .................. Art Wilmarth


Arthur E. Wilmarth, Jr.
Professor Emeritus of Law
George Washington University Law School
2000 H Street, N.W.
Washington, DC 20052