The Rise of Benefit Corporations: Show me the Money…and the Good

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A large cardboard box with a hole in the top is labeled to accept donations for a book drive sponsored by the organization Better World Books.The “Benefit Corporation” is a new corporation class and it may be coming to a state near you (if it hasn’t already).  A benefit corporation (colloquially referred to as B-corp) is an entity type that seeks to blend profit and purpose.

In 2010, Maryland was the first state to adopt a benefit corporation law.  Since then, about 30 other states have followed suit. As of October 2017, the Wisconsin legislature had a bill under consideration to create a benefit corporation statute.

What Exactly Is a Benefit Corporation?

Benefit corporations seek to create a material positive impact on society and the environment. These companies focus beyond the entrenched corporate purpose of profit maximization.  Most states with benefit corporation statutes base these laws on the Model Benefits Corporation Legislation.  Benefit corporations are required to (a) espouse a general/specific public benefit, (b) be accountable, and (c) be transparent.

This pursuit of public benefit could take various forms, such as: providing low-income communities with beneficial services; preserving the environment; improving human health; promoting the arts; or any other nonpecuniary purpose that could be of benefit to society or the environment.

For example, Better World Books, a benefit corporation, is an online book retailer that sells used and new books.  For every book sold, it gives a percentage of its funds and unsold books to literacy foundations across the globe.  Some other famous companies who have decided to go the benefit corporation route include Kickstarter, Etsy, and Ben and Jerry’s.

Benefit corporations are usually required to have some measure of accountability. This often entails measuring the provision of the corporation’s stated public benefit goal against an independent third-party standard.

Most benefit corporation statutes also require specific disclosures. Corporations are required to provide an annual benefit report to their shareholders regarding the corporation’s success or failures in delivering the espoused public benefit.  Continue reading “The Rise of Benefit Corporations: Show me the Money…and the Good”

Department of Labor Fiduciary Rule: The Good, the Bad, and the Ugly

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The Department of Labor passed a new Fiduciary rule on June 9, 2017, that has shaken up the investment and retirement-advice market. The new rule holds financial advisers who provide investment advice and recommendations in retirement accounts to a fiduciary standard. This fiduciary standard, the on-going duty of care and loyalty, is higher than the previous suitability standard which only required that the investment advice or product was suitable at the time of recommendation. Therefore, when advisers are providing investment advice, they must act in the best interest of their clients in retirement accounts.

The Good: For investors, this new DOL rule should have been passed years ago because as clients, no one wants to be deceived or oversold on unnecessary products. With this new rule’s soft implementation on June 9, an investor can sue an advisor for breaching the fiduciary standard and will have a better chance of winning in court because of that contractual obligation. The obligation instilled in the DOL’s standards “are formal obligations to serve clients’ best interests, to charge only reasonable compensation and to avoid misleading statements,” according to InvestmentNews’ Fiduciary Corner blog by Blaine Akin.

The Bad: For many companies, the DOL rule comes with risks of lawsuits and legal complaints by investors who believe that they have been harmed by a financial adviser’s advice or recommendation of investment. For some companies, the DOL rule has instilled a fear of class-action lawsuits that has caused them to go as far as eliminating certain types of products that their advisers can sell to investors, thus removing the slight risk of conflict of interest which potentially reduces the amount of revenue.

The Ugly: The answer that remains unknown is whether the DOL rule is here to stay. Currently, under the Trump Administration, the DOL rule is undergoing review which could lead to repeal or modification. One argument is that the DOL rule is too complex and costly, and is dangerously close to entering the regulatory space that is traditionally governed by the Securities Exchange Commission. SEC Chair Jay Clayton submitted a six-page comment request asserting that the SEC should govern this regulatory space as provided by the Dodd-Frank financial reform law. On June 1, Clayton reached out to DOL Secretary Alexander Acosta to “engage constructively as the Commission moves forward with its examination of the standards of conduct applicable to investment advisers and broker-dealers.”

With many opinions and speculations surrounding the DOL rule, there are only three possibilities ahead: (a) nothing will be changed and the hard implementation will begin next year, (b) there will be changes made to the proposed rule, or (c) the rule will be entirely rescinded. As of now, there are signs that indicate that the final effective date of January 1, 2018, will likely be pushed back with expected changes to the rule. One of those signs is that the House Committee on Education and the Workforce approved legislation that would replace the DOL rule and the House Appropriations Committee approved a DOL spending bill that would prevent funding that enforces the fiduciary rule. Although this indicates that the House plans to kill the DOL rule, there is still no telling what the outcome will be.

FCPA Enforcement in the Trump Administration: Nevertheless, It Persists

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Whenever a new president transitions into the White House, there is almost always a level of uncertainty around how the new administration will handle certain hot button issues now in their purview. As logic dictates, we often look to the newly minted president’s campaign promises to ascertain their stance on these issues. But with the election of President Donald Trump, many of us looked to Twitter and old interviews from the then-businessman turned reality TV maven to determine what would come of a myriad of laws and loose ends. One of the laws that many speculated could come under attack is rooted in preventing corporate corruption, and geared towards the promotion of respectable business practices, both domestically and internationally – the Foreign Corrupt Practices Act of 1977 [“FCPA”].

What is the FCPA?

The FCPA ascended from a cauldron of toil and trouble – or more aptly stated, came into existence as a result of corruption, scandal, and an unveiling of the pervasive bribery of foreign officials perpetuated by U.S. companies. The botched break in of the Democratic National Committee (DNC) Shaking hands with hidden moneyHeadquarters at the Watergate office complex ultimately led to the discovery of slush funds used to bribe domestic political parties and certain foreign government officials. In order to conceal these payments, companies misrepresented their corporate financial statements, allowing the cycle of corruption to continue domestically and internationally. These findings not only tainted the view of U.S. businesses, but revealed just how awful corruption is for business. Recognizing the need to restore confidence in U.S. businesses and mitigate future corruption, Congress enacted the FCPA.

Continue reading “FCPA Enforcement in the Trump Administration: Nevertheless, It Persists”

Uber Retirement

Posted on Categories Business Regulation, Labor & Employment Law, Public3 Comments on Uber Retirement

Although by no means a new question regarding retirement, the noteworthy growth of gig companies in the sharing economy has renewed concerns that even more American workers will lack access to employment-based retirement plans.  Although some argue that the gig economy offers workers advantages including more independence and flexibility, company-sponsored retirement saving is not one of them.  This is a dangerous state of affairs, as employment-based retirement plans make up a critical part of an individual’s strategy for retirement security.

Such retirement plans, like the nearly-ubiquitous 401(k) plans, provide a necessary bulwark against destitution in old age, especially given that Social Security provides only partial income replacement and few Americans have put away much in private savings.  Yet, independent contractors, which is how most gig companies classify their workers, are approximately two-thirds less likely than standard employees to have access to an employer-provided retirement plan.

Much academic and judicial ink has already been spilt over whether Uber drivers and other members of the sharing economy are members of the so-called “contingent” workforce or “precariat” (part-time, leased, temporary, and per diem workers), not entitled to receive retirement benefits as part of their employment.  Whether these employees are statutory employees is of utmost importance because it largely determines whether gig workers are covered by employment laws, as most such laws center on the employer-employment relationship.

What all these jobs have in common is that the work activity is happening outside of the traditional safety net of employment and are highly unstable.  Whereas statutory employees are covered in the United States by numerous labor and employment law statues that provide security and protection in the workplace, workers in these alternative work arrangements are not.  Once stable employment relationships have given way to relationships that are much more arms-length, regardless of whether it is a contractor situation, temporary employment, or a one-time encounter. Continue reading “Uber Retirement”

That Extra Incentive

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Most of us are familiar with wellness programs—programs sponsored by our employer or health plan that try to incentivize us to eat healthier, sleep well, and get more exercise.  If you’re anything like me, it helps to have that extra push or incentive, especially around the holidays when sweets abound, to stay on track—or at least, to not stray too far from health goals. Most of these programs have the added advantage of lowering health care costs, both by providing financial incentives to reduce immediate costs to the individual employees and by boosting the overall health of the employees as a whole, which could reduce future health care costs.   However, extensive technical regulations and recent litigation by the AARP make implementing health and wellness programs increasingly tricky for employers.

Title II of the Genetic Information Nondiscrimination Act of 2008 (“GINA”) and the regulations promulgated by the U.S. Equal Employment Opportunity Commission (the “EEOC”) thereunder, generally prohibit “an employer [from] request[ing], require[ing], or purchas[ing] genetic information [which includes an individual’s family medical history] with respect to an employee or a family member of the employee.”  42 U.S.C. § 2000ff–1(b). However, there is an exception for wellness programs, as long as employers jump through a set of hoops. 29 CFR § 1635.8(b)(2).  While not without its own problems and excesses, the exception in the EEOC regulations at least allows employers to provide incentives to those employees willing to participate in employer-sponsored wellness programs.

The AARP doesn’t like this whole “incentive” idea to begin with. It recently filed a lawsuit against the EEOC in an attempt to vacate the regulations entirely.  AARP v. U.S. Equal Employment Opportunity Commission, No. 1:16-cv-02113 (D. D.C. 2016) (hereafter the “AARP Complaint”).  This actually might not be a bad idea, except for the fact that the AARP thinks that the regulations do not have enough hoops.  In fact, the AARP would prefer that the regulations abolish any permission for any incentives or penalties to induce participation in employer-sponsored wellness programs. The AARP alleges in its complaint that all employer incentives or penalties to induce participation in employer-sponsored wellness programs violate Title I of the ADA and Title II of GINA.  AARP Complaint at 3Continue reading “That Extra Incentive”

Proposed Changes to the Model Business Corporation Act: Future Changes to Chapter 180?

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The Model Business Corporation Act, potentially following suit with the rest of ever-changing 2016, has acquired proposed notable changes through provisional amendments by its Official Committee. Some of these changes model company-friendly Delaware’s legal structure, which can only help to attract companies to incorporate within states that choose to adopt such changes. Although Wisconsin has modeled its own state corporation statutes based on the Act under Chapter 180 of the state legislature, the addition of these new amendments could help attract local companies to incorporate within the state.

First, the Committee has proposed adoption of the addition of subchapter E to chapter one of the Act, mirroring the Delaware General Corporations Law’s 2014 amendments. The subchapter permits the ratification of defective corporate actions, including actions in connection with the issuance of shares. It also provides for retroactive validity of subsequent actions taken in reliance on the validity of the defective action upon its ratification. If Wisconsin adopts this subchapter, actions taken by local corporations won’t be hindered and found void based on, for example, a greater issuance of shares than allowed by the articles of incorporation. This malleability gives companies assurance that certain vote-based corporate actions have a safety net from being deemed void instantly, ensuring a remedy for defective corporate actions.

Next the Committee has proposed changes to sections 2.02 and 8.70 of the Act, allowing corporations to include a provision within its articles limiting or eliminating the duty of a director or officer to become involved with a corporate opportunity without informing the corporation, which typically falls under a director’s or officer’s duty of loyalty. These provisions would give the corporation control over the liability imposed upon its directors and/or officers upon involvement in corporate opportunities, shielding them from said liability. It would also allow directors and officers to engage in such opportunities against the wishes of the company. These provisions have their strengths and weaknesses, but the advantage surrounds the control given to the corporation. Continue reading “Proposed Changes to the Model Business Corporation Act: Future Changes to Chapter 180?”

The Securities Act: Does It Permit Companies To Cheat Investors?

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New_York_Stock_Exchange_EntranceAuthor’s Note: This post is taking an economic and investor approach to The Securities Act of 1933. This is not to ignore the time and monetary cost of information. It is merely a critique of one portion of a larger regulatory scheme and its effects.

The purpose of the 1933 Securities Act was to protect investors by providing them with information in order to make a sound investment decision. Albeit not articulated at the time of The Securities Act’s inception, the modern application of the Securities Act reflects the Capital Asset Pricing Model and the Efficient Capital Market Hypothesis. Roughly, the efficient capital market hypothesis assumes that the market and the stock prices are a reflection of information available about that security.(1)  As the original standards for reporting requirements and disclosure requirements of the Securities Act have loosened in recent years, have we cheated investors? Are investors not being fairly compensated or informed for the risks they have assumed?

When a security becomes available to the public for the first time, the SEC requires certain disclosures through its registration statement. The registration statement provides basic information about the company and basic financial information. During this process, there are underwriters who analyze and then provide the first price for the security. They will consider the projections of the company, the segment in which it operates, as well as general global and national market conditions. Their ultimate goal, however, is to sell the securities. The underwriters receive a percentage of the final sales price, which incentivizes them to have a higher price than potential fair market value. The SEC helps to regulate this process and civil liabilities and administrative action can provide a disincentive to be overly optimistic about the security’s prospects.

Since 2005, there has been a movement towards reducing the information required from issuers prior to offering securities to the public. Continue reading “The Securities Act: Does It Permit Companies To Cheat Investors?”

Big Games, Big Crowds: A Note on Occupancy Law

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Last night, Wisconsin Badger fans and foes alike filled bars and restaurants to watch the final NCAA Men’s Basketball Championship game. ESPN Milwaukee reported that nearly five and a half hours prior to tip-off, one Madison bar was already turning people away because the bar was at maximum capacity. But what does that matter? Does “maximum occupancy” serve a purpose? As someone completely unfamiliar with owning or managing property, I went looking for information about occupancy.

A quick Google search led me to an article on eHow.com. The eHow article author noted that local fire marshals are the ultimate authority when it comes to occupancy permits. The fire marshal tip helped me find the Milwaukee’s Department of Neighborhood Service’s page about occupancy permits. Continue reading “Big Games, Big Crowds: A Note on Occupancy Law”

Exploitative Businesses and the Perpetuation of Poverty

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walker-thomas_furniture_signProf. David Papke has a new article in print, entitled “Perpetuating Poverty: Exploitative Businesses, the Urban Poor, and the Failure of Reform,” appearing in 16 St. Mary’s Law Review on Race & Social Justice 223 (2014). Here is the abstract:

While rent-to-own outlets, payday lenders, and title pawns operate in suburban and rural areas, these exploitative businesses are most concentrated in America’s inner cities. The businesses’ highly crafted, standardized contractual agreements are central in their business models and for the most part enforceable in the courts. What’s more, the contractual agreements and business models are so sophisticated and adjustable as to make them virtually impervious to regulation or legislative reform. The businesses as a result continue not only to exploit the urban poor but also to socioeconomically subjugate them by trapping them into a ceaseless debt cycle. Profits go up when the urban poor cannot pay up, and rent-to-own outlets, payday lenders, and title pawns take advantage of urban poverty while simultaneously increasing and perpetuating it.

An earlier draft of the paper appeared on SSRN.

Supreme Court Roundup Part Two: Burwell v. Hobby Lobby Stores, Inc.

Posted on Categories Business Regulation, Constitutional Law, Corporate Law, First Amendment, Health Care, Public, Religion & Law, U.S. Supreme CourtLeave a comment» on Supreme Court Roundup Part Two: Burwell v. Hobby Lobby Stores, Inc.

the bosses of senateOn October 30, I participated in a presentation entitled “Supreme Court Roundup” with Ilya Shapiro of the Cato Institute.  The event was sponsored by the Law School chapters of the Federalist Society and the American Constitution Society.  We discussed three significant cases from the 2013-2014 Supreme Court term: McCutcheon v. FEC, Burwell v. Hobby Lobby and Harris v. Quinn.  It was a spirited discussion, in which Mr. Shapiro and I presented opposing views, but I want to thank Mr. Shapiro for taking the time to visit the Law School and sharing his perspective with the students.

This is the second of three blog posts on the presentation.  Readers can find the first post here.  What follows are my prepared remarks on Burwell v. Hobby Lobby.  Readers interested in Mr. Shapiro’s position on the case can refer to the amicus brief that he filed on behalf of the Cato Institute.

The legal issue in Burwell v. Hobby Lobby Stores can be described simply.  Under the provisions of the Affordable Care Act, the Department of Health and Human Services requires employers to provide health insurance plans making contraception available to their female employees at no cost.  In the NFIB v. Sebelius decision in 2012, the Supreme Court upheld Congress’ power to pass the Affordable Care Act as an exercise of its taxing power.  But even if Congress has the power to pass the law, can a for profit corporation nonetheless avoid following the law by arguing that the contraception provisions burden the corporation’s free exercise of religion in violation of the Religious Freedom Restoration Act (RFRA)?

The rights of the individual shareholders that own the corporation were not at issue.  The law does not act on the individuals, and does not require these human beings to do anything.  The only legal requirement imposed by the law is imposed on the corporate entity.

So what did Congress intend to do when it passed RFRA in 1993?  As I will explain, the Hobby Lobby case presents two opposing views as to what Congress attempted to accomplish by passing that law.  The dissent by Justice Ginsburg argues that the intent of RFRA was to create a statutory remedy for burdens on religious expression that adopted the standard for evaluating First Amendment violations prior to the 1990 Employment Division v. Smith case. The majority opinion by Justice Alito argues that by passing RFRA Congress created a statutory remedy that protected more “persons” than the pre-Smith caselaw protected and that granted them greater protections than the pre-Smith caselaw granted. Continue reading “Supreme Court Roundup Part Two: Burwell v. Hobby Lobby Stores, Inc.”

Reflections on Judicial Contract Interpretation and the Boden Lecture

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agreement-signingThis week in my Contracts class we are discussing how to interpret a contract — that is, how to give contractual language meaning. This discussion inevitably focuses on how courts interpret contracts, because Contracts casebooks primarily examine principles of contract through case law. Cases do, in fact, provide a useful lens through which to study contract interpretation, for they allow an examination of courts’ goals and tools in approaching conflicting arguments about how to interpret an ambiguous term. Yet we also considered judicial interpretation of contracts from a policy perspective.

Specifically, in light of Professor Robert Scott’s Boden lecture “Contracts Design and the Goldilocks Problem,” I asked my Contracts students to reflect on the wisdom of judicial determination of the meaning of ambiguous contractual language. Continue reading “Reflections on Judicial Contract Interpretation and the Boden Lecture”

Big Tobacco Sues Uruguay

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fda cigarette warning lungsThose who follow efforts to use law to reduce smoking will be aware the United States Court of Appeals for the District of Columbia found in R.J. Reynolds v. FDA, 696 F.3d 1215 (D.C. Cir. 2012) that mandatory graphic imagery on cigarette packs was a violation of commercial speech rights. As a result of the decision, cigarette packs continue to have only prosaic warnings, which go not only unread but also, for the most part, unnoticed.

Foreign countries, of course, are not bound by U.S. law, and Uruguay forged ahead with its own laws requiring graphic warnings. They include photos of decaying teeth, premature babies, and disturbing hospital scenes, with each picture covering 80 percent of each pack. Big Tobacco cannot invoke its commercial speech rights in Uruguay, but Philip Morris has sued Uruguay for $25 million, alleging the required warnings violate treaties protecting intellectual property rights.

The case is in the courts, with former New York City Mayor Michael Bloomberg paying many of Uruguay’s legal costs. Smoking is on the rise in developing countries, and many think the decision in Uruguay will have significant impact on other developing countries’ willingness to require graphic warnings.

For my own part, I strongly endorse the required graphic warnings in the name of social justice. Smoking in both the United States and abroad is increasingly concentrated among poor and working-class men and women, and the health problems associated with smoking are also greater in these sectors of the world population. For the poor and members of the working class, reading skills and even any interest in written texts are limited, but poor and working-class smokers are aware of and receptive to visual imagery. If they could literally see what smoking causes, they might fight harder to break their deathly, addictive habit.