The Fed: Bullish for Now

At this morning’s breakfast presentation in Boston, Federal Reserve Bank of Boston’s President & CEO Eric Rosengren painted a cautiously optimistic US economic picture for the short-term, while identifying known risks which might derail his thinking.

Speaking under the auspices of the National Association of Corporate Directors – New England, Rosengren predicted 2019 economic growth of 2%, 2% of inflation and a reasonably strong domestic economy.  He noted substantive risks which should be considered, including trade with China, Brexit and weakness in European banks and foreign markets.  He also noted that while the stock market has recovered from the fourth quarter of 2018, the debt market and particularly the ten year treasury has not recovered, showing institutional concern and hedging of risk against an economic downturn.

On the positive side, there is no overheating of the economy, inflation rate is within expectation, and economic growth (while down from 3% last year) is reasonable.  A tight employment market also is a positive.

In New England, our education and tech sectors are robust, but an aging local population and public policy against retaining foreign graduate students could be a drag on the regional economy.

Asked about whether continued growth in the current Federal deficit was sustainable, Rosengren advised that you cannot continue to accelerate national debt without advancing productivity, in the face of rising social costs, particularly if those expenditures are not reinvested in the infrastructure (which in turn could drive future growth).

Finally, a reporter from Bloomberg gamely tried for a scoop in asking whether he foresaw a further boost in the Federal discount rate during the balance of the year.  Rosengren obviously but deftly avoided an answer, noting that his view of appropriate policy is to be “patient” to see whether growth continues as anticipated and whether some of the risks he had noted actually arose.  He did state that if the economy continued on its current pace, further fiscal tightening might be on the table.

Absent from his presentation and subsequent questions from the audience:  any mention of wealth disparity in the United States and its possible relationship to fiscal policy.

Impact Investing and M&A

Today’s mailbox brings a meandering article on the above subject from the Law360 news service.  Impact investing is the practice of making investments for profit which also foster some societal benefit, typically related to the target’s business.  Private Equity, obviously a big M&A acquiring cohort, is reported as having a growing interest in societal impact which, if accurate, is by definition admirable.

While the article predictably advises that deal structure thus should focus on management composition and compensation, and business planning, post-acquisition, the article also suggests that impact investing will affect deal diligence.  As to that proposition, there is only sparse discussion.  One commentator is cited as suggesting that representations “are likely going to get tailored to the mission and receive greater emphasis in due diligence.”  What changes in our M&A practice can we expect?  Will an acquirer, having gone so far as diligence, then want to delve into past practices in terms of societal impact?  What new is to be asked?  Awareness of disregard for society?  Negligent disregard?  Pursuit of maximum profit, regardless?

Let us assume an M&A target which manufactures widgets.  Standard current reps will ask about labor practices, payroll practices, environmental history, claims made for defective widgets, litigation and governmental actions relating everything.  Asking for an express representation concerning the company’s view of its social impact could be taken as vague, judgmental, not pro-deal.  An acquirer interested in making social impact should be looking to the future.

And assume for a moment that, in fact, the target has manufactured widgets harmful to users while dumping pollutants by action of an underpaid staff chosen based on discriminatory policies, all of which facts are elicited through diligence, and assume further that the diligence questions had been  tweaked with mission in mind to highlight such facts.  Might we want to consider how offended target management will feel about having its practices not just reported in normal course of diligence but also at having their noses rubbed in it by broad policy-related questions.

Seems to me that target past failure is, in the context of doing social good, great news for the acquirer.  The acquirer wants to do social good.  It has a prospective program to do so. It will do greater good by putting better practices in place at a company that until then was terrible on these mission metrics.  Acquirer gets its social return by definition.

And as to companies acquiring targets without a PE involvement, I have not seen sensitivity to social mission beyond that implicit in fixing the issues uncovered by normal due diligence; and, after the deal, the acquirer is in control and calling social benefit shots as it wishes.

Let me know if I am missing something here.

Bylaws Requiring Arbitration

Public companies, particularly those formed in Delaware, sometimes consider including bylaw  provisions requiring shareholder suits for violation of Federal Securities Laws to be brought by arbitration.  The SEC recently was asked if such a proposed provision, strangely presented for proxy statement inclusion through a shareholder proposal, could be excluded from the proxy statement by the company (this is a reversal of positions which one might expect on the issue).

Based on the possibility that such a proposal would violate the law of the State of incorporation (New Jersey), the SEC permitted the exclusion of the proposal from the proxy solicitation, noting that the SEC could not rule on the legality of the provision but on the facts could agree it would take no action if such provision was excluded.

SEC Chair Jay Clayton issued a statement this week that recommended the courts as the proper venue to determine legality and proxy exclusion, and that recommended the Congress address the ground-rules for such bylaw provisions, particularly if included in company bylaws during the IPO process.

Reminder re DE law: by statute it is legal for bylaws to require shareholder suits to be brought only in Delaware, it is generally illegal to shift costs to unsuccessful plaintiffs, and I don’t think there is statutory law addressing mandatory arbitration (please correct me if any of that is in error).

See also

SEC Power Overseas

A couple of weeks ago, a three-judge panel of the United States Circuit Court (for the non-lawyers: the highest Federal courts except for the Supreme Court) decided the case of SEC v Scoville, which in effect held that the SEC has enforcement powers against alleged securities frauds which are primarily extra-territorial.

Attorneys and those wedded to arcane analysis should revert to the case; the facts are complex and the decision arguably does not resolve the question of how far the arm of the SEC reaches.  And, the minority justice on the panel simply said that the Dodd-Frank Act just granted jurisdiction to the SEC, period, a conclusion not clear from statutory history.  Further, a 2010 SCOTUS decision, Morrison, was widely understood to require misconduct connected with US transactions; that understanding seemingly still applies to private lawsuits, but not necessarily to SEC enforcement.  This bifurcated result is defensible based on legal analysis, but perhaps anomalous if your step back and take a logical look.

What is the impact of this decision?  First, we have not heard from other Circuit Courts and they may disagree with Scoville, setting up an ultimate Supreme Court resolution of differing Circuit decisions.  Second, certainly the SEC, long seeking authority to chase off-shore frauds, at least for now will be more aggressive in selecting the cases they bring.

In the late 60s and early 70s I recall arguing to the First Circuit Court of Appeals that US-based brokerages were not liable for acts outside the United States, period, even if involving US securities and even involving US citizens. Claimants replied that protecting US investors when they were living or just traveling overseas, and keeping US-based firms generally ethical, were valid exercises of SEC power (and indeed also a basis for civil liability on behalf of injured investors, which was a viable argument pre-Morrison).  The law today still bars private rights of action in most offshore cases, but Scoville clarifies a rationale for SEC activity and, thus, at least some recourse for the allegedly defrauded.

Talking Diversity and the SEC

Diversity is a huge issue in constructing boards of directors, and never is it so focused as for reporting companies.

Extant SEC disclosure rules contained in Regulation S-K already required disclosure of diversity information, to the extent consent from a director or director candidate agrees, including race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background.  New guidance requires a statement as to HOW these characteristics were considered by the nominating committee or board.

Extant SEC disclosure also required a description of the process of nomination, whether it considers diversity and how.  New guidance requires an explanation of how it blended in consideration of other factors within scope of its diversity policy, including work history, military service or socio-economic characteristics.

Boards do discuss these issues, of course; one is compelled to if there is any sort of diversity program.  It is not clear to me what this new granularity has to add beyond eliciting an obvious response.  Perhaps the goal is to dig for detail to eliminate a suspected practice in some cases of tokenism?  Will we see disclosure other than a formulaic kind of recitation (“we aim for a board that is diverse, we needed a cyber expert, and  X turned out to be a widely recognized cyber expert and X also turned out to be a [pick a diverse category]!”).  Sharing the goals of diversity and preaching it in my own practice need not require government guidance on the obvious, and no board is going to say that they failed to look at all attributes of a director candidate.  Much SEC disclosure in response to ever-refined disclosure regimes results in a longer document but no increase in true qualitative data.

Today’s  Boston Business Journal carries an article about local company general counsel decrying lack of diversity in law firms while suffering lack of diversity on their own boards.  Aside from highlighting the intense topicality of board diversity, the article suggests an approach to disclosure: simple head count.  Should you care about process, or bottom line results.  As they say: “If you cannot measure it, you cannot achieve it.”

Stock Buybacks and the Wealth Gap

Most public observers note the wealth gap in the United States.  Liberal Democratic politicians for the past two years have suggested legislation to narrow it, and one theme is to prevent public corporations from buying back their own stock unless they have acted to close the wealth gap.

Bernie Sanders is re-introducing legislation that would ban buy-backs unless companies increase pay to a $15 minimum wage and provide paid sick-leave.  Similar controls would impact dividends.  The theory is that buy-backs enrich investors and executives, already wealthy enough.  A recent Times op-ed piece by Bernie and a California Rep was to the same effect.

Elizabeth Warren’s was more subtle, barring executive sale of shares for three years after a stock buy-back, although other provisions were more far-reaching (employees would name 40% of a public company board, a proposal so disruptive from a governance perspective as to be structurally unworkable even putting aside being a political non-starter.)

It is not my job here to engage in the ongoing un-civil political war we are now experiencing.  It does, however, strike me that the proposals of both Senators are very far from the mainstream of historical American social and political thought, as well as sure to create enormous resistance from business interests and business theorists.  To the extent one identifies and wishes to address wealth disparity, which indeed can be an existential risk to any government (at some point we cannot easily define for the US), a more limited practical approach in increments certainly seems more viable if you really want to see actionable legislation get passed and signed by someone living at 1600, Republican or Democrat.

Disclosure:  Bernie and I were classmates (class of ’59), and both writers for the James Madison High School Magazine, but at the time Bernie was writing about his track team and not about politics.  Same school attended by Chuck Schumer and Ruth Bader Ginsberg….

Rep Insurance in Acquisitions

A growing practice is for either a buyer or a seller of a company to insure the risk that there is a misstated warranty or representation in the acquisition documentation which triggers an obligation of the seller(s) to compensate the buyer for the damages arising from such misstatement.  This product offering has become more prevalent recently, as it facilitates reaching a deal rather than getting hung up on sorting out liability for unintentional misstatements.

As these policies have become more common, confusion has arisen about how efficacious they are.  This breaks into two inquiries: first, do they pay off or are the mechanics of proving a claim too arcane; second, just what is being insured against.

AIG, a major insurer in this space, has shared some experience about claims payment; seems almost 20% of all policies actually pay off with an average payment of about $4Millon; most claims arise in deals from $100M to $1B.  Most typical payments relate to misstated financials, tax obligations, legal compliance or contents of material contracts.

As to what is covered, that is really incredibly simple: these policies are widely varied and you have to read them carefully.  Law firms often say you need a lawyer to read them, and surely lawfirms can do this work and can pick up some difficult areas.  But there is no reason why any businesspeople cannot read the coverages and exclusions for themselves. For example,  all exclude active fraud and illegality, projections and matters in fact known to the insured party (typically but not always the buyer).

Areas where coverages vary, aside from amounts and premiums of course: the period of time in which a claim must be made; how large a claim must be before it is covered; whether the insurance pays first dollars of any claim or kicks in only once the seller’s indemnity obligations have been fully paid; whether particular areas are expressly excluded from insurance, such as particularized atypical representations.

As policy availability has moved down the food chain and become available for lower middle market deals, the market’s familiarity with this tool, beyond the PE fund acquirer, will no doubt increase.  These days, M&A counsel typically will at least alert clients to this deal tool on each side of a proposed transaction.


I again apologize for drifting away from law and business; I promise I will return to my core mission.  BUT I really wanted to share the view outside my office window right now.  The Patriots victory parade is wending its way through Boston and its nearest approach to my office has to be at least a half mile away; they go past the Commons, I am next to South Station.

Yet,outside my window, there is a constant stream of colored confetti.  Must be one heck of a parade for the wind to carry so much paper so far down the Hill and towards Southie.

And you could hardly drive to my office this morning, so many people were pouring out of South Station and assuming it was party time and that they could ignore traffic lights and cars.

That’s it; you can go back to work and so can I.


Forgive another post about baseball, particularly after my recent post noting how rarely I diverted from legal and business affairs.

Jackie Robinson was born 100 years ago today.  There is an entire section of today’s Times devoted to his life, and it is well worth reading as both baseball and social history  Although little will approach the emotional pull of Ken Burns’ treatment of Robinson in his epic baseball history, I confess that a tear (or more) came to my eyes in thumbing through the Times treatment.

I grew up in Brooklyn and my father took me to my first baseball game, at Ebbetts Field, to see Robinson play.  It is not possible to explain the role of the Dodgers in Brooklyn, nor the fervor of Dodger fans in favor of Robinson.  We did know we were making history.  It was not that history found out about us.  It was a knowing love of the man and the moment, and a proud moment for each of us.  We particularly hated those players who insulted or spiked Robinson, particularly hated those teams that were attacking #42.  Take that, St. Louis Cardinals!

Robinson is one of the few athletes to be relevant 62 years after his last game, and 47 years after his inexplicable early demise.  I still tell people what it was like in the stands, why Channel 9 invented split screen TV because viewers were more interested in seeing Robinson lead off first base than in watching the batter, how he stole home against the Yankees (yeah, the hated Yanks) in the World Series (of all places).  What I really can’t express to anyone is the sense of loss, to this day, felt about the man.

Memory is shrouded in the golden haze of childhood, sports is the early glue of a youngster defining who he is and what his tribe looks like, time promotes the mundane to the heroic, all this is true.  And it is easy to glorify someone whose social contribution is glorified by just about everyone else.  I don’t care the reason.  Every time I go to Fenway and see #42 on the facade where the retired numbers are displayed, my heart skips a beat.


ACLU Agenda

The Civil Liberties Union is a non-partisan organization defending civil rights guaranteed by the Constitution and our laws.  It’s political impact fairly can be said to be “liberal” as that phrase is understood in today’s politics.  ACLU brings numerous suits, almost always against governments; at today’s meeting at the Civil Liberties Union of Massachusetts it was noted that suits against the current Federal administration have numbered “about 200.”

Aside from litigating, ACLU has a program to establish civil rights through political action, all nonpartisan and all directed towards preservation of personal liberty. At today’s meeting, National Political Director Faiz Shakir outlined some of the actions ACLU has undertaken or is planning for 2019.  The key tool is ACLU volunteers, and the goal of ACLU is to mobilize and organize volunteers to achieve certain goals.

Those goals include: significant criminal law reform, some of which recently passed; increased voting through permitting ex-convicts to vote and easier registration of voters by various means; preserving rights of women to obtain abortions; suggesting or drafting legislation with pro-civil liberties themes; funding key state legislative initiatives through volunteers and advertising, including voting district gerrymandering; contacting potential presidential candidates now, at an early stage of their efforts, when they will be more open to forming opinions; and, encouraging legislation to limit the use of advanced technologies to surveil the general population by biometric technologies.

In the Massachusetts General Court (our legislature), many bills have been introduced this session worthy of study relating to protection from electronic surveillance, treatment for addiction, protection from forfeiture of property by the government for criminal connection unless a conviction has been obtained, rights of immigrants to attend court without ICE arrest, abortion protection, and a bill to permitting both registration and voting on election day itself.

One take-away: speakers suggested Massachusetts has a special obligation to limit  use of spying technologies on the general population, as so much of this technology is being developed by our local universities and is being deployed without statutory limits.