Sometimes it feels like I’m on the litigation-limiting-bylaw beat.

To briefly recap, in several prior posts, a law review article, and a forthcoming chapter, I’ve argued that corporate governance documents are not contracts in the traditional sense and thus should not be read to impose contract-like obligations on shareholders (critical for, among other things, the applicability of the Federal Arbitration Act).  I’ve also argued that a corporation’s governing documents cannot impose forum-selection or other limitations on shareholders’ ability to press federal claims or claims that arise under the law of a nonchartering state. 

This is relevant because some companies have gone public with forum selection provisions in their charters purporting to restrict Securities Act claims to federal court.  Snap was one, as I discuss in more detail here; apparently, other companies include Blue Apron, Stitch Fix, and Roku.  The Supreme Court is set to decide this term whether SLUSA requires that Section 11 class actions be brought in federal court, but that’s a separate issue from whether corporations can use private ordering to require that all Section 11 claims be brought in federal court.

Anyhoo, it looks like New Jersey is getting ready to pass a bill – modeled to some extent on a statute passed by Delaware a couple of years ago – that would allow corporations to include forum-selection provisions in their charters and bylaws.  Under the New Jersey bill, forum-selection bylaws and charter provisions could only be used to restrict plaintiffs to New Jersey federal and state courts (i.e., they could not be used to select other fora, including arbitral fora), and – critically – it appears the intent of the provision is to limit its application to state law claims.  The text reads:

N.J.S.14A:2-9 is amended to read as follows…

[T]he by-laws may provide that the federal and State courts in New Jersey shall be the sole and exclusive forum for:

     (i)    any derivative action or proceeding brought on behalf of the corporation;

     (ii)   any action by one or more shareholders asserting a claim of a breach of fiduciary duty owed by a director or officer, or former director or officer, to the corporation or its shareholders, or a breach of the certificate of incorporation or by-laws;

     (iii) any action brought by one or more shareholders asserting a claim against the corporation or its directors or officers, or former directors or officers, arising under the certificate of incorporation or the “New Jersey Business Corporation Act,” N.J.S.14A:1-1 et seq.;

     (iv)  any other State law claim, including a class action asserting a breach of a duty to disclose, or a similar claim, brought by one or more shareholders against the corporation, its directors or officers, or its former directors or officers; or

     (v)   any other claim brought by one or more shareholders which is governed by the internal affairs or an analogous doctrine.

Now, we usually think of derivative claims as state law claims but they don’t have to be (i.e., Section 10(b) claims can be brought derivatively, etc).  Still, I think language like “any other claim … which is governed by the internal affairs or analogous doctrine” suggests the intent here was to limit the bill to state law.

In any event, we may get some clarity on these issues.  D&O Diary is reporting that a shareholder lawsuit has been filed against Blue Apron, Roku, and Stitch Fix, seeking a declaratory judgment that the forum-selection provisions of those companies’ governing documents are invalid to the extent they purport to extend to federal law claims.

We’ll see how far along the case gets; it would be nice for courts to explore this issue in more depth.

On a previous post about Etsy dropping its B corp. certification, because of the B Lab requirement to convert to a public benefit corporation, I received the following comments:

  • “I simply believe that, in most ways, being a public benefit entity is more about a marketing strategy than a business plan.” (Tom N.)
  • “I had my students read the NY Times articles on Etsy as a part of their last class in my clinic this semester (thanks to my fellow Joe Pileri who alerted me to the article). We represent social enterprises in the clinic so this was a perfect wrap-up. The questions that I posed to my students: what social enterprise isn’t a soft target like Etsy? Won’t they all eventually cave to profit maximization?” (Alicia Plerhopes)
  • “I agree with To[m] N … Also, no theory of CSR actually requires an explicit weighting of the various stakeholders of a firm, so in reality, if the interests of shareholders are receiving the greatest weight, then Milton Friedman was right all along!” (Enrique)

I wanted to respond to these thoughtful comments, briefly, above the line.

Tom, I think the marketing benefits of becoming a PBC, currently, are weak. How many of your non-lawyer friends know what a public benefit corporation is? Even among lawyers, if they know what the form is, their knowledge is usually limited, and they are usually quite skeptical. But I agree, that simply becoming a PBC, without more, does not get you very far and will not substitute for a good business plan. Becoming a PBC, however, may help in takeover situations and it may help change the shareholder wealth maximization norm among directors.

Alicia, You are right, I think, that publicly traded benefit corporations would often be soft targets. That said, their PBC status, in connection with other takeover defenses, could help them fend off unwanted advances. Given the history of social enterprise sell-outs, however, one does wonder how long these companies, public or private, can stay on mission.

Enrique, You may be correct on most theories of CSR not requiring an explicit weighting of stakeholder interests, but the benefit corporation statutes do generally require “consideration” or “balancing” of stakeholder interests. You are right, however, that the statutes do not give instructions on how much weight is to be given to each stakeholder group. The benefit corporation statutes do generally say that the purpose of benefit corporations must be to materially benefit “society and the environment;” and some of the statutes say/suggest that shareholders can not be the predominant interest.

While I am not a big proponent of the current benefit corporation statutes, I do commend the drafters for moving the conversation forward and taking action. And hopefully we can agree that something needs to be done about the current state and focus of many American businesses. This holiday season confirmed to me how cheaply most things are made these days and how poor customer service has become. Toys from my childhood era are outlasting most of the toys my wife and I buy our children. Appliances now seem to last 1/5 of the time they lasted a generation ago. Ignoring or mistreating the customer has become the rule. Even Apple, which I think of as one of the positive exceptions, is now being accused on planned obsolescence, and their customer service has declined over the years, in my view. Maybe the above makes sense from a purely financial perspective; maybe customers buy mainly on price. But I would argue that what made Apple great was holding themselves to an even higher standard of quality and innovation than their customers did initially. I am not sure if benefit corporation law will help businesses make more quality products, and treat their employees and customers better, but I do think we should give businesses the latitude to explore.

The Wall Street Journal has an article on Morgan Stanley’s rising profits and stock price.  Much of the profits come from servicing retail investor accounts.  It’s an increasingly profitable business line:

Morgan Stanley’s X-Factor, though, is increasingly its giant retail brokerage, which oversees $2.4 trillion for some 3.5 million households. That unit’s revenue rose 10%, while lower expenses lifted its profit margin—once in the high single digits—1 percentage point to 26%. Mr. Gorman set a new upper goal of 28%.

Many of these profits come from gathering assets and then charging a management fee.  This allows Morgan Stanley to profit even when clients do not actively trade their accounts.  The Journal described it this way:

Morgan Stanley’s retail brokerage gets a growing portion of its revenue from steady fees that are assessed as a percentage of client portfolios, rather than commissions on trades. As the stock market marches higher, Morgan Stanley is guaranteed profits on those accounts whether clients trade or not.

Wrap fees or registered investment advisory services may account for much of this revenue.  At the end of December, the SEC released an investor bulletin about wrap fees.  It defined a wrap account as “an investment account where you are charged a single, bundled, or “wrap” fee for investment advice, brokerage services, administrative expenses, and other fees and expenses.” 
 
The SEC has concerns about wrap fee programs.  It’s 2017 examination priorities letter announced that the SEC will monitor these programs closely.  
Wrap Fee Programs. We will expand our focus on registered investment advisers and broker-dealers associated with wrap fee programs, which charge investors a single bundled fee for advisory and brokerage services. We will likely review whether investment advisers are acting in a manner consistent with their fiduciary duty and whether they are meeting their contractual obligations to clients. Areas of interest may include wrap account suitability, effectiveness of disclosures, conflicts of interest, and brokerage practices, including best execution and trading away.
Some retail investment firms have faced SEC enforcement actions arising out of their wrap fees.
 
The news about these rising retail-investor-driven profits makes me wonder how aggressively FINRA and the SEC now look at reverse churning issues.  The SEC made reverse churning an issue in its 2016 examination priorities letter, but dropped the term from its 2017 letter. Reverse churning occurs when a financial adviser convinces a client that has little need for ongoing services to move an account to an ongoing fee structure.  For example, a buy-and-hold investor investing with the intent to keep an index fund for a decade may not benefit from an account that charges 1.5% annually.  Instead of trading too much to drive profits (churning), the firm makes excessive profits by doing nothing.  In a bull market, an investor may never alert to the gains drained away by fees.  It may also be tough to recover for excessive wrap fees in FINRA arbitration because many arbitrators expect investors to have suffered some net-out-of-pocket loss.
 
As the SEC considers whether current disclosures effectively inform investors about the fees they pay, it should look at whether the retail investors driving Morgan Stanley’s profits actually understand how much money they pay Morgan Stanley over time and whether they believe that the services they receive are worth the fees.  
 
 

Call for Papers

The NYU Stern Center for Business and Human Rights and the Global Business and Human Rights Scholars Association invite you to submit papers: 4th Annual Conference of the Global Business and Human Rights Scholars Association at New York University, New York City, on September 14-15, 2018. Scholars from all disciplines are invited to apply, and we invite contributions that reflect the interdisciplinary character of BHR in theory and in practice.

We will also consider applications to participate as observers and discussants. Anyone interested in this possibility should submit their application in a few sentences to the email address below. Doctoral candidates are not eligible to present their research at this workshop, but they are welcome to attend. To discuss their work, PhD students may apply to the Young Researchers Summit (https://bhr.stern.nyu.edu/youngresearchers/). This is a workshop to discuss research-in-progress; papers must be unpublished at the time of presentation.

In addition to presenting a paper at the conference, participants are expected to read and be prepared to comment on and discuss the papers of other participants. The conference will be organized around three parallel working groups. Please indicate in your application to which of the three broad tracks you would like to contribute: (1) preventing, managing, and measuring BHR; (2) human rights in global supply chains and specific industry settings; or (3) conceptual approaches to BHR.

To apply, please submit an abstract of no more than 250 words to bhrnyu2018@gmail.com with the subject line Business & Human Rights Conference Proposal. Please include your name, affiliation, contact information, workshop theme preference, and short curriculum vitae. The proposals will be assessed by an organizing committee comprised of Dorothée Baumann-Pauly (NYU Stern, Program Chair and head of the committee), Justine Nolan (University of New South Wales), Penelope Simons (University of Ottawa), Kish Parella (Washington & Lee School of Law), Karin Buhmann (Copenhagen Business School), Merryl Lawry-White (Debevoise & Plimpton LLP), César González Cantón (CUNEF, Madrid), Humberto Cantú Rivera (University of Monterrey), Stephen Park (University of Connecticut), Michael Santoro (University of Santa Clara, President of the Global Business and Human Rights Scholars Association) and Anita Ramasastry (University of Washington School of Law, Vice-President of the Global Business and Human Rights Scholars Association).

The deadline for submission of abstracts is March 1, 2018. Scholars whose submissions are selected for the symposium will be notified no later than March 15. Full papers must be submitted by August 1.

About the Global BHR Scholars’ Association The Global Business and Human Rights Scholars’ Association is a non-profit, non-partisan membership association dedicated to bringing together a global and interdisciplinary group of scholars with an interest in the area of business and human rights, raising awareness of the human rights and other potentially harmful impacts of business activity, and promoting respect for international human rights among states, business enterprises, and other organizations. Membership is free and open to business and human rights scholars from every country and region of the world. More information about the Association and membership is available on our website: www.bhrscholarsassociation.org

I have had reason to look back on some foundational scholarship in LLCs recently, and one article really stood out for me. Larry Ribstein’s The Deregulation of Limited Liability and the Death of Partnership. It’s another snow day with kids, so I haven’t had a lot of time to delve into the thoughts this raised for me, so I’ll let Larry’s words speak for themselves.  Keep in mind this is from 1992:  

The popularity of the partnership form of business1 indicates that an organizational form in which some owners can be held personally liable for the firm’s debts is efficient for many firms. This could be because, for many firms, individual liability reduces the firm’s credit costs more than it increases owners’ risk-bearing, monitoring, or other costs. This Article, however, suggests an alternative explanation: the partnership form is attractive for many firms on the margin only because of the regulatory costs of limited liability, including double corporate taxation and limitations on organizational form.

Recent developments provide a valuable opportunity to test this explanation. Many lawyers and legislators have become interested in a new limited liability business form, the “limited liability company” (LLC), that lets firms adopt limited liability without many of the tax and other costs that once attended limited liability. If this Article’s regulatory explanation of partnership is correct, the partnership form of business will greatly diminish in importance. After a transitional period, partnership will survive, if at all, as a residual form for firms that have no customized agreement.

“Injustice anywhere is a threat to justice everywhere.”

Martin Luther King, Jr., Letter from Birmingham Jail, Alabama, 16 April 1963, in Atlantic Monthly August 1963

I had wanted to post a tribute to Dr. King here early on Monday.  However, after posting the Emory conference announcement, I moved on to other work, and that work filled up the available time in the day.  So, this late post including the quote above will have to suffice.

As I read meaningful quotes from Dr. King on social media and elsewhere all day on Monday, I found myself thinking of examples of inequality and injustice.  Many are compelling; many are meaningful.  Some are current events; and some of those involve business law questions.

For a number of days now (since before MLK Day) we have been showered with news stories relating to the compensation disparity between Mark Wahlberg and Michelle Williams for reshooting scenes from All the Money in the World in the wake of Kevin Spacey’s replacement in the film resulting from allegations of sexual misconduct.  (See here, among other places.)  Most folks who follow Hollywood business issues know that gender discrimination is common.  My sister, a visual effects producer (her current movie is Downsizing, which I enjoyed and recommend), has suffered the effects.

But I found myself focusing on the role of William Morris Endeavor Entertainment LLC (WME), the talent agency that represented both Wahlberg and Williams.  Talent agents are regulated by guilds and unions as well as under California law (as represented here).  But they also have fiduciary duties.  Why did Wahlberg’s contract not include a reshoot covenant (giving him the leverage to negotiate an outsized reshoot fee) while Williams’s contract did?  Did WME fail to act in a manner consistent with any applicable duty of care–or maybe loyalty–as an experienced agent representing both actors–with knowledge of an overall gender pay gap?  Of course, there are many other possible explanations for the difference, and we are not privy to the terms of the two actors’ talent contracts with WME (including any enforceable private ordering around agency law rules or confidentiality or privacy clauses).  But the related questions seem worth asking.  

Specifically, we might ask whether there is a question of WME’s care, competence, or diligence under Section 8.08 of the Restatement (Third) of Agency.  And, among other things, Section 8.11 of the Restatement (Third) of Agency imposes a duty of candor on agents that may be applicable here.  And were there differences in the benefits that WME got out of each agreement that may have affected the firm’s ability to act loyally for the principal’s benefit under Section 8.01 of the Restatement (Third) of Agency?  We may never know.

Intermediation likely cannot cure the evils of inequality and injustice.  But where intermediaries are agents or otherwise owe fiduciary duties to their clients, those fiduciary duties may cause–or at least incentivize–the intermediaries to use their experience and knowledge to correct gender, racial, and other inequities where they exist.  This is something I will continue to ponder.

Sixth Biennial Conference:
To Teach is to Learn Twice: Fostering Excellence in Transactional Law and Skills Education

June 1-2, 2018 • Atlanta

Emory’s Center for Transactional Law and Practice is delighted to announce its sixth biennial conference on the teaching of transactional law and skills.  The conference, entitled “To Teach is to Learn Twice:  Fostering Excellence in Transactional Law and Skills Education,” will be held at Emory Law, beginning at 1:00 p.m. on Friday, June 1, 2018, and ending at 3:45 p.m. on Saturday, June 2, 2018. 

Four New and Different Things about the Conference: 

  • Presentation of the inaugural Tina L. Stark Award for Excellence in the Teaching of Transactional Law and Skills.  Note:  For information about how to nominate yourself or someone else for this award, please visit http://bit.ly/2C1HdMW.
  • New 45-minute “Try-This” time slots for individual presenters to demonstrate in-class activities.   
  • Reduced registration fee for new transactional law and skills educators.
  • Reduced registration fee for adjunct professors.  

CALL FOR PROPOSALS

We are accepting proposals immediately, but in no event later than 5 p.m. on Monday, February 16, 2018. 

We welcome you to present on any aspect of transactional law and skills education as long as you view it through the lens of our theme.  We expect to receive proposals about theories, programs, curricula, courses, approaches, methods, and specific assignments or exercises that foster excellence in transactional law and skills education.  In other words, what works best (excellence in teaching) to achieve particular student outcomes (excellence in learning)?  If it’s true that “to teach is to learn twice,” what wisdom can you impart to others who may want to replicate or imitate what you are doing?  How have you made yourself a better teacher?  And how have you assured that you are achieving the best student outcomes?  

Try-This Sessions.  Each Friday afternoon “Try-This Session” will be 45-minutes long and will feature one classroom activity and one individual presenter.  

Panels.  Each Saturday session will be approximately 90 minutes long and feature a panel presenting two or more topics grouped together for synergy. 

Please submit the proposal form electronically via the Emory Law website at http://bit.ly/2BTD7pr before 5 p.m. on February 16, 2018. 

PUBLICATION OF SELECTED MATERIALS

As in prior years, some of the conference proceedings as well as the materials distributed by the speakers will be published in Transactions:  The Tennessee Journal of Business Law, a publication of the Clayton Center for Entrepreneurial Law of The University of Tennessee, a co-sponsor of the conference.

CONFERENCE REGISTRATION

Both attendees and presenters must register for the Conference and pay the appropriate registration fee:  $220 (general); $200 (adjunct professor); or $185 (new teacher).  Note: A new teacher is someone in their first three years of teaching.

The registration fee includes a pre-conference lunch beginning at 11:30 a.m., snacks, and a reception on June 1, and breakfast, lunch, and snacks on June 2. We are planning an optional dinner for attendees and presenters on Friday evening, June 1, at an additional cost of $50 per person. 

Registration is now open for the Conference and the optional Friday night dinner at our Emory Law website at http://bit.ly/2BpTQVc.

TRAVEL ARRANGEMENTS AND HOTEL ACCOMMODATIONS

Attendees and presenters are responsible for their own travel arrangements and hotel accommodations. Special hotel rates for conference participants are available at the Emory Conference Center Hotel, less than one mile from the conference site at Emory Law. Subject to availability, rates are $149 per night. Free shuttle transportation will be provided between the Emory Conference Center Hotel and Emory Law.

To make a reservation at the special conference rate, call the Emory Conference Center Hotel at 800.933.6679 and mention “The Emory Law Transactional Conference.” Note: The hotel’s special conference rate expires at the end of the day on May 18, 2018.  If you encounter any technical difficulties in submitting your proposal or in registering online, please contact Kelli Pittman, Program Coordinator, at kelli.pittman@emory.edu or 404.727.3382. 

We look forward to seeing you in June!

Sue Payne, Executive Director

Katherine Koops, Assistant Director

Kelli Pittman, Program Coordinator

Shu-Yi Oei and Diane Ring of Boston College Law School have posted Is New Code Section 199A Really Going to Turn Us All into Independent Contractors? to SSRN.  Here is the abstract:

There has been a lot of interest lately in new IRC Section 199A, the new qualified business income (QBI) deduction that grants passthroughs, including qualifying workers who are independent contractors (and not employees), a deduction equal to 20% of a specially calculated base amount of income. One of the important themes that has arisen is its effect on work and labor markets, and the notion that the new deduction creates an incentive for businesses to shift to independent contractor classification. A question that has been percolating in the press, blogs, and on social media is whether new Section 199A is going to create a big shift in the workplace and cause many workers to be reclassified as independent contractors.

Is this really going to happen? How large an effect will tax have on labor markets and arrangements? We think that predicting and assessing the impact of this new provision is a rather nuanced and complicated question. There is an intersection of incentives, disincentives and risks in play among various actors and across different legal fields, not just tax. Here, we provide an initial roadmap for approaching this analysis. We do so drawing on academic work we have done over the past few years on worker classification in tax and other legal fields.

 

As Joan and Josh previously posted, Stefan organized an excellent AALS panel on Rule 14a-8. We covered a number of topics, including the appropriate role of retail and employee shareholders, the proper sphere of activity for shareholders vis a vis managers, the true audience for shareholder proposals, and how to construct Rule 14a-8 so that frivolous and improper proposals can be easily weeded out.

In my remarks, I focused on the fact that shareholder proposals are usually precatory, even when they don’t have to be.  For example, shareholders have the right to pass bylaws, but even the Boardroom Accountability Project typically sponsors proposals that merely request that directors use their power to craft proxy access bylaws.  (I assume that’s at least in part because a good bylaw must address administrative matters that shareholders are ill-equipped to manage – for example, see management’s response to Proposal Ten, for a majority-rule bylaw at Netflix).

Because shareholder proposals are precatory, their main function is informational: they allow shareholders to communicate with management, with each other, and with the market more generally.  I suspect that this function may become especially important as passive investing’s popularity increases; absent the ability to sell, votes – and votes on specific governance matters – may be the most effective ways for shareholders to signal their views to management.

Given that, I believe that one fairly easy way of enhancing that signal would be to require that companies with multi-class shares disclose the class vote breakdown on shareholder proposals – and other votes as well – when they disclose the vote totals.  I’d also potentially recommend a breakdown that distinguishes the votes of the management group from other shareholders.

Right now, unless a class vote is held separately, companies are only required to release the vote totals.  This can cause some misleading reports.  For example, when Google’s shareholders proposed elimination of the multi-class share structure in 2017 (as they have done in prior years), Google reported that there were 191,712,790 votes for, and 472,583,246 votes against the proposal.

This, of course, obscured the fact that the public shareholders apparently mostly favored the proposal; it was only defeated because Larry Page and Sergey Brin, with their high-vote shares, voted against it. 

Now, obviously, even without a clear disclosure of this type, clever analysts might be able to glean the approximate breakdown from publicly reported information – as the above linked article indicates – but depending on the class structure, it may not always be that obvious.  Moreover, as I recently posted, the SEC’s Investor as Owner Subcommittee of the Investor Advisor Committee thinks clearer disclosures regarding multi-class share structures would benefit the market, even when some of that information might be deducible from a close reading of SEC filings.

There is also evidence that management may intentionally exercise in-the-money options to vote against shareholder proposals that are in danger of passing; because of these and other close-vote scenarios, a vote breakdown would be helpful.

And I think this is useful information to have.  It may assist with pricing of the public shares, and it may assist with pricing of shares of other companies with multi-class structures.  It could also assist with companies and underwriters trying to decide whether to go public with multi-class share structures in the first place.

In other words, I think this is a pretty cheap intervention, and one that would provide real informational benefits.