Business Law Prof Blog

Midwest Corporate Law Scholars Conference: Papers (Drafts)

This coming Wednesday I plan on presenting a very rough draft of my latest project, "The Silent Role of Corporate Theory in the Supreme Court’s Campaign Finance Cases," at the second annual Midwest Corporate Law Scholars Conference at The Ohio State University, Moritz College of Law.  A total of 26 scholars are scheduled to present--which is quite a positive uptick from last year, when I believe we had less than 10 (though it was nonetheless an extremely positive experience).  You can find links to a number of the papers/drafts (including mine) here.

SJP

Reckless Endangerment

I'm a little late to the game on this because I have spent the last week hiking in South Dakota's Black Hills, but there's a new book on the financial crisis that is receiving favorable reviews. It's Reckless Endangerment, byt Gretchen Morgenson and Joshua Rosner. Morgenson is a Pulitzer Prize-winning reporter for the New York Times. The New York Times review is here and the Wall Street Journal review is here. Neither review is completely satisfied with the slant of the book, which might be evidence of even-handedness. In any event, it does look worth reading.

-Steve Bradford

Income Inequality as a Policy Consideration

Professor Alan Taylor writes for Financial Times that emerging markets are catching up to developed markets in a way that few would have expected five years ago.  Still, the article notes that significant risks remain for developing markets, particularly concerns about the increasing level of income inequality.  The full article is here: Do emerging markets deserve developed status? (H/T: Greg Mankiw).

A few days ago, for the New York Times, Nicholas Kristoff argued that increasing levels of privitization and reductions in local, state, and federal programs indicate some U.S. trends back toward developing nations, where wealthy people have their own private bodyguards rather than support a strong police force and use diesel generators instead of paying taxes to support a reliable electric grid. Kristoff also noted that income inequality is a significant danger, although on he concedes that the United States is "in no danger of actually becoming Pakistan, any more than we’re going to become Sweden."

I'm not on board fully with either article (and I'm more convinced by the former than the latter), but both raise the point that increased income inequality is a significant concern.  On that, I definitely agree. So whether we are going to increase or reduce regulations on businesses or increase or reduce taxes on people and/or businesses, I think the impact on income inequality, and what that could mean for the country, needs to be part of the consideration.

Frankly, I don't want to live in a country where no one can afford a Bugatti Veyron ($1,700,000). I would, however, like to live in a place where a Fisker Karma ($100,000) is at least a possibility, and my Subaru Legacy is a reasonable expectation, for everyone.  (If you're not a car person, please feel free insert your luxury to practical options of your own.)    

--JPF

A Good Gig If You Can Get It.

Over at DealBook, Steven Davidoff declares that while there is much wailing and gnashing of teeth about "excessive" regulation--when it comes to director and officer liability, "the truth is that they have about the same chance of being held liable for their poor management of a public firm as they have of being struck by lightning."  Davidoff goes on to note that, "[e]ven if there is liability or a settlement, it is almost always covered by insurance of directors and officers."

Add to the limited risk of personal liability the fact that it is at times seemingly impossible to get oneself fired as a director (See the WSJ here: "A surprising number of embattled CEOs, forced out for poor performance or legal problems, find a warm reception from outside corporate boards on which they sit."), as well as what at least some see as very limited board accountability to shareholders, and it should not come as a surprise that some see a corporate management culture where "CEOs and Boards Enrich Themselves While Bankrupting America."  (The WSJ story reports that, "The median direct compensation for directors at the top 200 companies on the Standard & Poor's 500 is $228,058."  Given that most of these directors in fact run other companies, as well as sit on other boards, the hourly rate here is probably pretty good.)

SJP

Making a Difference As Lawyers and Educators

Yesterday I received a copy of Professor Matthew Fraidin’s Keynote Address to the Bergstrom Child Welfare Law Training Program, University of Michigan Law School (May 24, 2011) via two of my favorite lawyers (my wife and my aunt).  The address was in the context of child welfare law, but his message is, I think, applicable to all lawyers. In fact, I think it is a particularly important message for business lawyers, and it is a message that applies to transactional lawyers as well as litigators.  Professor Fraidin argues:

Lawyers.do.things.  They don’t stand and watch and think it’s right because everyone else does it, because the courthouse culture has always done it this way, because the oldtimers do it this way, or even because a law professor tells them to do it this way.  Lawyers don’t stand idly by just because that’s what a judge wants. . . . .

We can assume that every client and every litigant and every witness is different from every other one.  We can’t assume we’ve seen this one before, that we can spot this kind of case a mile away.  We have to resist the tendency to say “Oh, yeah, sure, this is the FILL IN THE BLANKS kind of case.”  This is the “mother who is a victim of domestic violence” case.  This is the “untreatable manic-depressive” case.  “This is the immature-father-still-sponging-off-his-mother” case.

Because if we know all the answers from the outset, we don’t get to do any thinking.   We don’t get to get to know this particular client, this particular human being.   We don’t get to hear her story, because we don’t have to.  And we can just stand around and let the world take its course. 

But that’s not what lawyers do.  We change the course of events.  We add value.  We make a difference.

I think he’s absolutely right, or at least he can be.  As lawyers, as educators, and as law students, we should all be listening more.  We should be trying to find answers and proposing solutions, but first we need to know what is behind the client's question or goal, and seek the root of their problem, not just the symptom. 

This is a great call to action for all lawyers, and especially for law professors.  We can’t assume we know all the answers or the best way to teach, just because we have done it before or the “great ones” did it a certain way.  We should asking what we can do better, and who are we teaching, and why we are teaching them. 

We must remember that we are not just teaching law students to be lawyers. We are teaching them to be lawyers who can serve other people.  If we focus on the serving people part a little more, I think, in the end, our students will become better lawyers.  And that’s one way we can make a difference. 

--JPF

Honoring Promotors' Entity Choices in Delaware

Recognizing the potential perils of self-promotion, I nonetheless offer this: The Harvard Business Law Review Online has just posted a short piece of mine called LLCs and Corporations: A Fork in the Road in Delaware?   

In it, I take a look at Vice Chancellor Laster's decision in CML V, LLC v. Bax, 6 A.3d 238 (Del. Ch. Nov. 3, 2010) and argue that his view "should be the default rule in analyzing all LLC questions: '[T]here is nothing absurd about different legal principles applying to corporations and LLCs.'"

As I note in the paper, this may be a asking a little too much, as many courts don't even seem to appreciate that LLCs are "limited liability companies," not "limited liability corporations."

With thanks to those thinking about these issues long before I did, including (but by no means limited to) Larry Ribstein, Stephen M. Bainbridge, Jeff Lipshaw, and Geoffrey C.Rapp, here's my take: 

Where legislatures have decided that distinctly corporate concepts should apply to LLCs—such as allowing piercing the veil or derivative lawsuits—those wishes (obviously) should be honored by the courts. And where state LLC laws are silent, the court should carefully consider the legislative context and history, as well as the policy implications of the possible answers to the questions presented. Courts should put forth cogent reasons for their decisions, rather than blindly applying corporate law principles in what are seemingly analogous situations between LLCs and corporations.

The members of an LLC chose the LLC as their entity, and they should enjoy both the benefits and burdens of that choice. Where courts refuse to acknowledge the distinct nature of LLCs, the promoters’ choice of entity is, at least in part, ignored. (citations omitted)

--JPF

The Edwards Affair: Creative License Versus Prosecutorial Discretion

I am not someone who knows a lot about federal election law, but the whole John Edwards thing seems to extend a theme of aggressive prosecution in the financial "crimes" area (as well the whole tawdry and unpleasant affair).  Here's what a few experts do have to say about the charges against Edwards (from Ari Melber at CBSnews.com, internal links in original): 

This is a "novel claim," according to George Washington law professor Jonathan Turley, who voiced support for Bill Clinton's impeachment and is not exactly known to be soft on political corruption.  Turley could not find a single "actual federal case" supporting the prosecution's theory. Election law expert Melanie Sloan, who runs the anti-corruption group Citizens for Ethics and Responsibility in Washington, agreed that "no court has ever interpreted the definition of campaign contribution this broadly."  Turley adds that the defense can argue "this was not an effort to hide money from the FEC but to hide an affair from Edwards' wife -- a classic motivation."

It seems that at the DOJ and SEC, among others, there is a growing sense that high-profile convictions are the key, not getting the law right.  On the one hand, I support creative crime fighting and using existing laws to punish wrong-doers.  And, especially in the financial-crimes area, I'd rather see more focus on actually catching cheaters than on passing new laws that usually prove equally ineffective. But in exercising that focus, law enforcement should be using the laws for the intended purpose, not just to see if they can get a conviction. 

Simply, DOJ should not be pursuing Edwards on this.  As near as I can tell, he was covering up his affair, not using the money to run for office. (While this makes him unpleasant and unsavory, it doesn't mean he broke election laws.)  Yes, the funds had the incidental effect of helping to keep alive his campaign (or at least made it less dead), but he would have been covering up the affair either way, and the money does not appear to ever have been given to the campaign.  It was given to him.   

As my colleague Steve Bradford noted last month, insider trading cases are getting similar aggressive treatment, triggering some to speculate that the law law enforcement will "ramp up prosecutorial methods once reserved for mob and terrorism cases."  Foreign Corrupt Practices Act cases are similarly pushing forward aggressively.

I tend to be a rule follower, and I appreciate that some people often abuse their rights and privileges.  I just can't get past a sense that some prosecutors have decided that they are "closers" who need to find ways to win at all costs, which, to me, misses the point.  

The folks at Cliffsnotes.com explain "prosecutorial discretion" this way: 

As an elected or appointed official, the prosecutor is the most powerful official in the criminal justice system. Prosecutors exercise unfettered discretion, deciding who to charge with a crime, what charges to file, when to drop the charges, whether or not to plea bargain, and how to allocate prosecutorial resources. In jurisdictions where the death penalty is in force, the prosecutor literally decides who should live and who should die by virtue of the charging decision.  

In my mind, prosecutorial discretion should be exercised a little more carefully, especially on the "how to allocate prosecutorial resources" part.

--JPF 

The Massey "Walk Away" Deal

Over at DealBook, Steven Davidoff has some nice analysis of the Delaware Chancery Court’s refusal to halt the acquisition of Massey Energy by Alpha Natural Resources in spite of the fact that one lawyer described the ruling as effectively saying that "you can be the worst C.E.O., you can violate all the laws you want, then you can arrange a sweetheart merger and just walk away.”  The same lawyer is also quoted as saying (perhaps summing up the feelings of a number of plaintiffs' lawyers about Delaware courts): "If you can’t win against Massey and Don Blankenship you can’t win.”

SJP