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The long overdue closure of the 10-day reporting window under Section 13(d) remains overdue

Ted Mirvis on the need to shorten the 10-day window for reporting by persons who acquire 5% or more of a company's stock:

The Wall Street Journal this week documented several, though not all, of the types of market abuse and manipulation that the current outmoded reporting rules permit and facilitate. The existing rules give activists an over-long 10-day period before they are required to report crossing the 5% ownership threshold in publicly traded companies. According to The Wall Street Journal, during the 10-day reporting window, activist hedge funds are “tipping” each other regarding their plans as they coordinate wolf-pack attacks, while ordinary investors and the targeted companies are left in the dark. When finally made, the 13(d) reports are often market-moving. This delivers outsized returns to the activist and those they tip, while injuring investors who are deprived of the same knowledge.

In an era of high frequency trading, the 10-day reporting window adopted by the Williams Act in 1968 simply makes no sense. It is time for the SEC to act on our petition to shorten the reporting window to one day, to adopt a “cooling-off period” of two business days following the public filing of an initial Schedule 13D, during which acquirers would be prohibited from acquiring additional beneficial ownership, and to modernize the definition of “beneficial ownership” under the Section 13 reporting rules to prevent activists from acquiring significant influence and control using a variety of stealth techniques and derivative instruments to evade Section 13D reporting requirements.

The ten day window maybe made sense back in the old days when one filed everything on paper. But in these days of electronic filing, when the SEC has accelerated filing of a host of disclosures, it makes no sense to let 5% holders have 10 days of secrecy. (Assuming you buy the case for any disclosure by 5% holders, of course.)

Angel investing, general solicitation, and Regulation D

Interesting speech by SEC Division of Corporate Finance Director Keith Higgins highlighting the flux in the regulatory landscape for angel investors.

The Failed Florida Dean search: Was Alex Acosta Rejected Because He's a Republican?

There's a remarkably mean-spirited airing of the University of Florida law school's dirty laundry in an op-ed today by Florida professor Michelle Jacobs. As I understand it, University of Florida President Machen rejected two candidates favored by the Florida law faculty. Jacobs claims that:

Machen could not give any concrete explanation for why the candidates forwarded to him, particularly University of Kentucky College of Law Dean David Brennen and former ambassador to New Zealand David Huebner, could not satisfy his criteria.

In an email sent to our faculty, he stated that he made his decision after consulting "stakeholders." These "stakeholders" could not have been anyone from our community who would have worked with the new dean. We suspect that these "stakeholders" were the individuals who tried to force Alex Acosta, dean of the Florida International University College of Law, upon our faculty.

Our faculty rejected him as unsuitable.

I don't know Acosta, but as a seemingly successful dean who was the only Hispanic and only South Floridian on the short list, it's not obvious why he was unacceptable. Unless ...:

According to published reports, Acosta was eliminated because of negative reactions from the law faculty on two issues—Acosta's involvement in a 2004 voting rights case in Ohio when he was a Justice Department assistant attorney general and sanctions imposed in a 2009 drug case when he was U.S. attorney in Miami.

Acosta came under scrutiny in 2004 after he wrote a letter to an Ohio judge four days before the election arguing it would "undermine" the enforcement of federal and state election laws if citizens could not challenge voters' credentials. The judge was weighing whether to let Republicans challenge the credentials of 23,000 mostly African-American voters.

In 2009, a Miami federal judge reprimanded Acosta, the U.S. attorney's office and trial attorneys for secretly taping the defense team of a physician who was ultimately acquitted in a prescription drug case. The reprimand and $601,795 in sanctions were reversed on appeal.

Throw out the reprimand as having been thrown out by the appeals court. This leaves the rather disturbing possibility that Acosta was rejected because he was a Republican lawyer working for the Justice Department at a time when voter fraud issues were high profile concerns.

So today's rebuttable presumption is that conservative legal academics should steer clear of Florida.

The Corporate Laws Committee's lovely tribute to Mike Dooley

My mentor Mike Dooley served for many years on the ABA Corporate Law Committee. In response to Mike's recent passing, the Committee adopted a lovely and moving tribute to him:

WHEREAS, the Corporate Laws Committee of the Business Law Section of the American Bar Association (the “Committee”) has been informed of the passing of Professor Michael P. Dooley on February 18, 2014, and therefore wishes to acknowledge and memorialize Professor Dooley’s enormous contributions to the work of the Committee, to the Business Law Section, and to the field of business law,

IT IS RESOLVED, that on behalf of its current and former members, advisors, consultants and liaisons, the Committee expresses its sincere condolences to Mrs. Jean H. Dooley and her family on the passing of her husband and dear friend of the Committee;

IT IS FURTHER RESOLVED, that the Committee expresses its gratitude to Professor Dooley’s wife Mrs. Jean H. Dooley and to his children, Michael Sean Dooley and Anne Dooley (Aaron Ferster), granddaughters Hannah and Ruthie Ferster, sisters-in-law Susan Harman and Ann Aylward, nieces Ellen Corsiglia and Jane Clemmons, nephews Pat Dooley, Terry Dooley, Michael Dooley, and Jim Dooley, for generously sharing Professor’s Dooley’s time and attention with the Committee;

IT IS FURTHER RESOLVED, that the Committee expresses its deep appreciation for Professor Dooley’s work for the Committee, first as an elected member of the Committee from 1983 to 1989, and as the Committee’s Reporter from 1996 through 2012;

IT IS FURTHER RESOLVED, that the Committee notes Professor Dooley’s extensive influence as a mentor to the members of the Committee and as a rich source of institutional memory and insight about the content, evolution, and societal purpose of the Model Business Corporation Act and of corporate and securities law generally;

IT IS FURTHER RESOLVED, that the Committee notes with approval and adopts the sentiments expressed by Professors Paul G. Mahoney and Stephen M. Bainbridge in A Tribute to Michael P. Dooley, 98 Virginia Law Review 1427 (2012), published on the occasion of Professor Dooley’s retirement from the University of Virginia Law School;

IT IS FURTHER RESOLVED, that the Committee communicate its abiding respect for and gratitude to Professor Dooley for the acute intelligence, level-headed practicality, abundant humor, and keen sense of diplomacy with which he carried out his responsibilities as a member of and Reporter for the Committee; and

IT IS FURTHER RESOLVED, that the Committee publish this resolution on its web site and present it to Mrs. Jean H. Dooley and her family, and to the University of Virginia Law School. 

The case against the SEC's blanket gag policy

Solid argument from Gary Matsko at WLF:

The SEC requires all settling parties to agree that they will neither directly nor indirectly make any public statement that calls into question the accuracy of any allegation made in the SEC’s complaint. Thus, a settling party who had meritorious defenses, but could not afford to litigate, may not say so publicly. Moreover, the policy, intended to put teeth into the SEC’s enforcement message, can have the unintended consequence of allowing government lawyers to operate “in the shadows” by preventing those with the greatest knowledge of the stated accusations or the process used to develop those accusations from criticizing either.

He goes on to make a very impressive case. 

Director versus Shareholder Primacy in New Zealand Company Law as Compared to U.S.A. Corporate Law

I have just finished a new article, Director versus Shareholder Primacy in New Zealand Company Law as Compared to U.S.A. Corporate Law (March 26, 2014). which is now available at SSRN. The abstract follows:

Any model of corporate governance must answer two basic sets of questions: (1) Who decides? In other words, when push comes to shove, who has ultimate control? (2) Whose interests prevail? When the ultimate decision maker is presented with a zero sum game, in which it must prefer the interests of one constituency class over those of all others, whose interests prevail?

On the means question, prior scholarship has almost uniformly favored either shareholder primacy or managerialism. On the ends question, prior scholarship has tended to favor either shareholder primacy or various stakeholder theories. In contrast, this author has proposed a “director primacy” model in which the board of directors is the ultimate decision maker but is required to evaluate decisions using shareholder wealth maximization as the governing normative rule.

Shareholder primacy is widely assumed to be a defining characteristic of New Zealand company law. In assessing that assumption, it is essential to distinguish between the means and ends of corporate governance. As to the latter, New Zealand law does establish shareholder wealth maximization as the corporate objective. As to the former, despite assigning managerial authority to the board of directors, New Zealand company law gives shareholders significant control rights.

Comparing New Zealand company law to the considerably more board-centric regime of U.S. corporate law raises a critical policy issue. If the separation of ownership and control mandated by the latter has significant efficiency advantages, as this article has argued, why has New Zealand opted for a more shareholder-centric model? The most plausible explanation focuses on domain issues, which suggest that there are a small number of New Zealand firms for which director primacy would be optimal. The unitary nature of the New Zealand government may also be a factor, because the competitive federalism inherent in the U.S. system of government promotes a race to the top in which efficient corporate law rules are favored. Finally, New Zealand’s social welfare net may also be a factor.

Keywords: shareholder primacy, director primacy, New Zealand, corporate law, company law

The case for changing the shareholder proposal rule

Made by Edward Knight in today's WSJ:

... shareholders and companies are spending significant amounts of money to manage the legal process involving proxy proposals. This cost is one that even shareholders would agree often will not add any long-term value to the company.

The low success rate of shareholder proposals is in part due to the low, nearly nonexistent barriers to their submission. Since 1998, the SEC's proxy rules have required that a shareholder interested in getting a proposal into the proxy own just $2,000 of the company's shares for at least one year. ...

Corporations are not meant to be perfect democracies, but even in democracies we require citizens to gather a threshold number of signatures to qualify an initiative for a state or municipal ballot. That threshold is markedly lower for publicly traded companies in the U.S., and the ultimate costs are high for the owners of those companies. Shareholders of U.K.-registered companies face a more reasonable test: They must be supported by at least 5% of eligible voting shareholders to submit a proposal, or represent a group of at least 100 shareholders whose collective stake is valued at a minimum of £10,000, or approximately $16,660.

I'd support such a proposal, even though I think it doesn;t go far enough. As I explain in Preserving Director Primacy by Managing Shareholder Interventions (August 27, 2013):

Even though the primacy of the board of director primacy is deeply embedded in state corporate law, shareholder activism nevertheless has become an increasingly important feature of corporate governance in the United States. The financial crisis of 2008 and the ascendancy of the Democratic Party in Washington created an environment in which activists were able to considerably advance their agenda via the political process. At the same time, changes in managerial compensation, shareholder concentration, and board composition, outlook, and ideology, have also empowered activist shareholders.

There are strong normative arguments for disempowering shareholders and, accordingly, for rolling back the gains shareholder activists have made. Whether that will prove possible in the long run or not, however, in the near term attention must be paid to the problem of managing shareholder interventions.

This problem arises because not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.

Accordingly, in that article I proposed managing shareholder interventions through changes to the federal proxy rules designed to make it more difficult for activists to effect operational changes, while encouraging shareholder efforts to hold directors and managers accountable.

Related articles

Director Primacy at the Lowell Milken Institute

Managing Shareholder Interventions: An Updated Director Primacy Critique of Shareholder Empowerment

Everything The Economist says about shareholder activism is wrong

"Are activist shareholders good for investors?"

"Director Primacy and Shareholder Disempowerment" makes an SSRN all-time top 10 list

Hobby Lobby debate podcasts

The pre-oral argument debate featuring yours truly is here.

The post-oral argument debate (not featuring yours truly) is here.

Yours truly quoted re the likely limits of a Hobby Lobby victory

In the National Journal:

So if the Supreme Court rules in favor of these two for-profit entities, the justices are not likely to rule broadly enough to encompass a significant number of employers, said Stephen Bainbridge, a corporate-law professor at the University of California (Los Angeles).

"The chances that the Supreme Court would rule that firms that are publicly held, large 'Apple-type' corporations, can get ahold of these exemptions are essentially nil," Bainbridge explained.

"In the most likely scenario in which Hobby Lobby and Conestoga Wood would prevail," he said, "the Court is likely to rule that only firms where essentially the firm is the alter-ego of the shareholders, where there is a small number of shareholders who hold cohesively and unanimously strong religious beliefs that inform how the business is run, only firms like that would be able to get the kind of exemption that Hobby Lobby and Conestoga Wood are seeking here."

Is the law school sky falling?

Northwestern Dean Dan Rodriguez has a message for all the Chicken Littles out there (and their blogosphere enablers). Unfortunately, the law school is a scam crowd is ineducable--or even capable of reasoned argument.

Related articles

Deans Respond to TaxProf Blog Posts on Faculty Layoffs

Dean Rodriguez (Northwestern) on hysteria about law schools

Cross-Posted from the Glom: If CJ Roberts wants a narrow ruling, I've got the vehicle he needs

The Wall Street Journal live blog of the contraception mandate cases before the Supreme Court reports that:

Chief Justice John Roberts suggested he was thinking of a narrow ruling allowing closely held companies like Hobby Lobby Stores Inc. to claim a religious exemption, while leaving aside more-complicated ownership structures of publicly traded corporations to another day — a position that Justice Stephen Breyer indicated he might, or might not, be open to.

If you'll pardon one more episode of self-promotion, reverse veil piercing would provide the basis for just such a narrow ruling. As I observed in A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood, which is now available in final form at the the Virginia Law Review Online:

In another red herring, the Brief argues that:

If this Court were to accept the arguments being advanced by Hobby Lobby and Conestoga, it would … invite … disruptive proxy contests … regarding whether the corporation should adopt a religion and, if so, which one.

Proxy contests are principally an issue for public corporations, while RVP-I—like forward veil piercing—is exclusively an issue for close corporations. The claim is thus disingenuous, at best. Nevertheless, this claim—while false—does provide a valuable opportunity for reminding the reader that the Brief’s concern for minority shareholders with diverse interests is largely irrelevant. As this author has noted:

[A] public corporation with many shareholders holding diverse views is a poor candidate for RVP-I. In contrast, a closely held corporation – even if quite large by metrics such as assets or employees – with a small number of shareholders holding common religious beliefs is a good candidate.

Courts routinely differentiate cases for piercing the veil from cases in which the veil should not be pierced based on, inter alia, the number of shareholders in the corporation. There is no reason why they could not do the same in cases like those brought by Hobby Lobby and Conestoga Wood.

So here is a proposed narrow test, taken from my article Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013):

Analysis of the RVP-I cases thus suggests a three-pronged version of RVP that should be adopted in the mandate cases:

1. Is there such substantial identity of the shareholder(s)’s religious beliefs and the manner in which the corporation is operated and the purposes to which it is devoted that the corporation is effectively the shareholder’s alter ego?
2. How strong is the government’s interest in ensuring that the corporation’s employees get the mandated insurance coverage?
3. Would reverse piercing this corporation’s veil advance significant public policies?

As to the first prong, Judge Walton’s analysis in Tyndale provides a useful model for future courts to follow.

• Veil piercing is a close corporation doctrine.39 In this context, in particular, a public corporation with many shareholders holding diverse views is a poor candidate for RVP-I. In contrast, a closely held corporation – even if quite large by metrics such as assets or employees – with a small number of shareholders holding common religious beliefs is a good candidate.
• Do the corporation’s articles of incorporation include a statement of purpose referencing religious beliefs and goals?
• Is the ownership structure of the corporation designed to ensure continuity of its religious purposes even after the original founders have retired or died?
• Are the directors and officers of the corporation obliged to share the founders’ religious beliefs? If so, are they required to document that fact, such as by signing a statement of faith?
• Are religious practices such as devotions, prayer, scripture reading, or worship services routinely made a part of corporate meetings?
• Are such practices made available to employees?
• Is some substantial portion of the corporation’s profits donated to religious charities or otherwise used to advance the founders’ religious beliefs? The biblical concept of a tithe springs to mind here as a possible metric.

The more of these factors that a court finds to be present, the more willing the court should be to treat the corporation as the shareholder’s alter ego.

Turning to the second prong, the government contends it has an interest in ensuring that Americans have access to the health insurance coverage required by the mandate. Whether or not that interest rises to the level of a compelling one that would justify infringing on free exercise and RFRA rights remains to be deter- mined. In evaluating the government’s interest, however, courts should note that the government has already undermined the mandate by carving out exemptions for grandfathered plans, employers with fewer than 50 employees, “member[s] of a recognized religious sect or division thereof” who have religious objections to the con- cept of health insurance, or religious employers [as defined in the regulations].” As Judge Walton observed, a “law cannot be regarded as protecting an interest of the highest order . . . when it leaves appreciable damage to that supposedly vital interest unprohibited.”

As for the final prong, the government has tried to minimize the significance of the issues at stake by referring to the plaintiffs’ interests rather than their rights. Conduct that is motivated by religious belief is accepted as one of the ways in which people exercise their religious freedom, however, even when the conduct occurs in a commercial setting. As such, the strength of the public policy issues at stake in the mandate cases go far beyond the homestead policy at issue in the seminal Minnesota cases. The issues at stake here arise out of the First Amendment, not a mere statute.

The values protected by the religious freedom clauses of the First Amendment “have been zealously protected, sometimes even at the expense of other interests of admittedly high social importance.” Accordingly, “no official, high or petty, can prescribe what shall be orthodox in politics, nationalism, religion, or other matters of opin- ion or force citizens to confess by word or act their faith therein.” Because that is precisely what the plaintiffs in the mandate cases claim the government is forcing them to do, the policy prong of the RVP-I standard strongly favors the plaintiffs. 

Early reports of the Hobby Lobby oral argument sound positive

LA Times:

The Supreme Court’s conservative justices sharply criticized part of President Obama’s healthcare law Tuesday, suggesting they will rule later this year that requiring Christian-owned corporations to offer their employees contraceptives coverage violates the freedom of religion.

“Your reasoning would permit requiring profit-making corporations to pay for abortions,” Justice Anthony M. Kennedy told U.S. Solicitor General Donald Verrilli, who defended the contraceptives provision of the Affordable Care Act. ...

... the five conservative justices sounded as if they stood in opposition to the contraceptives mandate.

The case also raises the question of whether for-profit corporations can invoke the religious beliefs of their owners in order to seek an exemption from federal law.

The WSJ live blog notes that:

Justice Sotomayor raised a line of questioning highlighted by a dissenting judge in a lower court.  How are courts, she asked, supposed to know whether a corporation holds a particular religious belief? And what happens to the minority members or shareholders of a corporation who may not share the majority’s belief?  How much of a corporation’s business has to be dedicated to religion?

Well, we know the answer to that, don't we? Of course, it's reverse veil piercing to the rescue.

Speaking of reverse veil piercing, the blog also reports that CJ Roberts opined that "he was thinking of a narrow ruling allowing closely held companies like Hobby Lobby Stores Inc. to claim a religious exemption, while leaving aside more-complicated ownership structures of publicly traded corporations to another day — a position that Justice Stephen Breyer indicated he might, or might not, be open to."

Which is precisely what reverse veil piercing would do.

Cross-Posted from the Glom: Pardon my self-promotion #2: My critique of the corporate law professors' brief in Hobby Lobby

As mentioned in my opening post, I think a key issue in the contraception mandate cases is whether form should trump substance. In my second post, I discussed my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013), in which I proposed that courts should use reverse veil piercing to provide a more coherent doctrinal framework for analyzing when substance out to trump form. As I noted in that post, some 44 corporate law professors filed an amicus brief in these cases that, at least in part, was intended to attack my argument.

I responded in A Critique of the Corporate Law Professors’ Amicus Brief in Hobby Lobby and Conestoga Wood, which is now available in final form at the the Virginia Law Review Online. In it, I argued, as the abstract explains, that:

The Patient Protection and Affordable Care Act (ACA) effected numerous changes in the legal regime governing health care and health insurance. Among the ACA’s more controversial provisions is the so-called contraceptive mandate, which requires employer-provided health care insurance plans to provide coverage of all FDA approved contraceptive methods. 

On March 25, 2014, the Supreme Court will hear oral argument in the Hobby Lobby and Conestoga Wood cases, in which the shareholders of two for-profit family-owned corporations argue that requiring them to comply with the contraception mandate violates the Religious Freedom Restoration Act. 

Forty-four law corporate law professors filed an amicus brief in these cases, arguing that the essence of a corporation is its “separateness” from its shareholders and that, on the facts of these cases, there is no reason to disregard the separateness between shareholders and the corporations they control. The Brief is replete with errors, overstated claims, or red herrings, and misdirection.

Contrary to the Brief’s arguments, basic corporate law principles strongly support the position of Hobby Lobby and Conestoga Wood. In particular, the doctrine known as reverse veil piercing provides a clear and practical vehicle for disregarding the legal separateness of those corporations from their shareholders and thus granting those shareholders standing to assert their free exercise rights.

Book recommendation of the day

What would the constitution look like if it actually protected everybody's individual rights? http://t.co/Zv7KYccaGD

— Stephen Bainbridge (@ProfBainbridge) March 24, 2014

Cross-Posted from the Glom: Pardon my self-promotion: Hobby Lobby and reverse veil piercing

As mentioned in my opening post, I think a key issue in the contraception mandate cases is whether form should trump substance. If Hobby Lobby were David Green's sole proprietorship, there is no question but that he would be able to assert his RFRA and First Amendment claims. Should that change simply because he incorporated his business?

Unfortunately, whether they have allowed incorporated employers to raise such claims or not, courts have failed to articulate a coherent doctrinal justification for their holdings. 

In my article, Using Reverse Veil Piercing to Vindicate the Free Exercise Rights of Incorporated Employers, 16 Green Bag 2d 235 (2013), I proposed that courts should use reverse veil piercing to provide a more coherent doctrinal framework.

Reverse veil piercing (RVP) is a corporate law doctrine pursuant to which a court disregards the corporation’s separate legal personality, allowing the shareholder to claim benefits otherwise available only to individuals. The thesis of this article is that RVP provides the correct analytical framework for vindicating certain constitutional rights.

Assume that sole proprietors with religious objections to abortion or contraception are protected by the free exercise clause of the First Amendment and the Religious Freedom Restoration Act (RFRA) from being obliged to comply with the government mandate that employers provide employees with health care plans that cover sterilizations, contraceptives and abortion-inducing drugs. Further assume that incorporated employers are not so protected. This article analyzes whether the shareholders of such employers can invoke RVP so as to vindicate their rights.

At least one court has recognized the potential for using RVP in the mandate cases, opining that these cases “pose difficult questions of first impression, including whether it is “possible to ‘pierce the veil’ and disregard the corporate form in this context.” The court further opined that that question, among others, merited “more deliberate investigation.” This article undertakes precisely that investigation.

Invoking RVP in the mandate cases would not be outcome determinative. Instead, it would simply provide a coherent doctrinal framework for determining whether the corporation is so intertwined with the religious beliefs of its shareholders that the corporation should be allowed standing to bring the case. Whatever demerits RVP may have, it provides a better solution than the courts’ current practice of deciding the issue by mere fiat.

This proposal met with some considerable hostility from a segment of the corporate law academy, which will be the subject of my next post.