News on TaxJazz: The Tax Literacy Project from Tulane Law colleague Marjorie Kornhauser:

TaxJazz provides individuals with non-partisan, non-technical, accessible tax information to help people participate in discussions about tax policy and problems facing the nation. TaxJazz already addresses basic tax questions, such as: Why do we have taxes? Are there any legal constraints on taxation? What can be taxed? How do we decide what is a fair tax? It plans to add material on particular tax issues and provisions.

The readings, worksheets, dialogues and other materials are suitable for use by individuals or by groups in a variety of situations. They have already been used 7 times in different settings including high schools, a city recreation department’s after-school program, and a community senior center. They have already been used by over 350 people between the ages of 12 and 80.

For more information, please Contact Us.

Looks like I may need to spend some time over there at TaxJazz.  I certainly do not consider myself tax literate! Maybe this will help.  A quick pass over the materials on the site reveals catchy graphics and coverage of salient issues about taxing authority and tax policy.  I know a few legislators who need to better understand the tradeoffs as among different types of taxation . . . .  Maybe I can convince them that learning about taxation can be fun?!

In addition, I wonder if we “firm governance folks” could increase literacy in our field with a project like this.  Hmm.  Food for thought.

I’m teaching a seminar on the Financial Crisis this semester, and so I was intrigued when I saw this article about a new paper that proposes a simple reform to improve credit ratings.

As most readers probably know, one of the problems that led to the crisis was a gradual deterioration in the quality of the credit ratings issued by agencies like Moody’s and Standard & Poor’s.  The basic charge has been that the agencies, paid by the issuers, had an incentive to issue inflated ratings.  If they did not, the issuer would simply turn to another agency.  The competition for business among agencies was destructive and corrupted the integrity of the rating.

There have been lots of proposals to reform the process – everything from greater disclosure to disgorgement of profits – but Howard Esaki and Lawrence J. White have a simpler idea.  They would simply create a rule that if the issuer goes to more than one ratings agency, the issuer is required to drop (or not pay for) the most lenient rating.  

They have a couple of variations, but the basic idea is the same – ratings agencies won’t compete to give the most lenient rating if the most lenient rating is never used or paid for.  They focus specifically on securitizations, and the amount of subordination each agency requires for the top ratings, because (in their view) this is the aspect of the process that needs the most intervention.

I gotta admit, it sounds like this would be a pretty elegant and effective solution.

The University of Richmond School of Law invites submissions for the inaugural Mid-Atlantic Junior Faculty Forum. This workshop will be held on Wednesday, May 10 and Thursday, May 11, 2017 in Richmond, Virginia.

Overview

This new workshop will bring together junior law scholars to present their scholarship in an informal collegial atmosphere.  The workshop is timed to allow participants to incorporate feedback on early ideas or projects before the summer.  Papers and works-in-progress are welcome at any stage of completion.  To maximize discussion and feedback, the author will provide a brief introduction to the paper, but the majority of the individual sessions will be devoted to collective discussion of the papers. 

Richmond Law will provide all lunches and dinners for those attending the workshop, but attendees will cover their own travel and lodging costs.

Eligibility

All untenured law faculty at Mid-Atlantic law schools who have been teaching for ten years or less are eligible to participate.   Those who do not currently hold a permanent or visiting faculty appointment, but expect to do so beginning in fall 2017 are also welcome. 

Submission Procedure

If you would like to participate, please send an abstract of the paper you would like to present to Jessica Erickson at jerickso@richmond.edu no later than Friday, March 17, 2017.  Please include your name, current position, and contact information in the accompanying e-mail. 

Questions

Any questions concerning the workshop should be directed to Professor Jessica Erickson (jerickso@richmond.edu).

The Constitution tells us that patents can be given to “inventors,” and the Patent Act states that protection is available to “[w]hoever invents or discovers” an invention.  These are not generally controversial propositions, but like so many legal regimes, technology is forcing these analog laws to deal with digital phenomena. The culprits here are artificial intelligence and software capable of inventing new technologies. Can patents be given to digital “inventors,” and if not, does any human have the right to patent such an invention?

Obvious comparisons can be drawn to whether non-humans can be “authors”—as required by the Constitution—for copyright purposes. For instance, can a digital composer of music be given copyright protection for its work? The academic consensus is that technology is not an author (for Constitutional purposes), but the agreement dissolves from there. Some have argued that programmers should be given ownership rights—a reasonable proposition—but this sentiment is far from universal.

With little guidance from copyright law, parties have looked elsewhere for ideas in the patent sphere.  It has been posited that—if a non-human cannot be an inventor—current patent laws require the first person to “discover” the value of the non-human invention to be the inventor. This may be correct, but one must consider if that policy creates maximum incentives to further the progress of technology. Perhaps an amendment to the Patent Act is appropriate.

There are several potential avenues to address this issue. Ownership could be allocated to the programmer, the company owning the hardware, or to no one at all. Granting ownership to any party incentivizes creation of more inventing software and artificial intelligence. This benefit, however, comes at the price of granting 20-year patent monopolies at a relatively small marginal cost to the patentee (after software is accounted for). Does this encouragement to create and use of inventing software/computers come at too high of a cost to society?

Denying any patent protection enriches the public domain by including all non-human inventions—a social positive. That policy, however, potentially discourages the creation of inventing machines (as it decreases their market value) and incentives fraud before the Patent Office.  Should a party identify a valuable invention created by a non-human, it might falsely claim that a human was the inventor to secure a patent. This would benefit dishonest firms at the expense of honest companies and society at large. 

Lastly, there is an interesting potential distinction to be drawn between inventing algorithms or software (e.g., genetic algorithms) versus artificial intelligence. Non-human corporations continue to obtain greater rights under the Constitution (see Citizens United). Might artificial intelligence (e.g., something that could pass the Turing Test?) be recognized as an inventor at some point, while a “mere” algorithm or software might not? The question is probably premature, and as presented, is likely not sufficiently nuanced.  However, the topic may eventually be raised.

At this time, no one has the answers to the above legal and policy questions, though I’m sure many commentators (myself included) will chime in.  I invite readers to voice their opinion in the comments.

Laureate Education recently became the first standalone publicly traded benefit corporation. They are organized under Delaware’s public benefit corporation (PBC) law, are also a certified B corporation, and will be trading as LAUR on NASDAQ.  

Plum Organics, also a Delaware PBC, is a wholly owned subsidiary of publicly-traded Campbell Soup Company. And Etsy is a publicly traded certified-B corporation, but is organized under traditional Delaware corporation law.

Whether the for-profit educator Laureate will hurt or help the popularity of benefit corporations remains to be seen, but some for-profit educators have not been getting good press lately.

Inside Higher Ed reports on Laureate Education’s IPO as a benefit corporation below:

The largest U.S.-based for-profit college chain became the first benefit corporation to go public Wednesday morning.

Laureate Education, which has more than a million students at 71 institutions across 25 countries, had been privately traded since 2007. Several major for-profit higher education companies have over the last decade bounced back and forth between publicly and privately held status; also yesterday, by coincidence, the Apollo Group, owner of the University of Phoenix, formally went back into private hands….In its public debut, the company raised $490 million….

Becker said the move to become the first benefit corporation that is public is one way to show that Laureate is putting quality first.“There is certainly plenty of skepticism about whether for-profit companies can add value to society, and I feel strongly we can,” Becker said, adding that Laureate received certification from the nonprofit group B Lab after years of “rigorous” evaluations….

But the certification and the move to becoming a benefit corporation doesn’t prove a for-profit will not make bad decisions or commit risky actions that hurt students, said Bob Shireman, a senior fellow at the Century Foundation and for-profit critic.

“The one thing that being a benefit corporation does is reduce the likelihood that shareholders would sue the corporation for failing to operate in the shareholders’ financial interest,” Shireman said. “So it makes a marginal difference, and there’s no evidence that benefit corporations, in the 10 or so years they’ve existed in the economy, cause better behavior.”

Companies and investors could make better choices and decisions for their students without needing a benefit corporation model to do that, Shireman said, adding that the legal protection it provides is small.

“What’s more important are what commitments are being made under the rubric of being a benefit corporation,” he said. “How is that going to be measured and enforced … and how can they be changed or overruled by stockholders.”

Head of Legal Policy at B Lab Rick Alexander, also authored a post on Laureate Education. For those who do not know, B Lab is the nonprofit responsible for the B Corp Certification and an important force behind the benefit corporation legislation that has passed in 30 states.

 

Shortly after the election in November, I blogged about Eleven Corporate Governance and Compliance Questions for the President-Elect. Those questions (in italics) and my updates are below:

  1. What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump’s transition team on economic issues, so perhaps a revision, at a minimum, may not be out of the question.

Last week, via Executive Order, President Trump made it clear (without naming the law) that portions of Dodd-Frank are on the chopping block and asked for a 120-day review. Prior to signing the order, the President explained, “We expect to be cutting a lot out of Dodd-Frank…I have so many people, friends of mine, with nice businesses, they can’t borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank.” An executive order cannot repeal Dodd-Frank, however. That would require a vote of 60 votes in the Senate. To repeal or modify portions, the Senate only requires a majority vote.

Some portions of Dodd-Frank are already gone including the transparency provision, §1504, which NGOs had touted because it forced US issuers in the extractive industries to disclose certain payments made to foreign governments. I think this was a mistake. By the time you read this post, the controversial conflict minerals rule, which requires companies to determine and disclose whether tin, tungsten, tantalum, or gold come from the Democratic Republic of Congo or surrounding countries, may also be history. The President may issue another executive order this week that may spell the demise of the rule, especially because others in Congress have already introduced bills to repeal it. I agree with the repeal, as I have written about here, because I don’t think that the SEC is the right agency to address the devastating human rights crisis in Congo.

As for the whistleblower provisions, it is too soon to tell. See #7 below.

Based on an earlier Executive Order meant to cut regulations in general and the President’s reliance on corporate raider/activist Carl Icahn as regulation czar, we can assume that the financial sector will experience fewer and not more regulations under Trump.

  1. What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency? 3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?

President Trump has nominated Jay Clayton, a lawyer who has represented Goldman Sachs and Alibaba to replace former prosecutor Mary Jo White. Based on his background and past representations, we may see less enforcement of the FCPA and more focus on capital formation and disclosure reform. Observers are divided on the FCPA enforcement because 2016 had some record-breaking fines. As for the other SEC vacancies, I will continue to monitor this.

  1. How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley? 

The Department of Labor enforces OSHA, and the current nominee for Secretary, Andy Pudzer, is a fast food CEO with some labor issues of his own. His pro-business stance and his opposition to increases in the minimum wage and the DOL white-collar exemption changes don’t necessarily predict how he would enforce SOX, but we can assume that it won’t be as much of a priority as rolling back regulations he has already publicly opposed.

  1. In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries. 

The U.S. has pulled out of TPP. Trump has not specifically commented on Ex-Im, but many believe that prospects don’t look good.

  1. How will a more conservative Supreme Court deal with the business cases that will appear before it? 

I will comment on this after the confirmation hearings of nominee Neil Gorsuch. Others have already predicted that he will be pro-business.

  1. Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?

Senator Jeff Sessions was confirmed yesterday after a contentious hearing. During his hearing, he indicated that he supported whistleblower provisions related to the False Claims Act, and many believe that he will retain retain the Yates Memo. Ironically, prior to that confirmation, President Trump fired Acting Attorney General Sally Yates, for refusing to defend the President’s executive order on refugees and travel.

  1. What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?

Despite, running on a populist theme, Trump has targeted a number of institutions meant to protect consumers. Based on reports, we will likely see some major restrictions on the Consumer Financial Protection Bureau and the rules related to disclosure and interest rates. Trump will likely replace the head, Richard Cordray, whom many criticize for his perceived unfettered power and the ability to set his own budget. The Financial Stability Oversight Council, established to address large, failing firms without the need for a bailout, is also at risk. The Volker Rule, which restricts banks from certain proprietary investments and limits ownership of covered funds, may also see revisions.

  1. What will happen with the Obama administration’s executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?

I will comment on this in a separate post.

  1. What happens to the Public Company Accounting Board, which has had an interim director for several months?

The PCAOB is not directly covered by the February 3rd Executive Order described in #1, and many believe that the Executive Order related to paring back regulations will not affect the agency either, although the agency is already conducting its own review of regulations. In December, the agency received a budget increase.

  1. Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump’s economic vision?

President Trump has tapped ex-Goldman Sachs veteran Steve Mnuchin, and some believe that he will be good for both Wall Street and Main Street. More to come on this in the future.

I will continue to update this list over the coming months. I will post separately today updating last week’s post on the effects of consumer boycotts and how public sentiment has affected Superbowl commercials, litigation, and the First Daughter all in the past few days.

Prominent corporate governance, corporate finance and economics professors face off in opposing amici briefs filed in DFC Global Corp. v.  Muirfield Value Partners LP, appeal pending before the Delaware Supreme Court.   The Chancery Daily newsletter, described it, in perhaps my favorite phrasing of legal language ever:  “By WWE standards it may be a cage match of flyweight proportions, but by Delaware corporate law standards, a can of cerebral whoopass is now deemed open.”   

Point #1: Master Class in Persuasive Legal Writing: Framing the Issue

Reversal Framing: “This appeal raises the question whether, in appraisal litigation challenging the acquisition price of a company, the Court of Chancery should defer to the transaction price when it was reached as a result of an arm’s-length auction process.”

vs.

Affirmance Framing: “This appeal raises the question whether, in a judicial appraisal determining the fair value of dissenting stock, the Court of Chancery must automatically award the merger price where the transaction appeared to involve an arm’s length buyer in a public sale.”

Point #2:  Summary of Brief Supporting Fair Market Valuation:  Why the Court of Chancery should defer to the deal price in an arm’s length auction

  • It would reduce litigation and simply the process.
  • The Chancery Court Judges are ill-equipped for the sophisticated cash-flow analysis (ouch, that’s a rough point to make).
  • Appraisal does not properly incentivize the use of arm’s length auctions if they are not sufficiently protected/respected.
  • Appraisal seeks the false promise of THE right price, when price in this kind of market (low competition, unique goods) can best be thought of as a range.  The inquiry should be whether the transaction price is within the range of a fair price.  A subset of this argument (and the point of the whole brief) is that the auction process is the best evidence of fair price.
  • Appraisal process is flawed because the court discounted the market price in its final valuation.  The argument is that if the transaction price is not THE right price, then it should not be a factor in coming up with THE right price.
  • Appraisal process is flawed because the final valuation relies upon expert opinions that are created in a litigation vacuum, sealed-off from market pressure of “real” valuations.
  • The volatility in the appraisal market—the outcome of the litigation and the final price—distorts the auction process.  Evidence of this is the creation of appraisal closing conditions.

Point #3: Summary of Brief Supporting Appraisal Actions:  Why the Court of Chancery should reject a rule that the transaction price—in an arm’s length auction—is conclusive evidence of fair price in appraisal proceedings.

  • Statutory interpretation requires the result.  Delaware Section 262 states that judges will “take into account all factors” in determining appraisal action prices.  To require the deal price to be the “fair” price, eviscerates the statutory language and renders it null.  
    • The Delaware Legislature had an opportunity to revise Section 262—and did so in 2015, narrowing the scope of eligible appraisal transactions and remedies—but left intact the “all factors” language.
  • The statutory appraisal remedy is separate from the common law/fiduciary obligations of directors in transactions so a transaction without a conflict of interest and even cured by shareholder vote could still contain fact-specific conditions that would make an appraisal remedy appropriate.
  • There are appropriate judicial resources to handle the appraisal actions because of the expertise of the Court of Chancery, which is buttressed by the ability to appoint a neutral economic expert to assist with valuations and to adopt procedures and standards for expert valuations in appraisal cases.
  • The threat of the appraisal action creates a powerful ex ante benefit to transaction price because it helps bolster and ensure that the transaction price is fair and without challenge.
  • Appraisal actions serve as a proxy for setting a credible reserve in the auction price, which buyers and sellers may be prohibited from doing as a result of their fiduciary duties.
  • Any distortion of the THE market by appraisal actions is a feature, not a bug.  All legal institutions operate along side markets and exert influences, situations that are acceptable with fraud and torts.  Any affect that appraisal actions create have social benefits and are an intended benefit.
  • Let corporations organized/formed in Delaware enjoy the benefits of being a Delaware corporation by giving them full access to the process and expertise of the Delaware judiciary.

Conclusions:

My thinking in the area more closely aligns with the “keep appraisal action full review” camp on the theory–both policy and economic.  Also the language in the supporting/affirmance brief is excellent (they describe the transaction price argument as a judicial straight jacket!).  I must admit, however, that I am sympathetic to the resources and procedural criticisms raised by the reversal brief. That there is no way for some corporate transactions, ex ante, to prevent a full scale appraisal action litigation—a process that is costly and time consuming—is a hard pill to swallow.  I can imagine the frustration of the lawyers explaining to a BOD that there may be no way to foreclose this outcome.  Although I hesitate to put it in these terms, my ultimate conclusion would require more thinking about whether the benefits of appraisal actions outlined in the affirmance brief outweigh the costs to the judiciary and to the parties as outlined in the reversal brief.  These are all points that I invite readers to weigh in on the comments–especially those with experience litigating these cases.

I also want to note the rather nuanced observation in the affirmance brief about the distinction between statutory standards and common law/fiduciary duty.  This important intellectual distinction about the source of the power and its intent is helpful in appraisal actions, but also in conflict of interest/safe harbor under Delaware law evaluations.

For the professors out there, if anyone covers appraisal actions in an upper-level course or has students writing on the topic– these two briefs distill the relevant case law and competing theories with considerable force.  

-Anne Tucker

According to CNN/Money, 2016 was a record year for women.  The report: 

America hit a milestone in 2016: The most female CEOs ever. There are now 27 women at the helm of S&P 500 companies. 

 The good news is it’s a new record for women in business, according to S&P Global Market Intelligence. It’s also 22% more — a big jump — from last year, when only 22 women led S&P 500 companies. 
Wow.  It’s not shocking that women are trailing, but the numbers are still pretty surprising to me. That’s a lot of unrealized talent.  
 
I have had the opportunity to work for two women who were deans of my law schools, and that, too, is pretty uncommon, though far more so than the numbers at Fortune 500 companies.  Women make up about 34% of faculty and 30% of law deans (or did as of 2015). That’s noticeably better, but it remains clear we have work to do.
 
And that’s really all I have to offer right now. We need to do better in how we assess talent and ability.  Because the numbers suggest we’re missing out.  
 
 
 

This post comments on the method for managing regulation and regulatory costs in the POTUS’s Executive Order on Reducing Regulation and Controlling Regulatory Costs.

I begin by acknowledging Anne’s great post on the executive order.   She explains well in that post the overall scope/content of the order and shares information relevant to its potential impact on business start-ups.  She also makes some related observations, including one that prompts the title for her post: “Trumps 2 for 1 Special.”  In a comment to her post, I noted that I had another analogy in mind.  Here it is: closet cleaning and maintenance.

84px-Wall_Closet
You’ve no doubt heard that an oft-mentioned rule for thinning out an overly large clothing collection is “one in, one out.”  Under the rule, for every clothing item that comes in (some limit the rule’s application to purchased items, depending on the objectives desired to be served beyond keeping clothing items to a particular number), a clothing item must go out (be donated, sold, or simply tossed).  Some have expanded the rule to “one in, two out” or “one in, three out,” as needed.  The mechanics are the same.  The rule requires maintaining a status quo as to the number of items in one’s closet and, in doing so, may tend to discourage the acquisition of new items.

Articulated advantages/values of this kind of a rule for wardrobe maintenance include the following:

  • simplicity (the rule is easy to understand);
  • rigor (the rule instills discipline in the user);
  • forced awareness/consciousness (the rule must be thoughtfully addressed in taking action); and
  • experimentation encouragement (the rule invites the user to try something new rather than relying on something tried-and-true).

Disadvantages and questions about the rule include those set forth below.

  • The rule assumes that it is the number of items that is the problem, not other attributes of them (i.e., age, condition, size, suitability for current lifestyle, etc.).
  • Once new items are acquired, the rule assumes that existing ones are no longer needed or are less desirable.
  • The rule operates ex post (it assumes the introduction of a new item) rather than ex ante (allowing the root problem to be addressed before the new item is introduced).
  • The rule encourages an in/out cycle that incorporates the root of the problem (excess shopping) rather than addressing it.
  • Definitional questions require resolution (e.g., what is an item of clothing).

Internet sources from which these lists were culled and derived include the article linked to above as well as articles posted here and here.

Regulation is significantly more complex than clothing.  But let’s assume that we all agree that the list of advantages/values set forth above also applies to executive agency rule making.  Let’s also assume the validity and desirability of the core policy underlying the POTUS’s executive order on executive agency rule making, as set forth below (and excerpted from Section 1 of the executive order).

It is the policy of the executive branch to be prudent and financially responsible in the expenditure of funds, from both public and private sources. In addition to the management of the direct expenditure of taxpayer dollars through the budgeting process, it is essential to manage the costs associated with the governmental imposition of private expenditures required to comply with Federal regulations.

How do the closet organization disadvantages or questions stack up when applied in the executive agency rule-making context?  Here’s my “take.”

Continue Reading Cleaning Out the Regulatory Closet: An Analogy for Consideration . . .