I’m committing to at least 1 Twitter post per day, and the content may be of interest to readers of this blog — as I say on my Twitter page: “Tweets focus on business law current events … except when they don’t.”  You can get a taste here: https://twitter.com/ProfPadfield

You might also get a chuckle from reading the pitch I sent to my Akron Law colleagues:

 

Because there is no such thing as too much social media … you
should follow me on Twitter (the goal is 20 followers by 2014 — ambitious, I
know, but if Kim Kardashian can get over 18 million followers ….):

 https://twitter.com/ProfPadfield  

Okay, okay … here is Kim’s:

https://twitter.com/KimKardashian

 

Professor Bainbridge takes issue with my analogy between shareholder activists and Congress.   I am pretty sure he’s missing my point, in part because I have not disagreed with the points he makes.  My point (or at least intended one) is not that shareholder rights should equal a strict democracy.  My point is that shareholder activists, sometimes with less than a majoity, say 20%, try to improperly impose their will on the currently elected (and properly empowered) board.  Further, they are seeking additional powers to further their influence.    

I figure we all agree that if a majority of shareholders agree, they can, at the proper time, make the changes they want.  In contrast, shareholder activists often try to make those changes before they have the votes — votes they may never have to support their views.  I happen to see at least some of the current Republican House in that same vein.  That’s my intended point.  I am sure lots of people disagree with that, too, but I just want to make clear that I am criticizing what I see as the abuse of a powerful minority messing with a regime that was properly elected and exercising that power that was obtained via election.  

I’m not suggesting shareholders should have more power; I am criticizing how they sometimes exercise the power they currenty have.  

Professor Haskell Murray is presenting on
Delaware’s new Public Benefit Corporation Act on October 5th at the
Southeastern Law Scholars Conference.  Delaware is the 19th state to
pass such legislation and given the influence that the state has on others in the area of
corporate law, it may prompt the many states that are considering it to pass their
own pending legislation.  Many question
the need for benefit corporations in general given the constituency statutes that are already in
place in many states and the debate about the shareholder wealth maximization norm. Others worry about unintended consequences (see
here for example).  

Haskell has
probably written more extensively on these entities than almost anyone else (see here).
Although his latest article is not yet on SSRN, the abstract is below.  I look forward to reading his article and to
seeing how many Delaware corporations jump on the benefit corporation
bandwagon.

“Systems should exist to serve
society.  Right now our capitalist system is not serving society; it’s
serving shareholders.  And we can’t run around expecting different
outcomes until we change the rules of the game.”   -Jay Coen Gilbert
(Co-founder, B-Lab)

“Delaware, the leading incorporation state, engages in
significant, and continual, legal innovation. . . . Delaware is not the only
state to be continually revising its corporation code: other states invariably
follow suit, revising their codes to follow Delaware’s innovations.” 
-Roberta Romano (Professor, Yale Law School)

B Lab co-founder Jay Coen Gilbert provided the introductory quote
in his 2010 TEDx Talk in Philadelphia on certified B corporations.  
Since 2010, B Lab has been quite active.  Not only has the non-profit
organization privately certified over 800 companies, but B Lab has also taken
the lead in successfully convincing 19 states and Washington, D.C. to pass
benefit corporation statutes:  in their words, “changing the rules of the
game.”   After eighteen months of lobbying and negotiation, B Lab
even convinced Delaware, the recognized pacesetter in U.S. corporate law, to
amend its corporate statute.   Delaware, however, cut its own path in
regard to the benefit corporation form.  Delaware is quite sensitive to
issues involving corporate law and often acts quickly to protect its strong
market position.   While most of the other states appear to have
worked from the Model Benefit Corporation Legislation (the “Model”) and stayed
relatively close it, Delaware seems to have merely consulted the Model and
created a largely new social enterprise form that Delaware calls a public
benefit corporation (“PBC”).   This article builds on the author’s
previous work on benefit corporations, compares the Model and the PBC
amendments, and offers suggestions for improving the law.

This article proceeds in five primary parts.  Part I of this
article provides a brief overview of benefit corporations, the PBC amendments,
and the legal side of the social enterprise movement more generally.  Part
II claims that the PBC amendments allow more private ordering than does the
Model, and argues that most of the PBC provisions providing additional
flexibility are positive developments.  Part III posits that the PBC
provides superior guidance to directors, but also makes suggestions for
providing additional clarity.  Part IV dissects the branding aspect of
both the Model and the PBC, decides that the Model provides for slightly better
branding, but opines that the social enterprise branding efforts are best left
to the private market.  Part V briefly examines remaining governance and
ethical challenges facing those associated with PBCs and sets the stage for
future research.  The article concludes with a summary of the article’s
main points and projections related to the future of social enterprise
legislation in wake of Delaware’s innovations.”

 

 

 

 

Is there a sociological explanation for why Wall Street–and other large, complex and interconnected systems–are rigged for crisis?  Charles Perrow, author of Normal Accidents: Living with High Risk Technologies says yes.  Normal accidents occur when two or more unrelated failures interact in unpredicted ways.  As applied to Wall Street, the theory is that as the number of trades, a steeply rising number, increases and as the market becomes increasingly technology dependent, the likelihood of these normal accidents occuring also increases.   Examples of normal accidents in the financial markets include the flash crash based on the false tweet that there were explosions at the White House last spring, the NASDAQ software glitch that caused the flash freeze in August, and the unprecedented trading losses suffered during the financial crisis of 2008. This article in the Atlantic provides a provocative description of Wall Street’s normal accidents, predicts that more are to come, and suggests that limiting the number/volume of trades is one place to start in thinking about reducing the occurance and significance of these normal accidents. 

A specific example of a normal accident is: “one trader at JP Morgan Chase” racking up a “$6 billion in trading losses while the company’s CEO, Jamie Dimon, thinks everything is under control.”

That natural accident and other alleged misdeeds of JP Morgan have the company and its legal troubles back in the news.  After the company’s September settlement with the SEC, which included an admission of wrong-doing and a $200 million fine, there is talk of a global settlement of all state and federal inquiries into its mortgage practices.    The settlement, news of which broke last week, is rumored to be around $11 billion, but is in jeopardy.  The FDIC is opposing an indemnification provision of the settlement that would put an indemnificaiton responsibility on the FDIC 5 years after the settlement and push approximately $3.5 billion in liabilities on to the FDIC.

This article (also from the Atlantic) provides a great description of the conduct at the center of JP Morgan’s legal troubles and outlines the company’s ongoing litigation related to the financial crisis and subsequent scandals (i.e., the Libor scandal). 

-Anne Tucker

So the government shutdown has me troubled.  I think it’s reasonable for the House not
like Obamacare and to do everything they can to repeal the law.  However, it strikes me as different to force a
government shutdown because that’s the only way they can get leverage to make a
change the voters, at least at the last election, did not agree with.  

As Sen. John McCain explained last week:

Many of those who are in opposition right now were not here
at the time and did not take part in that debate. The record is very clear of
one of the most hard fought, fair, in my view, debates that has taken place on
the floor of the Senate. That doesn’t mean that we give up our efforts to try to
replace and repair Obamacare, but it does mean that elections have
consequences. Those elections were clear in a significant majority that a
majority of the American people supported the president of the United States
and renewed his stewardship of this country.

The actions of the House right now remind me a lot of the
arguments put forth against shareholder activism.  That is, the complaints about rent-seeking actions put forth by an
influential minority to pursue an agenda that is not consistent with the
majority’s  wishes. I’m reminded of Steve
Bainbridge’s Preserving Director Primacy
by Managing Shareholder Interventions. 
Below (with alterations mine), you can see the parallels (and to be
clear, I am not suggesting the good professor agrees with my assessment – I’m
the one making this assertion):

[N]ot all shareholder interventions [congressional
deadlocks] are created equally. Some are legitimately designed to improve corporate
[governmental] efficiency and performance, especially by holding poorly
performing boards of directors and top management teams [government
actors] to account. But others are motivated by an activist’s belief that he or
she has better ideas about how to run the company [government] than the
incumbents [those who passed the current laws of the land], which may be
true sometimes but often seems dubious. Worse yet, some interventions [deadlocks]
are intended to advance an activist’s agenda that is not shared by other investors
[voters].

I concede there are many rather obvious differences, and maybe it’s a stretch, but I don’t think too much of
one.  Ultimately, we have rules set up to
hold our directors, and our elected leaders, accountable for their
decisions.  Attempting to wield power
using procedural methods or other tactical efforts that undermine the will of
the majority and shift power to the minority are rarely productive or
positive.  In my view, the same rules
should apply in both instances: either convince a majority you are right and
make the changes or move on.  

Before I
went to law school, I had a career in public relations and brand
management. I had the pleasure of having a client that was among the best when
it comes to brand reputation, Nintendo, where I was responsible (with our
client and a solid team) for product launches like this, this, and this (PDF, p. 3).  A few years ago,
I even wrote an article combining my interest in branding and my interest in
entity law: The North Dakota Publicly
Trade Corporations Act: A Branding Initiative Without a (North Dakota) Brand. 

Anyway, when I
recently received my version of ERN Economics of Networks eJournal, (Vol. 5 No.
68), I took note of the paper, Corporate
Reputation and Social Media: A Game Theory Approach, which is available
here.  The paper states in the abstract,
“Corporate reputation is more and more the most valuable asset for a firm. In
this day and age, corporate reputation, although an intangible asset, is and
will grow as the most essential asset to publicize and also protect.”  My first thought:  as a general matter, can that possibly be
true? 

It appears not,
though it is obvious that reputation can matter quite a bit to corporate (or
other entity) value. (I leave the commentary on congressional reputation to
others.)  One study found that “Corporate
Reputation contributes on average 26% of the value of a company’s market
cap.”  In addition, a
2011 study found:

Analysis found
that on average, corporate reputation is delivering proportionately more value
to FTSE100 companies (c32 percent of market cap) than to FTSE250 ones (c14
percent). The study found that Royal Dutch Shell, Unilever, BG Group and Tesco
are the top performers in terms of reputational contribution to market
capitalization in 2010. Others in the top 10 included BHP Billiton, British Sky
Broadcasting, Centrica, Rolls-Royce, GlaxoSmithKline and Diageo.

. . . .

The ten most
valuable corporate reputations are contributing on average 48 percent to
shareholder value (as measured by market cap). That represents a combined value
of some £228bn. By contrast, the ten least effective reputations ( alist that
includes Yell Group, Sports Direct, Enterprise Inns, UTV and Cable &
Wireless) eroded value in 2010, by on average 10.7 percent of market cap worth
a total of £720m.

 

Reputation
contributions vary considerably by business sector. They range from an average
51 percent in the oil and gas sector to 16 percent in technology and utility
companies.

One would expect
that the value of reputation would vary by sector.  It is not shocking to me that the value of
reputation in the oil and gas sector is high or that the value for utility companies
would be low. Technology companies on the low end seems odd, if you think Apple, Google, or Samsung. Apparently this study was talking more about tech companies like Molex, who most of us
had never heard of until recently. 

The harm that
comes from reputational harms, though, is clearly a corporate concern. Just ask BP and
for, that matter, other industry players, following the Deepwater Horizon
disaster.  Much of my current research is in the oil and gas area, especially related to hydraulic fracturing for
those resources. Hydraulic fracturing
already has a reputational problem, to say the least, but a major disaster could
have fair reaching effects. And there are ways to drastically reduce the risk
of bad events.  As I have explained
elsewhere (footnotes omitted):

A massive
hydraulic fracturing accident could cause broad-reaching harm to the
environment, landowners, drinking water, industry employees, and consumers. As
witnessed when BP’s Deepwater Horizon oil platform suffered a blowout in the
Gulf of Mexico, everyone can suffer when an industry actor errs. In that
circumstance, one industry leader stated, “[i]t certainly appears that not all
the standards that we would recommend or that we would employ were in place.”
Nonetheless, all of the companies in the industry were negatively impacted by
the moratorium placed on offshore drilling following the disaster.

Although
companies need latitude to determine their own course on many business
decisions, API and industry leaders seem to agree that there are some parts of
the drilling process that must be followed. Industry leaders, trade
associations, environmental leaders, engineers, scientists, and state and
federal regulators should be working together to ensure that there are baseline
standards in place to create a list of, and then avoid, “never events” for oil
and gas drilling.

All involved
need to avoid allowing the enemy of their version of “the perfect” to be the
enemy of the overall good.  Instead, we
need to learn from the BP disaster and we need to learn from the experiences of
those drilling, regulating, and studying hydraulic fracturing. As Laurence J.
Peter, once said, “[t]here’s only one thing more painful than learning from
experience, and that is not learning from experience.”

As it turns out, protecting against reputational harm does not only protect company value. It often also has corresponding economic, environmental, and social value.  

The SEC’s new Rule 506(c) exemption, mandated by the JOBS Act, allows issuers to solicit anyone to purchase securities, through public advertising or otherwise, as long as they only sell to accredited investors (or investors that the issuer reasonably believes are accredited investors). For most individuals, accreditor investor status depends on the investor’s annual income and net worth.

The crowdfunding exemption added by the JOBS Act allows issuers to sell securities to anyone, accredited or not, but the amount of securities each investor may purchase depends on the investor’s net worth and annual income. (For more on the new crowdfunding exemption, see my article here.)

Because of these requirements, it is important under both exemptions to know the net worth and annual income of each investor.

NOTE: Many people are referring to Rule 506(c) as “crowdfunding” but
the actual crowdfunding exemption is something different. Brokers and
others selling under Rule 506 began calling that crowdfunding as a
marketing ploy to capitalize on the popularity of crowdfunding. Some
academics have adopted that usage, which I think is unfortunate and only
leads to confusion.

The simplest way to deal with these requirements would be to allow investors to self-certify. If an investor tells the issuer his net worth is $1.5 million, the issuer should be able to assume this is correct, unless the issuer has reason to suspect otherwise. This is not, unfortunately, the SEC’s approach in Rule 506(c). The SEC still has not adopted the rules required to implement the new crowdfunding exemption, but it’s unlikely to take this simple self-certification approach in those rules either.  

In a Rule 506(c) offering, Rule 506(c)(2)(ii) requires “reasonable steps” to verify that any natural person who purchases is an accredited investor. The issuer may do that verification itself, or it may rely on written representations from registered broker-dealers, registered investment advisers, licensed attorneys, or CPAs that they have taken reasonable steps to verify the investor’s status.

Under the non-exclusive safe harbor in Rule 506(c)(2), those reasonable steps could include review of, among other things, the investor’s tax filings, bank statements, brokerage statements, credit report, tax assessments, and appraisal reports. Obtaining and reviewing this information will increase the cost of using the exemption and force investors to divulge confidential financial information that they would probably prefer to keep to themselves.

Why not self-certification? Obviously, people might lie. I might exaggerate my income or net worth in order to qualify to invest in a Rule 506(c) offering or to purchase more securities in an offering pursuant to the crowdfunding exemption. Securities would be sold under Rule 506(c) to investors who aren’t supposed to buy them. In crowdfunding offerings, investors could buy more securities than they’re supposed to buy.

But these requirements are designed to protect the investors. If I choose to lie about my status, why shouldn’t I forfeit that protection? Why should the issuer be burdened with additional costs just because some investors are willing to lie? As long as the issuer acts in good faith and has no reason to know an investor is lying, what’s the argument for punishing the issuer by denying the exemption? If we want to discourage people from lying about their net worth and annual income, we should punish the liars, not the innocent issuer.

Arguably related to the SEC’s recently proposed CEO pay ratio
rules, Alberto Salazar and John Raggiunti have posted “Why Does Executive Greed
Prevail in the United States and Canada but Not in Japan? The Pattern of Low
CEO Pay and High Worker Welfare in Japanese Corporations” on SSRN.  Here is the abstract:

According to a list of the 200 most highly-paid chief
executives at the largest U.S. public companies in 2013, Oracle’s Lawrence J.
Ellison remained the best paid CEO and earned $96.2 million as total annual
compensation last year. He has received $1.8 billion over the past 20 years.
The lowest paid on the same list is General Motors’ D. F. Akerson who earned
$11.1 million. The average national pay for a non-supervisory US worker was
$51,200 last year and a CEO made 354 times more than an average worker in 2012.
Hunter Harrison, Canadian Pacific Railway Ltd., was the best paid CEO in Canada
for 2012 and received $49.2-million as total annual compensation, significantly
higher than the 2011 best paid CEO, Magna’s F. Stronach who received $40.9
million. In 2011, the average annual salary was $45,488 and Canada’s top 50
CEOs earned 235 times more than the average Canadian. These executive pay
practices contrast with the growing inequality in Canada, recently illustrated
with the finding that 40% of Indigenous children live in poverty. In contrast,
Japan’s highest paid CEO is Nissan Motor Co.’s Carlos Ghosn who earned 988
million yen (US$10.1 million) in the year ended March 2013, little changed from
the previous year and modestly improved from his US$ 9.5 million compensation
for 2009. That does not even put him among the top 200 most highly-paid U.S.
company chiefs and the top 20 best paid CEOs in Canada for 2012. Why are
Japanese CEOs paid considerably less than their American or Canadian
counterparts? This essay argues that the activism of long-term oriented
institutional investors such as banks and the tying of executive pay to worker
welfare in the context of a culture of intolerance to excessive executive
compensation explain to a great extent the development of a pattern of low
executive pay in Japan. The Japanese experience also demonstrates that lower
executive compensation does not result in compromising firm performance and is
a necessary condition to build a stakeholder-friendly corporation. For example,
the CEO of Toyota (world’s biggest automaker), Akio Toyoda, earned 184 million
yen ($1.9 million) in 2012, a 35 percent increase from the previous year. He is
the lowest-paid chief of the world’s five biggest automakers and led Toyota to
generate the highest return last year among the top five global automakers.
Toyota’s outlook for increasing profit prompted the automaker to approve the
biggest bonus for workers in the last years. Alan Mulally, Ford Motor’s chief
and the best paid among the top five, took home $21 million in 2012.

A friend recently asked me to suggest some books that might help him improve his meditation practice.  Operating under the assumption that if the topic is appropriate for the Wall Street Journal (“Doctor’s Orders: 20 Minutes Of Meditation Twice
a Day“), then it’s good enough for this blog, I thought I’d pass on my suggestions to interested readers.  The first 3 make up my personal list of “classics,” and the last is a shameless plug for a book of edited dharma talks I wrote based on my year of studying under sensei Ji Sui Craig Horton of the Cleveland
Buddhist Temple.  While my suggestions all focus on Buddhist/Zen meditation, there are certainly more “generic” approaches to learning about meditation — for example, one might visit the website for the Center for Contemplative Mind in Society,
which seeks to transform higher education “by supporting and encouraging
the use of contemplative/introspective practices and perspectives to create
active learning and research environments that look deeply into experience and
meaning for all in service of a more just and compassionate society” (I was made aware of this source while attending a panel discussion on “Engagement, Happiness, and Meaning in Legal
Education and Practice“).  Regardless, here is my promised recommended reading list:

Peter Huang recently published a review of Leo Katz’s “Why
the Law Is So Perverse” in 63 Journal of Legal Education 131 (you can download the
paper via SSRN here).  I have only
briefly skimmed the paper, but I believe there is much of value here for
corporate law scholars. The following
excerpt is from the introduction:

This book is an imaginative tour of legal paradoxes that are
related to the field of social choice, which studies the aggregation of
preferences. In a non-technical and accessible way, Katz discusses many complex
and subtle ideas, using the language of legal cases, doctrines and theories. As
he notes on page 6, some legal scholars have applied social choice theory to
analyze diverse and fundamental legal issues. Two recent examples are how
social choice illuminates the reasonable person standard in torts and other
areas of law and the notion of community standards underlying the doctrine of
good faith performance in contract law…. Katz’s book explicates four fundamental legal paradoxes as
the logical consequence of the perspective that legal doctrines entail
multi-criteria decision-making. This means that each of these foundational
doctrines is logically related to a voting paradox and its corresponding
literature in social choice. Katz aptly describes the four legal puzzles he
analyzes by choosing as titles to the four parts of his book these four
questions: Why does law prohibit certain win-win transactions? Why are there so
many loopholes in the law? Why does so much of law have a dichotomous nature?
Why does the law not criminalize all that society morally condemns?

Importantly, Peter adds a valuable appendix entitled, “A
Brief Social Choice Primer for Legal Scholars,” which he describes as follows:

This appendix provides legal scholars a guide to social
choice in general and four distinguished impossibility theorems in particular.
It offers motivating examples and precise statements of those impossibility
theorems. The conventional interpretations for these theorems and the field of
social choice are negative in the sense that most commentators view social
choice theory as mathematically proving that no voting procedure is fair. These
commentators include legal scholars applying impossibility theorems and
concluding that difficulties are unavoidable with all collective or group
decision-making processes. There is a vast social choice literature full of
extensions and refinements of these and other impossibility theorems. Current
social choice research tends to be philosophical or technical. Katz’s book
mostly eschews the technical and emphasizes the philosophical. This appendix
does the opposite, while still avoiding mathematical details and emphasizing
conceptual understanding. Additionally, it highlights research by Donald Saari
and his coauthors that explains what goes wrong in these impossibility theorems
and provides benign interpretations and positive versions of them.