Protecting the Public from (Certain) Emerging Growth Companies

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Category: Business Regulation, Corporate Law, Public
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JOBS ActPart one of this blog post concluded that Fantex’s IPO represents an unintended consequence of the 2012 JOBS Act.  The costs imposed on startups attempting to go public are significant, and the burden of complying with mandatory disclosure laws can deter even the most-attractive startups from commencing an IPO.  The JOBS Act is intended to decrease the burden on startups attempting to raise necessary capital by reducing the financial disclosure requirements normally imposed on public companies.

One way the Act reduces disclosure is through the status of “emerging growth company.”  Most notably, an emerging growth company is defined as an entity with less than $1 billion in annual revenue.  By falling within this broad definition, a startup may take advantage of reduced disclosure requirements for up to five years.

Based on this $1 billion threshold, the definition of emerging growth company is broad enough to encompass companies either experiencing an accelerated growth rate or with high-growth potential.  Unfortunately, Fantex also falls within this broad definition of emerging growth company, as noted in its prospectus.  Therefore, the real question is whether the definition is too broad so that companies with little, or no, demonstrated growth are being granted the same access to the investing public as companies that are actually growing. Read more »

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SEC Issues Rule on CEO-to-Worker Pay Ratio Disclosures

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Category: Corporate Law, Labor & Employment Law, Public
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money_bag_svgLast week, the Securities and Exchange Commission (SEC) released a rule requiring companies to disclose the CEO-to-worker pay ratio.  Despite objections by many corporations, the rule covers all employees including seasonal, international, and part-time workers.  The SEC provides companies the option of using the entire workforce or a representative sample in the calculation.

There will now be a 60-day comment period.  The SEC voted for the rule 3-2, with the two Republican Commissioners who voted against the proposal calling it a special interest provision and proclaiming “shame on the SEC.”

Proponents of the rule argue that it will give shareholders and other stakeholders a clear line of sight into human capital management and worker pay.  Read more »

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Paul Dacier (L ’83) Assumes Presidency of the Boston Bar

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Category: Corporate Law, Legal Practice, Legal Profession, Marquette Law School, Public
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Paul Dacier

Paul Dacier (Boston Globe)

An important part of professionalism is, well, participating in the profession. The Law School has a rich record of alumni and faculty involvement in most walks of the profession, including leadership positions in local and state bar associations. Many alumni have also been recognized for their outstanding work as lawyers.

Paul Dacier (Arts ’80; L ’83) is part of this distinguished cohort. In 2013 Paul has garnered well-deserved recognition for his legal work on behalf of EMC Corp., while also serving as the President of the Boston Bar Association (BBA) for 2013-14. Indeed, the Boston Globe reports that Paul is the first general counsel to assume the BBA’s presidency in its over 250 year history.

Paul is general counsel for EMC, a $20 billion, publicly traded corporation with over 60,000 employees and a legal department of over 100 lawyers. EMC is one of the nation’s leading corporations specializing in information storage (“the cloud”) and related technology. Under Paul’s direction, the legal department has successfully defended EMC’s position in high-visibility patent litigation and developed innovative approaches to mergers and acquisitions. The National Law Journal recently named EMC’s legal department as the Boston Legal Department of the year (August 2013).

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Farewell to Ronald H. Coase

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Category: Corporate Law, Public, Tort Law
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CoaseAlmost every student who has attended law school in the past 40 years has encountered Ronald Coase and the Coase Theorem. Even professors who disagree with Coase feel compelled to expose their students to his famous theorem, even if only to rebut its argument. As a long-time teacher of both Torts and Property who is not an advocate of law and economics, I cannot imagine teaching either course without references to the Coase Theorem as a way of evaluating the correctness of legal rules.

In a nutshell, Coase, widely acknowledged as the founder of the law and economics movement, posited that in a world without transaction costs, individuals would bargain with each other to achieve the most efficient use of resources, and legal rules would be irrelevant. As a consequence, in a world with transaction costs, Coase seemed to suggest that legal rules should be constructed so that they favor the most efficient user, since that is the party who will eventually end up with the resource . The Coase Theorem was presented to the world in a 1960 article entitled, The Problem of Social Cost, which appeared in the Journal of Law and Economics and is still the most frequently cited law review article in history. Read more »

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Shareholder “Say on Pay” – Can it Expose Directors to Liability?

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[Editor's Note: Over the past month, faculty members have been posting on upcoming judicial decisions of particular interest. This is the fourth post in the series.]

In January of 2011, the Securities and Exchange Commission, as part of its implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, began requiring U.S. public companies to provide their shareholders with a non-binding vote on the compensation of certain executive officers. This “say on pay” gives shareholders an advisory say on the amount of compensation paid to those executives. Related disclosure is also designed to prompt the board to consider how the “say on pay” vote affects its broader executive compensation policies and practices.

The Dodd-Frank Act specifically provides that the shareholder say-on-pay vote is not intended to affect directors’ fiduciary duties. Despite this, in at least two cases, shareholders have sued directors for breaches of their fiduciary duties, primarily on the basis that they implemented compensation practices that shareholder had voted against. Read more »

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Best of the Blogs: The Ernst & Young Case

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Category: Corporate Law
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It’s not really my area, but I’ve been especially interested this week in reading about the new civil fraud case brought by the State of New York against Ernst & Young.  The case arises from E&Y’s auditing work for Lehman Brothers, an early and important casualty of the financial crisis.  In this post, Matt Taibbi explains the basics of the Repo 105 transactions that Lehman used to hide its precarious financial position.  E&Y is now in trouble for signing off on Lehman’s questionable accounting statements.

For some helpful commentary on E&Y’s expected defense, see this post by Caleb Newquist at Going Concern.  In essence, E&Y’s position seems to be that it cannot be held liable under the New York law because it was Lehman, not E&Y, that produced the misleading financial statements and that used the statements to sell billions of dollars of securities before the collapse.  Apparently, there is no precedent under the state law for the prosecution of an accounting firm based on its role as an auditor, so the courts may have to wrestle with some difficult questions in the case.

What particularly interests me about the case is the way it echoes the prosecution of Arthur Anderson, which destroyed the venerable accounting firm as a result of its role in the Enron collapse.   Read more »

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Will Financial Regulation Make Us Safe? (Part II)

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This is the second post on this topic.  Good to see you back for more!  Based on all of the notes that I received following my first post, the readership levels of this site are much higher than I expected.  Thanks for all of the kind feedback and responses.

I think that some of my former colleagues over at Stark Investments are thinking that they created a blogging monster (while at Stark I maintained a blog and I bet that some are thinking that I have taken things to a new extreme….).  While on that topic, I did want to mention a couple of tidbits about Stark Investments (it seems that some folks are still interested in what I have to say on the topic).

The original founders of Stark – Brian Stark and Mike Roth – were true pioneers in the hedge fund industry and played an important role in the evolution of this space and in paving the way for all those that followed into the business (including myself).  At its core, the hedge fund business (or “alternatives business” as it is commonly referred to) is based on the goal of providing absolute returns in an uncorrelated fashion (providing more attractive risk-adjusted returns than can be found from other investment techniques and strategies).  As they say about sports and hitting a baseball, achieving these objectives is one of the hardest things to do in any profession.  In any event, Brian and Mike have been doing this as long as anyone in the business.   I had a great 10 years working for the two of them and I learned much from both of their styles.

 Ok, enough of that stuff.  Let’s talk about financial regulation.  The last major overhaul of the regulatory structure of our financial markets, not surprisingly, occurred following the Great Depression.  The regulatory reaction to the stock market crash was the adoption of two cornerstone pieces of legislation which still provide the backbone of our regulatory structure — the Securities Act of 1933 (the “’33 Act”) and the Securities Exchange Act of 1934 (the “34 Act”). The 33 Act, administered by the then newly created Securities & Exchange Commission (the “SEC”), provides for the registration of the initial distribution of most securities and the 34 Act imposes ongoing reporting and disclosure requirements.

 The policy behind the Acts was that disclosure of material facts and overall transparency in the activities of the securities exchanges would provide confidence in the markets and in the companies issuing securities.  Increased transparency, in turn, would promote much-needed liquidity which makes the markets function in an orderly fashion (the pre-Depression markets were characterized by insider dealing and a significant laissez-faire attitude towards regulation).  This “sunlight theory of regulation” is based on the assumption that if investors are given all of the necessary information they will make wise investment decisions. Commentators have characterized the ’33 Act as follows (these quotes, some of my personnel favorites, can also be found on the State of Wisconsin Department of Financial Institutions website):

  • Congress did not take away from the citizen his inalienable right to make a fool of himself. It simply attempted to prevent others from making a fool of him.
  • As to its efficacy in regulating securities issuers, the sunlight theory may be summed up by a saying: Those who are forced to undress in public will presumably pay some attention to their figures.

Please remember these quotes because I believe that they are instructive in thinking about the role of regulation in light of the current environment.   Notably, it is my view that “full and fair disclosure” was not a major problem during our most recent financial crises – in my mind, the much bigger issue (as noted in my first blog) was excessive risk-taking and greed:  in short, too many people made fools of themselves….

My father recently guided me to some sections of Tony Blair’s newly released memoirs A Journey: My Political Life, which were of interest to me on the topic of financial regulation.  The Prime Minister had this to say of the markets, government and regulation:

 First, “the market” did not fail. One part of one sector did. The way sub-prime debt was securitized, spliced and diced and sold on with no real appreciation of underlying risk or value was wrong, irresponsible and immensely damaging. Some of the rewards, the huge payouts for shuffling around securities, the bonuses, are not just presentationally awful; they can’t be justified and, at worst, have helped create a propensity to “do the deal” whatever the long-term merits for short-term gain, in a way that significantly contributed to the crisis. All this is correct and should be acted on. However, such practice should not define or represent the whole of the banking sector, let alone the whole financial sector, let alone “the market.”

Second, government also failed. Regulations failed. Politicians failed. Monetary policy failed. Debt became way too cheap. But that wasn’t a conspiracy of the banks; it was a consequence of the apparently benign confluence of loose money policy and low inflation. The responsibility for the crisis should be shared, not borne by the market alone or even by the banks alone.

Third, the failure was one of understanding. We didn’t spot it. You can argue we should have, but we didn’t. Furthermore—and this is vital for where we go now on regulation—it wasn’t that we were powerless to prevent it even if we had seen it coming; it wasn’t a failure of regulation in the sense that we lacked the power to intervene. Had regulators said to the leaders that a huge crisis was about to break, we wouldn’t have said: There’s nothing we can do about it until we get more regulation through. We would have acted. But they didn’t say that.

My own beliefs flow from a similar line of thinking.  That is, our financial system has failed by not having a natural governor of its activities.  One of the interesting ironies, in my experience, is that during the creation of bubble-like conditions all of the players in the financial system act as if their interests are aligned.  Investors, speculators, bankers, and policy-makers all tend to act in a manner that is designed to “let the good times roll.”   The markets need a voice of reason in these environments – someone or something that can provide balance in recognizing the signs of a bubble, in recognizing where we are in terms of the investment cycle, in acting as a counter-balance to the “this time its different” mentality, and in ensuring prudent action during these periods.  If we do not find a way to do this then we will repeat these cycles – and in my mind they will occur with even more frequency and ferocity.

So, it will be in the next blog post where I will discuss whether the currently proposed regulatory overhaul can help mitigate against these risks.  That is, can the prevention of “too big to fail,” increased capital ratios among large banks, and the 2,315-pages of financial regulatory system legislation act as the “voice of reason” which will prevent future financial crises….and what does this all mean from an underlying policy perspective?

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Brands and Bankruptcy

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Category: Corporate Law, Intellectual Property Law, Legal Scholarship, Marquette Law School
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Congratulations to 3L Laura Steele, the winner of this year’s Frank DeGuire Award for the best student comment in the Marquette Intellectual Property Law Review.  Laura’s terrific comment, entitled “Actual or Hypothetical: Determining the Proper Test for Trademark Licensee Rights in Bankruptcy,” is available on SSRN.  Here is the abstract:

As trademark rights become an increasingly valuable asset in Chapter 11 reorganizations, it is critical for Congress and the courts to clarify how trademarks will be treated in bankruptcy, particularly where the debtor is a trademark licensee. Without clarity, Chapter 11 reorganization may not be a viable option.

This Comment urges that trademark licensees should not be stripped of a license simply because the licensee enters bankruptcy. Rather, where a licensee intends only to continue using an existing license under the terms of the existing agreement with the licensor, the licensee’s use of that license should be uninterrupted during reorganization. This recommendation, contrary to the position of trademark licensors, will not invade the province of trademark owners to control their marks.

To support this recommendation, this Comment examines the statutory frameworks of both trademark and bankruptcy law, legislative history of the Bankruptcy Code, and cases that illuminate the current circuit split over the rights of a trademark licensee in bankruptcy. Building on these elements, this Comment outlines an analytical approach that strikes a balance between the need for business reorganization and the duty of a trademark licensor to exercise control over its mark.

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The Business of Bigness

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brandeisLast summer, Eric Dash of the New York Times wrote an excellent article on the problems associated with big business in the U.S.  Dash noted that almost 100 years ago, Supreme Court Justice Louis Brandeis wrote prophetically about the “curse of bigness.”  Justice Brandeis denounced generally the influence that big business had on U.S. politics and its economy.

Today, Brandies’s “curse of bigness” is incorporated into the less pejorative term for large U.S. companies — companies that are “too big to fail.”  Certainly in light of the recent U.S. financial crisis, people are well aware of the influence that these large U.S. companies have on U.S. politics and its economy.   But these “too big to fail” companies may also be creating moral hazards in business operations, and the U.S. has yet to establish a unified system for dealing with the business of bigness.  Read more »

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Proxy Amendments and Short-Term Shareholders

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Category: Corporate Law
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Conference roomFirst, thank you for the invitation to be the March Student Blogger.  I have significant experience in blogs.  But perhaps unfortunately for this blog, that experience is restricted to Nebraska football and Lost blogs.  And I don’t think this is the proper forum for discussions of the Huskers’ 2011 recruiting class or how the Valenzetti Equation may answer all your questions regarding Lost.  However, I am open to requests during my March tenure.

Moving on.

Several blogs on this site have addressed election issues and reform in the judicial and political spheres.   Yet, despite imminent changes with regard to the election of corporate directors, any discussion of corporate election reform has been noticeably absent.  I do not doubt that the rules regarding the election of directors will change significantly this year.

Specifically, on June 10, 2009, the SEC published proposed amendments to the federal proxy rules that would facilitate shareholders’ ability to nominate directors to company boards of directors. Under the current director election rules, shareholders seeking to nominate a competing slate of director candidates have to bear all costs of a proxy campaign.  Yet, all costs for the campaigns of the incumbent board’s nominees are paid for out of corporate funds.  That advantage to the board’s nominees coupled with the significant costs in mounting a proxy contest serve as effective barriers to dissident shareholders seeking to initiate an election contest. Read more »

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Federalism, Free Markets, and Free Speech

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Category: Business Regulation, Constitutional Interpretation, Corporate Law, Election Law, Federalism, First Amendment, Judges & Judicial Process, Legal History, U.S. Supreme Court
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2not even-handed justiceThe Supreme Court decision in Citizens United v. FEC strikes down as unconstitutional a federal law that prohibits corporations and unions from using general treasury funds to make independent expenditures that expressly advocate the election or defeat of candidates for office.  The majority opinion, written by Justice Kennedy, ignores hundreds of years of Supreme Court history in interpreting the subjects of federalism, free markets, and free speech.  In its place, Justice Kennedy presents a textualist interpretation of the First Amendment that is divorced from any history or context.  Justice Kennedy engages in the sort of “faux originalism” (syn. “fake,” “artificial,” “false”) that has been criticized by Judge Richard Posner.  Kennedy places a historical glaze on his own personal values and policy preferences, and calls the result the “original understanding” of the First Amendment.

As such, Citizens United v. FEC stands with District of Columbia v. Heller, the Second Amendment case decided in 2008, as an example of the Justices slapping the “originalist” label on a profoundly un-originalist interpretation of the Bill of Rights.  It is appropriate to view the two cases together.  Both are exercises in raw political power employed in order to accomplish conservative objectives.  Both ignore hundreds of years of understanding about the meaning of the relevant constitutional provisions, in favor of a meaning derived by taking the words of the Amendment out of context.  And both embrace interpretations of the constitutional Amendment at issue that are inconsistent with the meaning ascribed to that same language by the intellectual father of originalism, Robert Bork.  In the same way that modern scholars deride the “Lochner era” as a misguided period in American Constitutional Law, I believe that future scholars and judges will recognize and reject the intellectual dishonesty of the “Heller era.” Read more »

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The Second Law of Thermodynamics and “Say on Pay”

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Category: Corporate Law
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sharris-deptofentropyIn one of his characteristically thoughtful blog postings (available here), Ed Fallone argues that market regulation follows the Second Law of Thermodynamics, which states (to paraphrase) that in any closed system, disorder will reign over time.  Ed argues that this principle holds true for federal securities regulation, where technological and market changes have made the comprehensive statutory scheme of market regulation obsolete.  With respect to non-financial institutions, he proposes (consistent with the Obama administration’s proposal) replacing our current scheme of detailed disclosure rules with regulation that focuses on the consumer (the investor), and the consumer’s need for multiple products to choose from as well as information to make product comparisons.

It does seem to make sense to consider the needs of investors in creating legislation aimed at protecting investors.  But in my view, any new regulatory scheme aimed at protecting investors should leave to the states the regulation over business organizations’ internal affairs. Read more »

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