Current Affairs

Subscribe to Current Affairs via RSS

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…

Joe Leahy (South Texas) recently posted an early draft of an interesting article entitled Corporate Political Contributions as Bad Faith.  He would appreciate any comments readers care to share with him.  The abstract is included below:

A shareholder who files a derivative lawsuit to challenge a corporate political contribution faces long odds, particularly when the shareholder sues under traditional theories for breach of the duty of loyalty, such as waste or self-dealing. However, there is a better theory for a shareholder to employ when filing such a lawsuit: bad faith. Bad faith is a better basis for challenging a corporate political contribution than either waste or self-dealing because bad faith is a more flexible concept than self-dealing and a less difficult standard to satisfy than waste. Even if she intends no harm, a director acts in bad faith when she (1) takes official action that is motivated primarily by any reason other than advancing the corporation’s best interests or (2) consciously disregards her fiduciary duties.

This Article identifies several examples of political contributions – both real and hypothetical – that are ripe for challenge as bad faith because they are made for reasons other than advancing the corporation’s

…

Last week I blogged about enterprise risk management,  lawyers, and their “obligations” to counsel clients about human rights risks based in part on statements by the American Bar Association and Marty Lipton of Wachtell, who have cited the UN Guiding Principles on Business and Human Rights. I posted the blog on a few LinkedIn groups and received some interesting responses from academics, in house counsel, consultants, and outside counsel, which leads me to believe that this is fertile ground for discussion. I have excerpted some of the comments below:

 “Corporations do have risk with respect to human rights violations, and this risk needs to be managed in a thoughtful manner that respects human dignity. I did wonder, though, whether you see any possible unintended consequences of asking attorneys to start advising on moral as well as legal rights?”

“I agree. Great post. Lawyers should always be ready to advise on both legal risks and what I call “propriety”. If a lawyer cannot scan for both risks, then he or she is either incompetent or has integrity issues. Companies that choose to take advice from a lawyer who is incompetent or has integrity issues probably have integrity issues too. I’m…

I am generating my summer reading list–both business and pleasure. At the top of my list is Other People’s Houses, by Jennifer Taub (Vermont Law School), which will be available from Yale Press on May 27th.   The official website for the book describes the project as:

Drawing on wide-ranging experience as a corporate lawyer, investment firm counsel, and scholar of business law and financial market regulation, Taub chronicles how government officials helped bankers inflate the toxic-mortgage-backed housing bubble, then after the bubble burst ignored the plight of millions of homeowners suddenly facing foreclosure.

Focusing new light on the similarities between the savings and loan debacle of the 1980s and the financial crisis in 2008, Taub reveals that in both cases the same reckless banks, operating under different names, received government bailouts, while the same lax regulators overlooked fraud and abuse. Furthermore, in 2013 the situation is essentially unchanged. The author asserts that the 2008 crisis was not just similar to the S&L scandal, it was a severe relapse of the same underlying disease. And despite modest regulatory reforms, the disease remains uncured: top banks remain too big to manage, too big to regulate, and too big to fail.

…

Last week I had the pleasure of speaking on a panel on global human rights compliance and enterprise risk management with Mark Nordstrom of General Electric and John Sherman of Shift. The panel was part of a conference entitled New Challenges in Risk Management and Compliance at the UConn School of Law Insurance Law Center. 

I spoke about the lack of direct human rights obligations under international law for multinationals, the various voluntary initiatives such as the Universal Declaration of Human Rights, the ILO Tripartite Declaration, the UN Global Compact, ISO 26000, the OECD Guidelines for Multinational Enterprises, the Global Reporting Initiative, and accusations of bluewashing. I also discussed Dodd-Frank 1502 (conflict minerals), sustainable stock exchange indices, ESG reporting, SEC proxy disclosure on risk management oversight, socially responsible investors, and the roles of the Sustainability Accounting Standards Board and the International Integrated Reporting Council in spurring transparency and integrated reporting. 

Sherman focused on the UN Guiding Principles on Business and Human Rights, which were unanimously endorsed by the UN Human Rights Council in 2011 and which contain three pillars, namely the state duty to protect people from human rights abuses by third parties, including business; business’ responsibility to respect…

The NBA’s handling of what the NBA concluded was Donald Sterling’s now-infamous, racist-language-laden phone call with V. Stiviano has generated a lot of commentary (including my own).  As one might expect, the incident has led to some oft-repeated assertions that are not quite right.  So, in taking a break from my grading, I thought I’d deal with a couple of those issues right now. 

To start, if Sterling is forced to sell the Clippers, the NBA and the other team owners are not “taking” anything away from him that he has a right to keep.  He is an owner subject to an agreement that, according to NBA Commissioner Adam Silver, allows the league to force Sterling to sell upon a three-fourths vote of other league owners.  As such, the league has, and has always had, the power to decide if Sterling would be allowed to own a team.  (Why the league owners didn’t act twenty years ago is a legitimate question, but one for another day.)

 That Sterling can be forced to sell should not be news to lawyers, at any rate.  This case reminds me of Lawlis v. Kightlinger & Gray, 562 N.E.2d 435 (Ind. App. 4th Dist. 1990). The case is taught in many Business Organizations courses. In that case, Lawlis was a partner the Kightlinger & Gray law firm. At some point, his alcoholism became a problem, and eventually he told the partners of his issues. Lawlis and his partners reached an agreement about how to move forward (one with a “no-second chances” provision).  Lawlis got things together for a bit, then returned to drinking, and he was given a second chance.  Lawlis apparently got sober and eventually insisted the firm should increase his partnership participation.  Instead, the firm decided to expel him by a 7-to-1 vote (Lawlis was the sole vote against expulsion).  Lawlis sued. 

The court was not convinced, and I would hope any court would look the same way at a vote to remove Sterling as an NBA owner. Even if they needed cause, I would opine that the league has it, but the likely don’t need it.  The Lawlis court explained: 

All the parties involved in this litigation were legally competent and consenting adults well educated in the law who initially dealt at arm’s length while negotiating the . . .  agreements here involved. At the time the partners negotiated their contract, it is apparent they believed . . . the “guillotine method” of involuntary severance, that is, no notice or hearing, only a severance vote to terminate a partner involuntarily need be taken, would be in the best interests of the partnership. Their intent was to provide a simple, practical, and above all, a speedy method of separating a partner from the firm, if that ever became necessary for any reason. We find no fault with that approach to severance.

 Where the remaining partners in a firm deem it necessary to expel a partner under a no cause expulsion clause in a partnership agreement freely negotiated and entered into, the expelling partners act in “good faith” regardless of motivation if that act does not cause a wrongful withholding of money or property legally due the expelled partner at the time he is expelled.

Lawlis,562 N.E.2d at 442-43.

Some have lamented that Sterling will still be a rich man from this, no matter what.  That is true, and the NBA has no way to change that.  Sterling must be properly compensated if he were forced to sell the team. But that’s the point.  In America, Sterling (like anyone else) is permitted (within the bounds of the law) to say racist and misogynist things and be a generally awful person without anyone taking away property.  On the other hand, it appears Sterling agreed to buy a team in a league with an agreement that has a guillotine clause that allows the league to force him to sell.  So be it.

Here are five other related points worth noting (at least, I think so), even if they are not as business-law focused. Click below for more.

Unless you have been under a rock, you’ve probably heard about the racially offensive (and morally repugnent) comments apparently made by Donald Sterling, owner of the NBA’s Los Angeles Clippers, made about African-Americans, including Magic Johnson.  Just moments ago, the league announced how it would respond.

NBA Commissioner Adam Silver announced that an NBA investigation has concluded that Sterling was the voice reflecting hateful speech, views that are “deeply offensive and harmful.”  (Note that the investigation was done by the Wachtell Lipton firm.)   

Commissioner Silver apologized for Sterling’s comments and vowed action. The result: Effective immediately, Sterling is banned for life from games, practices, facilities, and player personnel decisions, and he is barred from executive meetings.  In addition, the maximum fine of $2.5 million is levied, which will for to charities selected jointly by the NBA and the player’s association.  Silver said he will do everything in his power to help force a sale of the team. 

Silver said, “We stand together in condemning Mr. Sterling’s views. They have no place in the NBA.” Sterling said that a three-fourths vote of owners could force Donald Sterling to sell. He did not know how it would proceed, but Silver said he…

[The following post comes to us from Lawrence E. Mitchell, Joseph C. Hostetler – Baker & Hostetler Professor of Law at Case Western Reserve University School of Law.  All formatting errors should be attributed to me, Stefan Padfield.]

The March 5, 2014 oral argument in Halliburton Co. v. Erica P. John Fund, Inc.1 made clear that one of the issues being considered by the Supreme Court is whether to supplant the “market efficiency” analysis currently required at the class certification stage in securities fraud class action cases with a “price impact” analysis instead. Our purpose is not to debate the relative merits of that potential change. Rather, it is to identify a critical point that seemed to get lost in the argument: neither the Justices nor the advocates addressed what a price impact analysis would look like in the context of the most common securities fraud scenario—the making of false statements designed to mask bad news. While some of the briefing before the Court touches on the issue, the authors of a working paper cited by proponents of both sides have supplemented their views with a recent blog post that, while brief, discusses potential approaches to measuring the …

Regular readers know of my view that energy and energy law are closely related to business and business law.  Further to that point: Last week, a group of 20 organizations, including those representing the interests of business, oil, coal, aggregate, farm, and power sent an open letter to Pennsylvania state legislators stating their concerns about the state supreme court’s decision in Robinson Township v. Commonwealth of Pennsylvania.  That decision overturned Act 13, which largely eliminated local government’s ability to prevent oil and gas operations in their jurisdictions through zoning.  The letter explains:

The opinion undermines the traditional and long-recognized authority of the Legislature to balance environmental and economic interests on a statewide basis, leading to the spectra of multiple levels of government and a myriad of agencies second guessing each other in deciding whether to approve particular developments and how to manage natural resources. This expansive, broad and vaguely case-by-case application of the Environmental Rights Amendment threatens to reestablish the very uncertainty and ambiguity that Act 13 and many other statutes were originally intended to address through adoption of a holistic, comprehensive regulatory program that carefully balances the Commonwealth twin interests in economic progress and environmental stewardship. 

The plurality opinion opens the door to a myriad of litigation, at all levels of government, attempting to thwart virtually any type of industrial, agricultural, commercial or residential facility and development. The affects of this ruling will be felt by employers in all industries and will certainly adversely impact efforts to promote job creation throughout the state.

I agree with these organizations on a number of issues here.  First, I think they are right the state legislature had the power to pass Act 13,  or at least something similar. I also agree that the plurality opinion unnecessarily invites litigation in a variety of contexts that could negatively impact both business and the environment.  On the other hand, I think that the legislature took an unnecessarily heavy-handed approach to the legislation when a more modest version of the act could have been similarly effective. 

As I have explained previously, though there are very real risks related to hydraulic fracturing for oil and gas, much of the public, many politicians, and (in this case) judges are too easily distracted by risks that seem like they could be associated with the process, but aren’t. When judges assume facts, bad law (and bad policies) are very likely to follow. Building on that assessment, I have posted my article, Facts, Fiction, and Perception in Hydraulic Fracturing: Illuminating Act 13 and Robinson Township v. Commonwealth of Pennsylvania on here on SSRN.  Please click below to continue reading.