As noted over at the Family Law Prof Blog, Stanford Graduate School of Business recently issued a report, “Separation Anxiety: The Impact of CEO Divorce on Shareholders” (pdf),  in which a study considered the impact CEO divorces have on the CEO’s corporation.  The report indicates that recent events “suggest that shareholders should pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions.” 

The study found that a CEO’s divorce has the potential to impact the corporation and shareholders in three primary ways. First, is a possible reduction in influence or control if a CEO as to sell or transfer stock in the company as part of the divorce settlement. Second, divorce can negatively impact “the productivity, concentration, and energy levels of the CEO” or even result in premature retirement.  Third, the sudden change in wealth because of the divorce could lead to a change in the CEO’s appetite for risk, making the CEO either more risk averse or more willing to take risks.  

The report argues that this matters because:

1. Divorce can impact the control, productivity, and economic incentives of an executive—and therefore corporate value. Should shareholders and boards be concerned when a CEO and spouse separate?

2. Rigorous research demonstrates a relation between the size and mix of a CEO’s equity exposure and risk taking. Should the board “make whole” the CEO in order to get incentives back to where they originally intended? Would this decision be a “cost” to shareholders because it represents supplemental pay that could have been used to fund profitable investments, or a “benefit” because it realigns incentives and risk taking?

3. Companies do not always disclose when a CEO gets divorced. Reports only come out much later when shares are sold to satisfy the terms of the settlement. Is divorce a private matter, or should companies disclose this information to shareholders? If so, how detailed should this disclosure be? (citation omitted)

While I think this is somewhat interesting, I am not sure how much it helps shareholders or boards in their consideration of CEOs or their companies.  Any major life problems or events — divorce, death of a close family member, major losses in other investments, addiction, etc. — could (in varying degrees) have a negative impact on control, performance, and risk tolerance.  

In addition, the study cites two high-profile examples: Harold Hamm and Rupert Murdoch. Both such divorces are likely to touch on all the issues the study raises. Still, for both men, their recent divorces are not their first divorces.  I’d be curious to know if there is any correlation between the performance of companies with CEOs who have been divorced at least once versus those who have not.  

Clearly, a major life event can have a negative impact on the CEO and the company, at least in the short term.  But I can’t help but wonder how much value this adds as a general matter. That is, it may matter on a case-by-case basis, but  I don’t think I would want to see it become some kind of Sabmematric analysis of CEO potential.  It seems to me risky for a company to look at the likelihood of divorce of a CEO as a determining factor in hiring.  Or for a company to encourage a CEO to stay married (or single).  And I doubt it’s wise to go dumping stock in a company just because the CEO has a wandering eye (or their spouse does).

Perhaps there’s more to this, but it seems to me this just confirms that a divorce is an awful experience for everyone. Still, for the companies and their shareholders, just as it is for the people directly involved, divorce may be the best available option.   

H/T Kendra Huard Fershee

Thanks to Paul Caron and the BLPB editors for allowing me to join the blog as a contributing editor. 

I will post from time to time on my scholarly interests,
which include legal issues involved in corporate governance, mergers &
acquisitions, entrepreneurship, and social enterprise.  Currently, as Stefan mentioned in his kind introduction, most of my
time has been devoted to social enterprise law, especially
benefit corporation law. 

For my first few posts, however, I am going to write about
landing a job teaching law in a business school and how working at a business
school differs from working at a law school. 
This fall, I moved from a law professor position at Regent University
School of Law to a business school position at Belmont University.  The move has been a good one, and though my
appointment is in the business school, I will also be teaching Business
Associations in Belmont’s law school, starting next year. 

With the entry and lateral markets so weak at
law schools across the country, given
the 45% drop in LSAT test takers since 2009, I imagine some readers are
considering business school positions. 

Finding a legal studies position in a business school can be
a bit more work than finding a law professor position.  There doesn’t seem to be anything similar to
the Faculty Recruitment Conference (a/k/a “the meat market”) for legal studies positions in business schools.  If there is, I never uncovered it, and would
welcome information in the comments. 

David Zaring (Wharton)  does us all a great service over at The Conglomerate by posting some of
these business school legal studies positions. 
For example, this semester he has posted about openings at Wharton,
UNLV,
Kansas,
Texas State, Richard Stockton, UConn,
Penn State, Georgia, Texas A&M, Indiana, and Northeastern Illinois.  Occasionally, these business school legal
studies positions will require (or at least strongly prefer) a PHD, but for
most a JD is sufficient. 

Higher Ed Jobs
and the Chronicle’s
Vitae are two other places to look, though you will have to sort through
quite a few adjunct position postings if you are looking for a tenure-track
job.  As an addition to David’s helpful
list above, on November 1, 2013, George
Mason University posted an Assistant/Associate Professor in Business Legal
Studies opening. 

Business schools
tend to hire a bit later in the year than law schools, but you see postings
year-round.  That said, I think business
schools are starting to realize that they need to hire earlier if they want to
compete with law schools for the top legal talent.

I absolutely love being a professor; it
is a loophole on life.  For many,
however, it is difficult to find a position in your geographic area of
preference.  If location is important to
you, as it was (and is) to me, broadening your search to include business
schools could increase your options.    

 

I support crowdfunded securities offerings, but I have criticized the crowdfunding exemption in the JOBS Act. I won’t repeat those criticisms here, but, after wading through the 585-page SEC rules proposal, I am happy to report that some (but not all) of the proposed rules would significantly improve the exemption.

1. The proposed rules clear up the statutory ambiguities relating to investment limits and the amount of the offering

Title III of the JOBS Act includes a number of ambiguities relating to the investment limits and the amount of the offering. The proposed rules clear up those ambiguities. I have already discussed this aspect of the proposed rules and won’t repeat that discussion here.

2. Both issuers and intermediaries can rely on information provided by investors to determine if the investment limits are met.

The amount that an investor may invest in a crowdfunded offering depends on that investor’s net worth and annual income and also on how much that investor has already invested in section 4(a)(6) offerings in the last 12 months. I have argued that crowdfunding issuers and intermediaries should not be required to verify these numbers–that investors should be able to self-certify.
I am happy to report that the SEC’s proposal recognizes the substantial burden that verification would impose and allows both issuers and crowdfunding intermediaries to rely on the number furnished by investors.

Proposed Rule 303(b)(1) allows crowdfunding intermediaries to rely on an investor’s representations as to net worth, annual income, and previous investments unless the intermediary has reason to question the reliability of the investor’s representations. And Instruction 3 to proposed Rule 100(a)(2) allows the issuer to rely on the intermediary to ensure that investors don’t violate the limits, unless the issuer knows an investor is exceeding the limit.

3. The proposed rules include a “substantial compliance” rule that preserves the exemption in spite of immaterial violations.

The crowdfunding exemption’s requirements are detailed and extensive, and the availability of the exemption is conditioned on the issuer’s and intermediary’s compliance with all of those requirements. Most crowdfunding issuers will be relatively inexperienced small businesses and often won’t have sophisticated securities counsel, so violations are likely. The exemption could be lost due to a relatively minor technical violation of the exemption’s requirements.

The SEC solved this problem in Regulation D by adding a “substantial compliance” rule, Rule 508, that sometimes preserves the Regulation D exemptions even when issuers are not in full compliance.

The SEC has included a similar rule in the proposed crowdfunding rules. Proposed Rule 502 provides that a failure to comply with a requirement of the exemption will not result in loss of the exemption as to a particular investor if the issuer shows:

(1) The failure to comply was insignificant with respect to the offering as a whole;
(2) The issuer made a good faith and reasonable attempt to comply with all of the exemption’s requirements; and
(3) If it was the intermediary who failed to comply, the issuer was unaware of the noncompliance or the noncompliance was solely in offerings other than the issuer’s.

4. The proposed rules require the intermediary to provide communications channels for issuers and investors.

As I have discussed elsewhere, the statutory exemption

omits a crucial element of crowdfunding—an open, public communications channel allowing potential investors to communicate with the issuer and each other. Openness of this sort would allow crowdfunding sites to take advantage of “the wisdom of crowds,” the idea that “even if most of the people within a group are not especially well-informed or rational . . . [the group] can still reach a collectively wise decision.” Open communication channels can help protect investors from both fraud and poor investment decisions by allowing members of the public to share knowledge about particular entrepreneurs, businesses, or investment risks. Open communication channels also allow investors to monitor the enterprise better after the investment is made. [C. Steven Bradford, The New Federal Crowdfunding Exemption: Promise Unfulfilled, 40 SEC. REG. L. J. 195 (2012)]

(For more on why I think open communications channels are a good idea, see here, at pp. 134-136.)

Proposed Rule 303(c) requires crowdfunding platforms to provide “communication channels by which persons can communicate with one another and with representatives of the issuer about offerings made available on the intermediary’s platform.” Those communications channels must be accessible by the general public, although only investors who have opened an account with the crowdfunding platform may post.

Omri Y. Marian has posted “Jurisdiction to Tax Corporations”
on SSRN.  Here is the abstract:

Corporate tax residence is fundamental to our federal income
tax system. Whether a corporation is classified as “domestic” or “foreign” for
U.S. federal income tax purposes determines the extent of tax jurisdiction the
United States has over the corporation and its affiliates. Unfortunately, tax
scholars seem to agree that the concept of corporate tax residence is
“meaningless.” Underlying this perception are the ideas that corporations
cannot have “real” residence because they are imaginary entities and because
taxpayers can easily manipulate corporate tax residence tests. Commentators try
to deal with the perceived meaninglessness by either trying to identify a
normative basis to guide corporate tax residence determination, or by
minimizing the relevance of corporate tax residence to the calculation of tax
liabilities. This Article argues that both of these approaches are misguided.
Instead, this Article suggests a functional approach, under which corporate tax
residence models are designed to support the policy purposes of corporate
taxation. This Article concludes that the U.S. should reform the way it defines
“domestic” corporations for tax purposes by adopting a two-pronged tax
residence test: the place where the corporation’s securities are listed for
public trading, or the place of the corporation’s central management and
control.

We are very excited to welcome Haskell Murray to the BLPB as a contributing editor.  Many of our readers will already be familiar with Haskell’s work, particularly in the area of benefit corporations, but just in case, you can view his profile here, his SSRN page here, and some related past blog posts here and here.  As a contributing editor, Haskell is not committed to posting on any particular day (or, for that matter, to post at all)–but given what I’ve seen from him in the past, I doubt we’ll have to wait too long for one of his excellent contributions.  So, from all of us here at the BLPB–welcome, Haskell, and thanks for coming on board!

Grant M. Hayden & Matthew T. Bodie have posted “Larry
from the Left: An Appreciation” on SSRN. 
Here is the abstract:

This essay approaches the scholarship of the late Professor
Larry Ribstein from a progressive vantage point. It argues that Ribstein’s
revolutionary work upended the “nexus of contracts” theory in
corporate law and provided a potential alternative to the regulatory state for
those who believe in worker empowerment and anti-cronyism. Progressive
corporate law scholars should look to Ribstein’s scholarship not as a hurdle to
overcome, but as a resource to be tapped for insights about constructing a more
egalitarian and dynamic economy.

Although I blog
on business issues, I spent most of my professional life as a litigator and
this semester I teach civil procedure. A few weeks ago I asked my students to
draft a forum selection clause and then discussed the Boilermakers v. Chevron forum selection bylaw case, which at the
time was up on appeal to the Delaware Supreme Court.  The bylaws at issue required Delaware to be
the exclusive venue for matters related to derivative actions brought on behalf of the corporation;
actions alleging a breach of fiduciary duties by directors or officers of the
corporation; actions asserting claims pursuant to the Delaware General
Corporation Law; and actions implicating the internal affairs of the
corporation.  

While I was not
surprised that some institutional investors I had spoken to objected to
Chevron’s actions, I was stunned by the vitriolic reactions I received from my
students. I explained that Chevron and FedEx, who was also sued, were trying to
avoid various types of multijurisdictional litigation, which could be
expensive, and I even used it as a teachable moment to review what we had
learned about the domiciles of corporations, but the students weren’t buying
it.

Perhaps in
anticipation of the likelihood of an affirmance from Delaware’s high court, the
plaintiffs voluntarily dismissed their appeal, which may have been a smart
tactical move. Now let’s see how many Delaware corporations move from the wait
and see mode and join the 250 companies that already have these kinds of bylaws.
 Interestingly, prior to the dismissal,
only 1% of those surveyed
by Broc Romanek indicated that they would never institute a forum selection
bylaw. Given how broad some of these bylaws are, it may stem the tide of some
of the litigation that I blogged about here
as plaintiffs’ lawyers are forced to face Delaware jurists.  Yesterday, as we were discussing venue, I
broke the news about the dismissal of the appeal to my students. Needless to
say, many were disappointed. Perhaps they will feel differently after they have
taken business associations next year.

 

 

I have argued that, because of excessive regulatory costs, the new crowdfunding exemption in section 4(a)(6) of the Securities Act is unlikely to be as successful as hoped. (Rule 506(c) is another story; I expect that to be wildly successful.)

We now know what the SEC anticipates. Hidden deep within the SEC’s recent crowdfunding rules proposal is the Commission’s own estimate of the likely impact of the new exemption. (It’s on pp. 427-428, in the Paperwork Reduction Act discussion, if you want to look at it yourself.)

How Many Crowdfunded Offerings?

The SEC estimates that there will be 2,300 crowdfunded offerings a year once the new section 4(a)(6) exemption goes into effect, raising an average of $100,000 per offering. That’s a total of $230 million raised each year.

How Many Crowfunding Platforms?

The SEC estimates, “based, in part on current indications of interest” (p. 380) that 110 intermediaries will offer crowdfunding platforms for section 4(a)(6) offerings. Sixty of those will be operated by registered securities brokers and the other fifty will be operated by registered funding portals. (Non-brokers may act as crowdfunding intermediaries only if they register as funding portals.)

The Fight to Survive

If the SEC’s figures are correct, and who really knows, that’s an average of approximately $2 million raised per crowdfunding platform. I would expect many of those 110 platforms to fail rather quickly. Given the regulatory and other costs involved, crowdfunding intermediaries won’t survive for very long on 10-15% of $2 million a year. The SEC doesn’t appear to think so, either. They note (p. 380) that “it is likely that there would be significant competition between existing crowdfunding venues and new entrants that could result in . .  . changes in the number and type of intermediaries as the market develops and matures.”

Of course, as the proposal itself indicates, it’s impossible to predict exactly what will happen when the rules become effective. But it’s at least interesting to see the SEC’s own guesses.

I have a new article, Retirement Revolution: Unmitigated Risks in the Defined Contribution Society, which describes citizen shareholders–individual investors who enter the stock market through defined contribution plans–and examines the overlapping corporate and ERISA laws that govern their investments. 

If I haven’t lost you with the mention of ERISA, here’s an excerpt from the article:

A revolution in the retirement landscape over the last several decades shifted the predominant savings vehicle from traditional pensions (a defined benefit plan) to self-directed accounts like the 401(k) (a defined contribution plan) and has drastically changed how people invest in the stock market and why. The prevalence of self-directed, defined contribution plans has created our defined contribution society and a new class of investors — the citizen shareholders — who enter private securities market through self-directed retirement plans, invest for long-term savings goals and are predominantly indirect shareholders. With 90 million Americans invested in mutual funds, and nearly 75 million who do so through defined contribution plans, citizen shareholders are the fastest growing group of investors. Yet, citizen shareholders have the least protections despite conventional wisdom that corporate law and ERISA protections safeguard both these investors and their investments. As explained in an earlier paper, citizen shareholders do not fit neatly within the traditional corporate law framework because their investment within a defined contribution plan restricts choice and their indirect ownership status dilutes their information and voting rights, as well as exacerbates their rational apathy as diffuse and disempowered “owners.” 

-Anne Tucker

Last week, I posted a response to the New York Times article criticizing law reviews.  A friend pointed me to a cover story from the Economist, How science goes wrong: Scientific research has changed the world. Now it needs to change itself.  It’s an interesting read.  This paragraph jumped out at me:

In order to safeguard their exclusivity, the leading journals impose high rejection rates: in excess of 90% of submitted manuscripts. The most striking findings have the greatest chance of making it onto the page. Little wonder that one in three researchers knows of a colleague who has pepped up a paper by, say, excluding inconvenient data from results “based on a gut feeling”. And as more research teams around the world work on a problem, the odds shorten that at least one will fall prey to an honest confusion between the sweet signal of a genuine discovery and a freak of the statistical noise. Such spurious correlations are often recorded in journals eager for startling papers. If they touch on drinking wine, going senile or letting children play video games, they may well command the front pages of newspapers, too.

 The article also calls for more acceptance of what it calls “humdrum” or “uninteresting” work that confirms or replicates other trials, a long-standing practice underappreciated by both journals and those who award grants.  

Not all is lost. One interesting suggestion:  “Peer review should be tightened—or perhaps dispensed with altogether, in favour of post-publication evaluation in the form of appended comments.” The article notes that the areas of physics and mathematics have made progress using the latter method.

 We do have some versions of the post-publication evaluation in the law review world, often published as responses to the work of others, or articles that build upon such work.  Over at The Conglomerate the post, Bebchuk v. Lipton on Corporate Activism,  provides a good example of two papers take opposite views, with David Zaring’s post itself serving the role of post-publication evaluator (on a small, but I think important, scale):

Some of the studies cited are quite old, and not all of the journals are top-drawer.  But others seem quite on point.  Perhaps the disputants will next be able to identify some empirical propositions with which they agree, and others with which they do not (other than, you know, sample selection).

Many blogs do this (including, sometimes, the Business Law Prof Blog), and I think it is a important role. Perhaps it is one the should be more formalized so that the value of such commentary can be more clearly recognized as part of the scholarly realm. For example, perhaps law reviews and other journals should consider publishing updates, major citiations, or critiques from various sources made about articles the review/journal has previously published. 

There are many ideas out there, and we should
keep looking for ways to keep developing useful scholarship. And by useful, I
mean complete, thoughtful, and careful work, including what some people might consider
“not novel,” if not “humdrum” or “uninteresting.”
 We don’t always need the legal equivalent of studies about drinking wine
and letting kids play video games, not that there’s anything wrong with either of
those things.