The Global Economy/OPAL

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Introduction: This post is the first of a series (presently of indeterminate length) based upon information obtained from the recently concluded Opal Conference of family offices held in Newport, Rhode Island.  These posts will be denoted at the end of the title of each post with the word “/Opal.”  At this conference, presentations were made by experts in economics and government, advisers outside and within family offices, and persons suggesting (or directly offering) a variety of investment platforms.  All “Opal” posts are based upon my notes of the relevant panels and my personal reactions.  The data presented has not been verified by me.  Nothing in these posts constitutes investment or legal advice on the part of myself or my law firm.  My firm was one of many presenting sponsors of the Opal conference.  To the extent I may make reference to cannabis investment, be advised that one of my law partners chaired the panel on cannabis investment on behalf of our firm’s substantial cannabis practice group.  This introduction applies to all Opal posts but will not be repeated.

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Numerous panelists discussing numerous investment topics strongly concluded that investment in United States securities or opportunities was most prudent.

This in face of expressed fears that no one can tell where the economy in the US, or in the whole world is headed.  These fears came in two flavors: that the bull markets have gone on so very long and everyone knows that they are cyclical and at some point will fall either as a 10% correction or likely worse; or, there are identified fundamental signs that suggest that the markets must fall based on substantive business reasons. 

Specific citation to factoids indicating we are in for an adjustment or a recession some time soon (with no specific time horizon): trade wars; reduction in world trade; strengthening dollar harming exports; Chinese economic problems (aging demographics; debt; new American policy to consider China in the long term as a competitor and not an economy to be nurtured on humanitarian and US-profit grounds); European disunity (not limited to Brexit); rise of populist governments; European debt selling at a discount (“Europe is telling us something”); the gold markets (“Gold is telling us something”); return of quantitative easing on the part of central banks; central bank purchases of gold reserves; weaknesses in “other” markets; inability of other countries to generate unicorn giant companies with giant exits.

Not a lot of discussion of geo-political risk in specifics.  Not much emphasis on Brexit except as a symptom of national politicians needing to respond to local political and economic crises but being denied flexibility to do so by reason of “Brussels.”  Not much discussion of US national debt as a percentage of GDP.  No one mentioned robotics killing jobs or need for labor at all.

Specific citation to factoids indicating we are in excellent economic shape at least in the United States (you may note reasons directly contrary to some of the negative factoids): US technology and innovation; the American dream which will attract the best and the restless to the US over time to found innovation based on available investment capital and robust exit opportunities; the favorable US demographic future compared to other countries (a surprise item to me); lack of likelihood that tariffs will really be sustained at unacceptable levels and ability of the US to establish supply chains outside China (“Viet Nam is the next China;” less important supply chains for a service economy).

Most sobering thought, coming out of the ESG panel: an impassioned plea for companies and countries to address the nuclear weapons access situation: “If we don’t get this one right, nothing else matters.”

Who will lead the world?  The US and China (not a surprise) and very negative views of India (“70% of all cigarettes sold in India are by the single stick;” “the South may be fine but the North has majority of the population and no business”). 

Does seem to me that the dissing of India is a bit short-sighted.  India has vast populations and land mass and an edge into the English language and an entrepreneurial educated class.  It is a long life (assuming we survive the nuclear weapons issue) and it is hard to believe that India will not figure it out by planning or by accident or by dictatorship.

SEC Power Overseas

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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

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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

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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

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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.

Confetti

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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.

#42

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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

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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.

Hall of Fame

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The artwork on the top of the first page of this blogsite contains a courthouse and baseball players, but law generally gets the nod when I post; since I started this site years ago there are 324 lawyer posts and only 18 about baseball.  But today they announced those elected to Cooperstown and three of the players noted in the article have Boston Red Sox roots.  Not one of them made the cut, but for seemingly different reasons.

Closest to election was Curt Schilling, who won two World Series with the Sox and gained instant fame for pitching with blood oozing onto his sock.  I think the stocking is at Cooperstown though Schilling is not (yet).  He came closest with almost 70% of the vote (you need 75%) and had over 200 wins during 19 big-league years (although his win-loss ratio was not impressive).  Was it that Schilling was not good enough to be admitted, or that his politics were offensive, or that an odor lingers over his use of tens of millions of dollars of Rhode Island taxpayer money in his gaming company which fell bankrupt?

Roger Clemens, the best pitcher of his generation even before the alleged doping, received less than 60%, although that was an improvement.  Since he was superior when no one doped and then again in competition with many who doped, seems to me he was just better and should be admitted.  Certainly he was electric when on the Fenway mound, creating the kind of buzz that only superstars engender; reminded me of Robinson on the bases, of Musial at the plate, of Mantle just standing there (before his knees took him down).

Far far behind was Manny Ramirez, low 20%s.  All about the narcotics.  Manny was a great hitter although I never could buy into forgiving so many things because it was just “Manny being Manny.”  (Is it an excuse that Nero was just being Nero when Rome burned down?) To my mind, Manny should never be elected for a different reason which was he was a non-team player.  I recall being in the park one day when he was called off the bench against the Yankees when he was supposed to be rested and clearly did not want to hit.  He stood in the batters box, bat held loosely, stomach sort of slouched outward, and took three straight strikes down the middle at a critical point.  I know the idea of the athlete as hero is antiquated, it is just a job with a short time line, and some bums are making millions a year, but part of my baseball myth is that those I love have to at least appear to love the game, the team, the fans paying a buck-and-a-half for a decent seat at Fenway.  My baggage I know, but I am carrying it and will never support Manny for the HOF.  Not that anyone is asking me….

The first time I went through Cooperstown was in 1952 or 1953.  I was a kid and a nut Dodger fan.  It took only a half hour.  There were so few players then with plaques on the wall.  And I knew virtually all of them although I was a kid and many played in the 1880s and 1890s.  Baseball was still mythic then, and I could dream.  Today the Hall is still a bit stodgy and boring, and although I have lived through the careers of many many of the additions, it is to me a good deal less interesting.  Maybe it is just the years, not being a kid.  Maybe it was all explained away in the Ken Burns documentary, so dripping in nostalgia hat you had to laugh at yourself.  Maybe it’s the paychecks which seem — unseemly.  Although a good friend reminds me it is entertainment and filling seats and take a look at what singers and actors earn.

In all events, if you visit Cooperstown bring your sneakers.  It’s a long walk down those plaque-filled corridors these days.

Trending Proxy Issues

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What will be the major issues for public companies in the 2019 proxy season?  An expert panel convened by the National Association of Corporate Directors – New England on January 15 suggested these:  is your Board composition appropriately diverse, and what does diversity mean; is your audit committee competent to fulfill its obligations as they have evolved over time; has the annual shareholder selection of your auditing firm become too automatic and should this function be highlighted in the proxy statement; is the company overpaying its Board?

The panel, included a representative from the institutional advisory firm ISS.  ISS now will consider whether your board is sufficiently diverse, bearing in mind that statistics indicate that diverse boards perform better for shareholders.  ISS threatens adverse advice starting in 2020 if there is no diversity, but diversity is not defined.  Glass-Lewis (another advisory firm) may offer negative comment during 2019, depending upon the facts.  Diversity in the past has been focused primarily on gender diversity; a robust discussion of diversity in a proxy statement might well address other kinds of diversity, and also the question of the number of diverse members.  For example, is placing only one woman on the board effective?  The panel noted that SEC disclosure requirements concerning diversity are “lame” and that most of the diversity pressure comes from the investment community.

Have auditing committees become the “dumping ground” for all sorts of complex issues?  Members of the audit committee with financial expertise may not be the right people to deal with all sorts of risks, notwithstanding the New York Stock Exchange manual assigning risk evaluation to that committee (a requirement the panel says is typically ignored).  Why for example does cyber risk or reputational risk or political risk end up with the audit committee?  A suggestion was made that the proxy statement might provide more granular disclosure, indicating which committees are evaluating which types of risks, and how?

The panel then held an inconclusive discussion concerning auditor selection, suggesting that proxy disclosure might benefit from discussing the decisional process.  It was noted that large companies run both higher costs and certain risks in replacing established auditing firms, given complexity and the lack of familiarity with operations for a new firm.  Additionally, many large companies utilize a variety of accounting firms, one being the auditor but others being retained for tax or other advice, making replacement difficult (auditing firms cannot provide most other services to a client beyond the audit).  For example, if no change in auditors has been made, perhaps the proxy statement ought to explain why.  In candor, this issue to my mind is not ripe for proxy statement inclusion, given that the average public company proxy statement now is about 100 pages already.

The year 2018 saw an increase in negative shareholder votes on “say on pay.”  While the absolute number of “no” votes was still low (an increase from 2017 to 2018 from 34 to 53), the panel suggested that shareholder rejection rates might increase, particularly if the stock market continues to lose ground, causing investor satisfaction to decline.

Lastly, it was suggested that this is the year to completely readdress proxy Risk Factors, rather than simply repeating them.  With market developments in terms of valuation, tariffs, political risk, cyber risk, LIBOR, regional and global tensions, a complete redrafting of Risk Factors may be in order.