BUS 404 final
Proxy access?
"Proxy Access" provides an alternative route to a Proxy Contest Qualifying shareholders may request that director nominees of their choice be included in the Company's proxy statement and proxy card How? Securities and Exchange Commission ("SEC") Rule 14a-8 was amended to now allow shareholder proposals regarding the company's governing documents to make it easier for shareholders to nominate directors
Senator richard blumethal
"You have refused to acknowledge even an ethical obligation to have reported this violation of the FTC consent decree." Not happy with facebook
Result of a problematic reversal of the management pyramid
- CEO given the power to nominate board members - Selected and controlled the board - Controlled the information going to board - Many boards provided no oversight or direction at all
SEC Rule 14a-8 eligibility requirements?
- Only one proposal per meeting per shareholder - Must own at least $2,000 for at least 3 years of 1% of securities entitled to vote for at least one year - Proposal must be limited to 500 words
Trail courts holding
- Per Se Violation •Apple was the hub •Acting like a publisher
Publishers (Aka the big six)
-Hachette -HarperCollins -Macmillan -Penguin -Simon & Schuster All settled -- only apple went to trail
Ethical steps for analysis
1: Identify the ethical issue 2: Identify the stakeholders 3: Recognize a primary solution and alternative solutions Step 4: Recognize the consequences to solutions and use theroies to evaluate what is proper ethical decision
"plus" factors
A common motive Acts that are against the defendant's apparent individual economic self-interest Information sharing A high level of communication between companies
MFN clause
A contractual provision that requires one party to give the other party the best terms that it makes available to any competitor. The MFN clause in Apple's contract would require the publisher to offer any e-book in Apples' iBookstore for no more than what the same ebook was offered for elsewhere, like on Amazon
Rule of Reason = Balancing
A court will be weighing the pros and cons of the effect of the agreement How much the restraint promotes competition VS How much the restraint inhibits competition
Arguments supporting Dimon not being CEO and chairman
An independent chair of the Board will eliminate the structural conflict of interest The CEO is supposed to be the Chief Employee leading his or her organization to delivering the agenda and objective set by the board. The Chairman on the other hand is supposed to lead the board in setting the agenda, strategy and objectives of the corporation on behalf of us, the shareholders. Another key duty of the board with the chairman at its head is oversight. The board is supposed to monitor the performance of the CEO
U.S v. Apple Inc
Apple claimed it entered into independent vertical contracts with each publisher Proposed agency model contracts, rather than wholesale model contracts Initially, stated in writing, that if the publisher entered into the proposed contract, they would need to move all retailers to the agency model Then subsequently included a "Most Favored Nation" Clause in the contracts
Technology and the New Shareholder
Apps like Robin Hood have given more people the ability to purchase stock
Company's response
Company must file their reasons with the SEC stating that it intends to exclude a proposal and why The SEC usually issues a "no action" letter and typically address whether the company has a basis for its objection and sometimes point out how a defect could be cured.
Challenges
Board solicits proxies by inclusion into the corporation's notice of annual meeting - Cost borne by the corporation Shareholders can request list of shareholders, but is responsible mailing solicitation - Cost borne by the individual
Problematic reversal of the management pyramid
CEO Board of directions VP/Top officers Middle managers Rank & File
Is say on pay effective?
Case study: Cincinnati Bell -2011 66% of the shareholders voted against the resolution, disapproving the executive compensation - Lawsuit was filed by shareholders afterwards alleging that the company's board of directors had breached their fiduciary duty of loyalty when they approved large raises and bonuses for the top three executives in a year when the company's performance was poor "As part of this settlement, Cincinnati Bell will, among other things, reaffirm its pay for performance practice and provide for an annual discussion of its philosophy related to executive compensation."
Windowing
Content is available to a given distribution channel for a specified time window Publishers would withhold e-books until after hardcopies had been on sale
Monopolies
Creation of a Monopoly (or the attempt to create a monopoly) is prohibited under the Sherman Antitrust Act of 1890 -Section 1: prohibits restraints on trade -Section 2: forbids monopolization, attempts to create monopolies or conspiracies to do so.
Antitrust
Definition: against or opposing trusts or monopolies A "trust" is a group of companies organized to concentrate power and reduce or eliminate competition
US v Apple type of evidence
Direct Evidence -Proof of the actual misconduct -E.g. A recorded phone call between two competitors agreeing to fix a price or emails or text messages stating their plans Circumstantial Evidence (Indirect evidence you can draw an inference from) -Proof of parallel conduct by competitors -E.g. A sudden change to the same price by two companies at the same time or meetings and calls at the same time.
Facebooks break of ethical obligation
Facebook shared Facebook users' data with third party apps that were downloaded by the user's "friends" Once Facebook became aware of this, they did not take adequate steps to stop it and it continued Facebook did not inform the FTC that this had occurred.
Price fixing
Horizontal Restraint: When competitors agree on prices. Not price fixing when competitors engage in independent, parallel behavior. That is known as: "Conscious parallelism" ---when competitors follow parallel paths on things like pricing, but do not explicitly or implicitly agree on price.
Amazon
On March 19, lawyers from Hagens Berman Sobol Shapiro filed a class action lawsuit: -In the U.S. District Court (Seattle) - Alleges Amazon used a form of Most Favored Nation clause (Amazon called it a "fair pricing" provision) Horizontal price fixing with its third-party sellers?
Court's Application of Legal Standard
Horizontal - Per se Violation - Eliminate competition, undermine market Vertical - Rule of Reason - Sometimes harmful, sometimes beneficial to competition
Two Types of Restraints
Horizontal restraints of Trade - Occur when competitors conspire to increase profits by tactics like fix prices, restrict output, divide up territories. Vertical Restraints of Trade - Occur when two or more companies in a supply chain (like a manufacturer and a retailer of a product) conspire to do things like set prices or offer exclusive deals or requirement contracts
Differing Standards for Restraints on Trade
If Horizontal? A "Per Se Violation" standard applies- if conduct proven, it is determined to be a violation of the antitrust laws If Vertical? A "Rule of Reason" standard applies - if conduct proven, violation of antitrust law is determined on a case by case basis
Legal Standard Based on Market Share
If a company holds a 70% or greater percentage in market share, then the courts will apply a "presumption of monopoly" standard and say that this amount of market share supports the inference that the company does in fact hold a monopoly If a company holds 50% or less in market share, then the courts will apply a "presumption of no monopoly" standard and say that this amount of market share supports the inference that the company does not hold a monopoly -So most legal disputes occur when a company holds a 50-70% market share
History
In 1800s, large businesses dominated entire sections of the economy •Railroads •Sugar •Oil (Standard Oil Co.-John D. Rockefeller) •Steel (US Steel-Andrew Carnegie)
CEO vs chair of the board
In 2008, most fortune 500 companies were run by a CEO who was also chairperson of the board Dodd-frank Act requires corporations to disclose the reasons for choosing the same person for both positions
shareholder activism
Increased due to recent scandals 2001 enron bankruptcy 2008 financial crisis Financial crisis inquiry commission concluded that one significant factor in the scandals was the failure of corporate governance "Somnambulant boards of directors"
Public Corps
Inside directors - Senior executives of the corporation Outside directors - Not employees of the corp - Duty is to monitor the corporations activities, hire and replace corp executives and make major decisions
Purpose of a Corporation
It's been seem as to maximize shareholder value but recently this is being changed
Clayton Act 1914
Passed 3 weeks after FTC Act Created civil remedies for specific prohibited anti-competitive practices Focused on consumer protection (1) price discrimination; (2) exclusive dealing or requirement contracts; (3) mergers and acquisitions that substantially lessened competition; (4) interlocking directors (one person acting as a director in two or more competing corps)
Federal trade commission act
Passed in 1914 Created the Federal Trade Commission (FTC) Authorized to issue "cease and desist" orders against corporations engaged in anticompetitive behavior Targeted deceptive advertising and pricing
Ways shareholders can try to influence corporate governance by doing things like:
Proposing that the CEO not also be the Chairperson of the Board •Calling for a non-binding "say on pay" •Submitting a shareholder proposal that corporate governing docs be amended to allow a 3+3 proxy access
SEC Rule 14a-8
Qualifying shareholders may request that director nominees of their choice be included in the Company's proxy statement and proxy card
What was the one publisher that apple wanted to have in its iBookstore
Randomhouse, They were the only one that didn't join
Cue decided to test his agency model with
S & S, Macmillan, and Random House.
Regulatory response on robinhood
SEC previously fined Robinhood for making misleading statements about how it generates revenue. Robinhood tells its customers that trading was "commission free" But it made high Payments for Order Flow rates This meant Robinhood customers' orders were executed at prices that were higher than other brokers' prices. Yet, Robinhood claimed on its website that they beat competitors. The SEC found that their higher prices cost its customers $34.1 million even after taking into account the savings from not paying a commission. Lawsuits were filed against Robinhood based on the application of existing antitrust regulations.
Shareholder proposal
SEC rule 14a-8 A publicly traded company must include a shareholder proposal in its proxy materials unless the shareholder seeking the proposal does not meet the eligibility requirements (or if it falls within certain specified exceptions).
Other Dodd Frank Reforms
Say on Pay requirements Transparency re: Executive Comp vs. Revenue Why is executive comp going up when revenue goes down?
MFN applied
Sell an ebook for Steve Jobs Biography to Apple, set the price at $14.99 and give a 30% commission, but don't force Amazon to go to agency model and sell Amazon the same book using wholesale model, they set the price for $9.99, now publisher must sell the same book to Apple for $9.99 and only get 70% of $9.99 instead of $14.99.
Institutional investors
Sheer size of ownership has brought some changes In 2009, institutional investors (Pension funds, Mutual finds, etc) owned 73% of top 1000 corporations Have the resources to wage a proxy fight More practically, have influence without resorting to a proxy fight
Overview of Primary Antitrust Laws
Sherman Antitrust Act 1890 Section 1: forbids restraint of trade Section 2: forbids monopolization, attempts to create monopolies or conspiracies to do so. Created criminal penalties ($100M maximum fine per violation; Individuals potentially liable up to $1M and 10 years in jail) Allowed injunctive relief Wide support for new law (only 1 vote against it)
Shareholder rights
State law restricts shareholder control of management, other than through annual election of the board Committee for existing board nominates slate Shareholders can use proxies to propose slate Proxy is a written permission to vote a shareholders stock
Road to the changed rule
The SEC added rule 14a-11 that permitted the inclusion of shareholder nominees in a corporation's proxy statement. Business Roundtable v. SEC was filed challenging the new Rule arguing that the SEC had acted "arbitrarily and capriciously in adopting the rule in violation of the Administrative Procedure Act ("APA"). The DC Circuit Court of Appeal agreed and ruled that the SEC had failed to adequately consider the economic consequences of the rule and its effect on efficiency, competition and capital formation.
consent decree
The accused party, without admitting guilt, agrees to stop the alleged activity if the government drops the charges
Under the Per Se rule
The defendant bears the burden of proof with the focus on only the conduct: did they reach an agreement or plan to do something like fix prices or divide up territory? Viewed as plainly anticompetitive and the plaintiff need not prove an actual adverse effect on competition in the industry or market
Facebooks response to allegations
The firm Cambridge Analytica improperly gained access to the personal data of approximately 87 million Facebook users Facebook has said it first learned of the leak in 2015 and demanded Cambridge Analytica delete the data then, but later said it was a mistake to trust that the research firm had done so "We considered it a closed case. In retrospect that was clearly a mistake. We shouldn't have taken their word for it," Zuckerberg said
Under the Rule of Reason
The plaintiff bears the initial burden of proof with the focus being on: Did the defendants' conduct have an actual adverse effect on competition as a whole in the industry or market? •If the plaintiff proves a restraint of trade happened between non-competitors, like agreeing to only purchase from one particular vendor or agreeing to not sell a particular product except at a certain minimum price or agreeing to only sell one product if bundled with another, then the burden shifts to the defendants to present evidence showing the pro-competitive effects of their agreement: Did it actually promote competition? •In the defendant proves pro-competition effects, then the burden shifts back to the plaintiff to show the pro-competitive effects could be achieved in a less restrictive way: Was there a better way to do this?
MFN clause effect
The publishers had an economic incentive to switch Amazon to an agency contract Under Agency model, the publisher sets the price, the retailer (Apple/Amazon) sell it at that price and get a commission (70/30) If they have to let Apple sell for 9.99, they will make even less money. (Under the wholesale model, they at least got the wholesale price for all of the books Amazon sold.)
A corporate trust
The stockholders in a group of companies transfer their shares to a single set of trustees who control all of the companies. In exchange, the stockholders received certificates entitling them to a specified share of the consolidated earnings of the jointly managed companies. This is something John D. Rockefeller created to get around state laws that did not allow one corporation to by stock in another. He placed all stock from companies he owned in different states into a single legal structure called a "trust," and the board of that Trust made the decisions and controlled all of the companies across the country.
Say on Pay?
This term refers to the right of shareholders to have a direct vote regarding executive compensation Sections 951 of Dodd frank Requires publicly traded companies to seek a non-binding shareholder vote to approve executive comp at least every 3 years. 99.11% of S&P 500 companies have received majority shareholder support on comp. through August 2017 IF SHAREHOLDERS DONT AGREE ON COMP THE COMPANY STILL DOESN'T have to change
Section 2: Monopolies
To Be a Monopoly, must analyze the following: 1.What is the Product Market? 2.What is the Geographic Market? 3.What is the Company's Market Share? Total sales of company divided by the total sales in the market. 4.What is the Company's Intent? Has the company engaged in predatory or coercive conduct?
Management pyramid
Top to bottom - Board of directors - CEO - VP/Top officers - Middle managers - Rank & File
Proxy Contest
Under the SEC proxy solicitation rules, only the company director nominees can be included in the company's proxy statement and proxy card. A "proxy contest" is when a shareholder submits nominees by sending its own proxy statement and proxy card.
US v. Apple
United states district court - Trail court - Southern District of NY Plaintiff - Department of justice, antitrust division - 36 states were other plaintiffs Defendant - Apple
Tying Arrangements?
Vertical restraint: Bundling products so in order to get one, you have to buy the other. Example: If you wanted to buy a Microsoft Windows operating system, then you also had to use its Internet Explorer browser. Limited choice for consumers Kept competitors, like Firefox, out of the market
Exclusive Dealing?
Vertical restraint: I will sell you this product on the condition that you only buy supplies for that product from me. Exclusive dealing is when one party's willingness to deal with another is contingent upon that other party (1) dealing with it exclusively or (2) purchasing a large share of its requirements from it. Can be anticompetitive, like when such an arrangement allows one manufacturer to monopolize a supplier and thereby prevent other businesses from competing with it.
14a-8 amendement
When the SEC adopted 14a-11, it also adopted an amendment to Rule 14a-8 to prohibit companies from excluding from their proxy materials shareholder proposals that seek to establish procedures for the nomination of directors by shareholders. Prior to this amendment, Rule 14a-8 permitted companies to exclude such shareholder proposals from their proxy materials. The Business Roundtable case did not challenge that amendment, so the Court of Appeal decision had no affect on the Rule 14a-8 amendment. As of Fall of 2017, more than 60% of the S&P 500 had adopted a proxy access provision in their Bylaws.
Wholesale model vs. Agency Model
Wholesale: A publisher sells the book to a retailer, sets a "suggested retail price" but retailer decides ultimate price -Retailer keeps the profit or swallows the loss Agency: A publisher sets the retail price and the retailer sells the e-book at that price as its agent. -Retailer receives commissions
Did dodd frank bring change
Yes but Dimon is CEO and chairman of JPMogran chase In 2013, there was a shareholder movement to pressure the board to change this structure but dimon kept the chairman title
US Steel
•Andrew Carnegie •Used "Vertical Integration" technique to dominate steel industry •Purchased the companies that provided the materials and services he needed for his factories
The Analysis of the Evidence?
•Consider the "totality of the circumstances" •Not just one or two pieces of evidence, but all of the evidence taken together •Does all of the evidence establish that the defendants intended to reach an agreement that was designed to do something illegal, like fix prices? Was there a "meeting of the minds" between the defendants?
Facebook ethics
•Facebook was investigated by the Federal Trade Commission ("FTC") for allegedly deceiving consumers by telling them that they could keep their info on Facebook private and the repeatedly allowing people's info to be shared. Facebook agreed to a settlement in 2012. Documented in a Consent Decree:
Territorial Allocation
•Horizontal Restraint: Competitors dividing up regions •BMW dealers in Europe not selling to Swiss consumers
Exceptions to 14a-8
•Improper under state law •Violation of law •Violation of proxy rules •Personal grievance or special interest •Relevance (relates to operations that account for less than 5% of the company's total assets and for less than 5% of its net earnings) •Absence of authority or power of the company to implement it •Deals with Management's ordinary business ops •Relates to the election •Conflicts with company's proposal •Has been substantially implemented •Considered duplicative •Is a resubmission (a proposal made in the last 5 years) •Relates to a specific amount of cash or stock dividends
Standard Oil CO
•John D. Rockefeller •Organized the company in 1870 •Used many tactics to dominate industry, including "Horizontal Integration" - purchase competitors •First to create a "trust" of consolidated businesses •Rockefeller/Standard Oil controlled 94% of oil production in the US
What was the big deal about US v Apple
•Prices for e-books rose significantly in April 2010 •$9.99 vs $14.99 •E-books = $3 billion in 2012 •50% price increase would double the business
Applied to Big Tech Companies?
•Twitter, Facebook and YouTube use the fact they are so dominant in their market to ban, limit or suppress users. •Facebook deceived users about the privacy security in order to attract users away from competitors like MySpace.
