It used to be that Friday night was Domino’s Pizza night in our house . . . .  My, how things change if one lets 15-20 years slip by unnoticed.  No more of that in our house!

I guess Domino’s is doing OK without us, however.  Third quarter 2016 financial results for Domino’s Pizza, Inc., a Delaware corporation with common stock listed on the New York Stock Exchange, were favorable as compared to the firm’s 2015 results, accordingly to the most recent quarterly earnings release.  Somebody’s eating a lot of Domino’s pizza, even if it isn’t the Heminway family.

Apparently, Domino’s wants to share the wealth–with its customers.  Co-blogger Haskell Murray pointed this recent press item out to me and co-blogger Ann Lipton in an email message last week, knowing full well that we both were or would be interested.  He was right.  Ann may have more to say on this in a later post.  (She also noted that other firms are adopting consumer benefit plans similar to the Domino’s plan I describe here today.)

Of course, as a corporate finance/securities lawyer, I immediately had visions of Ralston Purina dancing in my head.  (Not quite like visions of sugarplums, in this holiday season . . . .  But I will take what I can get.)  So, I went looking for a registration statement/prospectus.  And I found what I sought!  No Ralston Purina-like Section 5 violation here.

Domino’s has filed a shelf registration statement on Form S-3 and a Rule 424(b)(5) prospectus with the SEC (both filed December 2, 2016).  The plan of distribution is summarized in the prospectus in two short sentences:  “The Piece of the Pie Program is just one of the ways we are giving thanks to our customers. Through the Plan, we are offering our eligible customers the opportunity to be entered into drawings for a chance to be selected to receive ten Shares.”  

The prospectus goes on to describe the way the plan operates plan in more detail.  Here’s a slice off the top:

Shares for the Plan will be purchased in the open market by Fidelity Brokerage Services LLC and o Fidelity Capital Markets,Fidelity or, at our election, provided by us to Fidelity out of our authorized but unissued shares and will be initially deposited in a custody account in the name of the Company (“Custody Account”). Open market purchases will be effected by Fidelity, with all Shares to be credited to the applicable participant’s Fidelity Account. Fidelity has full discretion as to all matters relating to open market purchases, subject to the terms of our agreement with them, including the number of Shares, if any, to be purchased on any day or at any time of day, the price paid for such Shares, the markets on which Shares are purchased (including on any securities exchange, in the over-the-counter market or in negotiated transactions) and the persons (including brokers and dealers) from or through whom such purchases are made.

The Plan is not designed for short-term investors, as participants will not have complete control over the exact timing of redemption transactions or the market value of our Common Stock redeemed pursuant to a Piece of the Pie Award under the Plan. See “—Timing of Purchases.” The Plan is designed primarily for customers who have a long-term perspective and affinity for the Company and its values.

Notably, Domino’s is planning to use shares that it repurchases in the market as well as, perhaps, authorized and unissued shares.  The use of market repurchases may signal management’s belief that the market is undervaluing those shares.  It also is a means of preventing dilution to existing stockholders.  Public companies often use market purchases to fund dividend reinvestment and other equity-based employee benefit plans.

Customers can enroll in the plan on the Domino’s Pizza app at no charge.  Here’s what the overall offering looks like:

 . . . We have established the Plan to provide our eligible customers with the opportunity to be entered into drawings under the Plan to receive ten shares of our Common Stock as a thank you for being a loyal customer. Between December 5, 2016 and November 30, 2017 (the “Offer Period”), we will conduct 25 drawings per month. An eligible customer who has enrolled in the Plan prior to a particular drawing date will be automatically entered into that drawing. Eligible customers will not be eligible to participate in drawings occurring prior to the date of enrollment in the Plan. An eligible customer who is selected in a drawing to receive an award under the Plan will be presented with an offer (the “Offer”) to receive ten shares of our Common Stock (each a “Share” and collectively, the “Shares”) under the Plan (each a “Piece of the Pie Award”).

Redemptions of Piece of the Pie Awards will be fulfilled through Fidelity and will require that, as a condition to redemption of a Piece of the Pie Award, the selected eligible customer open a brokerage account with Fidelity into which the Shares can be deposited. Fidelity will obtain the Shares to be delivered upon redemption of Piece of the Pie Awards through open market purchases or, to the extent determined by the Company, delivery by the Company to Fidelity of newly-issued shares. A Piece of the Pie Award must be redeemed within 30 days of receipt, after which time such Piece of the Pie Award will expire if not previously redeemed. Piece of the Pie Awards are limited to ten Shares per selected eligible customer and no eligible customer may receive more than one Piece of the Pie Award. In order to enter for a chance to receive a Piece of the Pie Award, eligible customers must enroll in the Plan using their account on the Domino’s Pizza App or by registering on the www.dominos.com website. An eligible customer who enrolls in the Plan will only be eligible to participate in drawings occurring after the date of such enrollment.

I am a member of a bunch of consumer loyalty programs–for department and drug stores, restaurants, etc.  But few businesses from which I buy goods and services have offered me the opportunity to invest.  And none have offered me the opportunity to “win” an equity interest in a firm through a drawing sponsored by a consumer affinity program.  Query whether, if equity-based consumer benefit plans like this one are successful and continued to be valued, an exemption like Rule 701 will be promoted in Congress and at the SEC to ensure there is a registration exemption available for these offerings.

I will leave it at that for now.  But this is a phenomenon to watch, for sure.  And it fits in nicely with my Securities Regulation course next semester.  You never know where it might pop up . . . .

As part of my ongoing effort to sample most pop cultural representations of corporate/business life, I’ve started watching SyFy’s Incorporated.  Incorporated envisions a dystopian future where, due to global warming and related environmental catastrophes, the world’s governments have become bankrupt, and in their place, “multinational corporations have risen in power and now control 90% of the globe.”

We learn in the first episode that formal governments still exist, but in almost vestigial form; as a practical matter, multinational corporations are in charge.  These corporations compete with each other for resources and market share.  They target each other with espionage and sabotage; when one’s stock price falls, the others’ stock prices rise.  Employees lead a comfortable life within the corporate compound, so long as they adhere to the rules set by their employers; outside of corporate compounds, life is poverty and anarchy.

I get where this show is coming from; I mean, fear of corporate control of government represents a particularly timely anxiety.  And there are lots of sly jokes about today’s political environment – a television news report, for example, tells us that the “Canadian Prime Minister is constructing a fence after 2073 became a record year for illegal immigation.  It is estimated that already 12 million US citizens live in Canada illegally.”  Ha, ha.  But the show perpetuates what I believe is the very damaging misconception that corporations can exist independent of government systems.

For example, it is clear that these corporations have shareholders, and that the shares trade publicly with prices that respond to new information.  So, what legal rights do these shareholders have?  How are they enforced?  What are the regulations that govern the market in which shares trade, and who enforces those regulations?  If corporate managers have that much power, why would anyone invest without fear of exploitation – and if there are limits on their power, so that investors are more confident, where do those limits come from?

The backstory of this universe – as described on the SyFy website – is that governments, under financial pressure, sold various police powers to corporations, and exempted them from taxation.  The implication must therefore be that the government either taxes everyone else to pay the corporations for their service, or allows the corporations to charge private citizens.  But by now, most people are unemployed and surviving as part of the underground economy; the U.S. government, at least, is unable to raise funds to pay for its operations.  Wouldn’t the US dollar have collapsed?  Wouldn’t it be replaced by corporate scrip?

And why are employees treated so well?  In a world where corporations rule, the constituents are the shareholders – not the employees – so that’s who I’d expect to live in luxury.  Certainly, today’s corporate theory would suggest that shareholder interests are somewhat adverse to those of employees, so that when shareholders are ascendant, employees suffer.  The world of Incorporated is obviously a world with excess labor; why would corporations expend so many resources on their workers? 

And who are the shareholders in this world, anyway?  Today’s shareholders are – in large part – employees, who have pooled their retirement funds in either defined benefit or defined contribution plans.  But with only a few multinational corporations – and the majority of the population shunted into the underground economy – that can’t be the system anymore.  If corporations are supplying their employees with all of their needs (healthcare, food, housing, presumably retirement plans), it doesn’t seem like there would be much of an insurance market, let alone a need for 401(k) plans, so those investors have been eliminated.

But I keep coming back to the central problem:  If corporations have supplanted governments, then at minimum, arbitration and trust and reputation and guilds must supplant regulation.  That’s a fascinating vision of the future, but nothing in the show even hints at this direction.  I realize that I’m now stealthily engaging relatively unoriginal debates about the nature of the corporation (artificial/concession, association, real) and the role of the state in constructing the corporate form, but the reality is that corporations are a product of their legal environment.  Without something like law emanating from some external source, there is no corporation.  To imagine corporations as independent of law fatally ignores the role of law in shaping the corporate form itself. 

As a result, I find Incorporated not merely irksome, but actively damaging.  It leads lay viewers to accept the current legal framework for the corporate form as baseline, or natural – instead of a set of affirmative regulatory choices.  I’m not talking about particular salient issues, such as political donations or tax policy; I’m talking about fundamental aspects about the form itself, such as limited liability, the role of the shareholder in the governance structure, and the transferability of ownership interests.  The form itself is inseparable from positive law, which means it is subject to change.  Incorporated obscures that fact, and thus – rather than presenting a critique of the status quo – ultimately reinforces it.

Below are some resources related to the integration of faith and work stemming from businesses or business people.

Companies 

Organizations

Presentations 

Books and Articles

A friend of mine is considering teaching his constitutional law seminar based almost entirely on current and future decisions by the President-elect. I would love to take that class. I thought of that when I saw this article about Mr. Trump’s creative use of Delaware LLCs for real estate and aircraft. Here in South Florida, we have a number of very wealthy residents, and my Business Associations students could value from learning about this real-life entity selection/jurisdictional exercise. Alas, I probably can’t squeeze a whole course out of his business interests. However, I am sure that using some examples from the headlines related to Trump and many of his appointees for key regulatory agencies will help bring some of the material to life.

Happy Grading!

If you’re a college football fan it’s hard to forget the beginning of the 2013 season when star quarterbacks Johnny Manziel (Texas A&M) and Tajh Boyd (Clemson) took the Internet by storm after rubbing their fingers together in the air – prompting “Show Me the Money!”, Jerry Maguire type hype across the nation – following touchdown plays.  That season Manziel even donned the cover of Time Magazine with the accompanied headline: “It’s Time to Pay College Athletes”.

Not six months later, Region 13 of the National Labor Relations Board (NLRB) held that Northwestern University football players qualified as employees and could unionize and bargain collectively.  Although the national level NLRB ultimately overturned this decision – denying players at private universities the ability to form unions – these highly-broadcast events reignited the historic debate about whether student-athletes should be paid to play.

As a tax aficionado and amateur sports fanatic, I can’t help but ponder the various tax consequences associated with paying student-athletes.  Such intrigue ultimately led to the first of three papers I’ve written thus far addressing the tax issues surrounding the pay-for-play model.  ‘Show Me the Money!’ – Analyzing the Potential State Tax Implications of Paying Student Athletes evaluates state tax issues surrounding pay-for-play and the ripple effect that such taxes could have on the world of college sports. 

Within this paper my co-author Adam Epstein and I created a theoretical analysis to illustrate several state tax considerations that should be considered, such as the immediate competitive recruiting advantage that athletic programs in states like Texas, Washington, and Florida – which have no state income tax – would have over programs located in high-tax jurisdictions like California (which boasts a 12.3% individual income tax rate!).  Realistically, just how much more cash or benefit incentives would schools like Southern Cal (currently ranked 9th in the CFP) or Stanford (ranked 18th) have to offer potential recruits in order to make their offers as attractive as those coming from the Huskies (ranked 4th), Seminoles (ranked 11th), and Gators (ranked 17th) – all located in states with no income tax?  While perhaps some wealthy programs could afford bargaining with additional “carrots”, what about those schools that can’t?  Could state tax rates ultimately affect the location of National Championship teams under the pay-for-play model?

Rather than promoting arguments for or against paying student-athletes, this article purposefully reserves a neutral tone and instead offers many thoughtful and candid tax points that should be included in the overall discussion about the future of pay-for-play.  With the prospect of paying student-athletes still just a hypothetical idea to ponder, I simply look forward to the next few weeks of bowl games, playoffs, and (perhaps!) a 2nd straight go-round for the Tigers at the National Championship!

Do you love charts? Do you need/want a break from grading/procrastinating/writing frantically on a deadline real or self-imposed?  All of these things at once?  Welcome to the month of December– the time of year that should be a break from our schedules, but which always (and I mean ALWAYS) is my busiest time when I try to fit 6 weeks of work into 2.  

My December gift to you?  The Investment Company Factbook.  The Investment Company Institute (ICI), is an association of regulated funds that collects and distributes data from its members.  The full text of the Factbook (an annual publication) is available here, and the charts (and underlying data) are available here.  I wept when I first discovered this source while writing years ago.  ICI information is widely used in legal research.  A quick search produced 3,265 law reviews and journal articles.  For critiques of ICI’s information and framing, see John C. Bogle, Mutual Funds at the Millennium: Fund Directors and Fund Myths, at http://www.vanguard.com/bogle_site/may152000/ (May 15, 2000); John P. Freeman & Stewart L. Brown, Mutual Fund Advisory Fees: The Cost of Conflicts of Interest, 26 J. Corp. L. 609, 625/26 (2001); and yours truly in  Anne M. Tucker, Locked in: The Competitive Disadvantage of Citizen Shareholders, 125 Yale L.J. Forum 163 (2015).

Now back to writing/grading/procrastinating!

-Anne Tucker

 

The political discourse of this election cycle, and the respective postures of the two main political parties, suggest that social justice and economic prosperity are in opposition to one another. At times, it seems that some believe pursuing racial and gender equality are (at best) distractions from “real problems” like jobs and the economy. Others seem to think any form of business or industrial development is essentially sanctioning the destruction of the Earth and its people. Both are wrong.

Equity and fairness are not anathema to economic progress. In fact, in the big picture, they are essential. There is nothing inconsistent about being pro-business and supporting social justice. One can believe in social justice and still think there are too many regulations that hamper businesses. There are, for example, regulations that disproportionately keep women and minorities from opening their own businesses. And there are laws and regulations that create barriers to entry and help maintain market power businesses where competition is both warranted and necessary..

My colleague, Haskell Murray recently posted Faith and Work in Universities, which lists some resources related to religion and scholarly activity, particularly as it related to business. This is a worthwhile discussion, and far too often we see discussions of business and morality as separate areas – silos related to separate and competing goals. 

This is not unlike the separation in environmental law and energy law I discussed in a recent short piece about the changing role of natural gas in the clean energy movement where I noted:

Electricity generation for industrial and residential consumers was one of the major drivers behind environmental regulation, but despite this long-standing connection, environmental law and energy law have often operated in separate silos. This fact has led to disjointed and ineffective policy and a poor understanding of the full scope of legal, regulatory, and business issues in the energy sector. (footnote omitted)

This is true in the broader business and social justice realm, as well. As Haskell’s compilation shows, though, that business and social justice (including, but not limited to, religion) are interrelated is hardly novel.  When Pope Francis visited the U.S. Congress, he explained:

The right use of natural resources, the proper application of technology and the harnessing of the spirit of enterprise are essential elements of an economy which seeks to be modern, inclusive and sustainable. “Business is a noble vocation, directed to producing wealth and improving the world. It can be a fruitful source of prosperity for the area in which it operates, especially if it sees the creation of jobs as an essential part of its service to the common good” (Laudato Si’, 129). 

Social justice and economic development are not either-or propositions, despite what recent election choices may have implied. There is, I think, a vast underrepresented center in America that cares both about pragmatic economic decisions and basic fairness and equity. This past election, I hope and believe, demonstrated more about the priorities of various voters rather than clear divides about the issues themselves.  To be sure, there are large numbers of people for whom this is not true — there is some fundamental disagreement out there — but I think the vast majority of people are decent caring people who have different ideas about the hierarchy of what is most important to move the country forward. 

This is not to ignore the repugnant behavior, language and acts, from some people before and since the election. There have been outrageous acts of violence and intimidation.  Shortly after the election, some of our law students were victims of such acts. As examples, one student was spit upon and racial epithets were shouted at another. There is no place hateful behavior, and it is unacceptable. A recent speaker invited to our campus said hateful and hurtful things about a valued faculty member. Free speech is a virtue, but this is simply not how we should treat each other, and it is shameful. And although racism, misogyny, anti-LGBT and anti-religious sentiment, and xenophobia have been part of virtually every government at some point, no government has found lasting peace or prosperity based on any of those things.

My point is not intended to suggest a Pollyanna-esque view of the world. I am not blindly asking, “Can’t we all just get along?”  I am asking whether we can agree to try.

It’s going to take a lot of work, and there are no simple answers. But we must start somewhere. Here are three modest principles to get started moving forward together:

  1. Stop succumbing to base and visceral reactions. We need to stop assuming everyone is lying and cheating and taking something from us so that we notice those who really are lying and cheating and taking something from us.
  1. Be skeptical of uncompromising absolutists. There are some absolutes in this world, to sure, but not nearly as many as we have been led to believe. And this is not a conservative or liberal issue. It’s an issue. Anyone who thinks they are right all the time is wrong. 
  1. Reaffirm our nation’s founding principles and self-evident truths, that all people are “created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” I think it is right to say we have evolved from knowing such rights belong to men to know such rights belong to us all.

These principles require seeing compromise as valuable. Virtually all of us agree about that, because most of us have jobs and friends and loved ones. Compromise is a big reason why or we wouldn’t have those people in our lives. Compromise does not mean sacrificing one’s beliefs or values.  It means recognizing the value and autonomy of others. It means seeing the mutual value of others in the world around us.  But also, to be clear, compromise is not one side listening and being nice while the other side sits obstinately waiting to get what they want.  Compromise requires that both sides work and give up something. Compromise is not, and cannot be, unilateral disarmament.   

Let’s debate vigorously the best way to achieve economic prosperity.  Let’s argue respectfully about how best to care for the nation’s poor and elderly.  But let’s value and respect each other. In short, let’s get out of our own way. We have work to do. 

In a relatively brief opinion released this morning, the U.S. Supreme Court affirmed the Ninth Circuit’s judgment in Salman v. United States.  The decision of the Court was unanimous.  The big take-aways include:

  • doctrinally, the Court’s complete, unquestioning reliance on the language in Dirks v. Sec’s Exch. Comm’n, 463 U. S. 646 (1983), as to when the sharing of information through a tip is improper, and therefore a basis for insider trading liability (quoting from the text on page 662 of the Dirks opinion: “'[T]he test,’ we explained, ‘is whether the insider personally will benefit, directly or indirectly, from his disclosure.’”);
  • factually, the emphasis placed by the Court on the value proposition represented by the information-sharing between the close brothers, Maher and Michael–that information passed on with the knowledge that it will be traded on was effectively a substitute for a monetary gift (“In one of their tipper-tippee interactions, Michael asked Maher for a favor, declined Maher’s offer of money, and instead requested and received lucrative trading information.”), noting “[a]s Salman’s counsel acknowledged at oral argument, Maher would have breached his duty had he personally traded on the information here himself then given the proceeds as a gift to his brother.”;
  • constitutionally, the Court finding no vagueness (“Dirks created a simple and clear ‘guiding principle’ for determining tippee liability”) and also rejecting on a similar basis application of the rule of lenity; and
  • procedurally, because of the Court’s ruling on the merits, the Court finding the jury instructions entirely proper.

The opinion offers some clarity on the application of U.S. insider trading doctrine by unanimously affirming the “gift” language from Dirks in a solid way: “To the extent the Second Circuit held that the tipper must also receive something of a ‘pecuniary or similarly valuable nature’ in exchange for a gift to family or friends, . . . we agree with the Ninth Circuit that this requirement is inconsistent with Dirks.”  Having said that, the Court also hints in several places that the facts in these cases do matter.  The following quote is particularly relevant in this respect:

Salman’s conduct is in the heartland of Dirks’s rule concerning gifts. It remains the case that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” . . .  But there is no need for us to address those difficult cases today, because this case involves “precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.”

In that context, the Court reminds us that “the disclosure of confidential information without personal benefit is not enough.”  This, indeed, places continuing pressure on the nature of the relationship between the tipper and the tippee and other facts relevant to the transmission of the information, all of which must be ascertained and then proven at trial.  And so, it goes on . . . .