Friday, October 23, 2020

When Wall Street Talks, Does Washington Listen?

It’s hard to believe that the US will have an election in less than two weeks. Three years ago, a month after President Trump took office, I posted about CEOs commenting on his executive order barring people from certain countries from entering the United States. Some branded the executive order a “Muslim travel ban” and others questioned whether the CEOs should have entered into the political fray at all. Some opined that speaking out on these issues detracted from the CEOs’ mission of maximizing shareholder value. But I saw it as a business decision - - these CEOs, particularly in the tech sector, depended on the skills and expertise of foreign workers.

That was 2017. In 2018, Larry Fink, CEO of BlackRock, told the largest companies in the world that “to prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society…Without a sense of purpose, no company, either public or private, can achieve its full potential. It will ultimately lose the license to operate from key stakeholders.” Fink’s annual letter to CEOs carries weight; BlackRock had almost six trillion dollars in assets under management in 2018, and when Fink talks, Wall Street listens. Perhaps emboldened by the BlackRock letter, one year later, 181 CEOs signed on to the Business Roundtable's Statement on the Purpose of a Corporation, which “modernized” its position on the shareholder maximization norm. The BRT CEOs promised to invest in employees, deal ethically and fairly with suppliers, and embrace sustainable business practices. Many observers, however, believed that the Business Roundtable statement was all talk and no action. To see how some of the signatories have done on their commitments as of last week, see here.

Then came 2020, a year like no other. The United States is now facing a global pandemic, mass unemployment, a climate change crisis, social unrest, and of course an election. During the Summer of 2020, several CEOs made public statements on behalf of themselves and their companies about racial unrest, with some going as far as to proclaim, “Black Lives Matter.” I questioned these motives in a post I called “"Wokewashing and the Board." While I admired companies that made a sincere public statement about racial justice and had a real commitment to look inward, I was skeptical about firms that merely made statements for publicity points. I wondered, in that post, about companies rushing to implement diversity training, retain consultants, and appoint board members to either curry favor with the public or avoid the shareholder derivative suits facing Oracle, Facebook, and Qualcomm. How well had they thought it out? Meanwhile, I noted that my colleagues who have conducted diversity training and employee engagement projects for years were so busy that they were farming out work to each other. Now the phones aren’t ringing as much, and when they are ringing, it’s often to cancel or postpone training.

Why? Last month, President Trump issued the Executive Order on Combatting Race and Sex Stereotyping. As the President explained:

today . . .  many people are pushing a different vision of America that is grounded in hierarchies based on collective social and political identities rather than in the inherent and equal dignity of every person as an individual. This ideology is rooted in the pernicious and false belief that America is an irredeemably racist and sexist country; that some people, simply on account of their race or sex, are oppressors; and that racial and sexual identities are more important than our common status as human beings and Americans ... Therefore, it shall be the policy of the United States not to promote race or sex stereotyping or scapegoating in the Federal workforce or in the Uniformed Services, and not to allow grant funds to be used for these purposes. In addition, Federal contractors will not be permitted to inculcate such views in their employees.

The Order then provides a hotline process for employees to raise concerns about their training. Whether you agree with the statements in the Order or not -- and I recommend that you read it -- it had a huge and immediate effect. The federal government is the largest procurer of goods and services in the world. This Order applies to federal contractors and subcontractors. Some of those same companies have mandates from state law to actually conduct training on sexual harassment. Often companies need to show proof of policies and training to mount an affirmative defense to discrimination claims. More important, while reasonable people can disagree about the types and content of diversity training, there is no doubt that employees often need training on how to deal with each other respectfully in the workplace. (For a thought-provoking take on a board’s duty to monitor diversity  training by co-blogger Stefan Padfield, click here.)

Perhaps because of the federal government’s buying power, the U.S. Chamber of Commerce felt compelled to act. On October 15th, the Chamber and 150 organizations wrote a letter to the President stating:

As currently written, we believe the E.O. will create confusion and uncertainty, lead to non-meritorious investigations, and hinder the ability of employers to implement critical programs to promote diversity and combat discrimination in the workplace. We urge you to withdraw the Executive Order and work with the business and nonprofit communities on an approach that would support appropriate workplace training programs ...  there is a great deal of subjectivity around how certain content would be perceived by different individuals. For example, the definition of “divisive concepts” creates many gray areas and will likely result in multiple different interpretations. Because the ultimate threat of debarment is a possible consequence, we have heard from some companies that they are suspending all D&I training.  This outcome is contrary to the E.O.’s stated purpose, but an understandable reaction given companies’ lack of clear guidance. Thus, the E.O. is already having a broadly chilling effect on legitimate and valuable D&I training companies use to foster inclusive workplaces, help with talent recruitment, and remain competitive in a country with a wide range of different cultures. … Such an approach effectively creates two sets of rules, one for those companies that do business with the government and another for those that do not. Federal contractors should be left to manage their workforces and workplaces with a minimum amount of interference so long as they are compliant with the law.

It’s rare for the Chamber to make such a statement, but it was bold and appropriate. Many of the Business Roundtable signatories are also members of the U.S. Chamber, and on the same day, the BRT issued its own statement committing to programs to advance racial equity and justice. BRT Chair and WalMart CEO Doug McMillon observed,  “the racial inequities that exist for many Black Americans and people of color are real and deeply rooted . .  These longstanding systemic challenges have too often prevented access to the benefits of economic growth and mobility for too many, and a broad and diverse group of Americans is demanding change. It is our employees, customers and communities who are calling for change, and we are listening – and most importantly – we are taking action.” Now that's a stakeholder maximization statement if I ever heard one.

Those who thought that some CEOs went too far in protesting the Muslim ban, may be even more shocked by the BRT’s statements about the police. The BRT also has a subcommittee to address racial justice issues and noted that “For Business Roundtable CEOs, this agenda is an important step in addressing barriers to equity and justice . . . This summer we took on the urgent need for policing reform. We called on Congress to adopt higher federal standards for policing, to track whether police departments and officers have histories of misconduct, and to adopt measures to hold abusive officers accountable. Now, with announcement of this broader agenda, CEOs are supporting policies and undertaking initiatives to address several other systems that contribute to large and growing disparities.”

Now that stakeholders have seen so many of these social statements, they have asked for more. Last week, a group of executives from the Leadership Now Project issued a statement supporting free and fair elections. However, as Bennett Freeman, former Calvert executive and Clinton cabinet member noted, no Fortune 500 CEOs have signed on to that statement. Yesterday, the Interfaith Center on Corporate Responsibility (ICCR) sent a letter to 200 CEOs, including some members of the BRT asking for their support. ICCR asked that they endorse:

  1. Active support for free and fair elections
  2. A call for a thorough and complete counting of all ballots
  3. A call for all states to ensure a fair election
  4. A condemnation of any tactics that could be construed as voter intimidation
  5. Assurance that, should the incumbent Administration lose the election, there will be a peaceful transfer of power
  6. Ensure that lobbying activities and political donations support the above

Is this a pipe dream? Do CEOs really want to stick their necks out in a tacit criticism of the current president’s equivocal statements about his post-election plans? Now that JPMorgan Chase CEO Jamie Dimon has spoken about the importance of respect for the democratic process and the peaceful transfer of power, perhaps more executives will make public statements. But should they? On the one hand, the markets need stability. Perhaps Dimon was actually really focused on shareholder maximization after all. Nonetheless, Freeman and others have called for a Twitter campaign to urge more CEOs to speak out. My next post will be up on the Friday after the election and I’ll report back about the success of the hashtag activism effort. In the meantime, stay tuned and stay safe.

October 23, 2020 in Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Employment Law, Ethics, Financial Markets, Human Rights, Legislation, Management, Marcia Narine Weldon, Nonprofits, Stefan J. Padfield | Permalink | Comments (1)

Monday, October 19, 2020

The Federalist Society's National Lawyers Convention will be November 9-13, 2020.

Lots of virtual events that should be of interest to our readers, including the "Showcase Discussion" on Thursday 11/12 from 11:00 a.m. – 12:15 p.m.: A Discussion with Professors Robert George and Cornel West on Freedom of Speech, Freedom of Thought, the Black Lives Matter Movement, and the Cancel Culture. You can find the full schedule and register here.

October 19, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Padfield on the Duty to Monitor Diversity Training

I have posted an essay over at Law & Liberty (here) that uses the Marchand case as a jumping off point for inquiring into a duty to monitor diversity training. The essay is an early summary of an on-going project. Comments are welcome.

October 19, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, October 14, 2020

Roe & Shapira on the stories we tell ourselves to insulate corporate executives from stock-market accountability.

Mark Roe & Roy Shapira have posted The Power of the Narrative in Corporate Lawmaking on SSRN (here).  Here is the abstract:

The notion of stock-market-driven short-termism relentlessly whittling away at the American economy’s foundations is widely accepted and highly salient. Presidential candidates state as much. Senators introduce bills assuming as much. Corporate interests argue as much to the Securities and Exchange Commission and the corporate law courts. Yet the academic evidence as to the problem’s severity is no more than mixed. What explains this gap between widespread belief and weak evidence?

This Article explores the role of narrative power. Some ideas are better at being popular than others. The concept of pernicious stock market short-termism has three strong qualities that make its narrative power formidable: (1) connotation — the words themselves tell us what is good (reliable long-term commitment) and what is not (unreliable short-termism); (2) category confusion — disparate types of corporate misbehavior, such as environmental degradation and employee mistreatment, are mislabeled as being truly and primarily short-termism phenomena emanating from truncated corporate time horizons (when they in fact emanate from other misalignments), thereby making us view short-termism as even more rampant and pernicious than it is; and (3) confirmation — the idea is regularly repeated, because it is easy to communicate, and often boosted by powerful agenda-setters who benefit from its repetition.

The Article then highlights the real-world implications of narrative power — powerful narratives can be more certain than the underlying evidence, thereby leading policymakers astray. For example, a favorite remedy for stock-market-driven short-termism is to insulate executives from stock market pressure. If lawmakers believe that short-termism is a primary cause of environmental degradation, anemic research and development, employee mistreatment, and financial crises — as many do — then they are likely to focus on further insulating corporate executives from stock-market accountability. Doing so may, however, do little to alleviate the underlying problems, which would be better handled by, say, stronger environmental regulation and more astute financial regulation. Powerful narratives can drive out good policymaking.

October 14, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Monday, October 5, 2020

The Business Law Prof Blog Symposium Goes Virtual!

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The fourth annual Business Law Prof Blog symposium, Connecting the Threads, is happening, despite the pandemic.  We are proceeding in a virtual format, hosted on Zoom on Friday, October 16.  More information is available here.

The line-up includes an impressive majority of our bloggers speaking on a wide range of topics from shareholder proposals to social enterprise, opting out of partnership, and much more.  Most papers will have a faculty and student discussant.  My submission, “Business Law and Lawyering in the Wake of COVID-19,” is coauthored with two students and carries one hour of Tennessee ethics credit.  While I wish we could host everyone in person in Knoxville, it always is an amazing day when we all get together.  I look forward to learning more about what everyone is working on and hearing what everyone has to say.

October 5, 2020 in Ann Lipton, Colleen Baker, Conferences, Haskell Murray, Joan Heminway, Joshua P. Fershee, Marcia Narine Weldon, Stefan J. Padfield | Permalink | Comments (0)

Tuesday, September 1, 2020

Sergio Gramitto on "Artificial Agents in Corporate Boardrooms"

Sergio Gramitto, co-author (with Lynn Stout and Tamara Belinfanti) of Citizen Capitalism: How a Universal Fund Can Provide Influence and Income to All just published Artificial Agents in Corporate Boardrooms in the Cornell Law Review.  Here is the abstract:

Thousands of years ago, Roman businessmen often ran joint businesses through commonly owned, highly intelligent slaves. Roman slaves did not have full legal capacity and were considered property of their co-owners. Now business corporations are looking to delegate decision-making to uberintelligent machines through the use of artificial intelligence in boardrooms. Artificial intelligence in boardrooms could assist, integrate, or even replace human directors. However, the concept of using artificial intelligence in boardrooms is largely unexplored and raises several issues. This Article sheds light on legal and policy challenges concerning artificial agents in boardrooms. The arguments revolve around two fundamental questions: (1) what role can artificial intelligence play in boardrooms? and (2) what ramifications would the deployment of artificial agents in boardrooms entail?

September 1, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Friday, August 14, 2020

Wokewashing and the Board

As an academic and consultant on environmental, social, and governance (ESG) matters, I’ve used a lot of loaded terms -- greenwashing, where companies tout an environmentally friendly record but act otherwise; pinkwashing, where companies commoditize breast cancer awareness or LGBTQ issues; and bluewashing, where companies rally around UN corporate social responsibility initiatives such as the UN Global Compact.

In light of recent events, I’ve added a new term to my arsenal—wokewashing. Wokewashing occurs when a company attempts to show solidarity with certain causes in order to gain public favor. Wokewashing isn’t a new term. It’s been around for years, but it gained more mainstream traction last year when Unilever’s CEO warned that companies were eroding public trust and industry credibility, stating:

 Woke-washing is beginning to infect our industry. It’s polluting purpose. It’s putting in peril the very thing which offers us the opportunity to help tackle many of the world’s issues. What’s more, it threatens to further destroy trust in our industry, when it’s already in short supply… There are too many examples of brands undermining purposeful marketing by launching campaigns which aren’t backing up what their brand says with what their brand does. Purpose-led brand communications is not just a matter of ‘make them cry, make them buy’. It’s about action in the world.

The Black Lives Matter and anti-racism movements have brought wokewashing front and center again. My colleague Stefan Padfield has written about the need for heightened scrutiny of politicized decisions and corporate responses to the BLM movement here, here, and here, and Ann Lipton has added to the discussion here. How does a board decide what to do when faced with pressure from stakeholders? How much is too much and how little is too little?

The students in my summer Regulatory Compliance, Corporate Governance, and Sustainability course were torn when they acted as board members deciding whether to make a public statement on Black Lives Matter and the murder of George Floyd. As fiduciaries of a consumer goods company, the “board members” felt that they had to say “something,” but in the days before class they had seen the explosion of current and former employees exposing  companies with strong social justice messaging by pointing to hypocrisy in their treatment of employees and stakeholders. They had witnessed the controversy over changing the name of the Redskins based on pressure from FedEx and other sponsors (and not the Native Americans and others who had asked for the change for years). They had heard about the name change of popular syrup, Aunt Jemima. I intentionally didn’t force my students to draft a statement. They merely had to decide whether to speak at all, and this was difficult when looking at the external realities. Most of the students voted to make some sort of statement even as every day on social media, another “woke” company had to defend itself in the court of public opinion. Others, like Nike, have received praise for taking a strong stand in the face of public pressure long before it was cool and profitable to be “woke.”

Now it’s time for companies to defend themselves in actual court (assuming plaintiffs can get past various procedural hurdles). Notwithstanding Facebook and Oracle’s Delaware forum selection bylaws, the same lawyers who filed the shareholder derivative action against Google after its extraordinary sexual harassment settlement have filed shareholder derivative suits in California against Facebook, Oracle, and Qualcomm. Among other things, these suits generally  allege breach of the Caremark duty, false statements in proxy materials purporting to have a commitment to diversity, breach of fiduciary duty relating to a diverse slate of candidates for board positions, and unjust enrichment. Plaintiffs have labeled these cases civil rights suits, targeting Facebook for allowing hate speech and discriminatory advertising, Qualcomm for underpaying women and minorities by $400 million, and Oracle for having no Black board members or executives. Oracle also faces a separate class action lawsuit based on unequal pay and gender.

Why these companies? According to the complaints, “[i]f Oracle simply disclosed that it does not want any Black individuals on its Board, it would be racist but honest…” and  “[a]t Facebook, apparently Zuckerberg wants Blacks to be seen but not heard.” Counsel Bottini explained, “when you actually go back and look at these proxy statements and what they’ve filed with the SEC, they’re actually lying to shareholders.”

I’m not going to discuss the merits of these cases. Instead, for great analysis, please see here written by attorneys at my old law firm Cleary Gottlieb. I’ll do some actual legal analysis during my CLE presentation at the University of Tennessee Transactions conference on October 16th.

Instead, I’m going to make this a little more personal. I’m used to being the only Black person and definitely the only Black woman in the room. It’s happened in school, at work, on academic panels, and in organizations. When I testified before Congress on a provision of Dodd-Frank, a Black Congressman who grilled me mercilessly during my testimony came up to me afterwards to tell me how rare it was to see a Black woman testify about anything, much less corporate issues. He expressed his pride. For these reasons, as a Black woman in the corporate world, I’m conflicted about these lawsuits. Do corporations need to do more? Absolutely. Is litigation the right mechanism? I don’t know.

What will actually change? Whether or not these cases ever get past motions to dismiss, the defendant companies are likely to take some action. They will add the obligatory Black board members and executives. They will donate to various “woke” causes. They will hire diversity consultants. Indeed, many of my colleagues who have done diversity, equity, and inclusion work for years are busier than they have ever been with speaking gigs and training engagements. But what will actually change in the long term for Black employees, consumers, suppliers, and communities?

When a person is hired or appointed as the “token,” especially after a lawsuit, colleagues often believe that the person is under or unqualified. The new hire or appointee starts under a cloud of suspicion and sometimes resentment. Many eventually resign or get pushed out. Ironically, I personally know several diversity officers who have left their positions with prestigious companies because they were hired as window dressing. Although I don’t know Morgan Stanley’s first Chief Diversity Officer, Marilyn Booker, her story is familiar to me, and she has now filed suit against her own company alleging racial bias.

So I’ll keep an eye on what these defendants and other companies do. Actions speak louder than words. I don’t think that shareholder derivative suits are necessarily the answer, but at least they may prompt more companies to have meaningful conversations that go beyond hashtag activism.

August 14, 2020 in Ann Lipton, Compliance, Consulting, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Financial Markets, Management, Marcia Narine Weldon, Shareholders, Stefan J. Padfield | Permalink | Comments (0)

Tuesday, August 4, 2020

Cynthia Dahl: "any corporate lawyer with technology clients must understand standard essential patents"

Cynthia Dahl has posted "When Standards Collide with Intellectual Property: Teaching About Standard Setting Organizations, Technology, and Microsoft v. Motorola" on SSRN (here).  The paper provides "a Teaching Guide to a plug and play module designed to easily allow professors to insert teaching about SEPs into their IP or other commercial courses."  I have provided the abstract below.

Technology lawyers, intellectual property (IP) lawyers, or even any corporate lawyer with technology clients must understand standard essential patents (SEPs) and how their licensing works to effectively counsel their clients. Whether the client’s technology is adopted into a voluntary standard or not may be the most important factor in determining whether the company succeeds or is left behind in the market. Yet even though understanding SEPs is critical to a technology or IP practice, voluntary standards and specifically SEPs are generally not taught in law school.

This article aims to address this deficiency and create more practice-ready law school graduates. The article is a Teaching Guide to a plug and play module designed to easily allow professors to insert teaching about SEPs into their IP or other commercial courses. It is particularly designed for professors who are unfamiliar with (or even intimidated by) the technical subject matter of SEPs. The Teaching Guide unlocks a number of helpful resources, available at the Penn Program on Regulation website (direct link on page 4). The resources together encompass a complete plan for the professor, using the recent seminal case of Microsoft v. Motorola - where licensing some SEPs went horribly wrong - to illustrate themes. Besides the Teaching Guide, the resources include a business school-style Case Study for students to read on the Microsoft case, recorded video interviews with the lead counsel for each party, the federal court judge for the case and his clerk, and other supporting materials. The Teaching Guide provides contextual background for the professor to explain SEPs and particularly this case, suggests a class discussion outline, lists discussion points and proposed “answers,” includes prompts to spark public policy debates, and offers an extensive resources library for further study, including cases as well as articles. It even helps the professor accommodate longer or shorter sessions, calibrate to more or less outgoing classes, and adapt the module for use in many different kinds of classes, including IP classes, but also classes in remedies, contracts, federal courts and licensing, among others. By offering guidance but much flexibility, the Teaching Guide aspires to make incorporating this critical SEP subject matter into the law school curriculum straightforward and accessible.

August 4, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Monday, July 27, 2020

Hovenkamp on Antitrust and Platform Monopoly

Herbert Hovenkamp has posted "Antitrust and Platform Monopoly" on SSRN.  The abstract is below.  I was particularly struck by: "The history of antitrust law is replete with firms that are organized as single entities under corporate law, but that function as competitors and [are] treated that way by antitrust law."

This article first considers an often-discussed question about large internet platforms that deal directly with consumers: Are they “winner take all,” or natural monopoly, firms? That question is complex and does not produce the same answer for every platform. The closer one looks at digital platforms they less they seem to be winner-take-all. As a result, we can assume that competition can be made to work in most of them.

Second, assuming that an antitrust violation is found, what should be the appropriate remedy? Breaking up large firms subject to extensive scale economies or positive network effects is generally thought to be unwise. The resulting entities will be unable to behave competitively. Inevitably, they will either merge or collude, or else one will drive the others out of business. Even if a platform is not a natural monopoly but does experience significant economies of scale in production or consumption, a breakup can be socially costly. In the past, structural relief of this type has led to higher prices or business firm failure. If breakup is not the answer, then what are the best antitrust remedies? One possibility is to break up ownership and management rather than assets. The history of antitrust law is replete with firms that are organized as single entities under corporate law, but that function as competitors and treated that way by antitrust law. This permits productive assets to remain intact, but forces decision makers to behave competitively.

Finally, this paper takes a look at the problem of platform acquisition of nascent firms, where the biggest threat is not from horizontal mergers but rather from acquisitions of complements or differentiated technologies. For these, the tools we currently use in merger law are poorly suited. Here I offer some suggestions.

July 27, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, July 25, 2020

Lipshaw on The False Dichotomy of Corporate Governance Platitudes

Jeffrey Lipshaw has posted "The False Dichotomy of Corporate Governance Platitudes" on SSRN.  I have set forth the abstract below.  I had the pleasure of reading an early draft, and I highly recommend the paper.  Among other things, Jeff brings a level of practical experience to the topic ("more than a quarter century as a real world corporate lawyer and senior officer of a public corporation") that makes his views a must-read.  Having said that, my own view is that the “shareholder vs. stakeholder” debate is meaningful even if it only really matters in "idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised."

In 2019, the Business Roundtable amended its principles of corporate governance, deleting references to the primary purpose of the corporation being to serve the shareholders. In doing so, it renewed the “shareholder vs. stakeholder” debate among academic theorists and politicians. The thesis here is that the zero-sum positions of the contending positions are a false dichotomy, failing to capture the complexity of the corporate management game as it is actually played. Sweeping and absolutist statements of the primary purpose of the corporation are based on arid thought experiments and idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised. In the real world, management regularly commits itself to multiple competing constituencies, including the shareholders.

There are three arguments. The first is from reality, borne out by a survey of pre-amendment CEO annual report letters to shareholders (2017) and post-amendment responses (2020) to the COVID-19 pandemic. The second is from economics. Neo-classical economic theory supporting the doctrine is misplaced; transaction cost analysis under the New Institution Economics does a far better job of explaining the primacy of wide corporate discretion in allocating surplus among the corporate constituencies. The third is from jurisprudence. Doctrinal dicta like “corporations exist primary to maximize shareholder wealth” are not so much right or wrong as meaningless. Rather, the business judgment rule, which justifies almost any allocation of corporate surplus having an articulable connection to the best interest of the enterprise, subsumes all other platitudes posing as rules of law.

July 25, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, July 21, 2020

Sanjukta Paul on Antitrust As Allocator of Coordination Rights

One of my Westlaw alerts contained a link to a recently published article I thought BLPB readers might find of interest.  Here is the abstract:

The reigning antitrust paradigm has turned the notion of competition into a talisman, even as antitrust law in reality has functioned as a sorting mechanism to elevate one species of economic coordination and undermine others. Thus, the ideal state idea of competition and its companion, allocative efficiency, have been deployed to attack disfavored forms of economic coordination, both within antitrust and beyond. These include horizontal coordination beyond firm boundaries, democratic market coordination, and labor unions. Meanwhile, a very specific exception to the competitive order has been written into the law for one type of coordination, and one type only: that embodied by the traditionally organized, top-down business firm.

This Article traces the appearance of this legal preference and reveals its logical content. It also explains why antitrust's firm exemption is a specific policy choice that cannot be derived from corporate law, contracts, or property. Indeed, because antitrust has effectively established a state monopoly on the allocation of coordination rights, we ought to view coordination rights as a public resource, to be allocated and regulated in the public interest rather than for the pursuit of only private ends. Intrafirm coordination is conventionally viewed as entirely private, buoyed up by the contractarian theory of the firm. But the contractarian view of the firm cannot explain antitrust's firm exemption and is inconsistent with the conventional justifications for it. This Article also briefly sketches policy choices that flow from the recognition that coordination rights are a public resource, focusing upon expanding the right to engage in horizontal coordination beyond firm boundaries.

Sanjukta Paul, Antitrust As Allocator of Coordination Rights, 67 UCLA L. Rev. 378 (2020).  A version of the paper is available via SSRN here.

July 21, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Monday, June 29, 2020

The 5 Strands of Coercion Under Delaware Law

From In re Dell Techs. Inc. Class V Stockholders Litig., No. CV 2018-0816-JTL, 2020 WL 3096748, at *20–30 (Del. Ch. June 11, 2020) [Hat tip to Steve Bainbridge, who comments here.]:

Coercion is a multi-faceted concept in Delaware law. At least five strands of case law use the term ….

The first strand of coercion jurisprudence does not involve the conduct of fiduciaries. It rather addresses the ability of a non-fiduciary to offer a reward or impose a penalty as a means of inducing action in an arm’s-length setting. The seminal case is Katz v. Oak Industries, Inc., 508 A.2d 873 (Del. Ch. 1986)….

A second strand of jurisprudence involves a third party taking action that a fiduciary (typically the board of directors) believes could have a coercive effect on the fiduciary’s beneficiaries (typically stockholders). In that setting, the fiduciary has both the power and an affirmative duty to defend its beneficiaries from the coercive threat. See Unocal, 493 A.2d at 954….

A third strand of coercion jurisprudence examines whether a fiduciary has taken action to coerce its own beneficiaries. By doing so, the fiduciary acts disloyally and violates the standard of conduct expected of fiduciaries. The fiduciary may only avoid a finding of breach by proving that the transaction was nevertheless entirely fair, notwithstanding the fiduciary’s use of coercion. The seminal case in this line of authority is AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103 (Del. Ch. 1986)….

A fourth strand of coercion jurisprudence has developed in response to the powerful cleansing effect of stockholder votes under Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015). Two decisions—Saba Software and Liberty Broadband—have held that forms of coercion that would not have supported claims for breach of duty were nevertheless sufficient to prevent stockholder votes from having a cleansing effect and changing the standard of review to the irrebuttable business judgment rule….

A final strand of coercion jurisprudence shifts the focus from the stockholder vote to the special committee. As with the stockholder vote, a controller’s explicit or implicit threats can prevent a committee from fulfilling its function and having a concomitant effect on the standard of review. The leading case … is Lynch I, where Lynch’s controller (Alcatel) offered to acquire Lynch at $14 per share. Lynch I, 638 A.2d at 1113….

June 29, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Process v. Substance

Back in March, Richard Epstein published a new book, "The Dubious Morality of Administrative Law."  Today, a review of that book by Michael S. Greve was published in Law & Liberty (here).  The following excerpt from the review may be of interests to BLPB readers:

The book title, of course, invokes Lon L. Fuller’s famous account of The Morality of Law—in here-relevant part, an explication of the minimum conditions a legal system must satisfy, at least most of the time, to be called “legal” in a moral or rule-of-law sense.... Lon Fuller, Professor Epstein argues, omitted crucial rule-of-law conditions, especially the need for an impartial judge. At variance with Fuller, moreover, and on a Hayekian note, Professor Epstein argues that formal rule of law constraints work best in the context of a classical-liberal regime that rests on property rights, freedom of contract, and protection against uncompensated takings. Once those substantive commitments go by the boards, procedural rule-of-law requirements are bound to give way as well and, for that matter, may not be worth very much.... The APA says that the “administrative process” is an adequate substitute for regular legal procedures in an independent court and that it will have to do no matter what or how much is at stake for regulated parties. It so enshrines the very premises that Professor Epstein resists and contests.

June 29, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, June 16, 2020

Corporate Responses to the Protests and Riots, Part 4

We have been having an on-going discussion about corporate responses to the protests and riots (see here, here, and here). A large chunk of that discussion has focused on my proposal (here) to add enhanced scrutiny to business decisions sufficiently raising a specter of political bias, and whether such enhanced scrutiny would be warranted for corporate decisions to strongly support “Black Lives Matter” while staying silent on the riots. The relevant posts have apparently been of interest to our readers, having been shared a combined 600+ times as of this writing. The discussion has many moving parts, and my views of the relevant issues have advanced as a result. Thus, I thought it worth updating and summarizing at least some of my current positions.

1.  The idea that “black lives matter” is unquestionably correct, and it is appropriate and important to strongly affirm that idea in light of current events.

2.  Perhaps the foregoing should end the discussion, but politically-charged controversy lurks just around the corner. Is “Black Lives Matter” an idea or a movement? If the latter, what are corporations endorsing when they emblazon their corporate banners with the phrase? Are they putting their weight behind the “defund the police” movement? What about blue lives? Google “police ambushed” and you’ll see that’s unfortunately a thing. Why aren’t we seeing corporations get behind “Blue Lives Matter”? Should those who connect the BLM movement with hatred of the police be simply dismissed as racists? Does endorsing “Black Lives Matter” mean corporations will now refuse to stand for the national anthem (metaphorically)? And while condemning the killing of George Floyd and inequality is obviously correct, where is the condemnation of the riots?

3. Having said all that, does allowing concerns like those expressed above to trigger enhanced scrutiny lead to too many false positives, even if one believes political bias in corporate decision-making is a problem and that enhanced scrutiny of at least some business decisions could be an appropriate response thereto? Co-blogger Ann Lipton did a great job in her prior comments of pointing out that political controversy can be found lurking around many business decisions these days. Uncertainty is costly, and perhaps the uncertainty regarding the identification of business decisions sufficiently suggestive of political bias to warrant enhanced scrutiny is simply too high.

4. Nonetheless, I continue to believe that political bias in corporate decision-making is a problem that warrants a response. Private ordering and market solutions certainly may be sufficient, but that doesn’t mean judicial or legislative responses shouldn’t be considered. Furthermore, it is important to not overstate what enhanced scrutiny, as proposed, implies. At the end of the day, it merely asks corporate decision-makers to confirm that they are doing what they are already supposed to be doing, which is to consider all material information reasonably available when making business decisions; it does not mandate any particular outcome, and generally leaves board discretion intact. Furthermore, protective devices such as heightened pleading standards and a safe harbor for viewpoint diverse boards at least promise the possibility of efficiently balancing the relevant costs and benefits. Finally, and as alluded to earlier, perhaps there is a way to distinguish decisions that have as obviously strong a starting foundation as set forth in item #1 above. Courts are good at using materiality determinations to dismiss what they deem to be frivolous litigation. Perhaps we just make room for a defense that amounts to saying that all the material information corporate decision-makers need here is that black lives matter.

ADDENDUM (11:15 AM): Another protection against frivolous claims we haven't mentioned is the need to plead damages.  In my paper, I discuss Nike's decision to make Colin Kaepernick a face of the brand, but frame that entire discussion in the understanding that a viable claim is limited under my proposal given the stock market's overall positive response. To the extent this constitutes a modification of Unocal's enhanced scrutiny, I consider it appropriate. Cf. Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304, 312 (Del. 2015) ("Unocal and Revlon are primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M & A decisions in real time, before closing. They were not tools designed with post-closing money damages claims in mind ....").

 

June 16, 2020 in Stefan J. Padfield | Permalink | Comments (1)

Sunday, June 14, 2020

More on Corporate Responses to the Protests and Riots

The following will likely not make much sense if you haven’t read the preceding relevant discussion, most of which can be found here. The core issue addressed is whether the decision of many corporations to strongly support Black Lives Matter while staying silent on the riots should be insulated from scrutiny by the business judgment rule. I have put my original comments in bold, responses by Idriss Z in italics, and my further responses in plain text. In addition to comments on the substance of this post, I hope readers will let me know if the formatting can be improved.

"Are the corporate executives making these decisions doing so in accordance with their fiduciary duty to become informed of all material information reasonably available (which requires consideration of the impact of these decisions on the bottom line)..."

IZ- Of course they are! Many cases have held that companies can acquire much goodwill and better pr from such community action (examples have included charitable donations and philanthropy to local schools, including HBCUs). Or a more "hip" take: African American culture might be the most profitable marketing material source in the world, people all over the global love the various arts that come from our (unfortunately) marginalized communities.

You provide good reasons for concluding the decision is rational, but that does not tell us whether it was properly informed. Those are two different inquiries. For example, if the type of polling data I set forth in my prior comments (from here) was available, then that likely should have been considered. Charitable contribution cases are best treated separately from cases involving ordinary business decisions.

"..., or are they simply acting on the basis of some echo-chamber supported confidence in the obvious rightness of their beliefs"

IZ- One of the best aspects of the American system compared to those of the English commonwealths in my estimation is the lack of mental probing done to business decision-makers. What a ridiculous assertion it would be that there was some pro-Black echo-chamber effect in board rooms that are under criticism for having virtually no Black board members, right? Moreover, where are you getting their ideas or confidences in their beliefs from? You wouldn't be just making it up?

How free from scrutiny corporate decision-makers should be in cases like this is the issue. Many people believe the heightened political divisions of our day don’t constitute a good reason for additional scrutiny. As I’ve written elsewhere, I believe they do. Under my proposal, if a corporate decision appears to be sufficiently politicized, then our lack of knowledge regarding the decision-making process becomes a reason for increased scrutiny, not a reason for continued insulation of the decision. Whether the decision in this case is objectively politicized enough to warrant additional scrutiny would be a question of fact. One might point to the fact that, according to at least one poll, 71% of Americans supported National Guard intervention in the riots (more on that poll here), while 62% do not strongly support BLM (assuming we can read failure to choose "strongly support" as “don’t strongly support”). Yet corporate decision-makers made strong statements in support of BLM while remaining silent on the riots. Finally, the echo-chamber I’m referring to is a progressive echo chamber -- and it can be all white.

"– completely ignoring, if not being downright disdainful of, the views of the half of the country that believes law and order, blue lives, and black lives all matter?"

IZ- Again, it is unclear where you're getting your facts from, I am unable any factual support for this. Also, I think you might want to check the poll numbers on people's preferences. Moreover, supporting BLM and Civil rights for marginalized communities does not put you in opposition to law, order, or any other life. In fact many have quite intelligently and correctly pointed out that suggesting that supporting BLM and Civil Rights does put you in opposition is flat-out racist. Moreover, many have also correctly pointed out that alleging that one who supports BLM and Civil Rights supports riots is also in completely disregard of the gulf separating factual and disingenuously racist. Or consider this: "half" the country believes the world is flat, must board members take factor that unscientific argument into their decisions?

I agree that the numbers matter.  And someone can agree with my proposal for heightened scrutiny of politicized decisions without agreeing that such scrutiny is appropriate here. Assuming we adopted heightened scrutiny for facially politicized decisions, the costs of heightened scrutiny argue in favor of keeping the scope of triggering facts narrow. Having said that, I think the polling I’ve identified so far provides at least some support for my position in that it concludes 71% of Americans supported some type of National Guard intervention in the riots, while 62% were reported to not strongly support BLM (including almost 30% of blacks, and almost 70% of whites). Of course, those numbers could be wrong and/or I could be wrong about the relevant weight/interpretation of those numbers. In all this, it’s important to keep in mind that the heightened scrutiny I’m advocating for merely seeks affirmation that corporate decision-makers are informing themselves of all material information reasonably available. It does not require a particular outcome. In this case, evidence that available relevant polling was considered would arguably be sufficient to carry that burden, even if the decisions remain the same.

Furthermore, I agree that there is no necessary conflict between “supporting BLM and Civil rights for marginalized communities” and supporting “law, order, or any other life.” In fact, we should expect them to support each other. I also agree that racists would want to draw connections between BLM and the riots. However, I don’t agree that corporate decision-makers can ignore relevant public opinion, including the relevant concerns of well-intentioned non-racists who may be having a hard time separating the protests from the riots, however misguided those concerns might be. Accordingly, if half the country believes the world is flat, then corporate decision-makers absolutely have a duty to consider that information when making a decision to roll out a “world is round” campaign. In fact, if the board is made up exclusively of round-earthers, and they refuse to even consider the contrary public opinion of half the nation (assuming those people would otherwise reasonably be deemed potential customers), then they would be acting in bad faith.  The centrality of this point to my proposal is difficult to overstate. Critically, however, nothing requires them to shelve the campaign based on that information. They just need to fully inform themselves of all information reasonably available, and have a rational business purpose for their ultimate decision– which typically shouldn’t be hard to do.

"Such a conscious disregard of reasonably available material information would constitute not only a breach of their duty of care, but also bad faith."

IZ- Well, as I've pointed out these "conscious disregards" would be impossible to prove and are only based on conjecture. Moreover, there is a duty of care to all members of the community, so supporting a group such as BLM and civil rights would be beneficial to all members, a rising tide raises all ships. Whereas disapproval of these groups might certainly fit your criterion as they are of benefit to exactly no one. Further, consider the ramifications of your approach-> would not every corporation face the exact same liability for putting their name on a College Football Bowl Game should a "riot" breakout?

An utter failure to properly inform oneself would suffice to support a finding of bad faith consistent with a conscious disregard of a known duty. If we shift the burden to corporate decision-makers to show that they properly informed themselves, and they are unable to carry that burden – that is sufficient. I certainly want the heightened scrutiny I propose to leave significant discretion to corporate decision-makers to appropriately consider the impact of decisions on stakeholders. Nothing I’m proposing should prevent corporate decision-makers from concluding that strong support for BLM is in the best interests of the corporation, while at the same time concluding silence on the riots is likewise best. The only way my proposal should interfere with those decisions is if the decision-makers failed to properly inform themselves.  Finally, the mere coincidence of a sponsorship decision and a riot would not trigger heightened scrutiny under my proposal.

June 14, 2020 in Stefan J. Padfield | Permalink | Comments (15)

Friday, June 12, 2020

Padfield on "the Omnipresent Specter of Political Bias" in Corporate Decision-Making (and 3 other papers)

Wednesday, June 10, 2020

Sharfman on Martin Lipton’s "Purpose of the Corporation"

Friend of the blog Bernard Sharfman has a new post up on the Oxford Business Law Blog, responding to Martin Lipton’s recent "On the Purpose of the Corporation" posts.  Bernie's full post can be found here, and I've excerpted some portions (slightly out of  order) below.  I appreciate that the post highlights that a big part of the shareholder v. stakeholder debate is about whose rights are determined by contract v. fiduciary duties.

[T]he Lipton, Savitt, and Cain definition of corporate purpose is missing both an objective and a strategy on how it will create social value....

I am disappointed with this definition, a definition that ignores the social value created by for-profit businesses, namely the goods and services they produce; ignores that this social value is being produced for the financial benefit of its shareholders; and uses the pretense that uninformed institutional investors are partners in the management of a company....

[T]hey make no mention of the social value created by the corporation through the successful management of its stakeholder relationships, the goods and services it provides. How can a definition of corporate purpose not mention this? It’s as if a corporation should be ashamed of why it exists....

Pfizer, as a for-profit corporation, ... has the legal obligation of looking out for the interests of its shareholders. This is the only stakeholder group that the board owes fiduciary duties to, who can sue the board for a breach of those duties, who can approve major corporate decisions, and who can initiate and implement a proxy contest to remove board members. Thus, shareholder wealth maximization is the objective of Pfizer’s social value creation....

[A] collective action problem in shareholder voting leads to uninformed institutional investors, resource-constrained investor stewardship teams and proxy advisors that cannot solve this problem, and the current lack of enforcement of an investment adviser’s fiduciary duties does not solve the additional problem of institutional investor bias in shareholder voting.

June 10, 2020 in Business Associations, Corporate Governance, CSR, Shareholders, Stefan J. Padfield | Permalink | Comments (0)

Friday, June 5, 2020

Is Corporate Silence on the Riots Deafening?

Corporations have appropriately been condemning racism recently, but where's the condemnation of the riots?  Does the following excerpt from "Understanding Antifa" provide some answers?

California Governor Gavin Newsom was a pitch perfect Rousseauist when he recently said that the violent riots were not caused by individuals; instead he insisted, “Our institutions are responsible.” Many progressives are ambivalent about criticizing the violence of Antifa because they retain this sympathetic worldview. While all on the left are not active in violent revolution, many liberal mayors and governors struggle to condemn it outright….

Some additional excerpts that may be of interest:

The anarchism of Antifa embodies the revolutionary outlook, common in the West since the 18th century, that … assumes any violent spark that creates a popular uprising will usher in a utopian world of equality and justice….

 

Antifa does not offer a platform of positive change. In the fashion of Robespierre, they seek to overthrow “the privileged” and they assume that this violence and destruction will inflame an uprising that will usher in a pure democracy of equality….

 

In the view of Antifa, traditionally powerful groups, such as white men and capitalists, conspire to suppress the natural nobility of underrepresented citizens….

 

The current politics of Western democracies are so roiled and divisive because strident elements on the left have adopted this revolutionary outlook and traditionalist and populist parties of the right, some genuinely suspect and some very healthy, have sprung up to resist it.

UPDATE (6/6/20): The conversation continues here.

June 5, 2020 in Stefan J. Padfield | Permalink | Comments (2)

Wednesday, June 3, 2020

ICYMI: #corpgov Midweek Roundup (June 3, 2020)

June 3, 2020 in Stefan J. Padfield | Permalink | Comments (0)

Wednesday, May 27, 2020

ICYMI: #corpgov Midweek Roundup (May 27, 2020)

If you have trouble viewing the embedded Tweets, please try a different browser (I recommend Internet Explorer).

It's been 11 weeks since the WHO declared the coronavirus outbreak a pandemic, and the NBA cancelled games. As of this writing, the NY Post reports: Total cases globally = 5,589,626; Deaths = 350,453.

May 27, 2020 in Stefan J. Padfield | Permalink | Comments (0)