News from Delaware.gov (H/T Broc Romanek):

Governor Markell today announced the nomination of Andre G. Bouchard, widely recognized as one of the country’s premier corporate law practitioners, to serve as the 21st Chancellor of the Court of Chancery. If confirmed by the Delaware Senate, Bouchard would succeed the Honorable Leo E. Strine, Jr., who was sworn in as Chief Justice of the Delaware Supreme Court in February.

Bouchard is a graduate of Boston College and Harvard Law School.  Currently, he is the managing partner of Bouchard Margules & Friedlander, P.A in Wilmington, Delaware. 

Looks like my friends in Delaware accurately predicted this nomination back in January.

For those interested, here is an amicus brief in the Hershey section 220 case arguing that  violations of domestic or international law are ultra vires acts.   Download Hershey Section 220 Amicus Brief

[B]ecause Delaware corporations (including defendant The Hershey Company) are chartered only for “lawful” acts or activity, 8 Del. C. § 101(b), illegalities committed by the company are considered ultra vires and may be the proper source of both direct shareholder suits and injunctive actions by the state Attorney General.  Delaware law is explicit on this point. A “lack of capacity or power may be asserted . . .[i]n a proceeding by a stockholder against the corporation to enjoin the doing of any act or acts” or “[i]n a proceeding by the Attorney General to dissolve the corporation, or to enjoin the corporation from the transaction of unauthorized business.” 8 Del. C. § 124.
 

-Anne Tucker

Thanks for inviting me to guest blog. As Stefan said, my area is corporate governance with particular interests in the rights and responsibilities of corporations in society, and how changing market dynamics impact corporations. In that vein, I had the pleasure of moderating a panel discussion yesterday at New York Law School on High Frequency Traders (HFTs). The panel immediately followed an announcement by New York Attorney General Eric Schneiderman on new proposals targeted at HFT firms (part of what his office terms their “Insider Trading 2.0” initiative).We certainly had a lively discourse and a link to the full panel discussion will be available shortly— I’ll be sure to post at that time. But in short, here are the highlights:

High frequency traders use a fully automated trading system to move in and out of securities at a rapid speed, often just in milliseconds. To get a sense of what is at stake, consider that by constructing a high-speed fiber optic cable, round-trip communication time between New York and Chicago was reduced from 16ms to 13ms, and now using microwave technology, the round-trip transmission time was further reduced to 10ms, then to 9ms, and most recently to 8.5ms. What can a HFT do in a millisecond? Turns out— a lot. One HFT who is about to go public, disclosed in its IPO filings that out of 1,238 trading days it made a profit on all but one of those trading days—  https://www.sec.gov/Archives/edgar/data/1592386/000104746914002070/a2218589zs-1.htm.Thus, there is this arms race to build the most super and fastest computer because whoever is fastest stands to be rewarded handsomely.

AG Schneiderman noted that several HFTs were getting an unfair edge on the rest of the market by paying news aggregators a fee to get a peek at market-moving information a few seconds before this information was distributed to the rest of the market. Moreover, to increase the speed at which they receive data, several HFTs pay a fee to the stock exchanges to co-locate within the exchange—  again, all with an eye to getting a split second head start on the rest of the market. Now a split second head start may not seem like much, but when combined with their ultra high speed networks, a split second head start allows HFTs to leapfrog over the rest of the market and quickly extract profit. How much profit are we talking about? On each trade, not much— typically, just a couple of cents. But, according to AG Schneiderman by making several hundreds of thousands of trades each day, it is estimated that HFTs make billions of dollars each year.

Proponents of HFTs argue that HFTs serve a market-making function, they increase liquidity, and improve efficiency, and they are quick to point out that the HFT trading framework is perfectly legal. However, concerns loom large about the unfair edge that HFTs have, and also about market destabilization. In terms of destabilization, at least two events come to mind – (i) the May 2010 “flash crash”, which was blamed on high frequency traders, and (ii) last April’s trading frenzy in response to a tweet which falsely reported explosions at the White House—  the frenzied wave of trading was linked to HFTs and it caused the Dow to lose 143 points in less than a minute.

So, what is being done about HFTs? And should something be done?

 

Currently, the SEC has succeeded in getting the major stock exchanges to agree to a circuit breaker, which would halt high-speed trades during emergencies. AG Schneiderman proposed a different solution, which would be to modify the market structure design. Currently, the predominant market design is the continuous limit order book market design. Under this design, orders are processed by the exchange in serial, meaning that orders are accepted and matched based on which order arrives first. This system benefits HFTs because in effect it rewards the best speed and not necessarily the best price.  One proposal from economists at the University of Chicago would be to change from the current continuous limit order design to a frequent batch auction system (a link to a draft of the paper is available here— http://faculty.chicagobooth.edu/eric.budish/research/HFT-FrequentBatchAuctions.pdf).  According to the AG, this proposal would put a “speed bump” in place so that orders would be processed in batches after short intervals (for example, one second intervals). The idea is that this would better ensure that price not speed would be the determinative factor in who obtains the trade.

 

In closing, let me venture to say that we should expect more focus from regulators, SROs, policy makers, the media, and academics on HFTs.  HFTs realize that it’s about to get ugly and so they are being proactive and according to the WSJ, have “hired a pair of heavy-hitting political strategists and formed a trade group to press their case with regulators and law makers.”  Top of their list is to get people like me to stop referring to them as HFTs, as they would prefer to be called “automated professional traders” — http://online.wsj.com/news/articles/SB20001424052702304887104579302681366721324 .

 

Now beyond semantics and technological fixes, HFTs present broader policy questions and concerns.

 

For one, is the insider trading framework the right framework for addressing HFTs? AG Schneiderman’s office realizes that the current insider trading framework is not an exact fit, but the view is that HFTs represent a new flavor of insider trading (hence the term “insider trading 2.0”).

 

Second, how do we draw the line between legitimate information gathering and predatory trading behavior ? What is our normative framework?

 

Third, to the extent we accept that something needs to be done about HFTs, who should take the lead? The SEC?  The states? The stock exchanges?

 

And fourth, do the traditional proxies of measuring “benefits” and “success” still work in today’s age? For example, HFTs use positively associated terms such as “liquidity” and “market making” to defend their activities, but according to one panelist we need to be careful about using “a lot of terminology and measurements that are related to the way the markets used to work.”

 

One of my attorney friends passed along information about a new, free legal research tool called “Casetext.”  (Disclosure: my attorney friend and her husband have an investment in the company.)

A description from Casetext CEO follows:

Casetext (https://www.casetext.com) is a legal research platform dedicated to interpreting and understanding the law. Casetext contains millions of cases, statutes, and regulations, and benefits from user-generated annotations from attorneys and professors who add analysis and insight. Contributors demonstrate thought leadership to Casetext’s 100,000 monthly users, including general counsels, law firms, and law students. Paid versions of the tool, still under development, will enable law firms to use the site’s annotations technology privately and internally for knowledge management.

Casetext and Google Scholar are both useful free resources for legals studies professors in business schools because our students often do not have Lexis/Westlaw access (or at least not full access to all the legal materials.)

Casetext uses the crowd for help with annotations and citations. Attorneys at law firm Bingham McCutchen LLP are featured annotators.  Citations can be voted up or down. 

In addition to citations from cases, Casetext also includes citations from law firm client alerts and blog posts.  One of the citations to eBay v. Newmark was from a post on Professor Bainbridge’s blog.  While I could see citations from client alerts and blogs becoming overwhelming, Casetext does seem to be doing a good job, so far, limiting it to substantive, helpful posts from reputable sources. 

Supposedly, law students at Columbia, Stanford, Nebraska, Brooklyn, Cardozo, Vanderbilt, Texas Tech, and Loyola have all had advanced legal research assignments tied to contributing to the Casetext website.

Anyway, I have played around on the website a bit, may design a classroom assignement around the website, and may contribute some myself.  

Hope other readers find the website interesting and useful as well.   

A hearing in the Delaware Court of Chancery highlights the question raised in my earlier post of institutional shareholder activism and provides a timely example of one brand of shareholder activism:  issue activism.

Yesterday, Vice Chancellor J. Travis Laster denied Hershey’s motion to dismiss a books-and-records suit brought by shareholder Louisiana Municipal Police Employees’ Retirement System. The suit seeks inspection of corporate books to investigate claims that the chocolate company knowingly used suppliers violating international child labor laws.  A full description of the hearing is available here.

UPDATE, Kent Greenfield who has been involved in the case, provided me with a copy of the Hershey hearing & ruling ( Download Hershey Ruling) as well as some context for the case.  Yesterday’s hearing did two things. First, it clarified the standard of review for motions to dismiss section 220 books and records demands. Citing to Seinfeld v. Verizon Commc’ns, Inc., 909 A.2d 117, 118 (Del. Supr. 2006), the proper standard is whether a shareholder has provided “some evidence to suggest a ‘credible basis’ from which a court can infer that mismanagement, waste or wrongdoing may have occurred.”    Second, the books and record request was brought on the novel theory that corporate violations of law (domestic and international) are ultra vires and within the scope of shareholder enforcement. The ultra vires corporate enforcement theory is discussed in more detail in this 2005 article by Professors Greenfield and Sulkowski. 

-Anne Tucker

 

I am interested in the behavior of institutional investors, including defined benefit plans and large mutual funds, primarily because they trade in people’s retirement savings.   Institutional investors and hedge funds are some of the only remaining investors under the big umbrella heading of “shareholders” that have the resources and incentive to act the way that corporate law theorizes shareholders should act.  They become the lab rats and the test case of governance experiments and debates.

Notably, the passivity of institutional investors has been described, empirically documented by number of initiated shareholder proposals and with voting records on such proposals, and debated at considerable length.  Alan Palmiter, Jill Fisch, Roberta Romano, as well as a recent article by Gilson & Gordon and many others have all grappled with the evidence for and against and provided theories that augment or diminish the view of passivity by institutional investors.

The New York Times DealB%k published an article yesterday, New Alliances in Battle for Corporate Control, describing the coordination between institutional investors (both pension funds and mutual funds) and hedge fund activists.  Drawing from industry sources, the article describes informal coordination of activists courting institutional investors’ votes before shareholder meetings, which is just what we would expect and consistent with how we probably teach proxy contests and shareholder proposals to our students.  The article also adds new dimensions describing how institutional investors may solicit hedge fund investment in poorly performing companies providing them with investment ideas, targets and strategies.

“Periodically, we are approached by large institutions who are disappointed with the performance of companies they are invested in to see if we would be interested in playing an active role in effectuating change,” said William A. Ackman, founder of the $13 billion hedge fund Pershing Square Capital, who is best known for his positions on J. C. Penney and Herbalife. Institutional investors even have an informal term for this: R.F.A., or request for activist.

Evidence of this successful strategy is found in the success rate of hedge fund proxy proposals of which over 20% succeed last year, up from 9% in 2011.

-Anne Tucker

 

Last night Belmont’s men’s basketball team beat a very good UW-Green Bay team 80 to 65 in the first round of the NIT.  Both teams were extremely close to making the NCAA tournament this year. Earlier this year, Belmont beat highly ranked UNC and UW-Greenbay beat ACC-Champs UVA.

[Photos courtsey of Belmont University Basketball]

Mann_bradshaw

Why is Belmont basketball relevant to this blog?

Well, actually, I just wanted to brag on my school’s team, but I will try to make a connection.

Some extremely interesting studies have been done tying atheletic success to increased applications, increased selectivity, and/or higher (academic) rankings.  See, e.g., Jain (Wharton) and Toma & Cross (UMKC & Michigan).  (While my co-blogger Steve Bradford called the U.S. News rankings of law schools “meaningless” earlier this week, even he admitted that rankings influence some student decisions.) 

In a similar study, a personal friend of mine and University of Georgia doctoral candidate, Michael Trivette, co-authored a paper in 2012 with Dennis Kramer (UVA) about the increases in selectivity and accepted student standardized test scores experienced by schools that switched athletic conferences.

Whether the time and money put into college sports is worthwhile makes for heated debate, and I am sure there are studies challenging some of the findings in the papers I linked to above. 

Personally, I love being at a school with competitive Division-I sports (even though we do not have a football team…).  First, I am convinced our sports teams are helping us recruit better students, Second, I think the teams help create community and school loyalty.  Third, I think our basketball team is one of the handful of things that has given our relatively unknown (but wonderful) school national attention (a few of the other ventures onto the national stage include our school’s appearances on the TV show Nashville, the annual airing of Christmas at Belmont on PBS, and the hosting of a 2008 presidential debate…not necessarily in order of importance).

A few of my co-bloggers teach at schools with some of the most successful athletic programs in the country (Duke, Nebraska, West Virginia).  I imagine they may have their own views, and I know that the relationship between university sports and academics is a complex one. 

Update: As noted in the comments, here is an article on Butler University’s 40% increase in applications following their NCAA tournament runs.  The article’s author also claims that Butler received $1 billion worth of media attention.  (Granted, making the NCAA finals is very different than a first round NIT win, or even a win over UNC, but we have to start somewhere).

We here at the BLPB feel very lucky and excited to be able to follow up on Ann Lipton’s month of guest-blogging with a month of guest-blogging by Tamara Belinfanti and, furthermore, that Ann has agreed to come on board to blog with us on a regular basis going forward.  We have no doubt that our readers will benefit greatly from all of this.

If you want to re-visit my original introductory post for Prof. Lipton, you can find it here. As for Prof. Belinfanti, I will as usual leave the bulk of the introduction to her but pass on the following from her New York Law School profile page, which you can find here.  Welcome, Tamara & Ann!

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.

Ed Whelan at National Review Online (h/t: Prof. Bainbridge) asks, in light of a recent Fourth Circuit opinion, “Will those who (wrongly) think that for-profit corporations are incapable of exercising religion for purposes of RFRA object as vigorously to the concept that for-profit corporations can have a racial identity for purposes of Title VI? If not, why not?”

I have been following the Hobby Lobby case with interest, though I am just delving into its depths now.  After starting through the various amicus briefs, my initial reaction is that the law has not evolved to where it needs to be with respect to protecting those engaging in the widespread use of entities.  As is often the case, my initial reaction is that the answer to Mr. Whelan’s question is somewhere in the middle: I think for-profit corporations are capable of exercising religion under RFRA, but in this case I don’t see the necessary substantial burden, at least when balanced with an individual’s right to make such decisions, to carry the day. (Reasonable minds can disagree on this, but that’s my take). 

Taking a broader look, though, view entities should be able to take on the race, gender, or religion of its primary shareholders (or members) in proper circumstances to protect against discrimination.  The Fourth Circuit opinion states:  “[W]e hold that a corporation can acquire a racial identity and establish standing to seek a remedy for alleged race discrimination under Title VI . . . .”  The opinion notes that seven other circuit courts “have concluded that corporations have standing to assert race discrimination claims.”  This seems proper, because a minority-owned company might be denied a contract or be treated differently in the execution of a contract because of the race of the primary shareholders.  It would be improper to deny protections for the shareholders/members just because they chose to avail themselves of entity protections to conduct their business.

The same should be true in cases of religion and gender.  Suppose, for example, an all-female construction company were denied a bid because the city seeking the project thinks construction is “man’s work to be done by men.”  Similarly, protections should be available if a Catholic-owned company were to lose a bid because the county seeking the bid was run by people who didn’t “trust Catholics to finish anything on time.”  (Disclosure: I was raised Catholic, and while I most certainly don’t speak for any other Catholics, my comfort level leads me to use Catholics in such examples.)

Thus, an entity should be able to take on the race, gender, or religion of the shareholders/members to fight cases where the same discrimination against an individual would stand. Obviously, then, having a member of a certain race, gender, or religion as a shareholder, member, director, or employee would not be sufficient to make the claim.  The entity would also have to demonstrate: (1) that the alleged discrimination was predicated on race, gender, or religion, and (2) the entity (and not just certain individuals) was identified with the group against whom the discrimination was targeted. 

In the Hobby Lobby case, then, under this rubric I think the claim would fail because the entity would not be able to demonstrate they have satisfied the first test.  Regardless of what one thinks of the healthcare law, the law was not designed to discriminate against certain religions (or race or gender).  The law also does not mandate any individual course of action, but merely requires that access be provided to certain healthcare options. (That is, it mandates access, not use.) 

This is not the current state of the law, of course.  Still, it seems to me that the proper way forward is to recognize that entities can often take on identities of those running them, but that protections should only be available where the entity’s identity was targeted for harm because of that identity, and not an arguable result of another non-identity-based decision. 

Professor Jennifer Pacella (CUNY-Baruch) recently posted an article entitled Bounties for Bad Behavior: Rewarding Culpable Whistleblowers under the Dodd-Frank Act and Internal Revenue Code.  The abstract is posted below:

In 2012, Bradley Birkenfeld received a $104 million reward or “bounty” from the Internal Revenue Service (“IRS”) for blowing the whistle on his employer, UBS, which facilitated a major offshore tax fraud scheme by assisting thousands of U.S. taxpayers to hide their assets in Switzerland. Birkenfeld does not fit the mold of the public’s common perception of a whistleblower. He was himself complicit in this crime and even served time in prison for his involvement. Despite his conviction, Birkenfeld was still eligible for a sizable whistleblower bounty under the IRS Whistleblower Program, which allows rewards for whistleblowers who are convicted conspirators, excluding only those convicted of “planning and initiating” the underlying action. In contrast, the whistleblower program of the Securities and Exchange Commission (“SEC”) under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”), which was modeled after the IRS program, precludes rewards for any whistleblower convicted of a criminal violation that is “related to” a securities enforcement proceeding. Therefore, because of his conviction, Birkenfeld would not have been granted a bounty under Dodd-Frank had he blown the whistle on a violation of the federal securities laws, rather than tax evasion. This Article will explore an area that has been void of much scholarly attention — the rationale behind providing bounties to whistleblowers who have unclean hands and the differences between federal whisteblower programs in this regard. After analyzing the history and structure of the IRS and SEC programs and the public policy concerns associated with rewarding culpable whistleblowers, this Article will conclude with various observations justifying and supporting the SEC model. This Article will critique the IRS’s practice of including the criminally convicted among those who are eligible for bounty awards by suggesting that the existence of alternative whistleblower incentive structures, such as leniency and immunity, are more appropriate for a potential whistleblower facing a criminal conviction. In addition, the IRS model diverges from the legal structure upon which it is based, the False Claims Act, which does not allow convicted whistleblowers to receive a bounty. In response to potential counterarguments that tax fraud reporting may not be analogous to securities fraud reporting, this Article will also explore the SEC’s recent trend of acting increasingly as a “punisher” akin to a criminal, rather than a civil, enforcement entity like the IRS. In conclusion, this Article will suggest that the SEC’s approach represents a reasonable middle ground that reconciles the conflict between allowing wrongdoers to benefit from their own misconduct and incentivizing culpable insiders to come forward, as such persons often possess the most crucial information in bringing violations of the law to light.