Matt Levine at Bloomberg continually expresses his view that private markets are the new public markets.  What he means by that is, given the availability of private capital (due to SEC rules and concentrations of private pools of capital in a relatively small number of hands), companies that need capital to expand can access the private markets; they only go for the public markets when private investors are ready to cash out.

Well, as the Case of Uber makes clear, “publicness” can exist in private markets, too.

“Publicness,” a concept first developed by Hillary Sale, refers to the general social obligations a corporation is perceived to have toward the public in terms of transparency and regularity of operations.  Companies that conduct themselves poorly may find themselves pressured to reform by consumers, investors, and regulators, in part because they are viewed as having public obligations almost akin to those of governments.  Prof. Sale explores, for example, the case of JP Morgan Chase and the London Whale scandal.

Uber is a private company, but as its various recent troubles demonstrate (and demonstrate and demonstrate and…),it is increasingly viewed through the lens of publicness – and is responding as though it recognizes, and hopes to meet, those obligations.

 In other words, the public views Uber as having certain duties in terms of ethics and propriety of operations, and Uber is attempting to fulfill those duties.  Uber is a private company that nonetheless has the responsibilities associated with publicness.

In that regard, it is interesting to compare to Mylan, a public company that seems to feel no pressure of “publicness.”  As a recent NYT article makes clear, Mylan has apparently adopted a business model of performing contrition in the face of public approbation, but failing to take any concrete steps to reform its operations.  It will respond to legal obligations (somewhat), but not moral ones.   It’s also picking a very public fight with ISS (and thus, potentially, investors) over ISS’s refusal to allow Mylan to review a draft copy of its recommendations to shareholders, which I assume is a conscious effort to buttress proposed GOP regulation of proxy advisors. (Side note: How much does the GOP want to advertise that Mylan, in particular, agrees with its proposed regulation)?

In other words, Uber – a private company – at least seems to recognize that it has public obligations, while Mylan – a public company – does not.  What accounts for the difference?  Is it that Mylan faces less competition due to the value of its intellectual property?  Uber feels more vulnerable to shareholder demands due to operational losses that require raising new capital?

This is ultimately a question of corporate theory, and as private becomes the new public (and as the federal government retreats from a regulatory role), it will become increasingly important.

In August, 2015, Chinese conglomerate, Wanda Group, acquired IRONMAN (primarily known for its long distance triathlon races) from a private equity group for $650 million. 

Last Friday, IRONMAN/Wanda acquired Competitor Group (primarily known for the Rock ‘n Roll Marathon and Half-Marathon series) for an undisclosed amount. 

To start, I had no idea organizing endurance sports had become such big business, but given the increasing popularity and the increasing entry fees, perhaps I should have known. 

Personally, I have mixed feelings about big corporations dominating endurance sports, which, previously, had been much less commercial. On one hand, because of their scale, larger corporations like Competitor Group can conduct their events in a very professional manner, produce slick event shirts, measure the courses precisely, host impressive expos before the races and impressive after-parties, maintain plenty of insurance, take proper precautions, and market effectively to bring new participants into the events.

On the other hand, the big corporations often seem focused on a single, financial line. They raise entry fees as high as they can and often seem to spend an incredible amount on marketing. The races organized by big corporations often lack the individual touch of local races. That said locally organized races are a mixed bag. Sometimes they are organized by complete amateurs, and their lack of experience or financial backing shows in things like poorly measured and marked courses. Other times, when organized by devotees of the sport, locally organized races can provide a superior event without the marketing, frills, and shiny gadgets. Perhaps there will be room all types of organizers, especially because the locally organizers are usually nonprofit operations, and therefore are a bit of a different animal.

This strategic acquisition by IRONMAN may be telling regarding the trajectory of races. The long distance races like the IRONMAN (2.4 mile swim, 112 mile bike, 26.2 mile run) had skyrocketed in popularity, but, while those races are still currently popular, I think that many people are starting to realize they don’t have the time or the money (the entry fee is often over $500) for that kind of event. Competitor Group brings not only a portfolio of marathons (26.2 miles) to the table, but also half marathons (13.1 miles, which is growing in popularity), 5Ks (3.1 miles), and even 1 mile races. 

In any case, I do wish IRONMAN the best with this acquisition, and I hope they will consider all stakeholders as they move forward. 

The list is here:  https://papers.ssrn.com/sol3/topten/topTenResults.cfm?groupingId=1566963&netorjrnl=ntwk

The paper can be downloaded here:  https://papers.ssrn.com/sol3/Papers.cfm?abstract_id=2957820

A portion of the abstract:

[T]his Essay and my other works introduce a new theory of the firm, collaboration theory. This theory views the corporation as a collaborative effort among a state government and those individuals organizing, operating, and owning the business entity to pursue economic development and economic gain. This theory is superior to the prevailing essentialist theories of the corporation because it explains both how and why the corporation exists.

Under this theory, corporations are obligated to seek profit based on the deal struck among the state and individuals owning, operating, and organizing the corporation, but the co-adventurers in the corporation are obligated to treat each other in good faith whenever possible. This means corporations should only engage in socially irresponsible ways in which the financial benefit to the corporation is clear. Because of the uncertainty of life, this is only going to be the rarest of circumstances. In these rare circumstances, to control bad behavior on the part of the corporation, the government must engage in affirmative lawmaking and regulation to alter the cost–benefit analysis to force corporations to be ethical.

In 2016, a number of news outlets focused on Wal-Mart’s reputation crisis and outdated management style. Many, including union leaders, doubted the sincerity behind the company’s motivation in raising wages last year. I’ve blogged about Wal-Mart before, but today, there appears to be a different story to tell. Wal-Mart, the bogeyman of many NGOs and workers’ rights groups, actually believes that “serving the customers and society is the same thing… [and] putting the customer first means delivering for them in ways that protect and preserve the communities they live in and the world they will pass on to future generations.” This comes from the company’s 148-page 2016 Global Responsibility Report. Target’s report is a paltry 43 pages in comparison.

What accounts for the difference? Both use the Global Reporting Initiative framework, which aims to standardize sustainability reporting using materiality factors and items in the 10-K. Key GRI disclosures include: a CEO statement; key impacts, risks, and opportunities; markets; collective bargaining agreements; supply chain description; organizational changes; internal and external CSR standards (such as conflict mineral policy, LEED etc); membership associations; governance structure; high-level accountability for sustainability; consultation between stakeholders and the board; board composition; board knowledge of sustainability; board pay; helplines or hotlines for reporting unethical or unlawful behavior; climate change risks; energy consumption; GhG emissions; employee benefits; health and safety; performance appraisal process; human rights assessments; wage and hour audits; supplier diversity; community engagement; PAC contributions by party; and more.

Whew! Companies can of course glean a lot of this information from their proxy, 10-K and other disclosures, but it still takes the average company months to complete. It may not even be worth it. Although 82% of consumers say they want to buy from a socially-responsible company, only 17% have actually read a CSR report, according to one study.  To be honest, I’m surprised the number of CSR report readers is that high. My informal survey during Monday’s class revealed that one student out of the 12 had read a CSR report, and this is in a group that chose to take a two-hour course in compliance and CSR that meets at 7:30 pm in the summer.

Here’s what I learned about Wal-Mart by reading the first four pages its report (it cleverly has big colorful picture blocks of statistics). I knew from press reports that Wal-Mart is currently facing numerous employment law class actions and may soon pay $300 million to the DOJ settle its bribery scandal. But the CSR report made Wal-Mart look like the model corporate citizen. The company earned 482 billion in revenue, employs 2.3 million employees, operates in 28 countries, and had 260 million weekly customer visits in 2016. It has invested 2.7 billion over 2 years in wages and benefits for its employees. It will train 1 million female farmers and factory workers around the world. It has eliminated 35.6 million metric tons of greenhouse gas emissions from its supply chain. Target, which has settled for 18.5 million with several states over data breaches, took a different approach for its report. Its first few pages has pictures and charts too but focuses on what it has achieved/exceeded and what it hasn’t based on its own 20 goals. The Target 2015 report is a decidedly more humble looking document than the Wal-Mart product (the next Target report is due this year). 

I tend to believe that these CSR reports are designed for the consumption of regulators and lawmakers- hence the longer and more robust Wal-Mart report. Although Target claims in its report that CSR can enhance its reputation, the average Wal-Mart and Target consumer will not stop to read the report and many who boycott these stores will not likely change their minds be reading these reports. Instead, they may view them as an expensive marketing tool. Although Target doesn’t face the same level of legal problems or reputational issues as Wal-Mart, it has still lost market share to Wal-Mart and Amazon, proving my theory that no matter what consumers say about shopping ethically, they really focus on convenience, quality, and price. 

I look forward to hearing what my students think at tonight’s class. I fear I may already traumatize them with the videos they will see about Nike, fair trade, and whether boycotting sweatshops make sense.

More than two years ago, I posted Shareholder Activists Can Add Value and Still Be Wrong, where I explained my view on shareholder proposals: 

I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock.  I don’t see activist shareholder as an inherently bad thing.  I do, however, think  it’s bad when boards succumb to the whims of activist shareholders just to make the problem go away.  Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It’s why we call them directors.    

Today, the Detroit Free Press reported that shareholders of automaker GM soundly defeated a proposal from billionaire investor David Einhorn that would have installed an alternate slate of board nominees and created two classes of stock.  (All the proposals are available here.) Shareholders who voted were against the proposals by more than 91%.  GM’s board, in materials signed by Mary Barra, Chairman & Chief Executive Officer and Theodore Solso, Independent Lead Director, launched an aggressive campaign to maintain the existing board (PDF here) and the split shares proposal (PDF here).  GM argued in the board maintenance piece: 

Greenlight’s Dividend Shares proposal has the potential to disrupt our progress and undermine our performance. In our view, a vote for any of the Greenlight candidates would represent an endorsement of that high-risk proposal to the detriment of your GM investment.

Another shareholder proposal asking the board to separate the board chair and CEO positions was reported by the newspaper as follows: “A separate shareholder proposal that would have forced GM to separate the role of independent board chairman and CEO was defeated by shareholders.” Not sure. Though the proposal was defeated, it’s worth noting that the proposal would not have “forced” anything.  The proposal was an “advisory shareholder proposal” requesting the separation of the functions.  No mandate here, because such decisions must be made by the board, not the shareholders.  The proposal stated: 

Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it did not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all the necessary steps be taken to accomplish the above.

GM argued against this proposal because the “policy advocated by this proposal would take away the Board’s discretion to evaluate and change its leadership structure.” Also not true.  It the proposal were mandatory, then this would be true, but as a request, it cannot and could not take away anything.  If the shareholders made such a request and the board declined to follow that request, there might be repercussions for doing so,  but the proposal would have kept in place the “Board’s discretion to evaluate and change its leadership structure.”  

These proposals appear to have been properly brought, properly considered, and properly rejected.  As I suggested in 2015, shareholder activists can help improve long-term value, even when following the activists’ proposals would not.  That is just as true today and these proposals may well prime the pumpTM for future board or shareholder actions.  That is, GM has conceded that its stock is undervalued and that change is needed.  GM argues those changes are underway, and for now, most voting shareholder agree.  But we’ll see how this looks if the stock price has not noticeably improved next year.  An alternative path forward on some key issues has been shared, and that puts pressure on this board to deliver.  They can do it their own way, but they are on notice that there are alternatives.  An shareholders now know that, too.

This knowledge underscores the value of shareholder proposals as a process.  They can and should create accountability, and that is a good thing. I agree with GM that the board should keep control of how it structures the GM leadership team.  But I agree with the shareholders that if this board doesn’t perform, it may well be time for a change.  

This past week, I traveled through parts of Tennessee and Georgia to attend a concert (Train with Natasha Bedingfield and O.A.R.–fantastic!) and visit the University of Georgia School of Law (to plan the 2018 National Business Law Scholars conference).  On that trip, I saw a number of billboards with religious messages–more than I remember having seen in the past.  This set me to reflecting on the use of billboards–typically commercial space–for this purpose.  I share a few observations today on that topic.

The messages on the billboards I saw appear to be important to the speakers who offer them.  [Note that in this paragraph I am working from memory but have tried to describe what I saw as accurately as possible.]  I saw several that were just printed with the word “JESUS” (in all capital letters, as I have written it here) and one that said: “TRUST JESUS” (again, in all caps, as written here) with a faded waving American flag in the background.  But the most striking billboard that I saw was one that stated: “In the beginning God created everything,” a message that was accompanied on the left by a circle in which the Darwinian progression to humankind was depicted and across which there was a large “X.”

On the one hand, highway billboards are a great vehicle for the exercise of free speech.  We are captive in our vehicles and generally bound to certain key routes when engaged in car travel over any significant distance.  Other than distinctive local flora and buildings (as well as traffic, exit, and other roadside driving guidance), billboards are the primary visual as one drives on a highway.  In fact, their size often makes them more attractive than those flowers, structures, and signage.  (Although I have never missed an exit for a billboard, I have come close.)

The use of billboards for religious messaging does not convert the message to commercial speech (to the extent that question may be relevant to any free speech analysis).  

Continue Reading Marketing God and Jesus: The Growing Commercialization of Religion

I watched with interest the battle at Exxon over a shareholder proposal requesting that the company provide more detailed disclosures about the risks posed by the Paris climate accord.  Last year, the same proposal won 38.1% of the vote; this year, prior to the vote at Exxon, shareholders at Occidental Petroleum approved a similar proposal.  Moreover, Blackrock and State Street have recently declared that they want to see more corporate disclosures about the impact of climate change.

As a result, things at Exxon were unusually heated.  Reportedly, Exxon was lobbying shareholders in advance of the vote.  The matter presumably was particularly sensitive because Exxon is being investigated by the NY and Mass AGs regarding the accuracy of its climate change disclosures to investors.

As this was going on, of course, it became increasingly clear that Trump was planning to withdraw the United States from the Paris accord.  Now, it’s not obvious what immediate impact that withdrawal has on companies like Exxon – after all, most other countries remain committed, and Exxon does business internationally.  Still, it raised the question:  Would shareholders decide the matter was less important, now that the US had essentially declared a more hands-off approach to climate change?  Or would shareholders view the matter as potentially more important, to fill the void left by regulators?

And we got an answer, sort of:  62.3% of shareholder votes bucked Exxon management and favored the proposal, a dramatic increase from last year.  We don’t know, of course, what influence Trump had on that vote, but it does suggest shareholders did not view the issue purely in (United States) regulatory terms; instead, they view climate change as a real risk to Exxon regardless of the (US) regulatory impact, and also believe their role includes monitoring that risk.

The Trump administration has made clear that it intends to take a more hands-off approach to regulation in a variety of areas; it will be interesting to see how shareholders view their role going forward (and okay, yeah, this is something I discuss in my paper, Reviving Reliance.  /plug).

Of course, another wrinkle concerns the Republican proposal to severely restrict shareholders’ ability to place proposals on the corporate proxy, reportedly scheduled for a House vote on June 8 (though its prospects in the Senate are uncertain).  Shareholders can’t pressure management if they can’t communicate with them.  And large shareholders like Blackrock can of course continue to have private negotiations with management, but I rather suspect that, at least to some extent, these asset managers respond to their own shareholder and customer demands for socially responsible governance.  (Witness State Street’s brilliant marketing stunt.  As money pours into index funds, State Street has very visibly distinguished itself from the pack.)  Point is, without shareholder proposals, there is no public record of funds’ positions on these issues, and that lever of pressure is eliminated.

Fearless1

    One of my favorite casebook problems involves a general partnership and the interesting question of whether a one-partner “partnership” is possible.  Consider the following:  Polly and Peter are the only partners of a general partnership with an express term of ten years. After two years of operation, Peter notifies the partnership that he is withdrawing as a partner. Is dissolution of the partnership now required? If not, what is the status of the remaining business?

    (A good portion of the below discussion and all of the case citations were taken from the excellent article, Partners Without Partners:  The Legal Status of Single Person Partnerships, 17 Fordham J. Corp. & Fin. L. 449, by Professors Robert W. Hillman and Donald J. Weidner.)

    Is there such a thing as a partnership with only one partner?  Under RUPA, Peter has dissociated by express will under § 601.  It is a term partnership, so dissolution is not required under § 801(1).  Unless Polly wants to dissolve the partnership, dissolution is also not required under § 801(2).  Section 801 states that a partnership is dissolved “only” upon the occurrence of the events listed in § 801; thus, it would appear that a buyout is necessary under § 701. 

    The problem with this conclusion, however, is that a partnership, by definition, requires “two or more persons.”  See id. §§ 101(6), 202(a).  While § 202 might be read to suggest that two or more persons are only needed to form a partnership (i.e., two or more persons are not needed after formation), § 101(6) defines a “partnership” as “an association of two or more persons * * * formed under Section 202,” which suggests that a partnership, by definition, must always have two or more persons.

    Until the time when Peter is fully bought out, it is possible to argue that the partnership still exists.  After all, Peter’s dissociation ends many of his rights and obligations as a partner, see id. § 603(b), but a dissociated partner is still a “partner” for some purposes.  For example, under § 702, a dissociated partner can still bind the partnership for two years.  Under § 703(b), a dissociated partner can still be liable as a partner for some post-dissociation obligations.  Under § 403(b) (and comment 2), a dissociated partner has some rights to inspect the books and records of the partnership.  Until Peter has been completely bought out, therefore, perhaps one can argue that he has enough vestiges of “partner-ness” remaining to count him as the second “person” under the partnership definition.  Cf. RUPA § 601 cmt. 1 (“A dissociated partner remains a partner for some purposes and still has some residual rights, duties, powers, and liabilities. Although Section 601 determines when a partner is dissociated from the partnership, the consequences of the partner’s dissociation do not all occur at the same time. Thus, it is more useful to think of a dissociated partner as a partner for some purposes, but as a former partner for others.”).

    This argument, however, is somewhat of a dodge, as it does not answer the ultimate question of whether there can be a partnership of one partner.  What happens, in other words, when Peter is fully bought out?  Does the partnership still exist when Polly is undeniably the only partner left standing?  On the one hand, a partnership is an entity distinct from its partners (§ 201(a)), which suggests that the entity itself should not disappear simply because the composition of the owners changes.  On the other hand, this argument proves too much, as it would suggest that the entity remains even if all of the partners dissociated through death or otherwise.  Moreover, presumably § 201(a) cannot override the partnership definition, which seems to require two or more persons.  As further support, comment 6 to § 302 states, in part, the following: 

The UPA does not have a provision dealing with the situation in which all of the partners’ interests in the partnership are held by one person, such as a surviving partner or a purchaser of all the other partners’ interests. Subsection (d) allows for clear record title, even though the partnership no longer exists as a technical matter. When a partnership becomes a sole proprietorship by reason of the dissociation of all but one of the partners, title vests in the remaining “partner,” although there is no “transfer” of the property.

Id. (emphasis added).  This language suggests that the drafters of RUPA believe that a partnership ends (and becomes a sole proprietorship) when there is only one remaining partner.

    In summary, Articles 6-8 of RUPA suggest that Peter’s dissociation requires a buyout, but not a dissolution of the partnership.  The definition of partnership, however, does not seem to allow for a partnership of one person, which suggests that the partnership would have to terminate (through, presumably, the dissolution process).  The case law on the issue sides with this latter position.  See, e.g., Corrales v. Corrales, 2011 WL 3484470 (Cal. App. 4th Dist. 2011) (“Having carefully studied the idea of a one-partner partnership in light of the Revised Uniform Partnership Act, we conclude that no such animal exists.  If a partnership consists of only two persons, the partnership dissolves by operation of law when one of them departs.”); Wheatley v. Fink, No. C048328, 2006 WL 3071451, at *4 (Cal. Ct. App. Oct. 31, 2006) (holding that buyout provisions do not apply when one partner leaves a two-person partnership because the partnership could not be continued by a single partner); Vesco v. San Diego Cmty. Corr. Ctr., No. D049266, 2008 WL 2547890, at *7 (Cal. App. Mar. 25, 2008); Kuist v. Hodge, No. B193863, 2008 WL 510075, at *11 (Cal. Ct. App. Mar. 25, 2008); Pemstein v. Pemstein, No. G030217, 2004 WL 1260034, at *1 (Cal. Ct. App. June 9, 2004) (“‘Can one person carry on a partnership?’  In short, the answer is no.  * * * Just as it takes two to form a marriage, it takes a minimum of two to run a viable partnership.  We were unable to find any contrary authority, and appellants fail to provide any, holding a partnership can be carried on by less than two persons.”); Costa v. Borges, 79 P.3d 316, 320 (Idaho 2008) (holding that “because it takes at least two persons to have a partnership,” a two-person partnership does not survive the withdrawal of a partner); see also  Rules of the State Bar of Cal., R. 3.179 (2010) (“The State Bar must terminate certification of a limited liability partnership if there is only one partner in the limited liability partnership * * * .”).

    The analysis under RUPA (2013) is similar, but there is one significant difference.  A “partnership” is still defined as “an association of two or more persons” under § 102(11); a partnership is a separate legal entity under § 201(a); and a dissociation by express will under § 601 does not, in a term partnership, lead to dissolution under § 801.  The significant difference is § 801(6), which states that a partnership is dissolved upon “the passage of 90 consecutive days during which the partnership does not have at least two partners.”  Interestingly, this suggests that a partnership can exist with only one partner, at least for 89 days.  The comment to RUPA (2013) § 302 quotes the comment from RUPA § 302, and then states the following:

      Section 801(6), added during the Harmonization Project, changes the analysis.  The paragraph states that dissolution is caused by “the passage of 90 consecutive days during which the partnership does not have at least two partners.”  Consequently, for at least eighty-nine consecutive days a partnership remains un-dissolved although having only one partner, and even at ninety days the partnership remains a partnership, albeit dissolved and compelled to wind up its business.  Subsection (d) remains quite useful if the sole remaining partner winds up the partnership by becoming a sole proprietor, but it is no longer accurate to state that a partnership with only one partner “no longer exists as a technical matter.”

So . . . do we have an answer?  What do you think dear reader?

One of the most striking lines in Provost Jeff Van Duzer’s talk at the Nashville Institute of Faith and Work a few months ago was his statement that “even bank robbers can tithe.”

See a somewhat similar version of that talk here.

Jeff Van Duzer’s point seemed to be that you cannot be a truly socially responsible company simply by giving some money to good causes. I think he was exactly right. He went on to explain that socially responsible businesses should focus on creating good products and good jobs. 

This week I was thinking about Jeff Van Duzer’s talk when I considered, for about the one hundredth time, how to define social enterprises.

Think about Ben & Jerry’s, a company that comes up at almost every social enterprise conference. While I can think of some good that ice cream does, I wonder if Ben & Jerry’s main products are, on the whole, socially beneficial. We have a serious, deadly obesity problem in the country, and Ben & Jerry’s products seem to be contributing to this problem. Perhaps Ben & Jerry’s ice cream is more healthy than most options or uses more natural ingredients (I am unsure if this is true), but are Ben & Jerry’s core products a net benefit to society? Perhaps Ben & Jerry’s tip the scale in the social direction by providing good jobs with good benefits. However, Ben & Jerry’s is best known for their giving and advocacy, which any business (no matter how socially destructive) could do.

The same arguments could be made against Hershey and Mars Corp., both of which are also well known for their focus on social responsibility. Are there certain industries that social enterprises should avoid altogether? Or should social enterprises enter all industries and try to make them incrementally better?

As a consumer, I am becoming more convinced that providing good products should among the very highest priorities. High quality products and thoughtful customer service is becoming increasingly difficult to find.

Given that I have two young children, Melissa & Doug toys come to mind as a company that is doing it right. Their products are durable and well-designed. Their products are designed to encourage Free Play, Creativity, Imagination, Learning, Discovery. Little Tikes is an older, but similar, company. I have never heard Melissa & Doug or Little Tikes referred to as “social enterprises,” but, in my opinion, both companies benefit society much more than many of the frequently mentioned “social enterprises.”