A couple of months ago, Snapchat’s parent announced that the company would hold an IPO in 2017 – the largest and most high-profile IPO since Alibaba in 2014.  Given the sluggish IPO market, as well as Snapchat’s general name recognition and tech cachet, the announcement was a big deal.

But it’s possible there’s going to be a monkey in the wrench.  On January 4, a former Snapchat employee (fired after 3 weeks) filed a lawsuit alleging two of Snapchat’s metrics – and which ones are redacted from the complaint – were fraudulently manipulated in order to inflate Snapchat’s valuations to private investors and in anticipation of the IPO.  (The redactions are due to concerns that the allegations are covered by the plaintiff’s confidentiality agreement).  The unredacted portions of the complaint allege that the company never built an appropriate team to analyze its metrics, and that the employee was illegally fired in retaliation for blowing the whistle.

Snapchat has given a statement to the media denying the allegations as the fictional creations of a “disgruntled former employee.”

Though the redactions are extensive, the complaint does offer at least a hint of what’s at stake.  In Paragraph 24, the complaint lists certain “key performance metrics” for all social media applications.  These are Daily Active Users, Monthly Active Users, User Retention Rate, Active User Growth Rate, Registration Completion Rate, Installations, Frequency, Session Length, and Average Revenue Per User.  It’s impossible to know whether the two allegedly fraudulent Snapchat metrics are in this group, but these are probably the best hint we have.  And these are significant numbers for Snapchat; it has claimed daily and monthly users in excess of Twitter,  and – though not on the list in the complaint – has claimed daily video views in excess of Facebook (and that was before Facebook admitted it view counts were wrong).

So this will be an interesting story to watch going forward; until it’s resolved, it could spook potential IPO investors, and may even prompt investigation by Snapchat’s pre-IPO investors.

One point of interest: Apparently, the plaintiff signed an arbitration agreement with Snapchat, and has designed his claims to get around it (and, I assume, make sure his complaint was picked up by the media to pressure the company).  According to the complaint, the arbitration agreement permits both parties to seek preliminary injunctions in court – and so, the plaintiff is seeking an injunction to force Snapchat to stop spreading allegedly false stories claiming that he was fired for incompetence.  The plaintiff has separately filed an arbitration claim seeking lost wages and damages.

Tulane Law School invites applications for its Forrester Fellowship and visiting assistant professor positions, both of which are designed for promising scholars who plan to apply for tenure-track law school positions. Both positions are full-time faculty in the law school and are encouraged to participate in all aspects of the intellectual life of the school. The law school provides significant support, both formal and informal, including faculty mentors, a professional travel budget, and opportunities to present works-in-progress to other faculty at workshops and in various settings.

Tulane’s Forrester Fellows teach legal writing in the first-year curriculum to two sections of 25 to 30 first-year law students in a program coordinated by the Director of Legal Writing. Fellows are appointed to a one-year term with the possibility of a single one-year renewal. Applicants must have a J.D. from an ABA-accredited law school, outstanding academic credentials, and at least three years of law-related practice and/or clerkship experience. To apply, please submit your materials via Interfolio at https://apply.interfolio.com/40042. If you have any questions, please contact Erin Donelon at edonelon@tulane.edu.

Tulane’s visiting assistant professor (VAP), a two-year position, is supported by the Murphy Institute at Tulane University (http://murphy.tulane.edu/home/), an interdisciplinary unit specializing in political economy and ethics that draws faculty from the university’s departments of economics, philosophy, history, and political science. The position entails teaching a law school course or seminar in three of the four semesters of the professorship (presumably the last three semesters). It is designed for scholars focusing on regulation of economic activity very broadly construed (including, for example, research with a methodological or analytical focus relevant to scholars of regulation). In addition to participating in the intellectual life of the law school, the visiting assistant professor will be expected to participate in scholarly activities at the Murphy Institute. Candidates should apply through Interfolio, at https://apply.interfolio.com/40013, providing a CV identifying at least three references, post-graduate transcripts, electronic copies of any scholarship completed or in-progress, and a letter explaining your teaching interests and your research agenda. If you have any questions, please contact Adam Feibelman at afeibelm@tulane.edu. 

The law school aims to fill these positions by March 2017.  Tulane University is an equal employment opportunity/affirmative action employer committed to excellence through diversity. All eligible candidates are invited to apply for position vacancies as appropriate.

I recently finished my first consistent year of running since high school. To celebrate, I bought and read Once a Runner. Yes, that is how nerds like me celebrate – buy and read a book. I was asleep by 10pm on New Year’s Eve.

Once a Runner is a cult classic published in 1978 and authored by a former University of Florida runner (and fellow lawyer), John Parker Jr. The novel was originally self-published, sold at running stores and out of the back of the author’s car. It eventually became a New York Times Bestseller. The story follows the fictional Quenton Cassidy as he moves from a successful (but still somewhat distracted) college runner to a laser-focused, woods-dwelling hermit who increases his training to beat the best runners in the world. He does, eventually, beat one of the very best milers (in a small track meet), and then goes on to win silver in the Olympic Games.

Among the passages that struck me was the following from Quenton’s time at a cocktail party, after spending months (in relative solitude) training and logging 100+ mile weeks:

What was the secret, they wanted to know; in a thousand different ways they wanted to know The Secret. And not one of them was prepared, truly prepared, to believe that it had not so much to do with chemicals and zippy mental tricks as with that most unprofound and sometimes heartrending process of removing, molecule by molecule, the very tough rubber that comprised the bottoms of his training shoes, The Trial of Miles; Miles of Trials.

Along those same lines, I recently listened to the How I Built This podcast on Angie Hicks of Angie’s List. Angie stated that she was an unlikely entrepreneur – introverted, risk-adverse, and not a “big idea” person. But she credited her success to one main thing, perseverance. I am still working on how to best teach my students to persevere, and in this instant access society, more and more students are looking for The Secret to allow them to master the material (or at least get an A) with as little effort as possible. While it can be good to look for more efficient ways to do things, I also think we need to teach our students that some things of great value are only acquired through old fashioned hard work.    

As regular readers of this blog know, I am skeptical of many disclosure regimes, particularly those related to conflict minerals. I am, however, a fan of the Sustainability Accounting Standard Board’s (SASB’s) efforts to streamline the disclosure process and provide industry-specific metrics that tie into accepted definitions of materiality.

Dr. Jean Rogers, the CEO and Founder of SASB, presented at the Association of American Law Schools yesterday with other panelists discussing the pros and cons of environmental, social, and governance disclosures. To prove SASB’s case that investors care about sustainability, Dr. Rogers noted that in 2016, sustainable investment strategies came into play in one out of every five dollars under professional management. She cited a number of key sustainability initiatives that investors considered including the United Nations Principles for Responsible Investments ($59 trillion AUM), the Carbon Disclosure Project ($95 trillion AUM), the International Corporate Governance Network ($26 trillion AUM), and the Investor Network on Climate Risk ($13 trillion AUM).

Despite this interest, SASB argues, investors lack information that equips them with an apples to apples comparison on material information related to sustainability. What might be material in the beverage industry such as water usage for example, may not be material in another industry.

Dr. Rogers cited a 2014 PwC study reporting that 89% of global institutional investors request sustainability information directly from companies, 67% are more likely to consider ESG information if it is based on a common framework or standard, and 50% are “very likely” to sponsor or co-sponsor a shareholder proposal.

Many who criticize the disclosure regime talk about disclosure overload and challenge the assumptions that investors care as much about sustainability as they care about earnings per share. On the flip side, companies experience what SASB acknowledges is “questionnaire fatigue.” GE for example, indicated that 75 people took months to answer 650 questionnaires with no value to the customers, shareholders, or the environment.

SASB is an independent 501(c)(3) with a who’s who of heavy hitters on the board, including Michael Bloomberg, former SEC Chair Mary Schapiro, the CEO of CalSTRS, and the former Chair of the FASB, among others. The organization first started this initiative in 2011 right after I left in-house life, and I remember thinking that this was an idea whose time has come. Over the years, SASB has worked to develop specific standards for 79 industries in 10 sectors to be used in Form 10-K and 20-F. Although it is a voluntary process, the goal is to allow investors to look at peers across an industry with standards that those industries have helped to develop.The SASB standards integrate into MD & As and risk factors without the requirement of any new regulation.

Some criticize SASB’s mission and fear more disclosure could lead to more lawsuits from investors or consumers. I don’t share this fear, but companies such as Nestle have been sued for fraud and other state law claims after disclosure required under the California Transparency in Supply Chain Act.

I’m a fan of SASB’s work so far. I hope that more organizations and advocacy groups continue to provide constructive feedback. Eventually, using the SASB methodology should become an industry standard that provides value to both investors and the company. Take a look at their 2016 State of Disclosure Report for more information and to find out how you can contribute to the effort.

Ethics has been a recurrent news headline from questions of President-elect Trump’s business holdings to the Republican House’s “secret” vote on ethics oversight on Monday.  

I want to share research from a seminar student’s paper on financial regulation and the role of ethics.  She made a compelling argument about the role of ethics to be a gap filler in the regulatory framework.  Financial regulation, as many like Stephen Bainbridge have argued, is reactionary and reminds one of a game of whack-a-mole.  Once the the regulation has been acted to target the specific bad act, that bad act has been jettisoned and new ones undertaken.  Her research brought to my attention something that I find hopeful and uplifting in a mental space where I am hungry for such morsels.

In 2015, in response to a perceived moral failing that contributed to the financial crisis, the Netherlands required all bankers to take an ethics oath.  The oath states: “I swear that I will endeavor to maintain and promote confidence in the financial sector, so help me God.”  The full oath is available here.  Moreover, “by taking and signing this oath, bank employees declare that they agree with the content of the statement, and promise that they will act honorable and will weigh interests properly . . . [by] ‘focusing on clients’ interests.’”  The oath is supported by a code of conduct and disciplinary rules  including fines, suspensions or blacklisting.

Georgia State University College of Law student Tosha Dunn described the role of the oath as follows: 

An oath is thought of as a psychological contract: “the oath has always been the highest form of commitment, and as a social function it creates or strengthens trust between people.”  However, psychological contracts are completely subjective; the meaning attached to the contract is wholly open to the interpretation of the individual involved. Social cues like rituals and public displays may impart meaning or responsibility… the very idea behind the oath is to restore confidence in the Dutch banking system: “we are renewing the way we do business, from the top of the bank to the bottom” and “a violation of the oath becomes more than simply a legally culpable act; it is, in addition, an ethical issue.”

And isn’t that a lovely way to think of an oath and the ability of a social contract to elevate our behavior and promote our higher selves?  

Citations from the student paper and further scholarly discussion are available with the following sources:  Tom Loonen & Mark R. Rutgers, Swearing To Be A Good Banker: Perceptions of The Obligatory Banker’s Oath in the Netherlands, 15 J. Banking & Reg. 1, 3 (2016) & Denise M. Rousseau & Judi McLean Parks, The Contracts of Individuals and Organizations, 15 Research in Org. Behavior 1, 18-19 (1993).

Happy New Year BLPB readers– here’s to an ethical and enlightened 2017.  

-Anne Tucker

Today is my annual check-up on the use of “limited liability corporation” in place of the correct “limited liability company.”  I did a similar review last year about this time, and revisiting the same search led to remarkable consistency. This is disappointing in that I am hoping for improvement, but at least it is not getting notably worse. 

Since January 1, 2016, Westlaw reports the following using the phrase “limited liability corporation”:

  • Cases: 363 (last year was 381)
  • Trial Court Orders: 99 (last year was 93)
  • Administrative Decisions & Guidance: 172 (last year was 169)
  • Secondary Sources: 1116 (last year was 1071)
  • Proposed & Enacted Legislation: 148 (last year was 169)

As was the case last year, I am most distressed by the legislative uses of the phrase, because codifying the use of “limited liability corporation” makes this situation far murkier than a court making the mistake in a particular application. 

New York, for example, passed the following legislation:

Section 1. Subject to the provisions of this act, the commissioner of parks and recreation of the city of New York is hereby authorized to enter into an agreement with the Kids’ Powerhouse Discovery Center Limited Liability Corporation for the maintenance and operation of a children’s program known as the Bronx Children’s Museum on the second floor of building J, as such building is presently constructed and situated, in Mill Pond Park in the borough of the Bronx. The terms of the agreement may allow the placement of signs identifying the museum.

NY LEGIS 168 (2016), 2016 Sess. Law News of N.Y. Ch. 168 (S. 5859-B) (McKINNEY’S).

This creates a bit of a problem, as Kids’ Powerhouse Discovery Center Limited Liability Corporation does not exist.  The official name of the entity is as Kids’ Powerhouse Discovery Center LLC and it is, according to state records, an LLC (not a corporation). Does this mean the LLC will have to re-form as a corporation so that the commissioner of parks and recreation has authority to act?  It would seem so.  On the one hand, it could be deemed an oversight, but New York law, like other states, makes clear that an LLC and a corporation are distinct entities. 

Several other states enacted legislation using “limited liability corporation” in contexts that clearly intended to mean LLCs.  Hawaii, West Virginia (sigh), Minnesota, Alabama, California, and Rhode Island were also culprits.  

There was one bit of federal legislation, too. The “Communities Helping Invest through Property and Improvements Needed for Veterans Act of 2016” or the “CHIP IN for Vets Act of 2016.” PL 114-294, December 16, 2016, 130 Stat. 1504.  This act authorizes the Secretary of Veterans Affairs to carry out a pilot program in which donations of certain property (real and facility construction) donated by the following entities:

(A) A State or local authority.

(B) An organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and is exempt from taxation under section 501(a) of such Code.

(C) A limited liability corporation.

(D) A private entity.

(E) A donor or donor group.

(F) Any other non-Federal Government entity.

I have to admit, it is not at all clear to me why one needs any version of (C) if one has (D) as an option.  Nonetheless, to the extent it was not intended to be redundant of (D), part (C) would appear to be incorrect.  

I addition, I’d be remiss not to note the increase to 1116 uses in secondary sources last year, though only 43 were in law reviews and journals.  That part is, at least a little, encouraging.

Last year, I wished “everyone a happy and healthy New Year that is entirely free of LLCs being called ‘limited liability corporations.’”  This year, I have learned to temper my expectations.  I still wish everyone a happy and healthy New Year, but as to the use of “limited liability corporations” I am hoping to reduce the uses by half in all settings for 2017, and I hope at least three legislatures will fix errors in their existing statutes. That seems more reasonable, if not any more likely. 

Last week, friend of the BLPB Steve Bainbridge published a great hypothetical raising insider trading tipper issues post-Salman.  He invited comments.  So, I sent him one!  He has started posting comments in a mini-symposium.  Mine is here.  Andrew Verstein’s is here.  There may be more to come . . . .  I will try to remember to come back and edit this post to add any new links.  Prompt me, if you see one before I get to it . . . .

Postscript (January 5, 2017): James Park also has responded to Steve’s call for comments.  His responsive post is here.

Postscript (January 9, 2017, as amended): Mark Ramseyer has weighed in here.  And then Sung Hui Kim and Adam Pritchard added their commentary, here and here, respectively.  Steve collects the posts here.

Tomorrow, I am headed to the Association of American Law Schools (“AALS”) Annual Meeting in San Francisco (from Los Angeles, where I spent NYE and a bit of extra time with my sister).  I want to highlight a program at the conference for you all that may be of interest.  John Anderson and I have convened and are moderating a discussion group at the meeting entitled “Salman v. United States and the Future of Insider Trading Law.”  The program description, written after the case was granted certiorari by the SCOTUS and well before the Court’s opinion was rendered, follows:

In Salman v. United States, the United States Supreme Court is poised to take up the problem of insider trading for the first time in 20 years. In 2015, a circuit split arose over the question of whether a gratuitous tip to a friend or family member would satisfy the personal benefit test for insider trading liability. The potential consequences of the Court’s handling of this case are enormous for both those enforcing the legal prohibitions on insider trading and those accused of violating those prohibitions.

This discussion group will focus on Salman and its implications for the future of insider trading law.

Of course, we all know what happened next . . . .

The discussants include the following, each of whom have submitted a short paper or talking piece for this session:

John P. Anderson, Mississippi College School of Law
Miriam H. Baer, Brooklyn Law School
Eric C. Chaffee, University of Toledo College of Law
Jill E. Fisch, University of Pennsylvania Law School
George S. Georgiev, Emory University School of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law
Gregory Gilchrist, University of Toledo College of Law
Michael D. Guttentag, Loyola Law School, Los Angeles
Joan M. Heminway, University of Tennessee College of Law
Donald C. Langevoort, Georgetown University Law Center
Donna M. Nagy, Indiana University Maurer School of Law
Ellen S. Podgor, Stetson University College of Law
Kenneth M. Rosen, The University of Alabama School of Law
David Rosenfeld, Northern Illinois University College of Law
Andrew Verstein, Wake Forest University School of Law
William K. Wang, University of California, Hastings College of the Law

The discussion session is scheduled for 8:30 am to 10:15 am on Friday, right before the Section on Securities Regulation program, in Union Square 25 on the 4th Floor of the Hilton San Francisco Union Square.  The AALS has posted the following notice about discussion groups, a fairly new part of the AALS annual conference program (but something SEALS has been doing for a number of years now):

Discussion Groups provide an in-depth discussion of a topic by a small group of invited discussants selected in advance by the Annual Meeting Program Committee. In addition to the invited discussants, additional discussants were selected through a Call for Participation. There will be limited seating for audience members to observe the discussion groups on a first-come, first-served basis.

Next week, I will post some outtakes from the session.  In the mean time, I hope to see many of you there.  I do expect a robust and varied discussion, based on the papers John and I have received.  Looking forward . . . .

Happy (Almost) New Year!  As 2016 draws to a close, I offer three quick hits of interesting recent business law developments:

First:  The endlessly-running case of Erica P. John Fund v. Halliburton has finally settled!  Halliburton has been a particular obsession of mine lo these past 6 years or so, and I even attended the Fifth Circuit oral argument held in September.  (My report of that argument is here, where I link to my prior blog posts on the subject).  I’m sort of sad to see it go, even though I found many of the opinions frustrating.  In any event, Alison Frankel has a nice retrospective of the case, including how David Boies ended up as lead attorney for the plaintiffs after the death of his daughter, the previous lead.  

Second: I previously posted about Facebook’s move to create a nonvoting class of stock, essentially as a mechanism to allow Mark Zuckerberg to have his cake and eat it too (i.e., divest his stock while still maintaining voting control).  The move was duly approved by an independent special committee, but – as was recently revealed in a shareholder lawsuit – one of the committee members appears to have been a double agent.  According to the plaintiffs, Marc Andreessen kept Zuckerberg informed of the committee’s deliberations, even going so far as to text Zuckerberg realtime advice on his negotiations during a conference call with the committee.  He apparently contacted Zuckerberg to tell him what the committee’s main concerns were, and to warn him what the committee planned to do.  He also apparently kept Zuckerberg informed of his progress in persuading the recalcitrant committee member – Erskine Bowles – to accept the proposal.  You can read articles about it here and here, or just pull the recently unsealed August 30 brief from In re Facebook Inc Class C Reclassification Litigation, 12286-VCL, but either way, I smell business law exam scenarios. (Maybe I shouldn’t have said that.)  Notably, Andreessen’s loyalty to Zuckerberg, despite his nominal independence, is exactly the kind of thing that apparently has Strine’s – and the Delaware Supreme Court’s – attention.

Third: Surprise!  The Tenth Circuit just held that the SEC’s ALJ’s are “inferior officers” and therefore their current method of appointment is unconstitutional.  The decision creates a circuit split with the DC Circuit in Raymond J. Lucia Companies v. SEC, 832 F.3d 277 (D.C. Cir. 2016), and pretty much assures Supreme Court review – possibly with a newly-appointed justice of Trump’s choosing.   And that makes me wonder whether we’re about to witness some radical changes to the structure of the administrative state.

Here’s to 2017 – there will be no shortage of change to keep us busy!