In recent weeks, the Tennessee General Assembly has been wrestling with a bill (house and senate versions here and here) that changes the governing board of The University of Tennessee (UT), where I teach.  Non-controversially, the UT FOCUS Act, as it is commonly called (Focusing on Campus and University Success at UT), decreases the size of UT’s board of trustees.  Currently, the board of trustees comprises 27 members–five ex officio members and 22 appointed members.  Tenn. Code Ann. § 49-9-202.  Most would agree that 27–or even 22–is a relatively unmanageable number of board members, without good cause, for most governing boards.  But the composition requirements for the board (with this newly reduced number of trustees) are where the rubber hits the road.

The Bill Summary for the measure, as reported on the Tennessee General Assembly website, succinctly describes the current board composition, which is established by statute.  I include the relevant text from the Bill Summary here.

The ex officio members are: the governor, the commissioner of education, the commissioner of agriculture, and the president of the university, who are voting members; and the executive director of the Tennessee higher education commission (THEC), who is a nonvoting member. Of the 22 additional members: one must be appointed from each congressional district (presently there are nine congressional districts); two additional members each must reside in Knox and Shelby counties; one additional member each must reside in Weakley, Hamilton, and Davidson counties; one additional member must reside in Anderson, Bedford, Coffee, Franklin, Lincoln, Moore or Warren County; one additional member is a non-Tennessee resident; two additional members, one voting and one non-voting, must be members of the faculty of the University of Tennessee who served as faculty senate president, or the equivalent, at a University of Tennessee institution during the academic year immediately preceding appointment as a trustee, appointed according to a sequence detailed in present law; and two additional members who are students at a UT institution, one voting and one nonvoting, appointed from the various institutions on a rotating basis pursuant to present law.

Present law requires that at least one third of the appointive members be members of the principal minority political party in the state and that at least one third of the appointive members must be alumni of the University of Tennessee. All appointive members are appointed by the governor subject to confirmation by the senate, but appointments are effective until adversely acted upon by the senate. In making appointments to the board of trustees, the governor must strive to ensure that at least one person appointed to serve on the board is 60 years of age or older, and that at least one person appointed to serve on the board is a member of a racial minority. Present law requires that the membership of the board reflect the percentage of females in the population generally. Appointive members serve terms of six years beginning June 1 of the year of appointment, and members are eligible to succeed themselves.

(emphasis added)  Of particular importance for purposes of this post are the italicized portions of the description.  The UT FOCUS Act calls for no faculty or students–no state employees altogether–on the board as voting or non-voting members.  I am concerned about this aspect of the bill because of its effect on the expertise of UT’s board.  No amount of board orientation can imbue board members with the knowledge that faculty and students have.

The apparent tension here is between the value of that expertise–boots-on-the-ground knowledge of shared governance, curriculum design and execution, the role of co-curricular and extra-curricular programming, faculty/staff/student relations, and other matters unique to current participation in the university’s campus communities–and a perceived conflict of interest (since faculty and students would be effectively governing themselves).

The Association of Governing Boards of Universities and Colleges (AGB) and the American Association of University Professors (AAUP) agree that university governing boards generally lack knowledge of faculty affairs.  A 2017 publication of the AGB notes in this regard:

Participants in all three categories in our listening sessions (board members, presidents, and faculty) acknowledged—and indeed emphasized—that there is a huge information gap between boards and faculty. They noted that board members often have very little— if any—understanding of the nature of faculty work, of the nature of academic culture, of the real meaning of academic freedom, and of the history and importance of faculty self-governance and the faculty role in shared governance. . . .

The AAUP website features a report on a 2012 Cornell University study of faculty trustees that includes a related observation.

Discussions of “best practices” for governing boards consistently cite improved relationships with the faculty as one of the characteristics of highly effective boards. We are in an era of increasingly “activist” boards, leading to significant mutual distrust between boards and faculty members and creating an impetus for improving faculty-board relations.

As a former faculty senate president at UT Knoxville, I understand and appreciate all of this.

Continue Reading Changes to The University of Tennessee Board of Trustees

Another week, another Delaware Chancery decision in which a powerful, visionary minority blockholder is deemed to have “control” over a corporate board’s decision to acquire a company in which he has an interest.

In In re Oracle Corporation Derivative Litigation, which I blogged about last week, Larry Ellison’s control was enough to show that demand was excused for the purpose of a derivative lawsuit, while the court avoided the question whether Ellison should be formally deemed a controlling stockholder.

In In re Tesla Motors Stockholder Litigation, however, the question could not be avoided.  That’s because – unlike in Oracle – the remaining stockholders voted in favor of the acquisition, which led the defendants to argue that the entire deal had been cleansed under Corwin v. KKR Financial Holdings LLC.   Since Corwin does not apply to controlling stockholder transactions, Elon Musk’s status became critical.

Briefly, Elon Musk is the Chair, CEO, largest stockholder (22% at the time of the acquisition), and dominant face of Tesla.  He was also one of the founders of SolarCity, along with his cousins.  When SolarCity neared bankruptcy, Tesla acquired SolarCity at a significant premium to its market price.  Though Musk formally recused himself from the Tesla board’s vote, he badgered the board into considering the acquisition (proposing it on three separate occasions within three months), hired the board’s financial and legal advisors, and ran the deal process.  Meanwhile, the board voted to approve the deal without forming a special committee.  (Sidebar: If the documents are made available under Wal-Mart Stores, Inc. v. Indiana Electrical Workers Pension Trust Fund IBEW, I cannot wait to find out what Wachtell – the board’s deal advisor – had to say about that.)  Tesla shareholders sued, alleging that the transaction was a bailout of Musk’s company, paid for with Tesla’s assets.

The court, per VC Slights, concluded that, at least for pleading purposes, plaintiffs had alleged that Musk was a controlling shareholder.  Slights rested his decision on Musk’s status as a visionary CEO, his substantial stockholdings, his close business and personal ties to Tesla board members who earned multi-million dollar salaries for their service, his domination of the process which led to the acquisition, the board members’ own ties to SolarCity, and SolarCity’s precarious financial position.

Slights recognized the awkwardness of his holding when compared with the Delaware Supreme Court’s recent conclusion in Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd that Michael Dell was not a controlling stockholder of the company that bore his name.  Nonetheless, he justified his conclusion on the ground that the buyout in Dell involved several procedural protections (including the use of an independent special committee and Michael Dell’s pledge to cooperate with any buyer) that the Tesla board’s decision lacked.

But that reasoning collapses two separate ideas: whether someone has controlling shareholder status, which requires them to utilize heightened procedural protections to win business judgment deference, and whether a controlling stockholder has, in fact, employed such protections.

What both Tesla and Oracle really illustrate, then, is the inadequacy of pinning the level of judicial scrutiny to a bright line distinction between controlling and noncontrolling stockholder status in the first place.  Yes, Musk was a large stockholder, but his stockholdings were the least important mechanism by which he dominated the board (and potentially influenced voting stockholders as well).  We can call this yet more Corwin fall out: by heightening the significance of the stockholder vote only for transactions that fall into a specific category, the Delaware Supreme Court wound up placing pressure on the boundaries of that category.

What also stands out about the Tesla opinion – as with Oracle before it – is Delaware’s continued willingness to cast a gimlet eye on the webs of social and business relationships (especially with venture capital firms) that often tie boards together, particularly in tech companies.  This is a point that Chief Justice Strine has been pushing, most recently at Tulane’s Corporate Law Institute, and what we are apparently seeing is that such relationships may not only evince a lack of independence, but may even count toward controlling shareholder status, as courts try to grapple with Corwin’s constraints.

Within the past 24 hours, I’ve seen at least three news article that led me to reflect on my past blog posts. Rather than write a full post on each article, I’ve decided to note some observations.

The Tweet That Launched A Boycott (And Maybe a Buycott)

I’ve been skeptical in the past about whether boycotts work.  Perhaps times are changing. This week, Parkland shooting survivor David Hogg tweeted that advertisers on Laura Ingraham’s cable show should pull out after she tweeted,  “David Hogg Rejected By Four Colleges To Which He Applied and whines about it. (Dinged by UCLA with a 4.1 GPA…totally predictable given acceptance rates.) https://www.dailywire.com/news/28770/gun-rights-provocateur-david-hogg-rejected-four-joseph-curl …”  On March 28th, the 17-year old activist responded with “Soooo what are your biggest advertisers … Asking for a friend. .” He then provided a list of her top twelve sponsors.

As of 8:00 p.m. tonight, the following companies dumped the Fox show, eleven after the talk show host had apologized, stating “On reflection, in the spirit of Holy Week, I apologize for any upset or hurt my tweet caused him or any of the brave victims of Parkland… For the record, I believe my show was the first to feature David immediately after that horrific shooting and even noted how ‘poised’ he was given the tragedy … As always, he’s welcome to return to the show anytime for a productive discussion.”

The companies that have pulled their advertising include Nutrish, Office Depot, Jenny Craig, Hulu, TripAdvisor, Expedia, Wayfair, Stitch Fix, Nestlé, Johnson & Johnson, Jos A Bank, Miracle Ear, Liberty Mutual and Principal. But will they ever return to the show after the attention moves to something else? Will the sponsors face a “buycott,” where Ingraham’s fans boycott the boycotters or increase their support of the advertisers that Hogg specifically named but have chosen to stay with Ingraham? Time will tell. 

Silicon Valley CEOs Warm to President Trump

Last year, I posted about various CEOs choosing to distance themselves from President Trump by resigning from advisory councils because they disagreed with his actions or positions on everything from immigration to his reaction to the events in Charlottesville. Today, the New York Times reported that some of the same CEOs that bemoaned Trump’s election and/or publicly condemned him have now had a change of heart. Apparently, they have more common ground than they thought on areas of tax reform, infrastructure, and looser regulation. I look forward to seeing whether any of these companies or CEOs refrain from criticizing him in the future or, more tellingly, whether they choose to use PAC money or personal funds to support his re-election. 

H & M Asks One of Its Lawyers To Lead Diversity Initiative

H & M has lots of problems from underperforming designs (billions in unsold clothes) to continued fallout from its “coolest monkey in the jungle” hoodie. As you may recall, in January, a number of consumers, public figures, and other called for a boycott of the company after a young black boy advertised a green hoodie with the word “monkey.” H & M even had to close its store in South Africa.  The fast fashion company has now turned to one of its in-house lawyers to lead a 4-person team to focus on diversity and inclusiveness. The lawyer will report directly to the CEO in Stockholm. Notably, the board is all white. Should the board diversify as well? It’s hard to say. While I support diversity in the executive ranks and the boardroom,  there is no evidence that the monkey hoodie led to the 62% drop in operating profit in Q1. Instead, experts note that consumers just didn’t like the selections, even at steep discounts. Further, the average H & M customer probably has no idea about this new diversity initiative and even if the customer knew, it’sdoubtful that would change buying habits. Even so, I applaud H & M for taking concrete steps. The company already produces a compelling Sustainability Report. I look forward to seeing if the company can return to profitabiity while keeping its commitment to diversity. 

 

 

 

The University of Richmond School of Law, in conjunction with Boston University School of Law, University of Illinois College of Law, and UCLA School of Law, invites submissions for the Sixth Annual Workshop for Corporate & Securities Litigation. This workshop will be held on October 19-20, 2018 at the University of Richmond School of Law in Richmond, Virginia.

Overview

This annual workshop brings together scholars focused on corporate and securities litigation to present their scholarly works. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible, including securities class actions, fiduciary duty litigation, and comparative approaches. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress.

Authors whose papers are selected will be invited to present their work at a workshop hosted by the University of Richmond.  Hotel costs will be covered.  Participants will pay for their own travel and other expenses.

Submissions

If you are interested in participating, please send the paper you would like to present, or an abstract of the paper, to corpandseclitigation@gmail.com by Friday, May 25, 2018. Please include your name, current position, and contact information in the e-mail accompanying the submission.  Authors of accepted papers will be notified by late June. 

Questions

Any questions concerning the workshop should be directed to the organizers: Jessica Erickson (jerickso@richmond.edu), David Webber (dhwebber@bu.edu), Verity Winship (vwinship@illinois.edu), and Jim Park (James.park@law.ucla.edu).

Interest rate risk seems to puzzle some students when they first encounter it.  It’s the idea that fixed-rate assets decline in value when interest rates rise.   I’ve started using a simplified bond trading exercise to help students get the concept quickly.  This is how it works. 

Give A Student A Bond

I find a few victims/volunteers and give them brightly colored pieces of paper.  These, I tell them, represent fixed rate bonds with a $10,000 value, paying 5% a year for the next twenty years.  We run through some basic questions.  How much money do they get each year ($500).  How much money will they get if they hold the bond to maturity?  ($20,000.  This is the amount of the bond plus another $10,000 in interest).  For the exercise, we keep it simple and just look at the cash flow coming off the one bond.

Change The Rates

After everyone gets the idea, I clap my hands and change the prevailing market interest rate from 5% to 8%.  This leaves our initial volunteer holding a 5% bond in an 8% market.  With a flourish, I pull out more brightly colored paper of a different shade and announce that I’m now a corporation selling a 20-year bond paying 8% a year to the general market (the class).  I round on our unfortunate volunteers and inform them that they have fallen on hard times and have a sudden need for more cash!  They have a child and, well, the baby needs braces, the roof requires repairs, or their wastrel nephew desperately needs funds to develop his plan to sell dehydrated water to the masses.  Putting the cause to the side, the students with 5% bonds now need to sell them to the open market.  Declaring that they paid $10,000 for the bond, I ask them how much they want to sell it?  Often, they respond that they want to get their money back and sell the bond for $10,000.  Such hopes!

Think of the Pensioners 

I designate another random student as a money manager for a pension fund and give a little backstory. She loves her job.  She invests to take care of municipal retirees.  Her steady work and prudent fiscal management means that retired firefighters with creaky knees live dignified, independent lives without the need to take odd jobs installing ceiling fans on precarious ladders.  It’s a noble profession.  She’s an unsung hero.

With the money manager understanding her role and her obligation to do right by her pensioners, I ask her if she wants to pay $10,000 for the 5% bonds held by our hapless initial volunteers, or if she would rather put her pensioners’ money to work with the glorious 8% bond I hold in my hand.  It may help to pop the paper for effect.  Our diligent pension manager reliably opts for the better bond deal.

Back to the Initial Bondholders

Once their initial efforts to liquidate their 5% bonds have failed, I ask the bondholders about their options.  They still need to cash.  I ask if they want to lower the price on their bonds.  Often they do, frequently by significant amounts to $7,000 or $8,000.  As a class, we discuss the bargain!  An investor can pick up a $10,000 bond for $7,000.  What a deal!  It’s practically free money.  Sometimes the money manager may be tempted to bite on this juicy reduction in price.

Run the Numbers

Before the money manger and 5% bondholders can close the deal, I renew my sales pitch.  I declare that the money manager is smart, diligent, and hardworking and note that she would never close a deal without running the numbers.  I ask if the 5% bond pays $500 a year, how much does the 8% bond pay?  The jump is easy and we can all agree that getting $800 is better than getting  $500 for our pensioners.  With a 3% difference, we’re looking at an extra $300 a year coming off my splendid 8% bond.  What does that come out to over twenty years, I ask?  A moment as the gears turn and everyone fires up the more calculating parts of their brains.  Suddenly, we’ve got it.  It’s a stunning extra $6,000. (This does not take into account the time value of that money.)

The Market Price

With that in mind I ask how much our initial bondholders need to discount their suddenly shabby wares to compete with magnificent 8% bond.  It’s an ugly, ugly day for them and they’re grumbling about how unfair selling $10,000 for $4,000 seems.

Discussion

Some points worth covering here for students with little familiarity with markets.  We talk about how bonds can be traded like stocks and how their prices change with prevailing interest rates.  I candidly admit that we’re unlikely to see a sudden lurch from 5% to 8% and that most changes are smaller.  It seems to work well for helping students without much background knowledge of finance see the time value of money in a more approachable way.

It’s worth pointing out that this is also a very simplified way of looking at it.  The ultimate returns to think about would also include the time value of the money received in each year from the bond’s interest payments.  For example, the $800 in year three is worth much more than the $800 to come later in year 17.

If you want to cover call risk, simply run the exercise in reverse.  Start the bondholders out with an 8% bond and then change the rates to 5%.  Make the class the corporation and ask if they would like to refinance and keep more of that money for their shareholders.

 

Job Description Summary:

The Southern University Law Center welcomes applications for the appointment of two to three visiting professors for the 2018-2019 academic year. We welcome applications from all individuals whose backgrounds and experiences will enhance the diversity of our faculty. Our primary curricular needs are as follows: 

Louisiana Civil Law Courses:

We are interested in candidates with experience teaching Sale & Lease, Obligations, and Security Devices. Individuals with a background in the civil law are preferred.

Business Law, Procedure, and Constitutional Law Courses:

We are also interested in candidates with experience teaching Contracts, Commercial Paper, Federal Civil Procedure, Federal Courts & Procedure, Business Entities, and Constitutional Law.

Qualifications:

  • JD degree
  • Experience and demonstrated success in law school teaching
  • Demonstrated ability in mentoring students
  • Commitment to the mission of the Southern University Law Center and its instructional methods and goals

Instructions to Applicants:

Candidates should submit the following to Professor Donald North, chair of the Faculty Appointments Committee, at dnorth@sulc.edu:

  • Resume/CV
  • Cover letter
  • Contact information for three professional references

Benefits: The Southern University Law Center offers a comprehensive benefits package to full-time faculty members that includes health, dental, vision, life insurance, and retirement. Salary will be commensurate with qualifications.

EMPLOYMENT NON-DISCRIMINATION POLICY: Southern University Law Center (SULC) is an Equal Opportunity Employer, committed to a diverse and inclusive work environment. SULC is committed to a policy against discrimination in employment based on sex, actual or perceived gender, age, race, color, religion, creed, national or ethnic origin, disability, sexual orientation, gender identity and expression, genetic information; or parental, marital, domestic partner, civil union, military, or veteran status.

 

International law is usually not my thing (only in a few instances), but it’s definitely Larry Catá Backer’s thing.  He has a new article out that may be of interest. If it’s your thing, I recommend checking it out. He knows his stuff. 

“Theorizing regulatory governance within its ecology: the structure of management in an age of globalization,”  
Larry Catá Backer
Contemporary Politics 24(3):– (2018)

Abstract: This article examines regulatory governance (‘RG’) within its own ecology. It considers RG as an ideology of governance, as its own set of techniques to that end, and as a methodology andpsychology of the relations of regulatory organisms to one another and to their context. The object is first to chart the structures and modalities of this ecology, and second to understand the properties that makes RG both coherent (singularly as the method of regulating a field, as the framework for the use of RG techniques, and as an ideology of governance), and structural (as a means of structuring regulation as an exercise of ordering power. After a brief introduction, the article introduces the regulatory context through a close reading of the operation of global garment supply chains in  Bangladesh, examining RG in action within the ecology of global production. It then theorizes the meta structures of RG within this ecology as a mechanics for governance within institutions, and as an ideology for ordering systems of governance among institutions.
For more on his piece, check out the introduction here.  

I am committed to introducing my business law students to business law doctrine and policy both domestically and internationally.  The Business Associations text that I coauthored has comparative legal observations in most chapters.  I have taught Cross-Border Mergers & Acquisitions with a group of colleagues and will soon be publishing a book we have coauthored.  And I taught comparative business law courses for four years in study abroad programs in Brazil and the UK.  

In the study abroad programs, I struggled in finding suitable texts, cobbling together several relatively small paperbacks and adding some web-available materials.  The result was suboptimal.  I yearned for a single suitable text.  In my view, texts for study abroad courses should be paperback and cover all of the basics in the field in a succinct fashion, allowing for easy portability and both healthy discussion to fill gaps and customization, as needed, to suit the instructor’s teaching and learning objectives.

And so it was with some excitement–but also some healthy natural skepticism–that I requested a review copy of Corporations: A Comparative Perspective (International Edition), coauthored by my long-time friend Marco Ventoruzzo (Bocconi and Penn State) and five others (all scholars from outside the United States), and published by West Academic Publishing.  I am pleased to say that if/when I teach international and comparative corporate governance and finance (especially in Europe) in the future, I will/would assign this book.  It is a paperback text that, despite its 530 pages, is both reasonably comprehensive and manageable.

The book is divided into ten chapters, starting with basic “building blocks” of comparative corporate law and ending (before some brief final thoughts) with unsolicited business combinations.  U.S. law is, for the most part, the centerpiece of the chapters, which consist principally of original text, cases, statutes, law journal article excerpts, and (in certain circumstances) helpful diagrams.  The methodological introduction, which I found quite helpful and user-friendly, notes that the coauthors “often (not always) start our analysis with the U.S. perspective.”  (xxvi)  Yet, despite the anchoring use of U.S. law throughout the book, it somehow has a very European feel.  The coauthors note the emphasis on “U.S., U.K., major European continental civil law systems (France, Germany, Italy) and European Union law, and Japan,” (id.) but my observation is that the words and phrasing also have a European flair.  Of course, this is unsurprising, given that all but one of the coauthors hail from European universities.  I note this without praise or criticism, but I mention it so others can assess its impact in their own teaching environments.

I recommend that those teaching in study abroad (or other courses focusing on comparative corporate law) review a copy of this book.  I will look forward to teaching from it the next time I need an international or comparative law teaching text for use in or outside the United States.