Tuesday, June 21, 2022

More Commentary on the SEC's ESG Proposal - Sharfman and Copland

Courtesy of friend-of-the-BLPB Bernie Sharfman, I am linking to his coauthored (with James Copland) comment letter to the Securities and Exchange Commission (SEC) on the climate change rule-making proposal.  The letter includes copious footnotes.  As with other comment letters that have been written on the substance of the SEC proposal, there are some interesting definitional questions on which intelligent folks disagree.  E.g., what is included under the umbrella of investor protection?  What regulation promotes "efficiency, competition, and capital formation"?  These all are among the big picture issues on which the SEC has the opportunity to speak.  I expect thoughtful responses.

June 21, 2022 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Monday, June 20, 2022

So much to say today . . . .

NBLS2022(OULawPhoto)

Having just come back from the first in-person National Business Law Scholars Conference since 2019 (at The University of Oklahoma College of Law, pictured here), I have many thoughts swirling through my head.  I always love that conference.  The people, whom I dearly missed, are a big part of that. And Megan Wischmeier Shaner was an awesome planning committee host. But the ideas that were shared . . . .  Wow. So many great research projects were shared by these wonderful law teachers and scholars!  Over time, I hope to share many of them with you.  

But for today, I want to focus on one thing that I heard in a few presentations at the conference: that the shareholder wealth maximization norm is and always has been the be-all and end-all of corporate purpose and board decision making. I am posting on that topic today not only because of my engagement with the conference, but also because the issue is implicated in Ann's post on Saturday (Bathrooms are About Stakeholders) and by Stefan's post yesterday (ESG & Communism?). I want to focus on a part of Stefan's post (and Stefan, you may that issue with my remarks here, based on your response in the comments to your post), but I promise to work in a reference to Ann's post, too, along the way.

Like Paul, I am somewhat troubled by the connections made in abstract for the article featured in Stefan's post—albeit perhaps for different reasons. I will read the article itself at some point to learn more about the issues relating to the Fed. And I agree with Stefan's commentator Paul that the Elizabeth Warren reference in the abstract is a bit of a stalking horse. I want to address here, then, only the asserted corroboration of an “incipient trend” offered as an aside at the end of the abstract excerpted in Stefan's post.

As readers may know from my published work and commentary on the BLPB, I do not accept that there is a legal duty to maximize shareholder wealth embedded in corporate law. (Articles have pointed out that the shareholder wealth maximization mantra has not existed consistently over the course of corporate history, but I will leave commentary on that literature for another day.) Regardless, to be sustainable, a corporation must make profit that inures to the benefit of shareholders, while also understanding and being responsive to the corporation's other shareholder commitments—commitments that may vary from corporation to corporation. But that does not mean that the board must maximize shareholder wealth, especially in each and every board decision. (Let's leave Revlon duties aside, if you would, for these purposes.). It also does not mean that shareholder wealth is properly ignored in corporate decision making, but in my experience, few firms actually completely ignore short-term and long-term effects on shareholder wealth in making decisions.

In essence, the standard shareholder wealth maximization trope would have us believe that the board's task is too simple, as I have noted in some of my work. A compliant, functional board engaged in corporate decision making first needs to understand as well as it can the firm's business and the markets in which the firm operates and then needs to assess in that context how the corporation should proceed. Some of the board's decisions may require it taking a stand on what have (regrettably, imv) become highly politicized social justice and commercial issues. It involves weighing and balancing. It is hard work. But that is the board's job. The board may want to inform itself of which political party likes what (especially as it relates to its various constituencies), but the board's decisions ultimately need to be made in good faith on the basis of what, after being fully informed in all material respects, they collectively believe to be in the best interest of the corporation (including its shareholders).

Some folks seem to ignore that reality. Instead, they assume (in many cases without adequate articulated foundation) that a board is catering to or rejecting, e.g., ESG initiatives based on a political viewpoint. I have more faith in corporate boards than that. I urge people to check those assumptions before making them (and to leave their own political preferences behind in doing so). Although I have seen a few dysfunctional boards in my 37 years as a lawyer and law professor, I have seen many more that are looking out for the long-term sustainability of the firm for the financial and other benefit of shareholders. That does require that employee interests, customer/client interests, and the interest of other stakeholders be understood and incorporated into the board’s decision making. Ann seems to agree with this last point when she writes in her post that: "despite occasional rhetoric to the contrary, it may very well be profit-maximizing to bow to employee demands; it doesn’t mean the CEO is pursuing a personal political agenda, it simply means that restive employees make a company difficult to run."

In concluding, I do not see an “incipient trend” or any “diametric opposition” of the kind noted in the abstract posted by Stefan. I also see board (and overall corporate management) support for ESG—although I admittedly am not a fan of looking at all the E, S, and G together—as the probable acknowledgement of an economic or financial reality in or applicable to those firms. Economies and markets are changing, and firms that do not respond to those changes one way or another will not survive. And that will not inure to the benefit of shareholders or other corporate stakeholders. The Business Roundtable Statement on the Purpose of the Corporation acknowledges the importance of corporations in our local, national, and global economies and, in light of that, articulates management’s recognition of the need to create sustainable economic and financial symbiosis through the firm's decision making: “Each of our stakeholders is essential. We commit to deliver value to all of them, for the future success of our companies, our communities and our country.”

As scholars, we should recognize the realities of the boardroom and of firm management in general, which optimally involve complex, individualized decision-making matrices. Moreover, as we theorize about, and assess the policy objectives of, the laws we study and on which we comment, we should keep those realities in mind. Rather than assuming why boards (and C-suite officers, for that matter) act the way they do based on our theoretical and political viewpoints, we should interrogate their management decisions thoroughly, understanding and critiquing the actual bases for those decisions and, when possible, suggesting a "better way."

Thanks to the National Business Law Scholars Conference participants for their stimulating presentations and to Ann and Stefan for their posts. I hope that this post serves to illuminate my perspective on shareholder wealth maximization a bit. The conversation is important, even if a common understanding may not be forthcoming.

June 20, 2022 in Ann Lipton, Conferences, Corporate Governance, Corporations, Joan Heminway, Management, Stefan J. Padfield | Permalink | Comments (4)

Friday, June 10, 2022

Why Transactional Lawyers Need to Educate Themselves on Compliance

Prior to joining academia, I served as a compliance officer for a Fortune 500 company and I continue to consult on compliance matters today. It's an ever changing field, which is why I'm glad so many students take my Compliance, Corporate Governance, and Sustainability course in the Fall. I tell them that if they do transactional or commercial litigation work, compliance issues will inevitably arise. Here are some examples: 

  • In M&A deals, someone must look at the target's  bribery, money laundering, privacy, employment law, environmental, and other risks
  • Companies have to complete several disclosures. How do you navigate the rules that conflict or overlap?
  • What do institutional investors really care about? What's material when it relates to ESG issues?
  • What training does the board need to ensure that they meet their fiduciary duties?
  • How do you deal with cyberattacks and what are the legal and ethical issues related to paying ransomware?
  • How do geopolitical factors affect the compliance program?
  • Who can be liable for a compliance failure?
  • What happens when people cut corners in a supply chain and how can that affect the company's legal risk?
  • What does a Biden DOJ/SEC mean compared to the same offices under Trump?
  • Who is your client when representing an organization with compliance failures?
  • and so much more

I'm thrilled to be closing out the PLI Compliance and Ethics Essentials conference in New York with my co-panelist Ben Gruenstein of Cravath, Swaine, & Moore. It's no fun being the last set of presenters, but we do have the ethics credits, so please join us either in person or online on June 28th. Our areas of focus include:

  • Risk assessment, program assessment, and attorney-client privilege
  • Ethical obligations for lawyers and compliance officers
  • Which compliance program communications can (and should) be privileged?

In addition to discussing the assigned issues, I also plan to arm the compliance officers with more information about the recent trend(?) of Caremark cases getting past the motion to dismiss stage and compliance lessons learned from the Elon Musk/Twitter/Tesla saga. 

Here's the description of the conference, but again, even if you're not in compliance, you'll be a better transactional lawyer from learning this area of the law. 

Compliance and ethics programs are critically important to the success of any organization. Effective programs allow organizations to identify and mitigate legal risks. With an increasingly tough enforcement environment, and greater demands for transparency and accountability, an effective compliance program is no longer just “nice-to-have.” It’s essential. 

Whether you are new to the area or a seasoned compliance professional, PLI’s program will give you the tools you need to improve your organization’s compliance program.  We will review the principal elements of compliance programs and discuss best practices and recent developments for each.  Our distinguished faculty, drawn from major corporations, academia, law firms and the government, can help you improve your program, increase employee awareness and decrease legal risk.  Compliance and Ethics Essentials 2022 is highly interactive and includes case studies, practical tools and real-time benchmarking.

What You Will Learn 

  • Designing and conducting effective compliance risk assessments that enhance your program
  • Structuring your program for appropriate independence and authority
  • The evolving role of the board
  • ESG and your compliance program
  • Using data analytics to improve your program
  • Encouraging reporting and investigating allegations of wrongdoing
  • Best practices in compliance codes, communications, training and tools
  • Ethics for compliance professionals

Who Should Attend

If you are involved in any aspect of corporate compliance and ethics as in-house counsel, a compliance and ethics officer, human resources executive, outside counsel, or risk management consultant, this event should be on your annual calendar.

Special Feature: Special luncheon presentation with guest speaker

If you do come to the conference, I would love to grab a cup of coffee with you, so reach out.

June 10, 2022 in Compliance, Conferences, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Lawyering, Legislation, M&A, Marcia Narine Weldon | Permalink | Comments (0)

Friday, May 20, 2022

What Do FIFA, Nike, and PornHub Have In Common?

It's a lovely Friday night for grading papers for my Business and Human Rights course where we focused on ESG, the Sustainable Development Goals (SDGs), and the UN Guiding Principles on Business and Human Rights. My students met with in-house counsel, academics, and a consultant to institutional investors; held mock board meetings; heard directly from people who influenced the official drafts of EU's mandatory human rights and environmental due diligence directive  and the ABA's Model Contract Clauses for Human Rights; and conducted simulations (including acting as former Congolese rebels and staffers for Mitch McConnell during a conflict minerals exercise). Although I don't expect them all to specialize in this area of the law, I'm thrilled that they took the course so seriously, especially now with the Biden Administration rewriting its National Action Plan on Responsible Business Conduct with public comments due at the end of this month.

The papers at the top of my stack right now:

  1. Apple: The Latest Iphone's Camera Fails to Zoom Into the Company's Labor Exploitation
  2. TikTok Knows More About Your Child Than You Do: TikTok’s Violations of Children’s Human Right to Privacy in their Data and Personal Information
  3. Redraft of the Nestle v. Doe Supreme Court opinion
  4. Pornhub or Torthub? When “Commitment to Trust and Safety” Equals Safeguarding of Human Rights: A Case Study of Pornhub Through The Lens of Felites v. MindGeek 
  5. Principle Violations and Normative Breaches: the Dakota Access Pipeline - Human rights implications beyond the land and beyond the State
  6. FIFA’s Human Rights Commitments and Controversies: The Ugly Side of the Beautiful Game
  7. The Duty to Respect: An Analysis of Business, Climate Change, and Human Rights
  8. Just Wash It: How Nike uses woke-washing to cover up its workplace abuses
  9. Colombia’s armed conflict, business, and human rights
  10. Artificial Intelligence & Human Rights Implications: The Project Maven in the ‘Business of war.’
  11. A Human Rights Approach to “With Great Power Comes Great Responsibility”: Corporate Accountability and Regulation
  12. Don’t Talk to Strangers” and Other Antiquated Childhood Rules Because The Proverbial Stranger Now Lives in Your Phone
  13. Case studies on SnapChat, Nestle Bottling Company, Lush Cosmetics, YouTube Kidfluencers, and others 

Business and human rights touches more areas than most people expect including fast fashion, megasporting events, due diligence disclosures,  climate change and just transitions, AI and surveillance, infrastructure and project finance, the use of slave labor in supply chains, and socially responsible investing. If you're interested in learning more, check out the Business and Human Rights Resources Center, which tracks 10,000 companies around the world. 

May 20, 2022 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Business, International Law, Marcia Narine Weldon, Securities Regulation, Teaching | Permalink | Comments (0)

Saturday, April 23, 2022

Elon Musk is a Blessing and a Curse

I'm doing what may seem crazy to some- teaching Business Associations to 1Ls. I have a group of 65 motivated students who have an interest in business and voluntarily chose to take the hardest possible elective with one of the hardest possible professors. But wait, there's more. I'm cramming a 4-credit class into 3 credits. These students, some of whom are  learning the rule against perpetuities in Property and the battle of the forms in Contracts while learning the business judgment rule, are clearly masochists. 

If you're a professor or a student, you're coming close to the end of the semester and you're trying to cram everything in. Enter Elon Musk. 

I told them to just skim Basic v. Levenson and instead we used Rasella v. Musk, the case brought by investors claiming fraud on the market. Coincidentally, my students were already reading In Re Tesla Motors, Inc. Stockholder Litigation because it was in their textbook to illustrate the concept of a controlling shareholder. Elon's pursuit of Twitter allowed me to use that company's 2022 proxy statement and ask them why Twitter would choose to be "for" a proposal to declassify its board, given all that's going on. Perhaps that vote will be moot by the time the shareholder's meeting happens at the end of May. The Twitter 8-K provides a great illustration of the real-time filings that need to take place under the securities laws, in this case due to the implementation of a poison pill. Elon's Love Me Tender tweet provides a fun way to take about tender offers. How will the Twitter board fulfill it's Revlon duties? So much to discuss and so little time. But the shenanigans have made teaching and learning about these issues more fun. And who knew so many of my students held Twitter and Tesla stock?

I've used the Musk saga for my business and human rights class too. I had attended the Emerge Americas conference earlier in the week and Alex Ohanian, billionaire founder of Reddit, venture capitalist, and Serena Williams' husband, had to walk a fine line when answering questions about Musk from the CNBC reporter. The line that stuck out to me was his admonition that running a social media company is like being a head of state with the level of responsibility. I decided to bring this up on the last day of my business and human rights class because I was doing an overview of what we had learned during the semester. As I turned to my slide about the role of tech companies in society, we ended up in a 30 minute debate in class about what Musk's potential ownership of Twitter could mean for democracy and human rights around the world. Interestingly, the class seemed almost evenly split in their views. While my business associations students are looking at the issue in a more straightforward manner as a vehicle to learn about key concepts (with some asking for investment advice as well, which I refused), my business and human rights students had a much more visceral reaction. 

Elon is a gift that keeps on giving for professors. He's a blessing because he's bringing concepts to life at a time in the semester where we are all mentally and physically exhausted. Depending on who you talk to in my BHR class and in some quarters of the media, he's also a curse.

All I know is that I don't know how I'll top this semester for real-world, just-in-time application.

Thanks, Elon.

Signed,

A tired but newly energized professor who plans to assign Ann Lipton's excellent Musk tweets as homework. 

 

 

 

 

 

April 23, 2022 in Corporate Governance, Corporate Personality, Corporations, Current Affairs, Financial Markets, Law School, Management, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Monday, April 4, 2022

Business Associations & Relationships on the Future Bar Exam: A Virtual Symposium (Part V)

It's been one week since I announced and started posting in this virtual symposium on the NextGen Bar Exam. Thanks to Josh, Ben, and John for joining me in commenting on the proposed content scope outline relating to Business Associations and Relationships.  You can find their posts here, here, and here, respectively. 

We have raised issues about terminology.  And there are a few areas that are lacking in clarity or specificity.  In addition, two important overarching points have emerged to date in our posts.  One is that it is important to indicate the source of the law being tested, since the default rules operative in various areas of LLC and corporate law are not the same in the dominant national statutory frameworks.  (I offer another example of how this may matter in the discussion of corporate director and officer fiduciary duties, below.)  The other is that the default rules in business associations law tell only part of the story.   Constitutional issues, authorized private ordering, and decisional law that both supplements and interprets state legislative enactments can all play roles.

In this post, I offer a few more points that illustrate or add to these observations.

Partnership Nomenclature

The outline notes that distinctions between or among partnerships (denominated "general partnerships" in the outline), limited liability partnerships, and limited partnerships will be tested.  That seems appropriate.  But the next few prompt all refer to "general partners."  Neither partnerships nor limited liability partnerships have general partners.  They just have partners.  Only limited partnerships distinguish general partners from limited partners.

Partnership Governance

Only the duty of loyalty between and among partners and the partnership is proposed to be tested as a matter of partnership fiduciary duties.  Why not care?  And what about the obligation of good faith and fair dealing?  These governance rules are all equally important.  And duties of care and loyalty exist in agency law, unincorporated business associations law, and corporate law.

Moreover, the outline notes under "Duty of loyalty": "This topic includes the consequences of a partner acting outside the scope of the partner’s authority to bind the partnership."  This annotation is perplexing to me.  I have two principal substantive comments about it.

First, a partner's authority to bind the partnership is a matter of agency authority--the authority to transact with third parties.  A partner's fiduciary duties are a matter of internal governance (as the relevant outline topic, "Rights of . . . partners among themselves" indicates).  Two separate parts of the Revised Uniform Partnership Act (the "RUPA") address relations with third parties and internal governance--Articles 3 and 4, respectively.  So, the annotation introduces an apples-and-oranges problem--the illumination of an internal governance rule by reference to a third-party relations rule.

Second, the duty of loyalty of partners in a RUPA partnership is relatively specific.  It consists of three exclusive components: 

(1) to account to the partnership and hold as trustee for it any property, profit, or benefit derived by the partner in the conduct and winding up of the partnership business or derived from a use by the partner of partnership property, including the appropriation of a partnership opportunity;

(2) to refrain from dealing with the partnership in the conduct or winding up of the partnership business as or on behalf of a party having an interest adverse to the partnership; and

(3) to refrain from competing with the partnership in the conduct of the partnership business before the dissolution of the partnership.

It is hard for me to see how a partner acting outside of their agency authority would implicate any of the three components of the duty of loyalty.  That conduct does not, of itself, result in the partner: deriving or taking any property, profit, or benefit of or belonging to the partnership; having conflicting interests, or competing with the partnership.

Corporations and LLCs, Generally

I agree with John that LLCs and corporations should each have their own category.  The doctrinal rules (structure, governance, and finance) are simply too different.  The general categories under each (and under partnerships, for that matter)--formation, management and control, fiduciary duties, agency, third-party liability, etc.--can be almost exactly the same.   Topics like veil piercing, pre-organizational contracting, and shareholder/member litigation that apply to both corporations and LLCs in similar ways can be noted in the outline for each with a cross-reference to the other or can be called out separately in the outline (with any unique corporate or LLC nuances addressed in that broader context).

Corporate Director (and Officer) Fiduciary Duties

While Josh and Ben have focused some pointed and valuable comments on jurisdictional differences in limited liability company fiduciary duties (comments that I endorse), I am at least as troubled by jurisdictional differences in corporate fiduciary duties.  I have written in the past in this space (here, here, and here) about the challenges in teaching corporate fiduciary duty law.  Delaware's classification of Caremark oversight duties as good faith questions actionable as breaches of the duty of loyalty runs counter to decisional law in other jurisdictions that characterizes oversight failures as breaches of the duty of care.  In sum, the relative narrowness of the fiduciary duty of care in Delaware, the capaciousness of Delaware's duty of loyalty, and the Delaware judiciary's reinterpretation of a director's obligation of good faith as a component of the duty of loyalty distinguish the law of director fiduciary duties in Delaware from the law of fiduciary duties elsewhere. 

Generally

Like others, I have doubts about the fairness and efficacy of bar exams as meaningful gatekeepers for the profession.  But I assume good faith in constructing the NextGen Bar Exam.  With that in mind, any bar exam should assess the law that licensed practitioners should know.  And it should use normative terms in signaling the law to be tested and recognize the use of normative terms in evaluating performance.  In this regard, it is important to note that there are parallel types of legal rules in agency, unincorporated business associations law, and corporate law.  There are recognized, well-worn labels for describing these component legal rules in agency and business associations law.  Why reinvent the wheel?  If parallel legal doctrine from business associations and relationships laws is to be tested, the content scope outline should use the acknowledged customary descriptors for those rules.

These comments round out my thoughts on the "Business Associations and Relationships" portion of the proposed Content Scope Outlines for the NextGen Bar Exam of the Future.  I welcome additional posts and any responses here on the BLPB, and as I noted in my initial post, comments can be filed with the National Conference of Bar Examiners hereThe comment period closes on April 18, 2022. 

April 4, 2022 in Business Associations, Corporations, Joan Heminway, LLCs, Partnership | Permalink | Comments (0)

Business Associations & Relationships on the Future Bar Exam: A Virtual Symposium (Part IV) - Guest Post from John Rice

The following symposium post comes to us from John Rice at Duquesne Law.

*     *     *

I’m pleased to add my voice among those commenting as part of this virtual symposium on the recently-released Content Scope Outline for the “Business Associations & Relationships” for the NextGen Bar Exam. Despite my general skepticism of the efficacy of any bar examination, I tend to view the draft outlines as an improvement above the current exam outline. I join with my colleagues Joan, Joshua, and Benjamin in stressing how imperative it is that the NCBE specify the specific sources of law from which these topics are drawn.

In terms of substance, I favor separating LLCs into their own category rather than merely being a sub-set of corporation law. Additionally, the business litigator in me feels compelled to note that the draft outline’s description of “Shareholder and member litigation: direct and derivative litigation” is underdeveloped. I want my students to recognize litigation as a form of shareholder control over the corporation and to evaluate the standing prerequisites and demand requirement. Likewise, I would prefer more attention be paid to the specific remedies available in business disputes, including declaratory judgment, injunctive relief, and the appointment of receivers and custodians.

In this post, however, I wish to briefly move our conversation of the “Business Associations & Relationships” coverage to consider the “Foundational Skill and Associated Lawyering Task” of legal research. The NCBE has identified two “skills” under the umbrella of legal research: First, the ability to engage in statutory interpretation, and second, legal issue spotting in a “client file.” In doing so, the NCBE under-comprehends the skills associated with legal research and overlooks what I consider to be one of the most fundamental legal research skills, and that skill is one particularly well-situated to be tested in the context of business law; that is, synthesis of separate legal authorities into one analysis.

Of all the subjects identified to be tested on the NextGen Bar Exam, Business Associations is the only subject that would require a test candidate to consider the interplay of separate legal authorities: the constitutional delegations of authority, the default rules created by the applicable statutory scheme, the private ordering agreed to by contract between the parties, the case law from the jurisdiction interpreting the statute and contract, and the underlying principles of equity and fairness. For example, a question about fiduciary duty in the context of a Delaware corporation would require a candidate to draw from multiple sources of law: the line of case law recognizing the existence of fiduciary duty; the statutory limits that may be impose on fiduciary duty by the chartering documents and bylaws; and the contractual limits actually agreed to by the parties.

Joshua implicitly recognized this opportunity in his post when he discussed the significance of looking to corporate documents to understand the applicable rules for quorum. But this sort of analysis should be the goal of the bar examination’s testing of the law of business associations—not merely an incidental consequence. A minimally competent attorney—whatever that may mean—should be able to articulate the legal research and factual investigation they would need to undertake to answer a question.

In my view, the NCBE would be wise to revise the content outlines to account for how candidates may evaluate different sources of applicable law in light of one another, and to express what information—legal and factual—they would to engage in a complete analysis of the questions presented.

April 4, 2022 in Business Associations, Corporations, Joan Heminway, LLCs | Permalink | Comments (0)

Friday, April 1, 2022

Call for Submissions: William & Mary Business Law Review, Volume 14 (2022-2023)

Volume 14 of the William & Mary Business Law Review is currently accepting submissions for publication in 2022 and 2023. The Journal aims to publish cutting-edge legal scholarship and contribute to significant and exciting debates within the business community. Submissions for consideration can be sent via Scholastica, or if need be, via email to wm.blr.articlesubmission@gmail.com.

April 1, 2022 in Business Associations, Corporations, John Anderson | Permalink | Comments (0)

Wednesday, March 30, 2022

Business Associations & Relationships on the Future Bar Exam: A Virtual Symposium (Part II)

Thanks to Joan Heminway for kicking off our virtual symposium, here, where some of us will take a look at the recently released National Conference of Bar Examiners (NCBE) content summaries of the material planned for future bar exams in the Content Scope Outlines .  These comments relate to the "Business Associations & Relationships” portion. 

As a general matter, I have been growing increasingly skeptical of the bar exam and its role and purpose for the profession.  I very much believe we need to facilitate a process to help ensure clients are served by competent lawyers who have the skills necessary to serve clients.  However, I am more and more convinced that bar exam does an incomplete job of testing readiness for practice, potentially ingrains some bad practices, and continues to inappropriately limit access to the profession for women and minorities. Those issues, though, are for another time.   

Following are my initial thoughts on the Business Associations and Relationships portion of the Outlines:

In the area of “Partnerships,” under “Nature of general partnerships” and “Formation, the outline states: “This topic includes the de facto treatment of improperly created incorporated entities as general partnerships.”  Here, in place of “incorporated entities” I would recommend replacing it with “corporations” or “limited liability entities.”  If they intend to limit the review to corporations, which would not be surprising given the way the “de facto corporation doctrine” is often taught, then say that. If it means improperly formed limited liability entities (intending to include LLCs, LPs or LLPs) then say that.  An “incorporated entity” is necessarily a corporation.

For the section on “Corporations and Limited Liability Companies,” I agree with Joan that the corporation concept of “articles of incorporation” is too narrow, unless they intend to pick a state or model law that uses that phrase (and if so, please tell us!).  Adding “formation document” or “creation document” could work, though most casebooks include something “charter or articles or certificate of incorporation.” 

For LLCs, I think it should say “Operating or member agreements” (not members, though maybe “members’ agreements”). 

Items “IX. Piercing the Corporate Veil” should say, “Piercing the Entity Veil” given that this section does not say whether it’s just corporations (the general section is corporations and LLCs).  A literal reading of this would suggest they only intend to test it as to corporations, but given the way courts and other commentators treat this concept, such an assumption would be (unfortunately) flawed. There is an “asterisk” by this area, which means exam takers will be expected” to know the details of the relevant doctrine without consulting legal resources.”  Here, too, it would be important to know the jurisdiction because veil piercing law is not uniform state to state, and this is even more true of LLCs than it is of corporations. The basics are similar, but states vary.  Texas, for example, requires “actual fraud” for contract-type veil piecing claims.  And veil piercing is different for LLCs, too. Compare, for example, Minnesota law and the ULLCA. 

Under “management and control” of corporations, I don’t love that they test quorum, because it’s my understanding that, in years past, they have tested on some default rules of quorum (though I have not been able to verify that). Quorum should always be checked by looking at the articles/certificate/charter and bylaws AND buy checking the state statute to make sure that the chosen path is permissible under the statute.  There is no “asterisk” by this area, which means exam takers should “have generality familiarity with the topics.” So, it’s possible the bar examiners are approaching this by testing quorum where they would provide the relevant statute and or corporate documents (or specifics would not matter for the call of the question).  If so, great, but I think it’s worth raising to ensure that’s the case.

Finally, fiduciary duties may be tested for corporations and LLC.  These, too, are general, so hopefully exam takers will be able to respond with general knowledge and supplemental information in the exam. Given the divergent nature of Delaware LLC law in this area, it would seem worthwhile to give some guidance as to the source of law, exam takers should be using in their responses.  I will, again, second Joan’s point: “I favor letting examinees know which sets of rules and norms apply to their exam responses.”

 

March 30, 2022 in Business Associations, Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (2)

Friday, March 25, 2022

Post-pandemic evolution, change management, and the role of in-house counsel

Join me in sunny Miami on April 26 for this in-person conference featuring outside counsel, inhouse practitioners, and academics. 

Panel topics include:

Change Management: The Legal Department of the Future -  More and more, in-house legal departments are employing new hybrid and remote work models, incorporating artificial intelligence and technology in their workflows, and restructuring and absorbing new teams after mergers, acquisitions, and divestitures. This panel discussion will focus on how the in-house legal department can be a champion in leading successful developmental and transformational change by implementing change management best practices to be effective and efficient, remaining client-focused, and being a trusted business advisor.

Remote Work:  Accelerated Adoption and Related Challenges - Which option would you choose: on-site, hybrid, or virtual? We will discuss the pros and cons of remote work arrangements, including the challenges of implementing a remote work policy in Latin America where the legal framework is a complex patchwork of requirements, as well as the strategies for creating culture and building a team in a remote work environment.

Counseling the Board of Directors (the panel I'm on)-  This panel will focus on issues that arise when counseling the board of directors and address important topics, including governance, ethics, fiduciary duties, director liability, best practices (diversity and environmental, social, and governance (ESG)), privileged insurance, and D&O insurance all in the context of private and public companies operating in the United States and Latin America.

Supply Chain: Challenges and Opportunities- Lessons learned from recent disruptions in global supply chains will shape crossborder business in the coming years. Our panel will discuss short- and long-term challenges and opportunities in supply chain management and logistics, as well as practical strategies for using technology, contractual protections, and risk-transfer solutions to overcome future supply-chain challenges.

What Is Your Company’s ESG Score? This panel will discuss the origins of climate change management, sustainability and how to operationalize it at your company, as well as how to transition to a low-carbon economy— including standards and disclosures. Panelists will also discuss the importance of implementing mechanisms to adopt a company’s ESG score as an ethical obligation to company commitments and as a governance imperative.

Click here to register.

If you make it down to Miami, I promise to buy you a mojito or cafecito. And don't worry, hurricane season doesn't start until June. 

 

March 25, 2022 in Compliance, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, International Business, Law Firms, Lawyering, Marcia Narine Weldon | Permalink | Comments (0)

Tuesday, March 22, 2022

Guttentag's Response to My Post Concerning His Article on Insider Trading as Wasteful Competition

The following comes to us from Professor Mike Guttentag in response to my recent post on his excellent and thought-provoking new article, Avoiding Wasteful Competition: Why Trading on Inside Information Should be Illegal. This is a worhy discussion I look forward to continuing--and I hope others will engage in the comments below. Now, here is Professor Guttentag's response:

As always, I am honored and impressed by the seriousness and respect with which Professor Anderson approaches my work.  I would, however, take exception to the reasons he offers for rejecting my conclusions.

The debate about insider trading over the past five decades has suffered from limited evidence of either benefits or harms. Those who have objected to a strict insider trading prohibition have reasonably asked: what evidence is there that the harms of insider trading justify a broad prohibition?

In my article I believe I have answered that challenge.  First, I explain why there is a significant mismatch between private gains and social gains when trading on inside information. This mismatch arises both because of how inside information is produced (largely as a byproduct of other activities) and how trading on this information generates profits (at the expense of others). I next show how this mismatch between private gains and social gains (perhaps the defining economic feature of insider trading) leads to an unusual problem: the problem of too much or wasteful competition. This is not just a theoretical concern. I offer concrete estimates of the magnitude of the costs of this wasteful competition problem. One very conservative estimate puts the costs of wasteful competition in United States equity markets in the range of tens of billions of dollars a year. The logic is compelling, and the amounts involved substantial: insider trading is a socially wasteful activity that should be outlawed. 

The time has now come for those who would do less than outlaw all trading when in possession of inside information to provide either equally compelling evidence of the benefits of an alternative regime or an explanation as to why my calculations are flawed. I do not believe that Anderson’s critiques meet either of these challenges.  

I will go through Anderson’s critiques one by one. The first concern Anderson raises is that he believes my argument hinges on the claim that all inside information is produced as a byproduct of other activities. Anderson has read my argument as relying on a stronger claim than I think it needs to rely on. I do not aim to refute the vast body of work by the likes of Henry Manne and many, many others on the various costs and benefits of insider trading. These lists of the potential costs and benefits established over the past decades are largely correct. However, there are two problems with these lists. First, these lists have consistently failed to realize the magnitude and importance of the wasteful competition problem created by insider trading (I have addressed the reasons for this oversight elsewhere, Law and Surplus: Opportunities Missed). Second, once the costs of wasteful competition are included in the calculus the appropriate starting point shifts. Given how significant the wasteful competition problem is, we need more than just a list of plausible but hard-to-quantify costs and benefits to rebut the presumption that all trading when in possession of inside information should be outlawed. That is the extent of my claim.

The second point that Anderson raises in his comments is that he does not think I have carried out an adequate “comparative institutional approach to market failure.” In fact, I think I do a fair job in the article of addressing this question, and show, for example, why private ordering is not an effective alternative to legal intervention as a way to address the wasteful competition problem created by insider trading. Moreover, the correct comparison should be between the cost of our muddled and confused current regime and the simple proposal I offer, a proposal, by the way, that is similar to the insider trading prohibition already in place in Europe (albeit with less enforcement capability in Europe). I do not see what institution Anderson thinks could do a better job addressing the problem I have identified than the federal government. As a side note, if we want to minimize the kind of rent-seeking by government officials that Anderson also mentions, then a bright-line such as the one I propose might well be preferable to the murky waters that now surround the insider trading prohibition.

The third point Anderson raises is that he finds my consideration of internal compliance costs lacking.  My response to this observation is: internal compliance costs as compared to what baseline? The current system is a quagmire, whereas the one I propose would be more straightforward to implement. It seems to me that when it comes to minimizing internal compliance costs my proposal is preferable to the status quo.  But even if I am incorrect about the relative costs of internal compliance under different regulatory regimes the larger point remains: discussions of these kinds of second order, difficult-to-quantify cost simply do not offer enough evidence to justify accepting the costs of wasteful competition that a very conservative estimate puts in the range of tens of billions of dollars a year in only one marketplace.

The fourth point Anderson raises is yet another potential cost of my proposal as compared to the status quo. Anderson correctly points out that my rule may be over-inclusive and prevent some individuals from gathering and trading on information for which social gains are equal to or greater than private gains. This is true. However, again, where is the concrete evidence that these costs of over-inclusivity are anything near the magnitude of the quantifiable costs that result from wasteful competition. The evidence in support of a sweeping prohibition remains.

Finally, Anderson raises the specter of criminal punishment. I did not hope, as Anderson suggests, to fully “detach my model from the debate over the morality of insider trading.” I only rejected current efforts to base an insider trading prohibition on fairness concerns. In terms of advancing my own arguments, I felt that as a practical matter the topic of links between solutions to a wasteful competition problem and criminality was too vast to fit in an already long article. For those who are interested, I have begun to further explore these connections elsewhere in work on the relationships between evolutionary psychology and the use of law as a tool to share resources.

The one point I did make in the article relevant to the question of criminal liability for insider trading was to observe that engaging wasteful competition can trigger moral outrage in some circumstances. Such feelings can be observed, for example, when others react to people cutting in line. We have normative reactions to people who pursue their naked self-interest in situations where payoffs through cooperation are greater than those that can be realized through competition by, for example, refusing to honor a queue.  Anderson investigates this analogy by asking about someone who has permission to cut in line.  Presumably, he means to draw a parallel to issuer-sanctioned insider trading wherein firms allow employees to trade on material nonpublic information. The question of whether or how permission to cut in line might be granted is quite complex and is a topic for another day. I only hoped in this article to suggest why there might be a link between my conclusion that avoiding wasteful competition justifies an insider trading prohibition and the choice to criminalize insider trading.

Again, I truly appreciate Anderson’s honest engagement with my work. However, I think he fails to provide a compelling rebuttal. What we need now in the United States is a prohibition on all trading when in possession of inside information.

March 22, 2022 in Corporations, Ethics, Financial Markets, John Anderson, Law and Economics, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Friday, March 18, 2022

Guttentag on Wasteful Competition and Insider Trading Reform

For some time now, the insider trading enforcement regime in the United States has been criticized by market participants, scholars, and jurists alike as lacking clarity, theoretical integrity, and a coherent rationale. One problem is that Congress has never enacted a statute that specifically defines “insider trading.” Instead, the current regime has been cobbled together on an ad hoc basis through the common law and administrative proceedings. As the recent Report of the Bharara Task Force on Insider Trading puts it, the absence of an insider trading statute “has left market participants without sufficient guidance on how to comport themselves, prosecutors and regulators with undue challenges in holding wrongful actors accountable, those accused of misconduct with burdens in defending themselves, and the public with reason to question the fairness and integrity of our securities markets.”

Congress appears to be responding, and a number of bills that would define insider trading and otherwise reform the enforcement regime are receiving bipartisan support. But it would be a mistake to pass new legislation without first taking the time to get clear on the economic and ethical reasons for regulating insider trading. This is particularly true in light of the fact that the general public is clearly ambivalent about whether and why insider trading should be regulated.

Mike Guttentag's new article, Avoiding Wasteful Competition: Why Trading on Inside Information Should Be Illegal, offers an important new (or at least heretofore underappreciated) lens through which the potential costs of insider trading may be identified. For Guttentag, inside information is generally created as a mere byproduct of otherwise productive economic activity. But though it takes no additional effort to create, it has significant economic value for those who can trade on it. The rush to capture this surplus results in “wasteful competition because competition for surplus (or rent-seeking in the terminology economists prefer) is both hard to prevent and inherently wasteful.” Absent comprehensive regulation of insider trading, vast resources would be wasted in efforts by market participants to capture what Guttentag estimates may amount to tens of billions of dollars in potential insider trading profits each year.

Since the problem of wasteful competition arises whenever trading with material nonpublic information is permitted, Guttentag recommends “(1) that federal insider trading legislation should be enacted that prohibits all trading on inside information regardless of whether the information is wrongfully acquired, (2) courts should not require proof that a tipper received a personal benefit to find tippers and tippees culpable, and (3) the mere possession of inside information should be sufficient to trigger a trading prohibition.”

Guttentag’s arguments are original and compelling, but I am not convinced they justify the reforms he proposes. Here are some of my reasons:

  • First, Guttentag’s wasteful competition argument turns on the claim that all inside information is a mere byproduct of otherwise productive activity. But this seems to beg the question against Henry Manne and others who have argued that insider trading as compensation can be an effective incentive for entrepreneurship and innovation at firms. And this incentive can come at a savings to shareholders by reducing the need for other forms of compensation. If the production of inside information is part of the motivation behind innovation, it is not a surplus. Guttentag does address some (though not all) of Manne’s arguments concerning insider trading as compensation, but I would like to see a more complete treatment.
  • Second, even if we are convinced that insider trading drives wasteful rent-seeking, I’m not sure Guttentag has shown that the broad enforcement regime he recommends is the appropriate response. Under the comparative institutional approach to market failure, the proponent of regulation needs to show the regulation would improve matters. Rent-seekers come in all shapes and sizes, and government agencies such as the SEC are by no means immune to the temptation to engage in rent-seeking and rent-selling. Expanded authority would no doubt increase the opportunities and incentives for such wasteful action on the part of the regulators. Guttentag fails to address this concern.
  • Third, Guttentag fails to acknowledge the internal compliance costs his proposed expansion of liability will impose on issuers. I address the significant costs of insider trading compliance in my article, Solving the Paradox of Insider Trading Compliance. I suspect these already significant costs (and incentives to rent-seek from regulators) would only increase under Guttentag’s proposed regime. This concern should be considered as part of a comparative institutional analysis.
  • Fourth, Guttentag’s proposed reform would impose liability for trading while in possession of inside information even if that information played no part in the trading. But trading for reasons unrelated to inside information does not evidence wasteful competition for that information. Guttentag’s rationale cannot therefore justify this rule. He suggests that this mere possession rule can be justified as a prophylactic measure—simplifying enforcement of insider trading that does derive from wasteful competition. Guttentag fails, however, to consider the significant costs (e.g., in terms of [a] liquidity for those who are compensated with equity and [b] the preclusion of otherwise innocent, value-enhancing trades) the broad restriction would impose on the insiders, the issuers, and the market more broadly.
  • Finally, Guttentag considers it a virtue of his wasteful competition model that it does not rely on any controversial claims regarding the ethics of insider trading to justify its regulation. His model imposes liability on those who trade while possessing inside information because it is wasteful—not because it is wrongful. But insider trading liability in the United States has historically carried stiff criminal penalties. Guttentag is comfortable with the idea that these penalties be imposed under his proposed regime as well. This makes me wonder what other criminal sanctions for morally innocent but wasteful behavior this logic might justify. Guttentag seems to anticipate this concern and hedges a bit by suggesting that wasteful behavior may not be morally innocent after all. He notes that, for example, those who engage in wasteful behavior like cutting in line typically elicit “strong feelings of moral disapproval.” First, this may be true, but what about those who ask permission to cut (for some good reason)—and receive that permission? Such persons’ behavior would be just as wasteful, but would probably not receive the same moral disapproval. Second, to the extent Guttentag considers detaching his model from the debate over the morality of insider trading, this line-cutting example pulls him right back in.

Despite these concerns, I am convinced that Guttentag’s new article advances the discussion about why insider trading is (or can be) harmful to markets and society. I recommend it to anyone who wishes to be educated on the subject. Here’s the abstract to Mike’s article:

This article offers a new and compelling reason to make all trading based on inside information illegal.

The value realized by trading on inside information is unusual in two respects. First, inside information is produced at little or no incremental cost and is nevertheless quite valuable. Second, profits made from trading on inside information come largely at the expense of others. When the value of something exceeds the cost to produce it, a wasteful race to be the first to capture the resulting surplus is likely to ensue. Similarly, resources expended solely to take something of value from others are wasted from an overall social welfare perspective. Thus, both at its source and in its use inside information invites wasteful competition. A law prohibiting insider trading is the best way to avoid this wasteful competition.

Previous scholarship misses this obvious conclusion because of its reliance on one of three assumptions. First, wasteful competition is assumed to be a problem that markets can rectify. Second, private ordering solutions are assumed to be available even when market mechanisms fail to address this problem. Third, a wasteful race to acquire and use inside information is viewed as otherwise unavoidable. None of these assumptions is correct.

The findings here have immediate policy implications. First, insider trading legislation should be enacted that bans all insider trading and not just trading based on wrongfully acquired information. Second, there is no reason to require proof that a tipper received a personal benefit to prosecute someone for tipping inside information. Third, the possession and not the use of inside information should be enough to trigger a trading prohibition.

March 18, 2022 in Corporations, Ethics, Financial Markets, John Anderson, Law and Economics, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Monday, March 14, 2022

Business Divorce in Tennessee: Oppression, Fair Value, Attorneys' Fees, Pre-Judgment Interest, and More!

A recent opinion of the Court of Appeals of Tennessee at Nashville, Buckley v. Carlock, is chock full of great issues from the standard Business Associations course.  Specifically, the case involves allegations of controlling shareholder oppression under Tenn. Code Ann. § 48-24-301.  The plaintiff requested, and was grated, a buy-out of his shares in lieu of dissolution.

As noted in the opinion, the plaintiff raises a variety of issues on appeal, arguing:

that the trial court's valuation of his interest in TLC was "erroneous as a matter of law, or at least contrary to the weight of the evidence." He also claims that the court abused its discretion in denying him prejudgment interest. And he contends that he was entitled to attorney's fees as the prevailing party for the whole case. Lastly, he argues that the trial court erred in dismissing his claim for unjust enrichment as moot.

The Court of Appeals affirms the trial court opinion after oral argument (a note on that below).  In the process, the court validates a dissenters' rights ("fair value") approach to calculating the value of the plaintiff's shares.  It also confirms aspects of the valuation calculation.

All of these "real life" business divorce issues are illustrative of the way the statutes we teach get used in practice.  The related issues (e.g. as to attorneys' fees, the admission of witness testimony, pre-judgment interest, and unjust enrichment) all add color to the standard Business Associations fare.  This case may make for interesting teaching material.

To that point, in writing up this post, I found some buried treasure relevant to teaching.  The oral arguments for the case were recorded on Zoom and are publicly available!  The two legal counsel arguing the case are professional and knowledgeable.  All of this may help to illustrate for students the relevance of the activities they engage in during law school.

March 14, 2022 in Business Associations, Corporations, Joan Heminway, Teaching | Permalink | Comments (2)

Monday, February 28, 2022

2022 Online Symposium – Mainstreet vs. Wallstreet: The Democratization of Investing Friday, March 4 12:30-3:30

2022 Online Symposium – Mainstreet vs. Wallstreet: The Democratization of Investing

I'm thrilled to moderate two panels this Friday and one features our rock star BLPB editor, Ben Edwards. 

                                                                     REGISTER HERE

The University of Miami Business Law Review is hosting its 2022 online symposium on Friday, March 4, 2022. The symposium will run from 12:30 PM to 3:30 PM. The symposium will be conducted via Zoom. Attendees can apply to receive CLE credits for attending this event—3.5 CLE credits have been approved by the Florida Bar. 

The symposium will host two sessions with expert panelists discussing the gamification of trading platforms and the growing popularity of aligning investments with personal values.

The panels will be moderated by Professor Marcia Narine Weldon, who is the director of the Transactional Skills Program, Faculty Coordinator of the Business Compliance & Sustainability Concentration, and a Lecturer in Law at the University of Miami School of Law.

Panel 1: Gamification of Trading 

This panel will focus on the role of social media and “gamification” of trading apps/platforms in democratizing investing, and the risks that such technology may influence investor behavior (i.e., increase in trading, higher risk trading strategies like options and margin use, etc.).

Gerri Walsh:

Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA). In this capacity, she is responsible for the development and operations of FINRA’s investor education program. She is also President of the FINRA Investor Education Foundation, where she manages the Foundation’s strategic initiatives to educate and protect investors and to benchmark and foster financial capability for all Americans, especially underserved audiences. Ms. Walsh was the founding executive sponsor of FINRA’s Military Community Employee Resource Group. She serves on the Advisory Council to the Stanford Center on Longevity and represents FINRA on IOSCO’s standing policy committee on retail investor education, the Jump$tart Coalition for Personal Financial Literacy, NASAA’s Senior Investor Advisory Council and the Wharton Pension Research Council.

Prior to joining FINRA in May 2006, Ms. Walsh was Deputy Director of the Securities and Exchange Commission’s Office of Investor Education and Assistance (OIEA) and, before that, Special Counsel to the Director of OIEA. She also served as a senior attorney in the SEC’s Division of Enforcement, investigating and prosecuting violators of the federal securities laws. Before that, she practiced law as an associate with Hogan Lovells in Washington, D.C.

Ari Bargil:

Ari Bargil is an attorney with the Institute for Justice. He joined IJ’s Miami Office in September of 2012, and litigates constitutional cases protecting economic liberty, property rights, school choice, and free speech in both federal and state courts.

In 2019, Ari successfully defended two of Florida’s most popular school choice programs, the McKay Program for Students with Disabilities and the Florida Tax Credit Program, before the Florida Supreme Court. As a direct result of the victory, over 120,000 students in Florida have access to scholarships that empower them to attend the schools of their choice.

Ari also regularly defends property owners battling aggressive zoning regulations and excessive fines in state and federal court nationwide and litigates on behalf of entrepreneurs in cutting-edge First Amendment cases. He was co-counsel in a federal appellate court victory vindicating the right of a Florida dairy creamery to tell the truth on its labels, and he is currently litigating in federal appellate court to secure a holistic health coach’s right to share advice about nutrition with her clients. In 2017, Ari was honored by the Daily Business Review as one of South Florida’s “Most Effective Lawyers.”

In addition to litigation, Ari regularly testifies before state and local legislative bodies and committees on issues ranging from occupational licensing to property rights regulation. Ari has also spearheaded several successful legislative campaigns in Florida, including the effort to legalize the sale of 64-ounce “growlers” by craft breweries and the Florida Legislature’s passage of the Right to Garden Act—a reform which made it unlawful for local governments to ban residential vegetable gardens throughout the state.

Ari’s work has been featured by USA Today, NPR, Fox News, Washington Post, Miami Herald, Dallas Morning News and other national and local publications.

Christine Lazaro:

Christine Lazaro is Director of the Securities Arbitration Clinic at St. John’s University School of Law. She joined the faculty at St. John’s in 2007 as the Clinic’s Supervising Attorney. She is also a faculty advisor for the Corporate and Securities Law Society.

Prior to joining the Securities Arbitration Clinic, Professor Lazaro was an associate at the boutique law firm of Davidson & Grannum, LLP.  At the firm, she represented broker-dealers and individual brokers in disputes with clients in both arbitration and mediation.  She also handled employment law cases and debt collection cases.  Professor Lazaro was the primary attorney in the firm’s area of practice that dealt with advising broker-dealers regarding investment contracts they had with various municipalities and government entities.  Professor Lazaro is also of Counsel to the Law Offices of Brent A. Burns, LLC, where she consults on securities arbitration and regulatory matters.

Professor Lazaro is a member of the New York State and the American Bar Associations, and the Public Investors Arbitration Bar Association (PIABA). Professor Lazaro is a past President of PIABA and is a member of the Board of Directors.  She is also a co-chair of PIABA’S Fiduciary Standards Committee, and is a member of the Executive, Legislation, Securities Law Seminar, and SRO Committees. Additionally, Professor Lazaro is the co-chair of the Securities Disputes Committee in the Dispute Resolution Section of the New York State Bar Association and serves on the FINRA Investor Issues Advisory Committee. 

Panel 2: ESG Investing

The second panel will address the growing popularity of ESG funds among investors that want to align their investments with their personal values, and the questions/concerns that arise with ESG funds, including: 1) explaining what they are; 2) discussing the varying definitions and disclosure issues; 3) exploring if investors really give up better market performance if they invest in funds that align with their values; and 4) asking if the increased interest in ESG funds affect corporate change? 

Thomas Riesenberg:

Mr. Riesenberg is Senior Regulatory Advisor to Ceres, working on climate change issues. He previously worked as an advisor to EY Global’s Office of Public Policy on ESG regulatory issues. Before that he worked as the Director of Legal and Regulatory Policy at The Sustainability Accounting Standards Board pursuant to a secondment from EY. At SASB he worked on a range of US and non-US policy matters for nearly seven years. He served for more than 20 years as counsel to EY, including as the Deputy General Counsel responsible for regulatory matters, primarily involving the SEC and the PCAOB. Previously he served for seven years as an Assistant General Counsel at the U.S. Securities and Exchange Commission where he handled court of appeals and Supreme Court cases involving issues such as insider trading, broker-dealer regulation, and financial fraud. While at the SEC he received the Manuel Cohen Outstanding Younger Lawyer Award for his work on significant enforcement cases. He also worked as a law clerk for a federal district court judge in Washington, D.C., as a litigator on environmental matters at the U.S. Department of Justice, and as an associate at a major Washington, D.C. law firm.

Mr. Riesenberg graduated from the New York University School of Law, where he was a member of the Law Review and a Root-Tilden Scholar (full-tuition scholarship). He received a bachelor’s degree from Oberlin College, where he graduated with honors and was elected to Phi Beta Kappa. He is a former chair of the Law and Accounting Committee of the American Bar Association, former president of the Association of SEC Alumni, former treasurer of the SEC Historical Society, and a current member of the Advisory Board of the BNA Securities Regulation and Law Report. For seven years he was an adjunct professor of securities law at the Georgetown University Law Center. He is an elected member of the American Law Institute. He serves on the boards of several nonprofit organizations, including the D.C. Jewish Community Relations Council and the Washington Tennis & Education Foundation. He is the author of numerous articles on securities law and ESG disclosure issues.

Benjamin Edwards:

Benjamin Edwards joined the faculty of the William S. Boyd School of Law at the University of Nevada, Las Vegas in 2017. In addition to being the Director of the Public Policy Clinic, he researches and writes about business and securities law, corporate governance, arbitration, and consumer protection. Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis.

Max Schatzow:

Max Schatzow is a co-founder and partner of RIA Lawyers LLC—a boutique law firm that focuses almost exclusively on representing investment advisers with legal and regulatory issues. Prior to RIA Lawyers, Max worked at Morgan Lewis representing some of the largest financial institutions in the United States and at another law firm where he represented investment advisers and broker-dealers. Max is a business-minded regulatory lawyer that always tries to put himself in the client’s position. He assists clients in all aspects of forming, registering, owning, and operating an investment adviser. He prides himself in preparing clients and their compliance programs to avert regulatory issues, but also assists clients through examinations and enforcement issues. In addition, Max assists advisers that manage private investment funds. In his little spare time, Max enjoys the Peloton (both stationary and road), golf, craft beer, and spending time with his wife and two children.

February 28, 2022 in Compliance, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Law Reviews, Law School, Lawyering, Legislation, Marcia Narine Weldon, Research/Scholarhip, Securities Regulation | Permalink | Comments (0)

Friday, February 11, 2022

Business and Sports

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. 

  1. 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?
  2. 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?
  3. 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)?
  4. 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?
  5. 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?
  6. 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?
  7. 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?
  8. 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?
  9. 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 mweldon@law.miami.edu.

 

 

 

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

Friday, January 7, 2022

AALS Annual Meeting 2022 Discussion Group on "A Very Online Economy"

We just wrapped up a fascinating discussion group titled "A Very Online Economy: Meme Trading, Bitcoin, and the Crisis of Trust and Value(s)--How Should the Law Respond?" as part of the AALS 2022 Annual Meeting. I co-moderated the group with Professor Martin Edwards (Belmont University School of Law). Here's the description:

Emergent forces emanating from social and financial technologies are challenging many underlying assumptions about the workings of markets, the nature of firms, and our social relationship with our economic institutions. Blockchain technologies challenge our assumptions about the need for centralization, trust, and financial institutions. Meme trading puts pressure on our assumptions about economic value and market processes. Environmental and social governance initiatives raise important questions about the relationship between economic institutions and social values. These issues will certainly drive policy debates about social and economic good in the coming years.

The group gathered some amazing presenters and commentators for the discussion, including:

The discussion was lively and informative, and I look forward to seeing the final versions of these projects in print! 

January 7, 2022 in Corporate Governance, Corporations, Financial Markets, John Anderson, Securities Regulation, Technology, Web/Tech | Permalink | Comments (0)

Tuesday, January 4, 2022

AALS 2022 Annual Meeting Programs - ICYMT

Perhaps you missed these interesting programs--with super speakers--among all the amazing business associations, securities regulation, business transactions, etc. sessions!  I know I did and was glad a friend highlighted them for my attention.

Wednesday, January 5, 2022, 12:35 PM to 1:50 PM
Climate Finance and Banking Regulation: Beyond Disclosure?
Financial Institutions and Consumer Financial Services

U.S. banking regulation has been slower than other forms of financial regulation (and slower than in Europe) to address climate-related financial risks. This panel explores the role of banking regulation in addressing the physical and transition risks from climate change. Possible measures include: mandatory climate risk disclosures by banks; supervisory assessments of climate-related financial risk; capital and liquidity regulation; scenario tests; determination of the appropriate role of banks in mitigating climate risk; financial stability oversight of climate risk; and action (through the Community Reinvestment Act and otherwise) to deter harms to disadvantaged communities and communities of color from climate change.

    • Patricia A. McCoy, Boston College Law School, Moderator
    • Christina Skinner, Wharton School of the University of Pennsylvania, Speaker
    • Graham Steele, Stanford Graduate School of Business, Speaker
    • Hilary J. Allen, American University, Washington College of Law, Speaker
    • Nakita Cuttino, Georgetown University Law Center, Speaker from a Call for Papers

Sunday, January 9, 2022, 3:10 PM to 4:25 PM
Workers, Boards, and the Global Corporation
Section on Economic Globalization and Governance

The appropriate role and status of employee voice in corporate governance is an evergreen issue for corporate law. In the US, the field has traditionally focused on the interactions between boards of directors, shareholders, and managers, but with an increased emphasis on corporate social responsibility, that view has expanded. Despite widespread embrace of CSR principles, however, many corporations still resist union organizing. The inclusion of worker voice in corporate governance has significant comparative law dimensions, encompassing co-determination and union representation on boards. With the recognition that work is increasingly remote, these issues will become even more salient.

    • Miriam Cherry, Saint Louis University School of Law, Moderator
    • Lenore Palladino, University of Massachusetts Amherst School of Public Policy, Speaker
    • Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law, Speaker
    • George S. Georgiev, Emory University School of Law, Speaker
    • Matthew T. Bodie, Saint Louis University School of Law, Speaker

Looking forward to seeing many of you on Zoom later in the week!

January 4, 2022 in Conferences, Corporate Governance, Corporations, Employment Law, Joan Heminway | Permalink | Comments (0)

Friday, December 31, 2021

New Year's Resolution for Lawyers

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

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

Wishing you a safe, healthy, and happy 2022.

December 31, 2021 in Compliance, Contracts, Corporations, Current Affairs, Ethics, Film, Intellectual Property, Jobs, Law Firms, Lawyering, Legislation, Management, Marcia Narine Weldon, Technology, Wellness | Permalink | Comments (0)

Friday, December 24, 2021

ESG in 2022- Pt 1

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

 

December 24, 2021 in Compliance, Conferences, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Business, International Law, Law School, Lawyering, Marcia Narine Weldon, Securities Regulation, Social Enterprise, Teaching | Permalink | Comments (0)

Tuesday, October 26, 2021

LLC Magically Appears, Incorrectly Called a Corporation

As I have noted previously, LLCs (also known as limited liability companies) are generally required to be represented by counsel in court proceedings.  This is unremarkable, as entities, like corporations and LLCs are deemed, by law, to be separate from their owners. They are often known as “fictional people.” Because they are not natural persons, they cannot (usually) represent themselves pro se and shareholder/member/owners cannot do so for them.

A recent case from the Eastern District of Wisconsin agrees with the well-established principal. Unfortunately, it also follows suit with a less productive prior practice, calling an LLC a limited liability corporation. An LLC, again, is a limited liability company, and it is a separate and distinct entity from a corporation, with its own statute and everything.  Here’s an excerpt:

Leszczynski is representing himself in the case, which he has a statutory right to do. 28 U.S.C. § 1654 (“In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein.”). But even though he is president of Rustic Retreats Log Homes, Inc., Leszczynski cannot represent that corporate defendant. “Corporations unlike human beings are not permitted to litigate pro se.” In re IFC Credit Corp., 663 F.3d 315, 318 (7th Cir. 2011) (citations omitted). “A corporation is not permitted to litigate in federal court unless it is represented by a lawyer licensed to practice in that court.” United States v. Hagerman, 545 F.3d 579, 581 (7th Cir. 2008) (citations omitted). That is true even if the corporation is a limited liability corporation. Id. at 582. “[T]he right to conduct business in [the form of a limited liability corporation] carries with it obligations one of which is to hire a lawyer if you want to sue or defend on behalf of the entity.” Id. at 581-82.

Leszczynski may represent himself, but he may not represent Rustic Retreat Log Homes, LLC. The corporate entity must be represented by a lawyer admitted to practice in the federal court for the Eastern District of Wisconsin. The corporation cannot file any documents in federal court—including any answer or response to the complaint—unless it does so through an attorney licensed to practice in this court.

PIONEER LOG HOMES OF BRITISH COLUMBIA, LTD., Plaintiff, v. RUSTIC RETREATS LOG HOMES, INC., & JOHN LESZCZYNSKI, Defendants., No. 21-CV-1029-PP, 2021 WL 4902169, at *3–4 (E.D. Wis. Oct. 21, 2021).

So, this is generally pretty standard fare. Wrong, but standard, though this one has a rather interesting wrinkle. The court here notes that “corporate” defendants must be represented by a lawyer.  It repeats other authority to support this, then attempts to draw a distinction between a corporation and an LLC, but incorrectly calling the LLC a limited liability corporation.  Twice.  But that, unfortunately, is not weird. It happens far to often. 

What’s weird here is that the case caption refers to Rustic Retreat Log Homes, Inc., as does the earlier part of the opinion.  Yet, down near the end, we have the vague LLC references, and an explicit reference to Rustic Retreat Log Homes, LLC.  But where does it come from? 

The “That is true even if the corporation is a limited liability corporation” language does suggest that perhaps there is another entity involved (an LLC in addition to the corporation), but this seems to be the only clue.  Clearly, this mystery needed to be solved, so I pulled the complaint.  In the complaint, it asserts, in paragraph 62, that “Leszczynski set up a successor company, Rustic Retreats WI, LLC, on June 25, 2021.”  That’s the only LLC reference in the complaint.  It seems likely, then that the court meant to say that both Rustic Retreat Log Homes, Inc. and Rustic Retreats WI, LLC needed to be represented by a lawyer in court.  But the opinion still seems kind of weird, and kind of wrong, in explaining what seems to be a rather simple (and correct) proposition.  Sigh.    

October 26, 2021 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (1)