So, this blog post about DoorDash and pizza arbitrage has been making the internet rounds; you’ve probably already seen it, but if not, it’s well worth a read.  It highlights some of the irrationalities of the platform-food-delivery business – irrationalities that have resulted in losses despite the fact that the pandemic has caused business to boom.  UberEats and GrubHub are now considering a merger, and I suppose their lack of profit might be interpreted as the result of predatory pricing, which would raise antitrust concerns, but honestly it looks more like they are just having trouble making the business model work. 

So what struck me about the blog post was this:

You have insanely large pools of capital creating an incredibly inefficient money-losing business model. It’s used to subsidize an untenable customer expectation. You leverage a broken workforce to minimize your genuine labor expenses. The companies unload their capital cannons on customer acquisition, while this week’s Uber-Grubhub news reminds us, the only viable endgame is a promise of monopoly concentration and increased prices. But is that even viable?  

Third-party delivery platforms, as they’ve been built, just seem like the wrong model, but instead of testing, failing, and evolving, they’ve been subsidized into market dominance. Maybe the right model is a wholly-owned supply chain like Domino’s. Maybe it’s some ghost kitchen / delivery platform hybrid. Maybe it’s just small networks of restaurants with out-of-the-box software. Whatever it is, we’ve been delayed in finding out thanks to this bizarrely bankrolled competition that sometimes feels like financial engineering worthy of my own pizza trading efforts.

The more I learn about food delivery platforms, as they exist today, I wonder if we’ve managed to watch an entire industry evolve artificially and incorrectly.

That’s pretty much the argument I made in my earlier post, The Meaning of We.  Loosening of the securities laws has, I think, resulted in a distorted and inefficient allocation of capital toward exploitative and ultimately unproductive businesses.  Now, it’s true – GrubHub and Uber are both publicly traded companies today – but they got their start due to piles of private investment, and that momentum has carried them through into the public markets.  From where I sit, the expanded ability of companies to raise capital privately has only facilitated particular kinds of biases and short-sightedness among a very small segment of the investor base, resulting in real, and damaging, effects in the broader economy.  Perhaps this is a problem that will resolve itself – with the implosion of SoftBank, perhaps private markets will simply get smarter – but I suspect that this is more a problem of the people who make decisions in private markets, and their biases and incentives.  Regulators are increasingly focusing their attention on investor sophistication with respect to individual transactions, and neglecting the broader macroeconomic purposes of the securities regulation regime.

I’ve written about the expungement process stockbrokers now use to suppress public information before.   We know that brokers who receive expungements are statistically more likely to cause harm than the average broker–about 3.3 times as likely to cause harm.  We also know that customers usually don’t get much notice before an expungement hearing will held.  We also know that brokers have used claims for nominal damages to cut costs and ensure that only a single arbitrator will hear the matter.

But I had not yet realized another problem with the system.  Brokers often succeed at expunging information after more than six years have passed.  Generally, a broker should not be able to secure an arbitration award recommending expungement after more than six years from the occurrence or event giving rise to the claim has passed.  I suppose some arbitrators might buy an argument that the presence of the information in the public record creates a type of continuing harm and that the claim continues to arise.  It’s a bit like arguing that a scar from a twenty-year old injury means you should be able to sue about it because seeing the scar continues to harm you.  Of course, many brokerage firm defendants simply don’t care whether a former broker secures an expungement or not and will not even raise the issue with an arbitrator.

Brokers are securing arbitration awards removing information dating back many many years, some involving complaining customer who have now passed away.  For example a broker recently secured an arbitration award (Docket Number 19-01639) recommending expungement for an incident dating back to the early 2000s.  Although the award does not provide substantial information, the arbitrator concluded that an unauthorized trading claim on his record was “not true” on account of the following evidence:

The evidence (including a receipt confirming the return of the relevant stock certificates to the Customer) showed that the alleged trading and sale of securities was authorized by the Customer. Claimant sent her a letter explaining the proposed sale of her securities which was reviewed by the NPC’s Compliance Department prior to being sent. According to Claimant’s testimony, a while after her complaint was filed, the Customer retained an attorney to determine if there was a basis for filing a legal action against Claimant. The attorney met with Claimant and informed Claimant that there was no basis for any legal action by the Customer.

Apparently, the broker testified that the complaining customer hired a lawyer.  And then the customer’s lawyer met with the broker and told him that the customer had no basis for any claim against him.  This strikes me as odd that an attorney hired by someone else would advise the broker about the Customer’s options.  

Of course, this doesn’t mean that the complaining customer’s claim was “false,” it might just be that there were not any damages.  I don’t know.  It all strikes me as very odd.  And you can’t ask the complaining customer, she passed away.

If you review the broker’s BrokerCheck report today, you will see that a customer alleged he engaged in “UNAUTHORIZED TRADING OF SECURITIES, REGARDING SALE OF SECURITIES. NO DAMAGE AMOUNT SPECIFIC.”  You will also see his comment responding to the allegation: 

ON NOVEMBER 1, 2002, IN A MEETING WITH CLIENT AND HER BENEFICIARY, WE DISCUSSED RE-POSITIONING HER STOCK PORFOLIO TO GENERATE MORE INCOME. WE AGREED ON EVERYTHING. CLIENT SIGNED FORMS TO REPOSITION THE PROCEEDS. CLIENT ASKED THAT THE SALES OCCUR AFTER MONDAY. AFTER NOT HEARING ANYTHING TO THE CONTRARY, I SOLD THE STOCK LATE ON TUESDAY, NOVEMBER 5, 2002.

If the broker completes the next step in the process and secures a court order confirming this arbitration award, the information will be deleted from public records.  Ultimately, I don’t know what happened–and the complaining customer has passed on so she can’t tell you.  But if you had to trust your life’s savings to stockbrokers, would you want to know about some of these past complaints so you could take it into account?  Do you want someone who will make absolutely sure you really want to execute a trade before doing it?

 

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It’s been ten 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 = 4,897,492; Deaths = 323,285.

I am teaching Business Associations this summer, and I am excited to get back in the classroom. Well, I was. Instead, I am teaching in virtual class room via Zoom.  I am still glad to be interacting with students in a teaching capacity, but I sure miss the classroom setting. I am glad, though, to have this experience so I am closer to what this has been like for our students and faculty.  I still have the benefit of my colleagues experiences, students who have been in the online learning environment, and a little time to plan, so it’s better for me than it was for everyone in March. Still, there is quite a learning curve on all of this. 

Over the past several years, I have asked students to create a fictional limited liability company (LLC) for our first class.  It does a number of things. To begin, it connects them with a whole host of decisions businesses must make in choosing their entity form.  It also introduces them to the use of forms and how that works.  I always give them an old version of the form. This year, I used 2017 Articles of Organization for a West Virginia Limited Liability Company. It does a couple of things.  There is an updated form (2019), so it gives me a chance to talk about the dangers of using precedent forms and accepting what others provide you without checking for yourself.  (Side note: I used West Virginia even though I an in Nebraska, because Nebraska doesn’t have a form. I use this one to compare and contrast.) 

In addition, I like my students to see how most businesses start with entity choice and formation — by starting one.  It leads to some great conversations about limited liability, default rules, member/manager management choices, etc. Each year, I have had at least one person opt-in for personal liability, for example, for all members.

I also, which will shock no one, use the form to discuss the distinct nature of LLCs and how they are NOT corporations.  And yet, the West Virginia LLC form tries to under cut me at each turn.  For example, the form requires that the LLC name choose a “corporate name ending.”  From the instructions: 

Enter the exact name of the company and be sure to include one of the required corporate name endings: “limited liability company,” “limited company,” or the abbreviations “L.L.C.,” “LLC,” “L.C.,” or “LC.” “Limited” may be abbreviated as “Ltd.” and “Company” may be abbreviated as “Co.” [WV Code §31B-1-105] Professional companies must use “professional limited liability company,” “professional L.L.C.,” “professional LLC,” “P.L.L.C.,” or “PLLC.” [WV Code §31B-13-1303] 

Seriously, people.  LLC are not corporate.  In fact, choosing a corporate name ending would be contrary to the statute.  

The form continues: 

13. a. The purpose(s) for which this limited liability company is formed is as follows (required): [Describe the type(s) of business activity which will be conducted, for example, “real estate,” “construction of residential and commercial buildings,” “commercial painting,” “professional practice of law” (see Section 2. for acceptable “professional” business activities). Purpose may conclude with words “…including the transaction of any or all lawful business for which corporations may be incorporated in West Virginia.”] (final emphasis added)

Finally, the instructions state that

[t]he principal office address need not be in WV, but is the principal place of business for the company. This is generally the address where all corporate documents (records) are maintained.(final emphasis added)

My students know from day one this matters to me, and it’s not just semantics. My (over) zealousness helps underscore the importance of entity decisions, and the unique opportunities entities can provide, within the default rules and as modified. My first day, I always make sure students see this at least twice: “A thing you have to know. LLCs are not Corporations!” 

Is it overkill? Perhaps, we all have our things.

Oh, and it’s time for West Virginia to add a 2020 update to the LLC form.  

This post updates my March 23 post on the 2020 National Business Law Scholars Conference.

After much deliberation, the planning committee for the National Business Law Scholars Conference has determined to cancel this year’s in-person event and instead host a virtual workshop on the original scheduled conference dates (June 18-19).  The workshop will consist of moderated paper panels featuring the work of those who submitted proposals for the 2020 conference and desire to participate. We also hope to host a discussion session focusing on online teaching and perhaps one or more feature programs on business law in the COVID-19 era.  

Each registrant for the 2020 conference who submitted an accepted proposal will receive a message in short order asking whether they want to participate in the virtual conference.  Relatively rapid responses to this query will be requested.  A workshop schedule, together with related logistics information will be constructed from those responses and circulated to participants.

As you may recall, the conference this year was scheduled to be held at The University of Tennessee College of Law.  We plan to hold the 2021 National Business Law Scholars Conference at UT Law in Knoxville next June.  We will determine the exact dates for next year’s conference in the coming months.  

All of us on the planning committee (listed below) are grateful to all who registered for this year’s conference for their patience as we considered options and made the determination to “go virtual.”  We look forward to getting everyone together in person next year when we anticipate that conditions will be more safe and stable.  We know that health and safety are paramount for all.  We also know that business law scholars engage in productive discussions that push each other’s work forward when we join forces.  We understand that electronic communication is no substitute for an in-person event, but we hope that our 2020 virtual forum responds adequately to both health and safety concerns and the desire to engage with and advance business law research and writing until we can next get together in the same physical place.

Afra Afsharipour (University of California, Davis, School of Law)
Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Tulane University Law School)
Elizabeth Pollman (University of Pennsylvania Carey Law School)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)
Megan Wischmeier Shaner (University of Oklahoma College of Law)

It’s long been blackletter law that a Section 10(b) claim can be rooted in statements that are not targeted to the company’s investors, and are not specifically about the health of the company, so long as investors rely on them, or the speaker should have expected such reliance.  See, e.g., In re Carter-Wallace, Inc. Sec. Litig., 150 F.3d 153 (2d Cir. 1998); Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir. 2000).  As a result, even product advertisements and other consumer-facing material can form the basis of a securities fraud claim.  Notably, in the recent case of Roberts v. Zuora Inc. et al., 2020 WL 2042244 (N.D. Cal. Apr. 28, 2020), the plaintiffs based their 10(b) claims both on the company’s statements to investors and its general product advertisements, and the court – denying a motion to dismiss – drew no distinction between the two.

Which is why I thought Background Noise? TV Advertising Affects Real Time Investor Behavior by Jura Liaukonyte and Alminas Zaldokas was so interesting (you can read the paper at this SSRN link, and their summary at CLS Blue Sky Blog here).  In the paper, the authors find that after a television advertisement for a product airs, searches for the manufacturer’s SEC filings increase, as does trading volume in the manufacturer’s stock.  The findings validate the caselaw; it seems retail investors, at least, regularly consider product advertisements when deciding what stocks to buy.

 The broader issue, though, arises when we’re not talking about an individual fraud claim, where a particular investor can attest that he or she relied on some specific piece of information, but a fraud on the market action, when the Carter-Wallace principle translates to the rule that just about any statement made by the defendant in any context to any audience may trigger securities fraud liability, so long as it was, in some sense, “public.”  The plaintiffs generally do not prove that investors really did rely on the misstatements; rather, it becomes the defendants’ burden to prove the opposite (which may be, literally, impossible to do).  As a result, when the statements are far removed from investment context, courts may grope for a limiting principle, and arrive at doctrinally inconsistent results to get there. 

That’s always how I’ve always understood the result in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011), anyway.  There, mutual fund prospectuses contained false information about fund policies, but the plaintiffs brought their claims not on behalf of fund investors, but on behalf of investors in the publicly-traded fund sponsor, who – it was claimed – misled its own investors about how it administered its funds.  Based on my experience as a plaintiffs’ attorney, I am quite confident that the reason the plaintiffs relied on mutual fund prospectuses to make an argument about the fund sponsor was that they looked, as hard as they could, for false statements made directly by the fund sponsor itself, and were unable to find any.  So they were forced to make the argument that buyers of the sponsor’s stock made their investment decisions based on the policies identified in the fund prospectuses.  And because that argument seems like a stretch but difficult to challenge factually, the Supreme Court took the easier route and simply said the fund sponsor was not responsible for the prospectuses.  Would the Court have reached the same result if investors in the funds had brought the same claim?  I suspect not – which is likely why the Court backtracked in Lorenzo v. SEC, 138 S.Ct. 2650 (2018).

Anyhoo, for those interested in more discussion along these lines, see Donald Langevoort’s papers Reading Stoneridge Carefully: A Duty-Based Approach to Reliance and Third Party Liability under Rule 10b-5 and Lies without Liars? Janus Capital and Conservative Securities Jurisprudence. 

States are struggling to figure out the right approach to administering bar exams in the middle of a pandemic.  Nevada has proposed moving to an online bar exam over the summer.  You can find the Nevada proposal and my comment letter here.  There are thoughtful comments from law professors including Claudia Angelos (NYU), Judith Wegner (UNC & Carnegie Report), Debby Merritt (OSU), Andi Curcio (GSU), Carol Chomsky (MN), Sara Berman (now AccessLex), and Eileen Kaufman (Touro), Steven Silva (TMCC), and Lori Johnson (UNLV).  Hopefully we can find a way to administer a fair exam without putting anyone at undue risk.

But I wanted to flag another issue about the Nevada bar exam, one near and dear to Joshua Fershee‘s heart.  Nevada’s official subject matter outline for the Nevada bar calls for exam takers to know about “Limited Liability Corporations.”  It’s listed as a subheading within “Corporations.” I checked the Nevada corporation code, and no such entity exists.  The closest we get is Chapter 86 for limited liability companies.  As Fershee has explained again and again and again and again and again, limited liability companies are not corporations.  There is not real difference between saying “corporation” and “limited liability corporation. It’s a very, very common mistake.

Some Nevada lawyers have taken Nevada’s relatively high failure rate as indicating that Nevada’s bar exam is one of the most “rigorous.” There are, of course, other possibilities to explain a higher failure rate.    

Details for the ALSB Annual Conference are here. 

The organization is primarily geared toward law faculty who teach in business schools, but we have presenters from practice and law school faculties from time to time as well.

The call for participation deadline is June 1, 2020.  And the virtual conference will be held August 2-7, 2020.

As reported here,

Thirty-one fellow CEOs wrote May 1 to BlackRock CEO Laurence Fink to argue that a publicly traded company is responsible to investors and shouldn’t engage in politics in the midst of an economic crisis.

What follows are some excerpts from the letter, which can be found in full here.

The word “stakeholder,” when used in this context, is intentionally nebulous. It can mean whatever the user chooses it to mean. And therefore, it means nothing….

any honest assessment of the successful “shareholder” model MUST acknowledge that it is inarguably stakeholder friendly as well. The distinction between the two models is purely cosmetic, an artificial construct purposefully fashioned to sow confusion and to permit its architects to pursue their own ends rather than those of American business.

In most cases, these ends are political. By adopting an explicitly “stakeholder”-centered model, activists are attempting to subvert the great American process of self-government, substituting their own views and beliefs for those of the people. By drawing a false distinction between shareholders and stakeholders, asset managers like BlackRock, CalPERS, and countless others intend to “target” corporations whose business models don’t meet their personal definitions of acceptable behavior. Whether done to intimidate corporations into toeing the vacuous and amorphous “sustainability” line, or to force “unacceptable” corporations out of business, the net effect is the same, namely the creation of an overtly ideological and extra-legal regulatory regime….

asset managers who capitalize on Americans’ inherent goodness and decency to push their own values under the headings of “sustainability” and “stakeholders,” are playing politics with OTHER PEOPLE’S MONEY. An asset or wealth manager’s primary fiduciary responsibility is to his CLIENTS… to manage the CLIENTS’ assets faithfully and in keeping with the CLIENTS’ needs, values, and risk tolerance. Substituting one’s own political predilections for the obligations owed to the clients is among the most offensive and irresponsible actions a manager can take. This is all the more the case when the manager is not chosen by the individual investor but dictated by law, as is the case with government employee retirement and pension plans.

Particularly now, in the age of COVID-19, the related economic collapse, and exponentially expanding state budget deficits, it is absolutely imperative that state and public employee pension funds – most of which were woefully underfunded BEFORE the collapse, during the longest bull market in history – NOT be used to soothe the political consciences of asset managers hired by the state or the government officials responsible for assigning those contracts. These are benefits that have been promised to workers and HAVE ALREADY BEEN EARNED. To risk them in pursuit of political trends and fads is the height of irresponsibility.

Maybe I am just sensitized to these media reports because of my research and teaching, but it seems that the COVID-19 pandemic has sparked new media interest in and engagement with corporate governance issues.  I have received four media calls in the past few weeks–two on background and two for source quotations.  That is an unusual rate of contact for me. Is anyone else noticing this?

Of course, there has been a lot to talk about.  Annual meetings already called and noticed to shareholders needed to move online.  As managers and employees moved out of workplaces to shelter at home, well-worn systems of decision-making and information dissemination–as well as the expectations of others in connection with them–changed or were challenged.  Filing and other deadlines became guidelines . . . .

The two media calls in which I was asked to provide background information related to

  • increased or altered director and legal counsel attentiveness to drafting force majeure clauses and material adverse change/effect definitions in light of what we now know about COVID-19 and its effects and
  • prospects for various kinds of shareholder derivative, direct, and class action litigation in light of COVID-19 and related board decision making.  

I was glad to be able to help the two journalists who called on these issues.  They had great questions; made me think.

The two articles in which I was quoted are both (regrettably) secured behind firewalls.  But if any of you are subscribers to Agenda, you will have access to them both.  I have linked to each below.  Both were written by Jennifer Williams-Alvarez.

The first piece, an April 22nd article entitled “Boards Adopt Emergency Bylaws for Critical Flexibility,” put a spotlight on the potential utility of emergency bylaws in light of the pandemic.  I admitted that I now am more sensitive and sympathetic to emergency bylaws than I used to be.

Decades ago, Heminway says she would not have necessarily recommended that companies include an emergency bylaw provision when drafting corporate governance documents. But with the financial crisis, the attacks on the United States on Sept. 11, 2001, and the current Covid-19 crisis, she says she would now make the suggestion.

I wonder how many of you who have been in practice for “more than a minute” feel the same way.

The second article, “DPA Forces New Unknowns for Boards to ‘Triage’,” posted on April 27, offered insights on the Defense Production Act, the subject of multiple executive memoranda and orders relying to product manufacturing and distribution over the past month.  This article picked up on a topic I wrote about here early last month.  Since Agenda focuses on issues of importance to corporate directors and those who work with them, the article explored various angles of interest in the Defense Production Act relating to corporate boards.  For example, we got into an extended conversation about public company reporting obligations and related information gathering and management.

Board members should think about disclosure responsibilities, says Heminway. For certain companies, such as manufacturers, an assessment must be made about whether it represents a material risk to repurpose operations or reprioritize contracts so that the government is at the front of the line, she says.

Between the two of us, we were able to find a few examples of COVID-19 Defense Production Act disclosures made in public filings with the U.S. Securities and Exchange Commission.  Our coverage of applicable mandatory disclosure obligations led to a brief conversation about how boards of directors gather information.

“What I worry about is the board exercising its fiduciary duties in this context,” Heminway says, referring to reporting responsibilities. “The main issues here are going to be duty of care issues,” a requirement that directors fully inform themselves of all material information, she notes.

“The amount of information available now is overwhelming, and it’s changing every day. The Defense Production Act is a piece of that,” says Heminway. “It’s part of what they need to be informed about.

The article covers a lot of ground overall and quotes from a number of sources, including former and current government employees.

I admit that I have been impressed by the level of interest and engagement of the journalists with whom I have been speaking.  What they and others like them are producing and publishing fueled my teaching during March and April (I assigned a number of articles to my students relating to COVID-19 and corporate governance) and is likely to continue to catalyze blog posts and, potentially, research projects as time goes on.  It is good to know that corporate governance questions are motivating useful media inquiries and publications during the COVID-19 crisis.  It also is nice to know that we law professors may be able to use our knowledge to help inform important constituencies during the pendency of the pandemic while, at the same time, expanding our own horizons.  A true win-win.