February 2014

Tamara Belinfanti recently posted “Shareholder Cultivation and New Governance” on SSRN.  Here is the abstract:

Several formal proposals have been made to address shareholder short-termism and speculative behavior. These include the imposition of a financial transaction tax, changes to the U.S. capital gains tax rate, and the adoption of an Investor Stewardship Code in the United Kingdom. This Article reverses the focus from looking to top-down solutions to looking at bottom-up grass root solutions that corporations can employ, and in some cases do already employ to achieve substantially the same effect of rewarding certain types of shareholder behavior while dissuading others — a process I refer to as “Shareholder Cultivation.” While many of the techniques and strategies discussed in this Article are not new and in fact many have been used by companies and investor relation professionals for years, the Article is the first to conceptualize a prescriptive framework for assessing which techniques and strategies should be allowed. Additionally, the Article utilizes new governance theory to examine the concept of Shareholder Cultivation with a fresh lens: as a corporate governance benefit.

Hello, everyone.  Stefan put out a call for reasonable facsimiles of business law professors, and I figured I fit the bill.  I’m a Visiting Assistant Professor at Duke Law, currently teaching Securities Litigation.  I’ve arrived here directly from practice: For the past 11 years, I’ve worked as a plaintiff-side securities litigator.

(On my first day of class, I asked how many of my students had done securities litigation work, perhaps as summer associates.  Almost every hand went up.  Then I asked how many had worked plaintiff-side.  The hands went down so quickly I swear I heard whooshing noises.  To be fair, there was one student who’d done plaintiffs’ work – outside the US.)

Anyway, like anyone teaching securities litigation these days, there’s one thing on my mind: Halliburton, where the Supreme Court is being asked to overrule Basic Inc v. Levinson, the case where it endorsed the fraud on the market presumption of reliance for claims brought under Section 10(b) of the Securities Exchange Act.

There’s been a lot of chatter about the possibility that if Basic is overruled, plaintiffs may, in some instances, still be able to obtain a presumption of reliance under Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) – many of the Halliburton parties and amici seem to assume this is the case, and it’s come up in the blogosphere.

Affiliated Ute holds that when a fraud consists of material omissions rather than affirmative misstatements, reliance may be presumed.

The problem that often seems to be overlooked, though, is that the Affiliated Ute presumption is rebuttable – and specifically, it’s rebuttable upon a showing that disclosure would not have made a difference, because the plaintiff never read the document in which the omission is contained.  See Eckstein v. Balcor Film Investors, 58 F.3d 1162 (7th Cir. 1995); Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981).

Given that, I don’t see how much of a role it can play with respect to substituting for Basic.  Defendants’ obvious ability to rebut the presumption with respect to wide swaths of the class should be enough to defeat class certification.  This is not to say that defendants’ rebuttal arguments should be entertained at class certification; the point is that there will be so many individualized differences among class members regarding what they read or did not read that class certification would usually be inappropriate, just as in any other non-fraud-on-the-market case where a defense applies differently to a significant number of class members (though there is authority the other way, see In re Smith Barney Transfer Agent Litig., 290 F.R.D. 42 (S.D.N.Y. 2013)).

But then I have a long train of speculation as I imagine how this might play out….

[More after the break]

Recently, I completed reviewing my mid-course student evaluations. 

I have found mid-course evaluations to be quite valuable.  As a student, I remember wishing we had mid-course evaluations so that my comments could be used to improve our class, rather than merely helping the professor improve the course for the next batch of students. 

The mid-course evaluation gives students a chance to voice concerns, anonymously, relatively early in the course.   While professors quickly learn that is likely impossible to please all of their students—some students love the exact same thing that other students hate—trends in mid-course evaluations can alert professors to potential issues and give time to make modifications before the end of the semester.   

Mid-course evaluations can also be used as a teaching tool—modeling the proper way to seek and evaluate advice.  The class period after I administer the mid-course evaluation, I take a few minutes to explain to the class what (if any) changes I plan to make on their advice and why I chose not to follow some of their advice (for example, even if a number of students dislike group work, I explain why we are going to continue with some group exercises).  The students may…

I typically leave introductions to the bloggers themselves, but let me just say that we here at the BLPB are very much looking forward to having Ann Lipton guest blog with us for the next four weeks.  Professor Lipton is currently at Duke Law, and her primary focus is on federal securities regulation and complex civil litigation.  You can find her full profile here.  Welcome, Ann!

From an e-mail I received from the production manager of The Business Lawyer:

The Editorial Board of The Business Lawyer is soliciting submission of articles and essays for Volumes 69 and 70. TBL is the flagship scholarly journal of the American Bar Association  Section of Business Law. It reaches 40,000 readers on a quarterly basis. Authors must submit exclusively to the journal and submissions are peer-reviewed. We generally give authors a response in about two weeks. TBL provides a good forum to reframe scholarly articles published elsewhere for an audience of judges and practitioners. Past authors include Lucian Bebchuk, Barbara Black, Bernie Black, Starvros Gadinis, Joe Grundfest, Henry Hu, Roberta Karmel,  Jonathan Lipson, Vice Chancellor Leo Strine, Guhan Subramanian, and former Chief Justice of the Delaware Supreme Court Justice Norman Veasey.

Articles should be submitted to Diane Babal, Production Manager, at diane.babal@americanbar.org. Questions about submissions can be addressed to Associate Editor-in-Chief, Professor Gregory Duhl, at gregory.duhl@wmitchell.edu

Update: I am told that submitted articles should be between 20 and 100 double-spaced pages, including footnotes. 

Last night I attended a forum organized by the Ladies Empowerment and Action Program (LEAP). The panel featured female entrepreneurs from the culinary industry.  Some were chefs, some owned restarurnts, some sold products, and others blogged and educated the public, but their stories were remarkably similar. They told the audience of business students and budding entrepreneurs that they generally didn’t like partners, were wary of investors because they tended to exert too much control over their vision, and that they wished that they had better financial advisors who cared about them and understood their business.  

One panelist, who had received $500,000 in capital from an investor, indicated that she was glad that she had been advised to enter into her contract as though she may end up in litigation.  As a former litigator who now teaches both civil procedure and business associations, I both agree and disagree with that advice.  As a naïve newbie litigator in a large New York firm, I used to joke with the corporate associates that the only reason I needed to understand how their deals were done was so that I could understand how to defend them went they fell apart and…

This article popped up from the local paper (home of internet sensation Marilyn Hagerty) serving the area of my prior instituion: 

Committee recommends no liquor license for Rumors bar in Grand Forks

The Grand Forks City Council Service/Safety Committee recommended Tuesday that the city deny a liquor license transfer for Rumors bar in Grand Forks.

The committee originally recommended the full council deny the license earlier this month because of the previous felony charges against Blake Bond, Jamestown, N.D., one of the partners in Sin City LLC, the applicant of the license.

The council then sent the issue back to the committee, but when representatives from Sin City failed to show up at Tuesday’s meeting, the committee voted to recommend denying the license again. . . . .

A quick note for the reporter, who wouldn’t necessarily know this:  LLCs don’t have partners. They have members.  So, the more accurate statement would be that Mr. Bond “is one of the members of Sin City, LLC.”  The North Dakota Limited Liability Company Act definitions provision explains that:

“Member” means a person, with or without voting rights, reflected in the required
records of a limited liability company as the owner

…

Last week, I had an enjoyable conversation with Joseph Yockey (Iowa) about his new article:  “Does Social Enterprise Law Matter?”  I am glad to see more people entering the social enterprise law conversation and have included the abstract of his interesting new article below: 

Social enterprise laws are sweeping through the nation. Entrepreneurs can now organize under one of several new legal forms, including the “benefit corporation” form. In theory, these options will make it easier for socially minded firms to pursue a double bottom line of profit and public benefit — that is, to do well while doing good.

This Article tests that theory. In asking whether social enterprise laws matter, I find that the answer is yes, but not for the reasons most people think. The traditional rationale for social enterprise laws is that they free managers from the “duty” to put profits ahead of social objectives. But that’s wrong; existing corporate law is already flexible enough to permit most social/economic tradeoffs. However, by drawing on insights from new governance theories of regulation, I argue that social enterprise laws add value in other ways. Specifically, they provide a catalyst for entrepreneurs, investors, and stakeholders to develop the

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CVS/Caremark announced, on Feb. 5, 2014, that that the company would cease selling tobacco products in its 7,600 U.S. pharmacies.  Given that the entity estimated that it would lose about $2 billion in revenues from the decision, the world took notice.  CVS has managed the announcement well, and the company has received generally good press about the whole idea.

 Personally, I applaud the decision, both because I think it’s a sensible choice and because I think the board properly exercised its authority to set CVS stores up for long-term success. The company tried to maximize the feel-good story of the decision, but I think that message was tempered by the necessity that CVS explain the profit-seeking role of the decision with the announcement. Clearly, CVS’s counsel read eBay v. Newmark.

The CVS announcement had two components.  First, the media spin – for the aren’t-they-great? response:

“We have about 26,000 pharmacists and nurse practitioners helping patients manage chronic problems like high cholesterol, high blood pressure and heart disease, all of which are linked to smoking,” said Larry J. Merlo, chief executive of CVS. “We came to the decision that cigarettes and providing health care just don’t go together in

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The SEC is taking some flak from crowdfunding proponents for its crowdfunding rules. Sherwood Neiss, one of the early proponents of a crowdfunding exemption, has taken the SEC to task, as has Representative Sam Graves, the chair of the House Committee on Small Business. See also this article.

These critics point out, correctly, that the crowdfunding exemption is too expensive and restrictive. The problem is that the critics are aiming at the wrong target. I’m no SEC apologist; I have criticized its approach to small business and the structure of its exemptions on a number of occasions. But, in this case, it’s not the SEC that deserves the blame. It’s Congress.

Almost everything the critics are concerned about originates in the statute itself, not in the SEC’s attempt to implement the statute. I pointed out the many problems with the JOBS Act’s crowdfunding exemption almost 18 months ago. The unnecessary cost, complexity, and liability issues the critics are currently complaining about are statutory problems.

Yes, the SEC has some discretion to change some of the objectionable provisions, but one should hardly expect the SEC, with no experience whatsoever with crowdfunding, to overrule the express requirements adopted by…