Regular readers know that I write a lot about business and human rights and that I have posted about a number of lawsuits brought in California alleging violations of consumer protection statutes and false advertising claiming that companies fail to disclose the use of child slavery on their packaging. The complaints allege that consumers are deceived into “supporting” the child slave labor trade. The latest class action has been filed against Hershey, Mars, and Nestle. Back in 2001, these companies and several others signed the Engel-Harkin Protocol (drafted by Congressman Engel) in an effort to avoid actual FDA legislation regarding “slave-free” labeling. Nestle has touted its work with some of the world’s biggest NGOs to help clean up its supply chain for all of its human rights issues, not just in the cocoa industry. Nestle denies the allegations and actually has an extensive action plan related to child labor. Mars and Hershey also denied the allegations.

I am curious as to whether shareholders demand action from the boards of these companies or if the steady stream of litigation being filed in California causes companies to invest more in supply chain due diligence or to change where and how they source their materials. The real question is whether consumers actually care. Today I conducted an unscientific poll. I asked my business associations and civil procedure students to vote on whether they would continue to buy their favorite chocolate if they knew that child slaves were used in the cocoa harvesting. I made them close their eyes so they wouldn’t feel self-conscious about their answers and asked for their honest feedback. About 90% of students in both classes said that they wouldn’t buy the products. We will see what happens to their moral outrage if I bring in Halloween candy next week. My business associations students also believed that shoppers who saw signs in grocery stores about child slaves wouldn’t buy the candy either. This is in fact the theory behind many of the name and shame campaigns such as Dodd-Frank conflict minerals. 

Maybe it does work. I am against the Dodd-Frank legislation for a variety of reasons, but when one of my students came in my office a few minutes ago and pointed out my Soda Stream bottle she said “you know that there is a huge conflict with that company and Israel, right”? I admitted that I knew. And yes, I am going to Bed, Bath, and Beyond this weekend to buy another brand. I have been shamed, even if she didn’t intend to so do. 

 

 

Just as I was in the middle of preparing for my class on shareholder proposals – for which I have assigned the opinion in Trinity Wall Street v. Wal-Mart Stores, Inc. – I got an email notification that the Division of Corporate Finance Staff had issued a new legal bulletin announcing that it disagrees with the majority opinion in Trinity, and instead agrees with the concurring opinion.

I discussed the Trinity opinion here, but basically, the issue was whether Walmart could exclude a shareholder proposal, submitted by Trinity Wall Street, requesting that Walmart develop a policy for oversight of sales of guns with high capacity magazines (the proposal was framed to encompass harmful products broadly, but the narrative made clear it was aimed toward gun sales).  In the Third Circuit opinion, the majority and the concurrence disagreed regarding the proper interpretation ordinary business exclusion for social-responsibility proposals.  The majority held that to determine whether a proposal is excludable, the court must first analyze whether it concerns ordinary business, next determine whether it involves a significant issue of social policy, and finally determine whether – despite involving ordinary business – the social policy issue is so important as to “transcend” day to day business operations.  The majority ultimately concluded, essentially as what appears to be a bright line rule, that certain “core” matters of business operations can never be transcended in this manner.

The concurring judge, however, believed that social policy = transcendence – i.e., that the proper inquiry is whether the social policy raised is of such significance that it inherently transcends the day to day business operations.

In its legal bulletin, the Staff agreed with the concurrence.

But that only raises more questions than it answers.  As I previously posted, the concurring judge also believed that the proposal at issue in the Trinity case was not sufficiently significant to “transcend” ordinary business operations for a variety of reasons, including that the proposal was framed in terms of benefits to Walmart.  I criticized this analysis because, among other things, most social responsibility proposals are framed in terms of benefits to the company – they might fail as improper under state law otherwise.  The concurrence also faulted the proposal for discussing harmful products generally instead of guns specifically – a fact that did not bother the majority.

Now we know the Staff agrees with the concurrence that the inquiry hinges on the significance of the social policy itself; but we also know that the Staff earlier issued a no-action letter concluding that Trinity’s proposal was excludable.  So I’m left a bit baffled as to the Staff’s basis for that conclusion.  Did the Staff agree with the concurrence that Trinity should have framed the proposal in terms of societal benefits?  That the proposal failed because it was framed in terms of harmful products rather than guns specifically?  The Staff’s no-action letter did not mention the significance of the social policy at all – instead, it focused solely on the business operations to which it was directed.  Does that make the no-action letter inconsistent with the Staff’s new bulletin?

Moreover, what is the precedential effect of Trinity now?  In its opinion, the Third Circuit majority stated that only a binding SEC ruling could overrule it; the Staff’s bulletin is not binding.  Does this mean courts in the Third Circuit are bound by Trinity while courts outside of the Third Circuit are free to rely on the Staff bulletin as persuasive authority?

Only time will tell – but surely this adds at least some fuel to Trinity’s pending cert petition.  I note, however, that Walmart ultimately caved and removed assault rifles from its shelves – even without including the proposal in its proxy.

In any event, I guess this means in addition to the Third Circuit opinion, my students will be reading the Staff bulletin and the original no-action letter.

On another note – the Staff bulletin also deals with the problem of shareholder proposals that are excludable because they conflict with management proposals in the same proxy under Rule 14a-8(i)(9).  Recently, some companies (*cough*Whole Foods*cough*) have tried to exclude shareholder proxy access proposals by including management-sponsored proposals with much higher – nay, unachievable – threshold ownership levels, and then arguing that the shareholder proposal conflicts with management.  The Staff bulletin seems to put the kibosh on these efforts, adopting a new rule that a “conflicting” proposal is one that is irreconcilable with the management proposal, such that a reasonable shareholder could not support both.

 

BLPB guest-blogger Todd Haugh (Indiana University – Kelley School of Business) has a new article in the Vanderbilt Law Review entitled Overcriminalization’s New Harm Paradigm. The abstract is reproduced below:

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The harms of overcriminalization are usually thought of in a particular way—that the proliferation of criminal laws leads to increasing and inconsistent criminal enforcement and adjudication. For example, an offender commits an unethical or illegal act and, because of the overwhelming depth and breadth of the criminal law, becomes subject to too much prosecutorial discretion and faces disparate enforcement or punishment. But there is an additional, possibly more pernicious, harm of overcriminalization. Drawing from the fields of criminology and behavioral ethics, this Article makes the case that overcriminalization actually increases the commission of criminal behavior itself, particularly by white collar offenders. This occurs because overcriminalization, by lessening the legitimacy of the criminal law, fuels offender rationalizations. Rationalizations are part of the psychological process necessary for the commission of crime—they allow offenders to square their selfperception as “good people” with the illegal behavior they are contemplating, thereby allowing the behavior to go forward. Overcriminalization, then, is more than a post-act concern. It is inherently criminogenic because it facilitates some of the most prevalent and powerful rationalizations used by would-be offenders. Put simply, overcriminalization is fostering the very conduct it seeks to eliminate. This phenomenon is on display in the recently decided Supreme Court case Yates v. United States. Using Yates as a backdrop, this Article presents a new paradigm of overcriminalization and its harms.

Home court advantage alleged in SEC securities cases brought before administrative judges rather than a jury.  Read this recent thought provoking article in the NYT DealB%k, A Jury Not the SEC, by Suja A. Thomas, a Univ. of Illinois law professor, and Mark Cuban, billionaire investor.  

After losing several cases before juries, the S.E.C. went to a place where it generally cannot lose: itself. When it accuses a person of a securities violation, the S.E.C. has often brought the case in an administrative hearing where one of its own judges decides the case, not a jury. Rarely does the agency lose such cases before its judges

Thomas and Cuban refute the argument that after the financial crisis securities issues are considered public rights questions and can constitutionally be transferred to an administrative judge. 

Despite the persistence of this public rights doctrine, there is no constitutional authority for it. First, Article I does not give Congress any authority to determine who decides civil cases. Second, the Seventh Amendment itself tells us who should decide these cases. Under it, juries decide money issues and federal judges decide other matters.

-Anne Tucker

As Steve Bradford mentioned in his post on Monday (sharing his cool idea about mining crowdfunded offerings to find good firms in which to invest), our co-blogger Haskell Murray published a nice post last week on venture capital as a follow-on to capital raises done through crowdfunding.  He makes some super points there, and (although I was raised by an insurance brokerage executive, not a venture capitalist), my sense is that he’s totally right that the type of crowdfunding matters for those firms seeking to follow crowdfunding with venture capital financing.  I also think that, of the types of crowdfunding he mentions, his assessment of venture capital market reactions makes a lot of sense.  Certainly, as securities crowdfunding emerges in the United States on a broader scale (which is anticipated by some to happen with the upcoming release of the final SEC rules under Title III of the JOBS Act), it makes sense to think more about what securities crowdfunding might look like and how it will fit into the cycle of small business finance.

Along those lines, what about debt crowdfunding as a precursor to venture capital funding?  Andrew Schwartz has written a bit about that.  Others also may have taken on this topic.  Professor Schwartz may be right that issuers will prefer to issue debt than equity–in part because it may prove to be less of an impediment to later equity financings.  But I don’t necessarily have a warm feeling about that . . . .

And what about the crowdfunding of investment contracts (e.g., what I have previously called “unequity” in this article (and elsewhere, including in this further article) and perhaps even the newly popular SAFEs)?  There is no equity overhang with unequity and some other types of investment contract, but crowdfunded SAFEs, which are convertible paper, may be viewed negatively in later financing rounds–especially if the conversion rights are held by a wide group of investors.  While part of me is surprised that people are not taking the investment contract part of the potential securities crowdfunding market seriously (since folks were crowdfunding investment contracts before the JOBS Act came along–not knowing it was unlawful), the other part of me says that crowdfunded investment contracts would have a niche market at best.

So, thanks, Haskell, for the food for thought.  No doubt, more will be written about this issue as and if the market for crowdfunded securities develops.  Coming soon, says the SEC . . . .

From potential employers to faculty, I hear a common mantra that students are “no longer able to write.” Thus, we need to get them practice ready in a way that apparently we, as law schools, used to do. 

I, too, share frustration with poorly written materials and poor performance generally. I also worry about the practice-ready nature of some of our students. Still, I find myself compelled to say that, in my experience, the vast majority of our students are thoughtful, intelligent, and capable.

I also can say that many of our students do not push themselves to deliver the high-quality work product of which they are capable.  I long for the self-motivated student, the same way I have (at times) longed for the self-motivated employee.  Some people have it, and some people don’t.  Like height, one can’t really teach motivation, but we can try to help students find their own motivation from within.  And we can set expectations high enough that failure is, in fact, an option. 

I have come in contact with quite a few students, and I don’t think we have an actual literacy problem with the students I have taught over the years (a few stark examples, perhaps, to the contrary). A lack of literacy or ability is simply not a fair assessment of virtually all students I have taught. I concede, however, that we often have far too many students who fail to demonstrate their abilities, and that is cause for alarm.  Not working hard is not that same as not being able to do the work, though the result is the same. 

I fully support taking measures to try to address these shortcomings, and the time to do something is now.  We have a moral and ethical obligation that we try to do more. At our law school, we are taking this concern seriously, but I want to make sure we are focusing our concern in the right areas.   

At our school, we have started (another) dialogue about how we can improve our students’ performance, and I think (hope/expect) that those conversations obviously include improving our collective performance as teachers, as well.  The law school community needs to be one that fosters learning.  Part of what everyone in the building, regardless of job, should be committed to is educating our students (on professionalism, as well as legal doctrine) because everything that happens here impacts the educational experience.  What happens in law school, does not stay in law school.  It impacts lives, futures, and communities, including our students, their clients, and every part of where we live, learn, and work.

One of the big keys to all of this is, I think, ensuring that we hold ourselves accountable for the learning of our students, and that means holding them accountable, not just complaining when they come up short.  If we’re not willing to have tough conversations, before (but including) issuing a final grade, we’re not doing our jobs. I love my job, and I care about what I do, but I’m putting myself first on the list of people who need to better.

We have many great students, and I am truly thankful for the countless wonderful I have had the chance to teach.  I have many great colleagues at my school (and at others schools) who care about law students and the world those students can and will impact.  But I also think that, as a group, we as faculty can do better.  It starts with holding ourselves accountable in the way many seem to wish we’d hold our students accountable.  Perhaps not surprisingly, part of truly holding ourselves accountable means holding our students accountable.  I think we need to start there. 

My co-blogger Haskell Murray had an interesting post on Friday about the use of crowdfunding as a strategy to attract venture capital. He points out that many companies that had successful crowdfunding campaigns on Kickstarter or Indiegogo subsequently raised venture capital. He argues that a successful crowdfunding campaign might be a signal to venture capitalists.

If you haven’t read Haskell’s post yet, it’s well worth reading. I want to take the discussion in a slightly different direction.

I don’t think venture capitalists should be waiting to see if a company has a successful crowdfunding campaign. I think they should use crowdfunding listings as leads and try to preemptively capture those companies before they complete their crowdfunding campaigns—convince the good companies to forego crowdfunding and go the venture capital route instead.

If I were a wealthy venture capitalist, I would have someone skimming through all of the crowdfunding sites, including the equity crowdfunding sites, looking for potential investments. The venture capital business is extremely competitive. Getting to the good companies before they have a successful raise is one way to one-up the competition. Once a company has shown crowdfunding success, others will want a piece.

Many of the companies doing crowdfunding will not interest venture capitalists. But it only takes a few hidden gems to make the weeding process worthwhile. And most of the weeding out could be done quite easily by inexpensive, low-level staff. Even I could spot most of the obvious losers.

I have suggested this strategy at a couple of conferences where venture capitalists were present. It will be interesting to see if any of them try it. (For some reason, professional venture capitalists don’t seem all that interested in my investment advice.)

As for me, I’ll file this in my “What I would do if I had a ton of money” folder. (It’s a very full folder.)

Jessica Erickson has just published a fascinating article on the structure of lead plaintiffs’ counsel arrangements in corporate cases. 

Erickson documents how Delaware courts have formally identified “factors” that will be used to select lead counsel, but have informally sent the message that the parties must work out the leadership structure amongst themselves.  This means that multiple law firms have an incentive to file claims with no intention of performing serious legal work, solely to negotiate a position in the leadership structure so that they can collect a portion of the fees.

This practice not only results in duplicative lawsuits, but allows lawyers to engage in rent-seeking – extracting fees without performing serious legal work – that can damage incentives for the “real” lawyers, and harm the class.

At this point, I just have to interject with an account of my experiences.  I was at Milberg Weiss for a few years (though I was more involved in securities cases under the PSLRA than corporate cases).   Milberg frequently worked with co-counsel, and most of the time – no matter which firm was formally appointed lead – Milberg was functionally in charge of the litigation.  Co-counsel generally was added to the case because they had a close relationship with an institutional plaintiff, but they tended to have little skill – or even interest – in the actual litigation.  Due to our fee agreements, we were required to allocate them some amount of work, and it was usually an administrative hassle – co counsel frequently failed to submit their work product by the relevant deadline, and what they did submit was often subpar and needed to be rewritten. 

What this meant, of course, is that the class suffered, through duplicative and unnecessary fees.

Eventually I landed at Bernstein Litowitz, and by then, the landscape had changed.  There were fewer co-lead firms, and the co-leads that existed were more functional – I could rely upon them to do serious work.  So there was a real change in the landscape of securities litigation between the time when I left Milberg in 2005, and when I joined BLBG in 2009.  Erickson’s article confirms my experience; she describes how, over time, judges overseeing PSLRA litigation became more suspicious of complex leadership structures that combined groups of unrelated plaintiffs.

Delaware litigation, however, has not undergone that kind of change, and remains driven by the same dynamics that governed earlier securities litigation – namely, small firms, existing mainly to file complaints, holding larger firms hostage.   In the securities context, small firms could only exert that kind of leverage if they at least had enough credibility to land an institutional client; Delaware, however, doesn’t use the PSLRA’s bright line largest-loss rule, and so any firm can hold up an entire case.  And because Delaware courts avoid injecting themselves in disputes among plaintiffs’ firms, as Erickson points out, firms cannot privately order their arrangements in an optimal matter.

Erickson’s central point is this: if courts are unwilling to enforce the standards they set, parties cannot bargain in the shadow of the law, and parasitic firms have correspondingly greater power.  Courts must demonstrate a willingness to select a single lead counsel when no private agreement is reached, in order to enable attorneys to bargain for optimal results.