Green Grass, Brown Hemp

The wires this week are all aflame with the news of passage of the new Farm Act, which was promptly signed by the President.  The bill legalizes hemp, a plant with substantial industrial use which has been banned in the US because of its chemical relationship to cannabis.  One cannot fail to note the business buzz about, and substantial investment in companies involved in, the cannabis business.

Hemp has very low content of THC, which is the stuff that gives weed its kick, and higher content of CBD, another derivative of marijuana which is non-hallucinogenic and which is removed from the controlled substance list by the Farm Bill.  The impact on the THC side of the business is the subject of current trade speculation, although since now-legal CBD can be derived from marijuana there will be at least some positive effect; query whether this is another step towards Federal acceptance of marijuana, thus ending the absurd stand-off between the States and the Feds.

A footnote from the trade press: looks like cannabis beer is on the horizon; various companies have formed cannabis partnerships or undertaken research.

Delaware Shareholder Suits

It is a generalization, but one I am willing to make, that Delaware courts tend to restrict the rights of shareholders and side with Delaware-formed corporations in allowing companies wide latitude in governing themselves and setting ground-rules of dispute resolution.  Thus, recently, Delaware courts decreed that a corporation can require shareholders to bring cases against directors and officers in Delaware only.

Separately, the US Supreme Court earlier this year declared that claims based on violations of Federal Securities Laws could be brought not only in Federal Courts but also in State Courts, reversing the prior rule that Federal issues should be resolved at the Federal level.

Delaware corporate lawyers, always quick to adjust corporate documentation to the benefit of management, thus began providing in corporate documentation that all stockholder claims against or involving a Delaware entity had to be brought in Delaware.  The recent Delaware Chancery Court case of Blue Apron et al  has voided such provisions; States can restrict the venue for claims relating to internal corporate matters to the courts of that State, but cannot restrict venue for claims based on violation of Federal Law, as such a violation does not relate to a State-controlled issue, specifically the internal governance of a Delaware entity, but rather to the violation of external laws or governmental rules.

Counsel to Delaware entities should periodically have by-laws reviewed to see if they are state of the art, as the art changes annually in Delaware; but Federal courts and courts in other States are going to be able to entertain SEC-type claims when brought to those courts at the discretion of stockholder litigants, and provisions to the contrary will not be able to alter that result.

Harvard, my Harvard

Seems Harvard is under attack by everyone these days.  One group has sued claiming bias in favor of white undergraduate applicants to the detriment of Asian students.  But Harvard Law School, including particularly the Harvard Law Review, is being sued on behalf of white males, claiming the membership on the prestigious Board of Editors and the selection of articles is biased in favor of “racial, gender and sexual orientation-based diversity.”

While I must confess that no one ever chased me to either join or write for the Review notwithstanding my patent male white-ness, I always understood that election to the Review was merit based and, hence, I was confident that my exclusion was wholly appropriate.  Further, it seems unclear who if anyone should be sued; the Review is a separate entity not owned or run by the University.  And while I guess I can understand why the same claims are being asserted against NYU and its law school also, the naming of US Secretary of Education Betsy DeVos seems attenuated.

Perhaps if I had in fact been named to Law Review I would have better understanding of the legal issues involved here.

But since the lawsuit names no one who has been or is about to be injured by whatever the policies of Review may be, I don’t understand how someone can bring a lawsuit in order to establish an idea or practice, as opposed to the seeking of a judicial determination of an actual case.  Indeed, lawyers for the University argued as much in Federal Court yesterday.

Not to slip into policy debate, particularly as my fact base is derivative and limited, but if the demographics of our country are changing then we would expect that the Review membership and the mix of submitting scholars would change also.  Further, one must suspect that if history is any guide, then the need for remedial action is to protect groups other than white males at Harvard Law School.

I must stop posting now and sit by my mailbox, awaiting my Law Review invitation.  It is about five decades late.  Mail service is so slow around the Holidays….

SEC Focus for 2019

The SEC today released their list of matters which they will be most focused upon in the coming year.

Matters relating to advisers are these: protection of retail investors, including seniors and those saving for retirement.  Clarity of disclosure of fees and expenses, supervision of representatives selling product, and brokers holding customer assets are specifically listed.  The focus on protecting seniors is not surprising, as many of the abuses noted in SEC actions this current year have involved duping retirees and near-retirees.

The SEC also says they will focus on cybersecurity (now so prevalent that it is expressed as a single word), particularly “proper configuration of network storage devices, information security governance, and policies and procedures related to retail trading information security.”

There is also focus on matters affecting the markets generally, monitoring market infrastructure, FINRA and money laundering.  Nothing directly related to reporting requirements for registered companies, something of a surprise.


Virtual Money and the SEC

It has been a while since my last post but end of year is pretty busy for attorneys.  I have been collecting items about which I want to share my views, however, and this is the first of a brief series of posts which caught my attention as matters of general interest.

Everyone reads almost daily that the SEC has shut down some virtual currency deal as involving the illegal sale of unregistered securities.  Yet Bitcoin and Ether are still around, which means they are not perceived to involve a security.  Why is that?  Both use block-chain and are distributed ledgers.  Both contemplate so-called smart contracts.  Both purport to be a currency but are highly volatile.

Let us go back to the seminal Supreme Court case defining a security, Howey, in the mid-40s.  A security is an investment utilized to finance an enterprise of some sort wherein the investor expects to make a profit from the efforts of others.  The ’33 Act has specific  examples, including stocks and notes, but Howey found a security existed in a management contract to run orange groves that the investor purchased.  (Another side-light: although the Act declares that notes are securities, court cases have decided that some notes are commercial instruments and not investments intended to be covered, for example the note you sign when you take out a house mortgage.)

Applying the common sense approach of what an investment actually is, in June the head of the SEC’s Division of Corporate Finance suggested that Ether fulfills a commercial function. There is no central “issuer” who takes the money and promises a return.  Control is decentralized.  Ether is a method of payment.

Enter the Commodity Futures Trading Commission, addressing futures contracts and options on Bitcoin and Ether.  This month the CFTC, in an effort better to understand Ether, posed the following questions:

How is ether being used?  How many transactions before we can be sure that transactions do not end up on an invalid block?  How do we know Ether can support smart contracts?  When will Ether move from  a “proof of work” standard where miners are rewarded for processing transactions to a “proof of stake” where control falls to users of the system as currency, or for contracting, or as an open ledger?  How is the network governed (is it liable to splinter apart due to disagreements)? Will there be negative impact if there is a derivative market for Ether?  What is status of cyber security?

Interestingly, the SEC is of the view that digital currency that once was marketing generally or to the public with speculative aspects might have been a security at the time but, by substantive use in real transactions, may morph out of being a security.  Implicit in this observation is the likely result that the SEC is not going backwards to punish what might once have been a violation; indeed, whom would they be punishing at this point?



Care and Feeding of Millennials

In dealing with Millennial employees, it seems that some of the old rules of compensation are not effective.  In a recent breakfast meeting of the New England Chapter of the National Association of Corporate Directors, directors serving on corporate compensation committees discussed the need to educate management on the care and feeding of young, mobile millennial employees.

Millennial employees are not “career-oriented” in the sense that they do not see themselves as lifetime or long term employees of the place in which they happen to be working.  This fact challenges fundamental corporate thinking about compensation: that we should reward employees with stock options or other incentives which will become valuable over a period of time if the enterprise in fact achieves its business goals.  Such thinking may well be appropriate for senior executives in charge of navigating the business to the promised land, but doesn’t particularly work for millennials who do not affirmatively expect to be around for ultimate corporate success.

How about paying top dollar?  Well, there is an immediate problem in some markets (think biotech in Cambridge) because the competition for talent is so intense that the cost of labor naturally escalates.  However, there is a range.  Is it desirable to pay at the top of the range?  The expert panel thought that being somewhere in the middle was a better economic strategy, as it would leave enough money on the table in order to provide millennials what they really want.

So here is a list of those things recommended for the attraction and retention of mobile millennials:

Robust paternal and maternal leave

  • Robust parental leave and other Work/Life balance accommodations
  • Obtain feedback on how meaningful the job feels (one company does this every two weeks!)
  • Learning programs for all employees
  • 360⁰ ratings of coworkers and bosses twice a year
  • 100% commitment to philanthropy
  • 100% commitment to corporate citizenship
  • Requirement of volunteerism
  • Celebrate all minorities, but do not limit activities just to the members of that group
  • Be specific about volunteer opportunities for schools, civic organizations
  • A clean workplace with plants, chairs, attention to ergonomics
  • Make the millennials’ lives easier: food onsite, concierge services, how can you help the millennial inside and beyond the office?

I have considered returning to earth as a millennial.  Meanwhile, I leave you with a question for corporate directors: does your Board monitor your Company’s strategic plan as it relates to Human Resources?


Tesla Pleads its Case

Regulation D, as I fully expect most readers know, is the typical (though not exclusive) way to raise business capital without SEC registration; it permits issuers to sell securities to wealthy investors with minimal formal disclosure requirements.  But lurking in Reg D is a “bad boy” disqualification for companies and people who do bad things.

Recently Tesla and Elon Musk pleaded to a $20M fine (each) for Elon’s loose talk about having lined up financing to go private.  Some elements of that settlement, restricting Elon’s actions and his agreement not to “do it again,” seemingly triggered the “bad boy” provisions that would eliminate Tesla’s use of Reg D.  Off to the SEC scurried the Tesla lawyers to ask for a waiver so Tesla could indeed use Reg D for private financing.

The SEC granted the waiver in a No Action Letter dated October 16, on condition that Elon indeed complied in the future with the SEC orders against him; this waiver is not in and of itself extra-ordinary, and indeed SEC regulations contemplate the possibility where there is showing of good cause, but the need for asking the SEC for No Action highlights the wide repercussions of loose talk by executives and board members.

Leaving the interesting question of why Reg D availability is so important to Tesla; assuming they would go to capital markets for financing, one would assume they would be looking for big dollars from big players, as to which other exemptions from registration would be available.  Maybe Musk will tell us some day  — or not.

Boards and Blockchains


What do boards have to know about blockchain to discharge their fiduciary obligation to oversee their companies?  On October 16, the National Association of Corporate Directors (New England) presented a program both explaining blockchain technology and addressing the function of boards.

Everyone knows the standard blockchain mantra:  blockchain is a database controlled by no intermediary, visible to all parties, protected by deep encryption, an unchangeable distributed ledger, with multiple copies stored across many servers.

We also have a growing series of “use cases” where the technology is utilized to record changes in stockholdings, process transactions in cryptocurrency, facilitate supply chains, handle proxies, and form a new kind of contract entered into without lawyers which can be automatically performed (computers can tell us when goods are delivered and release payment automatically).

The key  for boards is not to ask only technical questions but, also, questions concerning “governance” over the blockchain itself.  Who controls the algorithms and rules of that particular blockchain?  Since no central source controls the blockchain, but rather all the users are in a way owners of it, who can make changes in the blockchain that could imperil a company?  The panel recommends you ask the questions that directors asked when it was first proposed to place company data in the cloud.  What are the security parameters, what are the protections from people accessing the data, is the data backed up, who are the parties that set up the particular blockchain, what is the governance over that system?  To create trust without a middle man to provide that protective function (for example, when banks transfer money between each other, they trust the Fed system as the middle man), and since most rules changes will be controlled by a majority of users, questions should be asked with respect to the nature of the blockchain itself.

An IBM representative noted there is an IBM founders’ handbook discussing governance of blockchains, setting forth options in order to reach a consensus as to rules changes.

The key to hacking blockchain is your private encryption key, and boards also should determine who has access to that key, and whether multiple people are needed in order to access the blockchain.

Some companies are setting up their own “centers of blockchain excellence,” and boards were admonished not to place control of the company’s relationship with the blockchain in the hands of one single person.  The vulnerability of blockchain technology is not that someone can hack into it, but rather that somebody can steal your private key or access the end proceeds of a transaction once in the hands of the company, and after blockchain has done its work.

The NACD generated materials for attendees of the October 16 session, which suggest a further set of director questions:  how is your particular business likely to be impacted (see Jennifer Wolfe’s recent book Blockchain in the Boardroom), examine what competitors are doing, perhaps make minority investments in early and late stage startups in the space, build up internal employee knowledge, ask how blockchain fits into the company’s broad digital strategy, and decide whether you want to add tech-savvy C-level executives (or directors).

Additionally, it seems to me that directors need to assign blockchain responsibility specifically (is it for the audit committee, the risk committee, an ad hoc committee) and empower that group to gather information, command internal attention and have budget for needed technical advice.

The Red Sox Today

In a best-of-five series, the Sox and NY Yankees are tied one game apiece with two of the next three games played in Yankee Stadium, a park uniquely constructed to allow Yankee players to hit an inordinate number of home runs and thus obtain a “structural advantage.”  Today, Red Sox fans are in agony at the prospect that they will yield to their arch-rivals after winning 108 games (best in the Majors) and beating the Yankees in league standings by eight games.  And it may be that the Yankees, a formidable team with 100 wins itself, will prevail; they ain’t chopped liver and they have a couple of spectacular rookie players to augment their already-robust lineup.

What interests me is the vehemence of the Yankee friends I know.  (I admit this post is based on a tiny sample, in part because I don’t know many Yankee fans, but as to that small cohort my data is 100% accurate.

One “friend” showed up at my Boston office for lunch wearing a Yankee shirt.  I ask you: is this proper business attire anywhere, let alone in downtown Beantown?  Could he be reacting to the broom I gave him earlier in the season when Boston took four straight games from the Yanks?  I think rather it is just the Yankee habit of entitlement.  Having won so many Series in a prior century, they just get this super-aggressive mind-set.  Like the cartoon character of my youth, Crusader Rabbit, they will don their cape and fly through the air and proclaim to one and all that they will surely win, as it is in their DNA (the strands of which have been unfurled into the straight lines of the Pinstripe uniforms no doubt).

Then there is an old friend of mine, now in France, who texted me condolences when the Yanks won the second game.  From France!!  (I didn’t even know you could get the baseball scores over there.) Always slightly off center, this good dear friend, growing up a Yankees fan in Brooklyn during the great rivalries of the ’40s and ’50s, he now lives in (get this) Cincinnati (did I even spell the name of that backwater correctly?) but seems wholly invested in a Yankee victory without regard for the sensibilities of one of his closest friends, here in Boston.  Does he really have a horse in this race?  Well, perhaps the hind end of one.

Which brings me to why I care at all, seeing as how I grew up rooting for a team that no longer exists (you can take the team out of Brooklyn but that surely takes the Brooklyn out of the team), that Boston should beat the Yankees.  I grew up during the true “fan-bonding years” (aged 5-15) as an avid Dodger fan and thus a true Yankee hater.  I suffered through the years that the Yankees beat the Dodgers in the Series (1947, 1949, 1952, 1953) and those years when the Yankees took the Series even when the Dodgers failed to even compete in it.

I was so rabid that I even argued that Duke Snyder was a better center fielder than Mickey Mantle (sure they are both in the Hall, but Mantle in his prime was unbelievable and with all five tools).  (We all missed that the other NY center fielder, Willie Mays, proved in many ways better than both of them.)

So, I have no ill will for my friends the Yankee fans.  They are entitled.  It is only a game, fer Godzake.  I say, just let the better team win.

You know.  The team with 108 regular season victories.

Government in the Board Room

Recent news items: the SEC bars Elon Musk from board chairmanship for three years and fines each of Musk and Tesla $20M; California passes a law requiring public companies headquartered there to have at least one woman director, and in the future multiple women for larger boards.

It has been a long time since internal board governance became “news” but there is much imprecise thinking (to my mind) swirling around these news items.

First, as to Musk, the day his comments hit the news it was clear to SEC lawyers there was an issue.  He was hung out to dry based on established law, nothing new.  Commentary suggests that the fact that the board was static (mostly the same folks serving since the 2010 IPO) constitutes an argument for board renewal.  But any board, even long-serving in a company owned 22% by its founder, needs to institute control of the flow of news; board management 101.  This is the same problem the current Federal administration enjoys.  But in a public company, the SEC is there to enforce the need for accuracy and evidence.

As to California, the idea that you need one woman is in conflict with my understanding of the evidence, which is that one woman does not make much of a difference, you need multiple women to create an atmosphere where woman are active (and then the statistics show that performance improves).  Then also, it may well be that California is constitutionally not able to regulate management of an entity formed in another state (think Delaware for most public companies).  Corporate governance issues are driven by state of formation of an entity, not where it builds its shiny home office building.

The question of women on boards has triggered a broader discussion, however: the intrusion of government into the board room.  Today’s Boston Business Journal argues against Massachusetts following the California lead, even though only 19.2% of board members of the largest Massachusetts companies (public and private) are women.

It is interesting that there is resistance to government sticking their noses into board rooms, since nose-sticking is fundamental to the way in which US corporations operate.  Major examples: the SEC requires public companies to have independent key committees and in most cases an independent board majority; State statutes and courts impose substantial fiduciary duties on boards, sometimes by complex and arcane analysis of whether boards have properly authorized certain action involving risk of majority abuse of minority interests.  So governmental interference with the board room is pervasive, substantial, and well-established.  (I do not suggest disagreement with these “intrusions” but only note they are robust and firmly established.)

Since academic analysis demonstrates the superiority of gender-mixed board management, why the resistance to legislation in the gender/board discussion?  There is something different, as we have recently learned in the Federal setting, about issues perceived as gender-driven.  I do not dare take a dive into the basis for this difference or the appropriate way to address it as to matters of policy, except to say that the issue in the governance area should not be avoided by legislative bodies on the grounds that it constitutes inappropriate governmental impact on board governance; the train of governments messing with boards left the station, and at high speed, a very long time ago.