As a business lawyer in private practice, I found it very frustrating when the principals of business entity clients acted in contravention of my advice.  This didn’t happen too often in my 15 years of practice.  But when it did, I always wondered whether I could have stopped the madness by doing something differently in my representation of the client.

Thanks to friend and Wayne State University Law School law professor Peter Henning, who often writes on insider trading and other white collar crime issues for the New York Times DealBook (see, e.g., this recent piece), I had the opportunity to revisit this issue through my research and present that research at a symposium at Wayne Law back in the fall of 2015.  The law review recently published the resulting short article, which I have posted to SSRN.  The abstract is set forth below.

Sometimes, business entity clients and their principals do not seek, accept, or heed the advice of their lawyers. In fact, sometimes, they expressly disregard a lawyer’s instructions on how to proceed. In certain cases, the client expressly rejects the lawyer’s advice. However, some business constituents who take action contrary to the advice of legal counsel may fall out of compliance incrementally over time or signal compliance and yet (paradoxically) act in a noncompliant manner. These seemingly ineffectual varieties of the lawyer/client relationship are frustrating to the lawyer.

This short article aims to explain why representatives of business entities who consider themselves law-abiding and ethical may nevertheless act in contravention of the business’s legal counsel and offers preliminary means of addressing the proffered reasons for these compliance failures. The article does not address willful noncompliance or even willful blindness. Rather, it makes observations about behavior that falls squarely into what the law typically recognizes as recklessness. An apocryphal lawyer-client story relating to insider trading compliance provides foundational context.

The exemplar story derives from things I witnessed in law practice.  Perhaps some of you also have experienced clients or business entity client principals which/who act contrary to your advice in similar ways.  Regardless, you may find this short piece of interest.

I’m sure we’ve all been riveted by the colorful activist campaign led by Elliott Management Corp challenging the board of directors at Arconic Inc.  In some tellings, it’s a classic battle over whether companies should focus on immediate returns to shareholders (and whether activist pressure encourages short-term thinking), or whether companies should invest in innovation and research in hopes of a longer-term payoff.

This week, Elliott’s challenge netted it a scalp in the form of the forced resignation of the CEO, Klaus Kleinfeld, for sending a personal letter to the head of Elliott Management that vaguely threatened to reveal some apparently scandalous behavior undertaken during the 2006 World Cup.  While denying that any such behavior occurred, Elliot Management demanded Kleinfeld’s ouster, and the Arconic Board complied.

But the battle rages on.  Earlier this month, Arconic announced that if investors voted to seat Elliott’s board nominees, it could trigger the change-of-control provisions in Arconic’s deferred compensation and retirement plans, thus forcing Arconic to make a $500 million pay out.

Which just prompted this Section 14 lawsuit by an Arconic investor, accusing Arconic of manufacturing “fake news” because there is, in fact, no risk of a change of control.  At which point, I mourn the missed opportunity for a “wolf” reference.

(The plaintiff’s argument, by the way, is that a set of directors appointed earlier at Elliott’s urging do not count as part of a new controlling group, and therefore Elliott’s latest nominees constitute only a minority of the board.  The case is City of Atlanta Firefighters’ Pension Fund v. Arconic et al., No. 1:17-cv-02840 (S.D.N.Y.).)

Joking aside, courts have recently looked askance at dead hand proxy puts, even if they do have shareholder value-enhancing effects in the context of loan agreements and bond offerings.  The Arconic situation is a bit more unusual, however, because the obligations are to company employees rather than lenders, and I don’t know whether the same economic effects exist in that context.  The fact that the trust at issue was established for “a select group of management and/or highly compensated employees and former employees” raises the specter – in future cases if not this one – of a new twist on the old golden-parachute-as-takeover-defense.  I am curious to see what courts make of it.

In this semester’s student mentorship group, we have been discussing personal priorities and principles. The consensus from the students seems to be that this topic is not only useful, but also more difficult than originally envisioned. A number of the students expressed a lack of clarity regarding their own priorities and life principles, but they recognized the need for deep thinking about those things.

Outlining priorities and principles could be a useful exercise for politicians and professors as well. Without a clear understanding of our priorities and principles, we often drift toward our political parties and the visible rewards dangled in front of us.

Regarding both politicians and professors, I am most inspired by those who take stands that do not benefit their party or themselves, but rather make the stand because it is the “right thing” to do. Professors, obviously, have more freedom to seek and speak the truth, but I think that professors’ impact will be greater if they stick to their principles regardless of the party in power.

Of course sticking to priorities and principles does not guarantee a good or admirable outcome. One must have “good” priorities and principles. What qualifies as “good” is beyond the scope of this short blog post, but I do think priorities and principles that are selfless (or as selfless as we are capable of being) tend to be good ones.

Ratings behemoth Bill O’Reilly is out of a job at Fox News “after thorough and careful review of the [sexual harassment] allegations” against him by several women. Fox had settled with almost half a dozen women before these allegations came to light, causing advertisers to leave in droves once the media reported on it. According to one article, social media activists played a major role in the loss of dozens of sponsors. Despite the revelations, or perhaps in a show of support, O’Reilly’s ratings actually went up even as advertisers pulled out. Fox terminated O’Reilly– who had just signed a new contract worth $20 million per year– the day before its parent company’s board was scheduled to meet to discuss the matter. The employment lawyer in me also wonders if the company was trying to preempt any negligent retention liability, but I digress.

An angry public also took to social media to expose United Airlines’ after its ill-fated decision to have a passenger forcibly removed from his seat to make room for crew members. However, despite the estimated 3.5 million impressions on Twitter of #BoycottUnited, the airline will not likely suffer financially in the long term because of its near monopoly on some key routes. United’s stock price nosedived by $800 million right after the disturbing video surfaced, but has rebounded somewhat with EPS beating estimates. Check out Haskell Murray’s recent post here for more perspective on United.

Pepsi and supermodel Kendall Jenner also suffered more embarrassment than financial loss after people around the world erupted on social media over an ad that many believed trivialized the Black Lives Matter movement. Pepsi pulled the controversial ad within 24 hours. Some believe that Pepsi may suffer in sales, but I’m not so sure. Ironically, Pepsi’s stock price went up during the scandal and went down after the company apologized.

Pepsi and United both suffered public relations nightmares, but the skeptic in me believes that consumers will ultimately focus on what’s most important to them- convenience, quality, price, and in Pepsi’s case, taste. I recently attended my 25th law school reunion, and all of my colleagues who used a ride sharing app used Uber nowithstanding its well-publicized leadership scandals and the #deleteuber campaign. Indeed, many social media campaigns actually backfire. The #grabyourwallet boycott of Ivanka Trump’s brand raised public awareness but may have actually led to its recent record sales.

Reasonable people can disagree about whether social media campaigns and threats of consumer boycotts actually cause long-standing and permanent changes in corporate culture or policy. There is no doubt, however, that CEOs and PR departments will be working more closely than ever in the age of viral videos and 24-hour worldwide Twitter feeds.

Before I became a lawyer, I had the privilege of working with a number of great people at a public relations firm in Los Angeles. That firm was founded by Al Golin, who passed away last week, and by all accounts, he will be missed. Mr. Golin was the PR person behind McDonald’s, and it was a very symbiotic relationship.

I did not meet Mr. Golin, personally, but his vision was definitely part of the firm culture. Early on, his vision of good business was on display. As the New York Times reported:

Before corporate social responsibility and cause-related marketing became fashionable, Mr. Golin was instrumental in creating what he called a trust bank. He encouraged the McDonald’s Corporation to sponsor Ronald McDonald Houses for children with life-threatening illnesses, an All-American High School Marching Band, an All-American High School Basketball Game and the Jerry Lewis Muscular Dystrophy Telethon — all to build good will that could be drawn upon when the company needed public support.

I can’t say Mr. Golin is the reason I believe firms can be good corporate citizens without laws requiring them to do so, but I frankly like the idea that firms can compete to be recognized as such. The baseline should be set by law, but the rest is up for the market to determine. Mr. Golin suggested companies should choose to set the bar high. I agree. 

He left a great firm behind, with a lot of good people who certainly follow his advice. May he Rest In Peace. 

I rarely post twice in one day, but I am making an exception today.  After posting this morning, I learned that today is International Haiku Poetry Day.  I loved Haiku poetry as a kid.  I still love it as an adult.  It has structure–a structure that, in my opinion, encourages both brevity and creativity.

In honor of this special day, I wrote a personal haiku for my Facebook page.

Yoga feeds the soul
And calms the body and mind.
Breathe and move. Repeat.

I am pretty proud of that one, inspired by my Monday night Iyengar practice.  So, I thought I would try my hand at a BLPB haiku.  Here goes.

A new President.
Time to revamp business regs!
Uncertainty reigns.

The inspiration for this haiku is obvious . . . .  :>)

Prefer more humorous verse? I also loved limericks.  So, I checked to see whether there might be an International or National Limerick Day.  Indeed, it appears that we will celebrate limericks on Friday, May 12, 2017.  Hmm . . . .

 

As Haskell earlier announced here at the BLPB, The first U.S. benefit corporation went public back in February–just before publication of my paper from last summer’s 8th Annual Berle Symposium (about which I and other BLPB participants contemporaneously wrote here, here, and here).  Although I was able to mark the closing of Laureate Education, Inc.’s public offering in last-minute footnotes, my paper for the symposium treats the publicly held benefit corporation as a future likelihood, rather than a reality.  Now, the actual experiment has begun.  It is time to test the “visioning” in this paper, which I recently posted to SSRN.  Here is the abstract.

Benefit corporations have enjoyed legislative and, to a lesser extent, popular success over the past few years. This article anticipates what recently (at the eve of its publication) became a reality: the advent of a publicly held U.S. benefit corporation — a corporation with public equity holders that is organized under a specialized U.S. state statute requiring corporations to serve both shareholder wealth aims and social or environmental objectives. Specifically, the article undertakes to identify and comment on the structure and function of U.S. benefit corporations and the unique litigation risks to which a publicly held U.S. benefit corporation may be subject. In doing so, the article links the importance of a publicly held benefit corporation’s public benefit purpose to litigation risk management from several perspectives. In sum, the distinctive features of the benefit corporation form, taken together with key attendant litigation risks for publicly held U.S. benefit corporations (in each case, as identified in this article), confirm and underscore the key role that corporate purpose plays in benefit corporation law.

Ultimately, this article brings together a number of things I wanted to think and write about, all in one paper.  While many of the observations and conclusions may seem obvious, I found the exploration helpful to my thinking about benefit corporation law and litigation risk management.  Perhaps you will, too . . . .