I had the pleasure of taking a group of students to Washington for the most recent meeting of the SEC’s Investor Advisory Committee.  Among other things, they discussed issues with dual class shares.  In a nutshell, dual class shares give one set of shareholders much greater voting control than other sets.  In practice, it provides a means for insiders to permanently entrench themselves and retain control over a corporation even as their economic stake declines.  A number of leading companies (Facebook, Snapchat, and Google) have pursued similar structures aimed at entrenching existing founders and owners.

The committee issued a recommendation and suggested that the Commission take a close look at the kinds of risks these arrangements may create.  It also highlighted how these developments could widen the separation between ownership and control for many corporations:

For instance, while Snap disclosed the major governance provisions it planned to adopt, its IPO registration statement did not clearly disclose that those provisions would enable each of the co-founders to reduce his equity stake to below 1% of total economic ownership without relinquishing control. The fact that the governance structure adopted by Snap could – without further shareholder check – lead over time to such a dramatic divergence between economic and voting interests could be made significantly more salient and clear to investors. A reasonable investor might (wrongly) presume that existing SEC rules, state laws or listing requirements would prevent such a dramatic change over time.

It’s an issue worth keeping a close eye on as more and more corporations adopt dual-class structures.  In particular, it’s worth thinking about whether the justifications for having founders retain more control extends to indefinite control.

A recent Georgia case highlights a whole host of things that frustrate me with litigation related to limited liability companies (LLCs).  This one features an LLC making incorrect arguments and a court sanctioning that silliness. For example

Baja Properties argues that it is exempted from the rule set out in OCGA § 43-41-17 (b) by a provision in OCGA § 43-41-17 (h). Subsection (h) states, in part:
Nothing in this chapter shall preclude any person from constructing a building or structure on real property owned by such person which is intended upon completion for use or occupancy solely by that person and his or her family, firm, or corporation and its employees, and not for use by the general public and not offered for sale or lease. In so doing, such person may act as his or her own contractor personally providing direct supervision and management of all work not performed by licensed contractors.
Baja Properties, LLC v. Mattera, No. A17A1875, 2018 WL 1247432, at *2 (Ga. Ct. App. Mar. 9, 2018) (emphasis added).  Baja Properties is, naturally, an LLC, not a corporation.  
 
The Goldens, who are the members of the Baja LLC, go on to: 
 
contend that the trial court erred by denying their motion for summary judgment as to negligence claims asserted against them personally. They assert that corporate law insulates them from liability and that, while a member of an limited liability corporation [sic] may be liable for torts in which he individually participated, Ugo Mattera has pointed to no evidence that the Goldens specifically directed a particular negligent act or participated or cooperated therein. We agree with the Goldens that they were entitled to summary judgment on Ugo Mattera’s negligence claim.
An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor, and an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein.
Jennings v. Smith, 226 Ga. App. 765, 766 (1), 487 S.E.2d 362 (1997) (citation omitted). Thus, if Baja Properties was negligent in constructing the house, an officer of the corporation could be held personally liable for the negligent construction if he specifically directed the manner in which the house was constructed or participated or cooperated in its negligent construction. See Cherry v. Ward, 204 Ga. App. 833, 834 (1) (a), 420 S.E.2d 763 (1992).
There is NO corporation involved in the dispute! 
 
It may be that Georgia law applies provides that “corporation” includes all entity types and that “officers” includes any person with some level of entity control.  I don’t know.  And I don’t need to look it up.  But the lawyers in the case and the court should because without explaining that is the case, the opinion is applying law that is not clearly relevant.  
 
It’s time for courts to get this right, and it is time for lawyers to start noticing their mistakes and those of opposing counsel. Every time you reference an entity, look to see if you have it right.  When you see “corporation” make sure there is a corporation involved.  When you see LLC think “company,” and make sure the term are consistent.  It requires vigilance,  but we can do this.  We just have to want to.  Let’s do this! 

As I read recent news reports (starting a bit over a week ago and exemplified by stories here, here, here, and here–with the original story featured here) about Carl Icahn’s well-timed sale of Manitowoc Company, Inc. stock, I could not help but associate the Icahn/Manitowoc intrigue with the Stewart/ImClone affair from back in the early days of the new millennium–more than 15 years ago.  As many of you know, I spent a fair bit of time researching and writing on Martha Stewart’s legal troubles relating to her December 2001 sale of ImClone Systems, Inc. stock.  Eventually, I coauthored and edited a law teaching text focusing on some of the key issues.  A bit of my Martha Stewart work is featured in that book; much of the rest can be found on my SSRN author page.  For those who may not recall or know about the Stewart/ImClone matter, the SEC’s press release relating to its insider trading enforcement action against Stewart is here, and it supplies some relevant background.  (Btw, ImClone apparently is now a privately held subsidiary of Eli Lilly and Company organized as an LLC.)

In reading about Icahn’s Manitowoc stock sale, my thoughts drifted back to Stewart’s ImClone stock sale because of salient parallels in the early public revelations. Just as Icahn had personal and professional connections with U.S. government officials who were aware of material nonpublic information regarding the later-announced imposition of steel tariffs, Martha Stewart had personal and professional connections with at least one member of ImClone management who was aware of impending negative news from the U.S. Food and Drug Administration regarding ImClone’s flagship product.  We know from the law itself and Stewart/ImClone fiasco not to jump to conclusions about insider trading liability from such scant facts.  Stewart’s insider trading case ended up being settled.  (No, that’s not why she went to jail . . . .)  And I have argued in a book chapter (Chapter 4 of this book) that the facts associated with Stewart’s stock sale may well have revealed that she did not violate U.S. insider trading prohibitions under Section 10(b) of, and Rule 10b-5 under, the Securities Exchange Act of 1934, as amended.

The Supreme Court’s decisions in Dirks v. SEC and Salman v. United States advise us that a tippee trading while in possession of material nonpublic information only violates U.S. insider trading prohibitions under Section 10(b) and Rule 10b-5 if:

  • disclosure of the material nonpublic information in the tippee’s possession breached a duty of trust and confidence because it was shared (directly or indirectly) with the tippee improperly–typically (although perhaps not always–as I note and argue in a forthcoming essay) because the duty-bearing tipper benefitted in some way from disclosure of the information; and
  • the tippee knew or should have known that the tipper breached his or her duty of trust and confidence.

See, e.g., Dirks v. SEC, 463 U.S. 646, 660 (1983).  

Thus, there is much more to tease out in terms of the facts of the Icahn/Manitowoc scenario before we can even begin to assert potential insider trading liability.  Among the unanswered questions:

  • what Icahn knew and when he knew it;
  • whether any information disclosed to Icahn was material and nonpublic;
  • who disclosed the information to Icahn and whether anyone directly or indirectly making disclosures to him had a fiduciary or fiduciary-like duty of trust and confidence;
  • whether any disclosures directly or indirectly made to Icahn were inappropriate and, therefore, breached the tipper’s fiduciary or fiduciary-like duty of trust and confidence; and
  • whether Icahn knew or should have known that the information he received was disclosed in breach of a fiduciary or fiduciary-like duty of trust and confidence.  

Icahn denies having any information about the Trump administration’s imposition of tariffs on the steel industry.  (See, e.g., here.)  And the nature of the duties of trust and confidence owed by government officials is somewhat contended (although Donna Nagy’s work in this area holds great sway with me).  Regardless, it is simply too soon to tell whether Icahn has any U.S. insider trading liability exposure based on current news reports.  I assume ongoing inquiries will result in more facts being adduced and made public.  This post may serve as a guide for the digestion of those additoonal facts as they are revealed.  In the mean time, feel free to leave your observations and questions in the comments.

I’ve been consumed by the latest twist in Broadcom’s attempt at a hostile takeover of Qualcomm: the dramatic entrance of CFIUS.

For those who haven’t been following the saga, Broadcom, a Singaporean technology company, has been attempting to acquire San Diego-based Qualcomm for months.  After its attempts at a friendly merger were rebuffed, it launched a proxy contest, proposing its own nominees to replace Qualcomm’s existing directors. 

Qualcomm responded with what is apparently becoming de rigueur in contested proxy solicitations: in addition to setting up a website devoted to making its case to shareholders, it also promoted various tweets on the subject.

One intriguing aspect of Qualcomm’s argument has been that – as a leader in research and development – the merger would be bad for innovation and consumers.  This point is reiterated on its website, which fascinates me because it assumes that investors as investors would be persuaded by an argument directed toward consumer wellbeing. 

That may not have been the right tack; according to news reports, at least some large shareholders were poised to vote for Broadcom, giving Broadcom a fighting chance at a hostile takeover.

But the day before the crucial shareholder meeting, Qualcomm won a reprieve: the Committee on Foreign Investment in the United States (CFIUS) asked that the vote be delayed so that it could review whether the transaction posed a threat to national security.

CFIUS, Chaired by the Secretary of the Treasury and staffed with representatives of most major federal departments, is charged with reviewing proposed mergers and acquisitions in which a foreign entity proposes to gain control of a domestic one, to ensure that the transaction will not pose national security risks.  It can intervene on its own accord when a transaction raises red flags or – more commonly – the parties can ask for pre-acquisition review to ensure that problems will not arise later.  In this case, Qualcomm asked for the review, in an elegant example of the use of the regulatory system as a takeover defense mechanism that is sure to serve as a classroom example for decades.  (Check out the wording of CFIUS’s letter: “Qualcomm is a global leader in the development and commercialization of foundational technologies… Qualcomm led the mobile revolution in digital communications technologies…” – did Treasury write this or Qualcomm’s PR department?)

CFIUS’s eleventh-hour appearance is quite the eyebrow-raiser.  For one thing, it tests the outer boundaries of what counts as foreign control.  And that’s not just because of the technical definition of what it means to be foreign – as the New York Times points out, Broadcom’s employees and properties are mostly located in the US, and the company has plans to relocate its headquarters to US this year – but because it’s unclear that Broadcom is, at this time, seeking “control.”

As its proxy filings indicate, Broadcom’s nominees for Qualcomm’s board have no prior relationship to Broadcom and mostly appear to be American.  Broadcom is not a controlling shareholder, and its nominees will only gain board positions with the support of Qualcomm’s remaining (American) shareholders.  Though of course Broadcom expects that eventually these directors will agree to allow Broadcom to acquire Qualcomm’s stock, that is by no means certain (remember Airgas??) and Broadcom has no legal power to compel them to do so.  It is therefore a stretch to categorize the proxy fight itself as a “merger, acquisition, or takeover that is proposed or pending … by or with any foreign person which could result in foreign control of any person engaged in interstate commerce in the United States,” which is the only matter over which CFIUS has jurisdiction.  Indeed, this precise point apparently troubled Sec. Mnuchin.

The other stunner is the national security risk that CFIUS identifies, namely, the fact that Broadcom’s investment strategy involves cutting R&D spending, which might hobble Qualcomm’s efforts to develop 5G technology.  As CFIUS itself concedes, this is the investment strategy of many – American – private equity firms, and is unrelated to Broadcom’s (nominally) foreign status; it is simply the fact that Broadcom happens to be foreign that gives CFIUS jurisdiction to insert itself into the dispute.  Steven Davidoff Solomon calls this an example of “realpolitik,” namely, an acknowledgement that China – our main competitor in the 5G space – has a government policy of assisting private development of technology.

Broadcom has responded to all of this with pledges to continue spending on R&D and even to sponsor a new initiative dedicated to training American engineers, but my bottom line reaction is that if the US is so concerned about keeping American tech companies competitive, it might reconsider all those new immigration policies that are scaring talent away to other countries.

Edit: Jinx, buy me a Coke – after I typed this post up, a Qualcomm shareholder filed a lawsuit in Delaware arguing that by inviting CFIUS to review the deal using spurious arguments of foreign control, Qualcomm directors violated their fiduciary duties.  I can’t say I have high hopes for the suit’s chances, at least to the extent it rests on CFIUS’s actions, but I did find one detail interesting: the original CFIUS order apparently required that the shareholder meeting be postponed and proxies cease being accepted or counted; CFIUS then modified the order to call for an adjournment of the meeting and to permit proxies to be solicited.  The plaintiff contends this was done at Qualcomm’s urging, to permit it to continue to try to lobby shareholders to change their votes.

I love teaching courses that develop practical skills. This summer, I am teaching a 2-credit transactional drafting course for the first time. In the past, I have taught 2-credit skills courses that had a drafting element, but the students enrolled in those courses typically had taken business associations, and therefore we could do entity selection exercises, portions of bylaws, operating agreements,  asset purchase agreements, NDAs, and employment agreement clauses. This time, BA will not be a prerequisite, and I am likely to have a number of rising 2Ls enroll.

I have a pile of proposed textbooks that I’m looking to for inspiration (and to select for the course), but I’m specifically seeking tips and best practices for teaching these skills to students who are fresh off of their 1L year. I plan to have a number of practicing lawyers speak to the students about common pitfalls in negotiating and drafting because I have the luxury of one three-hour block of time per week. At a minimum, students will draft, edit, and redline (where appropriate) a retainer letter, time sheets, a nondisclosure agreement, an independent contractor or employment agreement, and a license or settlement agreement. The goal is to have them draft some documents from scratch, some from forms, learn interviewing and negotiation techniques, and apply some business judgment to address client concerns.

What has worked (or bombed) when you’ve taught a transactional drafting class, especially to those who have not taken BA? For the practicing attorneys, what would you want your interns or junior associates to have worked on prior to joining you? Inquiring minds want to know. Please comment below or feel free to email me at mweldon@law.miami.edu.

 

The main premise behind self-regulation is that an industry has an incentive to police its ranks if industry members bear the costs of misbehavior.  An organized industry won’t tolerate particular industry members cheating or taking advantage to get an edge for themselves if it imposes greater costs on the industry as a whole.  Notice here that profit-seeking industry self-regulators will construe “misbehavior” as actions that impose costs or reduce the profits of the industry as a whole—not necessarily as activities that generate costs elsewhere.  For example, self-regulating manufacturers may not limit environmental pollution because distant customers do not bear the environmental costs generated by their operations.   Their customers may even prefer pollution-spewing factories because they pay less for goods and bear no liability for the environmental cleanup.

The New York Stock Exchange’s history as a self-regulating exchange bears this out.  Traditionally, the NYSE aggressively policed its own ranks to prevent its members from undercutting the standard fixed commission rates.   It did not, however, aggressively police its members’ extraordinarily profitable market-manipulating stock pools.   The incentive to self-police, therefore, failed to check exploitation of the public for at least two reasons:  (i) the NYSE members that did not participate in the stock pools still profited because of the heightened trading volume;  and (ii) the stock pool operators controlled the NYSE governing committee.

The incentive to self-police and crack down on stock pool operators may also have been limited because Wall Street’s broker-dealer firms internalized only a limited portion of the costs that their misbehavior imposed on the public.  In theory, contractual relationships between broker-dealer firms and their customers should allow customers to impose costs incurred from misbehavior and disloyalty on the industry.  When contractual relationships do not transfer the costs of misbehavior back to the industry, this incentive to self-police diminishes. If customers lack the bargaining power to negotiate these types of contracts, the industry may under-invest in enforcement and monitoring.

Today, the brokerage industry imposes significant costs on the public through conflicted financial advice. To be sure, wronged investors can seek to recover through FINRA’s arbitration forum.  But winning a FINRA arbitration does not mean that an investor will always be paid.  Roughly one third of arbitration awards now go unpaid because the FINRA members that do the most damage often go out of business.

The issue over unpaid awards matters because it cuts to a core premise behind self-regulation: self-regulation works well if the industry bears the costs of its misbehavior.  Despite this, FINRA does not require its firms to acquire insurance to bear the costs of their operations or to maintain significant capital reserves.   While FINRA does expel member firms that fail to pay arbitration awards, the individuals employed by those firms often simply relocate to another firm and continue with business as usual.    While reform advocates have suggested creating a national compensation pool to address the issue, FINRA has not yet embraced the idea of internalizing the costs generated by FINRA members.

Senator Warren just introduced draft legislation to create a recovery pool and require FINRA’s member firms to internalize the costs they generate.  It calls for FINRA to create a pool to pick up the tab for unpaid arbitration awards.  In past years, the fines FINRA assesses against its members would have covered all unpaid awards.  This does not mean that fine revenues will always be sufficient.  Many persons likely abandon all hope now when a FINRA member goes out of business.  Since they couldn’t recover, they never seek an arbitration award.

This legislation may attract some bipartisan support. Importantly, the U.S. Government does not pay these unpaid awards.  FINRA and the industry will pay them.  This lets the market set the right price for the privilege of self-regulation.

Friend and colleague Jena Martin has posted her new paper, Easing “the Burden of the Brutalized”: Applying Bystander Intervention Training to Corporate Conduct.  And when I say new, I mean new.  It went on SSRN within the last hour.  

Prof. Martin is an expert in business and human rights, and her new paper offers a new framework for corporations that are seeking to reduce or eliminate human rights violations.  Her paper is designed to help corporation beyond due diligence and reporting to allow them to “engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses.”  It is a timely piece with some interesting and innovative suggestions.  I look forward to seeing where the final version ends up. 

Abstract

The last few years have borne witness to a shift regarding how to address issues of oppression and social injustice. Across many different advocacy points – from police brutality to sexual violence – there seems to be a consensus that simply engaging the oppressor or the victim is not enough to affect real social change. The consensus itself is not new: it has been at the heart of many social justice movements over the years. However, what is new is the explicit evocation of the bystander within this framework. Too often, in conversations on conflicts generally (and negative human rights impact specifically), bystanders have been relegated to the sidelines, with no defined, specific role to play and no discussion within the larger narrative. Now, however, — through the use of bystander intervention training — these actors are taking on a more prominent role.

In previous articles, I have stated that the rhetoric and posture that transnational corporations (TNCs) maintain vis-à-vis human rights impacts is that of a bystander. Frequently, when human rights abuses occur, TNCs find themselves in the position of having to acknowledge their presence in the area of the underlying conflict, while profusely maintaining that none of their actions caused the harm against the community. Building off this prior work, this article seeks to answer the following question: are there lessons that can be learned from bystander intervention training in other contexts, that can be used for the benefits of TNCs within the field of business and human rights? I conclude that what is lacking in the current discourse on corporate policies regarding addressing negative human rights impacts is an articulation regarding when, and under what circumstances, it is appropriate for corporations to intervene in negative human rights disputes. This goes beyond the current proposals for human rights due diligence frameworks in that, rather than merely undergoing an assessment and then reporting this information out (as is required by most current legal frameworks that address business and human rights reporting) this would help corporations – informed by a bystander intervention framework – to engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses.