I’ve previously blogged about the battle to muzzle proxy advisor services with new regulations, including posting a summary of the SEC’s roundtable on the subject, a discussion of the (lack of) existing regulation, comments on the SEC’s withdrawal of two no-action letters concerning the use of such services.

This week, we have a bit of new news.  First, the SEC announced that Commisioner Elad Roisman will be spearheading efforts in this area.  That matters because, as I previously observed, Commissioner Roisman seems particularly sympathetic to the idea that firms should have an opportunity to review and comment and/or correct proxy advisor recommendations.   So I’m guessing that’s something the SEC is going to propose.

Second, NASDAQ, Inc. – along with many other public companies (not all of which are NASDAQ companies, btw) – submitted a letter to the SEC requesting various changes to the proxy rules, including more regulation of proxy advisors.  And the first thing I’ll note about the NASDAQ letter is that it’s nine pages long – 1.5 pages of text, and the rest is just a list of signatories. 

I also notice that NASDAQ’s proposals are quite similar to those that were included in the Republican Financial Choice Act, which passed the House in 2017.  And it seems to me that, if adopted, they would pose a real threat to how proxy advisors function.

Among other things, NASDAQ claims it wants a process for companies to dispute “inaccurate” proxy recommendations, except it makes clear that it’s not just objecting to factual errors, but advisor opinions that the issuer feels are wrong.  As NASDAQ puts it, “The SEC should require transparent processes and practices that allow ALL public companies, regardless of their market capitalization, to engage with proxy advisory firms on matters of mistakes, misstatements of fact and other significant disputes.” (emphasis added). 

What NASDAQ is referencing here is the fact that ISS does send previews of its reports to the S&P 500, but not other companies.  (Glass Lewis makes factual data, but not the analysis, available to all issuers in advance).  I’m not sure I have much of an opinion on whether the reports should be distributed in advance to issuers, but if proxy advisors are required by law to resolve any disputes or even just entertain those disputes before distributing the report to clients – even disputes that are not about factual data but about substantive analysis – that could inhibit their efforts to make timely and unbiased recommendations to clients. 

As I said above, this is also the proposal likely to gain the most traction with Commissioner Roisman, so we’ll see how things unfold.

NASDAQ also wants proxy advisor services to make its recommendation policies public, and go through a formal notice and comment system to change those policies.  Obviously, this would not only inhibit proxy advisors’ flexibility, but would force them to reveal what may very well be trade secrets, thus potentially undermining their business models (a point John Coates made in his testimony before Congress). 

Finally, I note that NASDAQ is also asking the SEC to repeal the NOBO/OBO rules so that companies have direct access to information about shareholder identity. I didn’t even know that was something that was on the table, and I rather suspect that was thrown in as a Hail Mary, as I gather there would be a lot of objection from institutional investors.

So, that’s the general scoop, and I have to say that while I’m not surprised to see a lot of issuers take these positions, I’m a little surprised to see them coming from NASDAQ itself; given its ownership of the NASDAQ exchange, I’d have thought it would be a little more circumspect.  Is there a political economy story I’m missing, possibly some kind of competitive pressure for listings that’s playing a role here?  Or am I overthinking it?

Rory Van Loo (@RoryVanLoo) recently posted a new article exploring how automated personal assistants increasingly influence consumer purchasing decisions.  As these digital intermediaries play an ever-larger role, we need to think more about how protecting consumers requires protecting these digital intermediaries.  He opens with an example showing how a digital assistant may soon be able to efficiently shift consumer purchasing:

Siri. As part of my regular monitoring of your spending, I have located an opportunity to save money on your phone bill and on your grocery bill each month. Would you like to hear more?

Consumer. Tell me about the phone bill.

Siri. Based on your monthly data usage and the performance of the networks where you spend most of your time, you can receive comparable service through Sprint at $140 less per year. Let me know if you want to hear more. Or, if you would like me to switch your account, place your thumbprint on the phone.

Although some might fear the arrival and widespread adoption of this technology, I’d be thrilled.  Sure, I could puzzle through Project Fi, Sprint, and Verizon to find the optimal deal, but my time has real value and I cannot buy more of it.  I recently burned some of it trying to figure out the best way to deal with a dataplan when traveling in Europe over the holiday.  I’d much rather delegate that task to a digital assistant–assuming I could trust the assistant not to skew recommendations to benefit its own interests.   

Professor Van Loo has thought through this issue in a deep way.  The article covers the need to protect access to the streams of information available for AI to sift.  It also dives into what significantly reduced transaction and switching costs will mean.  In many instances, reduced transaction costs will allow consumers to get a much better deal than they would have otherwise found. Hyperswitching could also create real economic instability.  Take the example above and think about how 60 million users getting the Sprint savings notice at once would impact Verizon.  If half of them switch instantly, Verizon may suddenly loses about $1.5 billion in monthly revenue (assuming people were paying $50/month).  This could make it hard for Verizon to undertake long-term projects because customer churn rates would rise and future revenues would be less certain.  The same thing could happen with online banking deposits if capital flowed more efficiently to whatever account offered the best return.  Personally, I’m using Marcus at Goldman now with its glorious 2.25%.  PNC offers a hair better at 2.35%.  With my asset level, it’s not worth the switching cost on my time.  If I could do it with an AI butler and my thumbprint on my phone, I’d do it.  Sorry Goldman.  Markets are doing God’s work.  (I’m also assuming my AI butler can handle the additional tax form hassle.)

These are issues we should think more about.  Digital intermediaries do more every day.  We should make the transition to an increasingly digitally-intermediated economy in a way that protects consumers, markets, innovation, and the overall stability of our financial and other key infrastructure systems.

 

Tom Rutledge at Kentucky Business Entity Law Blog writes: 

As a general proposition, LLC operating agreements may change the default rules provided for in the LLC Act.  A recent decision from Pennsylvania found that a general provision as to decision making by majority vote did not alter the statutory default of unanimous approval to amend the operating agreement.  Saltzer v. Rolka, No. 702 MDA 2017, 2018 WL 5603050 (Pa. Super. Ct. Oct. 30, 2018).
 
     . . . .
     
Under the Pennsylvania LLC Act, the default rule for amendment of the operating agreement is unanimous approval of the members.  15 Pa.C.S.A § 8942(b).  That rule may be altered in a written operating agreement. Id. The LLC’s operating agreement provided that it could be amended by the members at a regular or special meeting, but in that section did not address the threshold for the required vote.  Another section of the agreement provided “Except as otherwise provided in the [LLCA], or this Agreement, whenever any action is to be taken by vote of the members, it shall be authorized upon receiving the affirmative vote of a majority of the votes cast by all Members entitle to vote upon.” 2018 WL 5603050, *4.  The court found that this provision was of itself insufficient to alter the statutory default as to amending the operating agreement.  Unfortunately the decision did not detail why it was insufficient or what more it would have needed to be sufficient.

This outcome is consistent with some similar limited partnership cases. Courts tend to look for clear and unambiguous statements of intent when operating agreements and partnership agreements change default rules of voting when it comes to fundamental rights that go to the purpose of the entity, like adding new investors (partners/members), dissolution, etc. For example, in In Re Nantucket Island Associates Ltd., 810 A.2d 351 (Del. Ch. 2002), the court considered whether a General Partner in a limited partnership “had the unilateral authority to: i) issue a new class of preferred units having superior claims to capital and income distributions and ii) amend the partnership agreement to subordinate the contractual distribution rights of the existing limited partners to those new claims.”  Although”  the general partner had the freedom to draft a clear and explicit grant of authority to itself to amend the partnership agreement in these circumstances,” Vice Chancellor Strine determined that the general partner failed to do so:

This case therefore stands as yet another example of how important it is to draft limited partnership agreements carefully. Although our law permits a limited partnership agreement to invest far-ranging authority in a general partner, it also requires a clear and unambiguous articulation of that authority so that investors are given fair warning of the deal they are making by buying units. When a general partner drafts an agreement that is susceptible to more than one reasonable interpretation, the one most favorable to the public investors will be given effect.

The lesson: when you want to take broad and far-reaching powers, especially those with a default rule requiring unanimity, be very, very clear.  

Our friend and colleague Dan Kleinberger sent the following request along to me a few days ago on behalf of the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association:

At the Spring meeting of the ABA Business Law Section in Vancouver, on Thursday, March 28, 2019 from 2:30pm – 4:30pm, the LLCPUE Committee is sponsoring a panel entitled, “Lessons from the Trenches for Transactional Lawyers.” Here is a brief description:

Avoiding errors in transactional documents — insights from attorneys who have seen errors play out in litigation: two litigators (including one who defends attorney malpractice claims), a transactional lawyer who often plays clean up, and an expert witness who frequently testifies in cases arising from problematic language in deal documents.

If you have some examples of problematic language, favorite (or disfavored) cases, or “occasions of sin” to share in, the panel would be grateful. The presentation will not be merely war stories. Instead, the panelists will present various categories of errors and occasions for error, as well as practical suggestions for avoiding error. However, the more examples the panel has from which to work, the more useful the categorizations will be.

Redact as you see fit or transform examples into illustrations. Please send info to: daniel.kleinberger@mitchellhamline.edu. We will not identify the sources of examples unless you ask for attribution.

Thank you for your consideration.

I hope that some of our readers have valuable examples to contribute and will send them on to Dan.

This from our friend Heather Johnson at Hofstra Law:

This May and June, Hofstra Law will offer a three-credit or five-credit study abroad program on International Financial Crimes and Global Data Regulation. Both programs will begin Sunday, May 19; the three-credit program will conclude on June 1, 2019 and the five-credit program will conclude on June 13, 2019. The courses will be taught by Hofstra University School of Law Professor Scott Colesanti and Professor Giovanni Comande from the Scuola Superiore Sant’Anna.

It will be held in Pisa, Italy, and is co-sponsored by the Scuola Superiore Sant’Anna. This year, we have added a dinner with the Dean of our Law School, Gail Prudenti and an excursion to Milan to visit the Borsa headquarters!

The deadline is Friday, March 29, 2019 — those interested should apply as soon as possible!

The course is open to law students around the country; students must have completed their full-time 1L course work by the start of this program. Attached to this e-mail you’ll find the up-to-date application, a poster about the program as well as the tentative schedule. Interested students should apply by AS SOON AS POSSIBLE.

Students joining us from other universities should have these credits verified to transfer to your home institution, submit a letter of good standing to our office and work with financial services to complete a consortium agreement. Feel free to reach out to me with any questions regarding the above information.

Warmly,

Heather Johnson

Heather N. Johnson, M.A. International Education
Assistant Director of International Programs and Student Affairs Coordinator
Maurice A. Deane School of Law at Hofstra University
121 Hofstra University, Suite 203 | Hempstead, NY 11549
Heather.N.Johnson@hofstra.edu | Phone: (516) 463-0417 |Fax: (516) 463-4710

HofstraLaw

Sounds like a great opportunity for the right student.  Contact Heather for more information.

I teach in the Energy Management Program at the University of Oklahoma, which was “the first of its kind” and recently celebrated its 60th Anniversary Diamond Jubilee.  Last spring, the title of a book in the office’s library caught my eye: Just Because You Can Doesn’t Mean You Should. The importance of prudence, a sensible and careful attitude when you make judgements and decisions; behaviour that avoids unnecessary risks, is often underappreciated, particularly in the area of financial market innovation.  Intrigued, I borrowed the book and began to read.  Although I’d never spoken with its author, Mike S. McConnell, I’d seen him in attending the Program’s Board of Advisors Meetings. 

The book’s Introduction has a great quote that I’ve now used in both classroom and lecture settings: “We did things because we could do them – not because we should do them.  I think Enron crossed the line between “could” and “should” and never actually saw it.  Moreover, it happened at many levels, from matters with the Board to our contention that “gray” financial structures were within the rules.  These structures may have been within the rules, but I’m not sure that means we should have used them.  If we had paused to contemplate “could” versus “should,” I am convinced Enron would be a solid and growing company today.” 

Prior to the quote, McConnell explains the book’s title: “It is significant.  I watched a company that won “Most Innovative” in the country for five straight years move into bankruptcy, scandal and total chaos, literally overnight.  Why? I believe the truth is that it was coming to an end for a long time.  We just didn’t see it.  As I documented my own ideas about success, I recognized – in retrospect – the warning signs that had been all around us.  They were important items like culture, values, the way many leaders or groups treated customers and employees; situations that should have been noticed and corrected.”  

McConnell also mentions in the Introduction that not only was he successful at Enron, but also that he did not “get in trouble or get accused of any wrong doing” in the Enron scandal.  Understanding more about his experience at Enron appears to have been an important motivation for writing the book. 

In the Conclusions chapter, McConnell states “Someone asked me recently about what I look for in considering a new job or position.  The answer is simple. If I am asked to boil it down to just one sentence, I would answer with the statement, “I want to be an impact player.””  McConnell then notes that he intends his use of the word “impact” to be understood broadly and that “The success of the business is a result of having an impact on helping people to live up to their potential.”

In this first Conclusion paragraph, I want to share with readers my excitement about McConnell’s new position: Director of the Robert M. Zinke Energy Management Program at OU.  McConnell “will take the reins beginning June 1” when Steve Long, the Director of the Program since 2006, retires.  Although I’ve only been at OU a short time, it’s abundantly clear to me what an important impact Long has had on the Program’s students and what a high bar he’s set for the Director position. 

In reading McConnell’s book last summer, I didn’t know that we’d soon be colleagues.  I’m looking forward to working with him, learning more about the energy industry given his extensive expertise, and hearing additional practical insights in the area of business ethics. Similarly, I met Joshua Fershee several years ago at the National Business Law Scholars Conference (a favorite conference whose call for papers ends February 15!) and spoke with him about my interest in learning more about the area of energy law.  Josh generously provided me with much helpful advice and directed me to an abundance of key resources (thanks again, Josh!).  Little did I know then that we’d be writing for the same blog today and that his encouragement to explore the energy area would be so impactful!             

 

It’s a crazy time for me right now, so this week I just offer five feature articles that I read last year, each of which did a business-related deep dive that, for one reason or another, had my jaw-dropping (and in more than one case, had me laughing out loud).

Josh Dzieza, Prime and Punishment: Dirty Dealing in the $175 Billion Amazon Marketplace. On the dirty tricks sellers use to sabotage their rivals and the quasi-court system Amazon has created to handle complaints.  Compare, by the way, to Molly Roberts on Facebook’s proposal for its own Facebook court.

Taffy Brodesser-Akner, How Goop’s Haters Made Gwyneth Paltrow’s Company Worth $250 Million.  One of the things that struck me here was where the author points out that women’s health concerns are often dismissed by doctors, which might drive them to seek help from nontraditional sources.  I’ve heard a similar explanation for the anti-vaxx movement – pregnant women are objectified and ignored by the medical establishment, which drives them to reclaim some kind of agency by rejecting that establishment entirely.

Elizabeth Evitts Dickinson, A Dress for Everyone: Claire McCardell took on the fashion industry — and revolutionized what women wear.  I know nothing about fashion but I still came away from this piece amazed that I’d never heard of Claire McCardell.  It’s a wonderful deconstruction of the political dimensions to clothing.  (For more on that, try The Politics of Pockets)

Zachary Mider, Zeke Faux, David Ingold & Dimitrios Pogkas, Sign Here to Lose Everything.  This is actually a series of articles about abuse of New York’s “confessions of judgment,” and it’s prompted various political responses.

Caity Weaver, What is Glitter? A strange journey to the glitter factory.  Every word sparkles. 

Enjoy!

Last week I participated in the LawWithoutWalls kickoff in Segovia, Spain. LWOW, as it’s affectionately called, originated at the University of Miami and is the brainchild of Professor Michele DeStefano. Although I’ve served as a mentor since its inception, I’ve attached  LWOW’s summary of the program: 

Over the course of 16 weeks, each team co-creates a Project of Worth: a business case and practicable solution to a real problem sponsored by a corporate legal department, law company, or law firm. In the process, the program refines the skills of those involved, recharges the law market with innovations across business, law and technology, and revitalizes relationships with colleagues, clients, and future talent across the globe.  

 

Law and business students from 35 schools around the world work together virtually (other than the kickoff) and learn about branding, business plans, legal tech, and marketing from some of top minds in the world during weekly webinars. This year’s topics include:

  • Team A: Waste Not, Want Change: How can advances in technology further a reduction in food waste? (Sponsored by Accenture) 
  • Team B: Organizing Chaos: How can distributed ledger technology facilitate advances in identification management in the foster care system? (Sponsored by Accenture) 
  • Team C: Back to the Future: How can law firms best use past case outcome data for future initiatives? (Sponsored by Cozen O’Connor)
  • Team D: Justify Me: How can in-house really know that legal tech enhances their value while keeping business and the bank account in mind? (Sponsored by Eversheds Sutherland + Link Assets Services)
  • Team E: Rise of the Machines: How can the increasing use of drones be effectively regulated and how might technology be used to enforce regulation? (Sponsored by Elevate Services)
  • Team F: Tough Gig: How can technology be used to give gig workers a deeper understanding of their legal rights and responsibilities? (Sponsored by Legal Mosaic) 
  • Team G: Redesigning the Playing Field: How might we create a hiring process for law firm candidates that takes into account a more meaningful slate of indicators of capability and fit, and does not rely inequitably on a candidate’s academic pedigree and/or professional or social network? (Sponsored by White & Case) 
  • Team H: Chains of Change: How can distributed ledger technology impact the way in which banks deal with their clients and how can it be used to improve the legal interactions between them? (Sponsored by HSBC) 
  • Team I: Are You Feeling Me: How can law firms, in house departments and technology providers collaborate for better business outcomes? (Sponsored by iManage)
  • Team J: Far is a Figure of Speech: How can we provide broader, more efficient access to legal services in rural communities? (Sponsored by LegalZoom)
  • Team K: Fasten Your Seatbelt: How can airlines protect consumer data from cyberattacks and other data security breaches? (Sponsored by LATAM)
  • Team L: Anti-tech Tool: How might in-house legal teams shift current processes to bypass the need to purchase a contract management system? (Sponsored by Leah Cooper Consulting)
  • Team M: Tech for Good: How might advancements in tech and AI be used to empower immigrant families in the United States? (Sponsored by Microsoft)
  • Team N: Navigating Uncharted Waters: What role can payment providers (like Visa) play in collaborating with new entrants (like fintech startups) to navigate regulations and drive industry transformation? (Sponsored by Pinsent Masons)
  • Team O: Making Your Voice Count: What role might Spotify play in broadening access to podcast creation and dissemination? (Sponsored by Spotify)
  • Team P: AI Transparency and Accountability: How can AI-based decisions for commercial purposes (e.g., recruiting or targeted advertising) be more transparent and less biased? (Sponsored by Pinsent Masons)

This year, as with last year, there are projects designed around blockchain. My team is sponsored by banking giant HSBC and is focusing on blockchain because its legal innovations team suggested it. Accenture is tackling the identity management issue and is looking to blockchain, as the United Nations has done. I’m excited to work on a blockchain project that will have practical application, but more broadly, I’m proud to be affiliated with a program that provides law and business students with the skills they need to tackle the problems that most law schools don’t address. Students develop a brand, logo, business plan, IT strategy, and some form of prototype for the solution. Major legal service providers and corporations develop the problems and require their lawyers to work directly wjth the students across time zones on resolving  the problems, providing an invaluable opportunity for the students and mentors alike. 

 

At the end of the sixteen weeks, the students and corporate teams present their projects of worth  in front of hundreds of lawyers, professors, business people, and other students who watch live in Miami or remotely. Venture capitalists, lawyers, academics, and business people judge the projects on viability, creativity, and originality after hearing the team pitches. Although I would like my team to win in April (my team, Spotify, won last year), I’m more interested in learning from the students, mentors and judges. Each year, I gain insight about the legal profession that helps me grow as a professor and a lawyer. 

 

On another note, as regular readers know, I’ve been focusing my recent research on blockchain use cases outside of the cryptocurrency arena. Two shameless plugs- if you’re in Miami on March 5th, the University of Miami is holding an evening conversation on blockchain and the law. If you’re lucky enough to be in Detroit in February, please visit Wayne State Law School in the 22nd. Joan Heminway and I will be on separate panels discussing legal issues related to blockchain. I’ll provide updates on the two blockchain conferences and on the Accenture and HSBC blockchain projects in the coming months. 

 

On February 15, the Washington & Lee Law Review will host a one-day symposium on the intersection of Civil Rights and Shareholder Activism.  In March of 1968, a civil rights organization, the Medical Committee for Human Rights, received five shares of Dow Chemical Company stock as a gift.  Well-known for its work deploying doctors and nurses on the front lines of civil rights protests across the American South, MCHR had no track record of shareholder activism.  Within a year, however, MCHR had initiated its first shareholder proposal to stop Dow from manufacturing and selling napalm for military use in the Vietnam War.  The activism campaign advanced MCHR’s commitment to civil and human rights, but it also represented an important innovation in shareholders’ use of corporate governance tools. The civil rights group had catalyzed a movement: shareholder activism campaigns on pollution, minority hiring, and apartheid were quickly brought by other shareholders at major U.S. companies like General Motors and Honeywell, Inc. and, over the decades, numerous other campaigns have followed.

Fifty years later, shareholder activism on ESG matters is surging. In the 2019 Proxy Season, companies will face shareholder campaigns on economic inequality, human rights, discrimination on the basis of race, gender, and sexual orientation, board and workforce diversity, and executive compensation, to name just a few topics.  The symposium will bring together scholars and practitioners to discuss the past, present and future of ESG shareholder activism.  It will also feature a preview of the 2019 Proxy Season, presented by staff members of the Law Review.

Lisa M. Fairfax, the Leroy Sorenson Merrifield Research Professor of Law at the George Washington University Law School, will give a public keynote lecture.  In addition, a number of highly regarded experts will participate in panel discussions to connect the movement’s origins to the modern era. They include Ifeoma Ajunwa, Cornell Law and author of the forthcoming book, The Quantified Worker; Tamara Belinfanti, New York Law School and author of the new book, Citizen Capitalism; Carliss Chatman, W&L Law; D. Wendy Greene, Samford University Cumberland School of Law; Sarah C. Haan, W&L Law; Virginia Harper Ho, University of Kansas School of Law; Barbara Krumsiek, former President, CEO and Chair of Calvert Investments and current Director, MISO Energy; Kish Parella, W&L Law; Harvey L. Pitt, the 26th Chair of the U.S. Securities & Exchange Commission; Colin Reid, The Williams School of Commerce, Economics and Politics at W&L University; Cary Martin Shelby, DePaul University College of Law; Omari Simmons, Wake Forest Law School; and David Webber, Boston University Law and author of The Rise of the Working-Class Shareholder.

A link to the full schedule can be found here.  The symposium is open to the public.