Tuesday, June 4, 2019
New papers: On shareholder primacy, controlling shareholders, and mootness fees (they're different papers)
Several months ago, I posted about a symposium I attended at Case Western Reserve Law School titled Fiduciary Duty, Corporate Goals, and Shareholder Activism. The Case Western Reserve Law Review will be publishing a volume of papers from the symposium, and my contribution, What We Talk About When We Talk About Shareholder Primacy, is now available on SSRN. The essay (well, they're calling it an article but I think of it more as an essay) is about how shareholder primacy can be defined either as a wealth maximization norm or as obedience to shareholders, and what that means for corporate organization and theory.
In April, I attended the Corporate Accountability symposium sponsored by the Institute for Law & Economic Policy and the Vanderbilt Law Review. The Vanderbilt Law Review will be publishing those papers, and my contribution, After Corwin: Down the Controlling Shareholder Rabbit Hole, is now available on SSRN. The essay addresses the inconsistencies in how Delaware treats controlling shareholder transactions, and the new pressure that Corwin, as well as changes to corporate financing, have placed on the definition of what a controlling shareholder is.
(Regular readers of this blog will note that both of these essays draw heavily from my posts here. Waste not, want not.)
Finally, I previously posted about a panel on securities litigation that I attended at George Mason. At that time, I mentioned that my remarks drew from research that Matthew Cain, Steven Davidoff Solomon, Jill Fisch, and Randall Thomas presented at the April ILEP conference, and I promised to link to their paper when it was finally made public. Well, that paper, Mootness Fees (also forthcoming in Vanderbilt's ILEP symposium volume), is now available on SSRN (so hot off the presses that as of this posting, it's still in SSRN jail). It's an empirical examination of mootness fees paid out in the wake of Delaware's crackdown on merger litigation.
Monday, June 3, 2019
At the 2019 Law and Society Association Annual Meeting last week, Geeyoung Min presented her paper Governance by Dividends. In the paper, she focuses attention on stock dividends. Near the end of her presentation, Geeyoung trod over ground on which so many of us also have trod--relating to judicial standards of review in fiduciary duty actions. As familiar as the story was, she helped me to see something I had not seen before. Perhaps many of you already have identified this. If so, I am sorry to bore you with my new insight.
Essentially, what I came to realize during her talk--and develop with her and members of the audience in the ensuing discussion--was that Delaware's judiciary may have (and I may be quoting Geeyoung or someone else who was there, since I wrote this down long-form in my contemporaneous notes) muddied the waters by seeking clarity. What do I mean by that? Well, by addressing relatively clearly the circumstances in which the business judgment rule, on the one hand, or entire fairness, on the other, govern the judicial review of corporate fiduciary duty allegations, the Delaware judiciary has effectively made the interstitial space between the two--intermediate tier scrutiny--less clear.
As I reflected a bit more, I realized that an analogy could be made to the development of the substantive law of corporate fiduciary duties in Delaware. The overall story? Judicial refinement of the fiduciary duties of care and loyalty has left the duty of good faith somewhat more indeterminate.
I am not sure where all this goes from here, but there may be lessons in these musings for both judicial and legislative rule-makers, among others. As always, your thoughts are welcomed.
Sunday, June 2, 2019
Last Thursday and Friday, I attended a truly worthwhile event: the first “Summit on the Profession of Business Law” at the University of Connecticut School of Business. Its organizer, Robert Bird, Professor of Business Law and Eversource Energy Chair in Business Ethics Marketing, did an excellent job of assembling a diverse program of interesting and informative sessions, and described the motivating purpose of the conference as follows:
Increasingly complex and challenging regulations have pressured organizations to manage legal risk or face costly penalties. Individuals who understand how to use the law to build creative relationships and solve difficult problems add value to their organizations. Business schools are challenged to train students to demonstrate ethical values, apply critical thinking, adapt to change, and show attention to detail. As a result, there is a growing need for business schools to train future leaders who are legally educated and astute. The purpose of this summit is to exchange knowledge and encourage best practices in business law and ethics that respond to changing demands of a broad array of stakeholders.
Although aimed at business law educators in business schools, the conference brought to my mind a number of general ideas that might resonate with readers, whether teaching business law in a business or law school (or both!), such as the importance of:
- Having and teaching good communication skills, and that clear expectations foster this objective
- Service for promoting a rich educational environment, and in shaping the path forward
- The right incentives to encourage interdisciplinary collaboration
- Openness to new opportunities, and that a myopic strategic approach can hinder this goal
- Speaking the language of one’s audience, for example, highlighting how legal education improves “exposure management” and compliance in business organizations
- Leadership, including the impact of inherited leadership
- Recognizing when change is inevitable, and proactively helping to shape it
Saturday, June 1, 2019
Jeremy McClane at Illinois recently posted to SSRN a truly fascinating study of boilerplate in IPO prospectuses (okay, I gather it may have been out for a while but it was only posted to SSRN recently and that’s how I learn anything these days). In Boilerplate and the Impact of Disclosure in Securities Dealmaking, he concludes that while the inclusion of “boilerplate” – namely, generic disclosures that copy from similar deals – contributes to lower legal fees (though not lower underwriter and audit fees), it ultimately costs firms in terms of greater IPO underpricing and greater litigation risk. (It should be noted that he does not analyze litigation outcomes - compare to the risk factor paper, described below). Boilerplate is also associated with greater divergence in analyst opinion, and greater (upward) price revision in the pre-IPO period. All of this, he concludes, demonstrates that boilerplate contributes to greater information asymmetry.
In a previous post, I described a working paper, Are Lengthy and Boilerplate Risk Factor Disclosures Inadequate? An Examination of Judicial and Regulatory Assessments of Risk Factor Language, that examines boilerplate in SEC risk factors. The authors of that study concluded that – perversely – boilerplate is rewarded by judges in litigation and, crucially, by the SEC, where it is associated with fewer comment letters.
McClaine’s findings are in a similar vein. Despite the SEC’s (purported) efforts to stamp out boilerplate, he discovers that excess levels of boilerplate are not associated with more pre-offering prospectus amendments or with more SEC commentary. (Caveat: His study period includes post-JOBS Act filings but I’m not entirely clear how he treats draft registration statements for the purposes of this analysis).
A final note: McClane speculates on how boilerplate could impact investor assessments, given the common expectation that few investors actually, you know, read SEC filings to begin with. He points out that professional investors and analysts do the reading, and their determinations may ultimately drive pricing. He also notes that lawyers and underwriters draft IPO disclosures and that process may prompt them to ask questions, which ultimately generates more information. I’d add to the mix that these days, computers do a lot of the reading (especially once trading begins), which raises the possibility that subtle variations are more detectable than they were in days’ past. I’d love to see more analysis along these lines that divide filings by time period.
Friday, May 31, 2019
Last week, I attended the American Law Institute (ALI) Annual Meeting in Washington, DC. (I am back in The District this week for the Law and Society Association Annual Meeting. More on that in a later post.) Many important project drafts and projects were vetted at the ALI meeting. As many readers know, however, the tentative draft of the Restatement of the Law, Consumer Contracts generated some significant debate in advance of and at the conference. The membership approved part of the draft of the project at the meeting, but much still is to come.
As many of you likely know, there has been significant litigation about the enforceability of these kinds of provisions in form agreements--and whether a valid contract has been formed at all. See, e.g., this article from earlier this year. As the debates on the Restatement proceeded at the meeting, I found myself thinking about whether the common law of contracts is the best way to handle legal challenges to standard form contracts. Something inside me just kept screaming for a more tailored legislative solution . . . .
After conclusion of the ALI Annual Meeting, I found this testimony before the Senate Judiciary Committee from Myriam Gilles, Paul R. Verkuil Research Chair and Professor at Cardozo Law. She notes in that testimony:
[W]hen pre-dispute arbitration clauses and class action bans are forced upon consumers and employees in take-it-or-leave-it, standard-form agreements, “the probability of litigation positions is highly asymmetrical: the seller is far more likely to be the defendant in any dispute, and the consumer the plaintiff.” There is no negotiation, no choice, and the resulting arbitration procedures are not, in truth, intended to provide a forum to resolve claims. The one and only objective of forced, pre-dispute, class-banning arbitration clauses is to suppress and bury claims. The whole point is that consumers and employees seeking redress for broadly distributed small- value harms cannot and will not pursue one-on-one arbitrations.
(footnotes omitted) Professor Gilles recommended a legislative solution.
I do not teach contracts. Perhaps those of you who do have comments on this matter that negate what I have written here. If so, please share them. In general, as a corporate finance lawyer, I favor private ordering. But consumer contracts are a whole other animal, distinct from merger or acquisition and other corporate finance agreements. Perhaps we should decrease pressure on the courts by focusing some legislative attention on the appropriate form of standardized terms in consumer contracts that operate as contracts of adhesion or otherwise offend public policy. I am not sure quite what that looks like overall, but the idea seems to bear further thought . . . .
Thursday, May 30, 2019
The SEC recently announced it would go ahead and vote on Regulation Best Interest and a number of other provisions on June 5th. Consumer and investor advocates have generally panned the draft regulation because it fails to meaningfully raise standards beyond the existing FINRA Suitability rule. Although the proposal ran to 408 pages, the actual draft regulation only spans about four pages.
It's difficult to see how the draft rule moves beyond FINRA's suitability standard in any meaningful way. The rule opens by saying that brokers must "act in the best interests of the retail customer at the time the recommendation is made, without placing the financial or other interest of the broker, dealer, or natural person who is an associated person of a broker or dealer making the recommendation ahead of the retail customer." This language seems to parallel FINRA's guidance instructing brokers to make recommendations that are "consistent with" the best interest of customers. Notably, the rule does not say that best interest means that a broker must place the customer's interests ahead of the broker's, which is what most people would think a best interest regulation would include. The draft simply declares that the firm cannot put its interests ahead of the customers.
After this odd initial language, the proposal goes on to chart out how a best interest obligation may be satisfied. It lays out three requirements, including a (i) disclosure obligation; (ii) care obligation; and (iii) conflict of interest obligation. A loyalty obligation remains conspicuously absent.
The disclosure obligation requires some written disclosure of the "material facts relating to the scope and terms of the relationship with the retail customer, including all material conflicts of interest that are associated with the recommendation." The SEC may allow firms to satisfy this obligation with general boilerplate disclosures. No doubt these documents will be detailed, thorough, technically accurate, and completely incomprehensible to the average financially illiterate American.
FINRA's suitability rule contains three components: (i) reasonable basis suitability; (ii) customer-specific suitability; and (iii) quantitative suitability. Regulation Best Interest again seems to track FINRA's rule with a (i) reasonable basis to believe that the recommendation might be in some theoretical investor's possible best interest; (ii) a reasonable basis to believe that the recommendation is in the best interest of a particular customer; (iii) and a reasonable basis to believe that standing together a series of transactions will be in the best interest of a retail investor.
The third part of the rule discusses the conflict of interest obligations for brokerages. It requires some written policies "reasonably designed to identify and at a minimum disclose, or eliminate, all material conflicts of interest that are associated with such recommendations." It also requires "written policies and procedures reasonably designed to identify and disclose and mitigate, or eliminate, material conflicts of interest arising from financial incentives associated with such recommendations."
The draft rule doesn't specify whether mitigation must be effective or what will count as mitigation. If a brokerage wants its representatives to push its costlier proprietary products, it'll still be able to have its brokers make those recommendations. This leaves the door open for brokerages to create financial incentives for brokers to tilt their recommendations in ways that generate more fees for the firm and lower returns for investors. If the firm is allowed to create financial conflicts, its unclear what meaning the mitigation requirement has. Would a rule saying that a broker will not be terminated for not selling a particular product be enough? This allows the firm to leave the carrot and stay the stick, generating the ability to claim it has mitigated conflicts. There does not seem to be any limiting principle for conflicts so long as the firm could point to some yet more horrid system that it claims to have moved away from.
If this goes through as it is, retail investors should not trust their brokers. It means that a customer cannot rely on a broker to actually act in their best interest. The same conflicts will continue to bias investment advice. Customers will likely receive more useless disclosures but will also be barraged with largely rhetorical claims that they should trust their brokers because they are now bound by regulation best interest.
The SEC will also vote on a number of other proposals, all unlikely to provide any material benefit to investors.
The SEC will consider requiring disclosures about the nature of the relationship. Testing revealed that the draft regulation's sample disclosure mock up largely failed to help customers understand the nature of their relationship.
Investment Adviser Standard of Conduct
The SEC is also considering some interpretation on the investment adviser standard of conduct. If it simply enshrines the disclosure-fetishistic position it has taken in recent enforcement cases, the interpretation may allow registered investment advisers to claim to be fiduciaries while betraying customer interests. If an investor pays an investment adviser 1% a year, they should be able to trust the investment adviser. In recent years, the SEC has leaned heavily on "eliminate or disclose" to address conflicts. Allowing the "disclose" option as a solution to address conflicts means that an investor cannot trust their registered investment adviser without reading and understanding the disclosure.
An investor considering whether to trust Wells Fargo will need to read the Form ADV specific to that particular program. Consider this one. It's 37 pages of small print. It also discloses that Wells Fargo's registered investment advisory arm has an incentive to pick the funds that kick cash to it:
Revenue sharing is paid by a mutual fund’s investment advisor, distributor, or other fund affiliate to us for providing continuing due diligence, training, operations and systems support and marketing to Financial Advisors and Clients with respect to mutual fund companies and their funds. Revenue sharing fees are usually paid as a percentage of our aggregate value of Client assets invested in the funds. Revenue sharing rates can differ depending on the fund family, and in some cases we receive different revenue sharing rates for certain funds and share classes within a particular fund family. In addition, not all mutual funds pay revenue sharing, as a result we have an incentive to include funds on our platform and recommend funds that pay revenue sharing and/or pay a higher rate. Advisory Clients are not permitted to restrict their Accounts to only mutual funds that do not pay revenue sharing. We do not collect revenue sharing payments on Program Accounts for ERISA plans, SEPs, and SIMPLE IRAs. Revenue sharing payments generated based on mutual fund assets under management in Participating Accounts are considered Platform Support and included in the Advisory Account Credit.
Allowing this sort of conflict to be solved through "disclosure" means that investors cannot trust their advisers. Anyone who would read and fully understand the Wells Fargo disclosures probably has no need for Wells Fargo's asset allocation assistance.
The SEC may also issue an interpretation as to what "solely incidental" means. The Investment Advisers Act does not apply to brokers as long as the "advice" they provide is "solely incidental" to their execution services. For decades the term has had practically no meaning or restraining effect. Brokers have long identified themselves as "financial advisers," putting it on the business cards, websites, and email signatures. If they only gave incidental advice, they wouldn't be holding themselves out as advisers. With the horse so far out of the barn, SEC seems unlikely do much on this front.
Wednesday, May 29, 2019
"diversified investors should rationally be motivated to internalize intra-portfolio negative externalities. This portfolio perspective can explain the increasing climate change related activism of institutional investors" https://t.co/B1muk1GbDt— Stefan Padfield (@ProfPadfield) May 26, 2019
"By understanding the corporation as a collaboration between the government and the individuals organizing, operating, and owning the corporation, the impermissibility of aggressive corporate tax avoidance becomes apparent." @EricChaffee, 76 Wash. & Lee L. Rev. 93 #corpgov— Stefan Padfield (@ProfPadfield) May 26, 2019
Is the “80 cents” figure "simply incompatible w/ calls of equal pay for equal work"? "figures are raw medians...meaning they don’t control for...hours worked"; "Studies that compare apples w/ apples find a much narrower pay gap—or none at all." https://t.co/tXdaQN2Ozi #corpgov— Stefan Padfield (@ProfPadfield) May 28, 2019
"Even more pointed is the possibility that global poverty is declining because of increasing economic inequality rather than in spite of increasing inequality. This challenges a central liberal nostrum that economic inequality causes poverty." https://t.co/bi4dvzrFSt #corpgov— Stefan Padfield (@ProfPadfield) May 23, 2019
"federal government began in the 1970s to endow private actors with the public purpose of rating the soundness of [financial] instruments.... Predictably, their performance of their public function began to be affected by their private interests" https://t.co/XZfyZs1282 #corpgov— Stefan Padfield (@ProfPadfield) May 28, 2019
Joey Elsakr, a PHD/MD student at Vanderbilt University, has teamed up with his roommate for a blog called Money & Megabytes. The blog covers personal finance and technology topics, which I think may be of interest to many of our readers and their students.
Last year, convinced that students need more guidance on personal finance, I gave a talk at Belmont University on the topic. Given the very limited advertising of the talk, I was surprised by the strong turnout. The students were quite engaged, and some simple personal finance topics seemed to be news to many of them. I plan on asking Joey to join me in giving a similar talk next year.
One post that I would like to draw our readers' attention to is Joey's recent post on his monthly income/expenses. You can read the entire post here, but here are a few takeaways:
- Know Where Your Money Goes. How many students (or professors!) actually have a firm grasp on where they are spending money? While creating a spreadsheet like Joey's could be time consuming, the information gained can be really helpful (and just recording the information -- down to your nail clippers purchase! -- probably makes you more careful). Bank of America users can create something similar, very quickly, using their free My Portfolio tab.
- Power of Roommates: Many of my students complain of the high rent prices in Nashville. Some have even said "it is impossible to find a decent place for under $1000/mo." Joey pays $600/mo, in a prime location near Vanderbilt, in a nice building, because he has two roommates. Also, because he has roommates, Joey only pays a third of the typical utilities. Now, if you have the wrong roommates, this could be problematic, but having roommates not only helps save you money but also helps work those dispute resolution skills.
- Charitable Giving. I am inspired that Joey, a grad student, devotes a sizable portion of his income to charitable giving. Great example for all of us.
- Multiple Forms of Income. Even though Joey is a dual-degree graduate student at Vanderbilt and training to make the Olympic Trials in the Marathon -- he ran collegiately at Duke University -- Joey has at least four different streams of income. Other than his graduate stipend, his other three streams of income appear to be very flexible, which is probably necessary given his schedule. This income may seem pretty minor, but it adds up over the year, and it gives him less time to spend money.
- Food Budget. This is an area where I think a lot of students and professors could save a good bit of money. My wife and I have started tracking our expenses more closely and the food category is the one where we have made the most savings -- thank you ALDI's. A lot of the food expenses are mindless purchases---for me, coffee and snacks from the Corner Court near my office---and those expenses add up quickly over the month.
Follow Joey's blog. Even though I consider myself fairly well-versed on personal finance topics, Joey recently convinced me that a savings account is the wrong place to house my emergency fund. And I agree with Joey's post here -- paying attention to personal finance can actually be a fun challenge. Joey's blog also introduced me to The Frugal Professor, though I am not sure I am ready to take the cell phone plunge quite yet.
Tuesday, May 28, 2019
I'll start with the exciting news that my Business Organizations students were 48 for 48 in recognizing that LLCs are not corporations. In fact, a number of my students specifically referred to "LLCs (NOT corporations) ..." in their exams. It's nice to be heard. I believe that's at least three years in a row without such a mistake, and maybe longer. I have evidence, at least on this issue, repetition is effective.
As for this summer, it is going to be an interesting one. I have now finished grading my last classes as a part of West Virginia Univerity College of Law. As some readers may know, I have accepted the opportunity to join Creighton University School of Law as the next dean. (For those wondering, my wife Kendra will be joining the Creighton Law faculty, as well, where, as was true at WVU, she will teach family law as a full professor.) After Kendra's run for Congress ended, she told me it was "my turn," and that I should pursue my goals. I don't think either of us expected such a big change so quickly.
Long before all of this became a reality, and after the campaign, we planned a family vacation to Europe for a month, so we'll be doing that with the kids -- Bulgaria, Germany, Italy, and Greece. Buying and selling a house, moving across the country, and starting new jobs (and new schools for the kids) will all be part of the mix, too, but hey, what's life without some adventure?
The fact that we're willing to leave should tell people just how much we believe in this opportunity. We have an absolutely incredible life already, with dear friends, amazing students, and a community of supportive and caring people. (Not to mention an absolutely gorgeous location.) And yet we're moving. I have high hopes and high expectations -- both for me and for my new institution. It's worth stating clearly that we have loved West Virginia and we have had incredible opportunities to grow both personally and professionally. I want people to know that we are not so much leaving West Virginia as we are going to Creighton, a possibility I wouldn't have without my time here at WVU.
I very much appreciate that, and because of all we have learned and experienced, new adventures await.
Monday, May 27, 2019
When I was young, Memorial Day meant one thing: the Memorial Day Fair at my church, The Cathedral of the Incarnation in Garden City, New York. As I contemplated how to honor our war dead this Memorial Day, I kept coming back to thinking about that fair. Others have also had memories of the fair on their minds this week. A May 25th post in a Facebook group I belong to, I grew up in Garden City, New York, asked: "What are your memories of the Memorial Day fair at the cathedral? I looked forward to it every year!" At the time this post was published, there were over 100 comments and replies posted. The Memorial Day Fair even gets a nod on the TripAdvisor page for the church--"Wonderful [sp] Memorial Day Fair and Concert." Local press stories on the preparations and schedule for this year's fair can be found here and here.
The Memorial Day Fair is a collaborative community event in which local businesses join together with church volunteers to produce a major good time. The webpage for this year's fair notes ten business sponsors and boasts that the fair "will feature games, inflatables, rides, prizes, and delicious fair food! You'll also find arts & crafts, vendors, organ concerts with patriotic sing-alongs (at 1pm and 3pm), historic tours, and an archives display." Those commenting in the Facebook group remembered the goldfish (most of which died rather soon after the fair) that many of us won by throwing ping-pong balls into goldfish bowls, the games, the rides, and the food--especially the cotton candy.
I remember all that--and selling ice cream to a famous actor visiting our local famous basketball player. But I also remember the American Legion's red poppies and the local Memorial Day Parade (which many also remembered in response to the Facebook group post). These parts of the day were directed almost exclusively toward honoring those who lost their lives fighting for our country and became intertwined with the fair in meaningful ways.
My memories of the Cathedral of the Incarnation Memorial Day Fair remain relatively strong as I take time out today to remember why Memorial Day exists: to honor the lives of people who died while serving in the U.S. armed forces. (See also here and here.) The forces of community in my home town--business and religious interests alike--that came together (and apparently continue to come together) in honor of the men and women who died in military service to our country is a great example of social responsibility in action. It continues to inspire.
Sunday, May 26, 2019
As it’s a holiday weekend, I’ll be brief and flag for readers one of the most intriguing news stories – given my research interests - that I came across this past week. In Sirius Computer moves to block derivatives holders from speculation, Kristen Haunss notes:
Language in the financing package backing Sirius’ buyout by private equity firm Clayton, Dubilier & Rice (CD&R) prohibits lenders that own derivative positions from voting on company matters, according to three sources familiar with the loan credit agreement. As investor activism rises, the borrower wants to prevent these holders from declaring a default that could pay off for their hedged trades.
It’s an interesting move to limit potential strategic behavior by lenders with CDS positions. The story notes that additional such limitations could be seen in the future. If you want to learn more about recent cases of such strategic lender behavior, a great place to start would be Gina-Gail S. Fletcher’s Engineered Credit Default Swaps: Innovative or Manipulative?, which will be published in the New York University Law Review.
Saturday, May 25, 2019
A couple of weeks ago, I was lucky to participate in a panel on securities litigation at George Mason University Antonin Scalia Law School, along with Professor J.W. Verret, Jonathan Richman of Proskauer Rose, Steven Toll of Cohen Milstein, moderated by Judge Michelle Childs of the District of South Carolina. We had a lively discussion about current issues concerning these actions, including what I guess is now being branded as “event-driven” litigation, definitions of materiality, and arbitration clauses in charters and bylaws.
In my opening remarks, I discussed merger litigation and the shift from state to federal courts, covering much of the territory I previously described on this blog (of course, since that post, the Supreme Court dismissed the Emulex case as improvidently granted). I also drew from research by Matthew Cain, Steven Davidoff Solomon, Jill Fisch, and Randall Thomas, presented in April at the ILEP symposium on corporate accountability. (Their research is not yet public but I will link here as soon as it becomes available).
In the meantime, if you’re interested, you can watch a video of the panel here:
The other panels from the symposium are also available for viewing at this link.
Friday, May 24, 2019
Currently, I am working on a project that looks at how social value is measured and reported. As I dig deeper, I am becoming even more convinced that measuring social value may be too difficult for us to do well.
Let’s take scooters as an example. How would you measure (and report) the social value of these scooter companies? How many points should a “third-party standard” assign for the jobs created, for the gasoline saved, for the affordable transportation provided, for the fun produced? How many points should you subtract for a death, for injuries, for obstructing sidewalks? In the language of the Model Benefit Corporation Legislation, how do you know if a scooter company is producing “[a] material positive impact on society and the environment, taken as a whole”?
Over the past few weeks, I’ve been diving into the B Impact Assessment, (which is the top third-party standard used by benefit corporations) and, frankly, the points assigned seem somewhat arbitrary and easy for companies to manipulate. In my opinion, almost any company, including a scooter company, could get the 80+ points needed to qualify as a certified B corp. if they learned and worked the system a bit (and, as most readers know, you don’t even have to be certified to become a benefit corporation under the state statutes.)
I know bright people who would emphatically argue that scooter companies create a “material positive impact,” and I know bright people who think scooter companies are socially destructive. Social reporting does not have to be totally useless; it would be interesting to have the data on scooter usage (how many people are using them for their commute, what is the injury rate relative to cars, etc?). But the total amount of social value is not easily reduced to numbers and social reports. Given the nuance of each decision, the various externalities, and the difficulty in quantifying the social impact, I have previously suggested giving stakeholder representatives certain governance rights (such as the ability to elect and sue the board of directors). This way, directors will be more likely to consider each stakeholder group when making decisions.
Thursday, May 23, 2019
We have a new call for papers in Professional Responsibility. It's the law regulating the business of law.
AALS Section on Professional Responsibility
2020 Annual Meeting
Call for Papers Announcement
Confronting the Big Questions About the Regulation of the Legal Profession
Saturday, January 4, 2020
10:30 a.m.-12:15 p.m.
The AALS Professional Responsibility Section is pleased to announce a Call for Papers for the Section’s program at the AALS 2020 Annual Meeting in Washington, D.C.
In its 2016 Final Report, the American Bar Association Presidential Commission on the Future of Legal Services concluded after a two-year inquiry that “technology, globalization, and other forces continue to transform how, why, and by whom legal services are accessed and delivered. Familiar and traditional practice structures are giving way in a marketplace that continues to evolve. New providers are emerging, online and offline, to offer a range of services in dramatically different ways. The legal profession, as the steward of the justice system, has reached an inflection point. Without significant change, the profession cannot ensure that the justice system serves everyone and that the rule of law is preserved. Innovation, and even unconventional thinking, is required.” Some of this change must come in the form of fundamental reconsideration of how we regulate the legal profession, the practice of law, and the delivery of legal services. This program calls for scholars to heed the ABA Futures Commission’s call and apply unconventional thinking to confront the big questions about the future of lawyer regulation.
Topics addressed at the program might include:
- What does the market for legal services look like today?
- What regulatory changes need to be made to improve the delivery of legal services?
- Do the current prohibitions on multidisciplinary practice, nonlawyer ownership of law firms, multijurisdictional practice, and the unauthorized practice of law need to be reconsidered in the interest of improving the delivery of legal services?
- What regulations are necessary to ensure ethical delivery of services and consumer protection?
- What regulatory changes have been implemented in other countries and what impact have those changes had on the delivery of legal services?
Papers should be submitted to the section chair, Ben Cooper, via email at email@example.com, no later than September 1, 2019, with the subject line: PR Section Call for Papers. 1-2 papers will be selected from the Call for Papers to be presented at the section program along with other panelists, including ABA President Judy Perry Martinez, Professor William Henderson, and Professor Rebecca Sandefur.
Wednesday, May 22, 2019
It has been kind of a unique end of the semester, and I am working feverously to get through my Business Organizations exams. I'm getting there. So far, I have had zero exams reference a "limited liability corporation." If this holds, it will be at least three years in a row.
I have had a couple of folks refer to LLC veil piercing as piercing the "corporate" veil (another no-no), and I did have some other "corporate" references to LLCs (e.g., "an LLC's corporate formalities"), so we're not all the way there. But so far, I am seeing improvement, and I appreciate the effort.
Here's hoping for 48 of 48 describing the LLC (as an entity) correctly. I hope the rest of my colleagues are holding up well here in the home stretch. Good luck to all.
The following comes to us from Bernard Sharfman:
I have slightly revised a key paragraph from the Introduction of my new article, Enhancing the Value of Shareholder Voting Recommendations. This paragraph takes the approach that shareholder voting is really more about authority than accountability. Using this approach has significant implications for the use of board voting recommendations. I would appreciate any comments that you may have on the following:
[S]hareholder voting in a public company cannot be looked at as simply another tool of accountability, i.e., a device to minimize agency costs or enhance efficiency, such as when shareholders file a direct or derivative lawsuit, initiate a proxy contest, attempt a hostile takeover, or take significant positions in the company and then advocate for change (hedge fund activism, here and here). When shareholders vote they are also participating, alongside the board, in corporate decision making. That is, they are temporarily transformed into a locus of corporate authority that rivals the authority of the board. As co-decision makers it is critical that shareholders and those with delegated voting authority, such as mutual fund advisers, have at their disposal informed and sufficiently precise voting recommendations, no matter what the source, including the board of directors. If shareholders and investment advisers with delegated voting authority feel that the board can provide them with the most precise voting recommendations, then those are the recommendations that they should use.
Monday, May 20, 2019
Last week, a wonderful man in my life died. Jonathan Spencer, a classmate from and fellow class leader for Brown University, died unexpectedly a week ago. He collapsed while exercising and was unable to be revived. At the time of his death, he was the General Counsel of the Museum of Science Fiction in Washington, DC, a museum that he helped to found. The above photo was taken last year at our 35th reunion celebrations. Although we did not see each other a lot in between reunions, we shared a passion for Brown and our class.
We also shared a professional connection, as the title of this post indicates. Jonathan was a fellow business lawyer. He focused on communications technology for much of his career. His formal professional bio as currently posted at the Museum of Science Fiction is as follows:
Jonathan Spencer, General Counsel. Jonathan is a technology and transactional attorney with over 25 years of experience having held senior and executive level positions with several Internet and telecommunications companies. Jonathan has also representedtechnology and media companies, financial institutions and nonprofit organizations. Jonathan is a former chair of the Association of Corporate Counsel’s IT, Privacy and E-Commerce Committee and has spoken at programs for the American Bar Association, the Association of Corporate Counsel, the American Society of Association Executives and the International Technology Law Association. Jonathan is a graduate of Brown University and Duke University School of Law.
I can assure you, as impressive as his professional accomplishments are, Jonathan was far more than an impressive business lawyer. He had a seemingly boundless intellectual capacity. At his memorial services in Falls Church, Virginia yesterday, it was noted by family that "Before Google and Wikipedia, there was Jonathan." That rang so true to me. But more importantly, perhaps, Jonathan had an incredible joy for life. He was "all in" when he chose to do things--from simple conversations with friends and classmates about mutual interests through event planning and fundraising work for Brown to world travel (and much more in between). He lived life--making sure that he enjoyed the present moment as he strived to achieve all that he accomplished. His altogether too-short life reminds me to do the same.
The photo below was taken of the two of us at Brown Homecoming back in 2007. We were on campus for a leadership weekend and attended the football game while we were there. A fellow classmate found this picture for me a few days ago. I will treasure it and all of the memories of our times together. Jonathan, may you rest in eternal peace, and may your family be comforted in their time of grief. You will be missed by us all.
Sunday, May 19, 2019
Today, I thought of Haskell Murray’s recent post, Reflections on the Life of a Smiling, Selfless Educator: Rivers Lynch, in thinking about paying tribute to my former colleague, mentor, and friend, University of Notre Dame Law School Professor John Nagle, who passed away yesterday. Like so many, I am stunned and devastated by John’s death. He too was a smiling, selfless educator who positively impacted the lives of so many.
John was a tremendous scholar in the areas of environmental law, property, legislation & regulation, and biodiversity and the law. Yet because of his characteristic selflessness, I could always as his junior colleague count on him to critically read and comment on my work on topics such as the Federal Reserve and clearinghouses! His feedback, in addition to his lasting support and encouragement, has been a priceless gift in my life. I will be forever grateful.
Others have written about how John creatively integrated his life and research. For example, he managed to “convert his love of the outdoors and our national parks into a research agenda.” In catching up with John, I always loved hearing about his most recent national park adventure. And others have written about his devotion to his family and faith. I too received an email from John one year saying we wouldn't get to catch up at AALS because he didn’t want to miss any of his daughter’s basketball games!
John knew what he valued and what his priorities were in life. And he lived accordingly. He had a clear definition of success and lived consistent with that vision. Harvard Business School Professor Clayton M Christensen asks “How Will You Measure Your Life?” John had a ready answer for this question.
Perhaps one of the best ways I can honor John and his memory is to reflect upon my values and priorities, and to ask myself whether I’m using my time, talent, and treasure in such a way that these values and priorities are actually being put into practice, and to encourage others to engage in similar reflection.
(published 5/19/19, revised 5/20/19)
Saturday, May 18, 2019
In 2014, the Supreme Court decided Burwell v. Hobby Lobby Stores, where it held that it is possible for a for-profit corporation to have a religious identity, derived from the religious commitments of “the humans who own and control those companies.” In so holding, the Court relied in part on state laws that permit even for-profit corporations to pursue purposes beyond stockholder wealth maximization. As the Court put it:
Not all corporations that decline to organize as nonprofits do so in order to maximize profit. For example, organizations with religious and charitable aims might organize as for-profit corporations because of the potential advantages of that corporate form, such as the freedom to participate in lobbying for legislation or campaigning for political candidates who promote their religious or charitable goals. In fact, recognizing the inherent compatibility between establishing a for-profit corporation and pursuing nonprofit goals, States have increasingly adopted laws formally recognizing hybrid corporate forms. Over half of the States, for instance, now recognize the “benefit corporation,” a dual-purpose entity that seeks to achieve both a benefit for the public and a profit for its owners.
In any event, the objectives that may properly be pursued by the companies in these cases are governed by the laws of the States in which they were incorporated—Pennsylvania and Oklahoma—and the laws of those States permit for-profit corporations to pursue “any lawful purpose” or “act,” including the pursuit of profit in conformity with the owners’ religious principles.
So it was a bit of an eyebrow-raiser to read this April Executive Order in which Trump declares:
The majority of financing in the United States is conducted through its capital markets. The United States capital markets are the deepest and most liquid in the world. They benefit from decades of sound regulation grounded in disclosure of information that, under an objective standard, is material to investors and owners seeking to make sound investment decisions or to understand current and projected business. As the Supreme Court held in TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976), information is “material” if “there is a substantial likelihood that a reasonable shareholder would consider it important.” Furthermore, the United States capital markets have thrived under the principle that companies owe a fiduciary duty to their shareholders to strive to maximize shareholder return, consistent with the long-term growth of a company.
As readers of this blog are likely aware, academics love to argue over whether existing law requires that corporations be run solely to maximize stockholder wealth, and of course over whether such law – if it exists – is a good idea or a bad idea. See generally Joan MacLeod Heminway, Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents, 74 Wash. & Lee L. Rev. 939 (2017). Usually, however, these battles occur in the context of state law. And while federal law – securities regulation, and so forth – often implies a corporate purpose of wealth maximization, I have to admit, I don’t recall seeing so blatant a statement about it before.
In any event, this section of the Executive Order directs the Department of Labor to review its existing guidance re: ERISA plans’ involvement in ESG matters. It’s a follow-up to last year’s Labor Department release – which I blogged about here – warning that ERISA plans may violate their duties to plan beneficiaries if they engage on ESG matters, or vote for ESG-related proxy proposals, for reasons other than plan wealth maximization.
As I’ve previously discussed, the SEC is currently reviewing rules governing the proxy process – including the role of proxy advisory services – to determine if additional regulation is needed. Much of this fight is, of course, about shareholder involvement in ESG matters and corporate governance more generally. I assume from this latest Executive Order that we’re about to see something of a two-pronged effort to limit shareholder power, with new guidance and/or regulations issuing from the SEC on one side and the Labor Department on the other. Anyone’s guess how successful this effort is likely to be, but I will highlight Andrew Tuch’s recent article, Why Do Proxy Advisors Wield So Much Influence? Insights From U.S.-U.K. Comparative Analysis, B.U. L. Rev. (forthcoming), pointing out that proxy advisory services have far less influence in the UK than in the United States, which he attributes to the fact that US shareholders have less power, and have reached less consensus on best practices in corporate governance, than shareholders in the UK. He concludes that many of the attempts to limit shareholder power – and the power of proxy advisors – in the US will not only be ineffective, but will actually strengthen proxy advisors’ hand.