The Law and Other Anomalies

In the face of growing backlash against DEI efforts in general and questions about the value of corporate positioning to root out alleged systemic racism, yesterday the New England Chapter of National Association of Corporate Directors presented a program on how Boards of Directors can best continue the fight against racial bias.

It should be pointed out that the positioning of the program was an assumption that systemic racism is present in corporate America, and that Boards needed to sharpen their attack notwithstanding that current events seem to attack that assumption: there is perceived to be a growing resistance to “woke” thinking, a belief that instituting racial preferences in hiring and promotion by definition disadvantage non-minority populations, and a presumed impact of the recent Supreme Court decision striking down previous use of equality metrics as practiced by colleges and universities.  As to the last point, everyone agreed that such thinking will in fact invade the corporate board room.

Harvard Professor Robert Livingston set the stage by identifying the perceived problem and the rationales available to decide to fight against racism in the corporate setting: it is morally correct, it is good for business as diversity improves outcomes, it is important in hiring and retaining employees. It was noted that while individual polls that favor anti-racism efforts are premised often on the moral case, 80% of Fortune 500 companies explain their programs based on the business case.  Unanswered was an explicit examination of the reason that large corporations adopt a business rationale; one expects that such an approach insulates against shareholder resistance where maximizing profit is important and some shareholders think that the cure of preference is worse than the problem itself. It does seem clear that corporate America remains generally aligned in the camp that systemic racism in business exists and is a bad thing; thus, the issue really is, how best to implement its eradication.

With that premise as grounding, the most interesting argument for how best to execute involves the recognition that hiring from the best schools or hiring people with the best grades, rigorously applied, tends to perpetuate racial bias.  It was suggested the companies must recognize that students without the educational and economic advantages of majority populations will not get into better schools and will not test higher and will thus look to be less attractive hires or promotion candidates.    It is, therefore, best to identify a band of favorable candidates, taking into account all factors including the challenges faced and overcome by those from less advantaged backgrounds, and then apply conscious decision to hire widely but only within that expanded “band” of candidates.

Other key take-aways: it is essential for the board to consider willingness of CEOs to undertake this effort, and essential for the board to “have the CEO’s back” in support; perhaps, make racial equity part of the corporate mission.  Companies without strong CEO buy-in fail in the fight against racism within. CEOs and leadership teams need to understand that the effort is “not about you” and your own initial views, but rather in furtherance of corporate goals. This thinking needs to exist also in the Nominating and Governance Committee, which screens board members who ultimately hire the CEO and set corporate tone.

Companies also need to be aware also in dealing with supplier cohorts and business partners–are they in the fight?  And when professional teams pitch a corporation for services, diversity in the pitch team should be considered.

Finally, the panel noted that today there is some growing societal resistance to the effort to fight systemic racism, and also a cadre of companies which adopt a stand against racism but fail to execute on the ground.

:::::::::::::::::::::::::::::::

Aside from the moral perspective, do diverse teams result in better corporate performance?  This morning, as I write the above post, I note in one of my legal information services a report claiming improved corporate business performance in cases of at least gender diversity; post will follow if you are interested.

As part of the Administration’s expanding activity in anti-trust, which includes new proposed Guidance and changes in pre-merger filings under Hart-Scott-Rodino for larger transactions, the FTC for the first time is going to court to make anti-trust violation claims against companies set up by  Private Equity funds as vehicles for effecting roll-ups of competitors.

A step back–generally anti-trust claims arise by reason of a transaction involving two large-enough entities to trigger required disclosure to the Feds.  Since roll-ups typically involve a party to be acquired the size of which entity is small, below the threshold of required filings, the transaction is invisible to the regulators.  So the government now is claiming that, regardless of size of any given acquisition, the overall roll-up plan violates that anti-trust statute that protects against unfair methods of competition.  This approach is said to be directed today primarily against life science and health care market roll-ups.

In a recent unique lawsuit, the FTC attacked an effort to roll up anesthesiologists in parts of one State, Texas.  Why did the FTC attack this particular set of roll-up transactions to establish principles it can use in future cases?  The lawyer take-away is because the company’s own records revealed that the sole purpose was to keep prices high, not to create better patient service or create savings or economic benefits that could be passed on to patients or doctors.  One of my partners commented: “your statements and documents matter.”

In this case, company documents made clear that the goal was to increase prices. And the company doing the roll-up also made agreements with non-rolled-up providers in key areas that those providers would not under-price services below what the roll-up would charge.  The lawyer take-aways thus are: PE’s in their literature they use to raise capital or to attract would-be acquisition targets, must show benefits to be derived other than increased financial profit driven by de facto monopoly.

My view is that while in this particular case the PE’s company left a variety of sexy smoking guns lying around which no doubt tempted the FTC to claim unfair competition, the strict legal analysis is really very tight against the typical roll-up transactions.  The de facto result of roll-up operations is efficiency that will in fact drive profit, and every one of such deals will have financial projections that show profit from such efficiency; investors will see these projections and will be induced to fund the roll-up by reason of profit; if roll-up documentation show profits, even if there is also stated that this deal is intended to reduce costs for patients or fees for underpaid staff, the reality of profit through efficiency will be evident.

Thus I assume that the fundamental lesson here is that for the first time the government is moving against the model.  Deals not large enough singly to trigger anti-trust mandatory reporting now can be aggregated and thus attacked as unfair competition. Attention to the tone and content of all related disclosures and documents may be a practical escape hatch in some instances;  but, what is important here that the Fed is taking action that attacks one of today’s fundamental business practices.

The Federal Government requires virtually all businesses formed in the United States before this year-end, regardless of form of entity and regardless of line of enterprise, to register during 2024 and disclose all owners; if you form a new business after the first of the year, you will have 30 days to file.  Failure to do so can be criminal and in any event non-compliance carries a $500/day civil penalty.

The reason is to fight crime and money-laundering.  The fact that you are not a crook obviously does not protect you– the Feds know lots of things but do not know (obviously, since Congress needed to pass this law) if you are an honest operation.

I know this seems weird– unlikely — a bother.  You would be merely correct.  If I were a crook, I am already on the wrong side of the law so perhaps I am not going to register.  Or do I register, figuring that I am hidden within the estimated 32,000,000 initial filings?

Hopefully the below link will connect you to my firm’s initial alert regarding these filings; and you can sign up for our alerts and then you will be updated as needed.  Email me if you are having trouble or have any current questions.

https://www.duanemorris.com/alerts/you_cant_hide_corporate_transparency_act_dragnet_0923.html