Monday, June 20, 2022
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.
Saturday, April 23, 2022
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.
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)
Friday, December 31, 2021
People rarely keep resolutions, much less ones they don’t make for themselves, but here are some you may want to try.
- 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.
- 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.
- Learn about legal issues related to the metaverse such as data privacy and IP challenges.
- 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.
- 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.
- 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.
- 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.
- Re-think how you work. What can you stop, start, and continue doing in your workplace and family life?
- 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.
- 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, September 24, 2021
I'm so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here's the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren't the only ethical traps, of course, but there's only so many things you can talk about in a 45-minute slot.
All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.
Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing with an unrepresented person), 7.1 (communications about a lawyer’s services), 8.3 (reporting professional misconduct); and 8.4 (dishonesty, fraud, deceit).
Discussion topics will include:
- Do lawyers have an ethical duty to take care of their wellbeing? Can a person with a substance use disorder or major mental health issue ethically represent their client? When can and should an impaired lawyer withdraw? When should a lawyer report a colleague?
- What ethical obligations arise when serving on a nonprofit board of directors? Can a board member draft organizational documents or advise the organization? What potential conflicts of interest can occur?
- What level of technology competence does an attorney need? What level of competence do attorneys need to advise on technology or emerging legal issues such as SPACs and cryptocurrencies? Is attending a CLE or law school course enough?
- What duties do lawyers have to educate themselves and advise clients on controversial issues such as business and human rights or ESG? Is every business lawyer now an ESG lawyer?
- What ethical rules apply when an in-house lawyer plays both a legal role and a business role in the same matter or organization? When can a lawyer representing a company provide legal advice to an employee?
- With remote investigations, due diligence, hearings, and mediations here to stay, how have professional duties changed in the virtual world? What guidance can we get from ABA Formal Opinion 498 issued in March 2021? How do you protect confidential information and also supervise others remotely?
- What social media practices run afoul of ethical rules and why? How have things changed with the explosion of lawyers on Instagram and TikTok?
- What can and should a lawyer do when dealing with a businessperson on the other side of the deal who is not represented by counsel or who is represented by unsophisticated counsel?
- When should lawyers barter with or take an equity stake in a client? How does a lawyer properly disclose potential conflicts?
- What are potential gaps in attorney-client privilege protection when dealing with cross-border issues?
If you need some ethics CLE, please join in me and my co-bloggers, who will be discussing their scholarship. In case Joan Heminway's post from yesterday wasn't enough to entice you...
Professor Anderson’s topic is “Insider Trading in Response to Expressive Trading”, based upon his upcoming article for Transactions. He will also address the need for business lawyers to understand the rise in social-media-driven trading (SMD trading) and options available to issuers and their insiders when their stock is targeted by expressive traders.
Professor Baker’s topic is “Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis.” Professor Baker will provide an overview of the regulation of Texas’ electric power system and the severe outages in February 2021, explaining why Texas is on the forefront of challenges that will grow more prominent as the world transitions to cleaner energy. Next, it explains competing electric power business models and their regulation, including why many had long viewed Texas’ approach as commendable, and why the revealed problems will only grow more pressing. It concludes by suggesting benefits and challenges of these competing approaches and their accompanying regulation.
Professor Heminway’s topic is “Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.” Professor Heminway will discuss how for many small business projects that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, and maintaining a tax-exempt nonprofit corporation may be daunting (or even prohibitive). Yet there would be advantages to entity formation and federal tax qualification that are not available (or not easily available) to unincorporated business projects. Professor Heminway addresses this conundrum by positing a third option—fiscal sponsorship—and articulating its contextual advantages.
Professor Moll’s topic is “An Empirical Analysis of Shareholder Oppression Disputes.” This panel will discuss how the doctrine of shareholder oppression protects minority shareholders in closely held corporations from the improper exercise of majority control, what factors motivate a court to find oppression liability, and what factors motivate a court to reject an oppression claim. Professor Moll will also examine how “oppression” has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief.
Professor Murray’s topic is “Enforcing Benefit Corporation Reporting.” Professor Murray will begin his discussion by focusing on the increasing number of states that have included express punishments in their benefit corporation statutes for reporting failures. Part I summarizes and compares the statutory provisions adopted by various states regarding benefit reporting enforcement. Part II shares original compliance data for states with enforcement provisions and compares their rates to the states in the previous benefit reporting studies. Finally, Part III discusses the substance of the benefit reports and provides law and governance suggestions for improving social benefit.
All of this and more from the comfort of your own home. Hope to see you on Zoom today and next year in person at the beautiful UT campus.
September 24, 2021 in Colleen Baker, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Ethics, Financial Markets, Haskell Murray, Human Rights, International Business, Joan Heminway, John Anderson, Law Reviews, Law School, Lawyering, Legislation, Litigation, M&A, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Teaching, Unincorporated Entities, White Collar Crime | Permalink | Comments (0)
Tuesday, June 8, 2021
Recently, I finished two similar books on problems with extreme meritocracy in the United States: The Tyranny of Merit by Harvard philosophy professor Michael Sandel and The Meritocracy Trap by Yale law professor Daniel Markovits. Law schools and entry level legal jobs tend to be intensely meritocratic. The more competitive entry level legal jobs rely very heavily on school rank and student class rank. Once in a private firm, billable hours seem to be the main metric for bonuses and making partner.
Sandel describes at least three problems with meritocracy: (1) people are not competing on an even playing field in the US "meritocracy" (e.g., children of top 1% in income are 77x more likely to attend an Ivy League school than children of bottom 20%); (2) even if there were an even playing field, natural talents that fit community preferences would lead to wild inequality in a pure meritocracy and those natural advantages are not “earned,” (3) a strict meritocracy leads to excessive hubris among the “winners” and shame among the “losers” who believe they deserve their place in society.
Markovits hits a lot of the same notes, but pays more attention to how the elite “exploit themselves” trying to keep themselves and their children in the shrinking upper class. While the $50,000/year competitive preschools Markovits describes are mostly limited to NYC and Silicon Valley now, the expenditures on the education and extracurriculars of children of the wealthy seems to be increasing exponentially everywhere. He also notes the lengthening work hours for the “elite” and the increasing percentage of wealth tied to labor. For example, Markovits points out that the ABA assumed that lawyers would bill 1300 hours a year in 1962 (and 1400 in 1977). As legal readers know, many firms now require 2000+ billable hours a year (which means working 2500+ hours in most cases).
Both Sandel and Markovits do a thorough job explaining the problems of meritocracy, but are fairly brief on proposed solutions. Sandel thinks meritocracy could be made more fair through elite schools eliminating SAT/ACT requirements (that tend to track family income), engaging in more aggressive class-based affirmative action, and using a lottery to admit baseline qualified students. He thinks the last suggestion would reduce the hubris of those admitted to elite schools, and acknowledge an element of luck in their selection. Sandel also suggests more government expenditures on training and retraining programs, as most economically advanced countries spend a much higher percentage of GDP on these programs (0.1% vs. 0.5% to 1.0%). He also suggests using the tax system to reward “productive labor” by, for example, “lower[ing] or even eliminat[ing] payroll taxes and rais[ing] revenue instead by taxing consumption, wealth, and financial transactions.” (218).
Markovits proposes that private schools should lose their tax-exempt status if at least half of their students do not come from the bottom two-thirds of the income distribution. Markovits also suggests promoting more mid-skill production; by, for example, reducing regulation to allow more work to be done by nurse practitioners (rather than doctors) and legal technicians (rather than lawyers.) He suggests uncapping payroll tax (so that the wealthy pay more of their share), introducing wage subsidies for middle class jobs, and raising the minimum wage.
As Ivy League professors, I think they overestimate the role of their schools in shaping the rest of the country, though they may be right about their influence among certain segments of the wealthy. And while their solutions are rather thin, I think they raise issues with meritocracy worth addressing. As Henri Nouwen acknowledged more than 50 years ago in his book Reaching Out, “people are in growing degree exposed to the contagious disease of loneliness in a world in which a competitive individualism [ a/k/a "meritocracy"] tries to reconcile itself with a culture that speaks about togetherness, unity, and community as the ideals to strive for.”
Monday, March 1, 2021
Friend of the BLPB Greg Shill's recent article, The Independent Board as Shield, is an engaging, provocative piece on board independence and the business judgment rule. The abstract provides a taste of his argument and principal related proposal.
The fiduciary duty of loyalty bars CEOs and other executives from managing companies for personal gain. In the modern public corporation, this restriction is reinforced by a pair of institutions: the independent board of directors and the business judgment rule. In isolation, each structure arguably promotes manager fidelity to shareholder interests—but together, they enable manager prioritization. This marks a particularly striking turn for the independent board. Its origin story and raison d’être lie in protecting shareholders from opportunism by managers, but it functions as a shield for managers instead.
Numerous defects in the design and practice of the independent board inhibit its ability to curb managerial excess. Nowhere is this more evident than in the context of transactions that enrich the CEO. When executive compensation and similar matters are approved by independent directors, they take on a new quality: they become insulated by the business judgment rule. This rule is commonly justified as giving legal effect to the comparative advantage of businesspeople in their domain—in determining the price of a product, for example—and it immunizes such decisions from court challenge. But independent directors can opt to extend the rule’s protection beyond this narrow class of duty of care cases to domains that squarely implicate the duty of loyalty. The result is a shield for conflicts of interest that defeats the major objective of the independent board and important goals of corporate law more generally.
This Article proposes to eliminate the independent board’s paradoxical shield quality by ending business judgment protection for claims implicating the duty of loyalty. Judges would apply the familiar entire fairness standard instead. The clearest rationale for this reform comes from the logic of the rule itself: comparative advantage. Judges, not businesspeople, are best situated to adjudicate conflicts of interest. More broadly, the Article’s analysis suggests that the pro-shareholder reputation of the independent board is overstated and may have inadvertently fostered a sense of complacency around board power.
Greg makes some thoughtful points about existing business judgment rule doctrine in this piece and formulates a novel approach to addressing contextual difficulties with board independence doctrine. A number of us had the privilege of hearing about and commenting on this project early on. Nice work (as I told him)!
Sunday, December 20, 2020
In my first post on the "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") prepared by Ernst & Young for the European Commission, I said that corporate boards are free to apply a purposive approach to profit generation. I added that:
[a]pplying such a purposive approach will depend on moral leadership, CEOs' and corporate boards' long-term vision, clear measurement of the companies' interests and communication of those interests to shareholders, and rethinking executive compensation to encourage board members to take on other priorities than shareholder value maximization. Corporate governance has a significant transformative role to play in this context.
This week, I focus on corporate governance’s enabling power. Therefore, “T” is for transformative corporate governance. Market-led developments can and do precede and inspire legal rules. Corporate governance rules are not an exception in this regard. To illustrate these rules’ transformative potential, I dwell on the ongoing debate around stakeholder capitalism.
First question. What is stakeholder capitalism? In a recent debate with Lucian Bebchuk about the topic, Alex Edmans explained that “stakeholder capitalism seeks to create shareholder welfare only through creating stakeholder welfare.” The definition suggests that the way to create value for both shareholders and stakeholders alike is by increasing the size of the pie.
In his book, Strategic Management: A Stakeholder Approach, R. Edward Freeman defines “stakeholder” as “any group or individual who can affect or is affected by the achievement of the organisation’s objectives.” (1984: p. 46). The Study on Directors’ Duties is concerned with the negative impact of corporate short-termism on stakeholders such as the environment, the society, the economy, and the extent to which corporate short-termism may impair the protection of human rights and the attainment of the sustainable development goals (SDGs). I am not going to discuss whether there is a causal link between short-termism and sustainability. In my previous post, I say that we need to take a step back to determine short-termism and whether it is as harmful as it sounds. Instead, I am interested in finding an answer to the following question. Has stakeholder capitalism practical value?
Edmans points out that “in a world of uncertainty, stakeholder capitalism is practically more useful.” It is more challenging to put a tag on various things in a world of uncertainty, and the market misvalues intangibles. Therefore, in this context, stakeholder capitalism would be a better decisional tool that improves shareholder value and profitability and shareholders' welfare.
Still, how do we measure CEO’s and directors’ accountability toward shareholders and the corporation for the choices they make? Can CEOs and directors be blamed for not caring about social causes? Is stakeholder capitalism, or as Lucian Bebchuk calls it “stakeholderism,” the right way to force managers to make the right decisions for the shareholders and the corporation?
While Edmans stays firmly behind stakeholder capitalism because he considers it has practical value in increasing shareholder wealth while increasing shareholders’ welfare, Bebchuk maintains that “stakeholderism” is “illusory” and costly both for shareholders and stakeholders. Clearly, they disagree.
However, both Edmans and Bebchuk agree on this – we need a normative framework that goes beyond private ordering and prevents companies from subjecting stakeholders to externalities such as climate change, inequality, poverty, and other adverse economic effects.
Corporate managers respond to incentives such as executive compensation, financial reporting, and shareholders' ownership. The challenge is to understand what type of corporate governance rules are more likely to nudge CEOs and managers to value other interests than shareholder wealth maximization. Would a set of principles suffice, or do we need a regulatory framework?
Freeman's definition of a stakeholder is telling because it allows us to think of corporations and governments as stakeholders for sustainable development. I am also inspired by the distinction that Yves Fassin makes in his article The Stakeholder Model Refined, between stakeholders (e.g., consumers), stakewatchers (e.g., non-governmental organizations) and stakekeepers (e.g., regulators). I suggest that the way to ensure stakeholder capitalism’s practical value is to create corporate governance rules based on appropriate standards. The SDGs afford the propriety of those standards.
Within this regulatory setting, corporate governance will fulfill its transformative potential by enabling, for example, the representation and protection of stakeholders, the representation of “stakewatchers” through the attribution of voting and veto rights and nomination to the management board (similar to German co-determination by which stakeholders like employees are appointed to the supervisory board). Corporate governance will show its transformative potential by enabling the expansion of directors' fiduciary duties to include the protection of stakeholders’ interests, accountability of corporate managers, consultation rights, and additional disclosure requirements.
The authors Onyeka K. Osuji and Ugochi C. Amajuoyi contributed an interesting piece, titled Sustainable Consumption, Consumer Protection and Sustainable Development: Unbundling Institutional Septet for Developing Economies to the book Corporate Social Responsibility in Developing and Emerging Markets: Institutions, Actors and Sustainable Development. The book was edited by Onyeka K. Osuji, Franklin N. Ngwu, and Dima Jamali. The piece addresses the stakeholder model from the emerging economies perspective. It goes to show how interconnected we are.
Sunday, December 6, 2020
The post below is the first in Lécia Vicente's December series that I heralded in my post on Friday. Due to a Typepad login issue, I am posting for her today. We hope to get the issue corrected for her post for next week.
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My series of blog posts cover the recent "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") prepared by Ernst & Young for the European Commission. This study promises to set the tone of the EU's policymaking in the fields of corporate law and corporate governance. The study explains that the "evidence collected over 1992-2018 period shows there is a trend for publicly listed companies within the EU to focus on short-term benefits of shareholders rather than on the long-term interests of the company." The main objective of the study is to identify the causes of this short-termism in corporate governance and determine European Union (EU) level solutions that permit the achievement of the United Nations (UN) Sustainable Development Goals (SDGs) and the objectives of the Paris Agreement.
Both the United Nations 2030 Agenda and the Paris Agreement are trendsetters, for they have elevated the discussion on sustainable development and climate change mitigation to the global level. That discussion has been captured not only by governments and international environmental institutions but also by corporations. Several questions come to mind.
What is sustainability? This one is critical considering that the global level discussion is often monotone, with the blatant disregard of countries' idiosyncrasies, the different historical contexts, regulatory frameworks, and political will to implement reforms. The UN defined sustainability as the ability of humanity "to meet the needs of the present without compromising the ability of future generations to meet their own needs."
The other question that comes to mind is: what is development? Is GDP the right benchmark, or should we be focusing on other factors? There is disagreement among economists on the merit of using GDP as a development measure. Some economists like Abhijit Banerjee & Esther Duflo say, "it makes no sense to get too emotionally involved with individual GDP numbers." Those numbers do not give us the whole picture of a country's development.
The Study on Directors' Duties maintains as a general objective the development of more sustainable corporate governance and corporate directors' accountability for the company's sustainable value creation. This general objective would be specifically implemented either through soft law (non-legislative measures) or hard law (legislative measures) that redesign the role of directors (this includes the creation of a new board position, the Chief Value Officer) and directors' fiduciary duties. This takes me to a third question.
What is the purpose of the company? In other words, what is it that directors should be prioritizing? In a recent blog post, Steve Bainbridge says
I don't "disagree with the assertion that the law does not mandate that a corporation have as its purpose shareholder wealth maximization" but only because I don't think it's useful to ask the question of "what purpose does the law mandate the corporation pursue?
[…] Purpose is always associated with the intellect. In order to have a purpose or aim, it is necessary to come to a decision; and that is the function of the intellect. But just as the corporation has neither a soul to damn nor a body to kick, the corporation has no intellect.
Bainbridge prefers "to operationalize this discussion as a question of the fiduciary duties of corporate officers and directors rather than as a corporate purpose."
Friday, October 23, 2020
It’s hard to believe that the US will have an election in less than two weeks. Three years ago, a month after President Trump took office, I posted about CEOs commenting on his executive order barring people from certain countries from entering the United States. Some branded the executive order a “Muslim travel ban” and others questioned whether the CEOs should have entered into the political fray at all. Some opined that speaking out on these issues detracted from the CEOs’ mission of maximizing shareholder value. But I saw it as a business decision - - these CEOs, particularly in the tech sector, depended on the skills and expertise of foreign workers.
That was 2017. In 2018, Larry Fink, CEO of BlackRock, told the largest companies in the world that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.” Fink’s annual letter to CEOs carries weight; BlackRock had almost six trillion dollars in assets under management in 2018, and when Fink talks, Wall Street listens. Perhaps emboldened by the BlackRock letter, one year later, 181 CEOs signed on to the Business Roundtable's Statement on the Purpose of a Corporation, which “modernized” its position on the shareholder maximization norm. The BRT CEOs promised to invest in employees, deal ethically and fairly with suppliers, and embrace sustainable business practices. Many observers, however, believed that the Business Roundtable statement was all talk and no action. To see how some of the signatories have done on their commitments as of last week, see here.
Then came 2020, a year like no other. The United States is now facing a global pandemic, mass unemployment, a climate change crisis, social unrest, and of course an election. During the Summer of 2020, several CEOs made public statements on behalf of themselves and their companies about racial unrest, with some going as far as to proclaim, “Black Lives Matter.” I questioned these motives in a post I called “"Wokewashing and the Board." While I admired companies that made a sincere public statement about racial justice and had a real commitment to look inward, I was skeptical about firms that merely made statements for publicity points. I wondered, in that post, about companies rushing to implement diversity training, retain consultants, and appoint board members to either curry favor with the public or avoid the shareholder derivative suits facing Oracle, Facebook, and Qualcomm. How well had they thought it out? Meanwhile, I noted that my colleagues who have conducted diversity training and employee engagement projects for years were so busy that they were farming out work to each other. Now the phones aren’t ringing as much, and when they are ringing, it’s often to cancel or postpone training.
Why? Last month, President Trump issued the Executive Order on Combatting Race and Sex Stereotyping. As the President explained:
today . . . many people are pushing a different vision of America that is grounded in hierarchies based on collective social and political identities rather than in the inherent and equal dignity of every person as an individual. This ideology is rooted in the pernicious and false belief that America is an irredeemably racist and sexist country; that some people, simply on account of their race or sex, are oppressors; and that racial and sexual identities are more important than our common status as human beings and Americans ... Therefore, it shall be the policy of the United States not to promote race or sex stereotyping or scapegoating in the Federal workforce or in the Uniformed Services, and not to allow grant funds to be used for these purposes. In addition, Federal contractors will not be permitted to inculcate such views in their employees.
The Order then provides a hotline process for employees to raise concerns about their training. Whether you agree with the statements in the Order or not -- and I recommend that you read it -- it had a huge and immediate effect. The federal government is the largest procurer of goods and services in the world. This Order applies to federal contractors and subcontractors. Some of those same companies have mandates from state law to actually conduct training on sexual harassment. Often companies need to show proof of policies and training to mount an affirmative defense to discrimination claims. More important, while reasonable people can disagree about the types and content of diversity training, there is no doubt that employees often need training on how to deal with each other respectfully in the workplace. (For a thought-provoking take on a board’s duty to monitor diversity training by co-blogger Stefan Padfield, click here.)
Perhaps because of the federal government’s buying power, the U.S. Chamber of Commerce felt compelled to act. On October 15th, the Chamber and 150 organizations wrote a letter to the President stating:
As currently written, we believe the E.O. will create confusion and uncertainty, lead to non-meritorious investigations, and hinder the ability of employers to implement critical programs to promote diversity and combat discrimination in the workplace. We urge you to withdraw the Executive Order and work with the business and nonprofit communities on an approach that would support appropriate workplace training programs ... there is a great deal of subjectivity around how certain content would be perceived by different individuals. For example, the definition of “divisive concepts” creates many gray areas and will likely result in multiple different interpretations. Because the ultimate threat of debarment is a possible consequence, we have heard from some companies that they are suspending all D&I training. This outcome is contrary to the E.O.’s stated purpose, but an understandable reaction given companies’ lack of clear guidance. Thus, the E.O. is already having a broadly chilling effect on legitimate and valuable D&I training companies use to foster inclusive workplaces, help with talent recruitment, and remain competitive in a country with a wide range of different cultures. … Such an approach effectively creates two sets of rules, one for those companies that do business with the government and another for those that do not. Federal contractors should be left to manage their workforces and workplaces with a minimum amount of interference so long as they are compliant with the law.
It’s rare for the Chamber to make such a statement, but it was bold and appropriate. Many of the Business Roundtable signatories are also members of the U.S. Chamber, and on the same day, the BRT issued its own statement committing to programs to advance racial equity and justice. BRT Chair and WalMart CEO Doug McMillon observed, “the racial inequities that exist for many Black Americans and people of color are real and deeply rooted . . These longstanding systemic challenges have too often prevented access to the benefits of economic growth and mobility for too many, and a broad and diverse group of Americans is demanding change. It is our employees, customers and communities who are calling for change, and we are listening – and most importantly – we are taking action.” Now that's a stakeholder maximization statement if I ever heard one.
Those who thought that some CEOs went too far in protesting the Muslim ban, may be even more shocked by the BRT’s statements about the police. The BRT also has a subcommittee to address racial justice issues and noted that “For Business Roundtable CEOs, this agenda is an important step in addressing barriers to equity and justice . . . This summer we took on the urgent need for policing reform. We called on Congress to adopt higher federal standards for policing, to track whether police departments and officers have histories of misconduct, and to adopt measures to hold abusive officers accountable. Now, with announcement of this broader agenda, CEOs are supporting policies and undertaking initiatives to address several other systems that contribute to large and growing disparities.”
Now that stakeholders have seen so many of these social statements, they have asked for more. Last week, a group of executives from the Leadership Now Project issued a statement supporting free and fair elections. However, as Bennett Freeman, former Calvert executive and Clinton cabinet member noted, no Fortune 500 CEOs have signed on to that statement. Yesterday, the Interfaith Center on Corporate Responsibility (ICCR) sent a letter to 200 CEOs, including some members of the BRT asking for their support. ICCR asked that they endorse:
- Active support for free and fair elections
- A call for a thorough and complete counting of all ballots
- A call for all states to ensure a fair election
- A condemnation of any tactics that could be construed as voter intimidation
- Assurance that, should the incumbent Administration lose the election, there will be a peaceful transfer of power
- Ensure that lobbying activities and political donations support the above
Is this a pipe dream? Do CEOs really want to stick their necks out in a tacit criticism of the current president’s equivocal statements about his post-election plans? Now that JPMorgan Chase CEO Jamie Dimon has spoken about the importance of respect for the democratic process and the peaceful transfer of power, perhaps more executives will make public statements. But should they? On the one hand, the markets need stability. Perhaps Dimon was actually really focused on shareholder maximization after all. Nonetheless, Freeman and others have called for a Twitter campaign to urge more CEOs to speak out. My next post will be up on the Friday after the election and I’ll report back about the success of the hashtag activism effort. In the meantime, stay tuned and stay safe.
October 23, 2020 in Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Ethics, Financial Markets, Human Rights, Legislation, Management, Marcia Narine Weldon, Nonprofits, Stefan J. Padfield | Permalink | Comments (1)
Friday, October 2, 2020
No. You didn't miss Part 1. I wrote about Weinstein clauses last July. Last Wednesday, I spoke with a reporter who had read that blog post. Acquirors use these #MeToo/Weinstein clauses to require target companies to represent that there have been no allegations of, or settlement related to, sexual misconduct or harassment. I look at these clauses through the lens of a management-side employment lawyer/compliance officer/transactional drafting professor. It’s almost impossible to write these in a way that’s precise enough to provide the assurances that the acquiror wants or needs.
Specifically, the reporter wanted to know whether it was unusual that Chevron had added this clause into its merger documents with Noble Energy. As per the Prospectus:
Since January 1, 2018, to the knowledge of the Company, (i), no allegations of sexual harassment or other sexual misconduct have been made against any employee of the Company with the title of director, vice president or above through the Company’s anonymous employee hotline or any formal human resources communication channels at the Company, and (ii) there are no actions, suits, investigations or proceedings pending or, to the Company’s knowledge, threatened related to any allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above. Since January 1, 2018, to the knowledge of the Company, neither the Company nor any of its Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or other sexual misconduct by any employee of the Company with the title of director, vice president or above.
Whether I agree with these clauses or not, I can see why Chevron wanted one. After all, Noble’s former general counsel left the company in 2017 to “pursue personal interests” after accusations that he had secretly recorded a female employee with a video camera under his desk. To its credit, Noble took swift action, although it did give the GC nine million dollars, which to be fair included $8.3 million in deferred compensation. Noble did not, however, exercise its clawback rights. Under these circumstances, if I represented Chevron, I would have asked for the same thing. Noble’s anonymous complaint mechanisms went to the GC’s office. I’m sure Chevron did its own social due diligence but you can never be too careful. Why would Noble agree? I have to assume that the company’s outside lawyers interviewed as many Noble employees as possible and provided a clean bill of health. Compared with others I’ve seen, the Chevron Weinstein clause is better than most.
Interestingly, although several hundred executives have left their positions due to allegations of sexual misconduct or harassment since 2017, only a small minority of companies use these Weinstein clauses. Here are a few:
Except in each case, as has not had and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect, to the Knowledge of the Company, (i) no allegations of sexual harassment have been made against (A) any officer or director of the Acquired Companies or (B) any employee of the Acquired Companies who, directly or indirectly, supervises at least eight (8) other employees of the Acquired Companies, and (ii) the Acquired Companies have not entered into any settlement agreement related to allegations of sexual harassment or sexual misconduct by an employee, contractor, director, officer or other Representative.
- Merger between Genuine Parts Company, Rhino SpinCo, Inc., Essendant Inc., and Elephant Merger Sub Corp.:
To the knowledge of GPC, in the last five (5) years, no allegations of sexual harassment have been made against any current SpinCo Business Employee who is (i) an executive officer or (ii) at the level of Senior Vice President or above.
- AGREEMENT AND PLAN OF MERGER BY AND AMONG WORDSTREAM, INC., GANNETT CO., INC., ORCA MERGER SUB, INC. AND SHAREHOLDER REPRESENTATIVE SERVICES LLC:
(i) The Company is not party to a settlement agreement with a current or former officer, employee or independent contractor of the Company or its Affiliates that involves allegations relating to sexual harassment or misconduct. To the Knowledge of the Company, in the last eight (8) years, no allegations of sexual harassment or misconduct have been made against any current or former officer or employee of the Company or its Affiliates.
- AGREEMENT AND PLAN OF MERGER By and Among RLJ ENTERTAINMENT, INC., AMC NETWORKS INC., DIGITAL ENTERTAINMENT HOLDINGS LLC and RIVER MERGER SUB INC.:
(c) To the Company’s Knowledge, in the last ten (10) years, (i) no allegations of sexual harassment have been made against any officer of the Company or any of its Subsidiaries, and (ii) the Company and its Subsidiaries have not entered into any settlement agreements related to allegations of sexual harassment or misconduct by an officer of the Company or any of its Subsidiaries.
Here are just a few questions:
- What's the definition of "sexual misconduct"? Are the companies using a legal definition? Under which law? None of the samples define the term.
- What happens of the company handbook or policies do not define "sexual misconduct"?
- How do the parties define "sexual harassment"? Are they using Title VII, state law, case law, their diversity training decks, the employee handbook? None of the samples define the term.
- What about the definition of "allegation"? Is this an allegation through formal or informal channels (as employment lawyers would consider it)? Chevron gets high marks here.
- Have the target companies used the best knowledge qualifiers to protect themselves?
- How will the target company investigate whether the executives and officers have had “allegations”? Should the company lawyers do an investigation of every executive covered by the representation to make sure the company has the requisite “knowledge”? If the deal documents don't define "knowledge," should we impute knowledge?
- What about those in the succession plan who may not be in the officer or executives ranks?
Will we see more of these in the future? I don’t know. But I sure hope that General Motors has some protection in place after the most recent allegations against Nikola’s founder and former chairman, who faces sexual assault allegations from his teenage years. Despite allegations of fraud and sexual misconduct, GM appears to be moving forward with the deal, taking advantage of Nikola’s decreased valuation after the revelation of the scandals.
I’ll watch out for these #MeToo clauses in the future. In the meantime, I’ll ask my transactional drafting students to take a crack at reworking them. If you assign these clauses to your students, feel free to send me the work product at firstname.lastname@example.org.
Take care and stay safe.
October 2, 2020 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Lawyering, M&A, Management, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)
Friday, September 18, 2020
Two weeks ago, I wrote about the role of compliance officers and general counsel working for Big Pharma in Where Were the Gatekeepers- Part 1. As a former compliance officer and deputy general counsel, I wondered how and if those in-house sentinels were raising alarm bells about safety concerns related to rushing a COVID-19 vaccine to the public. Now that I’ve watched the Netflix documentary “The Social Dilemma,” I’m wondering the same thing about the lawyers and compliance professionals working for the social media companies.
The documentary features some of the engineers and executives behind the massive success of Google, Facebook, Pinterest, Twitter, YouTube and other platforms. Tristan Harris, a former Google design ethicist, is the star of the documentary and the main whistleblower. He raised concerns to 60 Minutes in 2017 and millions have watched his TED Talk. He also testified before Congress in 2019 about how social media companies use algorithms and artificial intelligence to manipulate behavior. Human rights organizations have accused social media platforms of facilitating human rights abuses. Facebook and others have paid billions in fines for privacy violations. Advertisers boycotted over Facebook and hate speech. But nothing has slowed their growth.
The documentary explicitly links the rising rate of youth depression, suicide, and risk taking behavior to social media’s disproportionate influence. Most of my friends who have watched it have already decreased their screen time or at least have become more conscious of it. Maybe they are taking a cue from those who work for these companies but don’t allow their young children to have any screen time. Hmmm …
I’ve watched the documentary twice. Here are some of the more memorable quotes:
”If you’re not paying for the product, then you’re the product.”
“They sell certainty that someone will see your advertisement.”
“It’s not our data that’s being sold. They are building models to predict our actions based on the click, what emotions trigger you, what videos you will watch.”
“Algorithms are opinions embedded in code.”
”It’s the gradual, slight, imperceptible change in our own behavior and perception that is the product.”
“Social media is a drug.”
”There are only two industries that call their customers ‘users’: illegal drugs and software.”
”Social media is a marketplace that trades exclusively in human futures.”
”The very meaning of culture is manipulation.”
“Social media isn’t a tool waiting to be used. It has its own goals, and it has its own means of pursuing them.”
“These services are killing people and causing people to kill themselves.”
“When you go to Google and type in “climate change is,” you will get a different result based on where you live … that’s a function of … the particular things Google knows about your interests.”
“It’s 2.7 billion Truman Show. Each person has their own reality, their own facts.”
“It worries me that an algorithm I worked on is increasing polarization in society.”
“Fake news on Twitter spreads six times faster than real news.”
“People have no idea what is true and now it’s a matter of life and death.”
“Social media amplifies exponential gossip and exponential hearsay to the point that we don’t know what’s true no matter what issue we care about.”
“If you want to control the operation of a country, there’s never been a better tool than Facebook.”
"The Russians didn't hack Facebook. What they did was use the tools Facebook created for legitimate advertisers and legitimate users, and they applied it to a nefarious purpose."
“What [am I] most worried about? In the short term horizon? Civil War.”
“How do you wake up from the matrix when you don’t know you’re in the matrix”?
“You could shut down the service and destroy . . . $20 billion in shareholder value and get sued, but you can’t in practice put the genie back in the model.”
“We need to accept that it’s ok for companies to be focused on making money but it’s not ok when there’s no regulation, no rules, and no competition and companies are acting as de facto governments and then saying ‘we can regulate ourselves.’ “
“There’s no fiscal reason for these companies to change.”
This brings me back to the beginning of my post. We’ve heard from former investors, engineers, and algorithm magicians from these companies, but where were and are the gatekeepers? What were they doing to sound the alarm? But maybe I’m asking the wrong question. As Ann Lipton’s provocative post on Doyle, Watson, and the Purpose of the Corporation notes, “Are you looking at things from outside the corporation, in terms of structuring our overall legal and societal institutions? Or are you looking at things from inside the corporation, in terms of how corporate managers should understand their jobs and their own roles?”
If you’re a board member or C-Suite executive of a social media company, you have to ask yourself, what if hate speech, fake news, polarization, and addiction to your product are actually profitable? What if perpetuating rumors that maximize shareholder value is the right decision? Why would you change a business model that works for the shareholders even if it doesn’t work for the rest of society? If social media is like a drug, it’s up to parents to instill the right values in their children. I get it. But what about the lawyers and the people in charge of establishing, promoting, and maintaining an ethical culture? To be clear, I don’t mean in any way to impugn the integrity of lawyers and compliance professionals who work for social media companies. I have met several at business and human rights events and privacy conferences who take the power of the tech industry very seriously and advocate for change.
The social media companies have a dilemma. Compliance officers talk about “tone at the top,” “mood in the middle,” and the “buzz at the bottom.” Everyone in the organization has to believe in the ethical mandate as laid out and modeled by leadership. Indeed, CEOs typically sign off on warm, fuzzy statements about ethical behavior in the beginning of the Code of Conduct. I’ve drafted quite a few and looked at hundreds more. Notably, Facebook’s Code of Conduct, updated just a few weeks ago, has no statement of principle from CEO Mark Zuckerberg and seems very lawyerlike. Perhaps there’s a more robust version that employees can access where Zuckerberg extols company values. Twitter’s code is slightly better and touches more on ethical culture. Google’s Code states, “Our products, features, and services should make Google more useful for all our users. We have many different types of users, from individuals to large businesses, but one guiding principle: “Is what we are offering useful?”’ My question is “useful” to whom? I use Google several times a day, but now I have to worry about what Google chooses to show me. What's my personal algorithm? I’ve been off of Facebook and Instagram since January 2020 and I have no plans to go back.
Fifty years ago, Milton Friedman uttered the famous statement, “There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.” The social media companies have written the rules of the game. There is no competition. Now that the “Social Dilemma” is out, there really isn’t any more deception or fraud.
Do the social media companies actually have a social responsibility to do better? In 2012, Facebook’s S-1 proclaimed that the company’s mission was to “make the world more open and connected.” Facebook’s current Sustainability Page claims that, “At Facebook, our mission is to give people the power to build community and bring the world closer together.” Why is it, then that in 2020, people seem more disconnected than ever even though they are tethered to their devices while awake and have them in reach while asleep? Facebook’s sustainability strategy appears to be centered around climate change and supply chain issues, important to be sure. But is it doing all that it can for the sustainability of society? Does it have to? I have no answer for that. All I can say is that you should watch the documentary and judge for yourself.
September 18, 2020 in Ann Lipton, Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Family, Film, Human Rights, Lawyering, Management, Marcia Narine Weldon, Psychology, Shareholders, Television | Permalink | Comments (0)
Saturday, September 5, 2020
I think that the GCs at Big Pharma have hacked into my Zoom account. First, some background. Earlier this week, I asked my students in UM’s Lawyering in a Pandemic course to imagine that they were the compliance officers or GCs at the drug companies involved in Operation Warp Speed, the public-private partnership formed to find a vaccine for COVID-19 in months, rather than years. I asked the students what they would do if they thought that the scientists were cutting corners to meet the government’s deadlines. Some indicated that they would report it internally and then externally, if necessary.
I hated to burst their bubbles, but I explained that the current administration hasn’t been too welcoming to whistleblowers. I had served on a non-partisan, multi-stakeholder Department of Labor Whistleblower Protection Advisory Committee when President Trump came into office, which was disbanded shortly thereafter. For over a year after that, I received calls from concerned scientists asking where they could lodge complaints. With that background, I wanted my students to think about how company executives could reasonably would report on cutting corners to the government that was requiring the “warp speed” results in the first place. We didn’t even get into the potential ethical issues related to lawyers as whistleblowers.
Well the good news is that Pfizer, Moderna, Johnson & Johnson, GlaxoSmithKline, and Sanofi announced on Friday that they have signed a pledge to make sure that they won’t jeopardize public safety by ignoring protocols. Apparently, the FDA may be planning its own statement to reassure the public. I look forward to seeing the statements when they’re released, but these companies have been working on these drugs for months. Better late than never, but why issue this statement now? Perhaps the lawyers and compliance officers – the gatekeepers – were doing their jobs and protecting the shareholders and the stakeholders. Maybe the scientists stood their ground. We will never know how or why the companies made this decision, but I’m glad they did. The companies hadn’t announced this safety pledge yet when I had my class and at the time, almost none of the students said they would get the vaccine. Maybe the pledge will change their minds.
Although the drug companies seem to be doing the right thing, I have other questions about Kodak. During the same class, I had asked my students to imagine that they were the GC, compliance officer, or board member at Kodak. Of course, some of my students probably didn’t even know what Kodak is because they take pictures with their phones. They don’t remember Kodak for film and cameras and absolutely no one knows Kodak as a pharmaceutical company. Perhaps that’s why everyone was stunned when Kodak announced a $765 million federal loan to start producing drug ingredients, especially because it’s so far outside the scope of its business. After all, the company makes chemicals for film development and manufacturing but not for life saving drugs. Kodak has struggled over the past few years because it missed the boat on digital cameras and has significant debt, filing for bankruptcy in 2012. It even dabbled in cryptocurrency for a few months in 2018. Not the first choice to help develop a vaccine.
To be charitable, Kodak did own a pharmaceutical company for a few years in the 80’s. But its most recent 10-K states that “Kodak is a global technology company focused on print and advanced materials and chemicals. Kodak provides industry-leading hardware, software, consumables and services primarily to customers in commercial print, packaging, publishing, manufacturing and entertainment.”
The Kodak deal became even more newsworthy because the company issued 1.75 million in stock and options to the CEO and other grants to company insiders and board members before the public announcement of the federal loan. The CEO had only had the job for a year. I haven’t seen any news reports of insiders complaining or refusing the grants. In fact, the day after the announcement of the loan, a Kodak board member made a $116 million dollar donation to charity he founded. Understandably, the news of the deal caused Kodak’s shares to soar. Insiders profited, and the SEC started asking questions after looking at records of the stock trades.
Alas, the deal is on hold as the SEC investigates. The White House’s own trade advisor has said that this may be “one of the dumbest decisions by executives in corporate history.” I’m not sure about that, but there actually may be nothing to see here. Some believe that there was a snafu with the timing of the announcement and that the nuances of Reg FD may get Kodak off the hook .I wonder though, what the gatekeepers were doing? Did the GC, compliance officer, or any board member ask the obvious questions? “Why are we doing something so far outside of our core competency?” They didn’t even get the digital camera thing right and that is Kodak’s core competency. Did anyone ask “should we really be issuing options and grants right before the announcement? Isn’t this loan material, nonpublic information and shouldn’t we wait to trade?”
I’ll keep watching the Kodak saga and will report back. In coming posts, I’ll write about other compliance and corporate governance mishaps. In the meantime, stay safe and please wear your masks.
September 5, 2020 in Compensation, Compliance, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Ethics, Financial Markets, Lawyering, Management, Marcia Narine Weldon, Securities Regulation, Shareholders, Technology | Permalink | Comments (0)
Friday, August 14, 2020
As an academic and consultant on environmental, social, and governance (ESG) matters, I’ve used a lot of loaded terms -- greenwashing, where companies tout an environmentally friendly record but act otherwise; pinkwashing, where companies commoditize breast cancer awareness or LGBTQ issues; and bluewashing, where companies rally around UN corporate social responsibility initiatives such as the UN Global Compact.
In light of recent events, I’ve added a new term to my arsenal—wokewashing. Wokewashing occurs when a company attempts to show solidarity with certain causes in order to gain public favor. Wokewashing isn’t a new term. It’s been around for years, but it gained more mainstream traction last year when Unilever’s CEO warned that companies were eroding public trust and industry credibility, stating:
Woke-washing is beginning to infect our industry. It’s polluting purpose. It’s putting in peril the very thing which offers us the opportunity to help tackle many of the world’s issues. What’s more, it threatens to further destroy trust in our industry, when it’s already in short supply… There are too many examples of brands undermining purposeful marketing by launching campaigns which aren’t backing up what their brand says with what their brand does. Purpose-led brand communications is not just a matter of ‘make them cry, make them buy’. It’s about action in the world.
The Black Lives Matter and anti-racism movements have brought wokewashing front and center again. My colleague Stefan Padfield has written about the need for heightened scrutiny of politicized decisions and corporate responses to the BLM movement here, here, and here, and Ann Lipton has added to the discussion here. How does a board decide what to do when faced with pressure from stakeholders? How much is too much and how little is too little?
The students in my summer Regulatory Compliance, Corporate Governance, and Sustainability course were torn when they acted as board members deciding whether to make a public statement on Black Lives Matter and the murder of George Floyd. As fiduciaries of a consumer goods company, the “board members” felt that they had to say “something,” but in the days before class they had seen the explosion of current and former employees exposing companies with strong social justice messaging by pointing to hypocrisy in their treatment of employees and stakeholders. They had witnessed the controversy over changing the name of the Redskins based on pressure from FedEx and other sponsors (and not the Native Americans and others who had asked for the change for years). They had heard about the name change of popular syrup, Aunt Jemima. I intentionally didn’t force my students to draft a statement. They merely had to decide whether to speak at all, and this was difficult when looking at the external realities. Most of the students voted to make some sort of statement even as every day on social media, another “woke” company had to defend itself in the court of public opinion. Others, like Nike, have received praise for taking a strong stand in the face of public pressure long before it was cool and profitable to be “woke.”
Now it’s time for companies to defend themselves in actual court (assuming plaintiffs can get past various procedural hurdles). Notwithstanding Facebook and Oracle’s Delaware forum selection bylaws, the same lawyers who filed the shareholder derivative action against Google after its extraordinary sexual harassment settlement have filed shareholder derivative suits in California against Facebook, Oracle, and Qualcomm. Among other things, these suits generally allege breach of the Caremark duty, false statements in proxy materials purporting to have a commitment to diversity, breach of fiduciary duty relating to a diverse slate of candidates for board positions, and unjust enrichment. Plaintiffs have labeled these cases civil rights suits, targeting Facebook for allowing hate speech and discriminatory advertising, Qualcomm for underpaying women and minorities by $400 million, and Oracle for having no Black board members or executives. Oracle also faces a separate class action lawsuit based on unequal pay and gender.
Why these companies? According to the complaints, “[i]f Oracle simply disclosed that it does not want any Black individuals on its Board, it would be racist but honest…” and “[a]t Facebook, apparently Zuckerberg wants Blacks to be seen but not heard.” Counsel Bottini explained, “when you actually go back and look at these proxy statements and what they’ve filed with the SEC, they’re actually lying to shareholders.”
I’m not going to discuss the merits of these cases. Instead, for great analysis, please see here written by attorneys at my old law firm Cleary Gottlieb. I’ll do some actual legal analysis during my CLE presentation at the University of Tennessee Transactions conference on October 16th.
Instead, I’m going to make this a little more personal. I’m used to being the only Black person and definitely the only Black woman in the room. It’s happened in school, at work, on academic panels, and in organizations. When I testified before Congress on a provision of Dodd-Frank, a Black Congressman who grilled me mercilessly during my testimony came up to me afterwards to tell me how rare it was to see a Black woman testify about anything, much less corporate issues. He expressed his pride. For these reasons, as a Black woman in the corporate world, I’m conflicted about these lawsuits. Do corporations need to do more? Absolutely. Is litigation the right mechanism? I don’t know.
What will actually change? Whether or not these cases ever get past motions to dismiss, the defendant companies are likely to take some action. They will add the obligatory Black board members and executives. They will donate to various “woke” causes. They will hire diversity consultants. Indeed, many of my colleagues who have done diversity, equity, and inclusion work for years are busier than they have ever been with speaking gigs and training engagements. But what will actually change in the long term for Black employees, consumers, suppliers, and communities?
When a person is hired or appointed as the “token,” especially after a lawsuit, colleagues often believe that the person is under or unqualified. The new hire or appointee starts under a cloud of suspicion and sometimes resentment. Many eventually resign or get pushed out. Ironically, I personally know several diversity officers who have left their positions with prestigious companies because they were hired as window dressing. Although I don’t know Morgan Stanley’s first Chief Diversity Officer, Marilyn Booker, her story is familiar to me, and she has now filed suit against her own company alleging racial bias.
So I’ll keep an eye on what these defendants and other companies do. Actions speak louder than words. I don’t think that shareholder derivative suits are necessarily the answer, but at least they may prompt more companies to have meaningful conversations that go beyond hashtag activism.
August 14, 2020 in Ann Lipton, Compliance, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Financial Markets, Management, Marcia Narine Weldon, Shareholders, Stefan J. Padfield | Permalink | Comments (0)
Friday, July 24, 2020
Yesterday, I had the pleasure of moderating a panel of Black entrepreneurs sponsored by the Miami Finance Forum, a group of finance, investment management, banking, capital markets, private equity, venture capital, legal, accounting and related professionals. When every company and law firm was posting about Black Lives Matter and donating to various causes, my colleague Richard Montes de Oca, an MFF board member, decided that he wanted to do more than post a generic message. He and the MFF board decided to launch a series of webinars on Black entrepreneurship. The first panel featured Jamarlin Martin, who runs a digital media company and has a podcast; Brian Brackeen, GP of Lightship Capital and founder of Kairos, a facial recognition tech company; and Raoul Thomas, CEO of CGI Merchant Group, a real estate private equity group.
These panelists aren't the typical Black entrepreneurs. Here are some sobering statistics:
- Black-owned business get their initial financing through 44% cash; 15% family and friends; 9% line of credit; 7% unsecured loans; and 3% SBA loans;
- Between February and April 2020, 41% of Black-owned businesses, 33% of Latinx businesses, and 26% of Asian-owned businesses closed while 17% of White-owned business closed;
- As of 2019, the overwhelming majority of businesses in majority Black and Hispanic neighborhoods did not have enough cash on hand to pay for two weeks worth of bills;
- The Center for Responsible Lending noted that in April, 95% of Black-owned businesses were tiny companies with slim change of achieving loans in the initial rounds of the Paycheck Protection Program;
- Only 12% of Black and Hispanic business owners polled between April 30-May 12 had received the funding they requested from the stimulus program. In contrast half of all small business had received PPP funds in the same poll.
Because we only had an hour for the panel, we didn't cover as much as I would have liked on those statistics. Here's what we did discuss:
- the failure of boards of directors and companies to do meaningful work around diversity and inclusion- note next week, I will post about the spate of shareholder derivative actions filed against companies for false statements about diversity commitments;
- the perceptions of tokenism and "shallow, ambiguous" diversity initiatives;
- how to get business allies of all backgrounds;
- the need for more than trickle down initiatives where the people at the bottom of the corporation/society don't reap benefits;
- the fact that investing in Black venture capitalists does not mean that those Black VCs will invest in Black entrepreneurs and the need for more transparency and accountability;
- whether the Black middle class still exists and the responsibility of wealthier Black professionals to provide mentorship and resources;
- why it's easier for entrepreneurs to get investments for products vs. services, and a hack to convince VCs to invest in the service;
- whether a great team can make up for a so-so product when a VC hears a pitch;
- why there are so many obstacles to being a Black LGBTQ entrepreneur and how to turn it to an advantage when pitching; and
- whether reparations will actually help Black entrepreneurs and communities.
If you want to hear the answers to these questions, click here for access to the webinar. Stay safe and wear your masks!
July 24, 2020 in Corporations, CSR, Current Affairs, Entrepreneurship, Family Business, Management, Marcia Narine Weldon, Private Equity, Service, Shareholders, Technology, Venture Capital | Permalink | Comments (0)
Tuesday, July 14, 2020
Earlier today (July 14), Fordham University hosted a webinar entitled Reopening Justly or Just Reopening: Catholic Social Teaching, Universities & COVID-19.
Speakers on the topic of the ethics of reopening schools include the following theology professors:
- Christine Firer Hinze (Fordham)
- Gerald Beyer (Villanova)
- Craig Ford (St. Norbert)
- Kate Ward (Marquette)
Christine Firer Hinze discussed Catholic Social Thought, human dignity, and solidarity. She reminded us that reopening universities is literally a question of life and death, but is also a question of livelihood. Gerald Beyer stressed looking to the the latest science and considering the common good (the flourishing of all). Craig Ford commented on the reality that some universities may be facing financial collapse, that the pandemic is likely to be with us for a long while, and that there are no perfect solutions. Ford also suggested a focus on protecting those who are most vulnerable. Kate Ward talked about moral injury, lamentation, and redemption. A question and answer period --- including on the topics of racial justice, transparency, shared sacrifices and mental health --- followed opening remarks.
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.
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.
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)
Friday, April 12, 2019
As a former compliance officer who is now an academic, I've been obsessed with the $25 million Varsity Blues college admissions scandal. Compliance officers are always looking for titillating stories for training and illustration purposes, and this one has it all-- bribery, Hollywood stars, a BigLaw partner, Instagram influencers, and big name schools. Over fifty people face charges or have already pled guilty, and the fallout will continue for some time. We've seen bribery in the university setting before but those cases concerned recruitment of actual athletes.
Although Operation Varsity Blues concerns elite colleges, it provides a wake up call for all universities and an even better cautionary tale for businesses of all types that think of bribery as something that happens overseas. As former Justice Department compliance counsel, Hui Chen, wrote, "bribery. . . is not an act confined by geographies. Like most frauds, it is a product of motive, opportunity, and rationalization. Where there are power and benefits to be traded, there would be bribes."
My former colleague and a rising star in the compliance world, AP Capaldo, has some great insights on the scandal in this podcast. I recommend that you listen to it, but if you don't have time, here are some questions that she would ask if doing a post mortem at the named universities. With some tweaks, compliance officers, legal counsel, and auditors for all businesses should consider:
1) What kind of training does our staff receive? How often?
2) Does it address the issues that are likely to occur in our industry?
3) When was the last time we spot checked these areas for compliance ? In the context of the universities, were these scholarships or set asides within the scope of routine audits or any other internal controls or reviews?
4) What factors or aspects of the culture could contribute to a scandal like this? What are our red flags and blind spots? Do we have a cultural permissiveness that could lead to this? In the context of the implicated universities, who knew or had reason to know?
5) How can we do a values-based analysis? Do we need to rethink our values or put some teeth behind them?
6) How are our resources deployed?
7) Do we have fundamental gaps in our compliance program implementation? Are we too focused on one area or another?
8) Are integrity and hallmarks of compliant behavior part of our selection/hiring process?
Capaldo recommends that universities tap into their internal resources of law and ethics professors who can staff multidisciplinary task forces to craft programs and curate cultures to ensure measurable improvements in compliance and a decrease in misconduct. I agree. I would add that as members of the law and business community and as alums of universities, we should ask our alma maters or employers whether they have considered these and other hard questions. Finally, as law and business professors, we should use this scandal in both the classroom and the faculty lounge to reinforce the importance of ethics, internal controls, compliance with law, and shared values.
April 12, 2019 in Business School, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Law Firms, Law School, Lawyering, Management, Marcia Narine Weldon, Sports, Teaching | Permalink | Comments (0)
Tuesday, February 12, 2019
Sometimes, LLC cases are a mess. It is often hard to tell whether the court is misstating something, whether the LLCs (and their counsel) are just sloppy, or both. My money, most of the time is on "both."
Consider this recent Louisiana opinion (my comments inserted):
The defendant, Riverside Drive Partners, LLC (“Riverside”) appeals the district court judgment denying its motion for a new trial related to its order of January 8, 2018, dismissing all pending claims against three parties in this multiparty litigation: (1) CCNO McDonough 16, LLC (“CCNO”); (2) R4 MCNO Acquisition LLC (“R4”); and (3) Joseph A. Stebbins, II. After review of the record in light of the applicable law and arguments of the parties, the district court judgment is affirmed. . . .
This litigation arises out of a dispute among partners in a real estate development related to the conversion of an existing historic building into an affordable housing complex. Pursuant to the Operating Agreement signed on September 30, 2013, McDonough 16, LLC, was formed to acquire, rehabilitate, and ultimately lease and operate a multi-family apartment project consisting of the historic building and a new construction building. In turn, McDonough 16, LLC had two members, also limited liability entities: (1) the “Managing Member,” CCNO [an LLC] and (2), the “Investor Member,” R4, a Delaware limited liability company with its principal place of business in New York. [Who cares? Jurisdiction of the LLC is based on the citizenship of the LLC member(s).] Likewise, CCNO had two limited liability partnerships as members: (1) CCNO Partners 2, LLC, [thus not an LLP, but and LLC] which was formed by two members who were residents of and domiciled in Orleans Parish: Mr. Stebbins and Michael Mattax; and (2) the appellant, Riverside, a Florida limited liability company [also not an LLP] with its principal place of business in Florida whose sole member, Jack Hammer, is a resident of and domiciled in Georgia. Iberia Bank was lender for the project.
CCNO McDonough 16, LLC v. R4 MCNO Acquisition, LLC, 2018-0490 (La. App. 4 Cir. 11/14/18), 259 So. 3d 1077, 1078 (comments and emphasis added)
The issue was whether Riverside, LLC, as a member of CCNO, was needed to agree for CCNO to enter a settlement agreement. The court noted,
Section 3. 13 of the CCNO Operating Agreement provides:
Overall Management Vested in Members and Managers. Except as expressly provided otherwise in this Operating Agreement or otherwise agreed in writing at a meeting, management of the Company is vested in the Members in proportion to their initial Capital Contributions, and every Member is hereby made a Manager. All powers of the Company are exercised by or under the authority of the Managers and Members and the business and affairs of the Company are managed under the direction of the Members and Managers. The Managers may engage in other activities of any nature. (Emphasis added).
In addition, the CCNO Operating Agreement defines “Majority in Interest” as “any referenced group of Managers, Members or persons who are both, a combination who, in aggregate, own more than fifty percent (50%) of the Membership Interests owned by all of such referenced group of Managers and Members.” Notably, Section 2.05 of the CCNO Operating Agreement specifically provides that any amendment to the agreement requires the approval of the beneficiary of any mortgage lien, i.e., Iberia Bank.
Riverside does not dispute that it owns less than fifty per cent of the CCNO shares or that CCNO Partners 2, of which Mr. Stebbins is a member, owns proportionally more of the membership interest in CCNO. Rather, Riverside asserts that this does not matter because, although the CCNO Operating Agreement clearly established CCNO Partners 2 owned 66.67% of CCNO (and, concomitantly, that Riverside only 33.33%), a subsequent amendment altered the proportion of ownership to 60% (CCNO Partners 2) and 40% (Riverside) and redefined “Majority in Interest” to mean “more than 60%,” thereby making any settlement agreement reached without the appellant's consent invalid.
Two closing thoughts:
- Jack Hammer as an LLC member of a construction-focused entity sounds like one of my exam characters. Awesome.
- Westlaw's synopsis states: "Managing member of limited liability corporation (LLC) brought action against investor member to enjoin removal as manager." No. An LLC is a limited liability company, not a corporation. (Regular readers had to see that coming.)
- LLCs are not limited partnerships, either, even if they are structured similarly or even use the term "partner." An LLC is a separate and unique entity. Really.