Tuesday, May 24, 2016
Some time ago, I wrote the post Better Teaching Idea: Try to Notice When the Wind Is at Your Back. That post emerged from some observations while running, and today's post has the same origin.
This month I have been trying to up my miles again for no particular reason. I don't run for races. I run to run. And to feel like I am at least doing something to stay in some semblance of good shape (it's not really working). I now run 4 miles most days. Maybe a little more or less, but that's the norm this month. The past two days, I ran from my house, which is at the top of a hill. It is more of a mountain when I am running up it. (I promise, I am getting somewhere with this.)
I often go down to the rail trail along the river, which is a mostly flat, pretty place to run. The last two days, I have been running from my house. This means that if I want to get any distance in, I need to go down the mountain. And, of course, it means I need to get back to the top. Now, I could stay at the top. It's relatively flat on our street, and I can run a quarter of a mile down and back and stay at the top of the mountain. That's a lot of down and backs to get in four miles. No thanks. It's easier, but not much fun. (Note: you can follow along my running escapades on Twitter @jfershee and Nike+.)
My usual route from my house takes my down the mountain, then back up the mountain, where I turn around and retrace my steps. That means I am running up the steepest part of the run at mile 3.5. It's not always my favorite part of the run, even if it is my most triumphant. As I was slogging my way back up the mountain, my mind wandered and I caught myself thinking again, "It would have been a lot easier to just stay at the top." And it is. It's true in running, and it's true in most everything else we do.
It doesn't matter how you get to the top. Once you're there, it's easier to stay there than it was to get there. It may take a lot of work to get to the top. For most people, it does. But someone can just take you to the top, too. Once you're there, it's easier to stay there. And once you leave, it's hard to get back up.
Knowing all of this is important. And it is important to remember that not everyone has the same amount to climb to get to the top of whatever it is they are climbing. I did not come from money, but I had everything I needed. I am a straight, white male. The data show that starts you ahead of the game. I went to good public schools. I went to college. And law school. This required a lot of work to move ahead, but the opportunity was there for me in a way it isn't for many.
It's easy to start thinking that everyone is starting from the same point. And it's a lot easier to notice the people who are ahead of you on the way up. It's not that often that we look back, which can skew our perspective in unproductive ways.
As teachers, it's important to recognize that we can be part of helping our students move up their mountain. And they may not be starting from the same place we were. They may have further to go. Some may have less. It's our job to help them get where they want go. As a corollary, it's also important to remember that just because they might have farther to go, it's not our job to limit the mountains they can climb. To the contrary, it's our job to help them see that the sky truly is the limit.
That's my take away for the day: as hard as it is to keep climbing to the top, don't ever think you're doing it alone. Appreciate who helped you. Keep slogging. And when you get to the top, don't forget to see if you can help someone else up.
Monday, May 23, 2016
Well, given that I just spent several hours constructing a somewhat lengthy post that I apparently lost (aargh!), I will keep this relatively short.
This summer, I am working on a benefit corporation project for the Annual Adolf A. Berle Symposium on Corporation, Law and Society (Berle VIII) to be held in Seattle next month. In that connection, I have been thinking about litigation risk in public benefit corporations, which has led me to consider the specific litigation risks incident to mergers and acquisitions ("M&A"). I find myself wondering whether anyone has yet done a benefit corporation M&A transaction and, if so, whether a checklist might have been created for the transaction that I could look at. I am especially interested in understanding the board decision-making aspects of a benefit corporation M&A transaction. (Haskell, maybe you know of something on this . . . ?)
Preliminarily, I note that fairness opinions should not carry as much weight in the benefit corporation M&A approval context, since they only speak about fairness "from a financial point of view." Benefit corporation boards of directors must consider not only the pecuniary interests of shareholders in managing the firm, but also the firm's articulated public benefit or benefits (which is/are set forth in its charter). Will legal counsel pick up the slack and render an opinion that the board's consideration of the public benefit(s) complies with law? What diligence would be required to give that opinion? I assume in the absence of interpretive decisional law, any opinion of that kind would have to be qualified. I also assume that legal counsel will not readily volunteer to give this kind of opinion.
However, even in the absence of an opinion, legal counsel will have to offer advice on the matter, since the board of a benefit corporation has the legal obligation to manage the firm consistent with its public benefit(s) in any case. Moreover, M&A agreements typically include representations (on transactional consents, approvals, and governance/legal compliance) affirming that the requisite consents and approvals for the transaction have been obtained and that the agreement and consummation of the transactions contemplated by it do not violate the firm's charter or applicable law. Legal counsel will be responsible for counseling the client on these contractual provisions.
At first blush, the embedded issues strike me as somewhat complex and fact-dependent. Important facts in this context include the precise language of the applicable statutory requirements, the nature of the firm's public benefit or benefits, the type of M&A transaction at issue and the structure of the transaction (including which entity survives in a merger), and the identity of the other party or parties to the transaction (especially whether, e.g., a merger partner is organized as a public benefit corporation or another form of entity). As I continue to ponder these and related matters in the benefit corporation M&A setting, I invite your comments on any of this--or on broader aspects of litigation risk in the public benefit corporation environment.
Sunday, May 22, 2016
Saturday, May 21, 2016
Last week, Chancellor Andre Bouchard dismissed the derivative complaint filed against Walmart concerning the WalMex bribery scandal, on the grounds of issue preclusion: Earlier, a federal court in Arkansas had dismissed identical claims filed by a different set of plaintiffs.
The reason that the Arkansas decision came so much earlier than the Delaware decision was, of course, that the Arkansas plaintiffs filed their complaint without first exercising their inspection rights under Section 220. The Delaware plaintiffs did exercise their rights, as Delaware has repeatedly counseled plaintiffs should do, and fought Walmart for years over it – taking a trip to the Delaware Supreme Court as a result.
Standing alone, then, this case stands for the proposition that Delaware has no way of enforcing its own guidance to plaintiffs that they seek books and records before filing a derivative claim.
But there’s hope – because this is exactly the kind of destructive competition among plaintiffs’ firms that forum selection bylaws were meant to address. Had such a bylaw been in place, all of the plaintiffs could have been shunted into a Delaware forum.
Unfortunately, no. Because defendants have the freedom to ignore a forum selection bylaw if their interests are served by dealing with a weaker set of plaintiffs in a foreign forum.
I’ve expressed concern about this issue before, and my fears came to fruition in Gordon Niedermayer, et al. v. Steven A. Kriegsman, et al. and CytRx Corp., C.A. No. 11800-VCMR, tr. ruling (Del. Ch. May 2, 2016). There, the company waived its forum selection bylaw just in time to choose which group of plaintiffs with which to settle. When the Delaware plaintiffs challenged the waiver, the court upheld it: though the court warned directors against forum selection “gamesmanship,” it found no such gamesmanship here.
Though I'm not expressing an opinion on the particular ruling in CytRx, the situation stands as a warning of how Delaware procedural law - which is becoming as much a part of its corporate jurisprudence as its substantive standards - may be threatened. For example, in cases like In re Trulia Stockholder Litigation, 2016 WL 325008 (Del. Ch. Jan. 22, 2016), Delaware has declared a new war on “intergalactic releases” for meaningless disclosures in merger litigation – a move largely applauded by many commenters. But Trulia and cases like it will be reduced to rubble if plaintiffs can simply file in other jurisdictions, while defendants – seeking certainty that their deal is insulated from further challenge – waive forum selection bylaws as it suits them.
Indeed, according to a study by C. N. V. Krishnan, Steven Davidoff Solomon, & Randall S. Thomas, experienced defense counsel take advantage of the fact that doubtful merger agreements tend to result in challenges in multiple fora, reaching sweetheart settlements with the most amenable group of plaintiffs. In other words, the very weakness of the merger is what neuters the plaintiffs’ challenge: Lower premiums invite litigation by multiple firms, whom defendants can then play off each other.
If Delaware doesn’t come up with a way to manage this situation, the market will – and not to Delaware’s benefit.
Friday, May 20, 2016
As previously mentioned, last week I presented at the Center for Nonprofit Management's Bridge to Excellence Conference.
Below I share a few thoughts. Some of these thoughts I have shared before about other conferences, but I think they bear repeating.
- Value of Practitioner Conferences. As an academic, it is easy for me to stay mostly in the academic world. I do think, however, going to practitioner conferences can be quite useful. Maybe most important, these conferences can help you meet people who are in practice, especially in your local area. People I have met at practitioner conferences have served as guest speakers in my classes, provided individual advice to students, helped students find jobs, and provided ideas for blog posts and scholarship. Practitioner conferences can also be useful as they tend to address very practical problems and remind me that I want my scholarship to speak to not only academics, but also the bar, bench, and business people. Attending one practitioner conference can lead to more opportunities---other speaking engagements, board member openings, and consulting opportunities, and the like.
- Check Technology Before Speaking. I learned this early in my academic career, and I found the IT person well before my talk and made sure the technology worked well. We had no issues. In other sessions, however, there were a number of technology delays and hiccups. Especially, if you plan to use a video file, make sure that the file loads and that the sounds works beforehand. One of the speakers made the mistake of mocking PowerPoint before launching her Storify presentation, which would not load at all because of Internet issues. Thankfully, you did not let that slow her down and provided an engaging presentation. Checking technology beforehand is not always possible, and IT support is not always available, but it is a rare conference that doesn't have a technology issue at some point, so I think more planning is usually appropriate.
- Think-Pair-Share and Q&A. Think-Pair-Share is a well-known teaching technique that I often use in my classes. You pose a question. Allow some time for thought. Break the room into small groups to discuss. Then ask for volunteers to share thoughts. I tried this technique at the conference yesterday and thought it worked well. We did not have an incredible amount of time, so I did not allow much time for individual thought beforehand, but the audience seemed to enjoy the discussion and the thoughts shared were mostly quite useful. One benefit of this technique is that it gets the audience involved. Another benefit is that it allows the audience members to meet and talk with people they may not have had a chance to otherwise. I was able to leave a few minutes at the end of my presentation for Q&A, but not nearly as much as I would have liked. Personally, I often find the Q&A among the most valuable time, depending on the audience and the questions. I generally wish more speakers left more time for Q&A.
- Time Between Sessions. CNM provided significant time between sessions - always at least 20 minutes, I think. But, as always seems to happen at conferences, sessions run long, and that time gets squeezed. The networking time between sessions can be incredibly useful, and so I think it is important to get speakers to honor the time limitations and leave a good bit of time between sessions, knowing that there will be delays. Part of the responsibility of staying on track falls on the speaker. The conference organizers can help by starting on time and providing notice when time is short. CNM did quite a good job keeping things on track, but even so, I wished for a bit more time between sessions.
- Vendor "Passports" and Drawings. CNM included a vendor "passport" in our materials. You got an orange sticker for each vendor you spoke to and if you filled out the passport (which had blank boxes next to vendor names) you could be entered into a drawing for excellent prizes at the end of the day. This seemed to be a good way to get attendees to engage with the vendors (who are also usually conference sponsors), and it seemed to be a good way to keep the attendees at the conference until the end of the day.
- Speed Consulting. CNM had a speed consulting session where you could speak briefly with experts in finance, law, management, grant-writing, etc. I could see a session like this being used at academic conferences, where more senior faculty members would offer bits of advice to prospective professors or more junior professors. I imagine, however, that more in-depth questions would have to be scheduled for another time. It did seem to be a good time to get some very preliminary thoughts and meet experts.
- Mementos. Thoughts may vary on this, but I like conferences that provide attendees and/or speakers with unique takeaway items. Some may think too much money is wasted on these trinkets, and that can be the case if the item is quite generic, but I think mementos can be a nice touch. I keep a few such items from conferences on my office shelves and they are nice reminders of the conferences. At CNM's conference, they provided little elephants, because the theme was "elephants in the room." I especially liked this gift because both of my young children are crazy about elephants and it was nice to bring them something home from work. One of my table-mates gave me her elephant so I had one for each child.
Wednesday, May 18, 2016
Today, I received notice of a web seminar on corporate political activity to be hosted by one of my former firms, King & Spalding.
Interested readers can register for the free web seminar here.
More information, from the notice I received, is reproduced below.
Election 2016: What Every Corporate Counsel Must Know About Corporate Political Activity
Thursday, May 26, 2016, 12:30 PM – 1:30 PM ET
In this election year, corporations and their employees will be faced with historic opportunities to engage in the political arena. Deciding whether and how to do so, however, must be made carefully and based on a thorough understanding of the relevant law. In this presentation, King & Spalding experts will address this timely and important area of the law and provide the guidance that corporate counsel need when engaging in the political process.
California is the back on my short list for the state's inability to successfully differentiate between corporations and limited liability companies (LLCs). Last week, an "unpublished/noncitable" decision that was published on Westlaw provided a good example.
The opinion states:
A corporation—including a limited liability corporation—may be served by effecting service on its agent for service of process. (Code Civ. Proc., § 416.10, subd. (a); see also Corp.Code, § 17701.16, subd. (a) [allowing service on limited liability corporations under Code Civ. Proc., § 413.10 et seq.].)7
*12 One of the ways a limited liability corporation can be served is by substituted service. (1 Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2015) ¶ 4:172, p. 4–26.) This requires that a copy of the summons and complaint be left at the office of the person to be served (or, in some cases, at the mailing address of the person to be served), in the presence of a person who is apparently in charge, “and by thereafter mailing a copy of the summons and complaint by first-class mail, postage prepaid to the person to be served at the place where a copy of the summons and complaint were left.” (Code Civ. Proc., § 415.20, subd. (a).)
No, no, no. First, even in California, an LLC is a "limited liability company." It says so right in the act. Cal. Corp. Code § 17701.01 (West) ("This title may be cited as the California Revised Uniform Limited Liability Company Act.").
And, yet, I have to admit, if you note the cite to the LLC act, California lawmakers have made this less clear than in other states. Yes, that's right. In California, the LLC Act is part of the California Corporations Code. Cal. Corp. Code §§ 17701.16 - 17713.13 (West). For that matter, so are partnerships, under Title 2. Sigh.
Would it be so terrible if the Corporations Code were called what it is: the Business Entities Code? As currently structured, LLCs and partnerships are arguably types of corporations under California law, as the above cases suggests. One could argue the headings don't change the meaning or intent of the laws. See Cal. Corp. Code § 6 (West) ("Title, division, part, chapter, article, and section headings contained herein do not in any manner affect the scope, meaning, or intent of the provisions of this code."). The problem with that is that the code text says otherwise: "This act shall be known as the Corporations Code." Cal. Corp. Code § 1 (West).
To reinforce that notion, the Code Commission notes from the 2014 main volume explain:
This code was listed in the appendices of Code Commission reports showing code classification as the “Corporations, Partnerships, and Associations Code.” The 14 syllables of that title appear to make it impractical, but no shorter phrase indicative of the full subject-scope has been found. Therefore, resort has been had to the rhetorical device of synecdoche, and the entire code designated by the name of longest part.
I admit I had to look up synecdoche to be sure I was on the right track, but the term supports, I think, my point that California is treating LLCs and partnerships as corporations (or some subset thereof). See, for example, this explanation:
Synecdoche is a literary device in which a part of something represents the whole or it may use a whole to represent a part.
Synecdoche may also use larger groups to refer to smaller groups or vice versa. It may also call a thing by the name of the material it is made of or it may refer to a thing in a container or packing by the name of that container or packing.
Still, even if it were accurate to says LLCs and partnerships are "types" of corporations under the California code, one thing is still clear: an LLC is a limited liability company, which is, at a minimum, a specific type of "limited liability corporation."
I supposed I can see how "14 syllables" might be deemed "impractical," but not at the cost of imprecision. The "Business Entities" -- or even just "Entities" or "Associations" -- Code would seem like a better, more accurate, option.
Oh well. At least the court cited the part of the California code for service of an LLC. That much, they got right.
Tuesday, May 17, 2016
Breaking academic news:
Elsevier, a world-leading provider of scientific, technical and medical information products and services, announced today the acquisition of the Social Science Research Network (SSRN)....SSRN will be further developed alongside Mendeley, a London-based free reference manager and scholarly collaboration network owned by Elsevier....
Elsevier provides web-based, digital solutions - among themScienceDirect, Scopus, Elsevier Research Intelligence and ClinicalKey - and publishes over 2,500 journals, including The Lancet and Cell, and more than 33,000 book titles, including a number of iconic reference works. Elsevier is part of RELX Group, a world-leading provider of information and analytics for professional and business customers across industries. http://www.elsevier.com
What does this change mean for publishing authors and researchers? Content will remain free to post and download. Elsevier acquired Mendeley in 2013 creating controversy over Mendeley's continued "trustworthiness" as a part of a for-profit enterprise. Since the acquisition, Mendeley doubled its subscribers from 2.5 to 5 million. Elsevier's interest in SSRN, a profitable site for over 13 years, is primarily in its potential for generating user data and analytics. Integrating SSRN and Mendeley services is predicted to strengthen
"connections between SSRN author pages and Mendeley professional profiles, and workflow connections that allow Mendeley collaborative groups to submit papers for distribution and perhaps eventually review and publication. There will also be other opportunities to strengthen SSRN for its authors, with plans to link preprints on SSRN with Scopus, bringing analytics about article “performance” to SSRN authors, and to bring improved links between working papers and preprints with their eventual published versions."
Would it be too much to hope for a cosmetic overhaul of the website too?
The acquisition raises some interesting questions for those in academics whose scholarly productivity, national reputation and other outputs are increasingly measured with data points provided from sites like SSRN. Changes to the substance of the website may change how those metrics are generated and what they mean. The creation of new metrics available to authors (and schools) may provide for more reportable data points for our annual faculty reports with the questions remaining how useful are those metrics and what do they tell us about the value of ideas?
Monday, May 16, 2016
OK. I count 17 Form C filings (not including a few amended filings, two of which are noted below) on "Day 1" of U.S securities crowdfunding. Not a bad showing for the first day out, in my view.
First in line? Bloomery Investment Holdings, LLC with an offering of LLC interests on StartEngine Capital LLC. The firm filed its Form C a bit after 6:30 AM. Early risers! Eager beavers! (Maybe too eager, since an amendment was filed less than two hours later--apparently because the attendant Form C .pdf was rejected in the initial filing.) The firm's subsidiary is a moonshine-based liqueur producer. At this writing, $11,700 of the target threshold funding of $300,000 (1000 units at $300 per unit) has been committed--$288,300 to go! ($600 came in while I was typing this post.) And it looks like the base of operations is in West Virginia, Josh! Do you know these folks? (Slogan: "Take a Shot on Us.")
StarEngine also is hosting another crowdfunded offering filed today. The issuer on this offering, GameTree PBC (yes, Haskell, a public benefit corporation!), a social network for gamers based in Solana Beach, California. GameTree is selling common stock at $2 per share and has set a threshold funding target of $100,000. As of this writing, the firm had raised $8,360--$91,640 to go. The Form C filing for this offering also was amended. The reason? "Needed to re-upload campaign screen shots. First upload did not work." So, it seems there may be some glitches--or at least propensities for operator error.
This is pure spectator sport for me right now. I am interested to see that issuers are actually fling and that offerings are attracting some financing commitments. But some of what I am reading is pretty funny stuff. I don't have time to do a play-by-play on any of these filings (too busy a week this week). I must admit that I am especially amused by this "financial risk factor" in the GameTree materials:
Management has no experience managing companies with publicly traded securities.
The legal issues related to public securities are Byzantine and myriad. While it is our intention to follow the law as we understand it and seek the advice necessary to follow best practices, we recognize that mistakes with negative financial results to investors can occur. Crowdfunding is a new method for raising capital and laws are quickly changing and evolving. Changes in securities law may void and/or alter equity arrangements with shareholders.
I just had to quote that one here . . . . I nearly fell off my chair laughing. And here is the GameTree risk factor on benefit corporation status, so Haskell can have something to look at and consider:
GameTree is a public benefit corporation and thus may engage in activities in pursuit of its public benefit at the expense of financial gain.
Unlike traditional corporations in which operations and business goals are tied exclusively to the pursuit of profit, GameTree may also take actions in alignment with its stated public benefit at the expense of profit maximization. It is still a forprofit corporation in distinction from a charitable nonprofit which has a benefit as its sole purpose.
These disclosures are not what I would've drafted in either case. But neither disclosure is inaccurate, in my view. And each is relatively simple.
It will be interesting to continue to look at some of the SEC filings and related online disclosures as time passes. I hope to be able to devote additional time to that after I have finished grading exams and papers. In the mean time, I would enjoy reading your reactions here.
Sunday, May 15, 2016
Saturday, May 14, 2016
Money Monster, directed by Jodie Foster, is the latest addition to the pop cultural anti-finance zeitgeist. George Clooney plays – well, Jim Cramer, with Julia Roberts as his long-suffering director. Their usual television buffoonery is interrupted by a disgruntled investor who lost his life savings by following Clooney’s advice to invest in – well, Knight Capital. Now he insists on holding Clooney hostage at gunpoint until he can get an explanation for the trading “glitch” that caused his investment to go sour.
Warning: Below be spoilers, though I’ll try to keep them to a minimum (roughly movie review standards).
Friday, May 13, 2016
Yesterday, I presented on negotiation theory and stakeholder engagement at the Center for Nonprofit Management's Bridge to Excellence Conference.
At a session after mine, I was directed to a PowerPoint entitled What Every Board Member Should Know: A Guide for Tennessee Nonprofits. The PowerPoint was authored by the Tennessee Attorney General, the Tennessee Secretary of State, and the President of the Center for Nonprofit Management. The document is rather simple, but might be useful as a primer for nonprofit board members in Tennessee.
The conference attendees appeared to be a few hundred nonprofit practitioners and only about three or four professors, two of whom were among the presenters. After my morning presentation, I stuck around and listened to some of the other speakers and enjoyed an excellent lunch. I am a sucker for free food.
At the conference, I was struck by how nonprofit board members were discussed by some of the speakers and attendees. One question that was posed was - "how do you deal with a board member who is not pulling his or her weight as a fundraiser?" I guess I knew that nonprofit board members were chosen, at least in part, for their ability to give or raise money, but I never really saw fundraising as a major or primary role. The blunt phrase used was "give, get, or get off." Most of my thinking has been on for-profit board members and their role in governance, so this significant focus on another role was a bit unexpected.
Another question asked was - "how do you deal with a board member that is over-involved and thinks he or she is the executive director of the nonprofit?" Again, because of my focus on for-profit boards, this question hasn't been one that surfaced for me; I am usually thinking about how to get board members more involved. In fairness, I do recognize that officers are responsible for the day-to-day running of the organization, and I could see how a board member might overstep. Thankfully, the flip-side, the problem of the under-involved board member, was also discussed.
I left the conference wondering how effective nonprofit board members will be in governing when so much emphasis is put on their fundraising role, and when they are warned to not become over-involved in the operational side of the organization.
Board diversity was also a major topic - race and gender, and also age (there is evidently a push to get the next generation involved on nonprofit boards instead of just the "same old suspects") and skills and even personality type and political views. I didn't hear any discussion, outside of my session, on socio-economic diversity on boards, which is interesting given the communities that are often served by nonprofits, but maybe not surprising giving the role of fundraising. In my session, I did discuss the role of stakeholder boards, which I am writing on in the for-profit context, as a way to give voice to all major constituents, not just donors.
I may reflect further on this conference in future posts as it was certainly an interesting and useful day.
Thursday, May 12, 2016
For my second blog posting, I thought I would get into a bit of what I am working on in my research.
As Anne said in her intro, my work is interdisciplinary. The other discipline in which I work is moral philosophy and the branch of it that has to do with institutions, political philosophy. I believe that moral and political philosophy can help a great deal in our understanding of the law on banking, finance, and corporate governance, adding insights that often get overlooked in the dominant interdisciplinary approaches related to these areas of law. I have only a subsidiary interest in legal philosophy and to this end I would direct your attention to “Analytical Jurisprudence and the Concept of Commercial Law,” published in the Penn State Law Review in 2009, in which I developed a concept of a transnational commercial law on legal positivist grounds.
Some questions of interest to me are:
- What is the moral responsibility of individual agents in mitigating collective harm associated with the financial system? “Individual agent” refer to any person with moral capacity, from homeowner to senior bank manager. Once we get clear on how to allocate moral responsibility, we can then decide whether regulation by law is required or preferred or whether ethics alone is enough.
- What is a fair or just distribution of systemic financial risk? How shall we structure institutions to get this distribution right?
- Issues of egalitarian justice associated with debt and access to credit. Debt has a disproportionately greater adverse effect on the less well off, who tend to rely on it more to buy things necessary for a decent life in their society, such as housing, education, cars to get to work, health care (in the USA) etc.
See my article, “Luck, Justice and Systemic Financial Risk,” published in the Journal of Applied Philosophy. (email to request a copy). I am also working on another piece more for the law audience entitled “Debt in Just Societies”. The abstract follows:
A post-Great Recession consensus has emerged that persons, firms, banks, and governments have too much debt. The article deals with legal solutions to the dilemma that debt presents to societies: successful societies benefit from a substantial
Tuesday, May 10, 2016
I had a plan to write on something else today, but I got a note from Keith Bishop sharing his blog post, which he was right to think I would appreciated. In his post, Bishop discusses a California case:
The LLC May Well Be The Platypus Of Business Organizations
What happens to the attorney-client privilege when a corporation dissolves? Magistrate Judge Sallie Kim recently answered that question in Virtue Global Holdings Ltd. v. Rearden LLC, 2016 U.S. Dist. LEXIS 53076 (N.D. Cal. April 5, 2016):
When a corporation ceases to exist, “the corporate powers, rights and privileges of the corporation shall cease.” Cal. Corp. Code §1905(b). In that case, no entity holds the attorney-client privilege for Original MO2. City of Rialto, 492 F.Supp.2d at 1197 (“a dissolved corporation is not entitled to assert the attorney-client privilege”).
I am somewhat baffled by the ruling because the entity asserting the privilege in the case was not a corporation at all (Section 1905 is in the General Corporation Law). The entity attempting to claim the privilege was, according to the information provided in the opinion, indubitably a California limited liability company. Thus, the court should be citing the California Revised Uniform Limited Liability Company Act, not the General Corporation Law.
California, like many others states, seems to make the error relatively often.
Today, though, I will pick on the news. A Google News search of "limited liability corporation" for the past twenty-four hours provides a few such instances. (Note for new readers, an LLC is a "limited liability company," not corporation.)
I'll highlight two. According to one news outlet, the University of Illinois just extended a $2 million line of credit to an entity do research in Singapore.
To set up shop in another country, the university created a limited liability corporation, Singapore Research LLC. The LLC then established a private entity in Singapore which allows the center to compete legally for government grants.
Oops. Next, another news outlet reports:
A Nevada energy company said it wants to purchase an unfinished nuclear power plant from the Tennessee Valley Authority (TVA) and use the site in northeast Alabama to produce electricity with new technology.
Michael Dooley, managing partner of Phoenix Energy of Nevada, told the Associated Press his company wants to use the mothballed Bellefonte Nuclear Plant site as the base for a new, non-nuclear generation method.
. . .
Phoenix Energy of Nevada describes itself as a privately-held Nevada limited liability corporation, incorporated in October 2010, Kallanish Energy learns.
This time, though, the report is right. Phoenix Energy of Nevada, LLC (PENV) says on its web page it "is a Veteran owned closely and privately held viable early stage mid-market Nevada State Limited Liability Corporation (LLC) Small Business Company founded and incorporated in October 2010." Nope. It's an LLC.
I know I complain about this a lot, but there is value in getting it right. Reporters should get it right, and those who own the entity really should get it right. One of these days some court will find that an LLC didn't follow the corporate formalities required of a "limited liability corporation" and they won't even know to object.
I concede when one writes things like "company" and "corporation" a lot, a mistake may occur from time to time, especially when the distinction is not, on its face, crucial. My concern is less that people make mistakes. It's more that they don't know they are making one. That's where I come in.
On the plus side, I am about halfway through grading my Business Organizations exams, and not one person has called an LLC a corporation.
This is just to give everyone a "heads up" on a symposium being held this fall (Friday, October 21 and Saturday, October 22) to honor Lyman Johnson and David Millon. The symposium is being sponsored by the Washington & Lee Law Review (which will publish the papers presented), and I am thrilled to be among the invited speakers. I will have more news on the symposium and my paper for it as the date draws nearer. But I wanted everyone to know about this event so that folks could plan accordingly if they want to attend. I understand Lexington, Virginia is lovely in late October . . . . Actually, it's always been lovely when I have been up there! And the honorees and contributors are a stellar group (present company notwithstanding). I hope to see some of you there.
At the 2017 AALS annual meeting, January 3-7 in San Francisco, the AALS Sections on Agency, Partnerships LLCs, and Unincorporated Associations & Nonprofit and Philanthropy Law will hold a joint session on LLCs, New Charitable Forms, and the Rise of Philanthrocapitalism.
In December 2015, Facebook founder Mark Zuckerberg and his wife, Dr. Priscilla Chan, pledged their personal fortune—then valued at $45 billion—to the Chan-Zuckerberg Initiative (CZI), a philanthropic effort aimed at “advancing human potential and promoting equality.” But instead of organizing CZI using a traditional charitable structure, the couple organized CZI as a for-profit Delaware LLC. CZI is perhaps the most notable example, but not the only example, of Silicon Valley billionaires exploiting the LLC form to advance philanthropic efforts. But are LLCs and other for-profit business structures compatible with philanthropy? What are the tax, governance, and other policy implications of this new tool of philanthrocapitalism? What happens when LLCs, rather than traditional charitable forms, are used for “philanthropic” purposes?
From the heart of Silicon Valley, the AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations and Section on Nonprofit and Philanthropy Law will host a joint program tackling these timely issues. In addition to featuring invited speakers, we seek speakers (and papers) selected from this call.
Any full-time faculty of an AALS member or fee-paid school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1- or 2-page proposal by June 1, 2016. The Executive Committees of the Sections will review all submissions and select two papers by July 1, 2016. If selected, a very polished draft must be submitted by November 30, 2016. All submissions and inquiries should be directed to the Chairs of the Sections at the email addresses below:
University of Oregon School of Law
Garry W. Jenkins
Associate Dean for Academic Affairs
John C. Elam/Vorys Sater Professor of Law
Moritz College of Law,State University
Monday, May 9, 2016
[Please keep in mind as you read this post that my daughter is a Starbucks partner. Any pro-Starbucks bias in this post is unintended. But you should factor in my affiliation accordingly.]
Maybe it's just me, but the publicity around the recent suit against Starbucks for putting too much ice in their iced beverages made me think of Goldilocks and her reactions to that porridge, those chairs, and those beds. First it was McDonald's, where the coffee was too hot. Now it's Starbucks, where the coffee is too cold--or, more truthfully, is too watered down from frozen water . . . . (And apparently I missed a Starbucks suit earlier this year on under-filing lattes . . . .)
Different types of tort suits, I know. I always felt bad about the injury to the woman in the McDonald's case, although the fault issue was truly questionable. The recent Starbucks case just seems wrong in so many ways, however. This is a consumer dispute that is best addressed by other means. I admit to believing this most recent suit is actually an abuse of our court system.
How might a customer who is truly concerned about a substandard beverage attempt to remedy the wrong?
Thought Josephine Sandler Nelson's recent Oxford Business Law Blog post on Volkswagen might be of interest to our readers. It is reposted here with permission.
Fumigating the Criminal Bug: The Insulation of Volkswagen’s Middle Management
New headlines each day reveal wide-spread misconduct and large-scale cheating at top international companies: Volkswagen’s emissions-defeat devices installed on over eleven million cars trace back to a manager’s PowerPoint from as early as 2006. Mitsubishi admits that it has been cheating on emissions standards for the eK and Dayz model cars for the past 25 years—even after a similar scandal almost wiped out the company 15 years ago. Takata’s $70 million fine for covering up its exploding air bags in Honda, Ford, and other car brands could soon jump to $200 million if a current Department of Justice probe discovers additional infractions. The government has ordered Takata’s recall of the air bags to more than double: one out of every five cars on American roads may be affected. Now Daimler is conducting an internal investigation into potential irregularities in its exhaust compliance.
A recent case study of the 2015-16 Volkswagen (‘VW’) scandal pioneers a new way to look at these scandals by focusing on their common element: the growing insulation and entrenchment of middle management to coordinate such large-scale wrongdoing. “The Criminal Bug: Volkswagen’s Middle Management” describes how VW’s top management put pressure on the rest of the company below it to achieve results without inquiring into the methods that the agents would use to achieve those results. The willing blindness of top executives to the methods of the agents below them is conscious and calculated. Despite disclosure-based regulation’s move to strict-liability prosecutions, the record of prosecutorial failure at trial against top executives in both the U.S. and Germany demonstrates that assertions of plausible deniability succeed in protecting top executives from accountability for the pressure that they put on agents to commit wrongdoing.
Agents inside VW receive the message loud and clear that they are to cheat to achieve results. As even the chairman of the VW board has admitted about the company, “[t]here was a tolerance for breaking the rules”. And, contrary to VW’s assertion, no one believes that merely a “small group of engineers” is responsible for the misconduct. Only middle management at the company had the longevity and seniority to shepherd at least three different emissions-control defeat devices through engine re-designs over ten years, to hide those devices despite heavily documented software, and to coordinate even across corporate forms with an outside supplier of VW’s software and on-board computer.
The reason why illegal activity can be coordinated and grow at the level of middle management over all these years is rooted in the failure of the law to impose individual accountability on agents at this level of the corporation. Additional work by the same author on the way in which patterns of illegal behavior in the 2007-08 financial crisis re-occur in the 2015-16 settlements for manipulations of LIBOR, foreign currency exchange rates, and other parts of the financial markets indicates that middle management is further protected from accountability by regulators’ emphasis on disclosure-based enforcement. In addition, U.S. law has lost the ability to tie together the behavior of individuals within a corporation through conspiracy or other types of prosecutions.
Previous research has shown that the more prominent the firm is, and the higher the expectations for performance, the more likely the firm is to engage in illegal behavior. Now we understand more about the link between the calculated pressure that top executives put on their companies and the protection of middle management that supports the patterns of long-term, large-scale wrongdoing that inflict enormous damage on the public. It is not solely VW that needs to fumigate this criminal bug: the VW case study suggests that we need to re-think the insulation from individual liability for middle management in all types of corporations.
This post originally appeared on the Oxford Business Law Blog, May 5, 2016.
Sunday, May 8, 2016
Saturday, May 7, 2016
The latest example of dramatic institutional failure – that somehow was entirely accidental – comes to us from MetLife.
The story begins with variable annuities, a product that might be suitable if you’re trying to shelter your assets from a lawsuit, but otherwise one whose chief virtue lies in its capacity to serve as a litmus test for the honesty of your broker.
After the financial crisis, insurance companies decided that their outstanding variable annuities were too good for existing customers, and began offering very high commissions to any brokers who could persuade their clients to exchange an older one for a newer, less generous model.
Enter MetLife. From 2009 to 2014, MetLife brokers churned $3 billion worth of variable annuities, resulting in $152 million in dealer commissions. Customers were told that the newer annuity was less expensive or comparable, when in fact, 72% of the time, this was, shall we say, not so much true. For example, 30% of the replacement applications falsely stated that the new contract was less expensive than the old one. Applications also failed to disclose benefits and guarantees that the customer would forfeit in making the exchange, understated the value of existing benefits, and overstated the value of the benefits on the new contracts.
MetLife approved the exchange applications despite the errors. And as icing on the cake, sent false quarterly account statements that understated customer fees on their variable annuities.
For these sins, FINRA charged MetLife with “negligently misrepresent[ing] ... material facts” and failure to “reasonably supervise” its annuity replacement business. Without admitting or denying wrongdoing, MetLife consented to censure, a $20 million fine, and to pay damages to customers up to $5 million.
Now, forgive me for being perhaps a touch cynical, but it strikes me as a bit farfetched to imagine that a 5 year course of conduct that affected nearly 75% of a $3 billion business line represented merely “negligent” behavior - i.e., a mere failure to exercise due care - especially at a time when exchanges were being pushed precisely to persuade customers to shed the desirable features of older annuities.
Notably, these “mistakes” never resulted in customers being falsely told the new contract was worse than the old one; somehow, these happy accidents consistently worked to benefit MetLife at the customers’ expense. It’s hard not to suspect MetLife would have discovered the errors a lot more quickly if they were working in the other direction.
In recent years, the SEC and DOJ have both promised to put more teeth into investigations of corporate misconduct by pursuing individuals, avoiding “neither admit nor deny” settlements, and calling out intentional misbehavior for what it is. I guess FINRA hasn’t gotten the Yates Memo.