Monday, March 22, 2021
Registration is Open!
It is our great pleasure to announce that registration is now open for the seventh biennial transactional law and skills education conference to be held virtually on June 4, 2021. Please join us to celebrate and explore our theme – Emerging from the Crisis: The Future of Transactional Law and Skills Education with you. This year, we have reduced the registration fee to $50 per person. Secure your space today!
Call for Proposals
Please take a moment to review the Call for Proposals and submit your proposal here. Also, please share the CFP with your colleagues who may not have attended the Conference before. Consider forwarding it to adjuncts and professors teaching relevant subjects. Can you also think of any teachers who might be interested in attending or presenting?
The Call for Proposals deadline is 5 p.m. April 15, 2021. We look forward to receiving your proposals.
Last, but certainly not least, at this year’s Conference, we will announce the winner of the second Tina L. Stark Award for Teaching Excellence. Would you like to nominate yourself or a colleague for this award? More information will be forthcoming regarding award eligibility and the nomination process.
If you have questions regarding any of this information, please contact Kelli Pittman, Program Coordinator, at firstname.lastname@example.org or 404.727.3382.
We look forward to “seeing” you in June!
Sue Payne | Executive Director
Katherine Koops | Assistant Director
Kelli Pittman | Program Coordinator
Saturday, March 20, 2021
A speculative frenzy appears to have taken hold of markets, extending to everything from GameStop shares to sports cards and anything blockchain (again). Caught up in the mania are SPACs – specifically the blank-check firms trading before an acquisition target has been identified.
The difficulty, as the Financial Times recently reported, is that retail shareholders caught up in the SPAC craze aren’t necessarily interested in voting their shares when it comes time to consummate a merger. Worse, a large number of them may have sold their shares after the record date, leaving no one to actually cast the ballot.
Which is why Switchback Energy Acquisition Corporation recently issued the most extraordinary press release:
- Stockholders as of the Close of Business on December 16, 2020 Should Vote Their Shares Even if They No Longer Own Them
Switchback Energy Acquisition Corporation (NYSE: SBE) (“Switchback”) today announced that it convened and then adjourned, without conducting any other business, its virtual Special Meeting of Stockholders to February 25, 2021 at 10:00 a.m., Eastern time (the “Special Meeting”), to allow for more time for stockholders to vote their shares to reach the required quorum and approve the required proposals….
Switchback has received overwhelming support for the Business Combination. At the time the Special Meeting was convened, approximately 99.9% of the proxies received had been voted in favor of the transaction. However, since holders of approximately 45% of the outstanding shares submitted proxies to vote, the necessary quorum of a majority of the outstanding shares was not present. Switchback requests that any investor who held shares of stock in Switchback as of the close of business on December 16, 2020 and has not yet voted do so as soon as possible in order to avoid additional delays….
Can I still vote if I no longer own my shares?
Yes, if you owned shares as of the close of business on December 16, 2020, the record date for the Special Meeting, you can still vote your shares even if you no longer own them.
This is, I must say, quite remarkable. I mean, there have long been concerns about “empty voting,” i.e., casting ballots for shares in which you have no economic interest, including casting ballots for shares that have since been sold. See, e.g., Henry T.C. Hu & Bernard Black, The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership, 79 S. Cal. L. Rev. 811, 835 (2006). Here, everyone’s assuming that the vote was a mere formality and the reason the shares were not voted was that retail shareholders are indifferent, but what if some shareholders disfavored the merger? Pushing the deal through with the ballots of former shareholders would hardly be fair to them.
Which gets to the legal question of whether this is even okay. Delaware has vaguely suggested, you know, maybe not. For example, in In re Appraisal of Dell, 2015 WL 4313206 (Del. Ch. July 13, 2015), VC Laster held:
even the right to control how shares vote transfers with the shares, notwithstanding the legal expedient of the record date, because the subsequent holder can compel the seller to issue him a proxy (assuming the seller can be identified)
In support, he cited Commonwealth Assocs. v. Providence Health Care, Inc., 641 A.2d 155 (Del. Ch. 1993), where Chancellor Allen expressed “doubt” that a contract for the sale of shares that allowed the seller to retain the right to vote would be “be a legal, valid and enforceable provision, unless the seller maintained an interest sufficient to support the granting of an irrevocable proxy with respect to the shares.” See also In re Canal Construction Co., 182 A. 545 (Del. Ch. 1936) (“As between a transferror who has parted with all beneficial interest in stock and his transferee, the broad equities are all in favor of the latter in the matter of its voting. While the transferee may not himself be qualified to vote because he had not caused the stock to be registered in his name …, it does not necessarily follow that the transferror may exercise the voting right in defiance of the transferee's wishes. So far have courts recognized the equity of the true owner of stock to control its voting power as against the registered holder, that the latter has been required to deliver a proxy to the former.”); In re Giant Portland Cement Co., 21 A.2d 697 (Del. Ch. 1941) (“A mere nominal owner naturally owes some duties to the real beneficial or equitable owner of the stock; and even if the right to demand a proxy is not exercised, if the vendor exercises his legal right to vote in such a manner as to materially and injuriously affect the rights of the vendee, he is, perhaps, answerable in damages in some cases.”)
Those cases were about disputes between the transferor and the transferee regarding the manner in which shares would be voted, but it should also be noted that in the context of “vote-buying” allegations, Delaware has suggested that it is illegitimate to divorce economic interest in shares from the voting rights attached to them. See Crown EMAK Partners, LLC v. Kurz, 992 A.2d 377 (Del. 2010).
Anyhoo, we can add this to the growing list of “concerns about SPACs,” which is why the SEC is reportedly taking a closer look. Of course, if the world is finally opening up post-covid, speculative trading may also subside, and the problem may take care of itself.
Friday, March 19, 2021
The University of Connecticut School of Business hosts The Business and Human Rights Initiative, which “seeks to develop and support multidisciplinary and engaged research, education, and public outreach at the intersection of business and human rights.” Professor Stephen Park, Director of the Business and Human Rights Initiative, invited me to be a discussant at the most recent meeting of the Initiative’s workshop series. The workshop focused on Rachel Chambers' and Jena Martin's excellent paper, A Foreign Corrupt Practices Act for Human Rights. Here’s an abstract:
The global movement towards the adoption of human rights due diligence laws is gaining momentum. Starting in France, moving to the Netherlands, and now at the European Union level, lawmakers across Europe are accepting the need to legislate to require that companies conduct human rights due diligence throughout their global operations. The situation in the United States is very different: on the federal level there is currently no law that mandates corporate human rights due diligence. Civil society organization International Corporate Accountability Roundtable is stepping into the breach with a legislative proposal building on the model of the Foreign Corrupt Practices Act to prohibit corporations from engaging in grave human rights violations and to give the Securities and Exchange Commission and the Department of Justice the power to investigate any alleged violations.
The draft law, called the Foreign Corrupt Practices Act – Human Rights (FCPA-HR) follows the general framework of the FCPA, but with certain enumerated human rights violations as the prohibited conduct rather than bribery and corruption. The FCPA-HR continues where the FCPA left off by requiring companies to engage in substantive conduct to prevent any human rights violations from occurring in their course of business and to make regular reports regarding their compliance and success. This paper situates the draft law within the current picture for business and human rights legislation both in the United States and in Europe, identifies the strengths of using the FCPA model, and analyzes the FCPA-HR proposal, addressing the likely critiques of the proposal.
Though I have been following developments in the area of business and human rights for years, I must admit that I have not paid sufficient attention to the movement in my classroom and scholarship. Chambers’ and Martin’s paper reminds us all of the need for reform, and of the reality that legislation in this area is imminent (at home and abroad). Imposing civil and criminal liability on corporations and individuals for their direct or indirect involvement in human rights violations would force dramatic changes in corporate compliance practices. If the SEC will have primary responsibility for enforcement (as it does for the FCPA), then we can expect dramatic organizational changes at the Commission as well. With so much at stake, there is a real need for collaboration among human rights experts, lawyers, scholars, regulators, and issuers to find the right model. There’s a lot of work to do, and Chambers’ and Martin’s paper offers an excellent start. The paper remains a work in progress, but it will be available soon—I look forward to its publication!
Tuesday, March 16, 2021
2021 National Business Law Scholars Conference
June 17-18, 2021
The University of Tennessee College of Law
Call for Papers
The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 17-18, 2021. The 2021 conference is being hosted by The University of Tennessee College of Law. The conference will be conducted in a hybrid or online format, as determined by the NBLSC planning committee in the early part of 2021.
This is the twelfth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission. We expect to be in a position to offer separate programming for aspiring law professors and market entrants, as we have done in the past, likely on a separate date after the conference concludes.
Please use the conference website to submit an abstract or paper by April 9, 2021. If you have any questions, concerns, or special requests regarding the schedule, please email Professor Eric C. Chaffee at email@example.com. We will respond to submissions with notifications of acceptance shortly after the deadline. We anticipate the conference schedule will be circulated in May.
Conference Planning Committee:
Afra Afsharipour (University of California, Davis, School of Law)
Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Emory University School of Law)
Elizabeth Pollman (University of Pennsylvania Carey Law School)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)
Megan Wischmeier Shaner (University of Oklahoma College of Law)
Saturday, March 13, 2021
By now, you’ve probably seen that the SEC filed a lawsuit against AT&T for, allegedly, violating Regulation FD by selectively leaking information about an upcoming earnings announcement in 2016. According to the complaint, in previous quarters, AT&T had disappointed the market by announcing earnings below analysts’ consensus expectations; when it realized it was going to do so again, its Investor Relations department began contacting the analysts with high expectations in order to dampen their optimism. The result was a lowered consensus estimate, and when AT&T did announce its 1Q2016 results, they actually came in slightly above expectations.
AT&T disputed the charges with a curious statement:
The evidence could not be clearer – and the lack of any market reaction to AT&T's first quarter 2016 results confirms – there was no disclosure of material nonpublic information and no violation of Regulation FD.
Well, yeah, genius, because the point of the scheme was to prevent a market reaction to AT&T’s first quarter 2016 results.
But what really strikes me about the whole situation is that it’s as clear an example as you can imagine of a company apparently violating the securities laws for the explicit purpose of trying to avoid a negative market reaction rather than to induce a positive one.
That’s important because in recent years, defendants in Section 10(b) actions have tried to cast doubt on the viability of the “price maintenance” theory of fraud, i.e., the theory that some fraudulent actions are designed not to push prices upward, but to withhold negative information so that prices can be maintained at existing levels. Defendants have argued that statements that merely maintain prices are not material to investors and/or have no impact on prices, and therefore cannot form the basis of a fraud claim. Happily, most courts have rejected that argument, but it’s getting a new workout now before the Supreme Court in Goldman Sachs v. Arkansas Teachers’ Retirement System (my most recent blog post on that case is here; it links to earlier ones). There, the defendants are not explicitly arguing that price maintenance theory is illegitimate, but they are suggesting there is something suspicious about it that warrants extra scrutiny:
Critically, respondents conceded that the challenged statements did not increase Goldman Sachs’ stock price when made. Instead, respondents relied on the increasingly popular “inflation-maintenance” theory—a theory this Court has never endorsed—to assert that the statements maintained the stock price at a previously inflated level….
The inflation-maintenance theory already seriously impedes a defendant’s ability to rebut the Basic presumption. The theory allows plaintiffs to rely on the presumption even if there is no evidence that a misstatement increased the stock price when it was made. Nor do plaintiffs need to identify what statement (if any) inflated the price in the first place.
Some of Goldman’s amici are attacking the theory more directly. To wit.
Happily, a group of former SEC officials have filed a brief in support of the plaintiffs that is almost entirely devoted to defending the inflation-maintenance theory, and highlighting how important it’s been to SEC enforcement actions.
(In case anyone cares, I also signed on to a law professors’ brief in support of the plaintiffs, here).
To bring this back to AT&T, obviously, AT&T is not accused of fraud, or doing anything to mislead the market, but its alleged conduct demonstrates the lengths to which companies will go in order to avoid negative market shocks; it should be utterly unsurprising that many frauds are designed precisely to minimize market reaction, and defendants in those cases shouldn’t be rewarded for success.
That said, as Matt Levine points out, in AT&T’s case specifically, the whole kerfuffle raises interesting questions about what kinds of information move the market or are material to it. If AT&T’s stock price stayed flat after its earnings announcement because the company had already lowered analysts’ expectations, you would expect to see a downward drift in the stock price before the announcement, when AT&T was quietly walking it down. I eyeballed its stock prices during that period and - without running a statistical analysis or comparing it to peer companies or anything - it doesn’t seem like the revisions to analyst estimates was having much of an effect. That could be for any number of reasons - my eyeballs may not be sensitive enough to the detect the pattern, or maybe these analysts were already known to get things wrong and their estimates weren’t baked into the stock price - but it’s amusing that (AT&T thought, at least) the difference between a negative market reaction and no reaction was not the earnings themselves, but what analysts had said about them the day before. In fact, the market appears to have been a lot more sanguine about analyst commentary than AT&T was.
Which, ahem, doesn’t mean that nonpublic information AT&T’s upcoming earnings was not material; just that it confirmed market expectations, no matter what analysts said. If anything wasn’t material here, it was the analysts.
The Goldman case is set for oral argument on March 29.
Friday, March 12, 2021
It's been one year since the US declared a pandemic. It's been a stressful time for everyone, but this post will focus on lawyers.
I haven't posted any substantive legal content on LinkedIn in weeks because so many of my woo woo, motivational posts have been resonating with my contacts. They've shared the posts, and lawyers from around the world have reached out to me thanking me for sharing positive, inspirational messages. I hope that this care and compassion in the (my) legal community will continue once people return back to the office.
Earlier this week, I took a chance and posted about a particularly dark period in my life. I've now received several requests to connect and to speak to legal groups and law firms about mindset, wellness, resilience, and stress management. I've heard from executives that I used to work with 15 years ago asking to reconnect. Others have publicly or privately shared their own struggles with mental health or depression. I'm attaching a link to the video here. Warning- it addresses suicide prevention, but it may help someone.
I'm also sharing an article that my colleague Jarrod Reich wrote last year. He and I have just finished sitting on a panel on Corporate Counsel and Professional Responsibility Post COVID-19, and it's clear that the issue of lawyers and mental health could have been its own symposium. Here is the abstract for his article, Capitalizing on Healthy Lawyers: The Business Case for Law Firms to Promote and Prioritize Lawyer Well-Being.
This Article is the first to make the business case for firms to promote and prioritize lawyer well-being. For more than three decades, quantitative research has demonstrated that lawyers suffer from depression, anxiety, and addiction far in excess of the general population. Since that time, there have been many calls within and outside the profession for changes to be made to promote, prioritize, and improve lawyer well-being, particularly because many aspects of the current law school and law firm models exacerbate mental health and addiction issues, as well as overall law student and lawyer distress. These calls for change, made on moral and humanitarian grounds, largely have been ignored; in fact, over the years the pervasiveness of mental health and addiction issues within the profession have persisted, if not increased. This Article argues that these moral- and humanitarian-based calls for change have gone unheeded because law firms have not had financial incentives to respond to them.
In making the business case for change, this Article argues that systemic changes designed to support and resources to lawyers will avoid costs associated with lawyer mental health and addiction issues and, more importantly, create efficiencies that will increase firms’ long-term financial stability and growth. It demonstrates that this business case is especially strong now in light of not only societal and generational factors, but also changes within the profession itself well. As firms have begun to take incremental steps to promote lawyer well-being, lasting and meaningful change will further benefit firms’ collective bottom lines as it will improve: (1) performance, as clients are demanding efficiency in the way their matters are staffed and billed; (2) retention, as that creates efficiencies and the continuous relationships demanded by clients; and (3) recruitment, particularly as younger millennial and Generation Z lawyers—who prioritize mental health and well-being—enter the profession.
If you have any feedback on Jarrod's article or tips on how you are coping, surviving, or thriving in these times, please feel free to drop them in the comments.
Take care and stay safe.
Wednesday, March 10, 2021
"I'm no civ-pro geek," I confessed today at a research presentation by OU College of Law colleagues Professors Steven Gensler and Roger Michalski on their recent article, The Million Dollar Diversity Docket. But I also shared having been immediately intrigued by their paper after reading its abstract. And I am even more so now after today's presentation. Diversity of citizenship jurisdiction is, of course, a tremendously important subject for both business lawyers and business litigation. So, even if like me, civil procedure generally isn't your thing, check out their fascinating project! Here's the article's Abstract:
What would happen if Congress raised the jurisdictional amount in the diversity jurisdiction statute? Given that it has been almost 25 years since the last increase, we are probably overdue for another one. But to what amount? And with what effect? What would happen if Congress raised the jurisdictional amount from the current $75,000 to $250,000 or, say, $1 million?
Using a novel hand-coded data set of pleadings in 2900 cases, we show that the jurisdictional amount is not a neutral throttle. Instead, different areas of law, different parts of the country, and different litigants are more affected by changes in the jurisdictional amount than others. Our findings thus provide new guidance for Congress to consider when evaluating proposed changes to the amount threshold.
We build from our data to explore different ways Congress could use the amount in controversy lever to adjust the diversity docket, ranging from traditional techniques like incremental inflation-adjustments to radical experiments with lotteries or replacing the amount in controversy minimum with a maximum. Our analysis of the options highlights the normative choices Congress makes when deciding which cases to bless and curse with a federal forum. Thus, our study also provides a new window into the longstanding debates about the existence and reach of diversity jurisdiction. We hope our empirical work will inform these debates and enable a new wave of scholarship on the basic functions and functioning of the federal diversity docket.
Monday, March 8, 2021
Friend-of-the-BLPB Bernie Sharfman and his co-author Vincent Deluard recently posted their article, How Discretionary Decision-Making Has Created Performance and Legal Disclosure Issues for the S&P 500 Index, on SSRN. The article plays to several audiences, as noted by the authors. The SSRN abstract follows:
When investment funds track the S&P 500, the index becomes more than just a list of 500 companies. The focus then turns to the financial and regulatory issues that arise from the discretionary decision-making of its Index Committee. The discussion of these issues and their implications should be of extreme interest to both investors and regulators. This discussion involves: how Sharpe’s equality will hold in practice, what kind of companies may still be impacted by the index effect, how we are to understand the expected returns versus risk of a broad based market portfolio, whether funds that track the S&P 500 are to be considered actively managed or passive, the S&P 500’s suitability as an “appropriate” benchmark index, and what kind of legal disclosures are required in the use of the index. As a result of our discussion, including our empirical findings, we do not find the S&P 500 index to be desirable for either tracking or benchmarking purposes, even though our proposed legal disclosures should mitigate any potential legal liability for its continued use.
Our paper makes contributions to the literature on index managers and the SEC’s disclosure policy for open-end investment management companies. Most importantly, it will help guide the investment decisions of tens of millions of investors who are currently invested in, or are considering investing in, funds that track the S&P 500.
The abstract is thought-provoking. I am always interested in reading works that rely, illuminate, or comment on disclosure policy. And I believe my son has invested in at least one index fund that tracks the S&P 500. Other family members also may have investments in funds of that kind. So, I may need to read this . . . .
Saturday, March 6, 2021
Judge Rakoff’s decision in In re Nine West LBO Securities Litigation, 2020 WL 7090277 (S.D.N.Y. Dec. 4, 2020) is all the rage these days. The short version is that Nine West was taken private in a leveraged buyout by Sycamore; as part of the deal, allegedly the Sycamore buyers caused the company to sell the profitable subsidiaries to its own affiliates for less than they were worth, and the whole thing ended in Nine West’s bankruptcy. In the wake of all of this, the debtholders (many of whom held debt that predated the sale), via the litigation trustee, sued Nine West’s former directors – the ones who had approved the sale – for violating their fiduciary duties by negotiating a deal that would result in the company’s bankruptcy. Last year, Judge Rakoff refused to dismiss the claims, in a decision that spawned a thousand law firm updates about directors’ duties when selling the company.
But what I find interesting is how little anyone – including Judge Rakoff – seems to have interrogated the legal question of to whom the directors’ fiduciary duties were owed.
The classic Delaware formulation is that directors owe a duty to advance the best interests of the “corporation and its stockholders.” Firefighters’ Pension Sys. Of Kansas City v. Presidio, 2021 WL 298141 (Del. Ch. Jan. 29, 2021). Drill down a little further, and you discover that “the corporation” is equated with stockholders. See, e.g., North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007) (“When a solvent corporation is navigating in the zone of insolvency…directors must continue to discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners.”); Revlon, Inc. v. MacAndrews & Forbes Hldgs., Inc., 506 A.2d 173 (Del. 1986) (“A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders. However, such concern for non-stockholder interests is inappropriate when an auction among active bidders is in progress, and the object no longer is to protect or maintain the corporate enterprise but to sell it to the highest bidder.”). Under these precedents, the directors’ duties are to maximize stockholder wealth. Full stop.
Normally, it would be a proposition too obvious to articulate that of course if directors are to maximize shareholder wealth, a subsidiary obligation is to try to avoid bankruptcy. But that’s because normally, bankruptcy harms the stockholders – they’re the ones left with worthless stock. But, pace Revlon and Gheewalla, you’d think that if the stockholders themselves eagerly – nay, joyfully – court bankruptcy, because they’re being bought out at $15 per share and they don’t really care what happens after that, the directors have satisfied their duties and nothing more needs be said. The whole point of Revlon, after all, is that there is such a thing as a endgame transaction, after which shareholders exit the company and fiduciary duties cease.
But even in Delaware, where the law is probably clearest, I’m not sure that’s accurate. When a corporation is insolvent, the creditors have standing on behalf of the company to sue directors for breach of fidicuary duty. See Gheewalla, 930 A.2d at 101. And what precisely are the duties of the directors in this scenario? Per VC Laster, they are the same duties that directors always have, namely, “the fiduciary duties that directors owe to the corporation to maximize its value for the benefit of all residual claimants.” Quadrant Structured Products Co., Ltd. v. Vertin, 102 A.3d 155 (Del. Ch. 2014). If directors’ duties, generally, are to benefit residual claimants, that presumably means they have a duty to avoid bankruptcy in the first place even if shareholders would prefer it. But all that just highlights the difficulty with pinning fiduciary duties to residual claimants – all claimants are residual claimants, depending on the firm’s moment in its life cycle.
But Nine West was not incorporated in Delaware; it was incorporated in Pennsylvania. And, among other things, Pennsylvania has a constituency statute, which states that in discharging their duties to “the corporation,” Pennsylvania directors may (but are not obligated) to consider the effects of an action on all corporate constituencies. See 15 Pa. Cons. Stat. § 1715. Meaning that whatever else directors’ duties are, they do not include a duty to maximize value to stockholders, whether in a sale scenario or at any other time. Which is why Nine West’s litigation trustee argued that Pennsylvania law does not require maximizing value to “short-term” shareholders (although that still leaves maddeningly vague what to do when even the interests of long-term shareholders conflict with those of creditors), and the director-defendants argued that no duty to creditors would attach until the actual point of insolvency (never mind that they themselves had allegedly occasioned the insolvency).
Which is how matters stood when the case came before Judge Rakoff.
Rakoff chose not to engage in any of this. Instead, he simply declared that the directors’ duties were to the company, but quite explicitly treated the company as having different constituencies, namely, stockholders and creditors. For example, the director defendants tried to argue that any claims against them were res judicata because when the buyout was first proposed, stockholders brought a derivative claim on the company’s behalf arguing that the deal undersold the company, and that claim was settled. Rakoff rejected the argument in part because the stockholder plaintiffs – though they had acted on the company’s behalf – had not adequately represented the interests of creditors, who were now represented on the company’s behalf by the bankruptcy litigation trustee
Having thus recognized that “company” interests may be represented either by stockholders or by creditors – but that these two groups are distinct and often at odds – Rakoff went on to conclude that the Nine West directors had neglected their duties to the company by failing to investigate the effects of the deal on the company, and, in particular, failing to investigate the possibility that the transactions would harm the company by leaving it insolvent. He further held that the Nine West directors had aided and abetted the fiduciary breaches of the Sycamore directors – who took over after the merger – by assisting them with their plan to sell off the profitable assets, which would bankrupt the company.
By focusing on the company, Rakoff obscured the implications of his holding regarding the true parties in interest. He did not say so explicitly, but the import is that if directors had investigated, and had recognized (correctly) that the deal would leave Nine West bankrupt, but also believed that the price would benefit Nine West’s shareholders, they would still have violated their duties to the company by consciously choosing to leave the company insolvent.
Thus, in this scenario, Rakoff believed the directors’ fiduciary duties prohibited them from elevating shareholders over creditors. But he didn’t cite any law for this point – not even Pennsylvania’s constituency statute (which by my read gives directors considerable discretion to decide which constituencies to favor). It’s just what necessarily follows from his reasoning.
Nine West is, then, a real-world example of the “two masters” problem that is frequently used to justify shareholder primacy. And Judge Rakoff’s opinion rejects shareholder primacy in favor of a stakeholder view of the corporation, with fiduciary duties that follow.
Here’s my take: Usually, we can avoid asking whether directors must take Action A or Action B because matters are not obviously a zero-sum game; directors are taking risks, and different constituencies may benefit more or less from those risks. Yes, shareholders may benefit from risk-taking more than creditors, but it is by no means obvious that the risk won’t pay off for everyone, and exercising business judgment means deciding how to act under conditions of uncertainty.
But the Nine West problem presents things in starker terms: Accepting the allegations as true, it was clear at the outset that the buyout would benefit shareholders at the expense of creditors, because part of the plan was to undersell the profitable Nine West assets to Sycamore affiliates, where they would be out of creditors’ reach. If that hadn’t been part of the plan, this might simply have been a gamble as to how much debt the company could support; because it was part of the plan, there was an unusually clear choice: cooperate in a scheme to remove assets from creditors’ grasp and pay off the shareholders for their participation, or – don’t.
So the question then becomes, do directors’ duties to shareholders include evading obligations to debtholders?
And I still don’t have a clear answer, but what is true is that on the one hand, directors (at least in Delaware) may not break the law even if it’s intended to benefit shareholders, In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011) (“Delaware law does not charter law breakers. Delaware law allows corporations to pursue diverse means to make a profit, subject to a critical statutory floor, which is the requirement that Delaware corporations only pursue ‘lawful business’ by ‘lawful acts.’), but on the other hand, in Delaware, directors may efficiently breach a contract if it benefits shareholders, see Frederick Hsu Living Trust v. ODN Holding, 2017 WL 1437308 (Del. Ch. Apr. 14, 2017) (“the fact that a corporation is bound by its valid contractual obligations does not mean that a board does not owe fiduciary duties when considering how to handle those contractual obligations; it rather means that the directors must evaluate the corporation’s alternatives in a world where the contract is binding. Even with an iron-clad contractual obligation, there remains room for fiduciary discretion because of the doctrine of efficient breach. Under that doctrine, a party to a contract may decide that its most advantageous course is to breach and pay damages. Just like any other decision maker, a board of directors may choose to breach if the benefits (broadly conceived) exceed the costs (again broadly conceived).”).
In other words, in a world where statutory law is “law” that the corporation may not break, but contract law is not “law” with a similar prohibition, I … do not know what to do with debt agreements subject to, among other things, bankruptcy’s prohibitions on fraudulent and preferential transfers, etc.
So really, it would be so much easier if bankruptcy law, tort law, and contract law were to solve this problem, and spare corporate law the trouble.
(For more discussion of consequences of shareholder primacy in the bankruptcy context, see Jared A. Ellias & Robert Stark, Bankruptcy Hardball, 108 Cal. L. Rev. 745 (2020)).
Just posting to let everyone know that Tulane will be hosting a virtual Corporate and Securities Roundtable on March 13, featuring a Zoom discussion of works-in-progress by professors from across the country. The full program is listed below; you can register for this (free) event by clicking here. (Sorry, no CLE for this one; join us for the love of scholarship!)
Friday, March 5, 2021
In a prior post, I reflected on evidence that motives other than profit seeking may be driving some of the recent social-media-driven “meme” trading in stocks such as GameStop. Indeed, many of these traders have publicized that they are buying and holding their positions as a form of social, political, or aesthetic expression.
We typically classify retail traders as either investors or speculators. Investors are those who research a stock’s fundamentals and buy it with the expectation that it will perform well over time. Speculators are less concerned with a stock’s fundamentals than its potential for volatility in price (up or down). A speculator looks to anticipate how other traders in a stock will react to price movements or market events and trade accordingly, sometimes entering and exiting the same position in a single trading session. Though they employ different strategies, the principal goal for both the investor and the speculator is to profit from their trading.
The recent meme-trading phenomenon, however, suggests that a new category of retail trader has emerged, the “expressive trader.” An expressive trader is one who does not trade for profit, but rather to send a message or produce a social/aesthetic effect. Social media has made expressive trading practicable for retail market participants by allowing a large number of small investors to coordinate their trading in real time to deliver their desired message in the form of a measurable impact on the targeted stock’s price.
A consistent message from expressive traders in GameStop has been to protest the Wall-Street elitism that motivated the Occupy Wall Street movement in 2011. In contrast to the Occupy Wall Street movement, however, expressive trading has permitted this message to be brought home with very real economic consequences for the movement’s perceived hedge-fund villains.
Of course expressive trading comes at a price. Expressive traders know the price movement they generate does not reflect a stock’s fundamentals, and that they may incur losses when the likely correction takes place, but they consider the act of sending the message to be worth the cost. Indeed many GameStop traders have demonstrated just such an attitude. As one commentator notes, GameStop retail traders frequently quote Heath Ledger’s Joker character from “The Dark Knight” on their trade-related posts: "It's not about the money; it's about sending a message." Or as another commentator points out, "some investors have publicly said that as long as they can hurt the hedge funds, and hurt the system, that is a benefit to them; they don't care if they hurt themselves." Another retail trader admits to buying into the GameStop surge in the hope of a quick profit, but explains that "when individual investors like him managed to inflict some serious pain on hedge funds, it wasn't about money anymore." Similarly, a delivery driver in Central Florida described her purchase of GameStop shares as a "protest" and she explains that she’s “not selling” as the price declines.
The principal GameStop-related message may be anti-hedge-fund short selling, but future expressive trading may protest companies’ labor practices, lack of board diversity, controversial products, advertising, etc. As one Washington Post op-ed author suggests, "[i]f a corporation's stock plummeted 20-30 percent in a single day, that would send a clear and resounding message to its board of directors, principal shareholders, and senior leadership team, i.e., the decision makers." With all this in mind, we should expect more expressive trading in the future.
In future posts, I will address some potential risks and benefits of expressive trading, its consequences for our traditional understanding of market functioning, and how (if at all) regulators should address it. I am also working on an article concerning expressive trading with co-authors Jeremy Kidd and George Mocsary. We look forward to sharing a draft soon!
Thursday, March 4, 2021
Although empirical scholarship dominates the field of law and finance, much of it shares a common vulnerability: an abiding faith in the accuracy and integrity of a small, specialized collection of corporate governance data. In this paper, we unveil a novel collection of three decades’ worth of corporate charters for thousands of public companies, which shows that this faith is misplaced.
We make three principal contributions to the literature. First, we label our corpus for a variety of firm- and state-level governance features. Doing so reveals significant infirmities within the most well-known corporate governance datasets, including an error rate exceeding eighty percent in the G-Index, the most widely used proxy for “good governance” in law and finance. Correcting these errors substantially weakens one of the most well-known results in law and finance, which associates good governance with higher investment returns. Second, we make our corpus freely available to others, in hope of providing a long-overdue resource for traditional scholars as well as those exploring new frontiers in corporate governance, ranging from machine learning to stakeholder governance to the effects of common ownership. Third, and more broadly, our analysis exposes twin cautionary tales about the critical role of lawyers in empirical research, and the dubious practice of throttling public access to public records.
The authors recognized a major problem underlying much of the past empirical research, namely that "several of the most heavily relied-upon governance datasets suffer from inaccuracies so extensive so as to call into question some of the landmark insights of the field." After putting in an enormous amount of work to get a more reliable dataset, they show that some of the most significant findings in the field, now need to be re-evaluated. They're also releasing the dataset so that others can work with it. They also explain that part of the reason why inaccuracies and poor datasets have lingered for so long is that notable jurisdictions (ahem Delaware) "actively throttle public access" to documents.
In the coming months and years, I expect that the dataset will be used to reevaluate much of what we now think we know about corporate governance. By making their data open -source, any errors inadvertently made in the collection appear unlikely to persist as others work with the data.
The authors explain that they are "deeply indebted to" an extensive team of assistants for their work. The Senior Research Assistants (JD students or recent grads) were: Nicole Banton, Matthew Cunningham, Deandra Fike, Channing Gatewood, Katie Gresham, Qifan Huang, Elisha Jones, Sami Kattan, Gabrielle Kiefer, Andrew Kim, Adam Mazin, Cameron Molis, Courtney Murray, Doriane Nguenang, Sneha Pandya, Emily Park, Olivia Roat, Bhargav Setlur, Tom St. Henry, Avi Weiss, Gretchen Winkel, Geoffrey Xiao, and Ben Zonenshayn. Research Assistants (undergraduate students) were: Nathaniel Barrett, Amanda Cooper, Elif Nazli Hamutcu, Alex Inskeep, Justen Joffe, Alexa Levy, Annabelle Liu, Noam Miller, Emily Moini,Stephen Rothman, Adrien Stein, Max Swan, and Agnes Tran.
Wednesday, March 3, 2021
I recently had the good fortune to hear Professor Jonathan R. Macey speak about his insightful and timely new article, Fair Credit Markets: Using Household Balance Sheets to Promote Consumer Welfare (forthcoming, Texas Law Review). I wanted to highlight it to readers and share the Abstract:
Access to credit can provide a path out of poverty. Improvidently granted, however, credit also can lead to financial ruin for the borrower. Strangely, the various regulatory approaches to consumer lending do not effectively distinguish between these two effects of the lending process. This Article develops a framework, based on the household balance sheet, that distinguishes between lending that is welfare enhancing for the borrower and lending that is potentially (indeed likely) ruinous, and argues that the two types of lending should be regulated in vastly different ways.
From a balance sheet perspective, various kinds of personal loans impact borrowers in vastly different ways. Specifically, there is a difference among loans based on whether the loan proceeds are being used: (a) to make an investment (where the borrower hopes to earn a spread between the cost of the borrowing and the returns on the investment); (b) to fund capital expenditures (homes, cars, etc.); or (c) to fund current consumption (medical care, food, etc.). From a balance sheet perspective, this third type of lending is distinct. Such loans reduce wealth and are correlated with significant physical and mental health problems. In contrast, loans used to acquire capital assets (i.e. houses) are positively correlated with such socioeconomic indicators.
Payday loans are the paradigmatic example of the use of credit to fund current consumption. Loans to fund current consumption reduce the wealth of the borrower because they create a liability on the “personal balance sheet” of the borrower, without creating any corresponding asset. The general category of loans to fund current consumption includes both loans used to fund unforeseen contingencies like emergency medical care or emergency car repairs, and those used to make routine purchases. Consistent with the stated justification for creating these lending facilities, which is to serve households and communities, the emergency lending facilities of the U.S. Federal Reserve should be made accessible to individuals facing emergency liquidity needs.
Loans that are taken out for current consumption but are not used for emergencies also should be afforded special regulatory treatment. Lenders who make non-emergency loans for current consumption should owe fiduciary duties to their borrowers. Compliance with such duties would require not only much greater disclosure than is currently required. It also would impose a duty of suitability on lenders, which would require lenders to provide borrowers with the loan most appropriate for their needs, among other protections discussed here. These heightened duties also should be extended to borrowers when they take out a loan that increases the debt on a borrower’s balance sheet by more than 25 percent.
Tuesday, March 2, 2021
FYI: “Society of Socio-Economists (SoS) (Virtual) Meeting Program: ‘Ethical Dimensions of Economic Analysis and Pressing Social Issues’”
On Saturday, March 6, 2021, 1:00 pm - 4:00 pm (Eastern Time) the following presentations/discussions are scheduled as part of the next Society of Socio-Economists Meeting (Zoom link and additional information here).
1:00 - 1:30 Welcoming Remarks, Discussion of Pressing Social Issues and Future Meetings
1:30 - 2:25 Ethical Dimensions of Economic Analysis
Deirdre McCloskey (Economics, History and Communication, Emerita, Illinois-Chicago)
Shubha Ghosh (Law and Economics, Syracuse)
2:30 - 3:25 Modern Monetary Theory: Is Money Debt? Does it Matter? Who Decides When the Economy is at Full Capacity?
Rohan Gray (Law, Willamette)
William Black (Law and Economics, Missouri - Kansas City)
Philip Harvey (Law and Economics, Rutgers - Camden)
Nicolaus Tideman (Economics, Virginia Tech)
3:00 - 3:25 Continuation of Discussion of Pressing Social Issues and Future Meetings
3:30 - 3:50 For Whose Benefit Public Corporations?
Sergio Gramitto (Law, Monash) “The Corporate Governance Game”
3:50 - 4:00 Concluding Session.
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, February 28, 2021
This comes to us from friend-of-the-BLPB, Agnieszka McPeak:
Gonzaga Law is seeking a visiting assistant professor (VAP) for its Center for Law, Ethics, and Commerce, a centerpiece of Gonzaga Law School’s identity and mission. Persons with strong academic records, a dedicated commitment to teaching, and the potential for outstanding scholarship are encouraged to apply. The position is a full-time, 9-month, visiting position beginning in August 2021, with the potential to renew for one (but no more than one) additional year (contingent upon funding). The fellow may be permitted to work entirely remotely.
The successful candidate will teach up to three courses in the academic year in areas related to the Center and its mission, including at least one upper-level Business Law elective. Experiential and clinical teaching are also optional. The candidate will work closely with the Director of the Center for Law, Ethics, and Commerce to plan and participate in activities related to the Center’s goals and mission. In addition, the VAP will be invited to participate in faculty workshops and will be offered a budget for scholarship and travel. More information here: https://gonzaga.peopleadmin.com/postings/15150
I know Agnieszka (who directs the Center for Law, Ethics, and Commerce) is excited to hire for this position, which is likely to be attractive to aspiring law professors who may have a business/innovation interest and expertise. Please send folks her way!
Saturday, February 27, 2021
Last week, I blogged about the dominance of Delaware organizational law and its implications for the laws of other states. Which is why I was so interested to when Omari Scott Simmons posted his new paper, The Federal Option: Delaware as De Facto Agency, which takes a (sort of) different view. He argues that Delaware has become de facto federal agency, delegated by the federal government the power to make corporate law nationally, and that this system works well for now, though there might be circumstances where federal chartering – and the structural oversight that would come with it – might be appropriate. These could include situations where companies have received governmental bailouts, or where companies have committed significant wrongdoing and subject themselves to federal oversight as part of their settlement.
Of course, the concerns I’ve expressed in my posts are of a slightly different order – they’re about Delaware organizational law extending beyond the boundaries of internal affairs (and Delaware’s ability to define those boundaries in the first place) – but still, it’s an interesting holistic look at Delaware’s role in the corporate governance ecosystem. Here is the abstract:
Despite over 200 years of deliberation and debate, the United States has not adopted a federal corporate chartering law. Instead, Delaware is the “Federal Option” for corporate law and adjudication. The contemporary federal corporate chartering debate is, in part, a referendum on its role. Although the federal government has regulated other aspects of interstate commerce and has the power to charter corporations and, pursuant to its Commerce Clause power, preempt Delaware, it has not done so. Despite the rich and robust scholarly discussion of Delaware’s jurisdictional dominance, its role as a de facto national regulator remains underdeveloped. This article addresses a vexing question: Can Delaware, a haven for incorporation and adjudication, serve as an effective national regulator? Following an analysis of federal chartering alternatives, such as the Nader Plan, the Warren Plan, the Sanders Plan, and other modes of regulation, the answer is yes, but with some caveats and qualifications. Delaware’s adequate, if imperfect, performance as a surrogate national regulator of corporate internal affairs argues against the upheaval of the existing corporate law framework federal chartering would bring. Even in the contemporary moment where longstanding concerns about corporate power, purpose, accountability, and the uneasy relationship between corporations and society are amplified, Delaware can continue to perform an important agency-like role in collaboration with federal regulators, and regulated firms. A deeper examination comparing the merits of federal corporate chartering with Delaware’s de facto agency function illuminates the potential of existing and future reforms. This article concludes that federal chartering proposals have an important impact despite not being adopted for centuries. First, federal chartering proposals encourage policymakers to look beyond the status quo toward greater hybridization in regulatory design. Second, elements of previous federal chartering proposals have historically become successful “à la carte” reforms or part of other successful reform measures. Third, federal chartering proposals provide value as a bargaining tool where the threat of more intrusive federal regulation makes other reform methods more palatable to diverse corporate constituencies.
Friday, February 26, 2021
This isn't the post I had planned to write. In fact, I had two other ideas. But I feel compelled to write this, knowing that it may cause more controversy than it's worth.
My colleague Stefan Padfield wrote a post called "The Marxism In Your Diversity Training" that some would call provocative. Others would call it offensive. I had planned to comment on it, but he's taken it down. Did I agree with everything he said? No. Did I disagree with everything he said? Also no.
I have a unique perspective. I'm a Black female. I protested about race and gender issues in college and law school. I've been a management-side employment lawyer for 25 years both as outside counsel and in house. I still consult with companies, deliver training on EEO laws and polices, conduct discrimination investigations, and advise plaintiffs. I work hard to make sure that companies do the right thing. I've posted here before about my skepticism about certain diversity mandates. Not that we don't need MUCH more work in this area, but I'm not sure the approaches that some states and companies are taking will have long-term benefits.
My law school, like all others, is trying to figure out how to deal with race and social justice in the classroom. My conversations with some students and certain faculty members have been painful, draining, and exhausting. Closer to home, I have a 25-year old Black son. He's a gifted artist, has gone to school in Paris, has visited almost 20 countries, and wouldn't hurt a fly, but he's more likely to get stopped, frisked, arrested, or shot by police than his friends because of his skin color and hair style. If I don't hear from in within a 24-hour period, I panic.
So I have lots of thoughts about Stefan's post. Right or wrong, Stefan said what a lot of people that our students will encounter think. We owe it to them and each other to use our analytical skills and face volatile issues.
I've listened to presentations by outside speakers at my law school in the face of protests by some of our students because I believe in teaching and learning through reasoned debate, when possible. But I can't comment on Stefan's post because he took it down in the face of criticism. So I'm sad, but not for the reason that most would think. I'm sad because I think we could have had a thoughtful dialogue on some uncomfortable topics and been an example on how to disagree without being disagreeable. And that's a loss for everyone.
Thursday, February 25, 2021
Carliss Chatman and Najarian Peters recently posted The Soft-Shoe and Shuffle of Law School Hiring Committee Practices, which is forthcoming in the UCLA Law Review Discourse. The piece presents their perspective on the hiring process for legal academics and how many students currently experience the academy. Since it was posted, it has averaged well over a hundred downloads a day.
The abstract also captures attention:
“We have too many Black and Brown faculty,” said no one ever in any law school. Each year we sit in appointments discussions and hear the same things. The classics-oldies but goodies from appointments committees are:
“We can’t find any qualified Black candidates.”
“There weren’t any in the Faculty Appointments Register (FAR), we scoured websites and emailed our Black friend yet found no one.” One of our colleagues actually lifted a large binder filled with leaflets from the FAR from one year over her head with both hands and waved it side to side to punctuate this very point in a faculty meeting. Everyone around the room including the Brown and other non-white faculty shook their heads in agreement co-signing. Seeing this made one of us wonder whether the FAR binder was some kind of Bible or holy text the girth of which triggered some kind of irrational response or hypnosis to accept the rhetorical fuckery that proceeded the lift. Like that table of manilla folders filled with paper that Trump used in his press conference to prove he had turned over control over his businesses to his sons or that weird blank book that Kayleigh McEnany gave “60 minutes” reporter Leslie Stahl more recently.
The piece has resonated and some scholars are sharing stories about their experiences in the hiring market and with fielding questions that no one would ask someone like me. For example:
Since we’re telling horror stories: I was asked by a dean at the meat market what I would do to improve the school’s relationship with the Black community and the BLM movement. I said “do they need to form an LLC? Cause I teach business law.” I did not receive a fly back. https://t.co/hmQXY2d7gT— Carliss Chatman (@carlissc) February 21, 2021
Wednesday, February 24, 2021
Truth be told, I don't know a whole lot about SPACs. HOWEVER, I've been encountering this topic frequently these days, whether I'm following clearing and settlement news such as Ex-Cosmo editor teams up with ice hockey owner in Spac deal or doing my daily glance at the FT and reading about Why London should resist the Spac craze. Wanting to be more in the know, I've just added Michael Klausner, Michael Ohlrogge & Emily Ruan's "A Sober Look at SPACs" to my reading list. Here's the abstract:
A Special Purpose Acquisition Company (“SPAC”) is a publicly listed firm with a two-year lifespan during which it is expected to find a private company with which to merge and thereby bring public. SPACs have been touted as a cheaper way to go public than an IPO. This paper analyzes the structure of SPACs and the costs built into their structure. We find that costs built into the SPAC structure are subtle, opaque, and far higher than has been previously recognized. Although SPACs raise $10 per share from investors in their IPOs, by the time the median SPAC merges with a target, it holds just $6.67 in cash for each outstanding share. We find, first, that for a large majority of SPACs, post-merger share prices fall, and second, that these price drops are highly correlated with the extent of dilution, or cash shortfall, in a SPAC. This implies that SPAC investors are bearing the cost of the dilution built into the SPAC structure, and in effect subsidizing the companies they bring public. We question whether this is a sustainable situation. We nonetheless propose regulatory measures that would eliminate preferences SPACs enjoy and make them more transparent, and we suggest alternative means by which companies can go public that retain the benefits of SPACs without the costs.