Conglomerate

BA Summer Reading: Independent directors

2013-05-24T13:40:57-06:00

Some interesting cases on the duties of independent directors coming out of Delaware...I have yet to read either of them, but there's a holiday weekend coming up, and its sounds like they'll make for some excellent beach reading for the corporate faithful. They are Rich v. Chong, C. A. No. 7616-VCG (Del. Ch., April 25, 2013) and In re Puda Coal Stockholders’ Litigation C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013) (bench ruling).

David A. Katz of Wachtell and Laura A. McIntosh connect the cases by posing an intriguing question on the CLS Blue Sky Blog: Can an independent director just resign from the board of a troubled company? Answer: No, you lazy, lily-livered slacker. You've got to stay put and make things right. Or, as they put it:

In both of the cases discussed above, the Delaware Chancery Court was critical of the independent directors’ decision to resign. Chancellor Strine observed: “[T]here are some circumstances in which running away does not immunize you. It in fact involves breach of duty…. If these directors are going to eventually testify that at the time that they quit they believed that the chief executive officer of the company had stolen the assets out from under the company, and they did not cause the company to … do anything, but they simply quit, I’m not sure that that’s a decision that itself is not a breach of fiduciary duty.”[22] Similarly, Vice Chancellor Glasscock commented in a footnote in Rich v. Chong, “It may be that some of the former independent directors … attempted to fulfill their duties in good faith…. Nonetheless, even though [two of them] purported to resign in protest against mismanagement, those directors could still conceivably be liable to the stockholders for breach of fiduciary duty…. I do not prejudge the independent directors before evidence has been presented, but neither are those directors automatically exonerated because of their resignations.”[23] Both decisions found it “troubling that independent directors would abandon a troubled company to the sole control of those who have harmed the company.”[24]

There's more on Rich v. Chong from Francis Pileggi. The oddest thing about the case for me, based on Francis' summary, is that the plaintiffs made a demand on the board. What was that about? You never made a demand on the board, because then you're stuck with near-impossible wrongful refusal standard: you concede the board's independence and capacity to evaluate the demand. The board gets business judgment rule protection, and you lose. Which is why everyone pleads demand futility, to the sorrow and confusion of BA students each year.

But the Rich v. Chong plaintiffs made a demand. Who does that? Next to no one, right? And yet plaintiffs lucked out because the defendants sat on the demand for 2 years. They not only failed to respond, but started an investigation, uncovered evidence of mismanagement, didn't do anything about it, and abandoned the investigation. So plaintiffs survive a motion to dismiss on Caremark claims, which also never happens.

See? Told you it sounded interesting...

Michael Piwowar To Take Over For Troy Paredes At The SEC

2013-05-24T09:59:49-06:00

Congratulations to Michael Piwowar and Kara Stein, the two senate staffers nominated to the SEC today, but we at the Glom will be sad to see Troy Paredes, a law professor and former guest, leave (he's leaving because his term is expiring and of his own volition). It is our firmly held, and not at all parochial, belief that every agency could do with a few law professors at the top; the SEC will now not have even one.

LSA Happy Hour - at the Sheraton on Saturday at 9

2013-05-24T07:52:00-06:00

For those going to Law and Society, there's a Saturday happy hour, co-organized by Prawfsblawg, at the Sheraton hotel bar at 9. I'll be there (indeed, I helped choose the locale, so do blame me if the corporate macrobrews are not to your liking); do come say hello.

Vic Fleischer on the Apple Rule

2013-05-23T11:37:58-06:00

The late Larry Ribstein coined the phrase "the Apple Rule" when Apple seemed to be the only corporation engaged in options back-dating that got a pass from regulators and prosecutors. Now, it seems that the Apple Rule applies to corporate income taxes as well.

Here is Glommer Emeritus Vic Fleischer's very funny take on Apple's hearing in front of the U.S. Senate two days ago (or "the ghost of Steve Jobs Goes to Washington").

Here is Vic's more detailed explication of Apple's global tax maneuvers.

There are several ways that a company can lower its global tax bill by separating an otherwise integrated business model into components located in various subsidiaries in various taxing jurisdictions. To oversimplify things, a global operation can attempt to have subsidiaries in high tax jurisdiction bear costs (whether from paying high interest rates on intercompany loans or bearing the brunt of mark-ups for various inputs or fees for use of intellectual property) and have subs in low or zero tax jurisdictions recognize profits. This is easier for companies with very important intellectual property, but has been used by bricks-and-mortar companies like Starbucks (all green coffee is sold through a Swiss Starbucks and roasted by a Netherlands company and the markup paid to those entities; royalties for the "Starbucks experience" are paid to the Netherlands entity as well).

Apple's CEO assures us that Apple does not use "tax gimmicks." Instead, it has two subsidiaries that are incorporated in Ireland but managed from the U.S., which means that they are considered under Irish taxing authority by the U.S. and considered under the U.S. taxing authority by the Irish. They pay zero taxes. Apple also has two Irish subsidiaries that do pay taxes to Ireland, but they are very, very low taxes. And, a lot of profits are recognized by these four subs.

Apple's CEO also reminds us that Apple pays a lot of taxes to the U.S., about $6 billion in 2012, $3.4 billion in 2011, so we should feel pretty lucky. (See above for Vic's response.)

The Law and Economics of Tornado Shelters (and Angelina Jolie)

2013-05-23T06:36:57-06:00

Here is my disclaimer: I'm from "tornado alley." Here is "my tornado." The Lubbock tornado was 43 years ago (gulp), when I was an infant. I have no memories of it, just the story that my parents told me. We went down the street to a neighbor's storm cellar; the tornado didn't come that close to our neighborhood; we left the dog in our kitchen.

This week, as the history of the Moore, Oklahoma tornado is being written, I have read articles and heard radio stories asking why more residents in tornado-prone areas don't have storm cellars or safe rooms in their houses, schools, etc. Not only why don't residents take more precautions, but why doesn't the law require new houses have tornado protection (similar to earthquake building requirements).

I never had a basement until I moved out of Texas to the Midwest. In West Texas, and it seems Oklahoma and maybe further north, basements aren't really necessary. Land is flat and available. If you want more square footage, building out is cheaper than digging a basement in the really, really hard soil. I remember having two friends my entire childhood that had basements, and everyone was really, really jealous of them (mostly because there seemed to be a lot more kissing in basements than in main floor family rooms). Basements would also be handy in the case of a tornado, but are rare. Instead of digging a basement, the law could require a separate storm cellar in a backyard or attached. The NYT article estimated this cost as $4k, which seems like a low estimate to me. So, is adding $4k to every newly constructed home prohibitive? Is it wise?

The problem is that everyone doesn't need their own cellar, and most people will never need one. If you think of all the homes that are situated in tornado alley, the probability of a particular home needing a cellar is really, really low. And the cellar doesn't save your house. It saves you, if you happen to be at your house. At least in the Lubbock tornado, many victims were in cars, or fleeing their cars. (Here are some pretty interesting tornado data.) The reporters seen to think the probability of needing a cellar is really high in Moore, which also had a tornado in 1999 (no fatalities, but property damage). In a perfect world, there would be one storm cellar, safe room or basement per block, not per house. That's pretty hard to regulate. But, having a storm cellar or safe room per school or office building doesn't seem like a bad idea. (I haven't heard anyone talk about mobile homes/trailer homes, which are even less stable than a home with a shallow foundation.)

Interestingly, this same week, commentators in the news have questioned Angelina Jolie's choice to have genetic testing for breast cancer (that costs $3-4k, a little less than a storm shelter), then have a double mastectomy when she learned a rare gene gave her probability of getting breast cancer was 87%. Well, no one in tornado alley has an 87% chance of dying in a tornado.

The other variable, besides the probability that a tornado will hit not only your town, but your block, is whether you would go into the storm cellar. Here, the NYT article and the NPR story seemed to suggest that there is a low level of panic for residents of tornado alley. That may be true. The summers of my childhood seemed to be filled with tornado warnings and tornado watches, which we soon began to ignore. These warnings would shoot across our broadcast TV channels, and some families had storm radios in case the electricity went off. But, after awhile, you get a little desensitized to the daily tornado warning. And, of course, there are stormchasers, a category of thrill-seekers that I still don't understand. But even non-stormchasers can be mesmerized on their way to the cellar watching the sky, which looks really awesome in the middle of a storm.

But I guess what bothers me about these "why don't you have a cellar" questions is an underlying sense that people in tornado alley are stupid, so we should regulate their housing. I disagree.

Mercantilism In International Finance

2013-05-22T13:31:57-06:00

In a trade-in-services dispute that looks quite a bit like pre-WTO trade in goods disputes, Indonesia is conditioning the sale of one of its banks to a Singaporean company on access to the Singaporean market:

Difi A. Johansyah, a spokesman for Bank Indonesia, said it would be “unfair” if Indonesian state-owned banks like Bank Mandiri, Bank Negara Indonesia and Bank Rakyat Indonesia could not expand in neighboring Singapore while DBS could expand in Indonesia because of the country’s more open ownership regulations.

“We will still open the door if they want to increase the stake up to 67 percent, but it’s conditional on whether M.A.S. grants access to our national banks to enter Singapore, which is still under negotiation,” he said in an interview.

This sort dynamic is a point of modest tension between economists and business people. The former would surely insist on unilateral surrender by Indonesia on the access issue. Who wouldn't prefer a big foreign investment in your country's infrastructure to no foreign investment? But businesses often look to leverage access on access, it is one of the things, ironically, that keeps some commitment among export-oriented industries to trade barriers - so their government can have something to give up.

Buffett Symposium At Concurring Opinions

2013-05-20T19:26:46-06:00

Coinciding with Con-Op's Larry Cunningham's book of essays on Warren Buffett, said blog has put together a pretty stellar set of contributions about the investor and his world. It has Berkshire insiders:

● Carol Loomis, authors of Tap Dancing to Work, a collection of her and Buffett's writings in Fortune

● Simon Lorne

● Robert Mundheim, who worked with Buffett and Lorne at Salomon and is now of counsel at Shearman & Sterling

● Donald Graham, Chairman and CEO of The Washington Post Co.

And it has professors

● Kelli Alces (Florida State)

● William Bratton (Penn)

● Deborah DeMott (Duke)

● Jill Fisch (Penn)

● Steven Davidoff (OSU)

Among others, too. It's off to a great start, so do give it a look.

The IRS Scandal: Does It Fit With The IRS Weltanschauung?

2013-05-17T08:05:58-06:00

This is not the place to go for careful consideration of tax policy, but we do know something here about business regulation more generally, so an observation and a reference with regard to the IRS investigation of tea party groups and their 501(c)(4) status:

I assume that the decision to investigate the tea party applicants by the agency was an exercise of enforcement discretion; as such, it should be unreviewable by the courts under the principle that agencies cannot be reviewed for their decision to bring enforcement actions on one set of guys as opposed to another set of guys (the idea is that reviewing those sorts of decisions would enmesh the courts too much in the work of the agency). The denial of an application for 501(c)(4) status, oddly enough, would be plainly reviewable as a matter of administrative law. But doesn't appear to be what happened here. Of course, the mere fact that you can't go to court doesn't make it right, and what is happening here is supervision (pretty angry supervision, too) by the other branches of government, rather than by the judiciary. Moreover, this is tax, and tax is different; there may be special review provisions at stake in the tax code I'm not aware of.
Kristin Hickman is your source for the administrative procedures adopted by the IRS, and one of the themes of her work, fwiw, is that the IRS rarely complies with some of the basic principles of administrative law. See, e.g., here and here and here.

Wading into the Bloomberg Data Breach

2013-05-16T15:51:12-06:00

There have been a number of weird news stories this week, so the Bloomberg terminal data breach scandal may not be getting enough time in the limelight. Recently, it has come to light that employees at Bloomberg have access to at least some information regarding users' search habits. Bloomberg currently has more than 315,000 terminals at client offices, mostly financial institutions, but also law firms. (Our campus also has some.) From these terminals, users can do a vast array of things, from researching specific companies to chatting to sending emails to making financial trades. Think of it like Westlaw or Lexis -- you can do a thousand things on those websites, but you mainly read law review articles, cases and statutes. Bloomberg terminals are very expensive ($20k/year) and also not committed to being user-friendly. Though Westlaw and Lexis gave up dedicated terminals decades ago and went from dial-up access to a web-friendly interface, Bloomberg has remained pretty hard to learn how to use, which may be why users are so hesitant to give it up after mastering it.

This week, Bloomberg is trying allay its clients' fears that journalists could see some data, but not important data (chatting, emailing, trading, specific research), and Wall Street firms are trying to get more commitments from Bloomberg as to what was accessible and what will be accessible going forward. But what interests me is what I'm not seeing anywhere -- what does the SEC think is important here?

Back in the day, and I assume now, lots of people devoted a lot of time to try to collect information on companies that might be engaged in M&A activity. A common legend around my law firm was that individuals would pose as messengers to go to the conference room floor and peruse the sign-in book to see what sorts of people were in the same conference room. I'm sure that was an example of an amateurish effort. A famous insider trading case involved the guy who worked for the financial printer trading on information he gleaned from reading documents there. I don't think you have to be a mystery novelist to come up with a scenario whereby a journalist at Bloomberg sees which (M&A lawyer) users are logging on and what sorts of things they are looking at and cobbles together insider information. The EIC of Bloomberg, Matthew Winkler, says that no one could access specific securities information, but could see aggregate information "akin to being able to see how many times someone used Microsoft Word vs. Excel." What about aggregate information such as a steep increase in users accessing company information on Company X? (N.B.: Bloomberg offers a service called Bloomberg Law, which is separate from the terminals that are at the heart of the breach this week. However, many law firms have Bloomberg business terminals.)

And now that we realize that Bloomberg could see that individual users were logging on and off (or not) of their terminals, is anyone interested in what folks at Westlaw or Lexis see? I would think that a sudden unease now exists for any research service that gives us a user logon associated with an individual's name and employer, whether that's a law firm or an investment bank.

Political Science Hires A Lobbyist: Can Rational Actor Models Permit This?

2013-05-16T02:01:00-06:00

Given some recent unpleasantness over federal grant funding, it won't surprise everyone that the American Political Science Association has hired a Washington lobbyist. But you have to wonder if it shouldn't surprise the class of people who think that advertising and get-out-the-vote ground games don't really matter, that campaign strategy doesn't make a difference, and that public interest groups can only exert a fleeting, at best, influence on public policy. Assuming that APSA isn't enacting some sort of Judith Butlerian performance, you have to think that it is hoping to shape some consciousnesses in Washington. We can only hope that's okay with the tit-for-tat portion of its membership.

What Libertarians Worry About When They Worry About Bank Regulation

2013-05-15T10:16:23-06:00

The British government has praised the development of the Co-operative Bank, a member-owned institution that looks a little like an old school thrift, but that also provides funeral services, grocery shopping, agriculture - and, we'll let's just agree that it isn't exactly a model of a pre-Glass-Steagal institution.

However, like old-school thrifts, the bank is overcommited to the British housing market, and the result is that this alternative to corporate behemoth banking has had its credit downgraded to junk status (usually the death knell when you're talking about an institution that provides, and depends upon, credit), while the traditional banks start to produce profits.

So sad, too bad, banks die every month - but what if the government has been trying to prop up its golden child with regulatory forbearance? It's everything you worry about when you worry about capital regulation:

Ian Gordon, an analyst at Investec Securities, said it was “curious that the bank was allowed to run with such weak levels of capital,” adding there was “an element of regulatory neglect” that represented a lesson for the new system.

Julia Black, a professor at the London School of Economics, said, “Supervision isn’t a transparent process, but I’m surprised it hasn’t already been required to hive off the bad loans or to set aside more capital.”

The dirty secret of regulatory forbearance - and Congress tries to legislate it away after banking crises, you can see as much in the hand-forcing provisions of both Dodd-Frank and FIRREA - is that it works. Some day Citigroup will be much more profitable than it was during the Latin American debt crisis and the housing crisis, when the government could have shut it down. But not requiring a bank to maintain its capital levels during bad times is also counter to the whole point of safety and soundness supervision. We'll see if the forebearance suspicions save, or destroy, Co-operative.

How Many IPOs Should We Have Each Year? How Do You Know?

2013-05-15T09:45:46-06:00

The titular questions have been swirling in the back of my head for the past month or so. Spoiler alert: I don't have the answer. But Jeff Schwartz' post in the CLS Blue Sky blog on the SEC Advisory Committee on Small and Emerging Companies' proposal to create a separate market for small and emerging companies, open only to accredited investors--more or less a public SecondMarket/SharesPost--has me asking it again.

This strikes me, unlike Jeff, at first blush as a bad idea, but let's ignore the merits of the proposal and focus on one of its premises. One of the arguments the Committee makes in favor of it is that "providing a satisfactory trading venue" for these companies might encourage IPOs of their securities.

First question: Really? Isn't it just as likely that, if a robust market exists for these companies, they're less likely to go public? Isn't obtaining liquidity one big reason for going public in the first place?

Second question: How many is the right number of IPOs, anyway? The WSJ told me yesterday IPOs are set to raise the most cash since 2007. Jay Ritter argued in a recent paper that IPOs have dried up not because of heavy-handed government regulation but because times have changed. Now getting big fast is the way to go, and going public and being a small independent company isn't as attractive to a young firm being acquired by a bigger player.

As Ritter writes, "If the reason that many small companies are not going public is because they will be more profitable as part of a larger organization, then policies designed to encourage companies to remain small and independent have the potential to harm the economy, rather than boost it." Ritter's prescriptions to help IPOs are to encourage auctions over bookbuilding (here's yet more evidence that the underwriter spread is too big), discourage class action lawsuits, and reform the copyright and patent system.

Ritter closes with: "I do not know what the optimal level of IPO activity is in the United States or any other country, nor do I think that it should necessarily be the same now as it one was."

Right now I'm with him.

Colin Mayer Is Against Shareholder-Oriented Governance

2013-05-14T13:40:30-06:00

Over at HBR, Mayer, the former dean of the Said Business School at Oxford, decries British best-in-breed corporate governance. A taste:

The form of capitalism that has emerged in Britain is the textbook description of how to organize capital markets and corporate sectors. It features dispersed shareholders with powers to elect directors and remove them with or without cause, large stock markets, active markets for corporate control, a good legal system, strong investor protection, a rigorous anti-trust authority — the list goes on.

...

The downside, though, is that exemplary as a form of control the British financial system might be, it systematically extinguishes any sense of commitment — of investors to companies, of executives to employees, of employees to firms, of firms to their investors, of firms to communities, or of this generation to any subsequent or past one. It is a transactional island in which you are as good as your last deal, as farsighted as the next deal, admired for what you can get away with, and condemned for what you confess.

While incentives and control are center-stage in conventional economics, commitment is not. Enhancing choice, competition, and liquidity is the economist's prescription for improving social welfare, and legal contracts, competition policy, and regulation are the toolkit for achieving it. Eliminate restrictions on consumers' freedom to choose, firms' ability to compete, and financial markets' provision of liquidity and we can all move closer to economic nirvana.

Worth a look, at any rate. We can surmise that Lucian Bebchuk will be unconvinced; the question, to my mind, is whether Stephen Bainbridge will be persuaded? HT: Matthew Yglesias

Family Film Blogging: Iron Man 3

2013-05-14T13:04:24-06:00

Yes, Iron Man 3 has been out 10 days or so, but I couldn't blog about it until now because I had to see it twice. All five of us went on opening weekend, but our little guy (5 1/2) only lasted about an hour, so he and I spent some quality time in the parking lot. Thankfully the 11 year-old went with me yesterday so I could see the last half. Now, our youngest has seen Captain America, Thor and The Avengers, but the Iron Man movies are grittier. As even Rhodey says during the movie, this isn't superhero stuff. The bad guys appear as terrorists. Gritty, nasty terrorists. More CNN than Saturday morning cartoons. But the thing that put poor Will over the edge was that Tony Stark has PTSD. Seeing Tony have several anxiety attacks was the last straw. And the humor is much more subtle in Iron Man than in The Avengers, so to the kindergarten set, there is no comic relief. Lesson learned.

But, the rest of us very much enjoyed it. Tony spends a lot of time out of the armor, which is really what we all want to see anyway -- Robert Downey, Jr./Tony Stark at his genius best. The plot (not to give too much away) involves a series of "bombings" in the U.S. and a terrorist who appears on television taking credit for the bombings and threatening the President. The President does not call in Iron Man, but calls in Colonel Rhodes as Iron Patriot (a refurbished War Machine) to go find "the Mandarin." Tony gets involved when his friend Happy Hogan is seriously injured in one of the explosions and vows to find the Mandarin. But, his quest is sometimes halted by his anxiety attacks.

So, why does Tony have anxiety attacks? He says he has had them "since New York." Unfortunately, none of the Avengers appear in the actual movie, but the events of that movie are mentioned many times. Since Tony fought Loki's army from another world and went up "the worm hole," he is not the same. He can't sleep, and he's worried that he will lose the one thing he cares about -- Pepper Potts. (No, he doesn't go over to the dark side like Anakin/Darth Vader, if that's what you're afraid of.) So, he's created 42 Iron Man suits in his newly found free time in the middle of the night.

The producers of these blockbuster Marvel hero movies have a problem now. Now that the four Avengers have met and joined forces in New York (Iron Man, Captain A, Thor and Hulk), how do you keep them out of the individual sequels you have planned? To me, that seems like the elephant in the room during Iron Man 3. Why doesn't Tony call his (super) friends? Where is Nick Fury while the President is being threatened? At one point, Tony admits he needs backup, but he means his Iron Man army, not his Avenger friends. There is some discussion that maybe the public isn't ready for the Avengers again, that this is more military-related than alien-related, but these excuses seem rather slim. The real reason is that this isn't The Avengers 2. In this movie, the heroes are Tony, Rhodey and Pepper.

The ending seems to hint that there will be an Iron Man 4 (and who doesn't want it?). There are some details left to the imagination as to how Iron Man 4 will begin. But until then, we have Thor 2 to look forward to!

Delaware Public Benefit Corporations: Branding

2013-05-13T11:48:50-06:00

Cross-posted at SocEntLaw.

This is my third and final substantive post comparing the Model Benefit Corporation Legislation (the “Model”) to the proposed Delaware Public Benefit Corporation (“PBC”) amendments.

"Branding" is one area where proponents of the Model may argue that the Model is better than the PBC. As mentioned in my first substantive post, the PBC favors private ordering more than the Model, which makes the PBC more flexible, but also makes it more difficult to maintain a consistent brand. Branding could be useful to investors, consumers, and governments that wish to quickly identify socially responsible companies.

Some proponents of the Model may point to the required annual report (PBC only requires a biennial report) and the requirement of measuring general public benefit against a third party standard (optional under the PBC) as building the Model’s brand. In my opinion, however, neither the required annual report nor mandatory use of a third party standard is likely to facilitate creation of a useful brand under the current language of the Model.

First, the Model does not expressly provide an enforcement mechanism for assuring the public posting of an annual report and the use of a third party standard. Currently, a number of benefit corporations are in violation of the statute, but nothing seems to be done about the violations. Second, most of the few annual reports available are full of fluffy self-promotion and do not include much of value. Third, the available third party standards vary wildly, so simply requiring a third party standard is not likely to lead to a consistent and valuable brand. The updated version of the Model requires that the third party standard be “comprehensive,” “independent,” “credible,” and “transparent,” but those requirements will be difficult to enforce and, in any event, do not appear aimed at creating a consistent brand. A benefit corporation that does not see the value in using a third party standard may use the lowest standard available, provide little to no useful information to the market, and waste company resources in the process.

If the Model proponents wished to create a brand via statute they would do better requiring an annual charitable giving floor and a partial asset lock, as I suggest here. In my opinion, however, the heavy lifting in the branding department of social enterprise should be left to private organizations like B Lab. The social enterprise space is evolving quickly, and I think it unlikely the state governments would keep up with the changes and engage in the type of enforcement needed to maintain a valuable brand. Also, the term “social good” means very different things to different people, and therefore it is likely better to have private organizations develop various standards and allow the market to determine which standards, if any, are useful and valuable.