The Street reports that:
Trump plans to turn control of his companies over to his two eldest sons, Donald Jr. and Eric, on Wednesday pointing to piles of papers on the stage next to him he said are among the "many documents" he has signed in completing the process.
Sheri Dillon, the lead attorney hired by Trump to help advise him on his financial conflicts of interests, discussed the steps to be taken.
The Trump Organization, she said, will be conveyed to a trust prior to the inauguration to be overseen by the Trump sons and longtime Trump executive, Alan Weisselberg. Trump's daughter, Ivanka, will leave the business and move to Washington, D.C. with her husband, Jared Kushner, who it was announced will join the Trump administration earlier this week.
No new foreign deals will be made during Trump's presidency, and the firm will bring onboard an ethics adviser who will consult and approve on any new domestic agreements. Dillon said the Trump Organization has already terminated more than 30 pending deals since his election, resulting in "an immediate financial loss of millions of dollars" for Trump and his children. The firm will also enlist a Chief Compliance Officer to ensure ethical operations.
"He will only know of a deal if he reads it in the paper or sees it on TV," Dillon said.
Trump will limit his information rights and receive reports only to reflect profit and loss on the company as a whole.
All of which sounds a lot like the ethics wall I suggested Trump build. This won't satisfy the ethics experts whose severe case of Trump derangement syndrome leads them to insist upon divestment, but there are good reasons for Trump not to divest:
I am no fan of John Chevedden, the famous (or, if you prefer, infamous) shareholder activist (or, if you prefer, gadfly), but even a stopped clock is right twice a day. Per SEC Rule 14a-8, Chevedden recently put forward the following proposal for inclusion in HP Inc.'s annual proxy statement:
RESOLVED: Shareholders request that our Board adopt a corporate governance policy to initiate or restore in-person annual meetings and publicize this policy to investors.
Our management has adopted procedures allowing it to discontinue a Corporate America tradition - a physical stockholders meeting and "substitute" a virtual meeting - an alarming decision.
Internet-only meetings should not be substituted for traditional in-person annual meetings. The tradition of in-person annual meetings plays an important role in holding management accountable to stockholders.
Personally, I think Chevedden is wrong about the substantive merits of internet-only meetings. They are perfectly lawful in most (all?) states and an increasingly efficient means of shareholder communication.
But I also disagree with the SEC's conclusion that the proposal could be omitted under the exception for ordinary business matters.
The problem, of course, is that the Rule 14a-8(i)(7) exclusion of ordinary business maters is a badly screwed up mess. My article Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement By Proposal, 85 Fordham Law Review 705 (2016), which is available online here, documented that Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. For example, corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters. This creates a gap through which countless proposals have made it onto corporate proxy statements.
The Article proposes an alternative standard that is not only grounded in relevant state corporate law principles but is easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.
Under my proposed test, shareholder proposals that try to mandate how the board should decide specific substantive business decisions are excludible as matters of ordinary business, but proposals that define the process and procedures by which those decisions are made are permissible. Chevedden's proposal goes to how the shareholders meet and thus falls on the procedure side of the line. It therefore should not be a matter of ordinary business.
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Typically reasoned and thoughtful. I tend to be an absolutist on these issues, but I can still respect his position.
Does anybody still care? Personally, the only remaining piece of the Games of Thrones series I plan on reading is a recap of the final HBO episode to find out how it comes out.
Excellent op-ed in today's WSJ by Todd Zywicki and Geoffrey Manne reminds us that The Constitution Says Nothing About Behavioral Economics. As I explained in my article Mandatory Disclosure: A Behavioral Analysis, which is available at SSRN: https://ssrn.com/abstract=329880:
As with any model claiming predictive power, law and economics rests on a theory of human behavior. Specifically, neoclassical economics is premised on rational choice theory, which posits decisionmakers who are autonomous individuals who make rational choices that maximize their satisfactions. Critics of the law and economics school have long complained that rational choice is, at best, an incomplete account of human behavior.
The traditional law and economics response is that rationality is simply an abstraction developed as a useful model of predicting the behavior of large numbers of people and, as such, does not purport to describe real people embedded in a real social order. A theory is properly judged by its predictive power with respect to the phenomena it purports to explain, not by whether it is a valid description of an objective reality. Indeed, important and significant hypotheses often have assumptions that are wildly inaccurate descriptive representations of reality. Accordingly, the relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximations for the purpose in hand. Until quite recently, empirical research tended to confirm that the rational choice model of human behavior is a good first approximation of how large numbers of people are likely to behave in exchange transactions.
Over the last couple of decades, however, a new school of economic analysis has emerged that challenges the rational choice model precisely on its predictive power. Empirical and laboratory work by cognitive psychologists and experimental economists has identified a growing number of anomalies in which behavior appears to systematically depart from that predicted by rational choice.
Two of the more important examples of these decisionmaking biases are:
As Zywicki and Manne observe, while its proponents claim its neutrality, behavioral economics in fact is now a principal tool in the progressive argument for government intervention:
Behavioral economics has taken the academy by storm over the past two decades. The Obama administration has even looked to the discipline—which posits that psychological biases frequently lead consumers to make bad economic decisions—to shape government policy.
They focus on its use in a pending SCOTUS case: Expressions Hair Design v. Schneiderman.
The case involves New York’s ban on credit-card surcharges. For decades the state has barred companies from tacking on a fee when customers pay with plastic instead of cash. A hair salon now challenges that law, claiming businesses have a constitutional right to impose surcharges—and that behavioral economics provides the theoretical foundation.
Although the two appear to be mathematically equivalent, the salon argues that surcharges are more effective at changing behavior because consumers suffer from a “loss aversion” bias. More customers will decide to pay with cash, the theory goes, if faced with a “loss” (the $1 surcharge) than a “gain” (the $1 discount).
The salon argues that the only meaningful difference between the two pricing schemes is what they’re called—and that’s a matter of free speech. Barring the “surcharge” label but not the “discount” label, the argument goes, violates the First Amendment.
But they caution:
In the laboratory, under unrealistic premises and with no real money on the line, the loss-aversion hypothesis might play out as behavioral economists predict. But even that is unclear: So malleable are these theories that the U.K. Office of Fair Trading has pointed to behavioral economics to argue that surcharging can harm consumers through “drip pricing,” in which the merchant adds fees after the consumer has decided to buy.
When confronted with the messiness of the real world, the effort to extend behavioral economics founders. Far from providing a test case for its widening application, Expressions Hair Designdemonstrates why the field remains little more than an interesting intellectual parlor game. The Supreme Court should resist the invitation to import this unproven economic theory into constitutional law.
I concur, as I explained in my article:
The mere existence of such a market failure does not—standing alone—justify legal intervention. In addition to the standard prudential arguments in favor of limited government, which counsel caution in concluding that a purported market failure requires government correction, behavioral economics itself argues against presuming the desirability of intervention. As Jennifer Arlen has explained (in The Future of Behavioral Economic Analysis of Law, 51 Vand. L. Rev. 1765 (1998)):
Proposals designed to address biases generally entail the intervention of judges, legislators, or bureaucrats who are [themselves] subject to various biases. The very power of the behavioralist critique—that even educated people exhibit certain biases—thus undercuts efforts to redress such biases. In addition, the decisions of government actors also may be adversely influenced by political concerns—specifically interest group politics. Thus interventions to “cure” bias-induced inefficiency may ultimately produce outcomes that are worse than the problem itself.
In other words, the claim that law can correct market failures caused by decision-making biases or cognitive errors treats regulators as exogenous to the system. Once the state is endogenized, however, regulators must be treated as actors with their own systematic decision-making biases. It thus becomes evident that behavioral economics loops back on itself as a justification for legal intervention.
The LA Times reports that:
VCA Inc. has spent the last three decades consolidating chunks of the pet health industry into a leading chain of animal hospitals and diagnostic labs.
Now the Los Angeles company has agreed to be bought for $7.7 billion by Mars Inc., which is best known for its candy but also owns a significant pet-care business. ...
Mars, which is based in McLean, Va., and has $35 billion in annual sales, is the privately held maker of brands such as M&M’s, Snickers, Milky Way, Skittles, Dove chocolate and Wrigley’s gum.
The century-old company also has a major pet-care unit whose pet food brands include Pedigree, Whiskas and Sheba. It owns Banfield Pet Hospitals, many of which are in PetSmart Inc. retail locations.
What's the logic of bringing pet food and animal hospitals under one roof, especially when that roof is owned by a candy maker?
The deeper push into the pet business by Mars comes as large packaged-food companies are struggling with flagging sales. Changing consumer tastes, particularly a desire for less processed foods, has made it difficult for the companies that have dominated grocery-store shelves. Efforts to reduce sugar intake have struck an additional blow to candy makers such as Mars. That’s added pressure to diversify their portfolios.
But if that's Mars' reasoning, it's a lousy business idea. We have been here before, after all.
Once upon a time, companies often made strategic acquisitions for the sake of diversification. But why would a company choose to diversify its business when shareholders can very cheaply diversify?
For example, back in the 1960s ITT made telephones and other communication equipment. They also ran some phone companies. Then they decided to become a conglomerate: a holding company that owned lots of different businesses. They bought: Hilton Hotels, Wonder Bread, a steamship line, and a host of other companies. None of which had anything to do with telephones or each other.
Why would they do this? The theory was that a recession-sensitive industrial company (like ITT) could buy a non-recession sensitive company (like Wonder Bread), making it stronger by enabling it to always have some division that was doing well.
But this made no sense as a business strategy. Diversification necessarily reduces the maximum gains a conglomerate can produce. When one segment is doing well, it is being pulled down by a segment that is doing less well.
Moreover, the theory only worked if good telephone company managers also make good bakery managers. But it simply wasn’t true that management expertise could be transferred from one industry to the other.
True, the company lowered its exposure to unsystematic risk by diversifying. But so what?
Investors could diversify away unsystematic risk in their own portfolios. Indeed, they can do it more cheaply, because they need not pay a control premium. Shareholders thus are not better off because of diversification. Management may be better off, because their employer is subject to less risk, but making themselves better off is not management’s job.
Economists generally now agree that the conglomerate mergers were very bad for the economy. Most are negative NPV transactions. Indeed, many of the hostile takeovers were de-conglomerations in which somebody bought up conglomerates cheaply (due to their depressed prices) and sold off the pieces at a profit.
Granted, Mars is a private company. But it's owners are now in the fourth generation and the company now has non-family managers. To the extent its shareholders are now mostly passive investors their situation is not all that different from public shareholders of an exchange listed conglomerate.
I posted the following hypothetical about 10 days ago:
Target CEO Tony Treadwell has become highly stressed as a result of the high pressure merger negotiations and begins seeing a psychologist for therapy. In the course of their sessions, Treadwell discloses confidential information about the merger to his psychologist. Unbeknownst to Treadwell, the psychologist buys Target stock on the basis of that information. Does Treadwell’s conduct constitute an illegal tip under SEC Rule 10b-5? ...
One issue is whether disclosing information to a mental health care provider in order to receive appropriate treatment should be deemed the requisite sort of personal benefit required for a disclosure to be deemed an illegal tip. Your instinct may to say no, because Tony disclosed the information not with the intent of conducting an exchange or of making a gift. But this confuses the personal benefit test with the requirement of scienter.
In Salman, the Supreme Court blew off these sort of hypotheticals:
It remains the case that “[d]etermining whether an insider personally benefits from a particular disclosure, a question of fact, will not always be easy for courts.” 463 U. S., at 664. But there is no need for us to address those difficult cases today, because this case involves “precisely the ‘gift of confidential information to a trading relative’ that Dirks envisioned.” 792 F. 3d, at 1092 (quoting 463 U. S., at 664).
To which one can only reply, thanks a bunch. That's a big [expletive deleted] help.
So the question remains: Because personal benefit is not limited to a monetary or similar quid pro quo, what is the outer limit of the personal benefit requirement?
I asked some friends who specialize in this area for their thoughts and we ended up having a mini-symposium of sorts:
Steve asks if CEO Tony Treadwell has violated Rule 10b-5 by sharing confidential information about a potential merger in the course of seeing his psychologist for therapy.
Steve asks if CEO Tony Treadwell has violated Rule 10b-5 by sharing confidential information about a potential merger in the course of seeing his psychologist for therapy. Salman does not tell us much about the outer limits of the personal benefit standard, other than to reaffirm what Dirks told us: a gift of information to a relative or friend for trading meets the standard. Steve’s hypothetical shrink, however, is neither a friend or relative, so we are relegated to the first prong of Dirks personal benefit standard: “whether the insider receives a direct or indirect personal benefit from the disclosure, such as a pecuniary gain or a reputational benefit that will translate into future earnings.” Dirks v. SEC, 463 U.S. 646, 663 (1983).
Mental health is a personal benefit, I suppose, but it is well to remember that the personal benefit standard is simply refining the inquiry of whether the insider has breached a duty by making the disclosure, i.e., was the disclosure self-dealing. Dirks tells us the standard for liability under Rule 10b-5 is “whether the insider’s purpose in making a particular disclosure is fraudulent.” Id. The purpose of the disclosure by Steve’s stressed-out CEO is not to enrich the CEO, as Dirks requires, but to maintain his mental state. This is a personal purpose, as Steve notes, but it hardly constitutes a fraudulent purpose. A fraudulent purpose, within the meaning of Dirks, requires behavior that would be recognizable as self-dealing. Would any board of directors think that Treadwell’s disclosure was a form of stealing from the corporate till? Formulating Steve’s question this way, I am confident that Justice Powell would say no, and that would be the end of the inquiry from his perspective.
Salman does not change that answer, in my view. The only doctrinal news of note from Salman is the Court’s rejection of the Government’s “noncorporate purpose” standard. The Government’s standard might well have reached Treadwell’s hypothetical disclosure, which underscores the Court’s common sense in rejecting “noncorporate purpose” as the measure of a personal benefit. Absent an explicit broad-ranging prohibition enacted by Congress, what counts as fraud under Rule 10b-5 has to be defined by traditional categories of breach of duty, which give at least some guidance in finding the line between permissible and criminal behavior.
That said, if I am Treadwell’s lawyer, I tell him not to share that information with his psychologist. The cost and headache of dealing with an SEC or DOJ investigation are not worth it. (Note that when Treadwell shared the information with me for the purpose of seeking legal advice, he arguably had a “noncorporate purpose”: saving himself from personal liability. But no one—not even the SEC—would dare suggest that this disclosure to counsel would violate the personal benefit standard.)
Steve’s hypothetical is excellent in testing the outer limits of the personal benefit test, which was recently at issue in Salman v. US. Steve asks the question: Does CEO Treadwell’s disclosure of the confidential information about the merger to his psychologist constitute an illegal tip under SEC Rule 10b-5? My opinion is no, unless the purpose of Treadwell’s disclosure was to impart a trading advantage to his psychologist. Based on the described facts, it seems that Treadwell disclosed the information without a purpose to impart a trading advantage. Most likely, he did so inadvertently: he could have just said that “an important transaction” was in the works. If he did so inadvertently, he breached the duty of care, but we are reminded by SEC v. Dirks that breaches of the duty of care do not fall within the ambit of the insider trading prohibition.
Now, one might object that I am introducing another (unnecessary) element into the tipping analysis or confusing “purpose” with “scienter.” Maybe so, but I strongly believe that knowing the “purpose” of the disclosure, which is not always easy to do from an evidentiary standpoint, is essential to ascertaining whether the disclosure is or is not improper. For example, to prosecute the crime of public bribery, the prosecution must show the donor’s intent to influence the donee in the exercise of his official discretion. That is, more or less, a “purpose” element.
Of course, there will be evidentiary difficulties. Bill Klein’s first variant of the hypothetical suggests that Treadwell may have a purpose to impart a trading advantage. The facts of the second variant, however, make Treadwell look more innocent.
In my view, a quid pro quo should not be necessary to find liability for tipping. If the person is a relative, friend or acquaintance, a donative intent should suffice. Why? Because, as I described in my paper, Insider Trading as Private Corruption, the mere (intentional) use of an entrusted position for self-regarding gain (“self-regarding gain” to be defined broadly to encompass the personal (usually financial) gain of the insider’s friends, relatives and acquaintances) is improper, assuming such use is neither necessary nor incidental for the CEO to carry out the tasks and purposes of his position. Understanding insider trading as private corruption provides the intuition that not only bribes (tips for counter-tips or money) are improper, but less nefarious forms of reciprocity, such as gifts, are improper, as reflected in our aversion to cronyism and nepotism. To be sure, organized society cannot exist without the motivation to acknowledge and reciprocate a benefactor’s conferral of a benefit. But the domain of the securities markets is just not the place to indulge those (very human) impulses
I've posted a new paper to SSRN -- Interest Group Analysis of Delaware Law: The Corporate Opportunity Doctrine as Case Study (January 5, 2017). UCLA School of Law, Law-Econ Research Paper No. 17-01. Available at SSRN: https://ssrn.com/abstract=2894577:
Number of Pages in PDF File: 25
Keywords: Corporate Opportunity Doctrine, Fiduciary Duties, Directors, Officers, Interest Groups, Indeterminacy, Judicial Incentives
JEL Classification: K22
On Jan. 10, Senator Jeff Sessions is scheduled to appear before the Senate Judiciary Committee to present his qualifications to replace Loretta Lynch as Attorney-General of the United States. In anticipation of his hearing, over 1300 law professors have signed onto a statement to the Chairman and Ranking Member of the Committee, which urges them to reject President-Elect Trump’s nomination of Sessions.
Krauss, of course, is a professor of legal ethics and he thinks the 1300 are way out of line:
Character assassination is so unworthy of our profession – what an awful example to set for the budding lawyers who are our students! The ABA Model Rules of Professional Conduct prohibit “conduct that is prejudicial to the administration of justice.” I contend that the law professors’ statement, which condemns Attorney General nominee Jeff Sessions based on irrelevancies and innuendoes, is just that.
Go read the whole thing.