Donna M. Nagy recently posted “Owning Stock While Making Law: An Agency Problem and A Fiduciary Solution” on SSRN.  Here is the abstract:

This Article focuses on Members of Congress and their widespread practice of holding personal investments in companies that are directly and substantially affected by legislative action. Whether entirely accurate or not, congressional officials with investment portfolios chock full of corporate stocks and bonds contribute to a corrosive belief that lawmakers can – and sometimes do – place their personal financial interests ahead of the public they serve.

Fiduciary principles provide a practical solution to this classic agency problem. The Article first explores the loyalty-based rules that guard against self-interested decision-making by directors of corporations and by government officials in the executive and judicial branches of the federal government. It then contrasts the strict anti-conflict restraints in state corporate law and federal conflicts-of-interest statutes with the very different set of ethical rules and norms that Congress traditionally has applied to the financial investments held by its own members and employees. It also confronts the parochial view that lawmakers’ conflicts are best deterred through public disclosure of personal investments and the discipline of the electoral process. The Article concludes with a proposal for new limitations on the securities that lawmakers may hold during their congressional service. Specifically, and as a starting place, Congress should prohibit its members (and their staffs) from holding securities in companies substantially affected by the work of any congressional committee on which they hold membership. But Congress should also explore the adoption of even stricter anti-conflict restraints, such as a statute or rule that would, subject to some narrow exceptions, prohibit members and senior staff officials from owning any securities other than government securities or shares in diversified mutual funds.

My Akron colleague Will Huhn just posted “2013-2014 Supreme Court Term: Court’s Decision in Daimler AG v. Bauman, No. 11-965: Implications for the Birth Control Mandate Cases?” over at his blog wilsonhuhn.com.  Here is a brief excerpt, but you should go read the entire post:

On January 14, 2014, the Supreme Court issued its decision in favor of Daimler AG (the maker of Mercedes-Benz), ruling that the federal courts in California lacked personal jurisdiction over Daimler to adjudicate claims for human rights violations arising in Argentina. The ruling of the Court may have implications for the birth control mandate cases pending before the Court in Hobby Lobby Stores and Conestoga Wood Specialties…. In those cases the owners of two private, for-profit business corporations contend that their individual rights to freedom of religion “pass through” to the corporation — that the corporations are in effect the “agents” of the principal shareholders, and that this is why the corporations have the right to deny their employees health insurance coverage for birth control. In Daimler the Ninth Circuit Court of Appeals had held that MBUSA was the “agent” of Daimler AG, and that the substantial business presence of MBUSA in California could be imputed to Daimler AG. The Supreme Court was not persuaded by this agency analysis…. It would be anomalous for the Court to adhere to corporate identity for purposes of personal jurisdiction and liability for tort, and yet to ignore corporate identity to give effect to the personal religious choices of stockholders.

Last week, the New York Times Dealbook ran a story entitled, Wall Street Shock: Take a Day Off, Even a Sunday.  The story details how Bank of America Merrill Lynch is supposedly encouraging its investment banking analysts and associates to take four days a month off…on the weekends. 

As the authors note, “[s]uch an offer from an employer would sound like punishment for the average worker. But for junior employees of Bank of America Merrill Lynch, that recommendation was intended as a bit of relief.”  The memorandum was probably a relief …if the Merrill Lynch really meant it, and if it will be respected by the various managing directors.

At many large investment banks (and law firms), true rest is largely absent.  Analysts and associates are pushed, and push themselves, to the brink.  Call me cynical, but I doubt Merrill Lynch is doing this primarily for the good of its employees.  Perhaps Merrill Lynch thinks the diminishing returns of working 80+-hour weeks and the high employee turnover are impacting their bottom line. 

While the lack of true rest is glaring on Wall Street, I think any modern employee can suffer from insufficient rest.  With smart phones, it is possible to be on-call 24/7.  Taking a full 24-hour break from work can, and often does, lead to more productive work in the remaining hours of the week.  As Dr. Stephen Covey famously noted, it pays to take time to sharpen the saw.  Relatedly, I recently listened to a 2003 recording of Dr. Timothy Keller speaking eloquently on the topic of work and rest, from a Christian perspective, to his New York City audience.  The recording is available here.

The benefits of intentional, regularly-scheduled rest can be seen not only in our job, but also in our exercise.  One of the best marathon training plans on the market right now is the FIRST training plan, developed at Furman University.  Most marathon training plans recommend running five to ten times a week and recording a high volume of miles, but do not have much focus on pace or rest. 

In contrast, FIRST recommends only three runs a week, but focuses on quality and encourages a variety of speeds and distances.  Some of the recommended speeds are much faster than the average marathoner would typically run, but FIRST also encourages more rest than most plans and more diversity in types of exercise.  While the FIRST plan seems to recommend an insufficient number of miles to many marathon runners, it has led to countless personal records over the past few years.   

Wish you all a restful weekend. 

Update:  See Professor Brian Quinn on Emma Jacobs’ article on “why the recent fashion of limiting junior bankers hours is doomed to fail.  In short it boils down to [two] things:  the nature of the clients and the nature of the people who work for banks.”  For what it is worth, I think they are probably correct (note my two big “ifs” above).  That said, I do think there might be a way to give a client 24/7 service and also give junior bankers (and lawyers) a 24-hour break each week.  On the point that most of the people working in these jobs are “alpha types,” I think even the “alpha types” could appreciate 24-hours of rest each week, and may realize they perform better as a result. 

In my posts last Thursday (see here and here) and in others, I have explained why I don’t think that the Dodd-Frank conflicts minerals law is the right way to force business to think more carefully about their human rights impacts.  I have also blogged about the non-binding UN Guiding Principles on Business and Human Rights, which have influenced both the Dodd-Frank rule, the EU’s similar proposal, and the State Department’s required disclosures for businesses investing in Burma (see here). 

For the past few months, I have been working on an article outlining one potential solution.  But I was dismayed, but not surprised to read last week that the US government’s procurement processes may be contributing to the very problems that it seeks to prevent in Bangladesh and other countries with poor human rights records. This adds a wrinkle to my proposal, but my contribution to the debate is below:

Faced with less than optimal voluntary initiatives and in the absence of binding legislation, what mechanisms can interested stakeholders use as leverage to force corporations to take a more proactive role in safeguarding human rights, particularly due diligence issues in the supply chain?  Can new disclosure and procurement requirements provide enough incentives to have a measurable impact on the behavior of transnational corporations based in the United States? This Article argues that federal and state governments should take advantage of the fact firms are adapting to more rigorous transparency and due diligence demands from socially responsible investors, international stock exchange listing requirements, and enterprise risk management processes.

Corporations respond to incentives and penalties. Governments can and should  require stronger procurement contractual terms for contractors and subcontractors. The contract could require: (1) executive level, Sarbanes-Oxley like attestations regarding human rights policies and due diligence on impacts within the supply chain; (2) an audit by certified third parties and (3) suspension or debarment from contracts as well as clawbacks of executive bonuses and a portion of board compensation as penalties for false or misleading attestations.

Companies that do not choose to participate in government contracting programs will not have to complete the attestation or due diligence process but the benefits of participating will outweigh the costs.  The large number of participating firms will likely lead to the practice becoming an industry standard across sectors, thereby forestalling additional legislation, shareholder resolutions, and name and shame campaigns, and thus eventually leading to benefits for all stakeholders including those most directly affected.

 

 

(1) Corporate Disclosures, (2) Indirect Advocacy, (3) Climate Change, and (4) Institutional Investors 

The Union of Concerned Scientists, an alliance of more than 400,000 citizens and scientists, released a report today: Tricks of the Trade: How Companies Influence Climate Policy Through Business and Trade Associations.  The report is based on data collected by CDP, an international not-for-profit that “works with investors, companies and governments to drive environmental disclosure”.  CDP administers an annual climate reporting questionnaire to more than 5,000 companies worldwide with the support of various institutional investors (722 institutional investors with over $87 trillion in capital). The 2013 questionnaire asked companies about climate policy influence, including board membership in trade associations, lobbying, and donations to research organizations.

Tricks of the Trade highlights outsourced political influence through the use of trade associations and interest groups that lobby on behalf of their members rather than the members engaging in these activities in their own name.  The report highlights 3 main issues:  (1) lack of transparency, (2) incongruence with the outsourced message among responding companies, and (3) the continued role that the Citizens United decision has on corporate spending and political discourse.

 Transparency:

  • Of the 5,557 companies that received the climate change questionnaire (through either CDP’s request or their voluntary participation), 2,323 responded, and only 1,824 (33 percent) of them replied publicly.

  • Ninety-seven Global 500 companies—the top 500 companies in the world by revenue—including Apple, Amazon, and Facebook, did not participate.  

  • In the Standard & Poor’s (S&P) 500—a market value index of large U.S. companies—166 companies, including Comcast and the Southern Company, did not participate.

The report highlights that proposed rules before the SEC for corporate political spending disclosures would address some transparency concerns and notes that the SEC has no plans to address this issue in 2014.  This is no small issue considering the number of institutional investors and amount of invested capital ($87 trillion, with a “T”!!) behind this initiatve.  CDP sends its survey to corporations on behalf of the signatory institutional investors who are shareholders.

These shareholder requests for information encourage companies to account for and be transparent about environmental risk. Transparency of this data throughout the global market place ensures the financial community has access to the best available corporate climate change information to help drive investment flows towards a low carbon and more sustainable economy

 Incongruence:

  • Ninety-five companies noted that at least one of their trade groups had a climate policy position that was partially or wholly inconsistent with their own, for a total of 172 such responses across all trade groups.

The 2013 questionnaire, while focused on climate change issues, is relevant to broader questions of corporate political influence and spending, the SEC’s agenda for 2014, and the role of corporate disclosures.   If you are teaching corporations/BA this semester, this 12 page report raises several issues that, in my opinion, would elicit a great classroom discussion when you get to the role and purpose of corporations,  sections on the disclosure regime of our securities markets, and even on shareholder rights to information.

-Anne Tucker

Francis G.X. Pileggi and Kevin F. Brady at Delaware Corporate & Commercial Litigation Blog closely track Chancery and Supreme Court cases out of Delaware.  Their annual Delaware round up, is always a top-notch, quick  and dirty summary of the year. If you haven’t kept up with the major cases, or want a quick reference when thinking about what developments to include in your classes this spring or next fall–then this list is for you.

Here are 2 additional cases that I have found noteworthy for some combination of scholarship, teaching and practice reasons:

1.  Chevron forum selection clause enforceability

Chancellor Strine’s opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corp.,et al, upheld the enforceability of a Delaware forum selection clause unilaterally adopted by corporate boards of directors of Defendants.  Plaintiffs dismissed their appeal, and moved to dismiss their remaining claims in Chancery Court leaving intact Chancellor Strine strong support of forum selection clauses.  Chevron was preceded Chevron was preceded by National Industries Group (Holding) v. Carlyle Investment Managements LLC and TC Group LLC, a 2013 Delaware Supreme Court opinion, which addressed the contractual enforceability of forum selection clauses. 

2.  Huatacu Upholding waiver of dissolution rights when not “reasonably practicable” to carry on the business of the LCC.

VC Glasscock reaffirmed Delaware’s commitment to contractual freedom in LLCs by upholding an express waiver of statutory dissolution rights for LLC members.  The case enforced an LLC operating agreement that “rejected all default provisions, and expressly limited members’ rights to those provided in the LLC Agreement.”  The Chancery Court found that dissolution rights, were waivable by LLC members, but that the members remained subject to the non-waivable duty of good faith and fair dealing.  The Chancery Court also left open the possibility that members of an LLC may not divest the Court of all of its equitable authority to order dissolution, but where the parties presented no unusual facts giving rise to such equities, the waiver is enforceable.

-Anne Tucker

As a resident of West Virginia, I am especially appalled at the disastrous chemical spill into the Elk River that has left 300,000 without safe water. My family and I are fortunate that we live well north of the spill and we have not been burdened by a lack of safe water. Still, our state, our friends, and our environment have been, and we can sense the suffering. 

In the wake of disasters, there often follow what are known as “policy windows” that create opportunities for new legislation. G. Richard Shell describes the concept like this in Make the Rules or Your Rivals Will (Amazon link) :  

Policy windows “open” in the wake of a high visibility event such as an expose, a scandal, a public-health crisis, or a disaster.  They “close” when the legislature acts to address the problem or when some other news event pushes the issue off the front pages and diverts public attention elsewhere.

Some have noted that the disaster in West Virginia has not gotten its due on some of the news shows (see, e.g., Sunday Shows To West Virginia: Drop Dead!”, but the disaster has still been a high-profile media event. 

This chemical spill highlights failures by the corporation and failures by the environmental regulators charged with oversight of such corporations.  It is an issues the must be addressed, and should be addressed quickly.  However, I am concerned that much of the dialogue related to spill may already be forcing the window closed.  (To that point, it’s also not clear to me new legislation is as important as strict enforcement of current rules. Regardless, the window that will lead to mandating better enforcement, with increased funding to do so, will only be open a short period of time.)

Numerous outlets, from the Christian Science Monitor to the Daily Show, have linked the chemical spill to hydraulic fracturing (commonly called “fracking”). Although it’s true that chemicals are used in the hydraulic fracturing process, the spill here has nothing to do with that.  It was chemical spill at a site where the chemical was not being used for its purpose, which is to wash coal in preparation for sale in the market. (Again, though, this is neither a coal nor a natural gas problem.  It is a chemical spill and a failure of the chemical company involved and the regulators charged with oversight. Solar panels need toxic chemicals, too, so this is not simply a fossil fuel issue.)

As someone who spends a lot of time looking the impacts of energy-related regulation and the related economic, environmental, and social impacts, this misdirection concerns me.  The main concern is that the focus will shift away from the clear and present concern presented by the spill: the lack of inspection and oversight of West Virginia chemical plants.  That is the immediate and pressing issue raised, and adding separate (and largely distinct) risks and processes raised by the potential harms from hydraulic fracturing to the discussion is likely to distract from the danger staring West Virginia in the face. 

To be clear, I am not saying there aren’t risks from hydraulic fracturing. But I am saying that most of the risks are different than the one that left 300,000 West Virginian’s without water. I am saying that conflating the two is dangerous and misguided. And I am saying that West Virginia’s regulators need to do better.  

In discussing hydraulic fracturing, I have written elsewhere: 

One of the paramount concerns for both the oil and gas industry, as well as regulators and communities, should be that a company gets careless with their drilling methods or waste management processes, and that the carelessness leads to a major environmental disaster. The harm to the environment itself would be a concern, of course, but . . . this harm is one that should be universally recognized.

I continue to believe this is true, and it’s why I have called for increased use of baseline standards for all phases of hydraulic fracturing.  Still, the best ways to address the risks from hydraulic fracturing are different in most cases from how we must approach increasing safety from chemical plants.  It will serve all of us well to recognize that THIS disaster is not a fracking problem, and we should not approach it as if it is.   Merging the two issues would be bad economic, environmental, and social policy. We’ve had enough harm to all three areas already.

In December, the Deal Professor, Steven Davidoff, wrote a great piece about the grey areas triggered by DISH Network Chairman Charles Ergen’s debt purchase from LightSquared (a failing satellite-based broadband comany).  This case has several twists and turns, and I plan to write a few posts on some of these areas.  Today, we’ll start with debt purchase. 

As Davidoff explains, Lightsquared’s debt could not (per the debt documents) be purchased by “direct competitor” (e.g., Dish Network), so Ergen used a personal investment vehicle to buy the debt.  This, the Deal Professor notes, appears acceptable under the debt documents (even if it’s not what was intended):

In a court filing, LightSquared contends that Mr. Ergen breached the debt agreement because the documents define a “direct competitor” to also be a subsidiary of a direct competitor. LightSquared is arguing that because Mr. Ergen controls both Dish and the hedge fund that bought the debt, the fund is a subsidiary of Dish.

Yet that argument stretches the plain meaning of a “subsidiary” — a company owned or controlled by a holding company — language that is not in the document. So LightSquared’s claims against Mr. Ergen are tenuous at best.

The acquisition itself seemed to link DISH and Lighsquared, even if that was not technically the case. Although the major outlets seemed to understand the structure of the purchase (see, e.g., here), some early takes from the blogosphere were less precise, such as this headline: Dish Snaps Up Some LightSquared Debt, which links to articles characterizing the purchase correctly. In fact, Lightsquared has its own issues with the purchase. According to a Lightsquared Special Committee Report of November 15, 2013 (pdf here):

45. Although “Lenders” have the right to assign their rights under the Credit 
Agreement to third parties, the Credit Agreement contains strict transfer restrictions regarding those assignments. Specifically, section 10.04(b) of the Credit Agreement provides that a Lender can only “assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement.” The Credit Agreement proscribes that “Eligible Assignee” “shall not  include Borrower or any of its Affiliates or Subsidiaries, any natural person or any Disqualified Company.” (Credit Agreement, § 1.01.) A “Disqualified Company” is “any operating company that is a direct competitor of the Borrower,” as well as “any known subsidiary thereof.” (Id.) . . . .

49. The parties intended for the transfer restrictions to be as broad as possible, 
yet specific about which entities the Credit Agreement forbade from holding the LP Debt. Thus, the Credit Agreement includes a list of “Disqualified Companies.” As of October 10, 2010, EchoStar was on the “Disqualified Company” list. On May 9, 2012, LightSquared added DISH and several other entities. Therefore, DISH, EchoStar, and all entities they control directly or indirectly in any way cannot be “Eligible Assignees.”

The report further states that DISH and EchoStar personnel were used “to handle all trades . . .  at Mr. Ergen’s behest.”

Still, Ergen is not DISH or EchoStar, nor is he an entity.  It seems to me that clauses such as this may need to consider including directors, management, and/or large shareholders of the entities they seek to disqualify if that really is the goal.  Now, using DISH and Echostar to further personal investing may be a problem, and in fact, some DISH shareholder have taken issue with how things have transpired (Shareholders Sue Dish, Charlie Ergen Over $2.2 Billion Spectrum Bid).  That, however, has to do with Ergen and his role with DISH, and not Lightsquared.  

Expanding the limitations on credit agreements like Lightsquared’s to include directors, executives, and other shareholders could be argued as excessive.  It may be.  It certainly would further limit the pool of potential acquirers, but that’s okay, if that’s the desire.  Credit agreements are contracts, and the parties are free to limit their scope of dealing in this way, as well if they so choose.  In fact, we see this kind of language in contests all the time: “Employees and agents of [Entity], its respective affiliates and subsidiaries and members of their immediate families and households are not eligible.”  This kind of language could be adopted (and even expanded) for use in credit agreements.  

If that is what a company wants, though, they need to specifically do so to carry out their intent. Maybe this issue is that, with  the complaints about corporations being people, perhaps that some have forgotten that people are people, too, something I have known since at least 1984.  

I have spent a great deal of my academic life in the relative obscurity of Securities Act registration exemptions. It’s an important area of the law, especially for startups and other small businesses, but not one that has attracted a great deal of academic attention until recently. I could count the academics who specialize in the area on one hand.

From Obscurity to Slightly Less Obscurity

The JOBS Act, and the debate about crowdfunding that preceded the JOBS Act, have brought my academic specialty into the limelight. Dozens of papers and countless blog posts have appeared in the last couple of years discussing crowdfunding, general solicitation, Regulation A and Regulation A+, and a number of other aspects of exempted securities offerings. People have finally become interested in issues I have been writing about for over twenty years.

The Benefits (and Costs) of Being Less Obscure

In some ways, that’s great. People are reading my scholarship more and citations to my articles are increasing. I have been invited to speak at a number of seminars and webinars. I even got to testify before a Congressional subcommittee. It’s nice to know that people care what you think. (That’s not an unmitigated good. Even though I write on a public blog, I’m a private person, and I actually enjoy obscurity.)

The sudden explosion of scholarship in my field has also exposed me to the scholarship of people I might not have otherwise read: scholars like Usha Rodriguez and Joan Heminway, to name just a couple. If not for crowdfunding and the JOBS Act, I would not have had the pleasure of reading their work.

Two Lessons

I have also learned a couple of important lessons about academic research.

Citation counts and invited presentations are not the same as academic merit

People are now citing my work more often and inviting me to speak more. As much as I would like to think that means I’m really good, it means nothing of the sort. My scholarship now is no better or worse than it was before this sudden surge of popularity. The only thing that has changed is that more people are interested.

The lesson to be drawn from that? Citation counts and the number of invited presentations are not very precise measures of academic merit, and we should be very hesitant to use them for that purpose.

Faddish scholarship is often disconnected from the past

I have been very disappointed in how disconnected some of the new scholarship is. In the rush to publish, some (but definitely not all) scholars have failed to connect what they’re writing both to the existing law and to previous scholarship.

This area of the law has a long history and a very specialized terminology. (For example, how many of you who aren’t securities specialists know what the integration doctrine is?) Neither that history nor the current law is easily accessible. SEC no-action letters and unwritten lore dominate the field.
Some of the new authors haven’t taken the time to master that material. They are, for the most part, conversant with the language of the applicable regulations, but not that familiar with the terminology or the regulatory history.

In addition, some of the new scholars are not fully aware of, or at least do not acknowledge, the existing scholarship, often presenting ideas as novel that were anticipated decades earlier. (I don’t care if they cite me, but there’s a long history of scholarship that predates my contributions.)

Here’s an example. The JOBS Act required the SEC to amend Rule 506 to allow general solicitation in unregistered offerings to accredited investors. Practitioners and scholars have been arguing for the elimination of the general solicitation requirement from Rule 506 since before Rule 506 was passed. I don’t think I have attended a meeting of the ABA Federal Regulation of Securities Committee where the idea didn’t come up in some form. But some of the new scholarship ignores that earlier debate and presents the idea as if it sprung newborn out of the heads of the drafters of the JOBS Act.

I understand the incentives. It takes a significant amount of time and research for a scholar new to a field to review and fully understand its history. But the result of not doing so is scholarship that is much shallower and much less effective than it might have been.

(I hope that sounds curmudgeonly enough. I’m doing my best to retain my spot in the old curmudgeon rankings, but there are so many curmudgeons in legal academia that it’s difficult.)

Dolf Diemont, Aloy Soppe & Kyle Moore have posted “Corporate Social Responsibility and Downside Equity Tail Risk” on SSRN.  Here is the abstract:

This paper assesses the relationship between Corporate Social Responsibility and downside equity tail risk – a field of research that has so far been neglected – using world wide data for the period 2003-2011. Tail risk is estimated using Extreme Value Theory. Corporate Social Responsibility is approached using stakeholder theory. The results show that there are significant relationships between CSR and tail risk. These relationships are tested for robustness using a heterogeneous and homogeneous tail index, raw returns and idiosyncratic returns, and various values for the tail threshold. The relationships we found are sequential, which makes a causal relationship between CSR and tail risk plausible.