Corporations

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My wife and I both have many close family members in South Carolina, so the recent flood has been on our minds recently.

My first thoughts are with all of those affected by the flood.  

Relevant to this blog, the flood also reminds me of one of the opening passages in Conscious Capitalism by Whole Food’s co-CEO John Mackey. In that passage, Mackey recalls the massive flood in Austin, TX in 1981. At that time, Whole Foods only had one store, and the flood filled that store with eight feet of water. Whole Foods had loses of $400,000 and no savings and no insurance.

Mackey notes that “there was no way for [Whole Foods] to recover with [its] own resources” and then:

  • “[a] wonderfully unexpected thing happened: dozens of our customers and neighbors started showing up at the store….Over the next few weeks, dozens and dozens of our customers kept coming in to help us clean up and fix the store…It wasn’t just our customers who helped us. There was an avalanche of support from our other stakeholders as well [such as suppliers extending credit and deferring payment]. . . . It is humbling to think about what would

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Two weeks ago I wrote my first in a series of posts on the SEC’s proposed liquidity and redemption rules for mutual funds.  The first post, available here, focused on swing pricing.  Today’s post will focus on the liquidity management proposals contained in the proposed rules to address liquidity risk.

The proposed rules would require all open end mutual funds (not UITs, closed-end funds or money management funds) to create a written liquidity management program and to disclose it to the SEC via the proposed forms N-CEN and N-PORT.  Under the plan, funds would (1) classify and conduct ongoing reviews of liquidity of each of the fund’s positions in portfolio assets, (ii) assess and conduct periodic reviews of the fund’s liquidity risk, and (iii) manage the fund’s liquidity risk through a set-aside minimum portion of fund assets that are convertible within 3 business days at a price that does not materially affect the value of that asset immediately prior to sale.

Liquidity risk is born of concern that a fund “could not meet requests to redeem shares issued by the fund that are expected under normal conditions, or are reasonably foreseeable under stressed conditions, without materials affecting the fund’s net…

Alicia Plerhoples (Georgetown) has the details about the first benefit corporation IPO: Laureate Education.*

She promises more analysis on SocEntLaw (where I am also a co-editor) in the near future.

The link to Laureate Education’s S-1 is here. Laureate Education has chosen the Delaware public benefit corporation statute to organize under, rather than one of the states that more closely follows the Model Benefit Corporation Legislation. I wrote about the differences between Delaware and the Model here.

Plum Organics (also a Delaware public benefit corporation) is a wholly-owned subsidiary of the publicly-traded Campbell’s Soup, but it appears that Laureate Education will be the first stand-alone publicly traded benefit corporation.

*Remember that there are differences between certified B corporations and benefit corporations. Etsy, which IPO’d recently, is currently only a certified B corporation. Even Etsy’s own PR folks confused the two terms in their initial announcement of their certification.

Today I will present on a panel with colleagues that spent a week with me this summer in Guatemala meeting with indigenous peoples, village elders, NGOs, union leaders, the local arm of the Chamber of Commerce, a major law firm, government officials, human rights defenders, and those who had been victimized by mining companies. My talk concerns the role of corporate social responsibility in Guatemala, but I will also discuss the complex symbiotic relationship between state and non-state actors in weak states that are rich in resources but poor in governance. I plan to use two companies as case studies. 

The first corporate citizen, REPSA (part of the Olmeca firm), is a Guatemalan company that produces African palm oil. This oil is used in health and beauty products, ice cream, and biofuels, and because it causes massive deforestation and displacement of indigenous peoples it is also itself the subject of labeling legislation in the EU. REPSA is a signatory of the UN Global Compact, the world’s largest CSR initiative. Despite its CSR credentials, some have linked REPSA with the assassination last month of a professor and activist who had publicly protested against the company’s alleged pollution of rivers with…

The ABA has recommend amendment of 28 U.S.C. § 1332 through Resolution 103B, which 

urges Congress to amend 28 U.S.C. § 1332, to provide that any unincorporated business entity shall, for diversity jurisdiction purposes, be deemed a citizen of its state of organization and the state where the entity maintains its principal places of business.

I’m on record as saying a legislative fix is how this should happen because I don’t think courts should read “incorporated” in the act to include any entities other than corporations.  I still believe that.  However, I have come up with an argument that supports the idea in a way I had not thought of.  I still disagree with the idea of a court adding entities other than corporations to 1332 absent legislative action, so I disagree with what follows, but I thought of an interesting argument that I almost find compelling , so I am putting it out there anyway.  

In Hobby Lobby decision, Justice Alito stated:

No known understanding of the term “person” includes some but not all corporations. The term “person” sometimes encompasses artificial persons (as the Dictionary Act instructs), and it sometimes is limited to natural persons. But no conceivable

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Stephen Choi (NYU), Jill Fisch (Penn), Marcel Kahan (NYU), and Ed Rock (Penn) have posted an interesting new paper entitled Does Majority Voting Improve Board Accountability?

The authors report the dramatic increase in majority voting provisions. In 2006, only 16% of the S&P 500 companies used majority voting, but by January of 2014, over 90% of the S&P 500 companies had adopted some form of majority voting. (pg. 6). As of 2012, 52% of mid-cap companies and 19% of small-cap companies had adopted majority voting provisions. (pg. 7)

For the most part, the spread of majority voting has not led to significant reduction in election of nominated directors. In over 24,000 director nominations from 2007 to 2013, at companies with majority voting provisions, “only eight (0.033%) [nominees] failed to receive a majority of ‘for’ votes.” (pg.4)

The authors claim that their “most dramatic finding is”:

a substantial difference between early and later adopters of majority voting. The early adopters of majority voting appear to be more shareholder-responsive than other firms. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in shareholder-responsiveness going forward. By contrast, later adopters, as a group, seem

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Last week I blogged about the Yates Memorandum, in which the DOJ announced that any company that expected leniency in corporate deals would need to sacrfice a corporate executive for prosecution. VW has been unusually public in its mea culpas apologizing for its wrongdoing in its emission scandal this week. VW’s German CEO has resigned, the US CEO is expected to resign tomorrow, and other executives are expected to follow.

It will be interesting to see whether any VW executives will serve as the first test case under the new less kind, less gentle DOJ. Selfishly, I’m hoping for a juicy shareholder derivatives suit by the time I get to that chapter to share with my business associations students. That may not be too far fetched given the number of suits the company already faces.

This post is related to another great post from Tom Rutledge at the Kentucky Business Entity Law Blog, Diversity Jurisdiction and Jurisdictional Discovery: The Third Circuit Holds That “Hiding The Ball” Will Not Work. Tom’s post is about Lincoln Benefit Life Company v. AEI Life, LLC, No. 14-2660, 2015 WL 5131423, ___ F.2d__ (3rd Cir. Sept. 2, 2015), which is available here. 

Lincoln Benefit allows a plaintiff, after a reasonable inquiry into the resources available (like court records and public documents), to allege complete diversity in good faith, if there is no reason to believe any LLC members share the same state of citizenship.  Thus, the diversity claim can be made on “information and belief.”  Tom explains that

While it may do nothing to address the fact that diversity jurisdiction may be unavailable consequent to de minimis indirect ownership  . . .  it does limit the ability of a defendant to “hide the ball” as to its citizenship while objecting that the other side has not adequately pled citizenship and therefore diversity. 

This concern arises out of the fact that LLCs, as unincorporated associations, are treated like partnerships for purposes of federal diversity jurisdiction, meaning that an…

Last week I ventured a few blocks from Belmont’s campus to our neighbor Vanderbilt University Law School for their conference on The Future of International Corporate Governance. 

One of the many interesting papers presented was Independent Directors in Singapore: Puzzling Compliance Requiring Explanation by Dan Puchniak and Luh Luh Lan, both of the National University of Singapore.

The entire paper is worth reading, but I want to share three take-aways with our readers.

  1. “[O]nly a handful of jurisdictions [roughly 7%] have ever adopted the American concept of the independent director (i.e., where directors who are independent from management only— but not substantial shareholders—are deemed to be independent).” (pg. 6)

  2. Singapore adopted an American-style definition of “independent director” in 2001, which did not include independence from substantial shareholders. Despite this weaker definition of independence in a jurisdiction with much more concentrated shareholding than the U.S., Singapore enjoyed relative success through “functional substitutes” that limited the private benefits of control. According to the authors, these “functional substitutes” include social relationships in Family Controlled Firms (“FCFs”)” and legally imposed limits on the controlling government shareholder in Government Linked Companies (“GLCs”). 

  3. Despite relative success with the American-style definition of “independent director,” Singapore

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I think my life as a compliance officer would have been much easier had the DOJ issued its latest memo when I was still in house. As the New York Times reported yesterday, Attorney General Loretta Lynch has heard the criticism and knows that her agency may face increased scrutiny from the courts. Thus the DOJ has announced via the “Yates Memorandum” that it’s time for some executives to go to jail. Companies will no longer get favorable deferred or nonprosecution agreements unless they cooperate at the beginning of the investigation and provide information about culpable individuals.

This morning I provided a 7-minute interview to a reporter from my favorite morning show NPR’s Marketplace. My 11 seconds is here. Although it didn’t make it on air, I also discussed (and/or thought about) the fact that compliance officers spend a great deal of time training employees, developing policies, updating board members on their Caremark duties, scanning the front page of the Wall Street Journal to see what company had agreed to sign a deferred prosecution agreement, and generally hoping that they could find something horrific enough to deter their employees from going rogue so that they wouldn’t be…