Sunday, October 28, 2018

ICYMI: #corpgov Weekend Roundup (Oct. 28, 2018)

October 28, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, October 27, 2018

Women And Corporate Governance Symposium

Next Friday, the George Washington Law Review will host a symposium on Women and Corporate Governance. Co-sponsored by Lisa Fairfax, the symposium features an impressive lineup--three former SEC Commissioners, regulators, professors, partners at leading law firms, and the BLPB's own Joan Heminway.  The panels include discussions about women and corporate boards, women as regulators, women in the C-Suite, and women as gatekeepers.  This is the quick overview:

The Symposium will explore the role of women in a changing corporate environment, particularly in light of the 2008 financial crisis and its aftermath. Recent social, political, and economic events have brought renewed attention to the ways in which the corporate environment is impacted by, and responsive to, women. It is especially vital to further this discussion today, as corporations grapple with the under-representation of women on their boards, in their C-suites, and in a host of other managerial positions.

In place of the traditional individual keynote, we have the privilege of hosting a fireside chat featuring the three women who have served as Chair of the U.S. Securities and Exchange Commission – Mary Schapiro, Elisse Walter, and Mary Jo White, moderated by Professor Lisa Fairfax.

Congratulations to Professor Fairfax and the George Washington Law Review for getting so many leading lights together on such an important topic.  

October 27, 2018 | Permalink | Comments (0)

Friday, October 26, 2018

New Research on FINRA Arbitration

Some business school professors recently posted new research on FINRA arbitration and came away with interesting findings.  They looked at about 9,000 different arbitration cases and found significant differences between arbitrators.  Some were more industry-friendly, meaning they gave lower awards to claimants.  Others were more client/customer-friendly, giving more awards to customers.  Unsurprisingly, industry-friendly arbitrators were 40% more likely to be selected for panels.  The authors found that industry firms were, on the whole, better at picking arbitrators than customers.

The FINRA arbitration process allows parties to influence arbitrator selection.  FINRA generates lists with arbitrators for the parties and then allows the parties to strike a certain number of arbitrators before ranking the remaining arbitrators.  FINRA appoints the highest-ranking remaining arbitrators to decide the case.

The study provides some support for a longstanding fear about the FINRA arbitration process.  Customers with cases before arbitrators are usually not repeat players in arbitration.  Once burned in a stock swindle, customers tend to become more cautious about trusting brokers. Arbitrators and firms, on the other hand, are repeat players.  If the arbitrator tags the industry with a large award and rules in favor of the customer, other industry members will likely strike that arbitrator from future panels.  Fears of exclusion may bias arbitrators against sticking the industry with large awards. In contrast, giving industry-friendly awards significantly increases an arbitrator's odds of picking up more cases.  Because arbitrators collect supplemental income from serving on cases, some may consider their personal financial incentives when deciding cases.  This financial incentive could tilt the scale against customers, making it more difficult for them to recover.

There are some customer-side repeat players involved in the process as well.  The Public Investors Arbitration Bar Association is a bar association for attorneys that represent claimants in FINRA arbitration.  The study found that customers represented by PIABA attorneys recovered four or five percent more on average of the amount sought.  Still, PIABA attorneys do not represent every customer claimant and the study provides strong evidence that arbitrators have an economic incentive to decide cases in favor of industry members.  (Quick Disclosure:  Although I am a member of PIABA's board, I am not writing on behalf of PIABA.)

One possible solution to the problem--and suggested by the study's authors--is to do away with the parties' ability to influence arbitrator selection.  This would take away an arbitrator's incentive to please the industry.  Of course, a shift away from parties selecting arbitrators from a list would put the arbitrator selection process entirely in FINRA's hands.  Because FINRA isn't subject to the Freedom of Information Act, the public would have little direct ability to verify how FINRA administered that process.  Of course, the SEC supervises FINRA's operations.  If the process changes, the SEC should keep a close eye on how FINRA administers the selection process.

October 26, 2018 | Permalink | Comments (0)

Talk About Fictional Shareholders

Daniel Greenwood coined the term “fictional shareholders” to refer to courts’ tendency to base corporate law decisions on the preferences of a set of hypothetical investors, untethered to the real-world priorities of the actual shareholders who hold a company’s stock.  See Daniel J.H. Greenwood, Fictional Shareholders: “For Whom Are Corporate Managers Trustees,” Revisited, 69 S. Cal. L. Rev. 1021 (1996).  If ever there were an illustration of Greenwood’s point, it comes in VC Laster’s recent post-trial decision in In re PLX Stockholders Litigation.

And hey, this got really long, so more under the jump

Continue reading

October 26, 2018 in Ann Lipton | Permalink | Comments (2)

Wednesday, October 24, 2018

ICYMI: #corpgov Midweek Roundup (Oct. 24, 2018)

October 24, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, October 23, 2018

Employee Stock Options in Unicorns: Scholarship At the Intersection of Securities Law and Employee Benefits

Friend of the Business Law Prof Blog Anat Beck recently posted a draft of her article entitled Unicorn Stock Options - Golden Goose or Trojan Horse? on SSRN.  I heard presentations on earlier versions of this piece, which I personally find quite intricate and interesting.  An excerpt fro the SSRN abstract follows:

This article examines a contemporary puzzle in Silicon Valley – is there a shift in unicorn employees expectations that results in labor contracting renegotiations? It explores the challenges faced by unicorn firms as repeat players in competitive technology markets. It offers the following possible solutions. First, new equity-based compensation contracts, and critiques them. Second, alternatives to the traditional liquidity mechanisms, and critiques them.

It concludes with proposals to remove legal barriers to private ordering, and new mandatory disclosure requirements.

The article has been picked up by the Harvard Law School Forum on Corporate Governance and Financial Regulation and linked to in a Matt Levine column for Bloomberg.  This is a good read, especially for those of you interested in entrepreneurial business law (which is Anat's speciality).

October 23, 2018 in Employment Law, Entrepreneurship, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Sunday, October 21, 2018

5th Conference of the French Academy of Legal Studies in Business - June 20-21 - Paris

5th Conference of the French Academy of Legal Studies in Business (Association Française Droit et Management)

June 20 and 21, 2019 – emlyon - Paris Campus

CALL FOR PAPERS 2019 Social Issues in Firms

Social issues and fundamental rights occupy an increasingly important space in the governance of today’s companies. Private enterprises assume an increasingly active role not only in a given economy but also in society as a whole. Firms become themselves citizens. They recognize and support civic engagement by the men and women who work for them. Historically, the role of the modern firm that resulted from the Industrial Revolution has been torn between two opposing viewpoints.

[More information under the break.]

Continue reading

October 21, 2018 in Business Associations, Business School, Call for Papers, Conferences, Corporate Governance, Corporations, Ethics, Haskell Murray, International Business, International Law, Management, Research/Scholarhip | Permalink | Comments (0)

Quotes from a Draft: The Search for an Egalitarian First Amendment

Jeremy Kessler and David Pozen have posted a draft of their paper The Search for an Egalitarian First Amendment on SSRN (available here).  In skimming the paper, I came across a number of quotes, including a couple of citations, I thought readers of this blog might find of interest. So, here they are, in no particular order:

-- One does not need to read Piketty ... to guess that equating corporations’ rights to spend money, sell data, and trim benefits with citizens’ First Amendment rights might prove controversial in a world of bank bailouts and mortgage foreclosures.

-- the question whether the Free Speech Clause permits a legislature to limit the election-related spending of corporations, unions, or wealthy individuals in the service of antiplutocratic goals. To help answer this question in the face of mixed precedent and negligible Founding-era evidence, the Justices have adverted to each of the three major normative theories of the First Amendment [pursuit of truth, the promotion of individual autonomy, and the facilitation of democratic self-government].

-- Both the majority and the dissent in Citizens United thus plausibly invoked each and every one of the three major First Amendment theories, as well as the value of equality itself, in support of their dueling positions. 

-- For a decade now, the “anxiety that the ‘Great Recession’ . . . defines a new economic normal,” in which the wealthiest
individuals take an ever larger piece of an ever shrinking pie, has shaped American public culture.

-- “Pikettymania” revolved around the stark neo-Marxist claim that “capitalism automatically generates arbitrary and unsustainable inequalities that radically undermine the meritocratic values on which democratic societies are based.”

-- it is not just the current composition of the Supreme Court or its most controversial free speech decisions that account for the rise of First Amendment Lochnerism—a First Amendment jurisprudence that disables redistributive regulation and exacerbates socioeconomic inequality

-- The move from speaker to system is the most powerful move in the contemporary grammar of egalitarian First Amendment argument; its underlying account of free speech does not merely complicate or chisel away at the deregulatory Lochnerian paradigm but supplies a comprehensive alternative.

-- a First Amendment-industrial complex. Mapping the contours of this complex is well beyond the scope of this Essay. The basic point, for present purposes, is that arguments for a deregulatory First Amendment are now promoted not only
(or even primarily) by for-profit companies seeking to minimize their own labor costs or regulatory burdens, but also by a growing set of nominally depoliticized nonprofits with varying degrees of connection to the business community

-- An additional feature of informational capitalism extends the potential reach of First Amendment Lochnerism: the dominant role played by private owners of the platforms through which information circulates online and within which ever more data is commodified and mined for economic value. Even though they control the infrastructure of digital communication and function as the “new governors” of the digital public sphere, companies like Facebook and Google are generally assumed to not be bound by the First Amendment because they are not state actors. Instead of empowering users to challenge their policies, the First Amendment empowers the companies themselves to challenge statutes and regulations intended to promote antidiscrimination norms or users’ speech and privacy, among other values. First Amendment law not only fails to check the internet’s new governors and the inequalities that pervade their platforms, but also stands in the way of legislative and administrative correctives.

-- The neoliberal preference is not necessarily for “free markets” as such, but for a regulatory environment that prioritizes “familiar protections of property and contract” along with “a favorable return on investment and managerial authority.” In our digital age, the facilitation of these preferences has fallen to the “information state,” the set of national (or international) bureaucracies that oversee the operations of informational capitalism. Within these bureaucracies, “mandates or bans on conduct”—such as traditional labor laws, wage and price controls, or licensing regimes—are apt to be rejected as overly market-disruptive and replaced whenever possible with “‘lighter-touch’ forms of governance . . . such as disclosure requirements” and other regulatory techniques that further the production and circulation of commercially salient information.

-- Cases decided by the Roberts Court, the Rehnquist Court, the Burger Court, and even the Stone Court have been singled out as the inflection point when First Amendment doctrine took its inegalitarian turn.

-- For an ideologically diverse range of scholars, policymakers, and activists, growing inequality names both the deep cause and the dangerous effect of a set of overlapping conflicts—economic, racial, cultural, constitutional—that threaten the stability of contemporary U.S. society.

-- Citizens United v. FEC, 558 U.S. 310, 424–25 (2010) (Stevens, J., concurring in part and dissenting in part) (“Under the majority’s view, I suppose it may be a First Amendment problem that corporations are not permitted to vote, given that voting is, among other things, a form of speech.”).

-- Citizens United v. FEC, 558 U.S. 310, 441 (2010) (Stevens, J., concurring in part and dissenting in part) (arguing that “the Constitution does, in fact, permit numerous ‘restrictions on the speech of some in order to prevent a few from drowning out the many’” (quoting Nixon v. Shrink Mo. Gov’t PAC, 528 U.S. 377, 402 (2000) (Breyer, J., concurring)))

October 21, 2018 in Constitutional Law, Corporate Governance, Stefan J. Padfield | Permalink | Comments (1)

Friday, October 19, 2018

Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation

If you follow this blog regularly, you’ve probably seen me rant about the myriad errors courts make when evaluating market and investor behavior in the context of securities litigation.  I finally did what I’d been threatening to do and compiled my complaints into a single Essay on the subject, which I presented at the Connecting the Threads symposim hosted by the University of Tennessee at Knoxville in September.  (The symposium featured all of the Business Law Prof bloggers, and Marcia posted a description of the full program here)

My Essay, along with pieces by my co-bloggers, will be published in Transactions: The Tennessee Journal of Business Law.  I’ve just posted a draft to SSRN, and – anyway, here’s Wonderwall:

Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation

Abstract: Courts entertaining class actions brought under Section 10(b) of the Securities Exchange Act are required to make numerous factual judgments about the economic effects of the alleged misconduct.  For example, they must determine whether and for how long publicly-available information has exerted an influence on security prices, and whether an alleged fraud caused economic harm to investors.  Judgments on these matters dictate whether cases will proceed to summary judgment and trial, whether classes will be certified and the scope of such classes, and the damages that investors are entitled to collect.   

Over the years, courts have developed a variety of common law doctrines to guide these inquiries.  As this Essay will demonstrate, collectively, these doctrines operate in such an artificial manner that they no longer shed light on the underlying factual inquiry, namely, the actual effect of the alleged fraud on investors.  The result is that determinations of market impact and investor loss have become, in a real sense, fictional: the size and effects of the fraud are determined based on abstract doctrine rather than any empirical assessment of market behavior.  Ultimately, these stylized approaches to assessing market evidence interfere with the ability of the Section 10(b) cause of action to fulfill its modern function as a mechanism for deterring fraud. 

This Essay therefore recommends that, to the extent possible, these inquiries should be replaced with alternative schemes that award damages based on some combination of statutory formulas and evidence of investors’ reliance on the fraud.  These alternatives would be easier for courts to administer, and would re-align the fraud-on-the-market action with its fundamental goals.

October 19, 2018 in Ann Lipton | Permalink | Comments (0)

Wednesday, October 17, 2018

Rethinking Disclosure and Investor Education

SEC Commissioner Stein recently spoke at the Brookings Institution and called for more effective investor education as well as clearer and more effective disclosures.  One suggestion was to start designing curricula and providing investor education at much earlier ages.  She highlighted work done by  Nicole Iannarone and her students at Georgia State to put investor education information into nursery rhymes  My favorite is this bit from one about REITs set to My Little Teacup:

Non-traded REIT funds,

Have unique risks.

Illiquid value,

Harder to list.

Tempting for certain,

High dividend yields,

But higher up-front fees,

Could kill.

Admittedly, I might be unusual in my enthusiasm for poetry about the risks with non-traded REITs.  My attempts at crafting non-traded REIT rhymes veer toward unprintable, scatological rhymes.

Importantly, Commissioner Stein didn't just call for putting all investor protection hopes into Investor Ed.  She recognized that it can only do so much and that more effective and useful disclosures would make a big difference as well.  She also called for disclosures to make it clear to investors exactly who they are paying and how much they pay.  

Fee confusion remains widespread.  One recent survey found that about 43% of investors just don't know how much they pay.  This signals that our current system isn't working.  It's even worse for older cohorts.  A majority of investors in their sixties or seventies either don't know what they're paying or mistakenly believe that their financial adviser gives advice for free.

It may be difficult for commission-compensated salespeople to give good advice about non-traded REITs and similar products.  Josh Brown broke down what a transparent conversation about these products would look like on his blog:

With your portfolio size and risk tolerance I would recommend a $100,000 investment.  Given that amount let’s first go over the fees.  If you invest $100,000 I will be paid a commission of $7,000. My firm is going to get $1,500 – $2,000 in revenue share. My wholesaler, the salesman that works for the investment’s sponsor company, will get $1,000. He is a great guy, buys me dinner all of the time and takes me golfing. The sponsor company is going to get around $3,000 to pay for some of the costs they incurred in setting up the investment.  So all in on Day 1 there will be around $87,000 left over to actually invest.  I bet you are getting excited.

As the conversation around disclosure continues, we need to pay more attention to what disclosures actually increase understanding.  

October 17, 2018 | Permalink | Comments (2)

John Marshall Law School in Chicago seeks visiting faculty members for Spring 2019

The following comes to us from  John Marshall Law School Associate Dean David Sorkin. 

Spring 2019 Full-Time Faculty Podium Visitors

The John Marshall Law School in Chicago seeks one or two full-time visiting faculty members for the Spring 2019 semester. We need coverage in the areas of Corporations, Civil Procedure (evening course), Secured Transactions, and Estates & Trusts. The appointment is for one semester, but we will be seeking visitors for the 2019–2020 academic year in these areas plus some combination of Evidence, Criminal Law, and Property.

Candidates should have taught full-time at an ABA-approved law school.

To Apply:

Submit a current CV, cover letter, and three professional references to Associate Dean David Sorkin at The review will begin immediately and continue on a rolling basis until one or both positions are filled. We may request a Skype or in-person interview and submission of prior teaching evaluations.

The John Marshall Law School, finding any invidious discrimination inconsistent with the mission of free academic inquiry, does not discriminate in admission, services, or employment on the basis of race, color, sex, religion, national origin, ancestry, age, disability, veteran status, marital status, sexual orientation, gender identity, gender expression, genetic characteristics, or any other characteristic protected by applicable law.

October 17, 2018 in Jobs, Stefan J. Padfield | Permalink | Comments (0)

Tuesday, October 16, 2018

And So, I Brag: Business Law Students with Initiative

I try not to use this space too often to brag on my students--the folks whose quest for knowledge gets me up in the morning.  But three of my students have been co-authors of two separate pieces in the American Bar Association's Business Law Today publication since May.  The initiative and the follow-through that these students (two of whom have graduated and are now in private practice) exhibited is truly extraordinary.  And so, I brag . . . .

Most recently, my current student Samuel Henninger has co-authored an article with a practitioner on preference payments in bankruptcy entitled "I Scream, You Scream, We All Scream at Preference Claims."  Samuel graduates in May 2019. He will clerk for a local bankruptcy court judge next year and then practice with Waller Lansden Dortch & Davis, LLP in Nashville after his clerkship concludes.

Back in May, my former students Brian Adams and Bo Cook co-authored an article together entitled "Limiting the Scope of Post-Closing Actions in Private Mergers & Acquisitions: The Role of Non-Reliance and Integration Clauses in Delaware," delving into enforcement issues in mergers and acquisitions relating to allegations of fraud based on "extra-contractual representations."  Brian and Bo graduated in the spring of this year (2018).  Brian is a newly minted associate at Polsinelli PC in Nashville and Bo holds the same august position at Bass Berry & Sims PLC also in Nashville.

Few students understand the significant contribution that these kinds of articles may make in solving the problems of practicing lawyers and, potentially, the judiciary.  Fewer yet have the chutzpah to think that their article of this kind, if submitted, would make it to publication.  Even fewer students would undertake and complete the tailored research and writing that an article of this kind takes.  These three guys deserve some real credit, in my estimation.  And so, I brag!

October 16, 2018 in Bankruptcy/Reorganizations, Joan Heminway, M&A | Permalink | Comments (1)

Temple University Faculty Development in International Business Program

I posted about this program last year, too, and it looks like another good program this year. Hard to beat good wine and learning about international business, I would think,  but I can't make it again this year.  It overlaps with the AALS Annual Meeting, and I have plans for New Orleans.  But, if it's your thing, it looks like a neat opportunity.  

Temple University's Center for International Business Education (CIBE) presents

A Faculty Development in International Business (FDIB): Santiago, Chile

January 5-11, 2019


Chile: The Global Star of Latin America

Understanding the International Business Environment through Innovation in Chile

Chile is often considered to be the place where great Latin American wines come from. Some may even know that Chile is also the hub of the global copper industry. But what many people are unaware of is how Chile became the only South American country invited to join the OECD, or how it is a country that has signed 21 free trade agreements and is one of the most open economies in the world, or the fact that it is rapidly attracting foreign innovators and entrepreneurs through a unique start-up incubator program for investors worldwide. Chile serves as an example of what a Latin American country can do with the right economic and social policies in place. It is the star of the South.

On this FDIB, faculty will be immersed in the Chilean business environment and will meet with business and academic thought leaders across innovative sectors from copper to manufacturing to wine. Our emphasis will be on how a small Latin American economy far removed from major trade routes has excelled through its linkages to the global business environment. Two key sectors—wine and copper—have driven much of this growth and will be a large part of our focus. However, we will also explore the start-up, education, and manufacturing sectors, in order to grasp a full picture of the Chilean business environment. In addition to the robust academic content, participants will have a chance to explore Chile’s marvelous natural environment and history through cultural activities and events, from visiting a wine innovation center to exploring the effects of the dictatorship on Chilean business and social culture.  Some of the key learning outcomes will include:

  • A better understanding of how innovation is utilized to drive growth in emerging markets;
  • A comparative study of innovation in emerging and developed markets;
  • Increased awareness of the importance of global markets for commodity production, such as grapes and copper, and;
  • Fundamental insights into Latin American economic development and business strategy. 

This Chilean immersion experience is being led by Fox School of Business Assistant Professor Dr. Kevin Fandl, a professor of legal studies and international business. Dr. Fandl’s research emphasizes the relationship between law, policy, and business in global markets, especially in Latin America.  

PROGRAM FEE:  $2,750 per person*


  • Accommodations (single occupancy)
  • Corporate visits
  • Cultural activities
  • Some meals
  • In-country transportation

DEPOSIT: *A $500 non-refundable deposit is due upon registration. The remaining balance, also non-refundable, must be paid in full by November 30, 2018. Space is limited. A guest package for spouse/significant other is also available.

QUESTIONS? Please contact Phyllis Tutora, Director of International Programs at

October 16, 2018 in International Business, Joshua P. Fershee | Permalink | Comments (0)

Sunday, October 14, 2018

ICYMI: #corpgov Weekend Roundup (Oct. 14, 2018)

October 14, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, October 13, 2018

Wealth Shock and Increased Mortality

With the SEC considering how to raise the standards for investment advice, it's important to realize that more is at stake than just money.  If a retirement investor takes a large loss because of bad financial advice, the aftermath can be deadly.  A study recently published in the Journal of the American Medical association examined the impact of wealth shock on mortality.   Compared to persons that didn't experience wealth shock, the persons that experienced wealth shock faced significantly higher mortality rates:

In a nationally representative sample of US adults aged 51 years or older, more than 25% of individuals experienced a negative wealth shock of 75% or more during a 20-year follow-up period, from 1994 through 2014. A negative wealth shock was associated with an HR of 1.50, a risk that was only slightly smaller than the risk associated with asset poverty, an established social determinant of mortality. Furthermore, the association between negative wealth shocks and mortality did not differ by initial levels of net worth; thus, wealth shock may represent a potential risk factor for mortality across the socioeconomic spectrum.

The wealth shock research is consistent with the FINRA Foundation's finding that financial fraud can lead to depression and other negative health effects.  Wealth shocks might lead to increased mortality because the stress and anxiety associated with the loss drive negative health consequences.  It may also change the decisions people make.  Many people might put off or avoid medical care after losing wealth because of the high prices. 

Getting quality investor protection rules matters.  If better financial advice can reduce the likelihood of wealth shock, it'll save lives. 

To be sure, investment fraud and bad financial advice isn't the only possible cause for wealth shock.  The authors recognized that our costly medical system that often sticks patients with surprising and stunning bills may also be to blame:

Furthermore, because medical expenses from major illness can be a primary trigger of negative wealth shock in middle-aged and older adults,it can be difficult to disentangle the effect of negative wealth shocks on subsequent health outcomes from the effect of the medical illness itself.

Special thanks to Dr. Robert Roush and Debra Speyer for helping bring this study more attention.  We served on a panel together at the Public Investors Arbitration Bar Association's Annual Meeting. 


October 13, 2018 | Permalink | Comments (2)

Has the Dodd-Frank Conflict Minerals Rule Really Made a Difference and is Blockchain The Answer?

Last week Dr. Denis Mukwege won the Nobel Peace Prize for his work on gender-based violence in the Democratic Republic of Congo (DRC). This short video interview describes what I saw when I went to DRC in 2011 to research the newly-enacted Dodd-Frank disclosure rule and to do the legwork for a non-profit that teaches midwives ways to deliver babies safely. For those unfamiliar with the legislation, U.S. issuers must disclose the efforts they have made to track and trace tin, tungsten, tantalum, and gold from the DRC and nine surrounding countries. Rebels and warlords control many of the mines by controlling the villages. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. 

The stated purpose of the Dodd-Frank rule was to help end the violence in DRC and to name and shame companies that do not disclose or that cannot certify that their goods are DRC-conflict free (although that labeling portion of the law was struck down on First Amendment grounds). I  wrote a law review article in 2013 and co-filed an amicus brief during the litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rulehere about the EU's version of the rulehere about the differences between the EU and US rule, and half a dozen times since 2013.

I had the honor of meeting Dr. Mukwege in 2011, who at the time did not support the conflict minerals legislation. He has since endorsed such legislation for the EU. During our trip, we met dozens of women who had been raped, often by gangs. On our way to meet midwives and survivors of a massacre, I saw five corpses of villagers lying in the street. They were slain by rebels the night before. I saw children mining gold from a river with armed soldiers only a few feet away.  That trip is the reason that I study, write, and teach about business and human rights. I had only been in academia for three weeks when I went to DRC, and I decided that my understanding of supply chains and corporate governance from my past in-house life could help others develop more practical solutions to intractable problems. I believed then and I believe now that using a corporate governance disclosure to solve a human rights crisis is a flawed and incomplete solution. It depends on the belief that large numbers of consumers will boycott companies that do not do enough for human rights. 

What does the data say about compliance with the rule? The General Accounting Office puts out a mandatory report annually on the legislation and the state of disclosures. According to the 2018 report:

Similar to the prior 2 years, almost all companies required to conduct due diligence, as a result of their country-of-origin inquiries, reported doing so. After conducting due diligence to determine the source and chain of custody of any conflict minerals used, an estimated 37 percent of these companies reported in 2017 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 39 and 23 percent in 2016 and 2015, respectively. Four companies in GAO’s sample declared their products “DRC conflict-free,” and of those, three included the required Independent Private Sector Audit report (IPSA), and one did not. In 2017, 16 companies filed an IPSA; 19 did so in 2016. (emphasis added).

But what about the effect on forced labor and rape? The 2017 GAO Report indicated that in 2016, a study in DRC estimated that 32 percent of women and 33 percent of men in these areas had been exposed to some form of sexual and gender-based violence in their lifetime. Notably, just last month, a coalition of Congolese civil society organizations wrote the following to the United Nations seeking a country-wide monitoring system:

... Armed groups and security forces have attacked civilians in many parts of the country...Today, some 4.5 million Congolese are displaced from their homes. More than 100,000 Congolese have fled abroad since January 2018, raising the risk of increased regional instability... Since early this year, violence intensified in various parts of northeastern Congo’s Ituri province, with terrifying incidents of massacres, rapes, and decapitation. Armed groups launched deadly attacks on villages, killing scores of civilians, torching hundreds of homes, and displacing an estimated 350,000 people. Armed groups and security forces in the Kivu provinces also continue to attack civilians. According to the Kivu Security Tracker, assailants, including state security forces, killed more than 580 civilians and abducted at least 940 others in North and South Kivu since January 2018. (emphasis added)

The U.S. government provides $500 million in aid to the DRC and runs an app called Sweat and Toil for people who are interested in avoiding goods produced by exploited labor. As of today, DRC has seven goods produced with exploitative labor: cobalt (used in electric cars and cell phones), copper, diamonds, and, not surprisingly, tin, tungsten, tantalum, and gold- the four minerals regulated by Dodd-Frank. The app notes that "for the second year in a row, labor inspectors have failed to conduct any worksite inspections... and [the] government also separated as many as 2,360 children from armed groups...[t]here were numerous reports of ongoing collaboration between members of the [DRC] Armed Forces and non-state armed groups known for recruiting children... The Armed Forces carried out extrajudicial killings of civilians including children, due to their perceived support or affiliation with non-state armed groups. .."

For these reasons, I continue to ask whether the conflict minerals legislation has made a difference in the lives of the people on the ground. The EU, learning from Dodd-Frank's flaws, has passed its own legislation, which goes into effect in 2021.  The EU law applies beyond the Democratic Republic of Congo and defines conflict areas as those in a state of armed conflict, or fragile post-conflict area, areas with weak or nonexistent governance and security such as failed states, and any state with a widespread or systematic violation of international law including human rights abuses. Certain European Union importers will have to identify and address the actual potential risks linked to conflict-affected areas or high-risk areas during the due diligence of their supply chains. 

Notwithstanding the statistics above, many investors, NGOs, and other advocates believe the Dodd-Frank rule makes sense. A coalition of investors with 50 trillion worth of assets under management has pushed to keep the law in place. It's no surprise then that many issuers have said that they would continue the due diligence even if the law were repealed. I doubt that will help people in these countries, but the due diligence does help drive out inefficiencies and optimize supply chains.

Stay tuned for my upcoming article in UT's business law journal, Transactions, where I will discuss how companies and state actors are using blockchain technology for due diligence related to human rights. Blockchain will minimize expenses and time for these disclosure requirements, but it probably won't stop the forced labor, exploitation, rapes, and massacres that continue in the Democratic Republic of Congo. (See here for a Fortune magazine article with a great video discussing how and why companies are exploring blockchain's uses in DRC). The blockchain technology won't be the problem-- it's already being used for tracing conflict diamonds. The problem is using the technology in a state with such lawlessness. This means that blockchain will probably help companies, but not the people the laws are meant to protect. 










October 13, 2018 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)

Resisting an 800-pound gorilla

This week, the Delaware Supreme Court decided Flood v. Synutra, and began to clear up some of the questions left open after its earlier decision in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”).  Flood itself is relatively straightforward but, for me, it inevitably calls to mind some larger issues regarding the relationship between independent directors and controlling shareholders under Delaware law.

For many years, the regime in Delaware was that a controlling shareholder squeeze-out transaction would be reviewed for entire fairness, but the burden to prove lack of fairness would be placed on plaintiffs if the deal was approved by either a majority of the minority shareholders, or by a committee of independent directors who acted freely, without coercion, had the power to say no, etc. See Kahn v. Lynch Communication Systems, Inc., 638 A.2d 1110 (Del. 1994).

In MFW, the Delaware Supreme Court held that if a controlling shareholder employs both protections, and makes clear from the outset that any deal will be conditioned on their satisfaction, and there is no reason to think the protections were circumvented (i.e., the committee acted with care, was fully empowered, and so forth), the resulting deal will get business judgment review.  But a lot was still left open.

For one thing, MFW had this odd footnote that suggested that an independent committee’s lack of care/bargaining power might be demonstrated, for pleading purposes, by a showing that the deal price was insufficient.  The footnote was odd because normally a lack of care is not pled by challenging a substantive outcome; allowing it in this instance suggested the Court was not entirely confident that MFW’s dual protections truly substituted for an arm’s-length deal.  And for another thing, MFW did not specify how early in the process the controller would have to disable itself to be entitled to business judgment protection.

So in Flood, per Chief Justice Strine, the Court began to close the holes.

First, it basically did away with MFW’s baffling footnote, which to be honest is more housekeeping than anything else.

And second, the Court held that “so long as the controller conditions its offer on the key protections at the germination stage of the Special Committee process, when it is selecting its advisors, establishing its method of proceeding, beginning its due diligence, and has not commenced substantive economic negotiations with the controller, the purpose of the pre-condition requirement of MFW is satisfied.”

In other words, a controlling shareholder may still take advantage of the MFW framework if it proposes the deal without the protections, and adds them later, so long as no “substantive economic negotiations” (and possibly other steps) have taken place in between.

Justice Valihura, in dissent, argued that the majority’s rule would inevitably draw courts into factual disputes as to what constitutes “substantive economic negotiations.” (And I admit, even I’m unclear what happens if the deal is proposed, and the special committee hires advisors and conducts due diligence without any negotiations, but before the conditions are added).  Valihura would have preferred that the MFW rule kick in only if the conditions appear in the first formal written proposal (with, it must be said, exceptions if plaintiffs can show there was intentional evasion via oral negotiations before that point – so factual disputes are always possible).

Which brings me to the issue of independent directors.

In Flood, the controlling shareholder submitted a letter proposing a deal without either of MFW’s protections.  Over the next two weeks, a new independent director – one previously proposed by the controller – was added to the Board, a special committee was formed to consider the proposal, and the newly-added director was placed on that committee.  Also (and this was the focus of the Valihura dissent) there were other arrangements involving each side hiring counsel, and the directors being briefed on their fiduciary duties.  After that, the controller submitted a revised letter conditioning the deal on the MFW protections.  Despite the intervening events between the first proposal and the revised letter, the majority held that the MFW framework would apply.  The majority was untroubled by the new addition to the Board, or his presence on the special committee.  In other words, the Court was confident that, even under these circumstances, he could perform his duties fairly.

So here’s why this all strikes me as odd.

It has never been entirely clear whether the Delaware Supreme Court believes that independent directors can be trusted to stand up to controlling shareholders.

In Kahn v. Lynch, the Court held that squeeze out mergers would get entire fairness review even if approved by independent directors who acted diligently, fairly, etc.  But it did not justify its holding on the ground that independent directors are likely to be coerced by a controller; rather, it only explicitly said that minority shareholders might feel coerced.  Standing alone, then, Kahn might be interpreted to mean that since mergers ordinarily have dual protections (disinterested director plus disinterested shareholder approval), then if only one is present (disinterested director approval), there must be heightened scrutiny, with no suggestion that independent directors are likely to bow to a controller’s wishes.

Subsequent Chancery cases – including one authored by Chief Justice Strine when he was Vice Chancellor – interpreted Kahn to mean that independent directors might be cowed by the presence of a controller, and therefore their decisions are suspect. See, e.g., In re Pure Res., Inc., S'holders Litig, 808 A.2d 421 (Del. Ch.2002) (where then-VC Strine characterized controllers as 800-pound gorillas).  As a result, a series of Chancery cases have subjected controlling shareholder transactions to entire fairness review, even if approved by the independent directors, and even if the transaction wouldn’t ordinarily require shareholder approval. See discussion in In re Ezcorp Inc. Consulting Agreement Derivative Litigation, 2016 WL 301245 (Del. Ch. Jan. 25, 2016).

Then came MFW.  In response, some Chancery cases clarified that controllers can get the benefit of business judgment review if they employ the MFW framework, including transactions that ordinarily wouldn’t require shareholder approval at all.  See In re Ezcorp Inc. Consulting Agreement Derivative Litigation, 2016 WL 301245 (Del. Ch. Jan. 25, 2016); IRA Trust FBO Bobbie Ahmed v. Crane, 2017 WL 7053964 (Del. Ch. Dec. 11, 2017) (endorsing Ezcorp).

In other words, Chancery courts seem (?) to have coalesced around the view that controlling shareholders are likely to overwhelm both stockholders and independent directors, and therefore we can only trust the fairness of an interested-controller transaction if both approve, without any additional evidence of coercion.

If I’m not mistaken, the Delaware Supreme Court did eventually explicitly endorse the idea that directors can never be truly independent of a controller, but only twice.  In Kahn v. Tremont Corp., 694 A.2d 422 (Del. 1997), the Court held:

Entire fairness remains applicable even when an independent committee is utilized because the underlying factors which raise the specter of impropriety can never be completely eradicated and still require careful judicial scrutiny….The risk is thus created that those who pass upon the propriety of the transaction might perceive that disapproval may result in retaliation by the controlling shareholder. Consequently, even when the transaction is negotiated by a special committee of independent directors, no court could be certain whether the transaction fully approximated what truly independent parties would have achieved in an arm's length negotiation.

(quotations and alterations omitted).  Later, the Court said the same thing in Ams. Mining Corp. v. Theriault, 51 A.3d 1213 (Del.2012), quoting Tremont.  But these cases are the only ones that I know of where the Delaware Supreme Court explicitly said that we cannot fully trust even independent directors when they stand opposite controlling shareholders.  And I note that earlier cases held in dicta that independent directors could cleanse transactions involving controlling shareholders.  See, e.g., Summa v. Trans World Airlines, Inc., 540 A.2d 403 (Del. 1988); Nixon v. Blackwell, 626 A.2d 1366 (Del. 1993).

(Am I wrong? Is there another case where the Delaware Supreme Court was explicit about the fact that independent directors should be distrusted as a matter of law – even absent a showing of some specific dysfunction – when across the table from a controlling shareholder?)

But if that’s right, there’s an odd incongruity, which Vice Chancellor Laster explored in detail in In re Ezcorp Inc. Consulting Agreement Derivative Litigation, 2016 WL 301245 (Del. Ch. Jan. 25, 2016), and that then-Vice Chancellor Strine flagged in In re Pure Res., Inc., S'holders Litig, 808 A.2d 421 (Del. Ch.2002).  Namely, it is well-established that independent directors are presumed to be unbiased for the purposes of the demand requirement in a derivative lawsuit, even if the defendant is a controlling shareholder.  In other words, we always trust that independent directors can make a fair determination as to whether it is in the corporation’s interest to file a lawsuit against the controller.  That much goes back to Aronson v. Lewis, 473 A.2d 805 (Del. 1984).

The Aronson rule does not seem to have changed – mostly.  I’ve previously blogged about how in Delaware Cty. Emps. Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) and Sandys v. Pincus, 152 A.3d 124 (Del. 2016), the Delaware Supreme Court addressed demand futility in cases against controlling shareholders, and employed a much more nuanced inquiry than it had performed in the past.  Specifically, the Court was willing to hold that nebulous social and business ties could, collectively, compromise a director’s independence.  Neither case, however, limited its holding to the controlling shareholder context (and Chancery has not interpreted the cases to be so limited).  So Sanchez and Sandys, as far as we know, are not cases about controlling shareholders generally; they are cases about what constitutes independence.

So now here we are, back in the context of a controlling shareholder squeeze-out, and we have a prima facie reason to distrust the decisionmaking of the independent directors: A whole new one was added to the board, at the controller’s behest, and added to the special committee, after the controller had proposed the deal.

But does the Court suspect wrongdoing?  No!  To the contrary, it cites Aronson – the original case to hold that independent directors are unlikely to be cowed by controllers – to justify its faith in the directors’ fortitude.  See Flood, slip op. at 8 n.37.  The Court does not invoke Tremont, with its explicit doubts whether independent directors can resist controllers.

Point being, which is it?  Do we trust independent directors to protect minority shareholders when their interests diverge from the controller, or don’t we?  If we do, then MFW should only apply in the context of transactions that legally cannot be consummated without both director and shareholder approval; if the transaction does not require both, approval by independent directors should be sufficient.  And if we don’t trust independent directors to stand up to controllers, then MFW should apply to all situations where a controlling shareholder has interests that diverge from the minority, including determinations of whether demand is futile.  And if we don’t fully trust independent directors to defy controlling shareholders, we should be much more suspicious of squeeze-outs that are initiated without the MFW protections, even if the directors only engage in minimal preparations before those protections are added.  Or perhaps the demand requirement is its own separate world - which is what VC Laster seemed to think in Ezcorp - in which case, Aronson should not be used to support an inference of director independence in other contexts.

Anyhoo, these incongruities have persisted for many years; it’s quite possible they’ll continue for many years more, and I guess we’ll have to live with the uncertainty for now.

October 13, 2018 in Ann Lipton | Permalink | Comments (8)

Wednesday, October 10, 2018

ICYMI: #corpgov Midweek Roundup (Oct. 10, 2018)

October 10, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Destroying Distributed Assets

In the crypto-enforcement space, the SEC recently reached an administrative settlement with TokenLot, an unregistered broker-dealer firm, and its two twenty-something principals. TokenLot described itself as an "ICO Superstore" and offered access to all sorts of tokens.  Many of these tokens were, undoubtedly, securities.  

Interestingly, the SEC order here includes an undertaking to "destroy" TokenLot's digital assets:  

Destroy the digital tokens in the Current Inventory within 30 days of the date of this Order and Pending Inventory within 30 days of receipt by TokenLot; 

This isn't something I've seen before.  It's also something that makes me scratch my head.  I know how to destroy ordinary things.  If I wanted to destroy a piece of paper I could just shred it or burn it.  Once that happens, I can confidently say that the object has been "destroyed."  

A distributed asset is a bit different.  If it exists on many computer nodes across the world, I don't have the power to go into all of those notes and change them to erase the existence of the asset.  At best, all I could do is "destroy" the key to access/move the asset.  This seems different to me.

I reached out to TokenLot's counsel, Lisa Braganca, to ask how they were going to "destroy" these assets.  She told me that she and her clients are working closely with the SEC and an independent consultant to come up with a process to destroy these crypto assets. It'll be interesting to see how this happens.

Special thanks to Carla Reyes for bringing some attention to this issue in her excellent talk on this issue at the PIABA Annual Meeting.

October 10, 2018 | Permalink | Comments (0)

Tuesday, October 9, 2018

Bang Head Here: California and the LLC as a "Corporation"

California drives me nuts with lazy references to LLCs -- "limited liability companies" -- as" limited liability corporations." See, e.g., Dear California: LLCs are Not Corporations. Or Are They?

A 2010 case recently posted to Westlaw provides another example, this time from the local rules for the United States District Court for the Central District of California.  The case deals with an attorney withdrawing as counsel for an LLC, which requires the withdrawing attorney to provide notice to soon-to-be former client YPA, that as

a limited liability company that cannot proceed pro se, its failure to have new counsel file a timely notice of appearance will result in the dismissal of its complaint for failure to prosecute and of the entry of its default on the cross-complaint.

YOUR PERSONAL ASSISTANT, LLC, a Nevada limited liability company, Plaintiff, v. T-MOBILE USA, INC., a Delaware Corp., & DOES 1-100, inclusive. Defendants., No. CV1000783MMMRCX, 2010 WL 11598037, at *3 (C.D. Cal. Apr. 23, 2010)

This is fairly typical, as entities are generally not allowed to appear pro se -- that is reserved as an option for natural persons. However, because of poor drafting, the local rules keep open the possibility that an LLC could appear pro se.  As the court notes in footnote 9, the rules provide:

9. See CA CD L.R. 83-2.10.1 (“[a] corporation including a limited liability corporation, a partnership including a limited liability partnership, an unincorporated association, or a trust may not appear in any action or proceeding pro se.”)

Id. at *3 n.9 (C.D. Cal. Apr. 23, 2010).  The language here refers to an LLC a type of corporation, which, as a general matter, it is not.  A limited liability partnership is a type of partnership (with gaps often filled by partnership law), but corporations and LLCs are, most of the time, separate and distinct entities.
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None of this is new, coming from me.  But I'm not giving up, even if I that tree I keep banging my head on is a Redwood. 

October 9, 2018 in Corporations, Joshua P. Fershee, Lawyering, LLCs | Permalink | Comments (0)