Despite a delayed start, Alibaba's IPO seems to have gone off without the technical glitches that have marred some recent public offerings. Priced at the very top of its range at $68, it opened at $92.70. That's some kind of pop!
Investors apparently aren't listening to Harvard Law's Lucian Bebchuk, who earlier this week expressed governance worries about the firm, particularly its control by insiders.
In Alibaba, control is going to be locked forever in the hands of a group of insiders known as the Alibaba Partnership. These are all managers in the Alibaba Group or related companies. The Partnership will have the exclusive right to nominate candidates for a majority of the board seats. Furthermore, if the Partnership fails to obtain shareholder approval for its candidates, it will be entitled “in its sole discretion and without the need for any additional shareholder approval” to appoint directors unilaterally, thus ensuring that its chosen directors always have a majority of board seats.
For my money (or lack thereof--not a penny of mine is going to Alibaba), the bigger concern is the VIE structure whereby Americans can invest. As Dealbook explains, "the company that is going public is technically an entity based in the Cayman Islands that has contractual rights to the profits of Alibaba China, but no economic interest."
The concern is that Chinese courts will fail to honor these contractual rights. Dealbook quotes a U.S. lawyer who has worked in China as saying "“It’s prohibited for foreigners to own an Internet company of any kind in China — not discouraged, but prohibited” ... “Every lawyer agrees that if this goes to court in China, those contracts are void; they’re illegal.”
In a letter to the SEC, Senator Bob Casey tried to link VIEs to fraud-plagued Chinese reverse mergers of the past. This comparison misses the mark. In a reverse mergers a shell corporations that is publicly traded acquires a pre-existing Chinese corporation. The Chinese firm avoids the IPO process entirely, hence the colloquial "back-door IPO" moniker. It turns out that many of these firms had shoddy accounting practices, and some U.S. investors got burned.
The risk of accounting fraud appears to me to be a risk that you run when investing in any publicly traded comany where you know that the firm's main asset never got that initial SEC scrutiny and, while subject to the '34 Ac'ts periodic disclosure requirements, operates overseas in a country where corruption and fraud are widespread. That seems...risky. Whereas with Alibaba you're buying into a structure knowing that the Chinese government could declare it illegal and worthless at any time. That seems...like an act of faith.
Mark Mobius of Franklin Templeton and the WSJ editorial page share my skepticism about the VIE structure. Let's see how it goes.
For the next couple of weeks, we'll have the chance to hear from two law professors who, like me, are posted at business schools, David Orozco at Florida State and Robert Bird at UConn. They've got an interesting collaboration going on corporate legal strategy, and other subjects of note as well. So welcome David and Robert!
They've been doing some interesting hiring at OSU, lately, and this year they will be doing some more. The position announcement is after the jump.
Many of you may remember that a year ago this month, I won the New Yorker Cartoon Caption Contest.
I was very excited. Then, my husband told me that I was due a prize for this noble honor. Embedded in the rules for the contest is this paragraph:
The Qualified Winner of each Cartoon Caption Contest will receive a print of the cartoon, with the caption, signed by the artist who drew the cartoon (the “Prize”). If the winner cannot be contacted or does not respond within three (3) days, an alternate winner may be selected, and awarded to the person whose caption received the next greatest number of votes. The approximate retail value of the Prize is $250. Income and other taxes, if any, are the sole responsibility of the winner.
I was not alerted to this by my contact at the New Yorker. Let's call him "M." M emailed me to tell me that I was a finalist, and asked for my address and agreement, which I gave him immediately via email. After I won, I emailed him and asked about my prize. He said the NY was backed up and to remind him in 3 months if I had not heard from him. As you might imagine, I emailed him again on Jan. 8, and he said give him another month. I emailed him again on Feb. 3, and got the same reply. I emailed him again on Mar. 30, but this time his email bounced back. I then tried to email the New Yorker via the "Contact Us" interface and never heard back from anyone.
I then even emailed The Haggler at the New York Times, but I guess he's too busy fixing other people's bills. Today, I tried calling different numbers at Conde Nast, including the NY headquarter number which is eternally busy. Finally, I was given a number that ended in a human's voicemail. I left a message, but I am not hopeful.
If anyone knows someone at the New Yorker who can get me my prize, please let me know!
UPDATE: Right after I posted this, an awesome editor at the caption contest emailed me to say that would send asap. Unfortunately, the email went to my old UI email address, so I can't reply. I tweeted the editor, so maybe we will connect. Here's to social media! BTW, if you need my new email it's email@example.com or firstname.lastname@example.org.
Enforcement cases, where the enforcers have total discretion about what to do, don't often motivate dissents from one of those enforcers, but one did recently before the SEC, in a case where a CPA CFO misstated earnings, and agreed to a Rule 102(e) suspension, or, if you like, a "wrist slap." Commissioner Aguillar thought that the CPA role was crucial.
Accountants—especially CPAs—serve as gatekeepers in our securities markets. They play an important role in maintaining investor confidence and fostering fair and efficient markets. When they serve as officers of public companies, they take on an even greater responsibility by virtue of holding a position of public trust.
Aguillar appears to be worried that CPAs are getting pled down into relatively innocent offenses even when there is strong evidence of intentional fraud.
I am concerned that this case is emblematic of a broader trend at the Commission where fraud charges—particularly non-scienter fraud charges—are warranted, but instead are downgraded to books and records and internal control charges. This practice often results in individuals who willingly engaged in fraudulent misconduct retaining their ability to appear and practice before the Commission.
So there you go, a commissioner who is particularly insistent on holding the accounting profession to high standards, and thinks the SEC is too willing to plead down everything. As an empirical matter, it is difficult to know whether the SEC is indeed guilty of Aguillar's charge (though he is, presumably, an expert on the matter). It's hard to know how much conduct is going unprosecuted, and for settleed cases, whether stiffer charges would have been likely to stick.
I feel a little guilty about blogging about both of these items, for different reasons, but here goes...
1. I have a piece up on Slate that summarizes my Essay on campaign finance (guilt because all last week as I wrote it I couldn't shake the feeling I was cheating on the Glom)
2. I am the UGA's new M.E. Kilpatrick Professor of Law (guilt because self-promotion/bragging)
17 years of Catholic education. Guilt as a way of life.
Steven Davidoff Solomon and I have, as you may recall, been working on a Fannie and Freddie litigation paper - the question is what to do with the newly profitable firms, Treasury says: we'll take the money, the still extant shareholders say: we want a dividend. We say an entire fairness remedy. We've got an overview of the paper up over at the Harvard Law School Forum on Corporate Governance and Financial Regulation. You can find the paper here. Here's an excerpt, see the rest over there:
Our legal analysis  suggests that
- The equitable nature of the entire fairness remedy is consistent with administrative procedure’s commitment to equitable, as opposed to damages, remedies.
- The conflict of interest faced by the government in deciding whether to keep or share the firms’ profits provides an exception to many of the administrative law hurdles faced by shareholders seeking to subject the action of a government conservator to administrative law.
- The fact that two government agencies were involved in the decision about what to do with the profits from the firms does not authorize the dividend decision, as the agencies did not act at arm’s length.
- The firms were not in a zone of insolvency that might relax the fiduciary obligations of a controlling shareholder at the time the dividend decision was made, as some have suggested, and, even if they were, the government gave nothing of value to senior creditors in exchange for its decision to take all of the profits of the firm, to the detriment of shareholders.
- The Takings Clause offers another doctrinal remedy to the plaintiffs, and it is also plausible, in part because the government’s conflict of interest overcomes many of the doctrinal hurdles posed by the government’s usual defenses against takings claims.
The Basel Committee is doing a lot of Basel III capital accord implementation this week. Page 10 of this report makes it look like the largest banks hold slightly less capital than smaller banks, which is the opposite of what you would want (smaller banks hold more variable capital though). And this report suggests that the effort to have banks deal with a hypothetical effort to adopt the new capital rules was messy. Not to worry, though! As is the case with all Basel documents, bland positivity about the success of the regulatory effort is the tone of the day.
One of the reason that bank capital regulation became an international affair was to ensure a regulatory "level playing field," which would be paired with market access to the US and UK. That is, as long as the rest of the world complied with the Anglo-American vision of capital requirements, access to London and New York would be assured.
But as former law professor and current Fed Board member Daniel Tarullo will testify to Congress today, as those global (call them "BCBS") rules have become more elaborate and comprehensive, some countries have elected to depart from them - only upwards, not downwards. Switzerland is trying to use very, very heightened capital requirements to shrink its universal banks into asset managers. And now the United States is enacting global rules with its own pluses. For example, the liquidity coverage ratio, which requires banks to keep a certain percentage of their assets in cash-like instruments,
is based on a liquidity standard agreed to by the BCBS but is more stringent than the BCBS standard in several areas, including the range of assets that qualify as high-quality liquid assets and the assumed rate of outflows for certain kinds of funding. In addition, the rule's transition period is shorter than that in the BCBS standard.
The Fed is also imposing an extra capital requirement on the largest American banks:
This enhanced supplementary leverage ratio, which will be effective in January 2018, requires U.S. GSIBs [very large banks] to maintain a tier 1 capital buffer of at least 2 percent above the minimum Basel III supplementary leverage ratio of 3 percent, for a total of 5 percent, to avoid restrictions on capital distributions and discretionary bonus payments
And another such requirement based on the amount of risk-based capital,
will strengthen the BCBS framework in two important respects. First, the surcharge levels for U.S. GSIBs will be higher than the levels required by the BCBS, noticeably so for some firms. Second, the surcharge formula will directly take into account each U.S. GSIB's reliance on short-term wholesale funding.
I think of the global efforts in financial regulation as being notable precisely because they created, incredibly informally, some reasonably specific and consistently observed rules that comprise most of the policy action around big bank safety and soundness. The little new trend towards harmonization plus is a bit comparable to the trade law decision to create the WTO for global rules, but to permit regional compacts like NAFTA and the EU to create even freer trade mini-zones. Some find this multi-speed approach to be inefficient and, ultimately, costly to the effort to create a consistent global program. We'll see if the Basel plus approach rachets up bank regulation, or just disunifies it.
The school that go me my start in teaching is advertising for someone to join the BA level B school in business law. Because I think this announcement revises one published earlier, I'll leave it after the jump, for those interested.
The guilty verdict for Virginia ex-governor Bob McDonnell on charges of public corruption is a major headline of today. I've been thinking a lot about corruption for the past few months, so here are a few thoughts:
-Corruption is in the eye of the beholder. My Essay turns on the proximity of time of two donations and legislative action. In the most notable case, a member of the House introduced a bill the day after receiving a $1000 donation. Readers' reactions to the story fall into two distinct camps. One: OMG! I can't believe that! Two: So what? Why does that necessarily mean there's corruption? In answer I say:
-Timing does matter. From the WaPo:
[Prosecutors] backed up his story by using other evidence to weave a strong circumstantial case that an agreement had been reached between the businessman and the first couple based on the close timing of Williams’s gifts and loans and efforts by the McDonnells to assist Williams and his company.
In one instance, McDonnell directed a subordinate to meet with Williams on the same night he returned from a free vacation at his lake house. In another, six minutes after e-mailing Williams about a loan, McDonnell e-mailed an aide about studies Williams wanted conducted on his product at public universities.
-definitions are the name of the game. The Supreme Court's 2014 McCutcheon decision narrowed the definition of corruption to only cases of quid pro quo corruption--cases where there's an actual exchange. The McDonnell defense apparently conceded that there was an exchange, but contested whether the quo in question--events at the governor's mansion, setting up meetings for the donor--counted as "official acts." This is a broad definition.
-Corporations are always going to participate in political life. We expect them to lobby for positions favorable to their firms. See here for a recent WSJ article on disclosure of political spending, with quotations from some sterling law professors, including friends-of-Glom Mike Guttentag and Steve Bainbridge, who quite rightly observes that the risk is that managers spend the corporation's money "on their own preferences, as opposed to what's good for the company."
-So in corporate governance terms the question is how to sort the "good" spending that is for the benefit of the company from the "bad" spending that is driven by idiosyncratic managerial preference and doesn't do the corporation any good. But in political governance terms, the question is how to regulate even "good" corporate spending that we find to be corrupting. I at least don't have a good idea of how to draw that line. The Court says trading donations for access is fine, and so are donations that secure a candidate's gratitude. My hunch is a lot of people might call those corruption. But corporations need to be able to explain to candidates how the government's rules and regulations affect their business. I'm certainly not confident that the average politician knows much of anything about any particular issue.
So where does that leave me? Still wondering about corruption, and eager to get back to corporate and securities law, that's where!
Larry's book on Berkshire Beyond Buffett is due in a month, and we'll be reading it on the Glom. Here's a taste, prepared by Larry, and if you follow the link, you can see a full chapter of the book.
Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.
Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.
Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.
There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.
Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.
The more important—and more difficult—question is the price of autonomy. Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs:
We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.
Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock.
(The above is an excerpt from Chapter 8, Autonomy, from Lawrence Cunningham’s upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free here.)
[To read the full chapter, which can be downloaded for free, click here and hit download]
So, I guess the Illinois law faculty was just waiting for me to leave to start a blog! Congratulations on their new arrival, which promises to be very interesting and informative. The first post I read was definitely link-worthy. My friend and former colleague Rob Kar writes on another Urbana-Champaign development that I am out-of-the-loop regarding: the non-hiring of Steven Salaita. The Salaita affair has drawn a lot of writing from First Amendment/Academic Freedom quarters, but Rob analyzes it from a contract law perspective. Good reading!
Please don't think me a hypocrite, but despite being a proud, dyed-in-the-wool corporate type, I have penned a con law piece. In my defense, I came up on the story honestly, while doing empirical work in securities. And it's just an essay! Hopefully it won't cost me too much in corporate street cred.
Here's the abstract:
The Supreme Court recently held that campaign contributions under $5200 do not create a “cognizable risk of corruption.” It was wrong. This Essay describes a nexus of timely contributions and special-interest legislation. In the most noteworthy case, a CEO made a first-time $1000 donation to a member of Congress. The next day that representative introduced a securities bill tailored to the interests of the CEO’s firm.
Armed with this real-world account of how small-dollar campaign contributions coincided with favorable legislative action, the Essay reads McCutcheon v. Federal Election Commission with a critical eye. In McCutcheon the Supreme Court assumed that small-dollar donations do not pose a risk of corruption, and accordingly struck down aggregate contribution limits on the theory that the base limit of $5200 provides enough of a bulwark against corruption. This Essay suggests otherwise. The fact that the price of corruption is lower than commonly understood has fundamental repercussions for campaign finance law.
Tell me what you think!