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Conflict minerals disclosure repeal in the works?

Marcia Narine reports that:

Earlier this week the House Financial Services Committee voted to repeal the Dodd-Frank Conflict Minerals Rule, which I last wrote about here and in a law review article criticizing this kind of disclosure regime in general.

Under the proposed Financial Choice Act (with the catchy tagline of "Growth for All, Bailouts for None"), a number of Dodd-Frank provisions would go by the wayside, including conflict minerals because:

Title XV of the Dodd-Frank Act imposes a number of overly burdensome disclosure requirements related to conflict minerals, extractive industries, and mine safety that bear no rational relationship to the SEC’s statutory mission to protect investors, maintain fair, orderly, and efficient markets, and promote capital formation. The Financial CHOICE Act repeals those requirements. There is overwhelming evidence that Dodd-Frank’s conflict minerals disclosure requirement has done far more harm than good to its intended beneficiaries – the citizens of the Democratic Republic of Congo and neighboring Central African countries. SEC Chair Mary Jo White, an Obama appointee, has conceded the Commission is not the appropriate agency to carry out humanitarian policy. The provisions of Title XV of the Dodd-Frank Act are a prime example of the increasing use of the federal securities laws as a cudgel to force public companies to disclose extraneous political, social, and environmental matters in their periodic filings.

The House Financial Services committee has created a very flashy (by government standards) website to promote the bill. The summary of the proposed legislation, by the way, makes clear that they want to make sweeping changes in Dodd-Frank, not just get rid of conflict mineral disclosure.

As readers of my book on Dodd-Frank (Corporate Governance after the Financial Crisis) know, of course, I think there is much in Dodd-Frank that deserves repeal. But conflict minerals has been high on my list for quite a while:

Sec Reg News: Conflict Mineral Disclosure is Costly and Ineffective

Buried in the gargantuan mess that was the Dodd-Frank act was a requirement which, as the SEC explains: ... directs the Commission to issue rules requiring certain companies to disclose their use of conflict minerals if those mineral...

 

Breaking news (updated): SEC Conflict MineralsRule partially invalidated by court

The WSJ reports that: A federal appeals court, citing free-speech concerns, partly overturned a controversial rule requiring publicly traded U.S. companies to disclose whether their goods contain certain minerals whose sales result in...

 

The SEC Conflict Minerals Roundtable

The SEC is scheduled to hold a roundtable on conflict minerals disclosures tomorrow. When the roundtable was announced, BNA reported that: The matters to be debated include appropriate reporting approaches for the final rule, the cha...

 

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Buried in the gargantuan mess that was the Dodd-Frank act was a requirement which, as the SEC explains: ... directs the Commission to issue rules requiring certain companies to disclose their use of conflict minerals if those mineral...

The WSJ reports that: A federal appeals court, citing free-speech concerns, partly overturned a controversial rule requiring publicly traded U.S. companies to disclose whether their goods contain certain minerals whose sales result in...

The SEC is scheduled to hold a roundtable on conflict minerals disclosures tomorrow. When the roundtable was announced, BNA reported that: The matters to be debated include appropriate reporting approaches for the final rule, the cha...

Sec Reg News: Conflict Mineral Disclosure is Costly and Ineffective

Buried in the gargantuan mess that was the Dodd-Frank act was a requirement which, as the SEC explains: ... directs the Commission to issue rules requiring certain companies to disclose their use of conflict minerals if those mineral...

Breaking news (updated): SEC Conflict MineralsRule partially invalidated by court

The WSJ reports that: A federal appeals court, citing free-speech concerns, partly overturned a controversial rule requiring publicly traded U.S. companies to disclose whether their goods contain certain minerals whose sales result in...

The SEC Conflict Minerals Roundtable

The SEC is scheduled to hold a roundtable on conflict minerals disclosures tomorrow. When the roundtable was announced, BNA reported that: The matters to be debated include appropriate reporting approaches for the final rule, the cha...

Bainbridge and Henderson's "Limited Liability: A Legal and Economic Analysis" Now Available for Pre-Order

I am delighted to announce that you can now pre-order Limited Liability: A Legal and Economic Analysis, which I had the honor of co-writing with my dear friend Professor Todd Henderson of the University of Chicago Law School. Here's the blurb:

The modern corporation has become central to our society. The key feature of the corporation that makes it such an attractive form of human collaboration is its limited liability. This book explores how allowing those who form the corporation to limit their downside risk and personal liability to only the amount they invest allows for more risks to be taken at a lower cost.

This comprehensive economic analysis of the policy debate surrounding the laws governing limited liability examines limited it not only in an American context, but internationally, as the authors consider issues of limited liability in Britain, Europe and Asia. Stephen Bainbridge and M. Todd Henderson begin with an exploration of the history and theory of limited liability, delve into an extended analysis of corporate veil piercing and related doctrines, and conclude with thoughts on possible future reforms. Limited liability in unincorporated entities, reverse veil piercing and enterprise liability are also addressed. 

This comprehensive book will be of great interest to students and scholars of corporate law. The book will also be an invaluable resource for judges and practitioners.

And here are some reviews:

This book does a wonderful job of bringing sharp and clear analysis to a breathtakingly complex and poorly understood area of law. In particular, the book is distinctive for its careful treatment of the inefficiencies generated by current confusion and apparent subjectivity of the law in many states. Also of interest is the book's thoughtful economic analysis of the various ways that parent companies and other controlling investors react to the confused state of the law.' --Jonathan Macey, Yale University

'Professors Bainbridge and Henderson have made an outstanding contribution to the literature on limited liability. There is something valuable for everyone in this book, which provides not only a clear and comprehensive exposition of the doctrine and theory of limited liability, but also with a cogent and clever solution to limited liability's deeply troubled exception, veil-piercing. This is an important book in one of the most important areas of business law, and is a tremendous, versatile resource for attorneys, entrepreneurs, students and scholars alike.' --Peter Oh, University of Pittsburgh

'Bainbridge and Henderson have given us one of the most important books on one of the most important contemporary legal issues, the liability of individual and corporate shareholders for corporate debts. There is no issue in corporate law more subject to uncertainty and no issue more likely to be litigated. No single book has ever attempted, much less carried off, the complete historical, international, economic and legal theoretical exegesis of limited liability, which these two authors do with range, depth, confidence and even a bit of panache. This monograph, of crucial interest both to scholars and practitioners, will become an instant classic and an immediate authority.' --Stephen B. Presser, Northwestern University and the author ofPiercing the Corporate Veil

A research opportunity in the federalization of corporate governance by deferred prosecution

Back in 1982 Roberta Karmel published a classic article book, Regulation by Prosecution, the way the federal SEC was using prosecutions to regulate American business. As Mark Sargent summarized her argument:

Karmel concludes that this exaggerated emphasis on investor protection and corporate governance (each to be achieved primarily through prosecution of individual offenders) diverted the SEC from its other major task, the encouragement of capital formation.

Karmel expounds this general critique through case studies of the SEC's role in the corporate governance movement, its approach to the evolving national market system, its jurisdictional expansionism, and its tendency to erode materiality as a prerequisite to mandatory disclosure. Although a full summary of each of these case studies is be- yond the scope of this review, some of her specific criticisms deserve attention.

For example, Karmel's analysis of how the SEC used its control over the proxy rules to promote reforms in corporate governance, in overseas selling practices, and, generally, in the corporate sense of so- cial responsibility, points clearly to one unresolved contradiction in the agency's conduct. Specifically, the SEC would bring or threaten to bring enforcement actions against corporations which had paid foreign officials to secure contracts from their governments on the ground that such payments had not been adequately disclosed to the stockholders in a proxy statement or annual report. The corporation would ordinarily agree to a consent injunction through which the SEC would cause a restructuring of the board of directors or would apply other, ever more novel, forms of ancillary relief. The SEC would bring all of this about in the name of investor protection. The contradiction, however, is that most shareholders of those companies were not concerned with the illegality or immorality of foreign payments. Rather, those shareholders, like most shareholders, were primarily investors interested in tapping the corporation's income stream, thereby receiving a return on their investment. Thus, the relatively small amounts paid by management to receive lucrative foreign contracts were not matters of information material to the shareholders and, Karmel concludes, should not have been a basis for SEC action.

In addition, as Sargent recounts, Karmel objected to the SEC's creeping federalization of state corporate governance law:

The SEC's attempt to force preemption of state tender offer statutes would perhaps be more defensible if it had been the result of a careful, thorough, and open analysis of the regulatory alternatives, and not, as Karmel emphasizes, ad hoc litigation. The SEC's behavior in this episode appears even more reprehensible once it is realized that the tender offer statute ad- ministered by the SEC (the Williams Act) was not the product of careful study and policy formulation by the agency, but was an expedient political compromise. The SEC's preemptive strike on state takeover regulation thus seems more and more like institutional self-aggrandizement coupled with utter disregard for the effects of its actions on the traditions of federalism.

The more things change ....

Jennifer Arlen and Marcel Kahan have posted an interesting article on the latest twist in this story, which is the use of fevered prosecution agreements:

Over the last decade, federal corporate criminal enforcement policy has undergone a significant transformation. Firms that commit crimes are no longer simply required to pay fines. Instead, prosecutors and firms enter into pretrial diversion agreements (PDAs). Prosecutors regularly use PDAs to impose mandates on firms creating new duties that alter firms’ internal operations or governance structures. DOJ policy favors the use of such mandates for any firm with a deficient compliance program at the time of the crime. This Article evaluates PDA mandates to determine when and how prosecutors should use them to deter corporate crime. We find that the current DOJ policy on mandates is misguided and that mandates should be imposed more selectively. Specifically, mandates are only appropriate if a firm is plagued by “policing agency costs” — in that the firm’s managers did not act to deter or report wrongdoing because they benefitted personally from tolerating wrongdoing or from deficient corporate policing. Moreover, only mandates that are properly designed to reduce policing agency costs are appropriate. The policing agency cost justification for mandates that we develop thus calls into question both the extent to which mandates are used and the type of mandates that are imposed by prosecutors.

Arlen, Jennifer and Kahan, Marcel, Corporate Governance Regulation Through Non-Prosecution (September 2016). University of Chicago Law Review, Forthcoming; NYU School of Law, Public Law Research Paper No. 16-38; NYU Law and Economics Research Paper No. 16-31. Available at SSRN: http://ssrn.com/abstract=2833902

 

What the Arlen & Kahan article lacks, however, is a focus on the federalism issues raised by the use of these agreements to impose mandates that effectively federalize some aspect of corporate governance traditionally within the state's purview. Somebody ought to write that article.

Airgas and the case for director primacy even in takeovers

In Unocal at 20: Director Primacy in Corporate Takeovers, Delaware Journal of Corporate Law, Vol. 31, No. 3, pp. 769-862, 2006, available at SSRN: http://ssrn.com/abstract=946016, I argued that:

In Unocal Corp. v. Mesa Petroleum Co., the Delaware Supreme Court made clear that the board of directors of a target corporation is not a passive instrumentality in the face of an unsolicited tender offer or other takeover bid. To the contrary, so long as the target board's actions are neither coercive nor preclusive, the target's board remains the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders. 

Unocal is almost universally condemned in the academic corporate law literature. Building on his director primacy model of corporate governance and law, however, Bainbridge offers a defense of Unocal in this article. Bainbridge argues that Unocal strikes an appropriate balance between two competing but equally legitimate goals of corporate law: on the one hand, because the power to review differs only in degree and not in kind from the power to decide, the discretionary authority of the board of directors must be insulated from shareholder and judicial oversight in order to promote efficient corporate decision making; on the other hand, because directors are obligated to maximize shareholder wealth, there must be mechanisms to ensure director accountability. The Unocal framework provides courts with a mechanism for filtering out cases in which directors have abused their authority from those in which directors have not.

A key part of that article is devoted to rebutting the arguments by those who would deny target boards of directors their usual discretionary powers in the takeover context. And now we have a case in point:

Airgas is a leading distributor of industrial, medical and specialty gases in the United States, selling canisters of oxygen and other gases to more than a million customers across the country. The deal to sell the company was an eye-opener for corporate America. ...

Wall Street law firms now hold up Airgas as one of the best arguments for management’s right to defend its company. Business schools around the country are seeking to turn the tale into a case study. ...

Despite the long odds, Mr. McCausland prevailed, by winning on appeal at the Delaware Supreme Court. The case preserved the ability of companies to defend themselves against hostile takeovers, without input from shareholders.

Despite the mewling and howling from the takeover industry, activist hedge and pension funds, and their academic allies along the Acela corridor, courts have given boards the power to determine what is in the best interests of the company ... if only the board has the stomach for it.

The Case Against Fiduciary Entity Veil Piercing (and USACafes)

An interesting new paper, which I commend to your attention:

The doctrine of USACafes holds that whenever a business entity (a “fiduciary entity”) exercises control over and, therefore, stands in a fiduciary position to another business entity (the “beneficiary entity”), those persons exercising control, whether directly or indirectly, over the fiduciary entity (the “controller(s)”) owe a fiduciary duty to the beneficiary entity and its owners. Focusing on control as the defining element, courts have applied this far-reaching doctrine across all statutory business forms — including corporations, limited partnerships, and LLCs — and through successive tiers of parent-subsidiary entity structure to assign liability to the individuals that ultimately exercise control over an entity. In this respect, USACafes enables what two prominent business law jurists have aptly described as “a particularly odd pattern of routine veil piercing.”

This Article argues that USACafes is a needless doctrine that stands in conflict with other, more fundamental precepts of law and equity. Accordingly, when presented with the opportunity, the courts of Delaware and other jurisdictions should reject its holding. Instead, the law ought to respect the fiduciary entity for what it is: a legal person separate and apart from its owners and controllers. If the limited liability veil of a fiduciary entity is to be pierced, then it should be under the more rigorous legal standard that courts have traditionally applied in veil piercing cases.

Manesh, Mohsen, The Case Against Fiduciary Entity Veil Piercing (August 22, 2016). Business Lawyer, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2827876