Tuesday, October 13, 2015

Respect Limited Liability Rules, Respect the Entity

Readers of this blog know how much I hate courts that call LLCs "corporations." (If you're a new reader, welcome. And now you know, too.)  I am also one who likes to remind people that entity choices come with both rights and obligations, as do choices about whether to have an entity at all. Recent events in Illinois touch on both of these issues. 

A recent news story from Chicago's NBC affiliate laments a recent court decision in Illinois that requires entities to have counsel if they are to make an appeal, even in the administrative process related to a parking ticket.  The story can be found here.  The short story is this: if one registers a vehicle in the name of a corporation, then the corporation must be represented by counsel to contest the ticket.  The reason for this determination comes from a non-parking related decision from 2014. 

In that decision, Stone Street Partners LLC v. City of Chicago Department of Administrative Hearings, the court determined that "the City’s administrative hearings, like judicial proceedings, involve the admission of evidence and examination and cross-examination of sworn witnesses–all of which clearly constitute the practice of law." 12 N.E.3d 691, at ¶ 15 (Ill. App. Ct. May 20, 2014). As such, the court held, the "representation of corporations at administrative hearings–particularly those which involve testimony from sworn witnesses, interpretation of laws and ordinances, and can result in the imposition of punitive fines–must be made by a licensed attorney at law." Id. at ¶ 16.

As the news story reports, the parking division has adopted this rationale. Thus, the owner of an entity, even a sole owner, cannot represent the entity in an administrative challenge (unless he or she is a licensed attorney).  The report notes that the parking tickets were "unfair," which seems to be a fair characterization because the recipient appears to show that she had paid for the spot but was given a ticket anyway. Okay, so it stinks that the city gave an erroneous ticket, but the idea that the entity has different rules than an individual doesn't exercise me much at all.   

The complaint is that a small corporation is somehow unduly burdened by this rule.  They even talked to Chicago Kent law professor Harold Krent, who agrees.  The report notes:

"The problem is when the rule is applied to a very small corporation -- particularly if the corporation is one person -- the rule doesn't make any sense," Krent explained. “I think that if it's asked, the court itself would carve out an exception for the simple category of traffic tickets. It doesn't make sense if the corporation is an individual. The individual should be able to represent him or herself just like they can in any other case."

I respectfully disagree.  First, it makes a lot of sense if you take seriously the reciprocal nature of limited liability. That is, if the owner of a small corporation went bankrupt and the entity did not have funds to pay the parking tickets, I would adamantly defend the small business owner's individual right to avoid the ticket.  The city should not be able to just disregard the entity in that instance just because the corporation is an individual.  But for that to work, I think it has to work both ways.  

Second, the small business owner in this instance almost certainly made this specific decision to gain the protections of the entity.  I don't know Illinois car registration well, but it is my understanding that, if you lease a vehicle, the vehicle is owned by an entity, but registered (in part) in the lessee's name. In such a case, the lessee is responsible for parking tickets, and could thus contest them in their individual capacity.  As such, it's likely that an individual could choose to register the car in their own name; they just chose not to.  Decisions have consequences. 

Now, I may agree with Prof. Krent in some ways, in that I will concede that it does seem a little silly to suggest that the procedural nature of contesting a parking ticket through the mail is something that requires a law license, and I am pretty sure it's not efficient, but it's not an unreasonable decision from the court, either. And it's a decision that can likely be fixed by the legislature (despite some strong language in Stone Street). Still, as the court notes, "If anything, our holding will protect the rights of corporations which may lose valuable rights or property because they have lost administrative hearings due to the presence of an unqualified representative working on their behalf."  Id. at ¶ 19.

Lastly, I would be remiss if I did not point out a major flaw in the the Stone Street decision.  The entity -- Stone Street Partners, LLC --  is a limited liability company.  It is not a corporation. However, making the same type of mistake so many other courts have, throughout the decision the court called Stone Street "the corporation" and its counsel is called "corporation counsel."  So, what we have here is a case that requires those who form an entity to respect the entity, but the court fails to respect the entity type.  It appears it's just too much to ask to have both. 

H/T: Kentucky Business Entity Law

October 13, 2015 in Business Associations, Corporations, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (2)

Monday, October 12, 2015

How Much Securities Law Should Be in the Basic Business Associations Course?

Last week,  I asked whether casebooks should include statutes. That post provoked a healthy debate in the comments and elsewhere. Today, I want to address another content question, this one dealing not with the content of casebooks but with the content of the Business Associations course itself. What securities law topics should be included in the basic business associations course?

The answer to that question obviously depends on whether the course is for three or four credit hours. I don’t think a comprehensive business associations course should ever be limited to three credit hours. But, if I had to teach a three-hour course, I would not cover any securities law. Agency, partnership, corporations, and LLCs are already too much to cram into a three-hour course. Adding securities topics on top of all that would, in my opinion, make the course too superficial.

Luckily, I have the hard-fought right to teach B.A. as a four-hour course. In a four-hour course, I think it’s essential to cover proxy regulation. Federal law or not, it’s mainstream corporate governance, at least for public companies, and many, perhaps most, securities regulation courses don’t cover it.

Beyond that, I’m not sure any securities coverage is absolutely essential. I spend a few minutes on the registration of securities offerings and a few minutes on Rule 10b-5 and securities fraud. I cover both topics in my Securities Regulation course, so I don’t want to cover either topic in any detail, but it’s so easy to stumble into these areas without even realizing it that every future lawyer should be warned. My main message: if you’re not a regular practitioner of securities law, call a securities lawyer. It’s too complicated to pick up on your own.

When I say I cover those topics in a few minutes, I mean no cases and, except for the text of 10b-5, no regulations. Just a brief summary by me of the potential pitfalls.

I do cover insider trading in depth. It could be relegated to the basic securities course; I cover the rest of Rule 10b-5 in Securities Regulation. But it just seems to work better in Business Associations, perhaps because of its focus on fiduciary duties. And covering it in B.A. keeps me from having to cram even more into my three-hour Securities Regulation course.

I would be interested in hearing what others think about this. Which securities law topics should be covered in the basic B.A. course and which should be relegated to Securities Regulation?  

October 12, 2015 in Business Associations, C. Steven Bradford, Law School, Securities Regulation | Permalink | Comments (6)

Sunday, October 11, 2015

Friendship & #corpgov

Between the US Supreme Court's decision to let Newman stand and the Delaware Supreme Court's Sanchez decision, the intersection of friendship and corporate governance has been a hot topic this past week.  While the commentary has been enlightening, it's always good to reflect on the primary sources.  To that end, I have collected below a series of what I perceive to be interesting quotes from the relevant opinions as follows (I also included an excerpt from a law review article referencing Reg FD, which has something to say about the extent to which we need to protect insider communications with analysts):

1.  Dirks v. S.E.C.

2.  United States v. Newman

3.  United States v. Salman

4.  Delaware Cnty. Employees Ret. Fund v. Sanchez

5.  Dirks v. S.E.C. (dissent, excerpt 1),

6.  Dirks v. S.E.C. (dissent, excerpt 2), and 

7.  Donna M. Nagy & Richard W. Painter, Selective Disclosure by Federal Officials and the Case for an Fgd (Fairer Government Disclosure) Regime.

Obviously, Sanchez may be viewed as an outlier here, but perhaps this will spur some creative work on how the standard for director independence might inform the standard for improper tipping or vice versa.

Continue reading

October 11, 2015 in Corporate Governance, Current Affairs, Securities Regulation, Stefan J. Padfield | Permalink | Comments (0)

Saturday, October 10, 2015

I'm calling it a bubble

There's been something of a debate recently about whether there's a bubble in tech startups.  It is believed that 140 have reached "unicorn" status, i.e., valuations of $1 billion or more, and numerous voices have been raised questioning the legitimacy of those valuations.  Venture capitalists insist the valuations are legitimate, but I think Buzzfeed's story about recently-foaled unicorn JustFab is a rather powerful demonstration that something has gone awry.

JustFab offers discount clothing and shoes on a subscription basis; shoppers pay a monthly fee to have access to the products.  The problem is, according to Buzzfeed, JustFab has received thousands of complaints from consumers who claim that they were unaware they would be charged monthly subscription fees, and found themselves unable to cancel the service.   JustFab recently settled a lawsuit brought by district attorneys in Santa Clara and Santa Cruz alleging that it deceived customers.  Even more troubling are the allegations that JustFab's founders have a long history of forming similar companies, on a similar subscription model, that also generated considerable consumer ire - as well as complaints by credit card companies because of all the chargebacks, and an FTC complaint that settled for $50 million.  At least according to BuzzFeed, JustFab's original financing came from investments by these other, now defunct, entities - prompting lawsuits by those entities' creditors.

JustFab may turn out to be a legitimate company, or it may simply be an outlier.  Nonetheless, its unicorn status raises doubts about the herd.


October 10, 2015 in Ann Lipton | Permalink | Comments (0)

Friday, October 9, 2015

Christine Hurt on LLPs in Bankruptcy

Christine Hurt has written an interesting article on limited liability partnerships in bankruptcy. It's available here.

Here's the abstract:

Brobeck. Dewey. Howrey. Heller. Thelen. Coudert Brothers. These brand-name law firms had many things in common at one time, but today have one: bankruptcy. Individually, these firms expanded through hiring and mergers, took on expensive lease commitments, borrowed large sums of money, and then could not meet financial obligations once markets took a downturn and practice groups scattered to other firms. The firms also had an organizational structure in common: the limited liability partnership.

In business organizations classes, professors teach that if an LLP becomes insolvent, and has no assets to pay its obligations, the creditors of the LLP will not be able to enforce those obligations against the individual partners. In other words, partners in LLPs will not have to write a check from personal funds to make up a shortfall. Creditors doing business with an LLP, just as with a corporation, take this risk and have no expectation of satisfaction of claims by individual partners, absent an express guaranty. In bankruptcy terms, creditors look solely to the capital of the entity to satisfy claims. While bankruptcy proceedings involving general partnerships may have been uncommon, at least in theory, bankruptcy proceedings involving limited liability partnerships have recently become front-page news.

The disintegration of large, complex LLPs, such as law firms, does not fit within the Restatement examples of small general partnerships that dissolve fairly swiftly and easily for at least two reasons. First, firm creditors, who have no recourse to individual partners’ wealth, wish to be satisfied in a bankruptcy proceeding. In this circumstance, federal bankruptcy law, not partnership law, will determine whether LLP partners will have to write a check from personal funds to satisfy obligations. Second, these mega-partnerships have numerous clients who require ongoing representation that can only be competently handled by the full attention of a solvent law firm. In these cases, the dissolved law firm has neither the staff nor the financial resources to handle sophisticated, long-term client needs such as complex litigation, acquisitions, or financings. These prolonged, and lucrative, client matters cannot be simply “wound up” in the time frame that partnership law anticipates. The ongoing client relationship begins to look less like an obligation to be fulfilled and more like a valuable asset of the firm.

Partnership law would scrutinize the taking of firm business by former partners under duty of loyalty doctrines against usurping business opportunities and competing with one’s own partnership, both duties that terminate upon the dissolution of the general partnership or the dissociation of the partner. However, bankruptcy law is not as forgiving as the LLP statutes, and bankruptcy trustees view the situation very differently under the “unfinished business” doctrine. The bankruptcy trustee, representing the assets of the entity and attempting to salvage value for creditors, instead seeks to make sure that assets, including current client matters, remain in partnership solution unless exchanged for adequate consideration, even if the partners agree to let client matters stay with the exiting partners.

This Article argues that the high-profile bankruptcies of Heller Ehrman LLP, Howrey LLP, Dewey & LeBeouf, LLP, and others show in stark relief the conflict between general partnership law and bankruptcy law. The emergence of the hybrid LLP creates an entity with general partnership characteristics, such as the right to co-manage and the imposition of fiduciary duties, but with limited liability for owner-partners. These characteristics co-exist peacefully until they do not, which seems to be at the point of dissolution. Then, the availability of limited liability changes partners’ incentives upon dissolution. Though bankruptcy law attempts to resolve this, it conflicts with partnership law to create more uncertainty.

October 9, 2015 in Bankruptcy/Reorganizations, C. Steven Bradford, Partnership, Research/Scholarhip | Permalink | Comments (0)

Testimony of Michael Horn, President and CEO of Volkswagen Group of America, Inc.

Like many of you, I have been discussing the Volkswagen emission scandal in my business law classes.

Yesterday, Michael Horn, President and CEO of Volkswagen Group of America testified before the House Committee on Energy and Commerce Subcommittee on Oversight and Investigations. Horn's testimony is here

West Virginia University, home of co-blogger Joshua Fershee, is featured on the first page of the testimony as flagging possible non-compliance issues in the spring of 2014.

The testimony includes multiple apologies, acceptance of full responsibility, and the statement that these "events are fundamentally contrary to Volkswagen’s core principles of providing value to our customers, innovation, and responsibility to our communities and the environment."

I plan to follow this story in my classes as the events continue to unfold. 

October 9, 2015 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Haskell Murray, White Collar Crime | Permalink | Comments (0)

Floods, Stakeholders, and Small Businesses

My wife and I both have many close family members in South Carolina, so the recent flood has been on our minds recently.

My first thoughts are with all of those affected by the flood.  

Relevant to this blog, the flood also reminds me of one of the opening passages in Conscious Capitalism by Whole Food's co-CEO John Mackey. In that passage, Mackey recalls the massive flood in Austin, TX in 1981. At that time, Whole Foods only had one store, and the flood filled that store with eight feet of water. Whole Foods had loses of $400,000 and no savings and no insurance.

Mackey notes that "there was no way for [Whole Foods] to recover with [its] own resources" and then:

  • "[a] wonderfully unexpected thing happened: dozens of our customers and neighbors started showing up at the store....Over the next few weeks, dozens and dozens of our customers kept coming in to help us clean up and fix the store...It wasn't just our customers who helped us. There was an avalanche of support from our other stakeholders as well [such as suppliers extending credit and deferring payment]. . . . It is humbling to think about what would have happened if all of our stakeholders hadn't cared so much about our company then. Without a doubt, Whole Foods Market would have ceased to exist. A company that today has over $11 billion in sales annually would have died in its first year if our stakeholders hadn't loved and cared about us--and they wouldn't have loved and cared for us had we not been the kind of business we were." pgs. 5-7

I have two questions. First, what decisions lead to that sort commitment from stakeholders? Second, does this sort of commitment only attach to small businesses? 

Asked another way, would Whole Foods still have that sort of stakeholder turnout today? If not, is it because they have not continued to make decisions that inspire stakeholders or simply because they have grown so large that stakeholders assume the company can fend for itself.

It is seemingly easier to make connection with a small, local business than with a large chain, but there do seem to be a few larger companies that still reach their stakeholders on an individual and personal level. Companies, of all sizes, seem to reach stakeholders through making thoughtful decisions in hiring, training, producing, and giving. Authenticity seems to be quite important, as does listening to stakeholders and taking action to address stakeholder needs.

October 9, 2015 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Entrepreneurship, Family Business, Haskell Murray | Permalink | Comments (0)

Wednesday, October 7, 2015

SEC Mutual Fund Liquidity Risk Management Proposed Rule Overview

Two weeks ago I wrote my first in a series of posts on the SEC's proposed liquidity and redemption rules for mutual funds.  The first post, available here, focused on swing pricing.  Today's post will focus on the liquidity management proposals contained in the proposed rules to address liquidity risk.

The proposed rules would require all open end mutual funds (not UITs, closed-end funds or money management funds) to create a written liquidity management program and to disclose it to the SEC via the proposed forms N-CEN and N-PORT.  Under the plan, funds would (1) classify and conduct ongoing reviews of liquidity of each of the fund's positions in portfolio assets, (ii) assess and conduct periodic reviews of the fund's liquidity risk, and (iii) manage the fund's liquidity risk through a set-aside minimum portion of fund assets that are convertible within 3 business days at a price that does not materially affect the value of that asset immediately prior to sale.

Liquidity risk is born of concern that a fund "could not meet requests to redeem shares issued by the fund that are expected under normal conditions, or are reasonably foreseeable under stressed conditions, without materials affecting the fund’s net asset value." (Proposed Rules at 44-45).

Fund classification of portfolio liquidity is in addition to the 15% illiquid asset cap under current SEC guidelines (Release Nos. 33-6927; IC-18612, March 12, 1992). The proposed liquidity classifications "would require a fund to assess the liquidity of its portfolio positions individually, as well as the liquidity profile of the fund as a whole” and unlike the 15% cap to take "into account any market or other factors in considering an asset’s liquidity," and assess "whether the fund’s position size in a particular asset affects the liquidity of that asset." (Proposed Rules at 62-63).  

A fund would assess the relative liquidity of each portfolio position based on the number of days within which it is determined, using information obtained after reasonable inquiry, that the fund’s position in an asset (or a portion of  that asset) would be convertible to cash at a price that does not materially affect the value of that asset immediately prior to sale.”  (Proposed Rules at 63-64).  Funds would report portfolio classification in one of 6 categories of liquidity ranging from 1 day conversion to cash to 30 days conversion to cash to be reported on proposed N-PORT form.

The liquidity factors include:

o Existence of an active market for the asset, including whether the asset is listed on an exchange, as well as the number, diversity, and quality of market participants;

o Frequency of trades or quotes for the asset and average daily trading volume of the asset (regardless of whether the asset is a security traded on an exchange);

o Volatility of trading prices for the asset;

o Bid-ask spreads for the asset;

o Whether the asset has a relatively standardized and simple structure;

o For fixed income securities, maturity and date of issue;

o Restrictions on trading of the asset and limitations on transfer of the asset;

o The size of the fund’s position in the asset relative to the asset’s average daily trading volume and, as applicable, the number of units of the asset outstanding; and

o Relationship of the asset to another portfolio asset.” 

(Proposed Rules at 80).

 -Anne Tucker

October 7, 2015 in Anne Tucker, Corporations, Securities Regulation | Permalink | Comments (0)

Boise State University - Legal Studies Professor Position

I recently received the following e-mail announcement. Accordingly, I have updated my list of law professor positions outside of law schools:


The Department of Management in the College of Business and Economics, Boise State University,  invites applications for a tenure track faculty position in the area of Legal Studies in Business.

Management hosts the most majors in the College of Business and Economics, with over 1000 students currently majoring in General Business, Entrepreneurship Management, Human Resource Management, or International Business, and provides courses in four MBA programs. We are housed in the impressive Micron Business and Economics Building, which opened in the summer of 2012. The College of Business and Economics is AACSB-accredited.

Recognized as a university on the move, Boise State University is the largest university in Idaho, with enrollment of more than 22,000 students. The University is located in the heart of Idaho’s capital city, a growing metropolitan area that serves as the government, business, high-tech, economic, and cultural center of the state. Time Magazine ranked Boise #1 in 2014 for ‘getting it right’ with a thriving economy, a booming cultural scene, quality health care, and a growing university. Livability.com also ranked Boise first among the top 10 cities to raise a family in 2014 thanks to an abundant quality of life, a family-friendly culture, a vibrant downtown, and great outdoor recreation. To further enhance the superb quality of life Boise offers, the University has committed to sustaining the conditions necessary for faculty to enter and thrive in their academic careers, while meeting personal and family responsibilities.

Boise State University embraces and welcomes diversity in its faculty, student body, and staff. Accordingly, candidates who would add to the diversity and excellence of our academic community are encouraged to apply and to include in their cover letter information about how they can help us further these goals.

Minimum Qualifications:

  • J.D. degree with an excellent academic record from an ABA accredited law school.
  • Potential for outstanding teaching and research.
  • Willingness to be active in professional, university, and community service activities.

Preferred Qualifications: 

  • MBA or other advanced business related degree.
  • Demonstrated ability to engage in high quality teaching, including online teaching experience.
  • Journal publications in refereed, peer-reviewed business journals, legal journals, or law reviews.
  • Significant professional experience as a lawyer.
  • Ability and experience teaching and doing research across disciplines (e.g. accounting, health care law, economics) is a plus.

October 7, 2015 in Business School, Haskell Murray, Jobs | Permalink | Comments (0)

More on Berkshire Hathaway, Financial Intermediation, and The Like

As some of you may know, I have been focused on crowdfunding intermediation in my research of late.  My articles in the U.C. Davis Business Law Journal and the Kentucky Law Journal both touch on that topic, and a forthcoming chapter in an international crowdfunding book and several articles in process follow along that trail.  (I also have the opportunity to look into gatekeeper intermediary issues outside the crowdfunding context at an upcoming symposium at Wayne State University Law School, about which I will say more in a subsequent post.)  The underlying literature on financial intermediation is super-interesting, and it continues to grow in breadth and depth as I research and write.

Given my interest in this area, I was delighted to see that Larry Cunningham is contributing to the debate, following on his already-rich work relating to Warren Buffett and Berkshire Hathaway.  As you may recall, Larry was our guest here at the Business Law Prof Blog back in 2014.  You can read my Q&A with him here and his posts here and here.

Larry recently posted an essay responding to Kathryn Judge's Intermediary Influence, 82 U Chi L Rev 573 (2015).  In her article, Professor Judge shows "how intermediaries acquire influence over time and how they have used that influence to promote high-fee arrangements."  She then uses this descriptive analysis both to explain existing phenomena in the financial markets and to identify significant implications for the same.

Forthcoming in the University of Chicago Law Review Dialogue, Larry's responsive essay, Berkshire versus KKR: Intermediary Influence and Competition, compares the infamous private equity firm Kohlberg Kravis Roberts to his beloved Berkshire Hathaway.  His focus?  The M&A market.  His bottom line?

I have extended Judge’s insights with an illustration from the acquisitions market, depicting one firm (KKR) that epitomizes intermediary influence, in contrast to a rival (Berkshire)—the anti-intermediary par excellence. The juxtaposition affirms the portrait of intermediary influence that Judge paints as well as the potential for correction through lower-priced competition and fee disclosure she posits.

I have given Larry's essay a skim, and that quick pass has enticed me into giving both it and Professor Judge's article a good, thorough read in the not-too-distant future.

October 7, 2015 in Corporate Finance, Corporate Governance, Joan Heminway, Research/Scholarhip | Permalink | Comments (5)

Tuesday, October 6, 2015

Life as a Lions Fan: Bad Football Might Help Good Teams

As a life-long Detroit Lions fan, last night's loss to the Seattle Seahawks was largely expected.  How they lost was new, though the fact that the Lions lost in a creative way, was also to be expected.  As actor Jeff Daniels said, being a Lions fan is more painful than being a Cubs fan.

In recent years, there is ample evidence that random and uncommon rules have shown up to hurt my already mediocre team. This got me to thinking, though, of the old adage, bad facts make bad law. For the Lions, I think that's not necessarily apt.  It may be that bad football makes for better football later.   

To understand how one might get there, one needs to know a little what it's like to be a Lions fan, so here's a little insight into how life as a Lions fan works: 

I watched the start of the game last night with my ten-year-old son.  Part of the pre-game programming is all of the announcers and studio people make their pick for the game.  The ten or so predictions were unanimously for the Seahawks.  I turned to my son and said, "Well, the Lions will probably make a game of it then."  He asked why.  I replied, "Because the Lions have a better chance to win when absolutely no one objective expects them to. I don't know why. It's just true." 

He went to bed shortly after kickoff. Lest anyone think I am cruel, I am not trying too hard to make him a Lions fan.  I have tried to raise him and his little sister also as Saints fans.  I am not going to bandwagon an make them Pats fans or anything, but New Orleans was home for three years, so I can reasonably adopt the Saints.  I have been questioned on that choice as an alternative, and this year doesn't look too hot, but in my defense, my kids' team has a Super Bowl win in their lifetimes. More than I can say for me.

As the game went on, there was lost of social media complaining between me and my fellow Lions fans.  Most of it along the lines of: "Did they forgot how to throw downfield?" "This is awful." "Where's Barry Sanders?"  Then I posted something witty like, "Matt Stafford just checked down to me on my couch." 

Despite an awful game, the Lions had a chance.  With time running out, the team seemed to learned they could throw the ball down the field more than three yards. 

The Lions were losing 13-10 with 1:51 left in the game when Stafford passed to Calvin Johnson, who dove for a touchdown.  Just before the goal line, Seahawks safety Kam Chancellor punched the ball out of his hands, and the ball tumbled into the end zone. Another Seahawks play clearly hit the ball out of the back of the end zone.  The play was call a touchback, giving Seattle the football at their own 20 yard line.  The problem is that NFL rules make batting the ball illegal, and the ball should have been awarded to the Lions at the 1 yard line.  

No call, and the Lions go on to lose.  And yes, there were lots of other chances the Lions had to win, and you can't hope a refs call won't go against you.  But it still stunk.  Again, a social media glimpse into the life of a Lions fan. 

Friend 1:  Could an ending be more Lions than that?

Me:  If you're going to screw it up, do it with panache.  And no. 

Friend 2:  did you see the latest on ESPN.. apparently, it looks like it shouldn't have been a touchback, but 1 and goal at the 6 inch line

Me:  That would be as about as Lions as it gets.

That's a long-winded bit of rambling, but it's cheaper than therapy.  

All teams run into odd rules, but mediocre teams have more ways of finding challenges. The Lions find challenges like no one else. They have a history of struggling with (i.e., losing, in part, because of) arcane rules, as this article explains: Illegal bat continues Lions' proud tradition of getting hosed by the NFL rulebook. The Illegal Bat now joins the Calvin Johnson Rule and the Jim Schwartz rule.  

This mediocrity can have value, though.  Finding all these weird challenges can help make the game better by helping highlight risks for future games that matter.  Better officiating and better rules will not make the Lions a better football team, but the challenges they seem to goof into might make for more aware officials and better rules for playoff games, which usually feature better teams.

Of course, the Lions finally made the playoffs last year, only to lose, in part, because of an oddly changed call.  Nonetheless, if the Lions can't be good, at least some good is coming from their games. Right?  

You don't need to answer that. 

October 6, 2015 in Current Affairs, Joshua P. Fershee, Sports | Permalink | Comments (1)

Monday, October 5, 2015

Laureate Education - First IPO for a Benefit Corporation

Alicia Plerhoples (Georgetown) has the details about the first benefit corporation IPO: Laureate Education.*

She promises more analysis on SocEntLaw (where I am also a co-editor) in the near future.

The link to Laureate Education's S-1 is here. Laureate Education has chosen the Delaware public benefit corporation statute to organize under, rather than one of the states that more closely follows the Model Benefit Corporation Legislation. I wrote about the differences between Delaware and the Model here.

Plum Organics (also a Delaware public benefit corporation) is a wholly-owned subsidiary of the publicly-traded Campbell's Soup, but it appears that Laureate Education will be the first stand-alone publicly traded benefit corporation.

*Remember that there are differences between certified B corporations and benefit corporations. Etsy, which IPO'd recently, is currently only a certified B corporation. Even Etsy's own PR folks confused the two terms in their initial announcement of their certification.

October 5, 2015 in Business Associations, Corporate Finance, Corporate Governance, Corporations, CSR, Delaware, Haskell Murray, Research/Scholarhip, Securities Regulation, Social Enterprise | Permalink | Comments (0)

Should Casebooks Include Statutes?

The authors of the business associations casebook I use have, in their latest edition, reprinted some of the relevant statutes in the casebook. One section of the Revised Uniform Partnership Act even appears twice within a span of only eight pages. (I don't mean citations to statutes; I mean the full language of the statute.)

The authors of the book I use (which shall remain nameless) are not alone. I’ve also seen this practice in other casebooks.

I just don’t get it.

I can understand putting a few statutes or regulations in a casebook if the students are only going to look at a couple of sections in the course. It eliminates the need for students to purchase a separate statutory supplement.

But it makes no sense in courses like Business Associations or Securities Regulation, where students will be looking at dozens, even hundreds, of pages of statutory and regulatory material. The students in those courses will still have to buy a statute book; including some of the same statutory material in the casebook just increases the size (and cost) of the casebook.

Including statutory material can also accelerate the casebook’s obsolescence. Some of the sections included come from uniform and model acts, which aren’t likely to change rapidly. But the book includes a number of selections from Delaware and other states. We all know that Delaware almost never changes its business associations statutes. (Stifled chuckle here.) What am I supposed to do next year if the statute changes? Tell my students to cross out the material?

My apologies for the rant, but this is one of a number of things these authors have done in their latest edition that really bug me. I may soon be accepting my co-blogger Joan Heminway’s invitation to try the B.A. book she co-authors. (I hope you don’t reproduce any statutory material, Joan.)

If I'm wrong, and there's a legitimate justification for this, I'd be happy to eat my words, but I just don't see the point.

UPDATE: For another view, check out Usha Rodrigues's blog post over on The Conglomerate.

October 5, 2015 | Permalink | Comments (10)

Sunday, October 4, 2015

ICYMI: Tweets From the Week (Oct. 4, 2015)

October 4, 2015 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, October 3, 2015

Delaware Supreme Court Discovers the Power of Friendship

Yesterday, the Delaware Supreme Court held that plaintiffs had pled demand excusal under Aronson v. Lewis due in part to a director's "close friendship of over half a century with the interested party," in combination with that director's business relationship with the interested party.

Del. County Emples. Ret. Fund v. Sanchez involves a public company that is 16% owned by the Sanchez family.  The plaintiffs challenged a transaction in which the company paid $78 million to a privately-held entity owned by the Sanchezes, ostensibly to purchase certain properties and fund a joint venture.  The question, then, was whether plaintiffs could show that a majority of the Board was not independent, and because the Sanchezes themselves occupied 2 of the 5 seats, all eyes were on one additional Board member, Alan Jackson.

Alan Jackson, it turned out, had been close friends with the Senior Sanchez for "more than five decades," and the Delaware Supreme Court deemed this fact worthy of of judicial notice.  Thus, in a heartwarming passage, the Court noted that though it had previously held in Beam v. Stewart, 845 A.2d 1040 (Del. 2004), that a "thin social-circle friendship" is not sufficient to excuse demand, "we did not suggest that deeper human friendships could not exist that would have the effect of compromising a director's independence....Close friendships [that last half a century] are likely considered precious by many people, and are rare. People drift apart for many reasons, and when a close relationship endures for that long, a pleading stage inference arises that it is important to the parties."

Lest it be accused of being too emotional, however, the Court was careful not to end its analysis there.  Instead, it also noted that Jackson and his brother worked for another company over which the Senior Sanchez had substantial influence, and which counted the Sanchez entities as important clients.

With its tender recognition of the value of "human relationships" thus bolstered by the realer concerns of economics, the Court concluded that the plaintiffs had raised a reasonable doubt that Jackson was independent of the Sanchezes, and excused demand.

I realize it's only a baby step, but has the Snow Queen's heart begun to thaw?


In all seriousness, I do find this significant to the extent it suggests that Delaware may be trying to find some room in its caselaw for recognizing what we all know to be true, namely, that personal ties among directors may substantially influence their decisionmaking.  I mean, I don't expect any radical new recognition of structural bias, but this decision could herald a more realistic approach to evaluating the impact of informal personal relationships.  Or it could just be a one-off due to the extraordinary facts - we'll have to see what future cases bring. 

I do note, however, that one of the more interesting aspects of the opinion is the Court's observation that a Section 220 demand is unlikely to yield results for plaintiffs who allege that personal, rather than professional, ties compromise a director's judgment.  I expect that's going to get some play in plaintiffs' briefing for a while.

October 3, 2015 in Ann Lipton | Permalink | Comments (9)

Friday, October 2, 2015

Social Business and Scandal

Unfortunately, touting a business as socially-consious does not seem to lessen the chance of scandal.

Some companies known for their commitment to social causes have been in the news for all the wrong reasons. A few are noted below:

Predictably, the media latches onto these stories and claims of hypocrisy fly. See, e.g., Here's The Joke Of A Sustainability Report That VW Put Out Last Year and Whole Foods Sales Sour After Price Scandal and BP's Hypocrisy Problems.

No business is perfect, so what should social businesses do to limit the impact of these scandals? First, before a scandal hits, I think social businesses need to be candid about the fact that they are not perfect. Second, after the scandal, the social business needs to take responsibility and take significant corrective action beyond what is legally required. 

Patagonia's founder does a really nice job of admitting the imperfection of his company and the struggles they face in his book The Responsible Company. Whole Foods supposedly offered somewhat above-market severance packages to laid off employees and took some corrective action in the price scandal, but I wonder if they went far enough, especially given the lofty praise for the company's social initiatives by the Whole Food's co-CEO in his book Conscious Capitalism. Whole Foods quickly admitted mistakes in the pricing scandal, but then lost points in my mind when they backtracked and claimed they were a victim of the media.

Even if social businesses take the appropriate steps, I think scandals probably hit them harder than the average business because social businesses have more customer goodwill at risk. I would love to see some empirical work on impact of scandal on social business as compared to those that do not market themselves as such; please pass any such studies my way. 

Given this post, Marcia Narine's post, and Joan Heminway's post, it is turning out to be a very pessimistic week at BLPB, but I am sure there will be good news to report in coming weeks.

October 2, 2015 in Business Associations, CSR, Ethics, Haskell Murray, Social Enterprise | Permalink | Comments (2)


Today I will present on a panel with colleagues that spent a week with me this summer in Guatemala meeting with indigenous peoples, village elders, NGOs, union leaders, the local arm of the Chamber of Commerce, a major law firm, government officials, human rights defenders, and those who had been victimized by mining companies. My talk concerns the role of corporate social responsibility in Guatemala, but I will also discuss the complex symbiotic relationship between state and non-state actors in weak states that are rich in resources but poor in governance. I plan to use two companies as case studies. 

The first corporate citizen, REPSA (part of the Olmeca firm), is a Guatemalan company that produces African palm oil. This oil is used in health and beauty products, ice cream, and biofuels, and because it causes massive deforestation and displacement of indigenous peoples it is also itself the subject of labeling legislation in the EU. REPSA is a signatory of the UN Global Compact, the world's largest CSR initiative. Despite its CSR credentials, some have linked REPSA with the assassination last month of a professor and activist who had publicly protested against the company's alleged pollution of rivers with pesticides. The "ecocide," that spread for hundreds of kilometers, caused 23 species of fish and 21 species of animals to die suddenly and made the water unsafe to drink. REPSA has denied all wrongdoing and has pledged full cooperation with authorities in the murder investigation. The murder occurred outside of a local court the day after the court ordered the closing of a REPSA factory. On the same day of the murder other human rights defenders were also allegedly kidnaped by REPSA operatives although they were later released. Guatemala's government is reportedly one of the most corrupt in the world-- the President resigned a few weeks ago and went to jail amidst a corruption scandal-- and thus it is no surprise that the government has allegedly done little to investigate either the ecocide or the murder.

The other case study concerns Tahoe, a Canadian mining company with a US subsidiary that used private security forces who shot seven protestors. Tahoe is facing trial in a Canadian court, a case that is being watched worldwide by the NGO community. Interestingly, the company's corporate social responsibility and the board's implementation are indirectly at issue in the case. Tahoe feels so strongly about CSR that it has a  CSR blog and quarterly report online touting its implementation of international CSR standards, including its compliance with the UN Guiding Principles on Business and Human Rights, the Voluntary Principles on Security and Human Rights, the Equator Principles (related to risk management for project finance in social risk projects), the IFC Performance Standards and a host of other initiatives related to grievance mechanisms for those seeking an access to remedy for human rights abuses. Tahoe is in fact a member of the CSR Committee of the International Bar Association. Nonetheless, despite these laudable achievements, none of the families that my colleagues and I met with in the mining town mentioned any of this nor talked about the "Cup of Coffee With the Mine" program promoted in the CSR report. Of course, it's possible that Tahoe has made significant reforms since the 2013 shootings and if so, then it should be applauded, but the families we met in June did not appear to give the company much credit. Instead they talked about the birth defects that their children have and the fact that they and their crops often go for days without water. They may not know the statistic, but some of the mining processes use the same amount of water in one hour that a family of four would use in 20 years.

Of note, the Guatemalan government only requires a 1% royalty for the minerals mined in the country rather than the 30% that other countries require, although legislation is pending to change this. Guatemala also provides its police and military as guards for the mines to protect the Canadian company from its own citizens. Guatemala probably helps shore up security because even though 98% of the local citizens voted against the mine, the mine commenced operations anyway despite both international and Guatemalan human rights law that requires free, prior, and informed consent (see here). 

Given this turmoil, perhaps it was actually the more risky climate of mining in Guatemala that caused Goldcorp to sell a 26% stake in Tahoe earlier this year rather than the stated goal of focusing on core assets. Norway's pension fund had already divested in January due to Tahoe's human rights record in Guatemala. Maybe these investors hadn't read the impressive Tahoe CSR report. With the background provided above, my abstract for my book chapter and today's talk is below. I welcome your thoughts in the comment section or by email at mnarine@stu.edu.

North Americans and Europeans have come to expect even small and medium sized enterprises to engage in some sort of corporate social responsibility (CSR). Large companies regularly market their CSR programs in advertising and recruitment efforts, and indeed over twenty countries require companies to publicly report on their environmental, social and governance (ESG) efforts. Definitions differ, but some examples may be instructive for this Chapter. For example, the Danish government, which mandates ESG reporting, defines CSR as considerations for human rights, societal, environmental and climate conditions as well as combatting corruption in business strategy and corporate activities. The United States government, which focuses on responsible business conduct, has explained, CSR entails conduct consistent with applicable laws and internationally recognised standards. Based on the idea that you can do well while doing no harm, RBC is a broad concept that focuses on two aspects of the business-society relationship: 1) the positive contribution businesses can make to economic, environmental, and social progress with a view to achieving sustainable development, and 2) avoiding adverse impacts and addressing them when they do occur.

Business must not only have a legal license to operate in a country, they must also have a social license. In other words, the community members, employees, government officials, and those affected by the corporate activitiesthe stakeholdersmust believe that the business is legitimate. It is no longer enough to merely be legally allowed to conduct business. Corporate social responsibility activities can thus often add a veneer of legitimacy.

With this in mind, what role does business play in society in general and in a country as complex as Guatemala in particular? Guatemalan citizens, including over two dozen different indigenous groups, have gone from fighting a bloody 36-year civil war to fighting corrupt leadership that often appears to put the interests of local and multinational businesses above that of the people. For example, although the Canadian Trade Commission has an office with resources related to CSR in Guatemala, some of the most egregious allegations of human rights abuses relate to mining companies from that country. Similarly, many of the multinationals that proudly publish CSR reports and even use the buzzwords social license in slick videos on their websites are the same corporations accused in lawsuits by human rights and environmental defenders. How do these multinationals reconcile these acts? How and when will consumers and socially-responsible investors hold corporations accountable for these acts? Is the Guatemalan government abdicating its responsibility to its own people or is the government in fact complicit with the multinationals? And finally, do foreign governments bear any responsibility for the acts of multinationals acting abroad? This chapter will explore this continuum from corporate social responsibility to corporate accountability using the case study of Guatemala in general and the extractive and palm oil industries in particular.


October 2, 2015 in Commercial Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Litigation, Marcia Narine | Permalink | Comments (0)

Thursday, October 1, 2015

The Midwest Academy of Legal Studies in Business (MALSB) Annual Conference - Chicago, IL - April 2016

Currently, I am planning to attend the MALSB Annual Conference in Chicago this coming April. The conference is described by the organizers below. While ALSB regional meetings like this one are usually attended mostly by legal studies professors in business schools, I am told that the conference is open to all.


The Midwest Academy of Legal Studies in Business (MALSB) Annual Conference is held in conjunction with the MBAA International Conference, long billed as “The Best Conference Value in America.”

The MBAA International Conference draws hundreds of academics and practitioners from business-related fields such as accounting, business/society/government, economics, entrepreneurship, finance, health administration, information systems, international business, management, and marketing. Although the MALSB will have its own program track on legal studies, attendees will be able to take advantage of the multidisciplinary nature of this international conference and attend sessions held by the other program tracks.

 [More details are available under the break.]

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October 1, 2015 in Business School, Conferences, Haskell Murray, Law School | Permalink | Comments (0)

Illusionists and Scammers

Last night, I took my husband (part of his birthday present) to see The Illusionists, a touring Broadway production featuring seven masters of illusion doing a three-night run in Knoxville this week.  I admit to a fascination for magic shows and the like, an interest my husband shares.  I really enjoyed the production and recommend it to those with similar interests.

At the show last night, however, something unusual happened.   I ended up in the show.  I made an egg reappear and had my watch pilfered by one of the illusionists.  It was pretty cool.  After the show, I got kudos for my performance in the ladies room, on the street, and in the local gelato place.

But I admit that as I thought about the way I had been tricked--by sleight of hand--into performing for the audience and allowing my watch to be taken, I realized that these illusionists have something in common with Ponzi schemers and the like--each finds a patsy who can believe and suckers that person into parting with something of value based on that belief.  That's precisely what I wanted to blog about today anyway--scammers.  Life has a funny way of making these kinds of connections . . . .

So, I am briefly posting today about a type of affinity fraud that really troubles me--affinity fraud in which a lawyer defrauds a client.  Most of us who teach business law have had to teach, in Business Associations or a course on professional responsibility, cases involving lawyers who, e.g., abscond with client funds or deceive clients out of money or property.  I always find that these cases provide important, if difficult, teaching moments: I want the students to understand the applicable law of the case, but I also want them to understand the gravity of the situation when a lawyer breaches that all-important bond of trust with a client.

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October 1, 2015 in Ethics, Joan Heminway, Securities Regulation, Teaching | Permalink | Comments (0)

Wednesday, September 30, 2015

Albany Law School - Associate Dean and Professor Postions