. . . here‘s a relatively new Dodge Challenger commercial (part of a series) that you may find amusing.  I saw it during Saturday Night Live the other night and just had to go find it on YouTube.  It, together with the other commercials in the series, commemorate the Dodge brand’s 100-year anniversary.  “They believed in more than the assembly line . . . .”  Indeed!

You also may enjoy (but may already have read) this engaging and useful essay written by Todd Henderson on the case.  The essay provides significant background information about and commentary on the court’s opinion.  It is a great example of how an informed observer can use the facts of and underlying a transactional business case to help others better understand the law of the case and see broader connections to transactional business law generally.  Great stuff.

On December 10, the press reported the Second Circuit’s decision in the insider trading prosecution of Todd Newman and Anthony Chiasson (two of multiple defendants in the original case).  In its opinion, the court reaffirms that tippee liability for insider trading is predicated on a breach of fiduciary duty based on the receipt of a personal benefit by the tipper and clarifies that insider trading liability will not result unless the tippee has knowledge of the facts constituting the breach (i.e., “knew that the insider disclosed confidential information in exchange for a personal benefit”).  The court summarized its opinion, which addresses these matters in the context of the Newman case, a criminal case, as follows:

[W]e conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.

Continue Reading Dirks Reaffirmed and Clarified . . . But Insider Trading Law Remains Murky

Many people have been talking about the four teams chosen for the inaugural college football playoff. I, good business law blogger that I am, have been thinking about conflicts of interest on the selection committee.

If you’re a football fan, you know that this year, for the first time, the national champion in NCAA major college football will be chosen through a four-team playoff. The four teams selected—Alabama, Oregon, Florida State, and Ohio State—will participate in two semifinal games, with the two winners to play for the championship. (Yes, Art Briles, Baylor should be one of the four, but, no, Ohio State is not the team that shouldn’t be there.)

The four participating schools are chosen by a thirteen-person selection committee, although one of the members, Archie Manning, has taken a leave of absence this year for health reasons. The committee includes several people with current relationships to schools that play major college football, including the following athletic directors:  Jeff Long, Arkansas; Barry Alvarez, Wisconsin; Pat Haden, USC; Oliver Luck, West Virginia; and Dan Radakovich, Clemson.

The selection committee adopted a recusal policy that requires committee members to recuse themselves if the committee member or an immediate family member “(a) is compensated by a school, (b) provides professional services for a school, or (c) is on the coaching staff or administrative staff at a school or is a football student-athlete at a school.” A recused committee member may not participate in any votes involving that team or be present during any deliberations involving that team’s selection or seeding.

Under this policy, all of the athletic directors recused themselves from voting involving their schools. Others connected to particular schools also recused themselves: Condoleeza Rice, because she’s a professor at Stanford; Tom Osborne, because he’s still receiving payments as a former coach and athletic director at Nebraska; Mike Gould because he’s the Superintendent at Air Force.

As it turned out, none of the committee members were recused as to the six schools seriously considered for the final four—the four chosen, plus Baylor and TCU. But should they have been?

Consider Barry Alvarez, the athletic director at Wisconsin, a member of the Big Ten. The Big Ten schools share bowl revenues with other members of the conference. Thus, when Ohio State was chosen for the fourth spot over Baylor and TCU, Wisconsin became entitled to part of the $6 million paid to participants in the semifinal game (and additional money if Ohio State wins the semifinal and plays in the championship game). A vote for Ohio State directly benefitted the Wisconsin athletic department Alvarez heads.

The problem is not unique to Coach Alvarez. Other conferences also share bowl revenue, so Pat Haden (PAC-12), Jeff Long (SEC), and Dan Radakovich (ACC) also benefited when the representatives from their respective conferences were chosen. But those choices, unlike the choice of Ohio State over Baylor or TCU, were relatively uncontroversial. (The choice of Florida State over any of those schools should have been controversial, in my opinion, but it wasn’t.) Oliver Luck (Big 12) also had a financial incentive to vote for either Baylor or TCU, but, unfortunately for him and for his athletic department, neither of them was selected.

This conflict of interest may have been intentional. The committee appointments were carefully apportioned among the Power 5 conferences, and the expectation may have been that each of these athletic directors would vote for representatives of their respective conferences. (We don’t know if they actually did.) But no one is even talking about this clear conflict of interest, not even Art Briles, and that’s a little surprising.

Professor Lucian Bebchuk runs the Harvard Shareholder Rights Project, which helps investors filed proposals to be included in corporate proxies under Rule 14a-8.  The Project has filed several precatory proposals to express shareholders’ views that corporations should destagger their boards, arguing that research demonstrates that declassified boards improve corporate returns.

In a new paper posted to SSRN, SEC Commissioner Daniel Gallagher and Professor Joseph Grundfest accuse the Project of making misleading statements regarding the benefits of declassified boards.  They suggest that Harvard could be vulnerable to lawsuits by shareholders or the SEC under Rule 14a-9, which forbids false statements in proxy solicitations.  The paper, with the provocative title “Did Harvard Violate Federal Securities Law?” is discussed in the Wall Street Journal here.

The basic argument made by Gallagher and Grundfest is that the proposals misleadingly cite only research in favor of declassified boards, and fail to cite contradictory research. 

Now, I have to say, I’m trying to evaluate how this claim would proceed if brought by a private shareholder, and I don’t like its chances.  First, as Gallagher and Grundfest admit, the proposals are precatory – so even if they succeed, they only have an effect if the corporate directors bow to investor pressure and choose to destagger the board.  Gallagher and Grundfest argue that this is sufficient “causation” to constitute a Rule 14a-9 violation by analogizing to a case where management lied in response to a precatory shareholder proposal, and the court ordered a re-vote.  But that case seems obviously distinguishable, because in that instance, the damage wrought by the misstatement was, in effect, damage to the right to offer proposals in the first place.  And the shareholder had few options other than a truthful revote as a means of vindicating that right.

Here, of course, because the ostensibly misleading proposal is submitted by shareholders, and misstatements are not being used by management as a way to thwart shareholders, it’s difficult to see what concrete harm the alleged misstatements are actually causing.  Moreover, there are a variety of remedies for false statements beyond a private lawsuit: management can exclude proposals that are misleading, counter with its own information when opposing the proposal, or simply ignore the vote.

Apparently aware of the weaknesses in their causation theory, Gallagher and Grundfest also argue that these precatory proposals have a substantive effect sufficient to satisfy the causation requirement because proxy advisors like ISS often recommend voting against corporate directors who fail to declassify a board after a shareholder vote in favor of declassification.  Corporate directors may therefore feel pressure from ISS and vote in favor of declassification after a shareholder vote on the subject.

This chain of causation seems speculative, to say the least.  First, not only are ISS’s actions independent of the initial proposal, ISS’s threats are only going to matter if there’s a contested director election, and there usually isn’t one.  Even if votes are withheld from a director in a majority-vote corporation, the director will only actually lose his position if the Board accepts his resignation – which it may choose not to do if it concludes the voting was based on a misleading proxy proposal.

Second, the information that’s allegedly omitted here – countervailing research on a contested subject – is publicly available.  Leaving aside how that affects the analysis of the legal element of materiality (an omitted fact is only material if it affects the “total mix” of information available to shareholders, including public-domain information), if ISS pressure is a key step in the chain of causation, well, ISS is a sophisticated entity, as are the investors it advises – all of whom are no doubt capable of identifying and evaluating the research for themselves.

Finally, no damages would be available in a private action (because there’s no chance of a shareholder demonstrating loss causation).  The only remedy would be for a court to undo a vote in favor of the proposal and possibly order the re-staggering of a board – once again, difficult to imagine given the attenuated causation involved and the public nature of the omitted information.

That said, I’m fascinated by the fact that Commissioner Gallagher has chosen to fight this battle not in his capacity as Commissioner, but as the co-author of a paper posted to SSRN.*  (The paper claims, one suspects disingenuously, Gallagher and Grundfest  are not taking a position on the merits of declassification; they simply want to ensure that proxy proposals are truthful.)  Despite the paper’s suggestion that the SEC could bring an action against Harvard, the authors openly admit that the SEC’s policy has not been to challenge statements made in these proposals, but simply to allow corporate managers to refute them in proxy materials.  If anything, the goal of the article seems to be more about intimidating Bebchuk into altering the wording of his proposals (or intimidating Harvard into reining him in – the paper spends a bit of time on Harvard’s responsibility for the Project), giving ammunition to corporate boards to resist such proposals, and firing a shot across the bow of proxy advisory firms that recommend in favor of such proposals.  Commissioner Gallagher has long sought greater regulation of proxy advisors – winning new SEC guidance on the subject in June.  In this article, Commissioner Gallagher seems to be dropping a hint that they should revise their recommendations or be subject to further investigation and regulation.

*Who does he think he is, a Delaware judge?

The Delaware Court of Chancery recently denied a motion to dismiss in In re Comverge, Inc. Shareholders Litigation. In this case, the plaintiff claimed bad faith by the board of directors that approved an allegedly unreasonable termination fee in a merger agreement. Transactional attorneys and professors who teach M&A will want to read this case.  

I am deep into grading my business associations exams, so I will outsource to a nice client alert on the case by Steven Haas at Hunton & Williams. A bit of the alert is below, and you can access the entire alert here.

The court then found that the termination fees of 5.55% of equity value (or 5.2% of enterprise value) during the go-shop period and 7% of equity value (or 6.6% enterprise value) after the go-shop period “test the limits of what this Court has found to be within a reasonable range for termination fees.” The court also analyzed the termination fee in connection with the convertible note held by the buyer in connection with the bridge financing. The plaintiff alleged that the conversion feature in the note, which allowed the buyer to purchase common stock at a price below the merger consideration, would significantly increase the cost to a topping bidder of acquiring the company. Factoring in that cost to the existing termination fee, the plaintiff argued, would result in a total payment equal to 11.6% of the deal’s equity value during the go-shop period and 13.1% of the deal’s equity value after the go-shop period.

The court concluded that, for purposes of surviving a motion to dismiss, it was “reasonably conceivable that the Convertible Notes theoretically could have worked in tandem with the termination fees effectively to prevent a topping bid” from a buyer that might otherwise offer greater value to the company’s stockholders. Perhaps more importantly, the court found that the plaintiff adequately alleged that the board of directors acted in bad faith in approving these terms….

Despite the amount of litigation challenging M&A transactions, there are not many Delaware rulings that have upheld challenges to deal protections such as termination fees, matching rights, and no-shop provisions. This is because the Delaware courts have generally created a body of precedent that provides helpful guidance to buyers and sellers and also recognized the value of such terms. In Comverge, the parties appear to have deviated from this precedent, but more importantly, the court looked to the bridge loan to view the aggregate effect of the various terms on the ability of a third party to make a topping bid. 

In many companies, executives and employees alike will give a blank stare if you discuss “human rights.”  They understand the terms “supply chain” and “labor” but don’t always make the leap to the potentially loaded term “human rights.” But business and human rights is all encompassing and leads to a number of uncomfortable questions for firms. When an extractive company wants to get to the coal, the minerals, or the oil, what rights do the indigenous peoples have to their land? If there is a human right to “water” or “food,” do Kellogg’s, Coca Cola, and General Mills have a special duty to protect the environment and safeguard the rights of women, children and human rights defenders? Oxfam’s Behind the Brands Campaign says yes, and provides a scorecard. How should companies operating in dangerous lands provide security for their property and personnel? Are they responsible if the host country’s security forces commit massacres while protecting their corporate property? What actions make companies complicit with state abuses and not merely bystanders? What about the digital domain and state surveillance? What rights should companies protect and how do they balance those with government requests for information?

The disconnect between “business” and “human rights” has been slowly eroding over the past few years, and especially since the 2011 release of the UN Guiding Principles on Business and Human Rights. Businesses, law firms, and financial institutions have started to pay attention in part because of the Principles but also because of NGO pressures to act.  The Principles operationalize a “protect, respect, and remedy” framework, which indicates that: (i) states have a duty to protect against human rights abuses by third parties, including businesses; (ii) businesses have a responsibility to comply with applicable laws and respect human rights; and (iii) victims of human rights abuses should have access to judicial and non-judicial grievance mechanisms from both the state and businesses.

Many think that the states aren’t acting quickly enough in their obligations to create National Action Plans to address their duty to protect human rights, and that in fact businesses are doing most of the legwork (albeit very slowly themselves). The UK, Netherlands, Spain, Italy and Denmark have already started and the US announced its intentions to create its Plan in September 2014.  A number of other states announced that they too will work on National Action Plans at the recent UN Forum on Business and Human Rights that I attended in Geneva in early December. For a great blog post on the event see ICAR director Amol Mehra’s Huffington Post piece.

What would a US National Action plan contain? Some believe that it would involve more disclosure regulation similar to the Dodd-Frank Conflict Minerals Rule, the Ending Trafficking in Government Contracting Act, Trafficking Victims Protection Act, the Burma Reporting Requirements on Responsible Investment, and others. Some hope that it will provide additional redress mechanisms after the Supreme Court’s decision in Kiobel significantly limited access to US courts on jurisdictional grounds for foreign human rights litigants suing foreign companies for actions that took place outside of the United States.

But what about the role of business? Here are five observations from my trip to Geneva: 

1)   It’s not all about large Western multinationals: As the Chair of the Forum Mo Ibrahim pointed out, it was fantastic to hear from the CEOs of Nestle and Unilever, but the vast majority of people in China, Sudan and Latin American countries with human rights abuses don’t work for large multinationals. John Ruggie, the architect of the Principles reminded the audience that most of the largest companies in the world right now aren’t even from Western nations. These include Saudi Aromco (world’s largest oil company), Foxconn (largest electronics company), and India’s Tata Group (the UK’s largest manufacturing company).

2)   It’s not all about maximization of shareholder value: Unilever CEO Paul Pollman gave an impassioned speech about the need for businesses to do their part to protect human rights. He was followed by the CEO of Nestle.  (The opening session with both speeches as well as others from labor and civil society was approximately two hours long and is here). In separate sessions, representatives from Michelin, Chevron, Heinekin, Statoil, Rio Tinto, Barrick, and dozens of other businesses discussed how they are implementing human rights due diligence and practices into their operations and metrics, often working with the NGOs that in the past have been their largest critics such as Amnesty International, Human Rights Watch and Oxfam. The US Council for International Business, USCIB, also played a prominent role speaking on behalf of US and international business interests.

3)   Investors and lenders are watching: Calvert; the Office of Investment Policy at OPIC, the US government’s development finance institution; the Peruvian Financial Authority; the Supervision Office of the Banco Central do Brasil; the Vice Chair of the Banking Association of Colombia; the European Investment Bank; and Swedfund, among others discussed how and why financial institutions are scrutinizing human rights practices and monitoring them as contractual terms. This has real world impact as development institutions weigh choices about whether to lend to a company in a country that does not allow women to own land, but that will provide other economic opportunities to those women (the lender made the investment). OPIC, which has an 18 billion dollar portfolio in 100 countries, indicated that they see a large trend in impact investing.

4)   Integrated reporting is here to stay: Among other things, Calvert, which manages 14 billion in 40 mutual funds, focused on their commitment to companies with solid track records on environmental, social, and governance factors and discussed the benefits of stand alone or integrated reporting. Lawyers from some of the largest law firms in the world indicated that they are working with their clients to prepare for additional non-financial reporting, in part because of countries like the UK that will mandate more in 2016, and an EU disclosure directive that will affect 6,000 firms.

5)   Is an International Arbitration Tribunal on the way?: A number of prominent lawyers, retired judges and academics from around the world are working on a proposal for an international arbitration tribunal for human rights abuses. Spearheaded by lawyers for better business, this would either supplement or possibly replace in some people’s view a binding treaty on business and human rights. Having served as a compliance officer who dealt extensively with global supply chains, I have doubts as to how many suppliers will willingly contract to appear before an international tribunal when their workers or members of indigenous communities are harmed. I also wonder about the incentives for corporations, the governing law, the consent of third parties, and a host of other sticking points. Some raised valid concerns about whether privatizing remedies takes the pressure off of states to do their part. But it’s a start down an inevitable road as companies operate around the world and want some level of certainty as to their rights and obligations.

On another note, I attended several panels in which business executives, law firm partners, and members of NGOs decried the lack of training on business and human rights in law schools. Even though professors struggle to cover the required content, I see this area as akin to the compliance conversations that are happening now in law schools. There is legal work in this field and there will be more. I look forward to integrating some of this information into an upcoming seminar.

In the meantime, I tried to include some observations that might be of interest to this audience. If you want to learn more about the conference generally you can look to the twitter feed on #bizhumanrights or #unforumwatch, which has great links.  I also recommend the newly released Top 10 Business and Human Rights Issues Whitepaper.

 

 

The New York Times reports that LLCs have the ability to do things in New York politics that corporations cannot do: 

For powerful politicians and the big businesses they court, getting around New York’s campaign donation limits is easy.

. . .

Corporations like Glenwood are permitted to make a total of no more than $5,000 a year in political donations. But New York’s “LLC loophole” treats limited-liability companies as people, not corporations, allowing them to donate up to $60,800 to a statewide candidate per election cycle. So when Mr. Cuomo’s campaign wanted to nail down what became a $1 million multiyear commitment — and suggested “breaking it down into biannual installments” — the company complied by dividing each payment into permissible amounts and contributing those through some of the many opaquely named limited-liability companies it controlled, like Tribeca North End LLC.

It may appear unseemly to allow LLCs to do things corporations cannot do, but (as usual) I bristle at the implication that LLCs should be treated like corporations just because they are limited-liability entities. Perhaps LLCs and corporations should be treated the same for campaign purposes (and I am inclined to think they should be), but there are lots of reasons to treat LLCs differently than corporations, and it is not inherently “a loophole” when they are treated differently.

A loophole is an ambiguity or inadequacy in the law.  Here, the different treatment is not an ambiguity, though it is inadequate to limit funding in campaigns. However, it is not at all clear that the intent was to limit funding through LLCs.  The law was likely passed so that the legislature could say it did something to reform finance.  It did — it closed the door for corporations and opened the door for LLCs.  Playing entity favorites is permissible, even if it’s not sensible.  

LLCs and corporations are different entities, and different rules for different entities often makes a whole lot of sense.  And even when it doesn’t make sense, the idea that different entities should have different rules still does. Let’s not conflate the two concepts, even when decrying the impact. 

Many of you may have seen this already, but this past week’s news brought with it an update to JPMorgan Chase CEO Jamie Dimon’s health situation–positive news on his cancer treatment results, for which we all can be grateful. I posted here about Dimon’s earlier public disclosure that he was undergoing treatment for this cancer.  Based on publicly available information, I give Dimon my (very unofficial) “Power T for Transparency” cheer for 2014.  (The “Power T” is The University of Tennessee’s key–and now almost exclusive–branding symbol.  See my earlier posts on UT’s related branding decisions regarding the Lady Volunteers here and here.) 

As many of you know, I have written about  securities  law and corporate law disclosure issues relating to private facts about key executives (which include questions relating to the physical health of these important corporate officers).  I do not plan to rehash all that here. But I will note that I think friend and Glom blogger David Zaring gets it just right in his brief report on the recent Dimon announcement (with one small typo corrected and a hyperlink omitted):

Not to pile on, but there’s the slightly unsettling trend of CEOs talking, or not, about their health.  Surely material information a real investor would want to know about when deciding whether to buy or sell a stock in these days of the imperial CEO.  But deeply unprivate. . . . The stock is up 2% on the day.  It will be interesting to see whether this email makes its way into a securities filing.

Love that post.  Thanks, David.

Sadly, as I was drafting this post, I learned that Kansas City Chiefs safety and former Tennessee Volunteer football standout Eric Berry has been diagnosed with Hodgkin’s lymphoma.  This obviously is not a matter of public company business disclosure regulation (given that the Kansas City Chiefs franchise, while incorporated, apparently is privately held).  But I know I join many in and outside Vol Country in wishing Eric the same success in his cancer treatment that Dimon appears to have had to date with his.