Labor Protest Today in Boston– Supersize my Paycheck

Out for my usual luncheon stroll around town in today’s picture perfect weather, I was attracted to a noisy gathering, surrounded by flashing blue police lights, at the intersection of State and Congress Streets, in the heart of Boston’s downtown business district.  About a hundred very noisy protesters with bull-horns and cryptic signs were chanting that they wanted $15 an hour plus a union.

It was impossible to tell what industry they worked in, however.  They were organized enough to get into place all of their people, placards, bull-horns, banners, and a line of ten protesters prepared to be arrested by sitting across the traffic lanes; apparently, however, no one of the protesters thought to make it clear to the curious business lunch crowd who they were.

So I crossed the police line, drawing modest interest, and just asked.

They are the fast food workers.  All different fast food companies.  They want equality in wages (with whom they did not seem to know).  They want it NOW.  If they do not get it NOW, they will, seemingly per their chants, stay IN YOUR FACE until they get it.  They are much like the Terminator, it seems to me: they say that they will never be defeated and that they will not stop.

Now $15 an hour these days seems like not a lot of money, and I do not in fact begrudge them this modest stipend;  the press is full of stories of marginal workers who are below the poverty level although they do hold down jobs– at least these folks are trying.  My first law job worked out to about $3 an hour, I recall — but that was long ago, when men were men, a dollar was a dollar, and a Red Sox bleacher seat was a quarter.

It is a bit of an anomaly, perhaps, that the impact of a raise like this is likely to disproportionately affect the poorer populations, as the cost of fast food may well rise and as the target client base of fast food is not exactly the James Beard crowd.  But who knows how much this raise would really cut into profits, and how much the franchisees are earning; maybe the math just works out more or less.

A few details of note: protesters of all ages and colors; the Boston police were very controlled and gentle, easing the arrested sit-ins off the street with a few words and escorting them uncuffed to the paddy wagons (very reassuring and I think ACLU-friendly); the protest (for those of you unfamiliar with Boston history and lore) was just in front of the Old State House, built in 1713, site of the 1770 Boston Massacre in which the Redcoats shot and killed five protesters (it was about taxes in those days), and site of the headquarters of the British occupation of Boston during the Revolution.   My family goes there many July 4ths to hear the Declaration of Independence read from the balcony — pretty good piece of polemic writing, that Declaration. 

Come to think of it, today’s labor protesters could have taken a lesson in clarity of message from that Declaration. 


The Public Benefit Corporation

 Let us say you are a company that wants to make a profit, but wants to consider not only the interests of the shareholders, returning some profit to them, but also the interests of other groups you characterize as “stakeholders”: employees; the public at large; the environment; the general economy. In the context of the American corporation now conceived as a machine designed to return profit to shareholders, how do you establish such a corporation without having the officers and directors breach their fiduciary duties by making decisions which reduce profit in order to benefit some other constituency?

About a year ago, the state of Delaware established a new concept for a corporate entity. In effect, by statute, it has expressly permitted rejection of the now-ingrained corporate focus on shareholder return. While it is perhaps not surprising that Delaware, our most imaginative of corporate jurisdictions, has developed this option, it is also mildly anomalous; after all, one of the fountain-heads of the current understanding of the corporation ( run by fiduciaries for the benefit of the risk-taking shareholders) is Delaware, home of so many of our larger or public for-profit corporations.

You can establish a public-benefit corporation in Delaware by simply so providing. There is an infinite range of interests that can be benefitted by a public-benefit corporation, in addition to the stockholders. The corporate formation papers must specifically identify one or more categories of stakeholders, other than stockholders, within a very wide variety of possible beneficiaries: the list includes but is not limited to the following constituencies: artists, charities, cultural, economic, educational, environmental, literary, medical, religious, scientific or technological.

In lieu of including the cumbersome words “public-benefit corporation” in the legal entity name, you may use the abbreviation “PBC.”

Further, an existing for-profit corporation can amend its charter to become a PBC. The requirement is of a 90% vote of each class of stock.  Of course, that can leave as many as 10% of the shareholders, who signed onto a for-profit corporation, suddenly facing a fundamental change in the nature of their investment. Consistent with general Delaware and corporate practice, a shareholder so negatively affected economically by a change in his or her investment, to which such shareholders did not consent, is entitled to statutory “appraisal” (a mandatory redemption of stock at fair value), rather than requiring a shareholder to be dragged unwillingly into a public-benefit corporation.

Interestingly, it requires only a two-thirds vote of outstanding shares to go the other way, which is to say to take a public-benefit corporation and flip it back into a for-profit corporation. No right of appraisal is afforded in such instance, because although the nature of the shareholder’s investment is being radically altered, that alteration presumably is deemed not to create an economic disadvantage.

There is an express provision which requires the board of directors to manage the affairs of the public-benefit corporation to reflect the interests of the various constituencies specified in the charter, and provides protection from director liability  (shareholders cannot sue directors for taking action which they honestly believe to be in the best interest of the stakeholders specifically identified as benefitted by the PBC).

So, does Market Basket pressage a revised sensibility to the proper role of a corporation? Or is it a “one-off,” an oddity wherein a shareholder dispute triggered an unusual reaction? I note that no one has suggested that if “Arthur T” gains control and is reinstated (as was announced today), he will opt for a PBC approach, notwithstanding the incredible support he has received from employees and consumers;  there seems to be a private equity firm backing him, as well as a load of new corporate debt, and I doubt that many PE firms or creditors would have an interest in the PBC model for Market Basket just now….

The SEC, IRS and Shareholder Activism as Handmaidens of the New Corporation

 In the prior post, we tracked broadly the treatment of American corporations as economic institutions driven by increases in shareholder value. Boards of directors and CEOs are now being held to building shareholder wealth as their mission.

This second post broadly outlines three ways in which our government agencies, and emerging corporate practice, have bought into this concept.

The SECs disclosure scheme, particularly the mandatory discussion of compensation in annual filings, feeds into analyzing corporations only in terms of their earnings, and evaluating the CEOs in that fashion. The granularity of financial reporting under the SEC’s mandatory XBRL regime, while clearly improving corporate financial reporting, also lends itself to the kinds of calculations and valuations, and consequently the judgments and rankings, of corporate performance based upon easily quantifiable and comparable earnings data.

The current Internal Revenue Code denies public employers a deduction for the salary of the principal executive above $1,000,000 per year, except to the extent that excess compensation is tied to “performance”. Performance is most conveniently and objectively measured through profitability and earnings per share. Since short-term executive compensation often is tied to aspects of such performance, economic goals have become the focus of management. (Recently, compensation advisors have been suggesting an approach that rewards both short-term and long-term shareholder benefits, but the focus has still remained on total shareholder returns as the measuring stick.)

Similarly, the rise of shareholder activism, facilitated by changes in the law and in internal governance practices which eliminate insulation of boards from shareholder pressure, have made corporations more responsive to shareholder interests, and have thus created a system where directors and management cannot protect themselves from the mantra of maximizing shareholder returns.

Although Market Basket is a private company and not wholly analogous to the larger public companies which primarily concern the SEC and the IRS, we can measure how far down the line we have come in buying into shareholder focus as the touch-stone of corporate performance when we measure our own shock, and perhaps negative reaction, to the action of low-level Market Basket employees and local shoppers.

In the past, if an entity wanted to benefit public constituencies, it would form itself as a non-profit enterprise. By definition, the economic power and sustainability of non-profit enterprises is limited. In our third and final post on this subject, we will discuss the possibilities presented by a new form of entity, the “public-benefit corporation.”

From Market Basket to a New Corporate Model?

 The ongoing saga at Market Basket focuses clearly the following question: what is the appropriate role of an American corporation in the modern age?

While the shareholders battle and squabble for control and power, various constituencies affected significantly by Market Basket as an entity are in turmoil and suffering: employees, suppliers and customers.

To what degree should the Board of Directors of Market Basket care about the well-being of these constituencies? Clearly Directors want to make decisions which do not harm the bottom line, but that focus might lead to different results from saying: “we are all one big family, what is the best solution for everybody, giving shareholders and customers and employees and suppliers and creditors an equal weight?”

This first of three blogs will touch briefly on the history of American corporations. A second blog will discuss the current mantra of maximizing “shareholder value.” A third blog will discuss a new form of entity, the so-called “public-benefit corporation.”

Corporations as an idea began as a grant by a government of a charter to a company which was charged with an obligation of doing public good. Original corporate charters were given to railroads, canal builders and the like.

In the 1970s and 1980s, there was a shift in thinking about the role of corporations. Corporations were no longer viewed as stable entities providing long term income and retirement for employees, and providing a fundamental benefit to the cities and societies where they were located. In the face of heightening economic competition and in the fear that American corporations would be left by the wayside, a new view of corporations as purely economic entities found its way from academia into corporate America. The corporation, it was so asserted, was designed only to make money for the shareholders who undertook risk. You could measure the value of a corporation, and how well it was run, by a bottom line which was easily quantifiable. CEOs were to run companies for profit. Boards were to make decisions, and select CEOs, with the same goal in mind.

The price of your share of stock became the bottom line mantra. Never mind that thereafter some academicians pointed out that actual increases in shareholder value were higher in the period prior to this new focus on economic performance.

Today, it is common wisdom that boards and CEOs are to run companies for the benefit of their shareholders. Failure to do so gets you sued in shareholder derivative actions. To the extent that corporations now undertake programs of “social responsibility” these programs, as admirable as the may be, are often seen primarily as public relations efforts. One commentator describes this development (not wholly properly) as merely a “moral defense” of capitalism.

My next blog post will discuss certain structural elements of our legal and regulatory system which support the concept that corporations cannot be understood separate and apart from their mission to maximize shareholder return.

Where to live? Parlez-vous Anglais?

The Economist, that esteemed publication which is attached to a research and consulting business called the “Economist Intelligence Unit,” annually lists in order the best and worst cities of size in which to live.  The results are somewhat predictable — nice places do well, Africa and the mid-East not so much.

What is particularly interesting in this year’s list of the top ten most livable cities:  eight are English-speaking, and four are in Australia and three in Canada (the last in New Zealand).  Why is that?  Is it bias in selection, or bias in setting criteria?  Or, are English-speaking cities simply better (so long as they are not in the United States)?

Here are the ranking categories: stability (crime, terror, military conflict, civil unrest), health-care, culture and environment (from humidity to censorship to museums), education (some emphasis on private education availability), and infrastructure (housing, energy,water, roads, phone et al).

These seem to be criteria slightly weighted in favor of a certain life-style that is, shall we say, upscale.  Not all the factors, but those folks without enough to eat, or even in the lower reaches of the middle class, likely aren’t too concerned about private schools and museums, and would gladly incur humidity in exchange for a better diet.  The skewing of the ratings may reflect the business bias of the Economist’s consulting practice:  they want to sell their information to executives of companies that might want to locate a business, or sell goods or service, in a particular place.

Of more general interest (all these top-ten lists are gimmicky to some degree, whether they are of best cities or best movies or best sushi bars):

Falling index: over the past six months and the past five years, over-all liveability (as they measure it at least) has declined.  We have more overt wars and international tension and continued impact of the recession; not surprising.

Population density: if you are a mid-sized city in a wealthier economy, the lower your population density within the city the more liveable that city is rated.  Low density means more recreation without more crime or over-taxing of infrastructure.  Sounds like a bias to me: start with a rich country, spread out the city through perhaps big housing lots or urban planning, and voila: a nice place to live.  And, the better cities won’t get your head blown off; murder rates are really low. 

Notable exclusions: In any event, the following cities did not make the top ten: New York, London, Paris and Tokyo.  Or Boston.  All the places I would like to live….

Final tip: stay out of Damascus, Syria.  But then again, we did not need the Economist to slip us THAT inside piece of information.


Red Sox Redux: Decline and Fall

Although the artwork surrounding this blog site segues from the image of a court-house to a baseball motif, reflecting my intent to moderate the law-related content of the site with occasional forays into baseball commentary (an admittedly mindless but none-the-less often pleasant recreational interest), you may have noticed an absence of baseball in posts for some long period of time.  There are two reasons: first, my ability to predict accurately has proven to be nil; second, it is just really painful to consider the Red Sox of today.

Last night was my second visit to Fenway in four days, watching the team play two different teams (one inept, the other quite powerful).  The Sox managed to lose both.  For each game you might say fairly: “the Sox lost 8-1(Sunday) (or 8-3 last night) –  but it wasn’t that close.”

Bradley was sent down to Pawtucket which is good.  Should they demote Bogaerts?  Can his young psyche stand the impact?  Surely someone needs to work on his inability to lay off the outside slider that passes a good foot beyond his swing.  Maybe they can work on his fielding also — iffy at best, blew the simple task Sunday of stepping on second base in a blown double play that led to a Houston grand slam.

The outfield cannot field.  Cespedes blew a fly Sunday, hit the wall at knee height while he was looking the other way.  Nava blew a pop fly in right last night.  I suggest that the answer to center field is not named Mookie Betts.  At least Bradley could field; but you cannot sustain a center fielder ranking fourth from the bottom of all qualified full time big league batters, with one home run in 120 games.

No one is hitting at critical junctures.  Only Holt shows fire and constant bat contact with power (and the kid can bunt, and lift a sacrifice fly on command); that includes Papi who had four hits yesterday so who can complain, except the singles were chip shots and the homer was solo and the people behind him really did not pick him up.   Much-heralded Cespedes is hitting .250; he is clutch it is true but how about a clutch hitter who hits .300?  I hear that there are some of same in the world….  And who is this Craig I hear about?  Son of Victorino?

Clearly the team is testing out its pitching and hitting to pave the way for decisions for next year.  We do not have one reliable pitcher.  Last night Buchholz (feet of Clay, anyone?)  gave a typical peformance: great command for three innings, total collapse thereafter.  Who has an ace with an ERA over five?  We do, we do…. Tazawa is falling apart.  Uehara lost a game in the 9th, gave up runs in his last two outings.  I thought Webster was a dictionary and Wilson was Tom Hanks’ basketball….

The bottom line is that it is truly painful to go to the ball-park this year.  The crowds come, but singing “Sweet Caroline” is supposed to be a condiment, not the meal of the evening.  I left last night at the end of seven innings because I knew the team just could not come back, would not come back.  The last time I left a game early was in an April snow storm a decade ago, I revile the fans that exit before the game is over.  But I left last night — I ate my Fenway Frank, drank my $9.50 beer, gulped down a “sports bah” (they only send around the ice cream late in the game when it is cold outside; on a hot day when you really need an ice cream in the stands you cannot find an ice cream vendor to save your life) and then left.

 Not only inept and unlucky are we, but abandoned this year by management (17 1/2 games back?)  notwithstanding we paid for our tickets (more than anyone in baseball except the Yankees, and THEY deserve it).  Anyone want to bid for our four seats for this Saturday?  It’s like olden Roman times: the good guys are being thrown to the wild animals again, and you can drink a Honkers Ale while you watch….

More Pressure on Unregistered Finders in Equity Transactions

On July 24 I posted about a lawsuit which emphasizes the risks of companies raising capital through finders unregistered with FINRA under Federal securities laws.  It must be noted that the much-discussed SEC no-action letter of earlier this year provided some comfort, however imperfect, to unregistered finders in M&A, but not in equity raises.

Monday of this week the SEC issued one of its periodic Investor Alerts, listing ten “red flags” suggesting a scam offering.  The second red flag was that unregistered persons who sell securities perpetrate many of the frauds that target retail investors.  The SEC invites investors to go to the FINRA website to confirm registration.

Although our focus has been on the risks of using unregistered finders in non-retail raises (albeit typically underneath the institutional level), and although this warning is directed at “retail” investors who generally do not make venture investments, the SEC Alert reminds us that the official position of the SEC is that it is illegal to be a finder in the sale of securities if not registered.  The softening up of the landscape to facilitate capital formation, particularly through the JOBS Act, has not dented this aspect of the SEC’s armor against freer capital formation marketplaces.

Absent specific legislative relief, it does not look like there will be SEC action permitting unregistered finders in sales of securities any time soon.  Forewarned is — well, you know.

A little bit of things legal: cyber, M&A, banks, crowd sourcing

Just a few thoughts on what the recent couple of months has brought us on the lawyering front:

First, the focus on cyber security has, if anything, intensified.  Between the news articles recounting hacks of businesses and governments and the proliferation of programs designed to educate executives and directors, it is hard to avoid getting caught up in the conversation.  A summary of appropriate board responses can be found in my June article in New England In House, which can be linked through my CV at or accessed direct at    There is so much hysteria out there on the subject and so little specific “how to” information that I dared add my voice to the crowd by listing specific director steps that strike me as useful guides.

Next, the M&A surveys that now come to counsel regularly from various sources analyze not only M&A deal content but also deal pricing.  Larger companies continue to enjoy an advantage in multipes just based on size, but multiples over-all seem to be moving upwards in the middle market.  The market seems to me to be continually very choosy at least for the more traditional companies; the big stretches in price seem to be strategic tech or med-tech deals.  I am not sure that multiples for traditional mid-market companies have changed all that much. 

Banks continue to be an enigma.  In Washington, the debate continues about whether the restrictions on captial, and the Dodd-Frank reforms, are or are not valuable.   Few are shocked to see that debate break on party lines.  Meanwhile the huge settlements with banks based on any number of sins continues unabated:  money laundering for terrorists, facilitating trading with banned countries, assisting in avoidance of US taxes, lying to investors about the value of syndicated assets, inducing consumers to incur real estate debt they cannot repay, incurring trading risks for proprietary positions which are unmonitored and the results are not disclosed.  If an individual had a rap sheet like that, we would throw away the key.  No one goes to jail.   Bank stocks are not decimated.  Financial conservatives decry over-regulation nonetheless. Half the reports involve numbers beginning with a “B.”  That is a lot of money.  (Sen. Everett Dirkson famously once allowed that you take “a billion here, a billion there, and pretty soon you’re talking real money.”)

I expect to return to regular blogging in August, on return from Europe.  I look forward then to the SEC making up its mind about finally releasing crowd-funding regulations (they have been sitting on their October, 2013 proposals, and the commentary on same, for almost ten months already, they are over a year beyond their statuory deadline to act, contained in the 2012 Jobs Act, and even the States are beginning to adopt State-wide crowd funding regimes).  I look forward to Massachusetts deciding whether or not to ban non-competition agreements by statute, an issue that has raised the ire of some of the largest tech companies which (in their early days) attacked non-comps as a drag on innovation and now see non-comps as ensuring their own profitable status quo (as I write this, a weak Senate version is I believe in conference as the Session winds down). I look forward to learning that the Boston Globe was right in predicting that the revitalized Red Sox will rally and play baseball in October.

Well, it is summer; on that last point I can dream, can’t I?

Law Suit Based on Unregistered Finders

Recently, much has been published (including an article by me appearing in In-House) about the possible loosening of SEC restriction by not requiring finders in M&A situations to be SEC-registered. As I have noted, this possible SEC relief is limited; among other limitations, it relates only to M&A and not to the sale of equity.

Two days ago, a bankrupt cancer biotech company, Neogenix (and not its 940 shareholders who invested $50 Million), sued its officers and its outside lawyers based upon a continuous practice, undertaken by the company’s CFO and not halted by the lawyers, of paying a 10% commission on equity raises where the “finders” were not SEC-registered.

Some important caveats: the complaint is just that, a complaint, and the truth of the allegations must be proven; the complaint may have serious defects in terms of whether the various claims are barred by the statute of limitations; the claims are made on behalf of the company in bankruptcy, and I do not comment on whether the company itself can sustain this law suit and recover damages.

Notwithstanding, there are strong cautionary lessons which can be derived from reviewing this complaint:

First: If the method of raising capital is illegal by reason of non-registration of finders, then a company may be responsible to rescind all these transactions (give all the money back to the investors).

Second: When such a claim, which may lead to multi-million dollar rescission, is raised, it destroys a company’s financial statement, feeds an SEC investigation, eliminates the ability to raise additional funds, and not surprisingly contributes to bankruptcy and total failure.

Third: The board of directors has some duty to monitor the legality of financings.

Fourth: Outside counsel has some duty to advise the board if it believes (as alleged here) that a method of raising capital is illegal.

Next: Members of an “advisory board” are also named in the law suit, and are alleged to have fiduciary duties of care and good faith. Corporate counsel often suggest establishing advisory boards in part because they are not “fiduciary.” Although the facts alleged here are egregious, the complaint calls into question the nature of the fiduciary duty owed by advisory boards (as opposed to statutory boards of directors).

Lastly: When a company goes bankrupt, the lawyers for the company in bankruptcy often look around for breaches of duty by officers, directors, advisors, lawyers, and anyone else, which breach of duty may give rise to monetary liability to the company and thus funding to the bankruptcy estate. Thus the failure in bankruptcy of a company is not the end-point of risk for people who have served the company illegally, negligently or in breach of fiduciary duty.

The complaint, although long and “speaking,” is interesting and articulate. It can be accessed in the records of the United States District Court for the Eastern District in Civil Action 14-cv-4427.

SEC Over-regulation?


At the National Association of Corporate Directors-New England breakfast on Tuesday, one guest had the temerity to suggest to the Director of SEC’s Boston Office, and to Secretary of the Commonwealth Bill Galvin (who controls the State’s Securities Division), that the government was over-reaching in its regulation of financial institutions. Much of the corporate crowd mumbled in agreement; not surprisingly, the regulators did not.

Paul Levenson has been head of the SEC Boston office since October. His list of hot regulatory topics: large-scale pyramid schemes (something not normally within the SEC bailiwick); constant pressure on public issuers to hit earning targets, resulting in liberal accounting; migration of broker/dealers into registered investment advisory functions, giving people trained in sales a fiduciary obligation which they may not be attuned to filling.

The latter point is interesting; much litigation by regulators against broker/dealers is aimed at pointing out that they already are fulfilling a fiduciary agency role with respect to customers.

Secretary Galvin focused on consumer protection; most of his cases bubble up from citizen complaints. His key areas are pyramid schemes, insider trading, and an anticipated rush of claims based upon recent SEC liberalization of the rules for private placements (new SEC Rule 506(c) permits public advertising of formerly “private” security sales to sophisticated purchasers).

There were a couple of takeaways for boards of directors:

  • Cyber security is not a matter of “whether” your company will be hacked, but what your response mechanisms are. The importance of a board making sure that cyber security systems are in place varies with the company; if you are selling bumpers for automobiles you are less sensitive than if you possess consumer charge card data.
  • Are banks too big and complex to actually regulate (a question from the audience based upon the billons of dollars banks already have paid in settling SEC claims)? Levenson was unremitting in this regard. For directors, you must understand that security law breaches derive from actions of your employees. Take a look at your corporate organizational chart. Can you obtain a confident feeling that high ethical standards can be policed through the organization as currently structured? Is your organizational chart so complex and over-lapping that there is no way you can conceive of a workable compliance program?

Finally the SEC, since the 2010 Dodd-Frank Act, has been relying more heavily on adjudicating securities law violations through administrative law judges appointed by the SEC itself. This avoids the troublesome task of actually going to court and having a trial where you have to convince the jury of someone else’s guilt. Levenson’s explanation: going to a jury is a waste of time and money, these are sophisticated issues which sophisticated administrative law judges can resolve more efficaciously. This trend is therefore liable to continue. Trial by jury does not seem to be high on the SEC hit parade.