Ivy League Athletes Sue Colleges for Price Fixing?

I am not making this up.

It was reported two days ago that two Ivy League student athletes, a male and a female it seems, have sued all eight Ivy League schools, asserting a class action on behalf of more than 10,000 of their cohorts, claiming  –  wait for it — wait for it —claiming an agreement among those schools (via action of the Ivy League Council of Presidents)  to not grant Ivy Division 1 athletes an athletic scholarship or other incentives to attend, the injury to two distinct classes being that the cost of education increases and that compensation received by the athletes decreases.

Both named claimants, btw, seemingly did receive need-based financial help from their school (Brown, which is in Rhode Island while the litigation was filed in Connecticut where only Yale resides, for no doubt tactical reasons unknown to this writer).

To be fair, the Sherman Act (enacted I recall in 1890 when college students who might have raised this argument at that time would likely have been caned and then expelled) does prohibit price competition in relevant markets; and it is alleged that there are two markets here: smart kids who want to play Division 1 sports and athletic services provided by those students who are admitted.

To date there has been just one response from the Ivy League, which I find interesting but really not on point: it suggests that athletic scholarships might be taxable income to the students.

Given the intense scrutiny of university discrimination by our current US Supreme Court, it is interesting to speculate what they might do with this claim if it gets that far. Stay tuned (or not if you have bigger fish to fry, but I am going to follow this as it is just so darned interesting).

The Crisis in VC Financing

Everyone seems to know that VC financing in the current environment has dried up to a material extent.  The statistics demonstrating this fact, as set forth in the current issue of Economist magazine, are startling in confirmation, with the greatest impact on the largest deals; seems that seed capital is less impaired, and indeed robust in AI, albeit on tougher terms.

Yesterday’s Webinar presented by the Boston Bar Association, featuring VC lawyers in US and the West Coast (often somewhat disparate markets), explored the numerous practical ramifications of the current environment on actual deal terms for those companies lucky enough to get an actual proposal to invest.  Too numerous to list all, nonetheless below are some of the highlights (or for the company, lowlights).

Pre-money valuations are down of course, that comes with the territory by definition.  Larger equity deals may feature milestone release of funds based on progress of the company, redemption rights for investors, payment of cumulative dividends and even grant of security interests in assets for convertible notes (making them more like real notes), super-preferred returns for preferred classes (eg rather than having a distribution preference equal to cost, the preference before the common participates might be two times cost).

Deals also may provide for full-ratchet repricing of conversion rates to common rather than the typical (and statistically fairer) repricing over the total outstanding shares (the latter actually adjusts properly for the financial harm suffered by the earlier higher-priced preferred).

With convertible notes, aside from now looking like real notes, investors are insisting on receiving warrant coverage in greater amounts, particularly if milestones are not hit.

Investors in all deals are bargaining for greater corporate control: class votes on a broader list of corporate actions, more negative covenants, more board power.

When investors in prior rounds participate in a subsequent round which is a down round (eg the pre- money valuation is less), investors are sometimes insisting on recapping the entire company and repricing their prior investments to the lower valuation.  As a practical matter, also, prior investors are less likely today to waive the anti-dilution protections they obtained in their prior investment (which was often done because the company really needed new money or prior investments were imperiled).

Recapitalizations driven by investors, particularly those who already held an investment, raise fiduciary issues for directors, particularly nominees of the prior VCs and management holding common; recaps help new money investors and the price to be paid is paid by prior classes of stock.  (These fiduciary issues are not herein addressed.)  As to substantive deal terms, recaps often include addition of pay-to-play provisions, forced conversion of prior preferred to common, rights offerings, resetting preferred valuation of prior preferred.

Not addressed in the program was the prior practice in early rounds of requiring management holding large amounts of common to enter into forfeiture agreements whereby outstanding common shares are forfeited back to the company if the employee leaves or is terminated–  a somewhat draconian provision, but with persuasive investor logic behind it; and, incredulity expressed by founders in early rounds, particularly by founders who have not only sweat equity but also cash in the deal.  Empowered investors these days will be more likely to be  aggressive as to this practice.

One can speculate that seed and early stage companies may turn to more self-financing and to non-dilutive funding and joint venture models, in the face of the aggregate dilutive pressure these realities suggest.  Or– just wait it out, though the trough in VC financing in the early 2000s lasted, if I recall correctly, several years.

NLRP Restricts Contents of Certain Severance Agreements

The National Labor Relations Board ten days ago declared it an unfair labor practice, when offering a severance agreement to an employee, to include in that offer either a broad confidentiality provision or a broad non-disparagement agreement, which terms have been standard in such documents.

While the legal basis for this ruling is rooted in a provision of the National Labor Relations Act which ensures free communication among employees, and thus this ruling does not affect exempt employees (management and certain other senior-level workers), this radical departure from long-standing practice is further indication of the general approach of appointees of the current administration: to protect workers at all levels against pressure from employers.

(Reference is made to our post of late January which reported that the Federal Trade Commission declared general non-comps and non-hiring provisions upon hiring to be illegal (though employment lawyers do see some ability to craft limited restrictions based on specific facts, so that ruling is a story in progress).

In  moving away from Trump-era regulation, the NLRB is seeking to permit former employees to assist coworkers with workplace issues, terms of employment and disputes.  The ruling further makes clear that the mere offering of a noncompliant severance agreement is unlawful, even if rejected by the employee.

If I may be allowed an observation about lawyering: the changes in Federal administration these days sometimes create wide policy swings on the regulatory level (not just labor; look at anti-trust, SEC, etc.)  which whipsaw businesses and drive management to seek counsel from attorneys to readjust standard practices.  No doubt these swings in policy reflect the increased differences in policy held by the political parties, and the stridency with which adherence to those policies is sought both within and outside the government structures.  Current politics may well be described as the “Perpetual Full Employment of Lawyers Program.”

Chatbox as a Destroyer of Worlds?

Bing’s Chatbox has been much in the news and much reviled on several levels; the New York Times a few days ago did quite a number on its allegedly dangerous functionality.  To me, there was an eerie similarity to the first part of the story line in the movie Terminator I.

May I have the temerity to suggest that you follow this link to another of my blog sites to read an extended and irreverent commentary on the potentially imminent Chatbox War?  http://www.SMHonigAuthor.com


How to Improve Your Board of Directors

Add a social dimension to the interaction of board members; in your annual survey of board members, ask them to comment on the performance not only of themselves but also of other board members.  Reduce the size of your board to 7-9 members.  These were among the suggestions offered by an expert panel in today’s program presented by the New England Chapter of National Association of Corporate Directors.

Each of these take-aways is not obviously manifest.

Will not commenting on your fellow members create animosity? The goal is to make a better director and if done carefully a board can educate itself.  It was noted that a majority of  S&P 500 companies in fact gather this information at present.

If you target a small board, what do you do with your current larger board; and, do you have a problem staffing committees.  As to the first point, while term limits may not be the answer (why remove an older director who is contributing), that device might tend to add younger directors who are more tech-savvy and closer in age and viewpoint to customers.

As to social contact, this helps build the culture of the board and, while difficult  to achieve when meetings are remote, I have come to the view that doing business in person is highly desirable and long overdue; COVID is never going away entirely, and the lack of interpersonal contact in so many settings has a palpable social and economic toll in the long run.  Surely at the board level, so vital to the proper guidance of an enterprise, personal contact seems essential.

Another salient point has to do with the definition of a properly diligent board member: it is necessary to get better educated as part of the job, and not just show up at meetings.  The world is changing both in the tech sense and the social sense, and directors should be expected to read widely, utilize other methods of gaining information (example: pod casts, industry conferences), and learn all that there is to know about the company, including but not limited to visiting facilities and fully reading the board materials.

Although it is commonly thought that service on up to five boards can be acceptable, it was suggested that if a director is to be able to direct for what a company will look like five years in the future, rather than ten years in the past, the heightened educational curve should cause good directors to serve on fewer boards so they can do a better job in a fast-changing world.


FTC Strikes Again– Unfair Competition

A couple of weeks ago I posted about a new Federal Trade Commission initiative to toughen the anti-trust laws by proposing to ban all non-comps, even those previously executed.  Now the FTC proposes to begin enforcing the now-obscure Robinson Patman Act.  This Act, in 2007 considered for repeal, prohibits (in theory) unfair price advantages given by manufacturers or suppliers to larger customers.

Not all favorable  prices charged to larger customers were illegal under this Act; only those that tended to lessen competition; a vague judgmental standard if ever there was one.

I have been practicing law long enough to recall with clarity spending a lot of time counselling sellers about how they could not favor the big purchaser with lower pricing, or better payment or delivery terms, or better marketing and promotional support just because that purchaser was buying a zillion dollars of goods.  Were those actions “unfair”?  Often we would counsel that, if the larger purchaser “earned” better treatment, then better treatment from the seller was justified.  Did the purchaser warehouse and support the product?  Did the purchaser take over tasks generally performed by the seller, thus relieving the seller of cost so that a discount or benefit could be afforded to the purchaser in return?

By the way, this was a hard message to sell to the sellers; there was so much efficiency and profit in large orders, and it was so hard for the smaller purchaser to bring suit to enforce the Act, and so hard for the FTC to get interested enough to bring governmental action, that many a client listened to what I had to say, paid my fee and went ahead and continued favoring the big purchasers.

So today, an activist FTC is itself going to undertake the protection of the little guy, claiming that sheer quantity discounts are “unfair” price discrimination.  No doubt the government will start with the largest, most blatant cases, and perhaps those to which the consuming public will be most sensitive (the FTC has been looking hard at the soft drink industry).

It will be interesting to see, if the FTC is successful in preventing sheer quantify discounts, if in fact the retail price of some goods will increase (while small business profits will increase?).  Stay tuned as the FTC takes us down the rabbit hole…

Can the FTC Void All Employee Non-Comps?

The FTC on January 5 issued a stunning proposed rule that wipes out all employment noncomps for all employees and consultants, including those that comply with State laws and those that are currently in existence.

The theory is that non-comps are unfair competition.  Can the FTC do this?  Some observers think not but if the FTC in fact adopts its proposal, we will find out in court.

There are exceptions but precious few: franchisee noncomps are excluded, of course NDAs for trade secrets and technology are excluded, and employee non-solicitation agreements would survive.  And if you have a noncomp in connection with sale of a business in which you own at least 25%, your non-comp will be enforced (theory there: you are an owner selling good will and if you compete you impair that good will).  The cancellation of non-comps would apply to all workers, including senior executives in the C-suite.

This proposed rule will grab lots of headlines in the near term.  It is just not clear that the FTC has rule-making authority here, and further the business lobbies (and Republicans) will no doubt howl and with reason; this feels more like social policy engineering and less like regulating business competition.  Stay tuned.

SEC Heightens 10b5-1 Trading Programs

Officers and directors of public companies run a risk, in trading their company shares, that they will be liable to injured buyers or sellers of their shares if, shortly after the trade, the stock price moves and makes clear that the trading officer or director received an unusual economic advantage.  Since it is always possible that a trader will at a given moment know something more than the general public, how can officers and directors safely trade their company shares without risking accusations of insider information?

About two decades ago the SEC adopted Rule 10b5-1 which, in concept, allowed officers and directors to set up a plan by which at certain future dates their broker would buy or sell shares, or would buy or sell if certain price points were hit; the Rule required a written Plan that worked automatically at such later time so that there was little chance that the transaction reflected inside information; after all, the transaction was set a long time before (and was set up at a moment when the trader stated that they did not then have any insider information unknown to the general public).

Certain practices became common over time which “gamed” the system, the result no doubt of failure to define the permitted behavior properly and thus allowing corporate lawyers to, shall we say, stay within the letter if not the spirit of the law.  For the last year the SEC has been considering closing loopholes and the SEC last month issued final Rules doing just that, effective early 2023.

As with much SEC regulation, it is both technical and precise; as always, these posts are general and are not legal advice and should not be relied upon; if you are an officer or director, you have your own lawyer and you should consult there.  Generally speaking, aside from heightened disclosure about these plans, the major substantive changes are set forth below. I note that for once, all five SEC Commissioners, regardless of party, voted in favor.

  • Once a plan is set up, no trading can occur earlier than between 90 and 120 days (details control), making doubly sure no non-public information is being used by the trader
  • trading executives and directors must assert they are setting up the plan in good faith and not to circumvent regulation (this will assist regulators in penalizing those who later abuse the system)
  • Control use of multiple plans which can be maneuvered to in fact effect trades under the plan based on inside information (for example, under plans a proposed transaction can be cancelled and then a trade that is benefited by then-current information can be “automatically” effected under a different over-lapping plan)
  • limitations on single-trade plans.

All this becomes effective shortly. Officers and directors are well advised to consult promptly with their own counsel.


SEC Proposals May Impact Retail Stock Trades

Last month the SEC proposed a change in the manner in which your retail stock broker places a trade order for you, the first such amendment in two decades.  The changes are technical in nature, are subject to revision after a comment period running at least to next March 31, and half of them were not agreeable to the two-member Republican minority of SEC Commissioners, even though they have been posited as lowing execution costs for the retail investor.

To simplify a bit, today your order to your broker is typically sent to a small number of wholesalers; many wholesalers pay a fee to your broker in exchange for getting assigned the task of executing the order (think Robinhood, paid last year $235M in consideration of receiving the broker’s order flow).

The Democratic members saw ultimate savings for retail investors; Republican members thought this was too much tinkering with how stocks are sold, noting that the system is not fully tested n high-volume situations and imposes a new requirement on brokers to explain all this to their customers.

(I avoid here describing the benefit of having the order flow to the wholesalers, or why Democratic SEC  Chairman Gensler stated that “Zero commission doesn’t mean zero cost,” describing the payments to the brokers in exchange for order  flow as “economic rent” which brokers pass on to their retail accounts.)

All Commissioners did vote in favor of proposals to make execution disclosure more complete about how orders are executed, and by lowering the increments allowed for stock trading.



I will post new developments (I am researching now) that you should know concerning the SEC and the securities markets between now and year-end.  In the meanwhile, as we move into the Holiday Season, let me wish all my readers the very best of everything for this Season and for 2023 (and, indeed, well after that also!)