Wednesday, May 25, 2016
Last week the SEC announced insider trading charges against former-Dean Foods Company board member Thomas C. Davis and professional sports gambler, William “Billy” Walters of Las Vegas. Involved in the case is professional golfer, Phil Mickelson, named as a relief defendant in the case. Davis owed money to Walters and began passing along confidential information first about Dean Foods, and later about Darden Restaurants. Walters passed along his insider knowledge of Dean Foods to Mickelson, who also owed Walters money.
For those unfamiliar,
"the SEC may seek disgorgement from “nominal” or “relief” defendants who are not themselves accused of wrongdoing in a securities enforcement action where those persons or entities (1) have received ill-gotten funds, and (2) do not have a legitimate claim to those funds." S.E.C. v. DCI Telecommunications, Inc., 122 F. Supp. 2d 495, 502 (S.D.N.Y. 2000).
The SEC issued a statement on Friday detailing the alleged wrong doing by all parties and announcing that "Mickelson will repay the money he made from his trading in Dean Foods because he should not be allowed to profit from Walters’s illegal conduct.”
As most insider trading cases are, the facts are fascinating. This would make a great exam hypo, and I am flagging it for my casebook section on insider trading.
Tuesday, May 17, 2016
Breaking academic news:
Elsevier, a world-leading provider of scientific, technical and medical information products and services, announced today the acquisition of the Social Science Research Network (SSRN)....SSRN will be further developed alongside Mendeley, a London-based free reference manager and scholarly collaboration network owned by Elsevier....
Elsevier provides web-based, digital solutions - among themScienceDirect, Scopus, Elsevier Research Intelligence and ClinicalKey - and publishes over 2,500 journals, including The Lancet and Cell, and more than 33,000 book titles, including a number of iconic reference works. Elsevier is part of RELX Group, a world-leading provider of information and analytics for professional and business customers across industries. http://www.elsevier.com
What does this change mean for publishing authors and researchers? Content will remain free to post and download. Elsevier acquired Mendeley in 2013 creating controversy over Mendeley's continued "trustworthiness" as a part of a for-profit enterprise. Since the acquisition, Mendeley doubled its subscribers from 2.5 to 5 million. Elsevier's interest in SSRN, a profitable site for over 13 years, is primarily in its potential for generating user data and analytics. Integrating SSRN and Mendeley services is predicted to strengthen
"connections between SSRN author pages and Mendeley professional profiles, and workflow connections that allow Mendeley collaborative groups to submit papers for distribution and perhaps eventually review and publication. There will also be other opportunities to strengthen SSRN for its authors, with plans to link preprints on SSRN with Scopus, bringing analytics about article “performance” to SSRN authors, and to bring improved links between working papers and preprints with their eventual published versions."
Would it be too much to hope for a cosmetic overhaul of the website too?
The acquisition raises some interesting questions for those in academics whose scholarly productivity, national reputation and other outputs are increasingly measured with data points provided from sites like SSRN. Changes to the substance of the website may change how those metrics are generated and what they mean. The creation of new metrics available to authors (and schools) may provide for more reportable data points for our annual faculty reports with the questions remaining how useful are those metrics and what do they tell us about the value of ideas?
Tuesday, May 10, 2016
At the 2017 AALS annual meeting, January 3-7 in San Francisco, the AALS Sections on Agency, Partnerships LLCs, and Unincorporated Associations & Nonprofit and Philanthropy Law will hold a joint session on LLCs, New Charitable Forms, and the Rise of Philanthrocapitalism.
In December 2015, Facebook founder Mark Zuckerberg and his wife, Dr. Priscilla Chan, pledged their personal fortune—then valued at $45 billion—to the Chan-Zuckerberg Initiative (CZI), a philanthropic effort aimed at “advancing human potential and promoting equality.” But instead of organizing CZI using a traditional charitable structure, the couple organized CZI as a for-profit Delaware LLC. CZI is perhaps the most notable example, but not the only example, of Silicon Valley billionaires exploiting the LLC form to advance philanthropic efforts. But are LLCs and other for-profit business structures compatible with philanthropy? What are the tax, governance, and other policy implications of this new tool of philanthrocapitalism? What happens when LLCs, rather than traditional charitable forms, are used for “philanthropic” purposes?
From the heart of Silicon Valley, the AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations and Section on Nonprofit and Philanthropy Law will host a joint program tackling these timely issues. In addition to featuring invited speakers, we seek speakers (and papers) selected from this call.
Any full-time faculty of an AALS member or fee-paid school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1- or 2-page proposal by June 1, 2016. The Executive Committees of the Sections will review all submissions and select two papers by July 1, 2016. If selected, a very polished draft must be submitted by November 30, 2016. All submissions and inquiries should be directed to the Chairs of the Sections at the email addresses below:
University of Oregon School of Law
Garry W. Jenkins
Associate Dean for Academic Affairs
John C. Elam/Vorys Sater Professor of Law
Moritz College of Law,State University
Friday, May 6, 2016
With this post I warmly welcome John Linarelli to the Business Law Professor Blog as a guest blogger for the month of May. Professor Linarelli, Chair in Commercial Law at Durham Law School, has crossed the Atlantic and different disciplines throughout his career. His research engages with issues of inequality, specifically focusing on economic and commercial issues. Recent scholarly publications include his forthcoming co-authored book, to be published with Oxford University Press, Beyond Global Capitalism: Reclaiming the Future of International Law and his 2015 article Concept and Contract in the Future of International Law, 67 Rut. U. L. Rev. 61. Interested readers can view Professor Linarelli’s full academic bio and his SSRN page for more information. Look for new BLPB content from Professor Linarelli later this month.
Understanding that American academics and practicing lawyers may be unfamiliar with Durham University, Professor Linarelli provided us with an overview. He writes a helpful introduction and provides a charming view into some different academic traditions:
Durham Law School usually ranks as one of the top 5 law schools in the UK. In the UK-wide Research Excellence Framework (REF) exercise in 2014, of which all university participate, we ranked third. Our students are incredible and a good number go off to the big City of London law firms upon completion of their practice qualifications. Lord Justice Hughes on the UK Supreme Court is an alum. We also run several LLM programmes, including in Corporate Law, International Trade and Commercial Law, European Trade and Commercial Law, and International Law and Governance.
Wednesday, May 4, 2016
Last week, Hamdi Ulukaya, founder and CEO of Chobani, announced a 10% company stock grant to all company employees. Chobani joined the ranks of high profile stock grants including Whole Foods, Starbucks, Apple and Twitter. Stock grants, while more common in tech industries, are a part of hybrid corporate law-employment law conversation on shared ownership. Employee ownership in companies can occur in several different forms such as ERISA-governed benefit plans where the company stock issued or bought as a part of a retirement saving plan. Alternatively, a stock grant may be structured as a bonus plan, a standard compensation, or a vesting employee benefit eligible after threshold years and types of service. All of these plans fall under the rubric of shared ownership. In 2015, the National Center for Employee Benefits estimated that over 9000 companies participated in some form of shared ownership.
In a similar vein, actors in the hit (and record-breaking with 16 Tony Nominations) musical Hamilton have entered into a profit-sharing agreement with producers. The deal is different for these actors, but the sentiment is the same in sharing profits, aligning interests, and promoting employee loyalty.
Shared ownership plans, especially the ERISA-governed ones can have specific tax and financing benefits for companies. Creating a shared ownership plan, however is often focused on creating certain firm-specific benefits such as recruiting and retaining talent, and improving firm performance by aligning interests between employees and the company. The recruitment and retention aspect can be especially valuable to start-up firms that struggle to compete with mature firms on salary and reputation. Empirical studies have found improved workplace performance, on average, for firms with shared capitalism plans, with positive effects observed most strongly when combined with policies such as low supervision, decision-making participation, and competitive pay.
I note these stories with particular interest for several reasons. The first is that I am routinely embarrassed by how little play I give employees in my corporation class . I seem all too happy to ignore this very important piece of the corporate power puzzle, engine for the machine, etc., etc. Second, I have been looking at shared ownership in the context of a recent research project, so look for more on that topic in a separate post once the project progresses. Third, my sense is that social enterprise movement will bring with it greater demands for shared ownership as a means to address social factors such as retirement security, employee autonomy and wage inequality. Look for more of these stories in the headlines and an emphasis on it in scholarship.
Tuesday, May 3, 2016
Submissions: manuscripts or abstracts must be submitted electronically to Professor Michelle Harner, Chair-Elect of the Section on Business Associations, at email@example.com August 24, 2016.
The AALS Section on Business Associations and the AALS Section on Comparative Law are pleased to announce a Call for Papers for a joint program to be held on January 5, 2017, at the AALS 2017 Annual Meeting in San Francisco. The topic of the program is “Business Law in the Global Gig Economy: Legal Theory, Doctrine, and Innovations in the Context of Startups, Scaleups, and Unicorns.”
Startups and entrepreneurs have long played an important role in the U.S. economy. From Henry Ford to Mark Zuckerberg, entrepreneurs have revolutionized the ways in which their customers receive products and services. As Phil Libin, CEO of Evernote, has explained, “There’s lots of bad reasons to start a company. But there’s only one good, legitimate reason, and I think you know what it is: it’s to change the world.”
That philosophy continues today as entrepreneurs disrupt markets and challenge business and legal norms. Traditional notions of the firm, fiduciary duties, contractual bargains, and optimal capital structures may not aptly fit entrepreneurial approaches. Indeed, entrepreneurs’ business models, financing needs, and operational objectives require lawyers and scholars to rethink governance, capital structures, and regulatory schemes that may limit or impede further innovation, both nationally and transnationally.
Wednesday, April 27, 2016
The shimmering mirage of summer has cast its spell on me, which means I am laboring under the delusion that I will have so much more time to do the thinking, learning, and writing that I want to be doing. My work is increasingly dependent upon statistical evaluations that others do, and occasionally involves my own work in the area. Several years ago I attended an empirical workshop for law professors at USC (something like this) taught by Lee Epstein and Andrew Martin that was an instrumental introduction and my only formal foundation in the area. I have the bug and want to learn more! But I don't know the best way to go about it-- piecemeal or full immersion--or even what all is available. I compiled my research below and share the list for interested readers. Comments encouraged by anyone who wants to share their experience with a listed option, general advice, or add to this meager list.
Empirical Skills Resources:
Introduction/Immersion Workshops like:
- George Mason’s empirical workshop
- Duke/Northwestern’s causal inference workshop
- SELS pre-conference empirical training
- Estimate--Michigan State’s summer econometrics workshop
- ICPSR summer offerings –
Free electronic courses:
Recomended text books/books
Epstein/Martin Introduction to Empirical Research
Enroll in a course at your university (audit or pursue another degree) such as basic statistics or an Econometrics course.
Friday, April 22, 2016
The Fulbright Scholar Program offers teaching, research or combined teaching and research awards in over 125 countries for the 2017-2018 academic year. Opportunities are available for college and university faculty and administrators, as well as for legal professionals and independent scholars.
This year, the Fulbright Scholar Program is offering over 90 awards in the field of Law. Exciting opportunities are available in many countries, including but not limited to:
- Brazil: Fulbright Distinguished Chair in International Relations
- Canada: Research Chairs in Governance
- Ghana: Law
- Japan: Study of the United StatesPublish
- Jordan: Public Policy and International Relations
- Kazakhstan: All Disciplines (Law is a preferred discipline)
- Macedonia: Rule of Law, Judiciary Reform and Civil Society
- Norway: International Courts and Tribunals
- Russia: Distinguished Chair in Sustainable Development
- Sweden: Fulbright-Lund University Chair in Public International Law
We recently hosted a webinar on Fulbright opportunities in law. Staff provided an overview of awards open to academics and professionals, and a 2015-16 Fulbright alumnus spoke about his experiences and answered questions. Please follow this link to listen to the recording.
For further awards in the field of Law, please visit our new Opportunities in Law webpage. There you will find award highlights and examples of successful projects in the discipline.
For eligibility factors, detailed application guidelines and review criteria, please follow this link. Interested scholars may also wish to join My Fulbright, a resource center for applicants interested in the program.
Applicants must be U.S. citizens and the current competition will close on August 1, 2016.
Wednesday, April 20, 2016
As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the US Commodity Futures Trading Commission (CFTC) promulgated rules to regulate the swaps marketplace, securities trades that were previously unregulated and a contributing factor in the 2008 financial crisis. The CFTC oversees the commodity derivatives markets in the USA and has dramatically increased regulations and enforcement as a result of Dodd-Frank. As of January 2016, the CFTC finalized Dodd-Frank Rules exemptive orders and guidance actions. Commodity derivatives market participants, whether acting as a commercial hedger, speculator, trading venue, intermediary or adviser, face increased regulatory requirements including:
- Swap Dealer Regulation such as De Minimis Exceptions, new capital and margin requirements to lower risk in the system, heightened business conduct standards to lower risk and promote market integrity, and increase record-keeping and reporting requirements so that regulators can police the markets.
- Derivative Transparency and Pricing such as regulating exchanges of standardized derivatives to increase competition, information and arbitrage on price.
- Establishing Derivative Clearinghouses for standardized derivatives to regulate and lower counter party risks
The full list of CFTC Dodd Frank rulemaking areas is available here. In conjunction with the new regulations, the CFTC has stepped up enforcement actions according to a 2015 CFTC enforcement report detailing 69 enforcement actions for the year. Through these enforcement actions, the CFTC collected $2.8 billion in fines (outpacing SEC collections of $2 billion with a much larger agency budget and enforcement docket).
Wednesday, April 13, 2016
SEC Concept Release on Financial Disclosures in form S-K: Risk, Reporting Frequency and Sustainability
Today (April 13, 2016), the SEC made public a much anticipated concept release regarding financial disclosures in form S-K. The release seeks public comment on "modernizing certain business and financial disclosure requirements in Regulation S-K." The comment period is open for the next 90 days.
The release is 341 pages, so needless to say, I haven't gotten through the document. In it's entirety at least. By my initial count there are over 35 substantive issues in the release and many more technical/procedures ones. I've highlighted 3 issues that are relevant to prior BLPB discussions: Risk, Reporting Frequency and Sustainability.
Risk management and risk reporting in item 503(c) and 305 are addressed starting on page 146.
"[W]e consider whether requiring additional disclosure of management’s approach to risk and risk management and consolidating risk-related disclosure would, on balance, be beneficial to investors and registrants. We also seek to better understand how our disclosure requirements could be updated to enhance investors’ ability to evaluate a registrant’s risk exposures. We are especially interested in feedback on how we can improve the content and readability of the risk factors included in a filing as well as the potential advantages and disadvantages of different approaches to risk-related disclosure."
Reporting frequency as a component of the investor time horizons (aka short/long term investment) are discussed on page 280. The Commission questioned the frequency of financial reporting noting the adoption of semi-annual reporting in 1955 and quarterly reporting in 1970. Summarizing the current debate on quarterly reporting, the Commission states:
"The value of quarterly financial reporting has been the subject of debate. Opponents of quarterly reporting argue that frequent financial reporting may lead management to focus on short-term results to meet or beat earnings targets rather than on long-term strategies. Consequently, some have argued that quarterly reports should be discontinued or made voluntary in the United States.
Wednesday, April 6, 2016
I have heard the hype that April is financial literacy month, but I don't know what that means other than it is a slogan and a headline. It has a hashtag (#FLM2016), but no consensus definition other than merely understanding how money works. PBS, the President, the National Council of Financial Educators, Wikipedi and even someone self-titled "RichDad" all weigh in on the definition. This is unhelpful even by law school standards where we teach vague definitions like reasonable and negligent.
A basic internet search also reveals that there aren't widely adopted standards to demonstrate that a person has achieved financial literacy, and perhaps most strikingly there aren't comprehensive, free resources from a government agency or reputable third parties (i.e., companies not selling credit management services) to assist interested folks in acquiring the requisite financial information. There are resources available for children like this learning module hosted by the Federal Reserve Bank: Ella Saves! These introductory materials serve the goal of educating the next generation of financial consumers against the perils of credit and the need for saving. But what resources are available for the current generation of financial consumers-- those faced with student debt, who had access to large home mortgage loans, who have access to multiple credit cards with large balances and high fees, who are likely tasked with not only saving but investing their savings for retirement through a defined contribution plan? There are a variety of individual tools, articles and books available but if you are a novice and don't yet know what you need to know, this is both an overwhelming and an inefficient approach to acquiring the knowledge you need.
For example, through further research I found the Institute for Financial Literacy, a 2002 501(c)(3) focusing on adult financial education. Thank you Financial Literacy! They publish five standards (note that there is no consensus that these are the right benchmarks for financial literacy) and benchmarks, as well as provide some supporting materials for each one. A main resource they offer though is a listing of other state, federal and nonprofit websites where you can go and research what you don't know. Brilliant if you know where to start and what you need to find, unhelpful if not.
My frustration stems from the belief/observation that this information matters; individual and national financial stability depend upon it. Why is it so hard to know gauge whether or not I have it and what I need to do to gain it?
Wednesday, March 30, 2016
CALL FOR PAPERS
2016 Financial Stability Conference
“Innovation, Market Structure, and Financial Stability”
The Federal Reserve Bank of Cleveland and the Office of Financial Research invite the submission of research and policy-oriented papers for the 2016 Financial Stability Conference to be held December 1-2, 2016, in Washington, D.C. The objectives of this conference are to highlight research and advance the dialogue on financial market dynamics that affect financial stability, and to disseminate recent advances in systemic risk measurement and forecasting tools that assist in macroprudential policy development and implementation.
PAPER SUBMISSION PROCEDURE
The deadline for submissions is July 31, 2016. Please send completed papers to:firstname.lastname@example.org Notification of acceptance will be provided by September 30, 2016. Travel and accommodation expenses will be covered for one presenter for each accepted paper.
A pdf version of this call for papers is available here
Tuesday, March 22, 2016
Legal commentators and the media have been abuzz with news of President Obama's nomination of Judge Merrick Garland to the Supreme Court. If there was ever reason to be abuzz, in the world of legal news, this is it. Try to find a summary of Judge Garland's record in dealing with business law issues, however, and you are met with a silent, dark internet. Aside from mentions of Judge Garland having taught anti-trust at Harvard there is little discussion of his business jurisprudence. The D.C. Circuit court hears an administratively heavy caseload, but Judge Garland has been on the bench for nearly 20 years! I set out to uncover his business law barometer. My initial searches produced 19 opinions that he authored on business law matters, which are mostly securities cases but also include a piercing the corporate veil and contracts claims among others. While I am no online search wizard and am positive that I have missed some relevant cases, this is what I produced after such wide-net casting as "business law", "corporations", "partnership", "board of directors", "shareholders" etc. You get the idea, I ran several undeniably broad searches. The initial case list is provided below, and was generated (along with annotations) through WestLaw. Please comment if you have relevant cases to add. I may add commentary on the cases in a future post if there is interest... (and time).
Securities Law Cases
- Horning v. S.E.C., 570 F.3d 337 (D.C. Cir. 2009)
SECURITIES REGULATION - Brokers and Dealers. Mid-trial correction of sanction the SEC sought did not deprive broker-dealer firm’s former director of due process.
- Graham v. S.E.C., 222 F.3d 994 (D.C. Cir. 2000)
SECURITIES REGULATION - Fraud. Registered representative aided and abetted customer’s fraud.
- Katz v. S.E.C., 647 F.3d 1156 (D.C. Cir. 2011)
SECURITIES REGULATION - Brokers and Dealers. Former registered representation made unsuitable investment recommendations for her customers.
Wednesday, March 16, 2016
Being near to celebrity, even academic celebrity, can be exciting. I feel unjustifiable pride and exhilaration in the nomination of George Washington Law School professor Lisa Fairfax to be a SEC commissioner. The White House announced her nomination last October, and the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings yesterday for Lisa Fairfax (democratic nominee) and Hester Peirce (republican nominee). Professor Fairfax is being heralded as having "written extensively in favor of shareholder rights, shareholder activism, and gender and racial diversity on corporate boards." Her scholarship is available on her SSRN page. Hester Peirce, another academic of sorts, is a senior fellow at the Mercatus Center at George Mason University researching financial markets and an adjunct professor. The Mercatus Center is a "university-based research center... advanc[ing] knowledge about how markets work to improve people’s lives by training graduate students, conducting research, and applying economics to offer solutions to society’s most pressing problems." Her writing is available here.
The hearing process was reported by the WSJ as "tough" for both nominees. The confirmation process is by no means a given in the current political climate. A video of the hearing is available for viewing. Additionally, each nominee submitted a statement and financial records as a part of the confirmation process. Download FairfaxStatement Download FairfaxFinancialDisclosure Download PeirceStatement Download PeirceFinancialDisclosure
Lisa Fairfax summarized her credentials to be a Commissioner:
As a law professor, over the last fifteen years I have had the privilege of teaching Corporations and Securities Law to the next generation of practitioners, judges, and regulators, so that they can understand the increasingly complex world in which companies must operate, markets must perform, and regulators must monitor. My teaching, along with my research and writing in these areas, have given me a deep understanding of the issues confronting the SEC, as well as a strong desire to help tackle those issues head on.
Fairfax's statement also stated her view of the SEC:
[I] believe deeply in the SEC’s three part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. ... I believe that the SEC’s three-part mission statement is more than a statement; it is a set of guiding principles that should shape every aspect of the agency’s activities. ...I believe the SEC’s work must be aimed at ensuring that investors are protected at all times, and that investors have confidence in the markets and the financial system.
The SEC also has a responsibility to facilitate access to needed capital for all participants in the market, from the corporation and small business owner in need of cash and credit, to the individual investing to support a family, finance a child’s education, or ensure a comfortable retirement.
Hester Peirce, who previously worked with the SEC’s Division of Investment Management, Commissioner Paul Atkins, and the SEC Investor Advisory Committee wrote:
My desire to serve at the SEC is motivated by the conviction that the capital markets help unlock people’s potential. Investors build their retirement nest eggs, their down payments, and their children’s college funds. Vibrant capital markets find and fund individuals and companies with brilliant ideas that can enhance people’s lives and the nation’s prosperity.
My belief in the capital markets’ ability to enrich our communities is built on lessons I have learned at the Peirce family dinner table, in classrooms at Case Western Reserve and Yale, and from mentors and colleagues throughout my career.
I am academically (and personally) interested in the role of retirement investors in capital markets so I noted with interest that both nominees spoke of the relevance of capital markets and the SEC to individual (retirement) investors.
The Committee is expected to vote on April 7, 2016.
While we adjust to the departure of our long-time contributor (and friend) Steve Bradford and plan for the future, the Business Law Professor Blog editors seek interested guest bloggers willing to write one or more substantive posts on a business law topic (scholarship, doctrinal development, current event, etc.). We are open to a variety of business law backgrounds with a particular interest in adding coverage of commercial law and related topics. For questions or if you would like to nominate yourself or a colleague to guest blog between now and the end of summer 2016, please send an email to email@example.com with the subject line: "BLPB Guest Blogger". Our selection process will depend upon the volume and variety of responses.
Wednesday, March 9, 2016
Fellow BLPB editor, Stefan Padfield, raised some insightful questions on the continued reach and impact of defacto corporation doctrines and corporation by estoppel in an earlier, offline conversation. [Stefan uses my Business Organizations casebook offered on the electronic platform ChartaCourse and was graciously providing me some feedback]. The conversation raised two related groups of questions. First what is the continued import and application of defacto corporation doctrine in a world of standardized incorporation processes. Long gone are the days of lost mail (lost Email maybe) and corrections can be made nearly instanteously and will relatively little cost in the event of typos or other defects. To what extent does the de facto doctrine, long a staple of the survey law school course on corporations, still play a relevant role in practice. I understand all of the doctrinal reasons law professors may want to continue to teach it because it tests the outer limits of the substance over form debate in corporations and the begs the questions how fragile or strong is the legal fiction of separately incorporated entities. It is nearly as fun as piercing the corporate veil! But in [insert finger quotes here] "real life" or "practice" how relevant is this doctrine?
The MBCA Section 2.04 Liability for Preincorporation Transactions states "All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting." Despite earlier attempts to eliminate the doctrine of de facto corporations ("Therefore a de facto corporation cannot exist under the Model Act. Comments to section 56 in 1969 Model Act), the current version makes clear that the de facto doctrine lives on. "A number of situations have arisen, however, in which the protection of limited liability arguable should be recognized even though the simple incorporation process established by modern statutes has not been completed."
The MBCA, as a uniform statute, is a guide, but not operative law under individual state corporate charters. An initial count finds 27 jurisdictions with statutory language expressly acknowledging a knowledge-based standard for de facto corporations similar to that established in the MBCA. Many other states recognize de facto doctrine solely through case law. A few jurisdictions, such as Alaska and Idaho explicitly abolish de facto corporations via statutory text. Idaho recently changed the statute to state: "All persons purporting to act as or on behalf of a corporation, when there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting." Idaho Code Ann. § 30-29-204 (West)The highlighted word "when" replaced "knowing".
Academic interest in de facto corporation doctrines, a hot topic in the early 1900's (see, e.g. Edward H. Warren, Collateral Attack on Incorporation A. De Facto Corporations, 20 Harv. L. Rev. 456, 479-80 (1907)), has waned. One exception is the 2009 article The Doctrine of Defective Incorporation and its Tenuous Coexistence with the Model Business Corporation Act, by Timothy Wyatt,
This paper revisits the earlier studies and demonstrates that the apparently inconsistent findings were the result of analytical flaws. The paper then presents a new extensive study of post-MBCA defective incorporation cases, and demonstrates by statistical regression that the courts have continued to apply the defective incorporation doctrine (the MBCA notwithstanding) and that the courts have applied the doctrine in a way that is highly predictable: Where the defendant is active in the management of a business entity that is not validly incorporated, he will not be held personally liable for his actions on behalf of the corporation so long as he believed the corporation was valid at the time of the actions.
I conclude that, for the situation where the shareholders of a defective corporation seek limited liability, the concepts of “de facto corporation” and “corporation by estoppel” are largely indistinguishable and are really two different ways of stating the unitary common-law doctrine of defective incorporation. The outcomes of these cases are highly predictable if one considers whether the shareholder of the defectively incorporated entity is acting in good faith—a factor that has been neglected by previous commentators. I also conclude that, while the attempted abolition of the defective-incorporation doctrine by the MBCA injected some uncertainty into the outcomes of cases, the courts largely ignored the MBCA on this point. In fact, the judicial backlash against attempts to legislate defective incorporation out of existence may actually have strengthened the doctrine.
My initial reading of this is that attempts to eliminate the doctrine have failed. De facto corporations remains intact and a relevant legal theory. Justifications for removing de facto incorporation persist even though the process of incorporation has changed. The bottom line is that human error may still necessitate the doctrine. At a minimum, a variety of jurisdictions agree as evidenced by statute or common law.
Related to the inquiry on de facto corporations is the extension of any changes or continued relevance to the uncorporate entities space. Those issues will be tackled in a separate post.
Tuesday, March 1, 2016
It's super Tuesday and in the spirit of this big primary day, let's look at corporate spending in the election.
First, let's talk about someone who isn't in the race anymore, Jeb Bush. Ciara Torres-Spelliscy, law professor at Stetson University College of Law, and Brennan Center Fellow, wrote piece highlighting the role of corporate money in Jeb Bush's Super Pac. Corporate money was big business for Jeb. Torres-Spelliscy discusses a $10 million donation from CV Starr with former AIG CEO Maruice Raymond "Hank" Greenberg at the helm, several private company donations over $1M and a multi-million dollar donation from publicly traded, NextEra Energy Inc (NYSE ticker: NEE). Torres-Spelliscy writes "If anyone ever tries to sell you the bill of goods that corporations are not taking advantage of their Citizens United rights to spend in American politics, remember this: the top donor to Jeb! Bush’s Super PAC was a corporation." Read her full account here.
The failure of Jeb Bush's well-moneyed campaign has generated debate about the "real impact" of money in politics if it can't produce a certain result. Rick Hasen, election law professor at University of California Irvine and prolific writer behind the Election Law Blog, presented at Georgia State University College of Law on Monday promoting his new book (Plutocrats United). Rick used a very persuasive analogy to depict the role of money in the United States' current election climate. He posited that money cannot buy election results, but if an election can be thought of as a raffle or a lottery, it buys certain donors more tickets than most people. The more raffle tickets one holds, and here the big money donors are getting suitcases full of tickets, the greater the chance, the higher the odds, of winning the election lottery.
If you want to see who the ticket holders are and who they are supporting, here are a few resources that help readers delve into the specific question of how many tickets are corporations holding. For an overview of money-raised by candidate, the New York Times distills recent FEC disclosures into a digestible table available here. Open Secrets, which compiles and discloses election spending has a useful tool to identify outside spending/PACs as well as to identify industry financial support of candidates. The Federal Election Commission website is available here with a variety of searching tools and data summaries available.
Wednesday, February 24, 2016
Having just taught a corporate governance seminar class on the proxy process (from a company's perspective), proxy advisory services, and institutional voting, I have the upcoming proxy season on my mind. There are a great collection of resources available for those interested for academic or practice-related reasons. My students found many of these summaries to be a good distillation of the issues and introduction to the nuts and bolts of proxy access. I have provided my list of resources below, in addition to a quick summary of the major governance issues likely to be on the table in 2016.
Major Governance Issues:
- Dodd Frank pay ratio disclosure
- Say on Pay majority voting
- Executive compensation disclosures subject to new SEC interpretations
- Proxy Access Bylaws (see New York campaign)
- Audit Committee Disclosures
- Independent Chair proposals
2016 Proxy Season Resources:
Wednesday, February 17, 2016
Justice Scalia’s sudden passing has generated a tidal wave of media and academic attention on the future of the Supreme Court. As a corporate law scholar, I have to admit to a tinge of jealousy to be seemingly outside of this controversy, the hand wringing, and the political equivalent of Dungeons and Dragons that has ensued as people examine the various maneuverers available to our elected politicians and those vying-to be elected.
My solution? I searched for pending corporate cases hanging in the balance of the new, and indeterminate, vacancy on the Supreme Court. I wanted to know if there were any cases pending that would likely be decided differently in a post-Scalia court, or at least hang in a 4-4 split and thus uphold the lower court ruling. There isn’t a big juicy corporate law case pending, or at least one that I readily identified.
Not to be deterred, however, there is a case worth highlighting. Americold Realty Trust v. ConAgra Foods, Inc., was argued on January 19th before the Supreme Court (transcript available here). The issue before the Supreme Court in Americold was how to establish the citizenship of a real estate trust for purposes of diversity citizenship. Is the trust's citizenship dependent upon the citizenship of the controlling trustees (as argued by Americold)? Or is it dependent upon the citizenship of the trust beneficiaries (argued by ConAgra Foods), or some combination? Locating citizenship with trustees narrows the potential states and ensures diversity citizenship whereas citizenship with the beneficiaries, of which there are thousands, implicates most states and thus frustrates federal jurisdiction.
At the heart of the oral argument was the 1990 ruling Carden v. Arkoma Associates, which established a bright line between the citizenship of corporations (located in the state of incorporation) and the citizenship of all other artificial business entities (located in the states of the beneficial owners of the business).
In Carden, the Supreme Court wrote:
In 1958 it revised the rule established in Letson, providing that a corporation shall be deemed a citizen not only of its State of incorporation but also "of the State where it has its principal place of business." 28 U.S.C. 1332(c). No provision was made for the treatment of artificial entities other than corporations, although the existence of many new, post-Letson forms of commercial enterprises, including at least the sort of joint stock company ..., the sort of limited partnership association ..., and the sort of Massachusetts business trust ... We have long since decided that, having established special treatment for corporations, we will leave the rest to Congress; we adhere to that decision.
Drawing on the Carden precedent, the question became whether the REIT as issue in Americold was organized as a traditional corporation or not.
Ronald Mann writing for the SCOTUS Blog summarized Justice Scalia’s role in oral argument on this issue with the following:
Justice Antonin Scalia early on asked, “[w]ho owns these assets under Maryland law? Is it . . . this new corporation-type entity? That’s the entity that can sue.” That conclusion led him to dismiss out of hand Americold’s contention that the citizenship of the trust managers should be decisive: “[T]he trustees are sort of in the position of managers, just as though you hired a CEO.”
Scalia's skepticism about the REIT functioning like a corporation was shared by the other Justices despite the fact that modern REITs, in many ways, resemble corporations more so than other unincorporated business entities. REITs have dispersed and diffused shareholders, often with shares traded on public exchanges. This position was articulated by an amicus brief filed by National Association of Real Estate Investment Trusts (NAREIT). The Justices however signaled a truly formalistic approach asking if the entity was indeed formed as a corporation (not did it function as one or was it capitalized as one). Only if so would the state of incorporation rule prevail.
A Justice Scalia-influenced Supreme Court's last word on corporate jurisprudence may very likely be one of pure form over substance. Merely asking which entity form was used without looking at the distinguishing features of a corporation and the justifications for why corporations were treated differently beginning in 1958 produces a corporate law legacy of flimsy jurisprudence. Failing to take into account the market realities and relying upon strict categorical distinctions without reference to function would create a bright line, but not necessarily a bright result.
Wednesday, February 10, 2016
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.