Many financial industry analysts are bearish on the oil industry right now. I’m not sure they’re right, as I note below, but I also think it’s important to recognize that financial market impact of oil price fluctuations is not the only impact U.S. oil production has on markets generally.

One thing I want to make clear at the outset, though, is that I am not a financial analyst, or an economist (as I have previously noted). My comments here are reactions to things analysts are saying based on my experience researching U.S. shale oil markets and activity, as well as the U.S. transportation sector in recent years.  My thoughts are related to my expectations for how I think the companies and people in the industry are likely to react, and reflect my hope that financial market changes don’t negatively impact other essential planning, in areas related to health, safety, and the environment, the industry desperately needs.

Back to the market predictions:  Goldman Sachs and some other analysts see the oil sector as over saturated and anticipate continued supply gluts to keep prices down.  According to a report from Goldman analysts, U.S. price indicator West Texas Intermediate (WTI) crude will fall to $75 a barrel and Brent crude is expected to be at $85 a barrel in the first quarter of 2015. That would be a $15 per barrel discount from the last such report.  

In accord is Jim Cramer, of MSNBC fame, who says, “This is uniquely a perfect storm against oil.” Several others see an OPEC “price war” with some saying oil is teetering on the brink of collapse.  I’m even less sure that’s right, in part because of where Jim Cramer comes out on this. (I’m not a huge fan of his advice or style, but for those who don’t know, I’ll let Jon Stewart catch you up on that here.)  I don’t see a “perfect storm” or even much more than a “light shower” coming in the oil sector from pricing or demand problems.

I’m not alone.  Others see this recent price dip as real, but short lived. Dan Dicker, president of money manager MercBloc, sees oil prices increasing within the next two years going up to $125 per barrel or even $140.  Dicker called the pricing a “Mirage.” (I think these predictions are a bit bold in the other direction, too, as I expect to some fluctuation but think prices will reside mostly north of $85-$90 barrel, then increase into the $100s. Again, though, remember this is a law professor’s opinion.) 

Though I am sure he is not alone, Jim Cramer is the one person I have seen suggesting that a U.S. oil slowdown is likely, at least if oil prices drop to $70 a barrel.  Possible, but I still don’t see it.  As I have suggested elsewhere, I don’t think the price of oil, which is largely a global price, will drop to a point where it is not profitable to oil companies.   Obviously the price can (and will) fluctuate, and the reality is that oil demand increases and decreases, but it has a higher baseline than I think some people are appreciating.  

For years we heard about Peak Oil and the end of oil, but what we were really seeing was the end of really cheap oil.  As the recent shale boom has demonstrated, there’s plenty of oil available at the right price. The current price dip, I think, just an indication that supply is more abundant than expected, but not that the oil market is about to crater. Thus, perhaps we will see a slowing of the rate of new drilling activity, but I don’t see an actual slowdown in growth in the sector — just in the rate of growth. 

Historically, we’ve had other ways to deal with price drops, too. The Complete Idiot’s Guide to Options And Futures, 2nd Edition, By Scott Barrie, repeats the old trader’s adage, “the best cure for low prices is low prices,” and “the best cure for high prices is high prices.” Low oil prices in the 1990s helped lead the way for the boom of SUVs. Before that, in the 1970s, companies like Honda and Toyota made their way into the U.S. market with their fuel-efficient vehicles following the oil embargo and high gas prices.  Unlike when those market changes occurred, though, we have a full complement of both SUV and hybrids available to take advantage of price changes in the relatively near term when gas prices change.  

Ultimately, if stock price is why people care about oil prices and production in the United States, it’s entirely possible the bears are right that company valuations will come down in the near term. In the mid to long term, though, oil production is going to at least stay steady. As such, regardless of the market impact of the oil boom, oil will continue to flow, which will mean it will continue to need transportation.  Therefore, it’s important that we assess safety risks for infrastructure improvements, such as oil and gas pipelines, that can improve safety in areas that like rail and trucking, which are currently being taxed by the current level of oil and gas development in the country. In addition, a potential slowing of growth rates does not mean that other environmental and social challenges will go away soon.

Of course it makes sense to plan for a financial future and predicting how oil will fare in the coming months is part of the analysis for some.  But changes in market expectations don’t quickly, or necessarily significantly, impact the real world experience for those in affected areas.  Frankly, a slow down in growth rates likely would be welcome in many areas experiencing the oil boom, but a slow down doesn’t mean the work necessary to maximize economic opportunity, minimize environmental harm, boost social conditions, and improve safety can come to an end.  It might simply be a chance for impacted areas to catch up before the next boom begins (or this one continues).  We shouldn’t miss that chance. 

On Friday, I participated in the 2014 Workshop for Corporate & Securities Litigation sponsored by the University of Richmond School of Law and the University of Illinois College of Law and held on the University of Richmond’s campus.  Thanks to Jessica Erickson and Verity Winship for hosting an amazing group of scholars presenting impressive, interesting papers.  I attended the workshop to test an idea for a paper tentatively entitled: “Policy and International Securities Fraud Actions: A Matter of Investor and (or) Market Protection?”

The paper would address an important issue in U.S. federal securities law: the extraterritorial reach of the general anti-fraud protections in Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 adopted by the U.S. Securities and Exchange Commission under Section 10(b). In a world where securities transactions often cross borders—sometimes in non-transparent ways—securities regulators, issuers, investors, and intermediaries, as well as legal counsel and the judiciary, all need clarity on this matter in order to plan and engage in transactions, advocacy, and dispute resolution. Until four years ago, the rules in this area (fashioned more as a matter of  jurisdiction than extraterritorial reach) were clear, but their use often generated unpredictable results.

In Morrison v. Nat’l Austl. Bank Ltd., 130 S. Ct. 2869 (2010), the U.S. Supreme Court held that “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” This was a non-obvious analytical result (at least to me) that has generated significant criticism, debate, and discussion. The Court’s struggle—and that of those who disagree with the holding or the Court’s reasoning or both—has been to determine the purpose(s) of Section 10(b) as a federal securities law liability statute and assess the extraterritorial reach of Section 10(b) in light of that purpose or those purposes. This project extends my earlier work (originally written for and published as part of a French colloquium in 2012) and involves the engagement of a deep analysis of long-standing, albeit imperfectly articulated, federal securities regulation policy in the context of cross-border fraud and misstatement liability.

This will be a big undertaking, if I commit to a comprehensive approach.  I got a lot of good feedback on my overall concept for the project–enough that I am rethinking the project in significant ways.  One possible idea is to approach the underlying general policy articulation first, as a separate project, before undertaking the formidable task of rationalizing that policy at the intersection of the academic literature on class action litigation, Section 10(b) and Rule 10b-5, and cross-border markets and cross-listings.  The two-stage approach has significant appeal to me.  I start from the notion that investor protection and the maintenance of market integrity under federal securities regulation both serve the foundational goal of promoting capital formation.  But that is contestable . . . .

What are your thoughts regarding the most coherent articulation of the policies underlying Section 10(b) and Rule 10b-5 multinational securities regulation and the appropriateness of the Morrison test for extraterritoriality in light of that articulation?

A few weeks ago, I suggested the book Is Administrative Law Unlawful, by Philip Hamburger. I have now finished reading the book. It’s a tough read but, if you’re interested in constitutional history as it relates to administrative law, I strongly recommend it.

I was especially struck by the following argument about the connection between popular sovereignty and the growth of administrative rule:

The growth of administrative power in America has followed the expansion of suffrage—an expansion that increasingly has opened up voting to all the people. It therefore is necessary to consider whether there is a connection.

It would appear that the new, cosmopolitan, or knowledge class embraced popular suffrage with a profound caveat. They tended to favor popular participation in voting, but they also tended to support the removal of much legislative power from legislatures. The almost paradoxical result has been to agonize over voting rights while blithely shifting legislative power to unelected administrators.

. . . Throughout the nineteenth and twentieth centuries, reformers struggled for the people to have equal representation and thus to enjoy the power to govern themselves. The reformers told themselves that, if only the people had power, reasonable and righteous government would prevail. When the people gradually acquired this power, however, the results were disappointing for the knowledge class. The members of this class had established their status, influence, and sense of self-worth through their assiduous pursuit of rationality and specialized knowledge, and they were troubled that popularly elected legislatures did not operate in line with the qualities they so admired in themselves. . . . Administrative power . . . was one of the avenues for power by and on behalf of a class that understood authority not merely in terms of the equal rights of all the people, but more deeply in terms of their own rationality and specialized knowledge.

Democracies often make stupid choices. But I will take democracy over technocracy any day. Bureaucrats also make stupid choices, and bureaucrats are much less likely than democratic majorities to admit their mistakes and move on.

In addition to the two letters Anne Tucker mentioned earlier, Lyman Johnson (Washington & Lee and University of St. Thomas) has now organized another group of legal scholars to respond to the HHS post-Hobby Lobby Rules. The Johnson letter is available here.

As Stephen Bainbridge (one of the authors) notes, Lyman Johnson brought together a group of scholars with diverse views for this letter. The letter is worth reading and the abstract is provide below.

In late August 2014, after suffering a defeat in the Supreme Court Hobby Lobby decision when the Court held that business corporations are “persons” that can “exercise religion,” the Department of Health and Human Services (“HHS”) proposed new rules defining “eligible organizations.” Purportedly designed to accommodate the Hobby Lobby ruling, the proposed rules do not comport with the reasoning of that important decision and they unjustifiably seek to permit only a small group of business corporations to be exempt from providing contraceptive coverage on religious grounds. This comment letter to the HHS about its proposed rules makes several theoretical and practical points about the Hobby Lobby holding and how the proposed rules fail to reflect the Court’s reasoning. The letter also addresses other approaches to avoid in the rulemaking process and argues for rules that, unlike what the HHS has proposed, align with the Supreme Court’s reasoning while being consonant with generally applicable precepts of state law and principles of federalism.

Minor Myers and Charles Korsmo have a new paper that compares fiduciary duty merger litigation to appraisal litigation to determine whether fiduciary duty claims add any value for shareholders. 

After scrutinizing takeover challenges between 2004 and 2013, they find that the larger the deal, the more likely it is to be targeted in a fiduciary duty class action.  By contrast, whether there is a smaller merger premium – regardless of deal size – does not appear to be correlated with class action litigation.  Appraisal litigation, however, works differently; plaintiffs who bring appraisal claims tend to do so when the merger premium is low, regardless of deal size.

They also found that fiduciary suits are not associated with an increase in merger consideration.  I.e., they do not generate statistically significant benefits to shareholders.

Myers and Korsmo conclude from this that fiduciary duty class actions are not usually based on merit, and that such actions are brought for their nuisance value.  They recommend changes to the structure of fiduciary litigation, such as allowing investors who acquire stock after the deal announcement to serve as lead plaintiff, and switching to an opt-in model.

But there’s a wrinkle that comes in the form of a paper by C.N.V. Krishnan, Steven Davidoff Solomon, and Randall S. Thomas.  That paper compares fiduciary merger litigation brought by different plaintiffs’ firms, and concludes that not all firms are created equal.  Specifically, the top plaintiffs’ firms target more suspicious transactions, and when the litigation is controlled by these firms, the class members are more likely to win an increase in merger consideration.  They also find that top firms prosecute actions more vigorously, in measurable ways.

Obviously, these two papers, put together, raise an interesting question: what would happen if the Myers/Korsmo study were conducted with a view to the identity of the lead plaintiff’s law firm?  Would they see the same results?  And if the problem here is just that there are better and worse law firms, is that something that can be addressed via more exacting standards for the award of attorneys’ fees?

(Okay, full disclosure – one of the top plaintiffs’ firms in the Krishnan et al study is my former firm, BLBG.  But hey, I didn’t do the study – I’m just reporting the results.)

My co-blogger Stefan Padfield passed along this article from The New York Times Dealbook on the social network Ello.

Ello is a Delaware public benefit corporation. The social enterprise terminology is proving difficult, even for sophisticated authors at the New York Times Dealbook. The article calls Patagonia and Ben & Jerry’s public benefit corporations. Patagonia, however, is a California benefit corporation. I wrote about the differences between public benefit corporations and benefit corporations here. Ben & Jerry’s is a certified B corporation, but, as far as I know, Ben & Jerry’s has not yet made the legal change to convert to any of the social enterprise forms. I wrote about the differences between benefit corporations and certified B corporations here and here. Just as my co-blogger Joshua Fershee remains vigilant at pointing out the differences between LLCs and corporations, so I will remain vigilant on the social enterprise distinctions. 

Besides my nitpicking on the use of social enterprise terminology, there are a few other things I want to say about this article.     

First, Ello raised $5.5 million dollars, which is not that much money in the financial world, but puts Ello in pretty rare company in the U.S. social enterprise world. The vast majority of U.S. social enterprises are owned by a single individual or family; some social enterprises have raised outside capital, but not many. The increasing presence of outside investors in social enterprise means two main things to me: (1) the social enterprise concept is starting to gain some traction with previously skeptical investors, and (2) we may see a shareholder derivative lawsuit in the near future, which would give us all more to write about. 

Second, Ello included a clause in its charter that “forbids the company from using ads or selling user data to make money.” This provision seems a direct response to the eBay v. Newmark case. The business judgment rule provides significant protection to directors and, at least theoretically, should calm many of the fears of social entrepreneurs. But risk adverse individuals may seek additional layers of protection.

Third, Ello claims that their charter provision “basically means no investor can force us to take a really good financial deal if it forces us to take advertising.” This seems overstated.  Charters can be amended, but at least the charter puts outside investors on notice. This provision in the charter does not, however, protect against a change of heart by the founders and a selling of the company (such as in the case of Ben & Jerry’s sale to Unilever).

Fourth, this October 4, 2014 article claims that Ello is pre-revenue. The NYT Dealbook article notes that “[u]sers will eventually be able to download widgets and modifications, paying a few dollars for each purchase.” (emphasis added). Ello seems to be one of the growing number of technology companies that are being valued by number of users rather than by revenues or profits. Ello “grew from an initial 90 users on Aug. 7 to over a million now, with a waiting list of about 3 million.”

Fifth, even if traditional investors are (somewhat) warming up to social enterprises, social entrepreneurs still seem to be a bit skeptical of traditional investors. When raising money, Ello “drew the attention of the usual giants in the venture capital world. . . . But Mr. Budnitz said he instead turned to investors whom he could trust to back the start-up’s mission, including the Foundry Group, whom he came to know when he lived in the firm’s hometown, Boulder, Colo.” There are increasing sources of capital for social enterprises from investors who also have a stated social goal (See, e.g., JP Morgan’s May 2014 survey of impact investors).

Some in the academic world have wondered if social enterprise is just a fad. While I am confident that the space will and must continue to evolve, if it is a fad, it has already been a long-running one. The names and details of the statutes may change, but I see a growing interest in marrying profit and social purpose, and I think that interest is likely to continue in some form.     

Cross-posted at SocEntLaw.

I used to joke that my alma mater Columbia University’s core curriculum, which required students to study the history of art, music, literature, and philosophy (among other things) was designed solely to make sure that graduates could distinguish a Manet from a Monet and not embarrass the university at cocktail parties for wealthy donors. I have since tortured my son by dragging him through museums and ruins all over the world pointing spouting what I remember about chiaroscuro and Doric columns. He’s now a freshman at San Francisco Art Institute, and I’m sure that my now-fond memories of class helped to spark a love of art in him. I must confess though that as a college freshman I was less fond of  Contemporary Civilization class, (“CC”) which took us through Plato, Aristotle, Herodotus, Hume, Hegel, and all of the usual suspects. At the time I thought it was boring and too high level for a student who planned to work in the gritty city counseling abused children and rape survivors.

Fast forward twenty years or so, and my job as a Compliance and Ethics Officer for a Fortune 500 company immersed me in many of the principles we discussed in CC, although we never spoke in the lofty terms that our teaching assistant used when we looked at bribery, money- laundering, conflicts of interest, terrorism threats, data protection, SEC regulations, discrimination, and other issues that keep ethics officers awake at night. We did speak of values versus rules based ethics and how to motivate people to “do the right thing.”

Now that I am in academia I have chosen to research on the issues I dealt with in private life. Although I am brand new to the field of normative business ethics, I was pleased to have my paper accepted for a November workshop at Wharton’s Zicklin Center for Business Ethics Research. Each session has two presenters who listen to and respond to feedback from attendees, who have read their papers in advance. Dr. Wayne Buck, who teaches business ethics at Eastern Connecticut State University, presented two weeks ago. He entitled his paper “Naming Names,” and using a case study on the BP Oil spill argued that the role of business ethics is not merely to promulgate norms around conduct, but also to judge individual businesspeople on moral grounds. Professor John Hasnas of Georgetown’s McDonough School of Business also presented his working paper “Why Don’t Corporations Have the Right to Vote?” He argued that if we accept a theory of corporate moral agency, then that commits us to extending them the right to vote. (For the record, my understanding of his paper is that he doesn’t believe corporations should have the right.) Attendees from Johns Hopkins, the University of Connecticut, Pace and of course Wharton brought me right back to my days at Columbia with references to Rawls and Kant. My comments were probably less theoretical and more related to practical application, but that’s still my bent as a junior scholar.

In a few weeks, I present on my theory of the social contract as it relates to business and human rights. In brief, I argue that multinational corporations enter into social contracts with the states in which they operate (in large part to avoid regulation) and with stakeholders around them (the “social license to operate”, as Professor John Ruggie describes it). Typically these contracts consist of the corporate social responsibility reports, voluntary codes of conduct, industry initiatives, and other public statements that dictate how they choose to act in society, such as the UN Global Compact. Many nations have voluntary and mandatory disclosure regimes, which have the side benefit of providing consumers and investors with the kinds of information that will help them determine whether the firm has “breached” the social contract by not living up to its promise. The majority of these proposals and disclosure regimes (such as Dodd-Frank conflict minerals) rest on the premise that armed with certain information, consumers and investors (other than socially responsible investors) will pressure corporations to change their behavior by either rewarding “ethical” behavior or by punishing firms who act unethically via a boycott or divestment.

I contend in my article that: (1) corporations generally respond to incentives and penalties, which can cause them to act “morally;” (2) states refuse to enter into a binding UN treaty on business and human rights and often do not uniformly enforce the laws, much less the social contracts; (3) consumers over-report their desire to buy goods and services from “ethical” companies; and (4) disclosure for the sake of transparency, without more, will not lead to meaningful change in the human rights arena. Instead, I prefer to focus on the kinds of questions that the board members, consumers, and investors who purport to care about these things should ask. I try to move past the fuzzy concept of corporate social responsibility to a stronger corporate accountability framework, at least where firms have the ability to directly or indirectly impact human rights.

As a compliance officer, I did not use terms like “deontological” and “teleological” principles, but some heavy hitters such as Norway’s Government Pension Fund, with over five billion Kronos under management, do. The 2003 report that helped establish the Fund’s recommendations on ethical guidelines state in part:

One group of ethical theories asserts that we should primarily be concerned with the consequences of the choices we make. These theories are in other words forward-looking, focusing on the consequences of an action. The choice that is ethically correct influences the world in the best possible way, i.e. has the most favourable consequences. Every choice generates an infinite number of consequences and the decisive question is of course which of the consequences we should focus on. Again, a number of answers are possible. Some would assert that we should focus on individual welfare, and that the action that has the most favourable consequences for individual welfare is the best one. Others would claim that access to resources or the opportunities or rights of the individual are most important. However, common to all these answers is the view that the desire to influence the world in a favourable direction should govern our choices.

Another group of ethical theories focuses on avoiding breaching obligations by avoiding doing evil and fulfilling obligations by doing good. Whether the results are good or evil, and whether the cost of doing good is high, are in principle of no significance. This is often known as deontological ethics.

In relation to the Petroleum Fund, these two approaches will primarily influence choice in that deontological ethics will dictate that certain investments must be avoided under any circumstances, while teleological ethics will lead to the avoidance of investments that have less favourable consequences and the promotion of investments that have more favourable consequences.

Recently, NGOs have pressured firms to speak on out human rights abuses at mega-events and have published their responses. The US government has made a number of efforts, some unsuccessful, to push companies toward more proactive human rights initiatives. These issues are here to stay. As I formulate my recommendations, I am looking at the pension fund, some work by ethicists researching marketing principles, writings by political and business philosophers, and of course, my old friends Locke, Rousseau, Rawls and Kant for inspiration. If you have ideas of articles or authors I should consult, feel free to comment below or to email me at mnarine@stu.edu. And if you will be in Philadelphia on November 14th, register for the session at Wharton and give me your feedback in person.

 

 

 

 

Mohsen Manesh (Oregon) has posted a new article entitled Nearing 30, Is Revlon Showing Its Age?  I have read a fair number of Mohsen’s articles and am consistently impressed.

The abstract reads:

Nearly thirty years ago, in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., the Delaware Supreme Court famously dictated that in certain transactions involving a “sale or change in control,” the fiduciary obligation of a corporation’s board of directors is simply to “get[] the best price for the stockholders.” Applying a novel remedial perspective to this iconic doctrine, in The Dwindling of Revlon, Professor Lyman Johnson and Robert Ricca argue that Revlon is today of diminishing significance. In the three decades since, the coauthors observe, corporate law has evolved around Revlon, dramatically limiting the remedial clout of the doctrine. In this Essay, I show how two recent Delaware Chancery Court decisions — Chen v. Howard-Andersen and In re Rural Metro — underscore the expansive reach of Revlon and, therefore, the limits of Johnson and Ricca’s thesis. Instead, I suggest the dwindling of Revlon, if it is indeed dwindling, may be best observed from what is happening outside the pressed edges of corporate law, where other competing bodies of business law have emerged rejecting Revlon’s fiduciary mandate.

The article is a nice response to a thoughtful article by Lyman Johnson and Rob Ricca entitled The Dwindling of Revlon.

Both articles are highly recommended.

In addition, Stephen Bainbridge, Christopher Bruner, Franklin Gevurtz, and Vice Chancellor Travis Laster have all weighed in with interesting articles on Revlon over the last few years.

In response to the Department of Health and Human Services’ Proposed Regulation and Request for Comments regarding the definition of “eligible organization” (see earlier post here) at least two groups of law professors have weighed in on the issue.

The first comment letter, available here, was submitted by the U.C. Berkeley corporate law professors and encourages the Department to adopt a definition based upon the veil piercing theory.  “We … propose that for purposes of defining an “[W]e … suggest that shareholders of a corporation should have to certify that they and the corporation have a unity in identity and interests, and therefore the corporation should be viewed as the shareholders’ alter ego.”  The comments argue that utilizing the veil-piercing theory avoids the consequences of a setting an arbitrary number of shareholders thus creating a rule that would be “seriously under-and-over-inclusive, capturing corporations that meet the numerical test but for which shareholders are not the alter egos of the corporation, as well as failing to capture corporations with a relatively large number of shareholders that are all united in their interests and are alter egos of one another.”

The second comment letter on which I worked and was joined by some editors of this blog as signatories, is available here.  This comment letter, signed by 43 corporate law professors, was produced through the coordinating efforts of the The Public Rights / Private Conscience Project at Columbia Law School headed by  Katherine Franke, and the project’s executive director,  Kara Loewentheil.   This letter too encourages the HHS to adopt an approach that requires an “identity of interests.”  These comments suggest a blueprint for establishing an identity of interest, namely a focus on “entities (1) with a limited number of equity holders/owners, (2) that demonstrate religious commitment, and (3) submit evidence of unanimous consent of equity holders to seek an accommodation on an annual basis.”  The comments provide additional criteria under each of these three elements to operationalize the holding in Hobby Lobby.

-Anne Tucker