May 2014

Following up on Steven Bradford’s post regarding the Fourth Circuit’s interpretation of Janus Capital Group v. First Derivative Traders (2011):

The SEC recently announced  that it intends to pursue more cases under Section 20(b) of the Exchange Act, which prohibits people from violating the Exchange Act “through or by means of any other person.”  I suspect this move will have serious implications for private cases under Section 10(b).

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Brett McDonnell (Minnesota) recently posted a new article entitled Committing to Doing Good and Doing Well: Fiduciary Duty in Benefit Corporations.  I have not read the article yet, but it is printed and in my stack for the summer.  The abstract is below. 

Can someone running a business do good while doing well? Can they benefit society and the environment while still making money? Supporters of social enterprises believe the answer is yes, as these companies aim at both making money for shareholders while also pursuing other social benefits. Since 2010, states have begun to enact statutes creating the “benefit corporation” as a new legal form designed to fit social enterprises. Benefit corporations proclaim to the world that they will pursue both social good and profits, and those who run them have a fiduciary duty to consider a broad range of social interests as they make their decisions rather than a duty to focus solely on increasing shareholder value. Does this novel fiduciary duty effectively commit these businesses to doing good? How will courts actually apply this duty in practice? Will this new duty accomplish its goals without unduly high costs?

This article is among the first to

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The-giver-banner

Much has been written about the protests at various schools over proposed commencement speakers.  I am not sure I have much original to add to the many thoughts that have been shared on the issue (See, e.g., Jonathan Adler (Case Western), The Volokh Conspiracy; Stephen Carter (Yale), Bloomberg; Glenn Harlan Reynolds (Tennessee), USA Today; Editorial Board, Washington Post), but the controversy did make me think of the dystopian society in The Giver where “Sameness” rules.

One of my younger sisters recently accepted a job with Walden Media, which is producing the upcoming film version of The Giver with The Weinstein Company (shameless plug – in theatres August 15, 2014).  My sister was amazed that I hadn’t read The Giver, as it is supposedly regular middle school reading, but it looks like the book (published in 1993) was not in the curriculum in time for me.  Yes, I feel older every day. 

Anyway, in a single day a few weeks ago, I read a borrowed copy of The Giver, which was a nice break from legal treatises and law review articles.  While I understand the “Elders” in The Giver were trying to protect…

Two of my former colleagues at King & Spalding LLP, Jaron Brown and Tyler Giles, sent me their recently published book, Stock Purchase Agreements Line by Line.  Jaron Brown made partner in King & Spalding’s M&A group before moving in-house to Novelis, Inc.  Tyler Giles moved in-house earlier in his career (to Equifax, Inc.) and has since moved back to law firm life as a partner at FisherBroyles LLP.

The book appears aimed at practitioners, but it could also be a valuable resource for those who teach M&A or drafting courses.  The book includes various practical pointers for drafting typical provisions in a stock purchase agreement and, as the title suggests, goes through an SPA line by line.  The authors are true experts in their subject matter, and I look forward to using the book.   

Earlier this week, Stanford University’s Rock Center for Corporate Governance released a study entitled “How Investment Horizon and Expectations of Shareholder Base Impact Corporate Decision-Making.” Not surprisingly, the 138 North American investor relations professionals surveyed prefer long-term investors so that management can focus on strategic decisionmaking without the distraction of “short-term performance pressures that come from active traders,” according to Professor David F. Larcker. Companies believed that attracting the “ideal” shareholder base could lead to an increase in stock price and a decrease in volatility.

The average “long-term investor” held shares for 2.8 years while short-term investors had an investment horizon of 7 months or less.  Pension funds, top management and corporate directors held investments the longest, and companies indicated that they were least enamored of hedge funds and private equity investors.  Those surveyed had an average of 8% of their shares held by hedge funds and believed that 3% would be an ideal percentage due to the short-termism of these investors. Every investor relations professional surveyed who had private equity investment wanted to see the ownership level down to zero.

I wonder what AstraZeneca’s investor relations team would have said if they could have participated in the survey given…

Proxy issues are an interesting gauge of current and emerging corporate governance issues.  Even if the proposals don’t pass, they provide a tool to take investors’ and companies’ temperature on controversial issues.  Alliance Advisors issued a detailed report on 2014 proxy season trends and expectations, which is available for download here.  A few highlights are discussed below.

  • Majority Voting. A trend towards majority voting proposals with support from ISS and Vanguard means that many companies will be facing pressure to consider changes to director elections.
  • Declassified Boards.  While the Harvard Law School Shareholder Rights Project has been successful in obtaining declassification of 23 of 13 target companies, the academic and industry debate continues about the efficacy or harm of classified boards.  
  • Board Tenure & Diversity.  These initiatives seek to turn the tide against board compositions that are dominated by white men who hold director positions for extended periods of time.

“ISS’s fall policy survey revealed that 74% of investor respondents consider board service over 10 years to be problematic. Similarly, a recent academic study of S&P 1500 companies found that firm value peaks when average director tenure reaches nine years, and then drops off by as much

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The New York Times ran two articles this week about administrator and executive pay that struck a chord with me.  One piece was about a new report linking student debt and highly paid university leaders.  The article discusses a study, “The One Percent at State U: How University Presidents Profit from Rising Student Debt and Low-Wage Faculty Labor.”  The study reviewed “the relationship between executive pay, student debt and low-wage faculty labor at the 25 top-paying public universities.”

Then-Ohio State President E. Gordon Gee was the highest-paid public university president for the time period review. The study found that

Ohio State was No. 1 on the list of what it called the most unequal public universities. The report found that from fiscal 2010 to fiscal 2012, Ohio State paid Mr. Gee a total of $5.9 million. [$2.95 million per year.] During the same period, it said, the university hired 670 new administrators, 498 contingent and part-time faculty — and 45 permanent faculty members. Student debt at Ohio State grew 23 percent faster than the national average during that time, the report found.

[In the interest of full disclosure, I should note that President Gee is the president of my institution, for…

OK, where were we before the disruption of the blog?

Howard Wasserman at PrawfsBlawg has posted a comment on Justice Scalia’s recent commencement address at William & Mary. Justice Scalia argued against the proposals many have made for a two-year law degree, and argued in favor of more required courses in the second and third years. (Professor Wasserman links to the full text of Scalia’s address, if you want to read it.)

Professor Wasserman supports the general idea, but argues that enacting such reforms would put schools at a competitive disadvantage. A school with upper-level requirements would lose out to a school that offered students more flexibility. All else being equal, prospective students would choose flexibility over rigid requirements.

Professor Wasserman is probably correct. At least at the margin, students would probably prefer fewer requirements. I’m not sure how much this would affect law schools with stricter requirements, given the many other factors students consider in choosing a law school. But assume for the sake of argument that stricter curriculum requirements would put a law school at a competitive disadvantage. I don’t think that’s a legitimate reason to oppose upper-level requirements or any other reform of the curriculum.…

Our apologies to those of you who were unable to access the blog yesterday. Our blog is hosted by Typepad, and Typepad was down all day yesterday. This had absolutely nothing to do with an alien invasion force from another galaxy. To repeat, they want us to tell you that THIS HAD ABSOLUTELY NOTHING TO DO WITH AN ALIEN INVASION FORCE FROM ANOTHER GALAXY. Please return to your daily business, earthlings.