Business Law Prof Blog

Yesterday, I was privileged to attend a wonderful Knoxville Symphony Orchestra performance as part of its Chamber Classics Series. The featured piece was the Bach Concerto for Two Violins--an amazing piece of work. It was preceded in the program by a wonderfully catchy Stravinski Octet. The second half of the program focused solely on a Shostakovich piece (arranged by Rudolph Barshai): Chamber Symphony, Op. 73a. I want to focus here for a moment on this last composition.

Dmitri Shostakovich was a Russian (Soviet) composer. He died back in 1975. As my husband and I looked at the program in anticipation of the Shostakovich work, we could not help but think of the ongoing Russian invasion of Ukraine. We have watched with horror and sadness the violence, destruction, displacement, and more. Of course, the program for the concert today was many months in the making; the Knoxville Symphony Orchestra could not have anticipated that a Russian composer's music would be played in these circumstances . . . .

In his introduction to the Shostakovich Chamber Symphony, our conductor, Aram Demirjian, explained that Shostakovich was periodically critical of the Soviet government, despite its patronage of his work. He explained that the arrangement we were about to hear was derived from a Shostakovich string quartet with Shostakovich's consent. The original string quartet was composed in 1946 after an earlier symphony composition was censured by the Soviet government. Demirjian noted that Shostakovich labeled the five movements of the quartet as follows:

Blithe ignorance of the future cataclysm
Rumblings of unrest and anticipation
Forces of war unleashed
In memory of the dead
The eternal question: why? and for what?

As he expressly noted, Shostakovich's five movements reflecting on the progression of war at an earlier time seem eerily appropriate given our circumstances today . . . .

The Shostakovich piece--plus the rollouts of deepening economic sanctions against Russia and its President, concern about cyberattacks, and fears of nuclear warfare--have had me thinking about short-term and long-term impacts on cross-boarder transactions and multinationals. I have been teaching the regulation of securities offerings in my Securities Regulation course, including offers and sales of securities made by foreign issuers or offshore. Early news of and speculation about the impact of the Ukraine invasion on investment markets has been published. See, e.g., here and here. Corporate finance, writ large, is affected by the invasion and the West's responses to it. The New York Times reported that "[t]he market volatility generated by the crisis has . . . chilled I.P.O.s and complicated dealmaking."

In that same article, the Times noted effects on business more broadly. "Multinationals have halted operations in Ukraine and moved employees to safety, with Russia’s assault sending shudders through boardrooms around the world." Other news outlets have published similar reports. See, e.g., here, here, and here.

It seems important to be raising issues in our business law classrooms relating to all of this. In addition to the public offering/corporate finance angle, there are at least two connections to the material in my Securities Regulation course that may be productive to explore. I will share both briefly here, in case they may be of interest for the teaching done by some of our readers.

The first idea is to focus in on the investor side of the equation, given the investor protection policy underpinnings of the federal securities laws. A few weeks ago, we spent a class day on investors--who they are in today's markets and how theory and policy may impact and be impacted by those demographics. The mews media also have been covering the investor side of the corporate finance equation, including retail investing issues. See, e.g., here. In my classroom, we can revisit and think through how (if at all) the market impacts of the Ukraine invasion change investor protection--and the concept of the reasonable investor.

The second idea is to work in a discussion of the funding of the Ukrainian war effort when addressing the definition of "underwriter" for purposes of the registration exemption in Section 4(a)(1) of the Securities Act of 1933, as amended. The New York Times reported that "Ukraine and allied nonprofits are raising money from donors (including in cryptocurrency) to fund resistance forces." In covering underwriter status, I teach the SEC v. Chinese Consolidated Benevolent Association case. For those of you who are unfamiliar with the case, it involves efforts among Chinese persons here in the United States to fund China's efforts to resist Japanese aggression in the second Sino-Japanese conflict. (FYI, this book chapter offers lots of great background information on context that the case does not provide.) It would seem appropriate to offer hypotheticals relating to funding any long-term Ukrainian resistance through the sale of investment interests that may be securities and to discuss the possible effects of the advent of cryptocurrencies (and blockchains more generally) on securities regulation in financings and other investment contexts.

I am sure some of you have your own ideas about whether and how to work discussions of the current, disquieting news relating to the Ukrainian invasion into your business law classrooms. Please share thoughts that you may have in the comments to this post. As the conflict continues, there will no doubt be more to talk about.

February 28, 2022 in Current Affairs, International Business, Joan Heminway, Teaching | Permalink | Comments (2)

Saturday, February 26, 2022

Zhang and Morley on The Modern State and the Rise of the Business Corporation

Previously, I posted about Margaret Blair’s paper on concession theory, where she argued that the state played an integral role in the development of the corporate form, disputing those who argue that corporations could be somewhat replicated via private contracting.

The latest entry in this genre is a new paper by Taisu Zhang and John Morley, The Modern State and the Rise of the Business Corporation. They adopt a somewhat narrower definition of corporation to mean something like a large, publicly traded, limited liability entity, and argue that its rise is necessarily linked to the development of a state apparatus capable of recognizing and enforcing the rights of disparate investors, including the development of a uniform, professionalized court system. They make their argument through a series of cross-cultural case studies, the most fascinating (and convincing) of which is 19^th and early 20^th century China. According to the paper, at this time, China’s economy had grown to the point where it needed something like the corporate form, and corporations were in fact statutorily authorized, but China’s weak central state meant that there were few takers. It wasn’t until the middle of the 20^th century that China had sufficiently rebuilt its national government to make the corporate form more attractive.

Anyway, if this kind of historical analysis is your thing, Zhang & Morley’s paper offers a unique new analysis. Here is the abstract:

This article argues that the rise of the modern state was a necessary condition for the rise of the business corporation. A typical business corporation pools together a large number of strangers to share ownership of residual claims in a single enterprise with guarantees of asset partitioning. We show that this arrangement requires the support of a powerful state with the geographical reach, coercive force, administrative power, and legal capacity necessary to enforce the law uniformly among the corporation’s various owners. Other historical forms of rule enforcement—customary law or commercial networks like the Law Merchant—are theoretically able to support many forms of property rights and contractual relations, but not the business corporation. Strangers cannot cooperate on the scale and legal complexity of a typical corporation without a functionally modern state and legal apparatus to enforce the terms of their bargain. In contrast, social acquaintances operating within a closely-knit community could, in theory, enforce corporate charters without state assistance, but will generally not want to do so due to the institutional costs of asset partitioning in such communities.

We show that this hypothesis is consistent with the experiences of six historical societies: late Imperial China, the 19th century Ottoman Empire, the early United States, early modern England, the late medieval Italian city states, and ancient Rome. We focus especially on the experience of late Imperial China, which adopted a modern corporation statute in response to societal demand, but failed to see much growth in the use of the corporate form until the state developed the capacity and institutions necessary to uniformly enforce the new law. Our thesis complicates existing historical accounts of the rise of the corporation, which tend to emphasize the importance of economic factors over political and legal factors and view the state as a source of expropriation and threat rather than support. Our thesis has extensive implications for the way we understand corporations, private law, states, and the nature of modernity.

February 26, 2022 in Ann Lipton | Permalink | Comments (0)

Wednesday, February 23, 2022

This Friday & Saturday - Symposium on the Changing Faces of Business Law and Sustainability

Dear BLPB Readers,

Great news!!! A Symposium on The Changing Faces of Business Law and Sustainability is being held this Friday and Saturday!!! This Symposium is being hosted by the Business and Human Rights Initiative at the University of Connecticut, the Center for the Business of Sustainability, Smeal College of Business, Penn State University, the College of Business at Oregon State University, and the American Business Law Journal. All are welcome! I encourage interested readers to register and attend all or part of the event. The Symposium schedule is here. I'm grateful to be an invited participant and am really looking forward to the event and to discussing Derivatives and ESG! Hope to (virtually) see many of you there!

February 23, 2022 in Colleen Baker | Permalink | Comments (0)

Monday, February 21, 2022

Reaffirming the Benefits of Interdisciplinary Discussions

Last week, I had the privilege of presenting at the first of three sessions in an academic research symposium cohosted by George Mason's institute for Humane Studies and Florida Atlantic University's Madden Center for Value Creation. The symposium, Contemporary Challenges in Corporate Governance, has two spring semester online (Zoom) components and an in-person session in August in Seattle, Washington. The program in which I was featured, "Diversity, Equity, and Inclusion Initiatives," also included two management scholars (Siri Terjesen from Florida Atlantic University and Aaron Hill from the University of Florida). We each had the opportunity to talk about our work in the DEI space, engage with audience questions, and (in breakout rooms) discuss ongoing research projects and questions with other participants. The format was very engaging. And friend-of-the-BLPB Paul Rose was in attendance saying nice things about our blog. (Thanks, Paul!)

We should do more of this. And when I say "this," I mean getting together with scholars from other fields. Paul and I ended up in a fun conversation with a philosopher who is working on issues involving the purpose of the corporation, which led us into a productive discussion of the nature of fiduciary duties--to whom they are owed in context and how enforcement through derivative litigation works. The exchange felt fresh. The philosopher's questions were good ones, and he was honestly interested in our answers.

I have the opportunity to engage in similar, rich discussions through my work in our Neel Corporate Governance Center (and sometimes even through my teaching in the Professional MBA program at the Haslam College of Business Administration on our campus). Talking to people in different, but related, fields always opens my eyes to more things in my own field. Truly, it is at the heart of what makes universities great--the free exchange of ideas in a nonjudgmental environment for the purpose of acquiring and building knowledge.

'nough said on that (she says while stepping off her soapbox momentarily). But I will note that if you want to join in on the interdisciplinary fun as it relates to your research agenda in corporate governance, you can still apply to participate in the last two sessions of the academic research symposium series on Contemporary Challenges in Corporate Governance here. The second session focuses on "Regulations Concerning Stakeholdering" and the third (the one in Seattle) focuses on "Corporate Governance: Composition and Strategy" (and features friend-of-the-BLPB George Mocsary). I do think academic forums like these help us to be better legal scholars.

February 21, 2022 in Corporate Governance, Joan Heminway, Research/Scholarhip | Permalink | Comments (0)

Sunday, February 20, 2022

Now Available: A Recording of Vice Chancellor Laster's talk on "Big Law Ethics"

Dear BLPB Readers:

For those of you who missed Vice Chancellor Travis Laster's stellar talk on "Big Law Ethics" this past Thursday or would like access to a recording of the talk, here is a link.

February 20, 2022 in Colleen Baker | Permalink | Comments (0)

Saturday, February 19, 2022

A Contract is Not a Corporation

I am so amused by this brief opinion in Manti Holdings v. The Carlyle Group.

The case is a continuation of Manti Holdings, LLC v. Authentix Acquisition Co. There, as many of you know, the Delaware Supreme Court held that a shareholder agreement among sophisticated investors in a private company could waive appraisal rights associated with a merger.

Well, the same shareholders who sought appraisal are now instead suing for breach of fiduciary duty in connection with the merger, and the defendants argued that the same shareholder agreement not only waived appraisal rights, but also waived the right to sue for breach of fiduciary duty. We know, of course, that you cannot waive fiduciary duties in corporate constitutive documents; the question for VC Glasscock was whether you can waive them in personally-negotiated shareholder agreements. Glasscock held that he did not need to reach that question, because even if such waiver was possible, the agreement here was not clear about it.

But his reasoning is what fascinates me.

The agreement required that shareholders “consent to and raise no objections against such transaction,” i.e., the merger, thus raising the question whether an action for fiduciary breach is the equivalent of not consenting, and raising an objection.

Glasscock concluded it was not, in part because the agreement delineated the types of actions that would be deemed objections and nonconsents (such as voting against the deal, and seeking appraisal), and waiver of fiduciary duties was not on the list. As he put it:

Had the drafters desired to eliminate fiduciary duties, they could have similarly enumerated such an explicit waiver. They did not. The Defendants attempt to sidestep this choice by arguing that Section 3(e) does not waive the fiduciary duties themselves, it just waives claims for fiduciary duty breaches regarding a Company Sale. That, I admit, is a distinction too fine for my legal palate. A right without an enforcement mechanism is an empty right; without the Authentix stockholders’ ability to police fiduciary duty breaches, the fiduciary duties owed to them would be illusory.

I mean, I don’t disagree, but aren’t Delaware fiduciary duties literally built on the concept that the standard of conduct is different than the standard of review? For example, in Frederick Hsu Living Trust v. ODN Holding Corporation, 2017 WL 1437308 (Del. Ch. Apr. 24, 2017), the court said:

When determining whether directors have breached their fiduciary duties, Delaware corporate law distinguishes between the standard of conduct and the standard of review. The standard of conduct describes what directors are expected to do and is defined by the content of the duties of loyalty and care. The standard of review is the test that a court applies when evaluating whether directors have met the standard of conduct.

The distinction matters because the standard of review is more forgiving of directors than the standard of conduct, see Chen v. Howard-Anderson, 87 A.3d 648 (Del. Ch. 2014), which as a practical matter means that some actions by directors are fiduciary breaches without any remedy at all.

But Glasscock was not finished. He then went on to say that “the language waives objections to the Sale itself; it does not waive objections to fiduciary duty breaches made in connection with the Sale.”

Which is completely logical! And completely contrary to the entire Corwin line of cases, which treat a vote in favor of a transaction as the equivalent of a waiver of claims for fiduciary breach! Which is exactly what scholars have been saying for years. See, e.g., James D. Cox, Tomas J. Mondino, & Randall S. Thomas, Understanding the (Ir)relevance of Shareholder Votes on M&A Deals, 69 Duke L.J. 503 (2019).

In any event, I suppose none of that matters because despite claiming he would not do the thing, Glasscock then kind of went and did the thing. See footnote 45:

Finding such waiver [of duty] effective is a proposition that would blur the line between LLCs and the corporate form and represent a departure from norms of corporate governance, I note, even under the limited circumstances here, described above.

So, you know. Funny case.

February 19, 2022 in Ann Lipton | Permalink | Comments (1)

Friday, February 18, 2022

Robert Miller On Making Business Decisions Under a Stakeholder Model

By Stefan J. Padfield

Robert Miller has posted How Would Directors Make Business Decisions Under a Stakeholder Model? on SSRN (here). The abstract:

Strong forms of the stakeholder model of corporate governance hold that, in making business decisions, directors should consider the interests of all corporate constituencies (employees, customers, suppliers, shareholders, etc.) in such a way that directors may sometimes decide to transfer value to a non-shareholder constituency even though doing so produces no net benefit for shareholders even in the long-term. This article makes four main points about the stakeholder model. First, although its advocates often speak as if the model placed all corporate constituencies on a par, in fact the model uniquely disadvantages shareholders: since the claims of other constituencies arise in contract or by law, directors have no power to invade these claims for the benefit of shareholders; hence, business decisions made under a stakeholder model will often transfer value from shareholders to other constituencies but never from other constituencies to shareholders. Second, although critics of the stakeholder model have long argued that the model provides no definite standard by which directors may decide what to do in particular cases, this greatly understates the point. In fact, the stakeholder model leaves business decisions radically indeterminate, for it includes no normative criteria by which any business decision could be judged to be any better or any worse than any other. Third, some normative criteria that can be added to the stakeholder model and might seem to solve this problem in fact fail to do so; this includes criteria based on Kaldor-Hicks efficiency, on hypothetical bargains among the corporate constituencies, or even on Delaware doctrines about allocating merger consideration among classes of shareholders. Finally, the article notes a surprising point of agreement between advocates of stakeholderism and its critics, viz., that decisions made under a stakeholder model would be essentially political in nature. That is, they will be based not on rational, normative considerations but on the varying abilities of different constituencies to pressure or lobby the directors—i.e., business decisions become essentially rent-seeking contests.

February 18, 2022 in Stefan J. Padfield | Permalink | Comments (0)

Time for a Broad Prophylactic Against Congressional Insider Trading

By John P. Anderson

With a recent poll showing that 76 percent of voters think members of Congress have an "unfair advantage" in stock trades, I argued in my last post that Congress should adopt a broad rule against trading in individual stocks by sitting cogresspersons (and perhaps their spouses, children, and staff). I argued that such a move would go a long way toward restoring the perception that members of Congress are public servants, as opposed to the current perception shared by many voters that they are public parasites. In addition to restoring public confidence in the legislative branch, I argued adopting such a prophylactic against insider trading would also help improve public confidence in the integrity of our securities markets—a goal Congress has touted repeatedly for almost a century.

I have since posted a short paper on SSRN, Time for a Broad Prophylactic against Congressional Insider Trading, that develops these arguments. Part I offers a brief summary of the current state of insider trading laws, with a special focus on their application to Congress. Part II surveys some of the proposed insider trading reform bills under consideration. Part III argues that, given congresspersons’ unique role vis-à-vis securities markets, a broad prophylactic against congressional trading is both justified and needed.

February 18, 2022 in Ethics, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Wednesday, February 16, 2022

Tomorrow!! Vice Chancellor Travis Laster of the Delaware Court of Chancery on "Big Law Ethics"

https://uiowa.zoom.us/j/98641034913

Dear BLPB Readers:

"Vice Chancellor Travis Laster of the Delaware Court of Chancery will be at the University of Iowa College of Law to deliver the James Fraser Smith Lecture on Thursday, February 17, at 2:00PM (central time). He will be speaking on “Big Law Ethics.” The Zoom link is below. The event is free and open to the public."

You are invited to a Zoom webinar.

When: Feb 17, 2022 02:00 PM Central Time (US and Canada)

Topic: Chancellor Laster's Fraser Smith Lecture

Please click the link below to join the webinar:

Or One tap mobile :

US: +13017158592,,98641034913# or +13126266799,,98641034913#

Or Telephone:

Dial(for higher quality, dial a number based on your current location):

US: +1 301 715 8592 or +1 312 626 6799 or +1 646 876 9923 or +1 253 215 8782 or +1 346 248 7799 or +1 669 900 6833

Webinar ID: 986 4103 4913

International numbers available: https://uiowa.zoom.us/u/ab9dE3u6gw

February 16, 2022 in Colleen Baker, Conferences | Permalink | Comments (2)

Monday, February 14, 2022

A BLPB Valentine Haiku

❤️ It’s Valentine’s Day!

Time for candy and flowers,

Not for posting blogs.

Until next week, then,

When I will be back with more.

Be my Valentine? ❤️

February 14, 2022 in Joan Heminway, Weblogs | Permalink | Comments (0)

Saturday, February 12, 2022

An Update on My Paper, Capital Discrimination

Previously, I announced that my paper, Capital Discrimination, would be forthcoming in the Houston Law Review, and had just been posted publicly to SSRN. As I explained in that post, the paper explores the problem of gender discrimination against women as business owners and capital providers, and proposes changes to both statutory law and common law fiduciary duties in order to address gender-based oppression in business.

The paper itself describes several business law cases from different jurisdictions, including Shawe v. Elting, a matter very familiar to business lawyers, and which involved an acrimonious dispute in the Delaware courts. Just before Christmas, an attorney representing Philip Shawe sent this cease and desist letter to SSRN, demanding that the paper be removed from that site as defamatory.

On New Year’s Day, SSRN removed the paper in response to Shawe’s letter. After that, Houston Law Review could no longer assure me that the article would run in its journal, and stated that they would not preclude me from submitting the paper for publication elsewhere.

Tulane’s counsel has sent a response letter to SSRN in hopes of having the paper restored but for now, to ensure that the paper is not kept out of sight indefinitely, I have made a copy available at this link. This draft of the paper includes a reference to Mr. Shawe’s defamation claims.

An update to the update: As of the morning of February 14, SSRN has restored the paper, and it is available at the original link, here. SSRN put out a twitter comment on the situation here.

An update to the update to the update: I am pleased to report that the Houston Law Review informed me yesterday (February 18) that, with the consent of its Board of Directors, the Review has committed to publishing Capital Discrimination. I particularly want to thank the student editors for their persistence and support. A new version of the draft has been uploaded. With any luck, this saga is now complete and I look forward to publication in the April-ish/May-ish.

February 12, 2022 in Ann Lipton | Permalink | Comments (0)

Private Fund Rules

The SEC has been quite busy recently, and among other proposed rules, there’s this package of reforms that would impose some fairly dramatic new requirements for private funds. The proposing release documents problems and conflicts in the industry that are both hair-raising and, really, quite well known. In addition to just generally opaque fees and valuations, fund managers often charge fees to provide services to portfolio firms, which benefit the manager but eat into investor returns; some investors get preferred terms (extra liquidity, relief from fees, selective disclosures) that harm returns to other investors, and ultimately benefit the manager who can maintain relationships with the favored investors, and so forth.

So, in addition to requiring more disclosures to investors, audits, and the like, the SEC is also proposing to flat out prohibit certain practices. For example, fees associated with a portfolio investment would have to be charged pro rata, rather than forcing some investors or funds to bear more expenses. Funds would be prohibited from selectively disclosing information to preferred investors, or permitting them to have preferred redemption terms. Advisors would be prohibited from seeking exculpation or indemnification from liability for breach of fiduciary duty, bad faith, recklessness, or even negligence with respect to the fund.

(It is of course difficult to miss how much these reforms kind of mirror issues that have come up in public markets. The prohibition on selective disclosure sounds a lot like Reg FD; the prohibition on selective redemption ability calls to mind the mutual fund scandals from a couple of decades ago).

There are people who are much bigger fund mavens than me and probably have a lot more sophisticated thoughts, but here’s what immediately occurs to me:

First, I notice that in talking about the need for these rules, the SEC highlighted that funds give investors very limited governance rights. For example, the SEC said:

Private funds typically lack fully independent governance mechanisms, such as an independent board of directors or LPAC with direct access to fund information, that would help monitor and govern private fund adviser conduct and check possible overreaching. Although some private funds may have LPACs or boards of directors, these types of bodies may not have the necessary independence, authority, or accountability to oversee and consent to these conflicts or other harmful practices as they may not have sufficient access, information, or authority to perform a broad oversight role….To the extent investors are afforded governance or similar rights, such as LPAC representation, certain fund agreements permit such investors to exercise their rights in a manner that places their interests ahead of the private fund or the investors as a whole. For example, certain fund agreements state that, subject to applicable law, LPAC members owe no duties to the private fund or to any of the other investors in the private fund and are not obligated to act in the interests of the private fund or the other investors as a whole….

We have also observed some cases where private fund advisers have directly or indirectly (including through a related person) borrowed from private fund clients. This practice carries a risk of investor harm because the fund client may be prevented from using borrowed assets to further the fund’s investment strategy, and so the fund may fail to maximize the investor’s returns. This risk is relatively higher for those investors that are not able to negotiate or directly discuss the terms of the borrowing with the adviser, and for those funds that do not have an independent board of directors or LPAC to review and consider such transactions.

Now, I don’t know if funds are typically organized under Delaware or another state’s law, but either way, this is really a great example of the push-pull interaction of federal and state authority over entities and “internal affairs.” Mark Roe and Renee Jones have both written about how the threat of federalization of corporate law pressures Delaware to tighten its governance standards; this is a really dramatic example of the SEC saying that because state entity law does not contain investor protections and governance rights, it is necessary that the federal government assume that responsibility.

Second, I note that institutional investors have been requesting these kinds of reforms for a while (for example); they obviously feel they cannot effectively bargain for the terms and information they need. It really is a challenge to the current model of securities regulation, where we assume that institutional investors have the sophistication and bargaining power to protect themselves. Commissioner Hester Peirce has already put out a statement decrying the proposed rules on precisely these grounds, i.e., that institutions don’t need the SEC’s protection, but if that’s so, what do you do when the investors ask for it? If you don’t believe them, if you don’t believe they understand what they need and where they have insufficient bargaining power, then how can you justify Rule 506? And if you do believe them, then, well … how can you justify Rule 506?

Third, there is a way to square that circle, and the SEC leans heavily into it in its proposing release: comparability. Investors, even institutional ones, not only have collective action problems negotiating for terms and whatnot, but more than that, especially across investment managers, it may be very difficult to compare terms and returns. And facilitating standardization is a task that government agencies are especially well-suited for. Which is why the SEC repeatedly says that its proposed rules make it easier for investors to compare alternatives.

And then finally, there’s this: To the extent funds are charging opaque fees and inflating valuations and whatnot, that seriously affects the allocation of capital, in ways that have real world economic effects. I’ve posted about this before in the context of startups, and it’s true with funds as well: the fund model may encourage some kinds of investments (leveraged buyouts, certain startup models) and not others, and if they’re wrong about what’s profitable, it ultimately not only harms investors, but all the employees who are left without jobs when the business fails, and even founders of competing businesses who can’t find capital because they don’t fit the fund model. On the other hand, considering complaints about short-termism in markets today, I have no doubt that opponents of private fund regulation will particularly take issue with the SEC’s proposal for quarterly reporting; they will argue that doing so will eliminate private funds’ unique ability to focus on the longer term.

February 12, 2022 in Ann Lipton | Permalink | Comments (0)

Friday, February 11, 2022

Business and Sports

By Marcia Narine Weldon

Between the Winter Olympics and the Superbowl, this weekend is a sports-lover's dream. But it can also be a nightmare for others. Next week in my Business and Human Rights class, we'll discuss the business of sports and the role of business in sports. For some very brief background, under the UN Guiding Principles on Business and Human Rights, the state has a duty to protect human rights but businesses have a responsibility (not a duty) to "respect" human rights, which means they can't make things worse. Businesses should also mitigate negative human rights impacts. I say "should" because the UNGPs aren't binding on businesses and there's a hodgepodge of due diligence and disclosure regimes that often conflict and overlap. But things are changing and with ESG discussions being all the rage and human rights and labor falling under the "S" factor, businesses need to do more. The EU is also finalizing mandatory human rights due diligence rules and interestingly, some powerful investors and companies are on board, likely so there's some level of certainty and harmonization of standards.

I've blogged in the past about human rights issues in sports, particularly the Olympics and World Cup in Brazil, where hundreds of thousands of people were displaced, FIFA had its own courts, and human rights issues abounded. For more on human rights and megasporting events, see this post about the Russian Olympics. The current Olympics in China and the future World Cup in Qatar have been rife with controversy because of the long-standing human rights abuses in those countries. Some athletes have even called the Winter Olympics the Genocide Olympics.

So whose problem is it? If businesses know that there's almost always some human rights impact with megasporting events and they know sponsorship doesn't really add to the bottom line, should they get out of the sponsorship business all together? Are they complicit or merely (innocent) bystanders?

Here are the questions I've asked my students to consider for class this week.

My hometown of Miami is vying for a spot to host the 2026 World Cup. What are the obligations of the "state" when it's a city? As the US government begins revising its National Action Plan on Responsible Business Conduct in accordance with the UNGPs, should a city do more than the national government? Should FIFA look at issues such as the effect of the games on the cities beyond revenue that will enrich only a few?
Cities have a human rights obligation to protect their citizens but what responsibility do companies have to make sure they don't exacerbate pre-existing homelessness issues?
Does it matter if the company sponsoring is Nike (directly working with athletes), Coca Cola (providing beverages), or another company that's just an advertiser? Is there a difference in the degree of corporate responsibility (if any)?
Commentators have accused Nike and other companies of using forced labor in China. Is there a conflict with their support of Colin Kaepernick and the Black Lives Matter movement while also participating in events where there are alleged human rights abuses?
What about the issue of human trafficking and megasporting events? It's such a big problem that the NFL has partnered with US Customs and Border Patrol for a public service announcement about it in light of the Superbowl. Are public service announcements enough?
Should athletes boycott events in countries with poor human rights records? How would that affect their sponsorships and their other contractual obligations? A Boston Celtic called for a boycott of the Beijing Olympics, but who's really listening?
How do what athletes say about Black Lives Matter and taking a knee square with participating in events in China? Should athletes, who are businesses, just shut up and dribble? If an athlete/businessman like LeBron James takes on Black Lives Matter does he have an equal obligation to protest against the use of forced labor in China?
FIFA and the International Olympic Committee are corporations that base their human rights policies in part on the UNGPs. They have spoken out against discrimination, human rights, and racism in sport. Is it too much or too little? How far should a company like FIFA or the NFL go before they alienate fans by talking about hot button issues?
Should fans boycott events that are known for human rights abuses? How does that affect the livelihood of the workers who depend on that revenue? Would a boycott benefit or hurt those who need the support the most?

I look forward to a lively discussion in class on Wednesday about the respective roles and responsibilities of the state, the companies, and the fans. Will you look at sports any differently after reading this post? If you have thoughts, please leave a comment or email me at [email protected].

February 11, 2022 in Corporations, CSR, Current Affairs, Ethics, Human Rights, International Business, Law School, Marcia Narine Weldon, Sports | Permalink | Comments (0)

Wednesday, February 9, 2022

Perhaps worth keeping an eye on: Krehbiel v. BrightKey, Inc. (workplace political opinion discrimination claim)

By Stefan J. Padfield

According to their website, on November 15, 2021, the Center for Individual Rights (CIR) filed a complaint alleging workplace political opinion discrimination in the case of Krehbiel v. BrightKey, Inc. An amended complaint was filed on Jan. 3, 2022. You can find links to both complaints here. What follows is a brief description of the case as per CIR (emphasis mine).

On November 15, the Center for Individual Rights filed a political opinion and racial discrimination lawsuit against BrightKey, Inc., a Maryland corporation, which fired its vice president of operations, Greg Krehbiel, over views that he expressed in his off-work podcast. BrightKey violated Krehbiel’s rights under county, state, and federal anti-discrimination law.

In his podcast, Krehbiel questioned diversity hiring requirements and enhanced penalties for “hate crimes.” Other BrightKey employees discovered Krehbiel’s podcast. They objected to the content because his views were the product of “white privilege.” Shortly after discovering the podcast, a group of employees walked out and demanded the company fire Krehbiel. BrightKey swiftly acceded to the employees’ demands.

CIR is suing BrightKey for firing Krehbiel over the political opinions that he expressed in his podcast. Howard County, Maryland is one of many jurisdictions around the country that protects employees from political opinion discrimination. The suit also alleges racial discrimination under Howard County, state, and federal anti-discrimination law. Krehbiel expressed legitimate public policy positions, but because of his race, BrightKey employees construed his views as bigoted. CIR filed the case in the United States District Court for the District of Maryland.

February 9, 2022 in Stefan J. Padfield | Permalink | Comments (1)

Monday, February 7, 2022

Oklahoma City Law - Doctrinal Opening(s)

OKLAHOMA CITY UNIVERSITY SCHOOL OF LAW invites applications for one or more tenured or tenure-track faculty positions to begin with the 2022-23 academic year. We welcome applications from candidates with interests in any area of law, but we are particularly interested in candidates with a teaching interest in business organizations, energy law, environmental law, healthcare law, homeland security and national security, or secured transactions. We welcome candidates whose approaches in research will add to the scope and depth of our faculty scholarship.

Candidates should have an excellent academic background, demonstrated potential to be a productive scholar, a strong commitment to the practice of inclusion, and a strong commitment to becoming an engaged classroom teacher. Candidates must have a J.D. degree from an ABA accredited law school and be licensed to practice law in one of the states or the District of Columbia.

Oklahoma City University School of Law is located in downtown Oklahoma City and is deeply engaged with the legal, business, and governmental communities. Oklahoma City has been named “American’s Most Livable Community” and is consistently ranked among the most affordable and prosperous cities, among the top cities for entrepreneurs and small businesses, and among the best-run large cities.

Oklahoma City University is an equal opportunity employer and affirms the values and goals of diversity. We strongly encourage applications from members of demographic groups underrepresented in the teaching and practice of law. For the university’s complete nondiscrimination policy, please see: https://www.okcu.edu/admin/hr/policies/general/nondiscrimination-policy-equity-resolutionprocess/nondiscrimination-policy/.

To apply, please submit a CV and job-talk paper to https://jobs.silkroad.com/OKCU/FacultyCareers?page=2. A cover letter that describes the candidate’s commitment to the practice of inclusion and includes examples would be helpful. If a candidate is selected for an interview, teaching evaluations will be requested, if available.

February 7, 2022 in Joan Heminway, Jobs | Permalink | Comments (0)

Saturday, February 5, 2022

Kindness in Law

By Haskell Murray

In 2013, acclaimed short-story writer George Saunders gave a commencement speech on kindness at Syracuse University. The speech went viral, the transcript landed on The New York Times blog, and the talk later became the basis of a book.

The entire speech is well worth listening to, but the gist is Saunders saying: “What I regret most in my life are failures of kindness.”

Oxford English Dictionary defines “kindness” as “the quality of being friendly, generous, and considerate.”

When I think of the profession of law, “kindness,” “friendly,” “generous,” and “considerate” are sadly not among the first words that come to mind. “Analytical,” “bold,” “competitive,” “critical,” and “justice” were the first five words I would use to describe our field.

As C.S. Lewis reportedly said, “love is something more stern and splendid than mere kindness,” but I am not sure love is ever less than kindness. There may be ways, as negotiation theory teaches us, to “be soft on the person, but hard on the problem.” We can tackle injustice with vigor, but be mindful of the people across the tables from us.

Pre-pandemic, I put a real premium on “tough love” and preparing students for the rigors of practice. While I still think there is a place for the critical and exacting skills that law training tends to emphasize, I also think we would all do well to increase our focus on kindness.

February 5, 2022 in Books, Business School, Haskell Murray, Law School, Teaching, Wellness | Permalink | Comments (0)

Friday, February 4, 2022

Public Servants or Parasites? Why a Broad Prophylactic against Congressional Insider Trading Makes Sense

By John P. Anderson

In 2011, Peter Schweizer published a book, Throw Them All Out, in which he exposed some questionable means by which (according to one study) politicians manage to increase their personal wealth 50% faster than the average American.

According to Schweizer, trading on material nonpublic information appears to be a popular method among congresspersons for achieving outsized returns on their investments. He cites one study finding:

The average American investor underperforms the market.
The average corporate insider, trading his own company’s stock, beats the market by 7% a year.
The average senator beats the market by 12% a year.

Schweitzer’s book was followed by a feature story on the CBS News show, 60 Minutes, highlighting some dubious stock trades by leaders of both political parties. These stories got the public’s attention and spurred Congress to act—adopting the Stop Trading on Congressional Knowledge (STOCK) Act in April of 2012.

The STOCK Act made explicit what many already understood as implicit—that congressional trading based on material nonpublic information acquired by virtue of their position as a public servant was a breach of their fiduciary duties and would therefore violate Section 10b of the Securities Exchange Act of 1934. The Act also expanded disclosure requirements for members of Congress, the executive branch, and their staff members.

But no sooner had the STOCK Act passed than it was quietly overhauled to weaken certain of its key provisions, and, in any event, the Act has not been consistently enforced since its adoption. As a result, public cynicism concerning congressional insider trading has once again snowballed. For example, Speaker Nancy Pelosi's stock trades are monitored by popular Twitter, TikTok, and Reddit accounts with handles like "@NancyTracker," and the search “Pelosi stock trades” hit a record high on Google in January 2022.

Of course, Pelosi is not the only congressperson the public suspects of insider trading. For example, a number of U.S. Senators were scrutinized over suspicious stock trades as the threat of the COVID-19 pandemic emerged in 2020.

So what is to be done? Just as they did in 2011, members of Congress on both sides of the aisle are rushing to get out in front of the issue. A number of congressional insider trading reform bills have garnered bipartisan support. Many of these bills propose the broad prophylactic of proscribing members of congress from trading in individual stocks. Some bills would go so far as proscribing trades by spouses and dependent children as well.

There is precedent for broad prophylactics against insider trading. Consider, for example, Exchange Act Rule 14e-3, which permits civil and criminal liability for trading based on material nonpublic information concerning tender offers, even if there is no accompanying proof of fraud.

Though I have argued for reducing the scope of insider trading liability in some contexts (e.g., where such trading is licensed by the issuer of the stock being traded), I have consistently recognized misappropriation trading (such as when a congressperson misappropriates material nonpublic government information to trade for personal gain) as morally wrong, and as warranting civil and criminal sanctions. And I think extending the scope of liability for congressional insider trading with a broad prophylactic (e.g., proscribing all individual stock trades) is warranted for the following reasons (among others):

Congresspersons are in a unique position to affect individual stock prices by introducing (and voting for) bills directly affecting those issuers, calling on the SEC to investigate issuers, or otherwise exerting their extensive political influence to affect markets. As one congressperson notes, "one line in a bill in Congress can be worth millions and millions of dollars."

Congress’s influence over the SEC and DOJ makes aggressive enforcement by those agencies more challenging—and when actions are brought, there will always be the specter of political motivation. The broad prophylactic would simplify enforcement, and thereby mitigate these worries.

Given the above concerns, even legitimate stock trades by members of Congress will be the subject of continued public suspicion and cynicism. Such suspicion undermines public confidence in the integrity of the legislative branch--and the markets.

Protestations that a broad proscription of individual stock trading would be Un-American because "We're a free-market economy" and “[Members of Congress] should be able to participate in that” are totally unavailing. People voluntarily assume roles that deprive them of rights they would otherwise enjoy all the time (e.g., by joining the military), and public service has always been understood as just such a role.

Members of congress should not be (significantly) financially disadvantaged by a rule precluding trades in individual stocks. Given the efficient market hypothesis (roughly, that an individual stock’s price always reflects all currently available public information about that stock), members of congress should not expect their individual stock trades to outperform a similar trade in, say, a mutual fund in any event….unless, that is, they have information that is NOT publicly available.... Diversification is typically the best long-term investment strategy.

The most recent ReacClearPolitics Poll Average shows that Congress currently enjoys the approval of 21% of Americans. If Congress would like to begin improving those numbers, I suggest it adopt one of the proposed insider trading bills proscribing individual stock trading by its members. This might go a long way toward restoring the perception that members of Congress are public servants, as opposed to the current perception shared by many Americans (justified or not) that they are public parasites.

February 4, 2022 in Ethics, John Anderson, Securities Regulation, White Collar Crime | Permalink | Comments (3)

Thursday, February 3, 2022

FINRA Arbitration, Wells Fargo, and the Georgia Courts

By Benjamin P. Edwards

On January 25, 2022, Fulton Superior Court Judge Belinda Edwards issued an order vacating a FINRA arbitration award and finding, among other things that "Wells Fargo and its counsel manipulated the arbitrator selection process." Yesterday, the Public Investors Advocate Bar Association (PIABA) issued a statement calling for a Congressional investigation into whether FINRA's arbitration forum tilts the scales in favor of industry firms by manipulating the arbitrator selection process. The Wall Street Journal has already started covering the fracas. What happened here?

This story starts in the standard fashion. Wells Fargo managed the claimants accounts and allegedly over-concentrated their accounts into single stocks and industries. When the claimants suffered some losses and complained, Wells Fargo assigned a different broker to their account. The claimants became increasingly dissatisfied with Wells Fargo's management of their accounts and eventually brought an arbitration claim in the FINRA forum because their Wells Fargo account opening agreement contains a pre-dispute arbitration agreement. All perfectly normal.

Things soon became more interesting. Wells Fargo hired Terry Weiss as outside counsel to defend it. The arbitration proceeded in the normal course. FINRA circulates lists of potential arbitrators for the parties to rank and potentially strike before FINRA assigns the arbitrators for the case. When the matter reached the arbitrator selection process, Mr. Weiss went into action. He didn't like one of the arbitrators that had been included on the list and sent a letter to FINRA demanding changes, stating "It was made clear to me verbally that none of the Postell arbitrators would have the opportunity to serve on any one of my cases . . ." Judge Edwards found that Weiss's letter "disclosed an agreement between FINRA and counsel for Wells Fargo pertaining to the pool of arbitrators available to his clients in all of his cases." Although the investors opposed Mr. Weiss's request to remove the arbitrator from the list, the arbitrator was struck without explanation and the parties were provided with "a new, edited, computer generated list." A panel of three arbitrators was selected after the parties ranked and struck arbitrators from that list. Mr. Weiss did not like the panel's composition still and demanded that one of the arbitrators be removed. FINRA again "ceded to Wells Fargo's demands and struck the arbitrator from the case." A new arbitrator was appointed.

The arbitration proceeded and ultimately went in Wells Fargo's favor. Some interesting things happened along the way. When a broker began answering questions during testimony, he admitted that he had violated "Written Supervisory Procedures," "SEC record keeping rules," that it was a "bad thing," and that he he "did it anyway." Right at about that point, the testimony was interrupted by a sudden "medical emergency" afflicting "counsel for Wells Fargo." The hearing was postponed for about nine months. When the hearing picked up again, the testimony was different. Wells Fargo's counsel also told the arbitration panel that he did not recall the admissions that preceded the medical emergency. FINRA arbitrations are not ordinarily contemporaneously transcribed. FINRA keeps an audio recording which parties may request after the hearing. This can make it difficult to establish exactly what someone said earlier in the hearing. Judge Edwards found that "Wells Fargo and its counsel committed fraud on the arbitration panel by procuring perjured testimony, intentionally misrepresenting the record, and refusing to turn over a key document. . ."

Judge Edwards also found that the arbitrator selection process had been manipulated. The court's finding are troubling because they raise questions about the fairness of the arbitration forum:

The Court’s factual review of the record evidence leads to its finding that Wells Fargo and its counsel manipulated the FINRA arbitrator selection process in violation of the FINRA Code of Arbitration Procedure, denying the Investors’ their contractual right to a neutral, computer-generated list of potential arbitrators. Wells Fargo and its counsel, Terry Weiss, admit that FINRA provides any client Terry Weiss represents with a subset of arbitrators in which certain arbitrators (at least three, but perhaps more) are removed from the list Wells Fargo agreed, by contract, to provide to the Investors in the event of a dispute. Permitting one lawyer to secretly red line the neutral list makes the list anything but neutral, and calls into question the entire fairness of the arbitral forum.

The court also explained that "only reason this secret agreement came to light was because FINRA accidentally included one of the three Postell arbitrators, Fred Pinckney, on the neutral computer-generated List."

Did an agreement to circulate modified lists for Terry Weiss and his clients exist, and if so, who at FINRA made it? Do other lawyers have similar privileges? Terry Weiss said in writing that he had a verbal promise that certain arbitrators would never be allowed to serve on his cases. If that were the case, Wells Fargo could bias the arbitrator pool in its favor by hiring Terry Weiss. If this is true, this isn't fair to investors or to the defense lawyers out there who compete with Weiss for business. They can't offer their clients the ability to exclude certain arbitrators merely by appearing in a case. It's worth noting again that the Court found that "Wells Fargo witnesses and its counsel introduced perjured testimony [and] intentionally misrepresented the record. . ." It's possible Weiss's representations about preferential lists were not entirely accurate.

There is much we do not know. We do not know the reason why FINRA struck the first arbitrator. We don't know exactly why FINRA struck the second arbitrator. Nicole Iannarone has called for greater transparency around these issues. It may be that FINRA has some informal, unpublished criteria it uses when evaluating these kinds of requests. If that is the case, it's a problem for fairness and transparency in the forum, but it isn't a secret agreement to tilt the arbitration pool in the favor of well-connected lawyers representing FINRA members. FINRA itself didn't enter an appearance in the Georgia proceedings so the Court didn't have FINRA before it.

The language in the opinion goes directly to fears about industry-controlled arbitration forums. If the industry is able to manipulate the arbitrator pool, it can shift the outcomes in cases. Most of the time, investors won't have the kinds of facts available that led to this motion to vacate. The SEC oversees FINRA and I expect that it will ask questions and investigate this issue. Hopefully the investigation will be transparent and generate confidence in the forum. Transparency will require a deliberate decision by FINRA and the SEC though because FINRA isn't subject to FOIA and the SEC's oversight of FINRA is also not subject to FOIA.

February 3, 2022 | Permalink | Comments (0)

Wednesday, February 2, 2022

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