Wednesday, June 24, 2020
Tomorrow (6/25/20) at 9am EST, Colin Mayer (Oxford) will debate Lucian Bebchuk (Harvard) on the topic of stakeholder v. shareholder capitalism.
Oxford is streaming the debate for free here.
Friday, June 12, 2020
Padfield on "the Omnipresent Specter of Political Bias" in Corporate Decision-Making (and 3 other papers)
I've finally gotten around to updating my SSRN page. I would love to hear any comments you might have.
June 12, 2020 in Behavioral Economics, Books, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, CSR, Human Rights, Law and Economics, Stefan J. Padfield | Permalink | Comments (0)
Wednesday, June 10, 2020
Friend of the blog Bernard Sharfman has a new post up on the Oxford Business Law Blog, responding to Martin Lipton’s recent "On the Purpose of the Corporation" posts. Bernie's full post can be found here, and I've excerpted some portions (slightly out of order) below. I appreciate that the post highlights that a big part of the shareholder v. stakeholder debate is about whose rights are determined by contract v. fiduciary duties.
[T]he Lipton, Savitt, and Cain definition of corporate purpose is missing both an objective and a strategy on how it will create social value....
I am disappointed with this definition, a definition that ignores the social value created by for-profit businesses, namely the goods and services they produce; ignores that this social value is being produced for the financial benefit of its shareholders; and uses the pretense that uninformed institutional investors are partners in the management of a company....
[T]hey make no mention of the social value created by the corporation through the successful management of its stakeholder relationships, the goods and services it provides. How can a definition of corporate purpose not mention this? It’s as if a corporation should be ashamed of why it exists....
Pfizer, as a for-profit corporation, ... has the legal obligation of looking out for the interests of its shareholders. This is the only stakeholder group that the board owes fiduciary duties to, who can sue the board for a breach of those duties, who can approve major corporate decisions, and who can initiate and implement a proxy contest to remove board members. Thus, shareholder wealth maximization is the objective of Pfizer’s social value creation....
[A] collective action problem in shareholder voting leads to uninformed institutional investors, resource-constrained investor stewardship teams and proxy advisors that cannot solve this problem, and the current lack of enforcement of an investment adviser’s fiduciary duties does not solve the additional problem of institutional investor bias in shareholder voting.
Monday, May 11, 2020
Maybe I am just sensitized to these media reports because of my research and teaching, but it seems that the COVID-19 pandemic has sparked new media interest in and engagement with corporate governance issues. I have received four media calls in the past few weeks--two on background and two for source quotations. That is an unusual rate of contact for me. Is anyone else noticing this?
Of course, there has been a lot to talk about. Annual meetings already called and noticed to shareholders needed to move online. As managers and employees moved out of workplaces to shelter at home, well-worn systems of decision-making and information dissemination--as well as the expectations of others in connection with them--changed or were challenged. Filing and other deadlines became guidelines . . . .
The two media calls in which I was asked to provide background information related to
- increased or altered director and legal counsel attentiveness to drafting force majeure clauses and material adverse change/effect definitions in light of what we now know about COVID-19 and its effects and
- prospects for various kinds of shareholder derivative, direct, and class action litigation in light of COVID-19 and related board decision making.
I was glad to be able to help the two journalists who called on these issues. They had great questions; made me think.
The two articles in which I was quoted are both (regrettably) secured behind firewalls. But if any of you are subscribers to Agenda, you will have access to them both. I have linked to each below. Both were written by Jennifer Williams-Alvarez.
The first piece, an April 22nd article entitled "Boards Adopt Emergency Bylaws for Critical Flexibility," put a spotlight on the potential utility of emergency bylaws in light of the pandemic. I admitted that I now am more sensitive and sympathetic to emergency bylaws than I used to be.
Decades ago, Heminway says she would not have necessarily recommended that companies include an emergency bylaw provision when drafting corporate governance documents. But with the financial crisis, the attacks on the United States on Sept. 11, 2001, and the current Covid-19 crisis, she says she would now make the suggestion.
I wonder how many of you who have been in practice for "more than a minute" feel the same way.
The second article, "DPA Forces New Unknowns for Boards to ‘Triage’," posted on April 27, offered insights on the Defense Production Act, the subject of multiple executive memoranda and orders relying to product manufacturing and distribution over the past month. This article picked up on a topic I wrote about here early last month. Since Agenda focuses on issues of importance to corporate directors and those who work with them, the article explored various angles of interest in the Defense Production Act relating to corporate boards. For example, we got into an extended conversation about public company reporting obligations and related information gathering and management.
Board members should think about disclosure responsibilities, says Heminway. For certain companies, such as manufacturers, an assessment must be made about whether it represents a material risk to repurpose operations or reprioritize contracts so that the government is at the front of the line, she says.
Between the two of us, we were able to find a few examples of COVID-19 Defense Production Act disclosures made in public filings with the U.S. Securities and Exchange Commission. Our coverage of applicable mandatory disclosure obligations led to a brief conversation about how boards of directors gather information.
“What I worry about is the board exercising its fiduciary duties in this context,” Heminway says, referring to reporting responsibilities. “The main issues here are going to be duty of care issues,” a requirement that directors fully inform themselves of all material information, she notes.
“The amount of information available now is overwhelming, and it’s changing every day. The Defense Production Act is a piece of that,” says Heminway. “It’s part of what they need to be informed about.
The article covers a lot of ground overall and quotes from a number of sources, including former and current government employees.
I admit that I have been impressed by the level of interest and engagement of the journalists with whom I have been speaking. What they and others like them are producing and publishing fueled my teaching during March and April (I assigned a number of articles to my students relating to COVID-19 and corporate governance) and is likely to continue to catalyze blog posts and, potentially, research projects as time goes on. It is good to know that corporate governance questions are motivating useful media inquiries and publications during the COVID-19 crisis. It also is nice to know that we law professors may be able to use our knowledge to help inform important constituencies during the pendency of the pandemic while, at the same time, expanding our own horizons. A true win-win.
Wednesday, April 15, 2020
The National Center for Public Policy Research has posted an open letter to Blackrock CEO Larry Fink that should be of interest to readers of this blog. I provide some excerpts below. The full letter can be found here.
Dear Mr. Fink,
This economic crisis makes it more important than ever that companies like BlackRock focus on helping our nation’s economy recover. BlackRock and others must not add additional hurdles to recovery by supporting unnecessary and harmful environmental, social, and governance (ESG) shareholder proposals.
…. we are especially concerned that your support for some ESG shareholder proposals and investor initiatives brings political interests into decisions that should be guided by shareholder interests…. when a company’s values become politicized, the interests of the diverse group of shareholders and customers are overshadowed by the narrow interests of activist groups pushing a political agenda.
…. ESG proposals will add an extra-regulatory cost .... This may harm everyday Americans who are invested in these companies through pension funds and retirement plans. While this won’t affect folks in your income bracket, this may be the difference between affording medication, being able to retire, or supporting a family member’s education for many Americans.
There is a financial risk to this tack as well. The Wall Street Journal recently reported that “[p]erformance of BlackRock’s own iShares range of ESG funds shows that ESG is no guarantee of gold-plated returns. Its two oldest in the U.S., set up in 2005 and 2006 and now tracking the MSCI USA ESG Select index and the MSCI KLD 400 Social index, have both lagged behind iShares’ S&P 500 fund.”
And while publicly traded companies operate under a legal fiduciary duty to their investors, this is also a moral imperative. Free market capitalism has lifted more people out of poverty than any economic system in world history. That’s because, at its simplest level, capitalism operates under the basic rule that all exchanges are voluntary. Therefore, to achieve wealth and create growth in a capitalist system, one must appeal to the self-interest of others….
Friday, March 20, 2020
CNN recently ran a story entitled - the pandemic risks bringing out the worst in humanity.
Rather than focus on the negative, I decided to collect some of the positive business responses to COVID-19. This is probably just a small sampling of the positive responses. I may update this list from time to time; please feel free to add more in the comments or email me. [Updated with some suggestions from my business ethics students and to include some of the highlights from this excellent, more extensive list that a reader e-mailed.]
- Alibaba co-founder is donating masks and test kits to the US.
- AT&T provides free wireless to school districts and 60 days free service to new customers
- Bank of America allows borrowers to pause mortgage payments
- Comcast is offering free internet to low-income customers for two months and opening up WiFi hotspots and waiving disconnect/late fees.
- Dallas Mavericks are paying their hourly workers despite the NBA season being suspended.
- Delta waives change fees.
- Disney paying workers and donating food
- General Motors to support production of ventilators
- Goldman Sachs, Capital One, and American Express waived interest payments
- Google is offering free virtual tours of 1200+ museums & building a triage website (currently just for Bay area)NextDoor adds help maps and groups.
- Kellogg offering $4M in food relief
- Major League Baseball Pledges $30M to Ballpark Workers
- Publix offering special shopping hours for senior citizens. (Kroger, Giant, Target, Whole Foods and Dollar General are also doing this)
- Starbucks is offering free therapy sessions for its employees
- Taco Bell will continue to pay workers during the pandemic
- Tesla's CEO (Elon Musk) donating ventilators
- U-Haul is offering 30 days of free storage for college students
- Many distilleries and breweries make hand sanitizer (here, here, and here). (As is Louis Vuitton)
- Many online learning platforms are providing free materials.
- Many fitness studios are streaming free classes online (here, here, and here)
- Many musicians live streaming music for free.
- Many companies are offering more flexible working conditions and paid sick leave (beyond what is being required)
- And here is another list. 50 Ways Companies are Giving Back.
Also related to COVID-19, I just came across this article about David Lat (founder of "Above the Law"). David is an acquaintance of mine and many of our readers. According to the article, David has COVID-19 and has been dealt a particularly harsh case. David is an incredibly kind person, with a beautiful family, and his case has made me take the virus even more seriously.
Monday, February 10, 2020
My short essay, "Me, Too and #MeToo: Women in Congress and the Boardroom," was recently published in the George Washington Law Review. The abstract follows.
The “Year of the Woman” (1992) and the year of #MeToo (2018) were landmark years for women in federal congressional elections. Both years also represent significant milestones for women’s roles as U.S. public company directors. In each of these two years, social context was interconnected with these political and corporate gender changes. The relevant social context in 2018 is most clearly defined by public revelations of sexual misconduct involving a significant number of men in positions of political and business power. The relevant social context in 1992 similarly involved specific, highly public disclosures and allegations of sexual misconduct.
These parallels beg many questions. In particular, one may ponder whether the correlation between social context and congressional or public company board elections is coincidence or something more. Apropos of the current era, those of us who focus on corporate board diversity may wonder whether looking at the election of women to Congress and corporate boards in the #MeToo era provides any insights or lessons about female corporate board representation.
This brief Essay examines and comments on possible gender effects of the #MeToo movement on public company board composition in relation to the possible gender effects of the #MeToo movement on the composition of legislative bodies. Although #MeToo has clarified, and perhaps expanded, the salient connections between business issues and women’s issues, those who have the power to elect corporate directors may not fully recognize this connection or other factors as unique values of female corporate board participation. Until additional female membership on corporate boards is substantively valued, swift sustainable changes in the gender makeup of corporate boards may not be realizable without specific, enforceable legal mandates. Although California’s state legislature has taken a bold step in this direction in the #MeToo era, it seems unlikely that additional state legislatures will follow its lead. As a result, the pace of change in corporate board gender composition is likely to continue to be more evolutionary than revolutionary.
I appreciate the opportunity to publish these thoughts generated in connection with a conference held at GWU Law back in 2018. The conference, "Women and Corporate Governance: A Conference Exploring the Role and Impact of Women in the Governance of Public Corporations," featured a number of super panels. I had the opportunity to moderate one ("Women as Counsel and Gatekeepers") and publish this piece.
Wednesday, January 15, 2020
The following comes to us from Bernard S. Sharfman. It is a copy of the comment letter (without footnotes) that he recently sent to the SEC in support of the Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice. (The comment letter with footnotes can be found here.) An introductory excerpt is followed, after the break, by the full letter. Please excuse any formatting errors generated by my poor copy-and-paste skills.
Part I of this letter will describe the collective action problem that is at the heart of shareholder voting. Part II will discuss the problems that this collective action causes for the voting recommendations of proxy advisors, including the creation of a resource constrained business environment. Part III discusses how proxy advisors deal with such a business environment. Part IV will discuss how the market for voting recommendations is an example of a market failure, requiring the SEC to pursue regulatory action to mitigate the harm caused by two significant negative externalities. Part V will discuss how the collective action problem of shareholder voting and the market failure impacts corporate governance. Part VI will discuss the value of the proposed amendments.
Monday, January 13, 2020
Each time I teach Advanced Business Associations, I try to engage students on the first day in an exercise that leverages their existing knowledge of business associations law but also introduces new angles and nomenclature. I assign a reading (this year, on shareholder wealth maximization) and ask each student to write up a brief definition of the concepts of “policy” and “theory” as they may apply to and operate in business associations law. I then ask them to relate their definitions to the reading.
So, the core question before the house in that course on the first day of classes last week effectively was the following: is shareholder wealth maximization legal doctrine, policy, theory, or something else? We had a wide-ranging discussion on the question, working off three propositions I put on the board. The class session enabled me to review some concepts from the foundational Business Associations course while also discussing the role of theory and policy in law and lawyering, getting some creative mental juices flowing, and teaching a bit of the new vocabulary they will need for the course.
I decided that it could be beneficial to share with my students the views of others on our effective core question from class last week. So, today, I ask you:
Shareholder wealth maximization: doctrine, theory, policy, or something else?
Offer your answers in the comments or send me a private message. You can pick more than one category, of course, in classifying shareholder wealth maximization. In other words, the categories are not intended to be mutually exclusive. A brief explanation for your response would be helpful. I will not attribute the answers I pass on, unless you want me to. I hope this post will stimulate some interesting responses, but I also know that law professors are busy with the start of the new semester. It may go without saying, but (especially in these circumstances) a short response is appreciated as much as a long one.
Monday, December 16, 2019
Earlier today, the CLS Blue Sky Blog published a post written by Adam Sulkowski and me (thanks to Adam for taking the laboring oar on this piece at the outset!) on corporate governance lawyering in the blockchain era--the topic of our recent article published in the Wayne Law Review. A bit over a month ago, I posted the abstract for that article, together with some related commentary, here on the BLPB.
The CLS Blue Sky Blog includes some observations from our article about law practice in a corporate governance context if and as data storage and usage moves to blockchains. I want to highlight them by repeating them here.
Our specific recommendations relating to lawyering cover several areas. First, we advise attorneys not only to stay updated about applicable law and relevant interpretations, but also to expand their awareness. Serving clients responsibly will require more familiarity and astuteness with technology and operations. Second, we urge our colleagues in the practice of law – including those involved in the making and administration of laws – to be uncharacteristically forward-looking. It is prudent to be proactive in the contexts of advising firm management and public policymaking. Overall, we highlight that counsel has a critical role in thinking through all the implications and contingencies resulting from a move of any governance function or process to a blockchain-based platform.
Why might that critical role look like? I mentioned in my original post that Adam and I engaged in some visioning. Among other things,
[i]t may well fall to attorneys to help clients see and appreciate irrevocable consequences and the potential risks and opportunities. We suggest that anyone engaged in the practice and study of law has a role to play in provoking conversations and new ideas for policy solutions in the context of ambiguities. Eliminating doubts about the adoption and consequences of blockchain-enabled corporate governance will create more certainty for market participants and society.
Perhaps more strikingly, in the article,
. . . we discuss a conceptual reframing that several authors have suggested will be useful as a way of understanding our new role as attorneys. We proffer that that the lawyer’s role will evolve into that of a sort of translator – helping to transform human norms and values into software code. This is a key function in assuring that the deployment of technology serves its intended ends.
There are implications of these possible evolutions in the lawyer's role as corporate governance moves to blockchains. Those implications extend to the legal education setting.
This reconceptualization of business lawyering is relevant to the functions of legal educators and law schools. Based on our observations, there undoubtedly will be a growing need for lawyers who are familiar with both how blockchain technology can be deployed and laws relevant to corporate governance. Law schools should consider evolving their courses and business law curricula accordingly.
Overall, in the CLS Blue Sky Blog post, Adam and I offer a longer playing summary of our work. The additional information we provide there may help you to decide whether and when to read our entire article. To the extent you are not inclined to read the article, however, I hope that this post or that post may at least provoke some thought.
Monday, December 9, 2019
This post is dedicated to the students in my Business Associations class, who took their final exam this morning.
Two weeks ago, reflecting on Francis v. United Jersey Bank, 432 A. 2d 814 (N.J. 1981), I asked for commentary on the following question: "How would the Francis case be pleaded, proven, and decided as a breach of duty action under Delaware law?" That post generated some commentary--both online and in private messages to me. In this post, I forward an analysis and a related request for commentary.
A number of commentators (including BLPB co-blogger Doug Moll in the online comments to my post) posited that a Caremark oversight claim may be the appropriate claim, and that the cause of action would be for a breach of the duty of care. I find the latter part of that answer contestable. Here is my analysis.
I begin by agreeing that Mrs. Pritchard's abdication of responsibility constitutes a failure to exercise oversight. Under the Delaware Supreme Court's decision in Stone v. Ritter, I understand that claim to be Caremark claim. ("Caremark articulates the necessary conditions for assessing director oversight liability.") I think many, if not most, are also in agreement on this.
Here is where there may be some divergence. Also relying on Stone, I understand that Caremark claim as a breach of the duty of loyalty, founded on a failure to act in good faith. ("[B]ecause a showing of bad faith conduct . . . is essential to establish director oversight liability, the fiduciary duty violated by that conduct is the duty of loyalty.") This makes sense to me because of the Delaware Supreme Court's opinion in Brehm v. Eisner, in which it circumscribes the duty of care. ("Due care in the decisionmaking context is process due care only.")
However, Brehm (as evidenced in the immediately preceding parenthetical quote) addressed the duty of care under Delaware law in a decision-making context. Francis was largely a case about the absence of decision making. Moreover, the Brehm court's view on a substantive duty of care are rooted in the contradiction of that doctrine with the business judgment rule. ("As for the plaintiffs' contention that the directors failed to exercise 'substantive due care,' we should note that such a concept is foreign to the business judgment rule. Courts do not measure, weigh or quantify directors' judgments.") So, Brehm's wisdom on the duty of care under Delaware law may be inapplicable to facts like those in Francis, since the business judgment rule is inapplicable because the board did not engage in decision making.
Nevertheless, Stone seems to erect barriers to a duty of care claim for oversight like that presented in the Francis case. BLPB co-blogger Anne Tucker voiced this concern in a 2010 article in the Delaware Journal of Corporate Law
Exculpatory provisions that eliminate liability for negligence and gross negligence (i.e., the duty of care), combined with the assumption of the duty of good faith under the liability standard for the duty of loyalty, narrow the standard of liability for director oversight. The result is while directors have three fiduciary duties-the duties of care, good faith, and loyalty-the three standards of conduct are essentially collapsed into one actionable standard: the duty of loyalty.
Anne Tucker Nees, Who's the Boss? Unmasking Oversight Liability Within the Corporate Power Puzzle, 35 Del. J. Corp. L. 199, 224–25 (2010). Lyman Johnson similarly had commented, seven years earlier (and before the Stone case was decided) that
care has been rendered a “small” notion in corporate law. It largely refers to the manner in which directors are to act. It is a process-oriented duty to act “with care.” Having confined care to that narrow chamber, the other meanings of care as found in the phrases “take care of” (the corporation) and “care for” (the corporation) remain fully available for infusion into corporate law through an expansive duty of loyalty.
Lyman Johnson, After Enron: Remembering Loyalty Discourse in Corporate Law, 28 Del. J. Corp. L. 27, 72 (2003). Others also have written about this.
Based on the foregoing, I conclude that a duty of care cause of action is not available in Delaware for an oversight claim like that raised in Francis. Delaware's duty of care comprises the duty to fully inform oneself of material information reasonably available under Smith v. Van Gorkom. As a result, an oversight claim based on facts like those in Francis is a claim for a breach of the duty of loyalty as described in Stone.
Agree? Disagree? Provide analyses and, if possible, relevant decisional law.
Monday, December 2, 2019
In running circles, Nike has been in the news quite a lot this year.
In May, Nike was criticized for its maternity policy (of lack thereof) for sponsored runners (See “Nike Told Me to Dream Big, Until I Wanted a Baby”).
In September, Nike’s running coach, Alberto Salazar, was suspended for 4 years for facilitating doping. (See “Nike’s Elite Running Group Folded After Suspension of Coach Alberto Salazar”)
In October, Nike's sponsored runner, Eliud Kipchoge, ran the first sub-2 hour marathon, wearing the much-hyped Nike Vaporfly shoes. (See “Eliud Kipchoge runs first ever sub-two hour marathon in INEOS 1:59 challenge”) (See also, “Achieving the Seemingly Impossible: A Tribute to Eliud Kipchoge” by our own Colleen Baker)
In November, former Nike-sponsored runner Mary Cain’s allegations of verbal abuse and weight shaming went viral. (See “I Was the Fastest Girl in America, Until I Joined Nike: Mary Cain’s male coaches were convinced she had to get “thinner, and thinner, and thinner.” Then her body started breaking down.”) (See also, “Mary Cain Speaks Out Against Nike and Coach Alberto Salazar Over Emotional, Physical Abuse”)
I think Robert Johnson of Let’s Run gets it right - Don’t Believe The Spin, Nike’s Treatment Of Mary Cain Is Very Much In Line With Its #1 Core Value: Win At All Costs. And, at least based on what I see among my serious running friends, the negative press is not hurting Nike’s sales. The Nike Vaporfly shoes are the best running shoes on the market, and the negative press appears to be rationalized or ignored by consumers. Even the author of the Mary Cain story for Sports Illustrated (which was extremely critical of Nike) donned a Nike kit and the Nike Vaporflies in his recent marathon.
So here is the perennial business law question: is Nike's "ruthless winning" strategy proper, or even required? As we all know, the business judgment rule allows Nike’s board of directors a great deal of flexibility in their decision-making. But the pull of the shareholder maximization norm---and the fact that shareholders hold many more accountability tools than other stakeholders---makes the results above pretty unsurprising.
Former Chief Justice of the Delaware Supreme Court has posted a paper with some ideas for encouraging more prosocial behavior by U.S. corporations, but there are no easy solutions and still much academic work to be done in this area.
Monday, November 4, 2019
I approached with some curiosity the Securities and Exchange Commission's recent shareholder proposal guidance in Staff Legal Bulletin No. 14J ("SLB 14J"). My interest in this topic stems from my past life as a full-time lawyer in private practice. During that time, I both wrote shareholder proposals and wrote no-action letters to the Securities and Exchange Commission ("SEC") to keep shareholder proposals out of corporate proxy statements.
In SLB 14J, the SEC clarifies its application of the "ordinary business" exception to the inclusion of a shareholder proposal under Rule 14a-8. Specifically, "[t]he Commission has stated that the policy underlying the 'ordinary business' exception rests on two central considerations. The first relates to the proposal’s subject matter; the second relates to the degree to which the proposal 'micromanages' the company." I want to share the SEC's guidance with you on the latter.
The idea of shareholders micromanaging most public firms is almost laughable. Yet, certain shareholder proposals do get somewhat specific in their direction of the firm and its resources.
In considering arguments for exclusion based on micromanagement, . . . we look to whether the proposal seeks intricate detail or imposes a specific strategy, method, action, outcome or timeline for addressing an issue, thereby supplanting the judgment of management and the board. [A] proposal, regardless of its precatory nature, that prescribes specific timeframes or methods for implementing complex policies, consistent with the Commission’s guidance, may run afoul of micromanagement. In our view, the precatory nature of a proposal does not bear on the degree to which a proposal micromanages. . . .
This makes some sense to me, yet this guidance may not be as easy to apply as the SEC may think. Here is the SEC's example of an excludable proposal:
For example, this past season we agreed that a proposal seeking annual reporting on “short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius” was excludable on the basis of micromanagement. In our view, the proposal micromanaged the company by prescribing the method for addressing reduction of greenhouse gas emissions. We viewed the proposal as effectively requiring the adoption of time-bound targets (short, medium and long) that the company would measure itself against and changes in operations to meet those goals, thereby imposing a specific method for implementing a complex policy.
I am note sure how I feel about the characterization of this proposal as excludable. Is the described proposal about reporting or about "prescribing the method for addressing the reduction of addressing reduction of greenhouse gas emissions"? Well, maybe a little of each . . . . What do you think?
During my time in active, full-time law practice, the format and content of Rule 14a-8 changed a number of times. It appears that the SEC may be poised to make another change--one more fundamental than enhanced guidance. According to one recent report, the SEC may announce as early as tomorrow "changes . . . to make it harder for shareholders to file proposals, and harder for proposals to be eligible for re-filing in subsequent years." Stay tuned for that possible announcement.
[Note: All footnote references in the quotations used in this post have been omitted.]
Monday, October 21, 2019
Given the number of corporate governance functions that can be conducted using blockchains, it seems appropriate to consider how business lawyers should respond to related challenges. Babson College's Adam Sulkowski and I undertook to begin to address this concern in an article we wrote for the Wayne Law Review's recent symposium, "The Emerging Blockchain and the Law." That article, Blockchains, Corporate Governance, and the Lawyer's Role, was recently released. An abstract follows.
Significant aspects of firm governance can (and, in coming years, likely will) be conducted on blockchains. This transition has already begun in some respects. The actions of early adopters illustrate that moving governance to blockchains will require legal adaptations. These adaptations are likely to be legislative, regulatory, and judicial. Firm management, policy-makers, and judges will turn to legal counsel for education and guidance.
This article describes blockchains and their potentially expansive use in several aspects of the governance of publicly traded corporations and outlines ways in which blockchain technology affects what business lawyers should know and do—now and in the future. Specifically, this article describes the nature of blockchain technology and ways in which the adoption of that technology may impact shareholder record keeping and voting, insider trading, and disclosure-related considerations. The article then reflects on implications for business lawyers and the practice of law in the context of corporate governance.
In the article, Adam and I do a fair amount of visioning. Based on the development of blockchain corporate governance we imagine, we conclude that business lawyers must both focus on understanding technology in the context of their clients' business operations and be proactive in providing legal advice relating to potential uses of the technology. We conclude that,
[i]n representing business clients, counsel have a critical role in thinking through all the implications of moving any governance function or process to a blockchain-based platform. It is especially important to help clients see, consider, and appreciate certain irrevocable consequences and legal risks, as well as potential opportunities. . . .
There is much for us all to learn in this area. A number of legal scholars are engaging in work that may be useful in better informing us. I, for one, try to attend as many of their presentations as possible as a means of better informing myself of what I need to know to teach corporate governance in the blockchain era. (We note in the article that blockchain corporate governance "impacts the job of legal educators and law schools.") I will continue to be on the lookout for additional work on blockchain corporate governance (and lawyering in an increasingly blockchain-driven world) and endeavor to highlight key things I find by posting about them here.
Saturday, September 7, 2019
Have you ever wanted to learn the basics about blockchain? Do you think it's all hype and a passing fad? Whatever your view, take a look at my new article, Beyond Bitcoin: Leveraging Blockchain to Benefit Business and Society, co-authored with Rachel Epstein, counsel at Hedera Hashgraph. I became interested in blockchain a year ago because I immediately saw potential use cases in supply chain, compliance, and corporate governance. I met Rachel at a Humanitarian Blockchain Summit and although I had already started the article, her practical experience in the field added balance, perspective, and nuance.
The abstract is below:
Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, the technology also has the potential to transform the way companies look at governance and enterprise risk management, and to assist governments and businesses in mitigating human rights impacts. This Article will discuss how state and non-state actors use the technology outside of the realm of cryptocurrency. Part I will provide an overview of blockchain technology. Part II will briefly describe how public and private actors use blockchain today to track food, address land grabs, protect refugee identity rights, combat bribery and corruption, eliminate voter fraud, and facilitate financial transactions for those without access to banks. Part III will discuss key corporate governance, compliance, and social responsibility initiatives that currently utilize blockchain or are exploring the possibilities for shareholder communications, internal audit, and cyber security. Part IV will delve into the business and human rights landscape and examine how blockchain can facilitate compliance. Specifically, we will focus on one of the more promising uses of distributed ledger technology -- eliminating barriers to transparency in the human rights arena thereby satisfying various mandatory disclosure regimes and shareholder requests. Part V will pose questions that board members should ask when considering adopting the technology and will recommend that governments, rating agencies, sustainable stock exchanges, and institutional investors provide incentives for companies to invest in the technology, when appropriate. Given the increasing widespread use of the technology by both state and non-state actors and the potential disruptive capabilities, we conclude that firms that do not explore blockchain’s impact risk obsolescence or increased regulation.
Things change so quickly in this space. Some of the information in the article is already outdated and some of the initiatives have expanded. To keep up, you may want to subscribe to newsletters such as Hunton, Andrews, Kurth's Blockchain Legal Resource. For more general information on blockchain, see my post from last year, where I list some of the videos that I watched to become literate on the topic. For additional resources, see here and here.
If you are interested specifically in government use cases, consider joining the Government Blockchain Association. On September 14th and 15th, the GBA is holding its Fall 2019 Symposium, “The Future of Money, Governance and the Law,” in Arlington, Virginia. Speakers will include a chief economist from the World Bank and banking, political, legal, regulatory, defense, intelligence, and law enforcement professionals from around the world. This event is sponsored by the George Mason University Schar School of Policy and Government, Criminal Investigations and Network Analysis (CINA) Center, and the Government Blockchain Association (GBA). Organizers expect over 300 government, industry and academic leaders on the Arlington Campus of George Mason University, either in person or virtually. To find out more about the event go to: http://bit.ly/FoMGL-914.
Blockchain is complex and it's easy to get overwhelmed. It's not the answer to everything, but I will continue my focus on the compliance, governance, and human rights implications, particularly for Dodd-Frank and EU conflict minerals due diligence and disclosure. As lawyers, judges, and law students, we need to educate ourselves so that we can provide solid advice to legislators and business people who can easily make things worse by, for example, drafting laws that do not make sense and developing smart contracts with so many loopholes that they cause jurisdictional and enforcement nightmares.
Notwithstanding the controversy surrounding blockchain, I'm particularly proud of this article and would not have been able to do it without my co-author, Rachel, my fantastic research assistants Jordan Suarez, Natalia Jaramillo, and Lauren Miller from the University of Miami School of Law, and the student editors at the Tennessee Journal of Business Law. If you have questions or please post them below or reach out to me at email@example.com.
September 7, 2019 in Compliance, Conferences, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Reviews, Lawyering, Legislation, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)
Tuesday, August 27, 2019
Back in April, I posted on a leadership conference focusing on lawyers and legal education, sponsored by and held at UT Law. I also posted earlier this summer on the second annual Women's Leadership in Legal Academia conference. I admit that I have developed a passion for leadership literature and practices through my prior leadership training and experiences in law practice and in the legal academy.
Because lawyers often become leaders in and through their practice (both at work and their other communities) and because leadership principles interact with firm governance, I want to make a pitch that we all, but especially all of us teaching business associations (or a similar course), focus some attention on leadership in our teaching. It is a nice adjunct to governance. For example, management and control issues, especially director/officer processes in corporations, are a logical place to discuss leadership. Who are the managers and the rank-and-file employees inspired by in managing and sustaining the firm? Who is able to persuade the board to take action? Is it because of that person's authority, or does that person hold a trust relationship with others that motivates them to follow? And speaking of trust, it is an element of both leadership and fiduciary duty . . . .
As you consider my teaching suggestion, I offer you my latest blog post on our Leading as Lawyers blog. It involves the importance of process to effective leadership. The bottom line?
One can have a promising vision and strategy that emanate from the best of all intentions and ideas. But without engaging a process that includes effectual communication and input from, candid interchanges with, expressions of appreciation for, and buy-in from the relevant affected populations, those worthy intentions may be misinterpreted and those good ideas may die on the vine or not be implemented effectively.
We have all seen this happen in business governance. Let's let our students in on the role that leadership plays in the practical application of business law. It is bound to inform both their law practice and their lives.
Monday, July 29, 2019
For last year's Business Law Prof Blog symposium at UT Law, I spoke on issues relating to the representation of business firms classified or classifiable as social enterprises. Last September, I wrote a bit about my presentation here. The resulting essay, Lawyering for Social Enterprise, was recently posted to SSRN. The SSRN abstract follows.
Social enterprise and the related concepts of social entrepreneurship and impact investing are neither well defined nor well understood. As a result, entrepreneurs, investors, intermediaries, and agents, as well as their respective advisors, may be operating under different impressions or assumptions about what social enterprise is and have different ideas about how to best build and manage a sustainable social enterprise business. Moreover, the law governing social enterprises also is unclear and unpredictable in respects. This essay identifies two principal areas of uncertainty and demonstrates their capacity to generate lawyering challenges and related transaction costs around both entity formation and ongoing internal governance questions in social enterprises. Core to the professionalism issues are the professional responsibilities implicated in an attorney’s representation of social enterprise businesses.
To illuminate legal and professional responsibility issues relevant to representing social enterprises, this essay proceeds in four parts. First, using as its touchstone a publicly available categorization system, the essay defines and describes types of social enterprises, outlining three distinct business models. Then, in its following two parts, the essay focuses in on two different aspects of the legal representation of social enterprise businesses: choice of entity and management decision making. Finally, reflecting on these two aspects of representing social enterprises, the essay concludes with some general observations about lawyering in this specialized business context, emphasizing the importance of: a sensitivity to the various business models and related facts; knowledge of a complex and novel set of laws; well-practiced, contextual legal reasoning skills; and judgment borne of a deep understanding of the nature of social enterprise and of clients and their representatives working in that space.
I hope that this essay is relatable and valuable to both academics and practicing lawyers. Feedback is welcomed. So are comments.
Also, I will no doubt be talking more about aspects of this topic at a SEALS discussion group later this week entitled "Benefit Corporation (or Not)? Establishing and Maintaining Social Impact Business Firms," which I proposed for inclusion in this year's conference and for which I will serve as a moderator. The description of the discussion group is as follows:
As the benefit corporation form nears the end of its first decade of "life" as a legally recognized form of business association, it seems important to reflect on whether it has fulfilled its promise as a matter of legislative intent and public responsibility and service. This discussion group is designed to take on the challenge of engaging in that reflective process. The participating scholars include doctrinal and clinical faculty members who both favor and tend to recommend the benefit corporation form for social enterprises and those who disfavor or hesitate to recommend it.
As you can see from the SEALS program for the meeting, the participants represent both academics (doctrinal and clinical) and practitioners who care about social enterprise and entity formation. If you are at SEALS, please come and join us!
Friday, July 26, 2019
I'm at the tail end of teaching my summer transactional lawyering course. Throughout the semester, I've focused my students on the importance of representations, warranties, covenants, conditions, materiality, and knowledge qualifiers. Today I came across an article from Practical Law Company that discussed the use of #MeToo representations in mergers and acquisitions agreements, and I plan to use it as a teaching tool next semester. According to the article, which is behind a firewall so I can't link to it, thirty-nine public merger agreements this year have had such clauses. This doesn't surprise me. Last year I spoke on a webinar regarding #MeToo and touched on the the corporate governance implications and the rise of these so-called "Harvey Weinstein" clauses.
Generally, according to Practical Law Company, target companies in these agreements represent that: 1) no allegations of sexual harassment or sexual misconduct have been made against a group or class of employees at certain seniority levels; 2) no allegations have been made against independent contractors; and 3) the company has not entered into any settlement agreements related to these kinds of allegations. The target would list exceptions on a disclosure schedule, presumably redacting the name of the accuser to preserve privacy. These agreements often have a look back, typically between two and five years with five years being the most common. Interestingly, some agreements include a material adverse effect clause, which favor the target.
Here's an example of a representation related to "Labor Matters" from the June 9, 2019 agreement between Salesforce.com, Inc. and Tableau Software, Inc.
b) The Company and each Company Subsidiary are and have been since January 1, 2016 in compliance with all applicable Law respecting labor, employment, immigration, fair employment practices, terms and conditions of employment, workers' compensation, occupational safety, plant closings, mass layoffs, worker classification, sexual harassment, discrimination, exempt and non-exempt status, compensation and benefits, wages and hours and the Worker Adjustment and Retraining Notification Act of 1988, as amended, except where such non-compliance has not had, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.
c) To the Company's Knowledge, in the last five (5) years, (i) no allegations of sexual harassment have been made against any employee at the level of Vice President or above, and (ii) neither the Company nor any of the Company Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or misconduct by any employee at the level of Vice President or above.
The agreement has the following relevant definitions:
"Knowledge" will be deemed to be, as the case may be, the actual knowledge of (a) the individuals set forth on Section 1.1(a) of the Parent Disclosure Letter with respect to Parent or Purchaser or (b) the individuals set forth on Section 1.1(a) of the Company Disclosure Letter with respect to the Company, in each case after reasonable inquiry of those employees of such Party and its Subsidiaries who would reasonably be expected to have actual knowledge of the matter in question.
Even though I like the idea of these reps. in theory, I have some concerns. First, I hate to be nitpicky, but after two decades of practicing employment law on the defense side, I have some questions. What's the definition of "sexual misconduct"? What happens of the company handbook or policies do not define "sexual misconduct"? The Salesforce.com agreement did not define it. So how does the target know what to disclose? Next, how should an agreement define "sexual harassment"? What if the allegation would not pass muster under Title VII or even under a more flexible, more generous definition in an employee handbook? When I was in house and drafting policies, a lot of crude behavior could be "harassment" even if it wouldn't survive the pleading requirements for a motion to dismiss. Does a company have to disclose an allegation of harassment that's not legally cognizable? And what about the definition of "allegation"? The Salesforce.com agreement did not define this either. Is it an allegation that has been reported through proper channels? Does the target have to go back to all of the executives' current and former managers and HR personnel as a part of due diligence to make sure there were no allegations that were not investigated or reported through proper channels? What if there were rumors? What if there was a conclusively false allegation (it's rare, but I've seen it)? What if the allegation could not be proved through a thorough, best in class investigation? How does the target disclose that without impugning the reputation of the accused?
Second, I'm not sure why independent contractors would even be included in these representations because they're not the employees of the company. If an independent contractor harassed one of the target's employees, that independent contractor shouldn't even be an issue in a representation because s/he should not be on the premises. Moreover, the contractor, and not the target company, should be paying any settlement. I acknowledge that a company is responsible for protecting its employees from harassment, including from contractors and vendors. But a company that pays the settlement should ensure that the harasser/contractor can't come near the worksite or employees ever again. If that's the case, why the need for a representation about the contractors? Third, companies often settle for nuisance value or to avoid the cost of litigation even when the investigation results are inconclusive or sometimes before an investigation has ended. How does the company explain that in due diligence? How much detail does the target disclose? Finally, what happens if the company legally destroyed documents as part of an established and enforced document retention and destruction process? Does that excuse disclosure even if someone might have a vague memory of some unfounded allegation five years ago?
But maybe I protest too much. Given the definition of "knowledge" above, in-house and outside counsel for target companies will have to ask a lot more and a lot tougher questions. On the other hand, given the lack of clarity around some of the key terms such as "allegations," "harassment," and "misconduct," I expect there to be some litigation around these #MeToo representations in the future. I'll see if my Fall students can do a better job of crafting definitions than the BigLaw counsel did.
July 26, 2019 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Law School, Lawyering, Litigation, M&A, Management, Marcia Narine Weldon, Teaching | Permalink | Comments (0)
Monday, June 3, 2019
At the 2019 Law and Society Association Annual Meeting last week, Geeyoung Min presented her paper Governance by Dividends. In the paper, she focuses attention on stock dividends. Near the end of her presentation, Geeyoung trod over ground on which so many of us also have trod--relating to judicial standards of review in fiduciary duty actions. As familiar as the story was, she helped me to see something I had not seen before. Perhaps many of you already have identified this. If so, I am sorry to bore you with my new insight.
Essentially, what I came to realize during her talk--and develop with her and members of the audience in the ensuing discussion--was that Delaware's judiciary may have (and I may be quoting Geeyoung or someone else who was there, since I wrote this down long-form in my contemporaneous notes) muddied the waters by seeking clarity. What do I mean by that? Well, by addressing relatively clearly the circumstances in which the business judgment rule, on the one hand, or entire fairness, on the other, govern the judicial review of corporate fiduciary duty allegations, the Delaware judiciary has effectively made the interstitial space between the two--intermediate tier scrutiny--less clear.
As I reflected a bit more, I realized that an analogy could be made to the development of the substantive law of corporate fiduciary duties in Delaware. The overall story? Judicial refinement of the fiduciary duties of care and loyalty has left the duty of good faith somewhat more indeterminate.
I am not sure where all this goes from here, but there may be lessons in these musings for both judicial and legislative rule-makers, among others. As always, your thoughts are welcomed.
Friday, May 10, 2019
Join me in Miami, June 26-28.
June 26-28, 2019
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May 10, 2019 in Compliance, Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Law School, Marcia Narine Weldon, White Collar Crime | Permalink | Comments (0)