Tuesday, June 29, 2010

U.S. Supreme Court Unanimously Rules-- Sarbanes-Oxley Act “Remains Fully Operative as a Law”

The Supreme Courted voted unanimously to reject a challenge to the constitutionality of the Sarbanes-Oxley Act of 2002 (SOX). The case Free Enterprise Fund v. Public Company Accounting Oversight Board (PCAOB) raised the constitutional issues as to whether the PCAOB's structure complies with the Appointments Clause and the doctrine of separation of powers, in particular, whether SOX appropriately authorized the Securities and Exchange Commission (SEC) to appoint members of PCAOB rather than the President.

SOX was adopted by Congress to regulate the accounting industry as a result of the corporate scandals on Wall Street including the infamous Enron, WorldCom, Kmart, Global Crossing debacles, and others of their ilk, which exposed a wave of accounting chicanery used by certain publicly-traded companies to pump up their stock prices during the late-1990s through early-2000s bull market. In the aftermath of the accounting chicanery exposure, Congress sought to reform corporate America by creating, in essence, a federal corporate governance law. For centuries, corporate governance laws with the exception of securities laws, had been the exclusive purview of state legislators because corporations are creatures of state law not federal law. I recently published an article in the Encyclopedia of the U.S. Supreme Court, which analyzes the historical rulings of the Supreme Court regarding corporate law from 1880-2008. The article is available here.

Nonetheless, Congress overwhelming adopted SOX, which authorized the SEC to create an administrative entity that would regulate the accounting industry as it relates to publicly-traded companies, and the accuracy and truthfulness of financial disclosure to the general public. In response, the SEC created PCAOB to oversee the accounting methodology and disclosure of publicly-traded companies. Almost from its creation SOX has been vilified by many and beloved by many. Some commentator argued that SOX was too burdensome and expensive for publicly-traded multi-million dollars to adequately comply with its requirements. Still others argued that SOX did not go far enough regarding governance disclosure requirements, and as a result companies were not in compliance with the “spirit” of the law. In the words of Benjamin Franklin, it seemed as if SOX was the quintessential example of “laws too gentle are seldom obeyed, too severe seldom executed.”

Several legal commentators predicted that because SOX did not contain a severability clause, the Supreme Court would rule that SOX was unconstitutional. As such, Congress would be forced to re-enact SOX with amended provisions to address the severability and power to appointment concerns raised in Free Enterprise Fund v. PCAOB . In the alternative, Congress could simply return to the law, as it was before SOX was adopted. Professor Donna Nagy, C. Ben Dutton Professor of Law at the Indiana University Maurer School of Law, most recent scholarship on the PCAOB published in the PITTSBURGH LAW REVIEW entitled, "Is the PCAOB a 'Heavily Controlled Component' of the SEC?: An Essential Question in the Constitutional Controversy" raised interesting arguments regarding the PCAOB’s constitutionality. Professor Nagy’s article is available here. Additionally, Professor Nagy in collaboration with several law professors, submitted an amici brief to the Supreme Court in support of Free Enterprise Fund. The amici brief is available here. Despite legal commentators’ well argued positions, the Supreme Court disagreed. On Monday, the justices unanimously ruled that PCAOB has been legally established and appointed. There was a 5-to-4 split, but it concerned only the manner in which members of the PCAOB can be removed from office. As a result of the ruling, the SEC can remove PCAOB members at will, rather than being able to do so only if there were good cause that warranted removal. Chief Justice John G. Roberts Jr., writing the majority opinion stated that “the Sarbanes-Oxley Act remains ‘fully operative as a law’ with these tenure restrictions excised.”

With the issue settled, the SEC, under the direction of its chairwoman, Mary L. Schapiro, is expected to promptly act to fill three of the five seats on the PCAOB. SOX only authorized two of the five members could be certified public accountants — and both those jobs went to former SEC officials — Mr. Goelzer and Mr. Niemeier. Mr. Goelzer stated that the PCAOB was “pleased it would be able to carry out its important mission of overseeing public company audits in order to protect investors and promote the public interest.” Although, the PCAOB was established by Congress, it is not formally a federal government agency. As such it does not have to comply with federal pay schedules. PCAOB members are paid more than $500,000 a year. Not bad for an honest day’s work at the PCAOB.

Lydie Nadia Cabrera Pierre-Louis

Wednesday, June 23, 2010

More on BP Dividend Payments

Professor Dorothy Brown has recently posted an opinion piece on CNN.com in connection with British Petroleum's decision to suspend dividend payments to shareholders based on its continuing oil spill debacle in the Gulf of Mexico, as detailed in this blog space by Professor Joseph Grant. On CNN, Professor Brown argues that BP's shareholders, by virtue of their investment in the petroleum powerhouse, must recognize that a risk of ownership includes the possibility that the corporation will be called upon to pay for massive environmental accidents that it causes. Per Professor Brown:

"Shareholders who own stock in an oil company that drills offshore without adequate plans in place, should disaster strike, have made a risky investment indeed. Given the potentially catastrophic impact of the oil spill, how can BP really know how much all of the costs will be? And the safest course of action is to wait until the company gets a better handle on its potential liabilities, which seem to be growing daily.

Between the business owners in the Gulf with their very livelihoods being threatened, the workers who are unable to earn a living and the looming environmental cleanup costs (once the oil actually stops spilling into the ocean) on the one hand and BP's shareholders on the other hand, the choice is easy: The shareholders should wait for their dividends. After all, isn't that why their tax rates are so low?"

To view the entire story see "BP Right to Stop Paying Dividends."

Monday, June 14, 2010

World Summit Regarding Ayiti’s Future Held in the Dominican Republic

In early June, the most recent World Summit was held in Punta Cana, Dominican Republic to discuss Ayiti’s future given the catastrophic devastation caused by the 7.0 earthquake that hit the island-nation on January 12th. Dominican Republic President Leonel Fernandez Reyna's welcoming remarks at the Summit began with "in only 30 seconds, more than 300,000 people were injured; in just 30 seconds, more than one million people lost their homes; in just 30 seconds, Ayiti lost 120 percent of its GDP; in just 30 seconds thousands of children were made orphans, thousands lost their most close relatives, and thousands were left in anguish."

The theme of the World Summit was Solidarity Beyond the Crisis, and was hosted by Dominican Republic President Leonel Fernandez, in collaboration with Ayiti President Rene Preval, and Ayiti Prime Minister, Jean-Max Bellerive. Ayiti President Rene Preval stated that "Ayiti was already facing a very difficult situation before the earthquake. We shouldn't only heal the wounds caused by this earthquake. We must develop the economy, we must develop the agriculture, we must develop the education and health, create jobs and strengthen democratic institutions." To a large extent, the World Summit was successful in securing a sustainable commitment for Ayiti’s long-term recovery. The World Summit on Ayiti focused on four specific development central themes: (1) economic re-foundation, (2) territorial re-foundation, (3) social re-foundation; and (4) cultural and artistic recovery.

In late March, the United Nations hosted the International Donors Conference on Ayiti. The International Donors Conference garnered pledges of $5.3 billion for the next two years and $9.9b for the next three years and beyond. The World Summit on Ayiti sought to solidify those commitments and to create permanent ties of solidarity between the international community and Ayiti. U.S. Secretary of State Hillary Clinton stated that "we have more than one million people that are currently living in very precarious conditions, in camping tents." Secretary Clinton is part of the United Nation's Special Envoy to Ayiti. Secretary Clinton continued that "we cannot allow for people to die during this Hurricane Season because they inhabit temporary dwellings." It is estimated that more than 1.3 million people were left homeless amid predictions of a very intense hurricane season. Much of Ayiti's fragile infrastructure was destroyed by the earthquake, which left more than 200,000 people dead, and 300,000 people injured including two thousands amputees.

The Summit also sought to spearhead the beginning of Ayiti’s reconstruction work. The commitments of donor countries and organizations were reviewed, and a list of the projects containing the priority activities, and detailed progress reports were analyzed to effectively manage the reconstruction process. The priority activities identified in the action plan, which require almost immediate attention, and financial support focused on development of critical infrastructure including highways, potable water systems, electricity, housing, schools and universities. By the conclusion of the World Summit, the international community and multilateral organizations agreed to provide Ayiti with more than US $15 billion in aid during the next decade.

The World Summit included participants from Heads of State and Government, as well as representatives of multilateral organizations to evaluate the aid to Ayiti and arrange for the disbursement of economic resources for Ayiti’s recovery. In particular, former Jamaica Prime Minister, P.J. Patterson, Special Representative of the CARICOM Heads of Government to Ayiti, and Ambassador Colin Granderson, Assistant Secretary-General, Foreign and Community Relations, represented the Caribbean Community at the forum.

Lydie Nadia Cabrera Pierre-Louis

Sunday, June 13, 2010

The Politics Of BP's Dividend Payment: Should BP Pay A Dividend As The Gulf Of Mexico Oil Spill Rages On?

Several weeks ago I posted a piece on the BP oil spill in the Gulf of Mexico. At that time I was optimistic that the oil spill would be quickly resolved. We are now more than 50 days out and still no resolution. The environmental damage to the Gulf of Mexico, and specifically to Louisiana, Alabama, and Florida, is mounting each day.

According to BP's latest press release the company has spent $1.43 billion on the oil spill thus far. Estimates on the clean-up cost of the oil spill range from $3 to $40 billion over a period of several years. Last year BP had a cash flow of $30 billion. Undoubtedly, this will be a costly accident.

BP has proposed paying a quarterly (for the second-quarter) dividend of an estimated $2.4 billion. According to BP's annual report the company paid dividends of $10.5 billion last year.

Political pressure is mounting to suspend or halt BP's payment of dividends until the Gulf of Mexico oil spill is resolved or brought under control. BP's CEO Tony Hayward will likely face intense pressure and get push-back on the dividend from members of Congress when he testifies next Thursday on the oil spill.

Apparently, members of the BP Board of Directors are discussing a plan to set up an escrow fund to place the $2.4 billion dividend payment until the Gulf of Mexico oil spill is brought under control.

What do you think? Should BP be pressured to suspend or halt all dividend payments until the Gulf of Mexico oil spill is resolved? Alternatively, would the establishment of an escrow fund be a satisfactory resolution? Should BP look out for BP shareholders? Should environmental clean-up and remediation take top priority? The BP oil spill presents important questions on shareholder primacy, corporate responsibility, and the role of the corporation in our society. I look forward to hearing your thoughts.