A new poll, conducted by Greenberg Quinlan Rosner Research, suggests that the desire for new Wall Street regulations has not been maximized by candidates for political office.  Here are some of the poll’s key findings.  The release about the poll states:

A strong, bipartisan majority of likely 2014 voters support stricter federal regulations on the way banks and other financial institutions conduct their business. Voters want accountability and do not want Wall Street pretending to police themselves: they want real cops back on the Wall Street beat enforcing the law.

As evidence, the release notes that David Brat’s upset win over Eric Cantor in the Virginia 7th District Republican primary, may have been related to Brat’s attack on Wall Street, sharing Brat’s words from a radio interview: “The crooks up on Wall Street and some of the big banks — I’m pro-business, I’m just talking about the crooks — they didn’t go to jail, they are on Eric’s Rolodex.”

The poll found that voters consider Wall Street and the large banks as “bad actors,” with 64% saying,  “the stock market is rigged for insiders and people who know how to manipulate the system.”  Another 60% want “stricter regulation on the way banks and other financial institutions conduct their business.” Finally, 

Voters believe another crash is likely and that regulation can help prevent another disaster. An 83 percent majority of voters believe another crash is likely within the next 10 years, and 43 percent very likely. Another 55 percent, however, agree “Stronger rules on Wall Street and big financial institutions by the federal government will help prevent another financial collapse.”

I don’t doubt that voters believe this, but I also don’t think this poll data will lead to much (if any) significant change.  I concede the poll shows that the issue resonates with voters, but I think Brat’s quote shows where the wiggle room is (and perhaps how other astute Republicans, particularly, may use the issue in their races).   That is, I think the majority of Americans are “pro-business” and anti-crooks. That’s not news. When it comes time to vote on new regulation, though, I expected Mr. Brat (should he win the election) would find that the proposals before him would only “hurt business” and “not punish crooks.”  

I could be wrong, of course, but I doubt it.  Like “energy independence” and “good schools,” I think this poll shows us another one of those issues where voters care more about hearing that the system needs to be fixed rather than an issue where voters will be keeping score to see if progress is made.  

So, I’ve been thinking a lot about “happiness” lately. Not just because of Pharrell’s catchy tune, but more so because I am at the beginning of a project where I am questioning whether there is room for happiness and well-being in corporate law (both in theory and in practice).

First, what do I mean by happiness? To be honest, I am not quite sure yet and that may be part of my search and exploration.  Happiness can be thought of in terms of “raw subjective feeling”, where a happy life is one that “maximizes feelings of pleasure and minimizes pain” (the Hedonism Theory). It can also be thought of in terms of fulfilling whatever it is you desire (the Desire Theory) and yet still, happiness could also be viewed as consisting of achieving “things” (for lack of a better word) that are “objectively valuable” – for example, having financial security, love, a better education, and good health (the Objective List Theory). Additionally, happiness could be thought of as encompassing all three of these theories. For example the Authentic Happiness Theory developed by Martin E.P. Seligman and Ed Royzman, views happiness as consisting of “three distinct kinds of happiness: the Pleasant Life (pleasures), the Good Life (engagement) and the Meaningful Life.” Seligman and Royzman’s framework for thinking about happiness in the wider sense is one of several that I have found useful for thinking about happiness in the specific context of corporate law, as it consists of both subjective measurements (Pleasant Life and Good Life), as well as objective measurements (the Meaningful Life, which according to Seligman and Royzman focuses on “what is larger and more worthwhile than just the self’s pleasures and desires”).

Well, what about the Meaningful Life in the context of the corporation? Is such a concept even relevant? My preliminary answer is yes – for among other things, as I have written about previously…

  • as corporations endeavor to deal with increasing demands for sustainable business models from their consumers and various other stakeholders
  • as concepts of shifting from our current linear economy to a circular economy gain more traction
  • as corporations begin to increasingly focus on meeting the estimated $5 trillion demand at the BoP,  and
  • as tri-sector cooperation models that leverage the strengths of for-profit business, governments, and NGOs in tackling global problems, such as access to clean water and childhood malnutrition increase…

in order to remain competitive, corporations will have to contend with developing business models that contribute to some larger societal good beyond mere profit maximization.

Of course the cynic in me can’t help but ask whether such new business models will represent a shift to greater other-regarding behavior from corporations or whether they are really no more than profit maximand norms dressed in Aristotelian garb.

In terms of corporate law, does our current corporate law framework and its attendant core concepts such as efficiency, transparency, accountability, “shareholders qua owners” allow for considerations of an “other-regarding” Meaningful Life? I think the BJR and current corporate law framework would say “yes”, barring some extreme circumstance a la Revlon, but I also think it depends in large part on who we appoint as our proxy for measuring meaning.

I have been working on a draft article for the University of Cincinnati Law Review based on a presentation that I gave this spring at the annual Corporate Law Symposium.  This year’s topic was “Crowdfunding Regulations and Their Implications.”  My draft article addresses the public-private divide in the context of the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act–more commonly known as the CROWDFUND Act.  I am using two pieces coauthored by Don Langevoort and Bob Thompson (here and here), as well as three works written by Hillary Sale (here, here, and here) to engage my analysis.

I also will be participating in a discussion group at the Southeastern Association of Law Schools annual conference in August on the publicness theme.  That session is entitled “Does The Public/Private Divide In Federal Securities Regulation Make Sense?” and is scheduled for 3:00 pm on Augut 6th, for those attending the conference.  Michael Guttentag was good enough to recruit the group for this discussion.

All this work on publicness has my head spinning!  There are a number of unique conceptions of pubicness, some overlapping or otherwise interconnected, with different conceptions being useful in different circumstances.  I am attracted to a number of observations in both the Langevoort/Thompson and Sale bodies of work, but there’s clearly a lot more to think about from the standpoint of both scholarship and teaching.

So, today I ask:  What does publicness mean to you?  Does there continue to be salient meaning in the distinction between piublic and private (offerings, companies, etc.)?  If so, what should publicness mean in these contexts?  I am curious to see what others think.

The Internet is the Wild West of securities law. I often see things and wonder, “How can they get away with that?”

Sometimes, the answer is that they can’t. A couple of years ago, I stumbled across ProFounder, a crowdfunding platform offering equity interests in startups. I couldn’t understand how ProFounder could do what they were doing without running afoul of securities laws. Sure enough, a few months later, the California Department of Corporations issued a consent order barring ProFounder from selling securities on its web site unless it registered as a broker-dealer.

My latest securities law puzzle comes via the Wall Street Journal. A recent article reports that a new crowdfunding platform, CrowdFranchise, will allow investors to buy equity stakes in business franchises.

If those franchise interests were being sold only to accredited investors, the new Rule 506(c) exemption might apply. It allows public solicitations through a web site like this. But according to the Journal, “CrowdFranchise investors don’t need to be accredited, because the franchises themselves are offering the deals, and franchises are allowed to award multiple pieces of an outlet.” This doesn’t make a lot of sense to anyone familiar with securities law. Depending on how they’re structured, franchise interests can be securities, and there’s no exemption for selling “multiples pieces of an outlet,” whatever that means.

So how can these franchise offerings avoid registration? The new crowdfunding exemption in section 4(a)(6) of the Securities Act might work, but it’s not yet available. The SEC still has not adopted the required rules.

The argument appears to be that these franchise interests are not securities. A FAQ on CrowdFranchise’s web site says:

Until Title III of the JOBS Act is passed, each member will be required to sign a franchise agreement and be given the rights required as an active franchisee partner. To facilitate the management of the franchise with multiple partners, each franchise opened through CrowdFranchise will need to subscribe to mandatory electronic communication, management, and voting tools provided by CrowdFranchise to help with daily decisions for the company.

Title III has, of course, already passed; I assume they mean until the crowdfunding regulations under Title III are adopted. But, setting that aside, the requirements they impose don’t guarantee that these franchise investments won’t be treated as securities.

Business investments that do not involve corporate stock are generally evaluated under the investment contract analysis adopted by the Supreme Court in SEC v. W. J. Howey Co., 328 U.S. 293 (1946). Under Howey, a security is present if there is an investment of money in a common enterprise with an expectation of profits from the efforts of others. The franchise investors would clearly be investing money with an expectation of profits and, if there are multiple investors, there would be a common enterprise. The key is the final part of the test: whether those profits would come from the efforts of others or the investors’ own efforts.

Franchise investors would clearly have some control, and therefore, some involvement in determining the fortunes of the franchise. But the question is whether their efforts would be “the undeniably significant ones, those essential managerial efforts which affect the failure or success of the enterprise.” SEC v. Glenn W. Turner Enterprises, Inc., 474 F.2d 476 (9th Cir. 1973).

To answer that question, most courts say you have to look beyond the rights granted in the agreement. You must consider whether, as a practical matter, the investors have the experience and knowledge to play an effective role in management. See, e.g., Williamson v. Tucker, 645 F.2d 404 (5th Cir. 1981). And the efforts of others test is more likely to be met where, as would presumably true of the CrowdFranchise investors, the investors are geographically dispersed, with no preexisting relationship. See, e.g., SEC v. Merchant Capital, LLC, 483 F.3d 747 (11th Cir. 2007). Significantly, the CrowdFranchise FAQ indicates the company may assign an operating manager “to help with the day to day operations of your franchise.”

In brief, whether these franchises are securites would depend on the facts of the particular case, and there’s certainly an argument that they would be. Perhaps CrowdFranchise has fully vetted this through an experienced securities lawyer and I’m just missing something. It certainly wouldn’t be the first time. But it puzzles me.

We here at the BLPB are very excited to be able to welcome back Prof. Tamara Belinfanti for a second month of guest blogging. You can find a couple of her prior posts here and here. The following bio comes from her New York Law School profile page, which you can find here. Welcome back, Tamara!

Professor Belinfanti joined the faculty in fall 2009 and teaches Corporations, Contracts, and a corporate transactional skills seminar. Professor Belinfanti’s scholarly interests include general corporate governance matters, executive compensation, the proxy advisory industry, shareholder activism, and law, culture and identity. Prior to joining academia, Professor Belinfanti was a corporate attorney at Cleary Gottlieb Steen & Hamilton LLP, where she counseled domestic and international clients on general corporate and U.S. securities regulation matters, and was co-editor of the securities law treatise, U.S. Regulation of the International Securities and Derivatives Market (Aspen, 2003). Professor Belinfanti received her Juris Doctor, cum laude, from Harvard Law School in 2000.

Via the 10-5 Daily, I learned of the case In re Maxwell Technologies, Inc. Sec. Litig., 2014 WL 1796694 (S.D. Cal. May 5, 2014), which dismissed the plaintiffs’ securities fraud claims for failure to plead scienter.  The case interests me, because I have actually just written a paper on this very subject, forthcoming in the Washington University Law Review (in April 2015 – it’ll be a while!)

[More under the cut]

Continue Reading Liability Begins at the Top

My former colleague, Scott Pryor (Regent), recently posted an interesting article entitled Municipal Bankruptcy: When Doing Less is Best. In 2013 Professor Pryor was the Resident Scholar of the American Bankruptcy Institute.  His paper’s abstract is below.  

The bankruptcy process takes as a given the pre-bankruptcy allocation of economic risk. Yet, the Bankruptcy Code permits this risk to be reallocated through the adjustment process so long as that reallocation is “fair and equitable,” does not “discriminate unfairly,” and is in the “best interests” of creditors. The first two look to bankruptcy law for their definitions; the third derives from state law.

Chapter 9 of the Bankruptcy Code does not resolve any conflicts among these requirements. This uncertain state of affairs generates a powerful incentive among most parties to settle. So long as the court retains the power to dismiss the case and remit the conflicts to the vagaries of state adjudication, Chapter 9 functions to create an institutional game of Chicken driving stakeholders to consensus.

Greetings from Salvador, Bahia, one of the twelve cities hosting the World Cup. Apologies in advance for any spacing issues. I am typing on an iPad with spotty internet service in Brazil so editing is an issue.
The long plane ride gave me some time to reflect on the Law and Society Conference I attended two weeks ago. It was my second time and once again, it didn’t disappoint. I served as the discussant on a panel on Theorizing the Corporation with Elizabeth Pollman, Charlotte Garden and Sarah Haan. All of the papers talked about a right to speak. The common theme was the question of who is speaking, the basis of that right and whose interests are being served by the speech. I found them particularly interesting given my background. Prior to joining academia I was a deputy GC and our PAC and lobbying activities reported to me.
Elizabeth Pollman presented “The Derivative Nature of Corporate Constitutional Rights”, which she co-authored with Margaret Blair. She started off by providing us with a 200-year history of the corporation which I plan to incorporate in my BA class next fall. Her paper provided a framework for the court to think about corporate rights in a number of ways ending with Constitutional and particularly First Amendment slant.
Before a court is going to extend constitutional protections to corporations, she asks judges to consider whether the corporation represents an identifiable group of individuals in the matter at stake or whether the corporation has its own interests distinct from any specific group of individuals. The second threshold question she asks is whether extending the protection to the corporation is necessary or convenient to ensure that the rights of the individuals that the corporation represents are protected.
Sarah Haan’s paper “Opaque Transparency: Outside Spending and Disclosure by Business Entities” examined corporate and individual rights from another perspective. I was completely surprised to learn that the majority of reported outside spending from the 2012 federal election came from privately-held, not publicly-held companies, including a large number of unincorporated organizations such as LLCs. She noted that more than 40% of spending by privately-held companies was obscured in some way in terms of the source of the funding. I think many of us know about the Koch Brothers, Sheldon Adelson and some wealthy individuals but I hadn’t realized how many LLCs and other non-public companies where involved in financing elections. She asked us to think about the value of transparency and disclosure- a common theme from the corporate Law and Society panels and the recent BLPB posts. Specifically, she proposes that privately-held entities should be compelled to reveal the names of the individuals who control them, at least in federal elections.
Charlotte Garden’s article “Citizens United and the First Amendment of Labor Law” looked at speech rights from the union perspective. She observed that unions have different speech rights than others and posited that the recent McCutcheon case, which looked at the effect of corruption in the political process, might eventually have an effect on future corporate and union campaign finance cases.
Next week I will discuss some of the interesting trends that emerged from Emory’s Teaching Transactional Law Conference.
Now back to celebrating Brazil’s first win. Adeus from Bahia.

On May 28, 2014, the company owning The Inquirer (Philadelphia), the Daily News and other properties, was sold for $88M in a court-ordered, private, English-style auction.  On petition for dissolution of the company, Vice Chancellor Parson (Delaware) ordered judicial dissolution and the private auction in an opinion issued on April 24, 2014.  

This case presents a fascinating set of facts, unique legal analysis and discussion of LLC management, and the pitfalls of deadlock.  The opinion also discusses the consequence of judicial dissolution versus private agreements (buy outs and dissolution procedures).  It would make a great case for class room discussion, exam fact patterns and casebook inclusions.

Facts. The facts can be quickly summarized as follow:  Interstate General Media LLC (IGM), a Delaware limited liability company, acquired the company (PMN) that owned The Inquirer, Daily News and other properties in 2012 for $55M.  General American Holdings, Inc., a company controlled by George E. Norcross, III held a 54% interest in IGM.  Intertrust GCN LP, a company controlled by Lewis Katz held a 26% interest.  Both Norcross and Katz, as representatives of their respective companies which were joint Managing Members, served on IGM’s 2- member Management Committee.  The Management Committee controlled the daily operations of the company and decisions required unanimous consent.  Disputes arose between Norcross and Katz concerning personnel, editorial freedom and the direction of the paper.  The parties reached an irresolvable impasse over the firing of The Inquirer’s Editor without Katz’s approval.   With the management committee in deadlock, the parties sought judicial dissolution of IGM.

LLC Agreement.   The LLC agreement deferred dissolution matters to the court and didn’t proscribe dissolution procedures.  Noting the freedom of contract in LLCs, the choice not come to an agreement regarding dissolution at the outset of the relationship provided V.C. Parson with the justification he needed to fashion a unique remedy for the now-deadlocked parties.

“It is well-settled under Delaware law that LLCs are creatures of contract rather than statute, and that those who form LLCs are given great latitude in defining their rights and obligations by mutual agreement. Based on that freedom, the parties to the LLC Agreement were free to craft whatever procedure they wished to govern IGM’s dissolution. That freedom included the ability to proscribe the use of judicial dissolution altogether as a means to dissolve the Company.  Instead, however, the parties chose not to exercise their contractual freedom in that regard and explicitly recognize the possibility of a judicial dissolution under  Del. C.§ 18-802, and, in that context, submitted themselves to the discretion of the Court to determine how IGM should be dissolved.”

The Auction.  V.C. Parson’s opinion outlines the different options and precedent for court-ordered dissolution and various mechanisms to maximize value.  Having completed an evidentiary hearing on the matter, V.C. Parson had ample facts to weigh in crafting the appropriate remedy.  He rejected General American Holdings (Norcross) plea for a public auction, instead preferring a private auction similar to the one proposed by Intertrust GCN (Katz).  The court’s discussion of the auction options and the role of auctions is a great, and informative, read.  Ultimately, V.C. Parson concluded that there were no serious public bidders who would participate in a public auction and that the procedures would increase the costs of dissolving the company.

“I conclude that a public auction is unlikely to yield an additional ―serious bidder for IGM. Because IGM more likely than not would not realize any benefit from a public auction and because a public auction would both take longer and be more expensive to execute than a private auction, the value of IGM, and, thus, the value of IGM’s Members’ ownership interests, will be maximized by a private auction conducted among its interested Members, General American and Intertrust.”

Instead, he ordered a private, English-style open auction where the parties, plus the Guild (the union for the papers) would submit  bids and have 10 minutes to increase their bid to surpass the highest bidder.  The opening bid was set at $77M reflecting the original purchase price ($55M) plus existing debt. V.C. Parson noted that both Norcross and Katz, and substantial interest holders in IGM were both a buyer and a seller and therefore had adequate incentives to bid at a premium.

“[W]hen one side reaches the highest price it was willing to pay for the asset, it still has an incentive to keep bidding because even if it ultimately loses the auction, because it is also a seller, it will benefit from driving the price as high as possible.”

Additionally, the parties had equal access to confidential information about the company and no apparent material advantage over the other.

The Forecast. A quick search of Delaware cases in WestLaw indicates that this remedy is unique– no other published opinions mandate an open, English-style auction.  V.C. Parson’s opinion makes it clear that  “determining the value maximizing process by which an entity should be liquidated is both a fact-intensive and fact-specific endeavor that must be tailored to the particular circumstances and realities in which the entity is operating.”  This isn’t like to ignite a new trend in company dissolutions, but the opinion’s careful analysis of factors for and against options may be a blueprint for how to litigate these issues in the future.

-Anne Tucker 

 

Many of you have undoubtedly followed the ongoing saga of Donald Sterling and the Los Angeles Clippers. (If you live in the U.S. and you’re unaware of the story, you have undoubtedly been backpacking in some remote mountain region for the last few weeks.) The NBA ordered the Clippers sold. Donald said no. Rochelle Sterling, Donald’s wife, acting on behalf of the trust that actually controls the Clippers, has agreed to sell the team to Steve Ballmer, the former CEO of Microsoft for $2 billion. Depending on the hour, Donald either approves or is contesting that sale.

A New York Times story today adds an interesting angle. The Times reports that the deal with Ballmer grants Ms. Sterling “owner emeritus” status, entitling her to two floor seats for each home game, five stadium parking spaces, and three championship rings if the Clippers ever win an NBA title.

I know nothing about the Sterling trust other than what’s been reported in the media, but that seems to raise an obvious fiduciary duty issue. In negotiating the sale, Ms. Sterling is acting as trustee of the trust and owes a duty of loyalty to the trust. Her duty is to consider only what’s best for the trust and obtain the highest possible value for the trust. But these perks, if the Times story is correct, are personal benefits to her. That seems like an obvious conflict of interest.

Of course, it’s a $2 billion deal, and the value of these perks pales in comparison. (How much can the right to a hypothetical Clippers championship ring be worth?) But, at a minimum, shouldn’t those benefits belong to the trust rather than to Ms. Sterling?