Saturday, February 13, 2016
In recent years, and particularly since the Supreme Court’s decision in Citizens United v. FEC, 558 U.S. 310 (2010), there have been increasing calls for the SEC to require public companies to disclose their spending on political activities.
The situation is complex because while there may be many reasons for transparency on the subject, it is difficult to tie disclosure specifically to the needs of investors as investors. Most political spending is likely undertaken by companies to benefit the firm itself – that is, in fact, precisely why people find it objectionable – and it is difficult to articulate why investors as investors (rather than, say, as employees or as citizens) should care about political spending any more than any other ordinary business decision for which we have no required disclosures.
The SEC has resisted increasingly loud calls that it regulate in this area, likely due to this precise problem. In December, Congress passed a budget that actually forbade the SEC from using funds to regulate political spending in the following year, though that has not ended the matter for Democrats. (Interestingly, I note that it was only after the budget had passed both Houses that there started to be any real press on the subject and the issue still didn't get much press traction until after the budget was signed into law. I’m no political expert but if I had to guess, I’d say that the reason for the relative stealth was that the SEC supported the measure as a way of alleviating some of the political pressure on itself).
In any event, over the years, there have been a variety of attempts to show that political spending is/is not beneficial to investors, often with a view toward providing a solid foundation for SEC regulation. One study, Corporate Lobbying and Fraud Detection by Frank Yu and Xiaoyun Yu, found that political activity – namely, lobbying – helps firms conceal fraud. Based on class actions filed between 1998 and 2004, and class period length, they concluded that firms that engage in political lobbying managed to keep their fraud under wraps for longer periods than non-lobbying firms. They also found that lobbying expenses increased during fraud periods.
Which is why I read with interest a new study by Matthew McCarten, Ivan Diaz-Rainey, and Helen Roberts that extends Yu and Yu’s original research. According to the authors, the Sarbanes Oxley Act has significantly mitigated the impact of lobbying. They find that post-SOX, lobbying is no longer correlated with longer class periods/fraud detection; they attribute the change, at least in part, to various SOX corporate governance provisions, such as the requirement that the CEO and CFO certify SEC filings, and increased whistleblower protection.
These results are intriguing, though I have some reservations. The authors treat any action filed in 2005 or later as post-SOX (to account for delays in SOX’s implementation since its passage in 2002). But this was also a period of great upheaval in securities class actions. In 2005, the Supreme Court decided Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, which introduced loss causation as a new and heavily litigated variable in class actions – and one that can dramatically affect the length of a class period. Moreover, over the years, courts have become increasingly strict in their analysis of Section 10(b) pleadings: As Hillary Sale documented, requirements for pleading scienter have ratcheted up over the years (and I’d argue that the standards have only tightened since her paper was published; among other things, confidential sources have become de rigueur). Cases like Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) and Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) – as well as their precursors in the circuits - have made it increasingly difficult to bring claims not only against secondary actors, but also against corporate executives who do not directly speak to the public. The combined effect of these developments make me question whether class action data – especially class action data that purports to measure changes over time – is a reliable proxy for fraud.
That said, none of these developments has anything to do with lobbying, so theoretically, they may not affect McCarten et al.'s findings. The paper is an interesting one, both for what it adds to the debate on disclosure of political spending, and also for its implications about SOX’s effectiveness (which was, at the time of its passage, famously described as “quack corporate governance”).
Friday, February 12, 2016
For those of you interested in the general topic of negative interest rates, today's New York Times has a very good discussion of negative interest rates and their implications.
Even though I have never participated in a single Yoga class, I enjoyed my co-editor Joan Heminway’s Yoga Analogy Post from a couple weeks ago. Her post inspired this analogy post about running and the law.
While I am not the most consistent runner among the BLPB editors---that title goes to Josh Fershee---I have been running 3+ times a week consistently for the last 6 months or so, following a few very inconsistent years.
Below the break, I discuss some parallels between running (particular long-distance running) and the practice of law. Due to these parallels, as a hiring partner, I believe I would look favorably on an applicant who was a distance runner.
Also about distance running, is anyone else really excited about watching the Olympic Trials for the Marathon on NBC tomorrow? Not a great spectator sport, to be sure, but I love that so many people with normal jobs are running. Nashville-area elementary school teacher Scott Wietecha qualified for the Trials (though he has chosen not to run, due, at least in part, the some health issues). Scott has details and predictions here; after reading his long post, I can quickly see that he is even much more excited about watching the race than I am.
Thursday, February 11, 2016
|Call for Papers
Vol. 7, No. 1
Special Issue -
The Ethics of Social Entrepreneurship
- How does an ethical perspective on social entrepreneurship enhance social enterprise opportunity recognition?
- How do ethics help us understand social venture creation and operations?
- What ethical questions arise when traditional nonprofit organizations move to an earned income revenue model of operations?
- What ethical questions arise when social enterprises move from nonprofit legal forms to a for profit legal form?
- What are the ethical implications of competing logics within hybrid organizations?
- What are the links between social entrepreneurship theories and ethical theories?
- Which ethical theories aid in our understanding of social venturing?
- How can an ethical lens for social entrepreneurship best be utilized to address significant social change?
- How can ethics be brought into the social entrepreneurship classroom?
Wednesday, February 10, 2016
A colleague recently encouraged me to undertake to write a blog post series. The essence of his idea? Reveal how those who regularly turn out quality research and writing over a period of time do it. He suggested it might be valuable for readers to know how one might organize the applicable research, deal with research assistants, write, etc. He indicated his belief that I am qualified to undertake this task (which was/is both flattering and daunting at the same time). He concluded with the following observation: "I'm sure that you work harder than many people, but my guess is there's more to it than that."
I recognized immediately the value of his suggestion. Many of us struggle with keeping the scholarship leg of the three-legged academic stool for law faculty roughly as long as the teaching and service legs. But what enables law faculty not only to survive this struggle, but also to consistently produce worthy scholarship? And am I really qualified to speak on this?
Because I do think the topic is meritorious and because I respect the colleague who made this suggestion, I am going to give the topic a shot. This post offers my preliminary reflections. They may or may not represent reality for others. Perhaps (regardless) my thoughts will sponsor other productive ideas.
First, I do work long hours. Those who know me well know this well. My husband has said that he believes I work longer hours in law teaching than I did in private practice (and I worked long hours in private practice). I admit that, although my doctor has indicated it's not good for my health, I do not always get eight hours of sleep. But I want to be clear that my short nights of sleep, when they happen, are largely my choice. That choice is made because of the heartfelt passion I have for my work. (The key is to not let things go to an extreme . . . .)
New Scholarship on Hedge Fund Activism Urges Courts to Adopt Enhanced Scrutiny of Boards' Defensive Actions
Bernard Sharfman, in his new article on SSRN, The Tension Between hedge Fund Activism and Corporate Law, argues that hedge fund activism for control of a publicly traded corporation is a positive corrective measure in corporate governance. After asserting that hedge fund activism should be permitted, Sharfman, argues, controversially, that courts should depart from traditional deference to a corporate board's decision making authority under the business judgment rule. Alternatively, Sharfman urges courts to adopt a heightened standard of scrutiny when reviewing defensive board actions against hedge funds.
[Hedge Fund Activism] has a role to play as a corrective mechanism in corporate governance and it is up to the courts to find a way to make sure it continues to have a significant impact despite the courts’ inclination to yield to Board authority. In practice, this means that when the plaintiff is an activist hedge fund and the standard of review is the Unocal test because issues of control are present, a less permissive approach needs to be applied, requiring the courts to exercise restraint in interpreting the actions of activist hedge funds as an attempt to gain control.
If there are no issues of control, then Board independence and reasonable investigation still needs to be the focus. That is, before the business judgment rule can be applied, the courts need to utilize an enhanced level of scrutiny in determining whether the Board is truly independent of executive management or any other insider such as a fellow Board member. As previously discussed, Board independence is critical to maximizing the value of HFA. Moreover, reasonable investigation of the activist hedge fund’s recommendations should be required to justify Board action taken to mute the fund’s influence. Like the Unocal test, the burden of proof for establishing independence and reasonable investigation needs to be put on the Board. In sum, what is required in the court’s review of Board actions to mute the influence of an activist hedge fund is something similar to the first prong of the Unocal test except independence and reasonable investigation is now focused on the Board’s evaluation of the fund’s recommendations, not the threat to corporate policy and effectiveness.
Sharfman uses Third Point LLC v. Ruprecht, the 2014 Delaware case invovling Sotheby's poison pill, to illustrate how the traditional (deference) standard of review leads to boards being able to defeat hedge fund activists.
An interesting comment published in the Yale Law Journal by Yale Law Student Carmen X.W. Lu, Unpacking Wolf Packs, offers an alternative view of the Third Point case emphasizing the coalition of hedge funds acting in that case and the court's skepticism of wolf pack activist investors.
This week, Delaware Governor Jack Markell nominated Joseph R. Slights, III for the position held by retiring Vice Chancellor John Noble on the Delaware Court of Chancery.
Judge Slights previously served a 12-year term on the Delaware Superior Court. Immediately prior to his nomination, Judge Slights was a commercial litigation partner at the firm of Morris, James, Hitchens & Williams LLP.
Once Vice Chancellor Noble retires, Vice Chancellor Laster will become the judge with the most experience serving on the Delaware Court of Chancery. Vice Chancellor Laster was sworn into his position in October of 2009. It has been a quick 6+ years; it seems like that was just yesterday.
I outsource the details of Joseph Slights' nomination below:
Tuesday, February 9, 2016
My home state in West Virginia is struggling. The economy is struggling because two of the state's main industries -- coal and natural gas -- are facing falling production (coal) and low prices (gas). Severance taxes for the state account for approximately 13% of the budget, and both are down dramatically. Tax revenues for the state were down $9.8 million in January from the prior year and came up $11.5 million short of estimates. For the year-to-date, the state collected $2.29 billion, which is $169.5 million below estimates. Oddly enough, state sales and income taxes for January both exceeded estimates, but not enough to offset other stagnation in the state.
The state has long been known as a coal state, and that industry has dominated the legal and political landscape. West Virginia has been criticized for having a legal system that is "anti-business," with the United States Chamber of Commerce finding stating that West Virginia is the 50th ranked state in terms of the fairness of its litigation. (See PDF here.) CNBC (with input from the National Association of Manufacturers) also ranked West Virginia last in terms of business competitiveness, so the starting point is not good.
Now, the West Virginia legislature is considering the state's Religious Freedom Restoration Act, which many (including me) see as about legalizing specific forms of discrimination, and not promoting or supporting religion. And some religious groups agree. As the Catholic Committee of Appalachia’s West Virginia Chapter explains:
We appreciate the background of 1993 federal act with the same name, and the history leading up to it, with its pertinence to protecting Native American sacred lands and religious practices from governmental infringement. With the U.S. Supreme Court’s decision that RFRA would only be applicable to federal actions, we can recognize, also, the value of an argument for versions of a law to be passed at the local level. However, the primary motivation behind West Virginia’s bill #4012, and others like it, seems not to be the protection of legitimate religious exercises, but securing the ability of religious groups to discriminate against marginalized populations on the basis of religious convictions.
Just as important for purposes of this post, many West Virginia businesses oppose the bill. Local Embassy Suites and Marriott hotels representatives spoke out against the bill, and the Charleston (WV) Regional Chamber of Commerce and Generation West Virginia, along with several city mayors, have opposed the bill, as well. They have good reason. When the state of Indiana passed a similar bill, Indianapolis promptly lost as many as twelve conventions and estimates around $60 million. Ouch. As one mayor said, West Virginia legislators need to "Get out of the way."
Morgantown, home to my institution, was the state’s second city to pass an LGBT non-discrimination ordinance in February 2014. West Virginia University’s faculty senate also unanimously yesterday approved a resolution condemning the bill. And there was a chance to make clear the intent of the bill was not intended to be used as a way to discriminate against someone based sexual orientation through a proposed amendment making that clear. Unfortunately, the amendment was deemed “not germane.”
Beyond coal, natural gas, chemicals, and timber, tourism is one of our state's main industries. It's also a great one. From whitewater rafting to skiing to hiking, the state is a great place for outdoor activities. Craft breweries and a few great local restaurants are helping make the state a destination. Unfortunately, the debate about this bill, especially in the wake of the backlash in Indiana, is hurting the state's ability to make build up it's tourism industry by making many people feel unwelcome.
It's really too bad as a local restaurant, Atomic Grill, made international news for how they responded to comments about their waitresses and has been lauded for their response to other intolerance in their restaurant.
I don't like this bill because, to me, it's either a tautology or an attempt to discriminate through legislation. But beyond that, it's stupid, terrible way to promote business in the state. We spend enough time trying to get people to come visit -- and when people do, they almost always like it. It really is a great place in so many ways. At a time when the entire state is looking at 4% budget cuts across the board -- when we need to be building bridges to broader audiences -- the state's legislature is screwing around with bills that have zero economic upside and reinforce stereotypes about the people of our state.
Being pro-business means being pro-consumer, which really means being pro-people. This bill is none of those. We need to do better, and it's disappointing our time and our money are being wasted like this.
Monday, February 8, 2016
Every year, the Corporate Practice Commentator publishes an annual list of each year’s best corporate and securities law articles. Bob Thompson, a law professor at Georgetown, is currently the curator of that list. Each year, he circulates a ballot to corporate and securities scholars with a list of articles for them to vote on.
I’ve always been a little skeptical of this list, and not just because I’ve never been on it (I don’t think). There are over 500 articles on the list and, unless most professors have more time on their hands than I do, they haven’t read most of those articles. Even if they had, I’m not sure a popular vote, even one limited to law professors, is the best way to measure quality. And quality often becomes apparent only over time, when one can see the effect the article has had.
Having said that, I have nothing against Professor Thompson’s poll, even though I don’t participate. But his recent solicitation to participate in this year’s balloting prompted me to think about the other side of things: what are the worst corporate and securities law articles of the year?
We should probably exclude student-written notes and comments in creating such a list. It’s isn’t fair to compare amateurs to professional academics (although I’ve read many student articles that are far better than some of the professionally written drivel). But what are the worst articles law professors write each year?
I’ve read some real stinkers over my 30-year career—or I should say I have begun to read some real stinkers over my career; it’s usually clear very early if an article is terrible. It would have been nice to have a list to warn me not to waste my time.
I would start a list like that, but I’m afraid too many people would vote to put my articles on it. Instead, I’ve decided to keep my own private list, beginning this year. No one else gets to see it, but be warned that one of your publications may be enshrined on my own personal wall of shame.
Note: Any comments attempting to nominate articles for the “worst” list will not be posted. I don’t want to make any more enemies than I already have.
Sunday, February 7, 2016
Saturday, February 6, 2016
Friday, February 5, 2016
Starting on the first day of my Advanced Business Associations course, I attempt to tease out the policy underpinnings and theoretical conceptions of entity law and, in particular, corporate law. This turns out to be a somewhat difficult task, since most students in the course, to the extent that they remember anything at all from their experience in the foundational Business Associations course, are more focused on what a corporation is and does than why we might have one in the first place. As the semester proceeds and the readings unfold, the students get more comfortable talking about the rationale for certain aspects of the corporate form and why corporate law structures and operating rules promise to achieve the goals of those organizing a firm as a corporation. But it's a slow process.
I have to believe that some of my fellow law professors face similar challenges with their students. I also believe that instructors in other educational settings face analogous difficulties when they incorporate abstract notions into the teaching of more "black letter" (for want of a better term at this point in my day) concepts. My approach has been to assign readings of primary and secondary material and use classroom discussion time and projects to reveal things about why the corporation exists, why venturers form them (as opposed to conducting business as sole proprietors or using another business form), and what issues we observe and might expect to observe as among corporate constituents as time unfolds. So, I plan to cover everything from the general role of entity law in fostering the conduct of business (by offering off-the-shelf rules for use by venturers in structuring and operating businesses) to notions of corporate personhood and the role of the corporation in society.
I am wondering if there is an alternative to my approach that any of you use in a similar course, or whether there is a particularly good set of foundational readings that you use to approach this set of issues in a business law offering. At the end of this semester, I will have taught this course in this general format twice, and I will be taking stock to shore it up to make sure the third time's a charm. [FYI, I start the semester with Bebchuk and Bainbridge, take a tour through the public company using the Disney case and its corporate documents, then move on to compare/contrast the publicly held firm with closely held corporations and unincorporated business associations before moving into some depth topics (M&A, complex business litigation, corporate social responsibility and the benefit corporation, etc.). It is a two-hour course.] Suggestions and other thoughts in comments or by email are welcomed.
I have been on the road a good bit over the past few months. Like Stephen Bainbridge, I greatly prefer driving to flying. On these road trips, I have noticed an increasing number of billboard advertisements for universities (my university included).
When I was in high school, I cannot remember any respectable 4-year universities or graduate schools using billboards to advertise. Maybe they did, and I just did not notice; but I do remember for-profit and community colleges using them. Today, however, I have seen billboard advertisements for schools ranked as high as the top-25 universities in the country, not to mention many solid public (including state flagship) and private universities. The Ivy League schools and their chief competitors seem to still be avoiding billboards, though even some them resort to billboards for their executive programs. (The for-profit schools still use billboards, but have also moved on to things like buying stadium naming rights).
I do wonder what accounts for the shift towards university billboard advertising, if there has been a shift. I also wonder about the costs and benefits of billboard advertising for universities. And I wonder about the comparative costs and benefits of alternative marketing.
Super Bowl ads – costing a record high $5 million for a 30-second spot – are likely a much more significant investment than your average billboard ad, but I imagine most companies that are advertising during the Super Bowl have decided that the costs outweigh the benefits. A few years ago, however, Pepsi decided to withdraw from the Super Bowl advertising frenzy for the first time in 23 years. Instead, Pepsi made more than $20 million in local grants, in the amount of $5,000 to $250,000 each. The local grants included things like buying uniforms for a high school's band. I imagine the local grants were powerful, relatively narrow in impact, and perhaps difficult to tie directly to sales. This year, it looks like Pepsi is back advertising during the Super Bowl where the advertising is much broader, if shallower. (Hat tip to the Coursera and University of Illinois digital marketing course for the link to the Pepsi story).
So maybe the decision for universities to use billboards is similar to the decision of multinational corporations to advertise during the Super Bowl: the ad might not be as personally powerful as something more individualized like local grants, but the ad will reach many more people. While I think the broader reach makes some sense, I do wonder if that will continue to hold true with social media; I imagine some of Pepsi’s local grants, for example, could “go viral” when shared on social media and could possibly rival the reach of a Super Bowl ad.
Thursday, February 4, 2016
For the past four weeks I have been experimenting with a new class called Transnational Business and Human Rights. My students include law students, graduate students, journalists, and accountants. Only half have taken a business class and the other half have never taken a human rights class. This is a challenge, albeit, a fun one. During our first week, we discussed CSR, starting off with Milton Friedman. We then used a business school case study from Copenhagen and the students acted as the public relations executive for a Danish company that learned that its medical product was being used in the death penalty cocktail in the United States. This required students to consider the company’s corporate responsibility profile and commitments and provide advice to the CEO based on a number of factors that many hadn’t considered- the role of investors, consumer reactions, the pressure from NGOs, and the potential effect on the stock price for the Danish company based on its decisions. During the first three weeks the students have focused on the corporate perspective learning the language of the supply chain and enterprise risk management world.
This week they are playing the role of the state and critiquing and developing the National Action Plans that require states to develop incentives and penalties for corporations to minimize human rights impacts. Examining the NAPs, dictated by the UN Guiding Principles on Business and Human Rights, requires students to think through the consultation process that countries, including the United States, undertake with a number of stakeholders such as unions, academics, NGOs and businesses. To many of those in the human rights LLM program and even some of the traditional law students, this is all a foreign language and they are struggling with these different stakeholder perspectives.
Over the rest of the semester they will read and role play on up to the minute issues such as: 1) the recent Tech Terror Summit and the potential adverse effects of the right to privacy; 2) access to justice and forum non conveniens, arguing an appeal from a Canadian court’s decision related to Guatemalan protestors shot by security forces hired by a company incorporated in Canada with US headquarters; 3) the difficulties that even best in class companies such as Nestle have complying with their own commitments and certain disclosure laws when their supply chain uses both child labor and slaves; 4) the Dodd-Frank conflict minerals debate in the Democratic Republic of Congo and the EU, where students will play the role of the State Department, major companies such as Apple and Intel, the NGO community, and socially-responsible investors debating some key corporate governance and human rights issues; 5) corporate codes of conduct and the ethical, governance, and compliance aspects of entering the Cuban market, given the concerns about human rights and confiscated property; 6) corporate culpability for the human rights impacts of mega sporting events such as the Super Bowl, World Cup, and the Olympics; 7) human trafficking (I’m proud to have a speaker from my former company Ryder, a sponsor of Truckers Against Traffickers); 8) development finance, SEC disclosures, bilateral investment treaties, investor rights and the grievance mechanisms for people harmed by financed projects (the World Bank, IMF, and Ex-Im bank will be case studies); 9) the race to the bottom for companies trying to reduce labor expenses in supply chains using the garment industry as an example; and 10) a debate in which each student will represent the actual countries currently arguing for or against a binding treaty on business and human rights.
Of course, on a daily basis, business and human rights stories pop up in the news if you know where to look and that makes teaching this so much fun. We are focusing a critical lens on the United States as well as the rest of the world, and it's great to hear perspectives from those who have lived in Europe, Africa, Asia, and South America. It's a whole new world for many of the LLM and international students, but as I tell them if they want to go after the corporations and effect change, they need to understand the pressure points. Using business school case studies has provided them with insights that most of my students have never considered. Most important, regardless of whether the students embark on a human rights career, they will now have more experience seeing and arguing controversial issues from another vantage point. That’s an invaluable skill set for any advocate.
February 4, 2016 in Business Associations, Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Business, International Law, Investment Banking, Law School, Lawyering, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
I am proud to announce that the lead official (the referee in NFL parlance) in Sunday’s Super Bowl is a graduate of my law school. Clete Blakeman graduated from the University of Nebraska College of Law in 1991, after playing for the Nebraska football team as an undergraduate. In addition to being an NFL referee, Clete is an attorney for an Omaha firm. (That's right: the same Clete Blakeman who somehow managed to toss a coin in the Packers-Cardinals game without it flipping.)
Clete took Corporations from me so, if any corporate law issues come up during the course of the game, I’m confident he will handle them well.
If he screws up an important call, I will, of course, delete this post immediately after the game.
Wednesday, February 3, 2016
Laurence Fink, CEO of BlackRock, the largest asset manager in the U.S., wrote a letter to the CEO's of S&P 500 Companies urging reforms aimed at fostering long-term valuation creation and curbing a myopic focus on near-term profits. Fink has long been a public advocate of long-term valuation creation for the health of American companies and the wealth of society (for an example see this April 2015 letter on the "gambling nature" of the economy"). His message has been consistent: long term, long term, long term.
Citing to increased dividends and buyback programs as evidence of corrosive short-termism, Fink laid out a modest play for action. He asks every CEO to publish an annual strategic plan signed off on by the board. The CEO strategic plan should communicate the vision for the company and how such long-term growth can be achieved.
[P]erspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent. As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth.
Fink wants companies to create these long-term vision statements as a routine part of governance and not just in the context of hedge-fund motivated proxy fights. The idea is that informing the investing public as to the long-term direction of the company and short-term obstacles frames the company message and dampens the "quarterly earnings hysteria". Also interesting to me as I approach a class on corporate social responsibility is Fink's encouragement of companies to pay more attention to social and environmental risks as increasingly difficult obstacles that must be addressed as part of a long term plan. Fink also called upon lawmakers to incentivize a long-term view by thinking beyond the next election cycle as would be needed to enact tax reform (specifically capital gains) and increased resources for infrastructure.
As readers of the blog know, I am in interested in the long-term/short-term debate and have written past posts about it. How controversial would such a CEO statement be? Venture capital/private equity funds investing in companies often require an annual CEO statement. If the language can be crafted to avoid liability for future statements, what are the downsides? Tipping off competitors and losing information advantages or first actor advantages? Letting lesser competitors free ride and adopt market leaders's plans a year or two later? Exposing the board of directors and officers to breached duty claims for failure to meet the objectives? (this last one seems very unlikely given the liability standards and exculpation provisions.)
The financial press and blogs are awash in stories on this. If you are interested in the related commentary, here are a few:
Tuesday, February 2, 2016
Embracing Freedom of Contract in the LLC: Linking the Lack of Duty of Loyalty to a Duty of Disclosure
I have been giving a lot of thought to the idea of waiving the duty of loyalty in LLCs in Delaware. The more I think about it, the more I am okay with the concept of allowing members of an LLC to decide to do away with the duty of loyalty when they form the entity. Delaware, of course, retains the implied covenant of good faith and fair dealing in any contract, and I think parties to a contract should be able to decide the terms of their deal.
Still, I am sympathetic to those who are concerned about eliminating the duty of loyalty because it does seem rather awful, and yet, I am also a proponent of freedom of contract. How to reconcile these things? Well, I am now of the mind that perhaps we need to bring a partnership principle to LLCs to help. In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j). I think changes to the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default.
At formation, then, those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty. This is part of the bargain, and any member who does not agree to the terms need not become a member. Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated. This is not especially concerning to me.
What would concern me more is a change in the duty of loyalty after one becomes a member. That is, if the majority of LLC members could later change the loyalty provision, then that seems problematic to me, as fiduciary duties are not just to protect the majority. As such, it seems to me more proper that changes to the duty of loyalty, when a member does not have any say in that change, is what should be restricted. Like in changing a partnership agreement, if everyone agrees, then there is not a problem. And if you accept the provision when you join, it is not a problem. But you shouldn't have a fiduciary duty removed or modified after the fact without your consent.
Because the duty of loyalty is a fixture that most people expect, I do see value in requiring (at least for some time) that there be clear disclosure of the applicable to duties to potential LLC members. But at least for the moment, I am feeling the freedom of contract option on the duty of loyalty is quite reasonable.
Monday, February 1, 2016
Most law professors want to place their articles in the top law reviews. The higher the ranking, the better. Because of that, editors at schools further down the chain have trouble getting high-quality articles.
Personally, I think it’s inappropriate to judge articles by where they’re placed. I don’t trust the quality judgments student editors make. They lack the subject-matter background to judge the true quality of an article and they often have a preference for faddish topics. But placement matters to many people, and that has a negative effect on many law reviews. They never even see some of the best articles.
The Harvard, Yale, and Chicago law reviews are never going to have trouble getting good submissions. If you’re a law review editor at a top-20 law review, you can stop reading here. But what about the rest of the reviews?
One option many people have tried is to organize symposia, but that’s not always effective. Even if leading scholars are willing to participate in those symposia, they often don’t submit their top work.
My proposed solution: use money as a motivation.
Paying for each article is a possibility, but that’s financially difficult. Professors might be willing to publish in a lower-ranked review for a thousand dollars or two, but schools aren’t going to give their law reviews enough extra money to pay $2,000 for each article. And $100 or so per article isn’t going to motivate many law professors. There’s also no quality assurance; leading scholars might just dump their lower-quality work on the review to get the money.
But there’s a better way to spend the money that might work. Assume a law school is willing to cough up an extra $2,000-$3,000 a year to improve its law review. (That’s not a huge amount for many law schools; it’s certainly less than schools pay for symposia.) Instead of trying to spread that out among the authors, the review could offer a $2,000-$3,000 cash prize to the article in each volume that gets the most citations within 2-3 years of publication. The better the article (at least in terms of citations), the more likely it is to win the prize.
That amount of money might motivate authors. I’ve written things for foreign journals for cash payments like that.
It’s a lottery, but many law professors have big egos and would assume their article would win. It would be most attractive to the professors who are cited most often, increasing the review’s readership.
Law reviews could even phrase the payment as an award, giving professors something to put on their vitas. “I won the John J. Smith Award for Legal Writing Excellence.”
If you’re a law review editor considering something like this, let me know. I have this article I’m working on and I need some money for a backpacking trip I’m planning.
Sunday, January 31, 2016
Is it possible for the Constitution to be "neutral" as to choice of business entity? 101 Iowa L. Rev. 499 #corpgov— Stefan Padfield (@ProfPadfield) January 25, 2016
Saturday, January 30, 2016
This piece in the Wall Street Journal reports on a recent article by David F. Benson, James C. Brau, James Cicon, Stephen P. Ferris regarding the language used in charters and bylaws of companies going public. As described in the WSJ, they conclude that companies with shareholder-unfriendly provisions – such as, for example, staggered boards or supermajority voting – are inclined to “camouflage” this fact by using more obscure, harder-to-parse language. And this effect is more pronounced for companies that can expect they won’t be caught – such as, companies with a smaller analyst following and fewer institutional investors. They also find that companies that use camouflage reap benefits in the form of higher pricing. I was intrigued by the description in the WSJ, and thought the findings might be a useful point of discussion in my Sec Reg class, so I tracked down the actual study. But I found myself a bit confused by the evidence offered to support their conclusions.
[More under the cut]