Wednesday, May 18, 2016
Today, I received notice of a web seminar on corporate political activity to be hosted by one of my former firms, King & Spalding.
Interested readers can register for the free web seminar here.
More information, from the notice I received, is reproduced below.
Election 2016: What Every Corporate Counsel Must Know About Corporate Political Activity
Thursday, May 26, 2016, 12:30 PM – 1:30 PM ET
In this election year, corporations and their employees will be faced with historic opportunities to engage in the political arena. Deciding whether and how to do so, however, must be made carefully and based on a thorough understanding of the relevant law. In this presentation, King & Spalding experts will address this timely and important area of the law and provide the guidance that corporate counsel need when engaging in the political process.
Tuesday, May 10, 2016
This is just to give everyone a "heads up" on a symposium being held this fall (Friday, October 21 and Saturday, October 22) to honor Lyman Johnson and David Millon. The symposium is being sponsored by the Washington & Lee Law Review (which will publish the papers presented), and I am thrilled to be among the invited speakers. I will have more news on the symposium and my paper for it as the date draws nearer. But I wanted everyone to know about this event so that folks could plan accordingly if they want to attend. I understand Lexington, Virginia is lovely in late October . . . . Actually, it's always been lovely when I have been up there! And the honorees and contributors are a stellar group (present company notwithstanding). I hope to see some of you there.
Monday, May 9, 2016
Thought Josephine Sandler Nelson's recent Oxford Business Law Blog post on Volkswagen might be of interest to our readers. It is reposted here with permission.
Fumigating the Criminal Bug: The Insulation of Volkswagen’s Middle Management
New headlines each day reveal wide-spread misconduct and large-scale cheating at top international companies: Volkswagen’s emissions-defeat devices installed on over eleven million cars trace back to a manager’s PowerPoint from as early as 2006. Mitsubishi admits that it has been cheating on emissions standards for the eK and Dayz model cars for the past 25 years—even after a similar scandal almost wiped out the company 15 years ago. Takata’s $70 million fine for covering up its exploding air bags in Honda, Ford, and other car brands could soon jump to $200 million if a current Department of Justice probe discovers additional infractions. The government has ordered Takata’s recall of the air bags to more than double: one out of every five cars on American roads may be affected. Now Daimler is conducting an internal investigation into potential irregularities in its exhaust compliance.
A recent case study of the 2015-16 Volkswagen (‘VW’) scandal pioneers a new way to look at these scandals by focusing on their common element: the growing insulation and entrenchment of middle management to coordinate such large-scale wrongdoing. “The Criminal Bug: Volkswagen’s Middle Management” describes how VW’s top management put pressure on the rest of the company below it to achieve results without inquiring into the methods that the agents would use to achieve those results. The willing blindness of top executives to the methods of the agents below them is conscious and calculated. Despite disclosure-based regulation’s move to strict-liability prosecutions, the record of prosecutorial failure at trial against top executives in both the U.S. and Germany demonstrates that assertions of plausible deniability succeed in protecting top executives from accountability for the pressure that they put on agents to commit wrongdoing.
Agents inside VW receive the message loud and clear that they are to cheat to achieve results. As even the chairman of the VW board has admitted about the company, “[t]here was a tolerance for breaking the rules”. And, contrary to VW’s assertion, no one believes that merely a “small group of engineers” is responsible for the misconduct. Only middle management at the company had the longevity and seniority to shepherd at least three different emissions-control defeat devices through engine re-designs over ten years, to hide those devices despite heavily documented software, and to coordinate even across corporate forms with an outside supplier of VW’s software and on-board computer.
The reason why illegal activity can be coordinated and grow at the level of middle management over all these years is rooted in the failure of the law to impose individual accountability on agents at this level of the corporation. Additional work by the same author on the way in which patterns of illegal behavior in the 2007-08 financial crisis re-occur in the 2015-16 settlements for manipulations of LIBOR, foreign currency exchange rates, and other parts of the financial markets indicates that middle management is further protected from accountability by regulators’ emphasis on disclosure-based enforcement. In addition, U.S. law has lost the ability to tie together the behavior of individuals within a corporation through conspiracy or other types of prosecutions.
Previous research has shown that the more prominent the firm is, and the higher the expectations for performance, the more likely the firm is to engage in illegal behavior. Now we understand more about the link between the calculated pressure that top executives put on their companies and the protection of middle management that supports the patterns of long-term, large-scale wrongdoing that inflict enormous damage on the public. It is not solely VW that needs to fumigate this criminal bug: the VW case study suggests that we need to re-think the insulation from individual liability for middle management in all types of corporations.
This post originally appeared on the Oxford Business Law Blog, May 5, 2016.
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.
Friday, April 29, 2016
Earlier this month, B Lab, the 501(c)(3) nonprofit organization that oversees the certification of B corps, announced that it will move its October 2016 retreat from North Carolina because of North Carolina’s controversial House Bill 2 (“HB2”).
In an April 12 e-mail to “Friends of the B Corp Community,” the B Lab team wrote:
Standing for inclusion, the global B Corp community has decided to relocate the 2016 B Corp Champions Retreat and related events from North Carolina in light of the newly-enacted State law HB2 which limits anti-discrimination protections, particularly for members of the LGBT community.
Immediately, B Lab will work with the North Carolina B Corp community and others to get HB2 off the books and make North Carolina more inclusive and business-friendly.
B Lab also linked to this longer statement in that e-mail.
The Model Benefit Corporation Legislation and the laws following the Model require that a third-party standard be used by benefit corporations to measure their social and environmental impact. B Lab’s standard is currently the most popular standard, but it is not required or even mentioned by the benefit corporation statutes. Allowing for various third-party standards helps prevent the benefit corporation law from being overly political. I do wonder, however, if B Lab’s public stand on this issue will make the benefit corporation laws harder to pass in more conservative states, because of B Lab’s large role in cultivating both the certified B corp and benefit corporation communities.
Further, this situation leads to a question I asked in 2012 --- would B Lab exercise their veto power and deny certification to Chick-fil-A, if Chick-fil-A applied for certification and managed the required social score? As I wrote in 2012, I don’t see anything in the benefit corporation laws that would prevent Chick-fil-A from becoming a benefit corporation, but I am less sure if Chick-fil-A would be successful in obtaining certification from B Lab. B Corp certification is separate from the entity formation process, and the certification is under the control of B Lab rather than the government.
Also, I am not a nonprofit expert, but I wonder whether B Lab is flirting with the lobbying restrictions for 501(c)(3)s, especially when it promises to “work with the North Carolina B Corp community and others to get HB2 off the books.” They also seem to be involved in the attempts to pass benefit corporation laws in states across the country. (Thoughts from nonprofit lawyers or professors welcomed in the comments or by e-mail...I am told that 501(c)(3)s are allowed to do an "insubstantial" amount of lobbying).
In any event, in seems that non-profits, social enterprises, and traditional for-profits are becoming more and more active in social and political debates. And these organizations are often powerful, influential players.
Tuesday, April 19, 2016
A recent Illinois case uniquely applied the alter ego doctrine in the context of a criminal case. See People v. Abrams, 47 N.E.3d 295, ¶¶ 57-61, 399 Ill. Dec. 790 (2015) ( slip op. PDF here ). In my view, not quite right, either.
In the case, the defendant (Abrams) stole $1.87 million from the victim (Lev), which led to a restitution order for that amount and a twelve-year prison sentence for Abrams. The conviction was for a Class 1 felony, for the the theft of property exceeding $500,000. Id.¶ 23 (citing 720 Ill. Comp. Stat. Ann. 5/16-1(a(2) (West 2012)). The statute provides, "Theft of property exceeding $500,000 and not exceeding $1,000,000 in value is a Class 1 non-probationable felony." 720 Ill. Comp. Stat. Ann. 5/16-1(b)(6.2).
On appeal, the defendant argued the indictment was wrong in that it stated the money was stolen from Lev, when most of the money actually belonged to Lev's company, The Fred Lev Company (presumably a corporation, but that is not stated expressly). Abrams claimed:
the State did not prove he obtained “unauthorized control” of more than $500,000 of Lev’s property. Abrams recognizes the evidence presented at trial established that over $1.8 million was taken. Abrams contests the finding that the entire amount was taken from Lev and not The Fred Lev Company.
Abrams, 47 N.E.3d 295 ¶ 57. The court countered: "This is a distinction without a difference. Two separate doctrines of law guide our decision." Id. Although I think the court is probably right on the outcome, one of the rationales is wrongly explained.
The court's first assertion is as follows:
First, the alter ego doctrine of corporate law was developed for and has been traditionally used by third persons injured due to their reliance on the existence of a distinct corporate entity. In re Rehabilitation of Centaur Insurance Co., 158 Ill. 2d 166, 173 (1994). “The doctrine fastens liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.” Peetoom v. Swanson, 334 Ill. App. 3d 523, 527 (2002). In the context of “piercing the corporate veil,” an alter ego analysis starts with examining the factors which reveal how the corporation operates and the particular party’s relationship to that operation. A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, ¶ 43. Generally, did the corporation function simply as a facade for the dominant shareholder? Id. Here, without question, the corporate entity, The Fred Lev Company, served as the alter ego or business conduit of Lev, and Abrams’ own testimony confirmed it.
Id.¶ 58. This is an overreach, as far as I am concerned, and I don't like the ease with which the court uses veil piercing without a detailed analysis. I believe that veil piercing, if it is to be used, should have some consistency, though I know that's now how it tends to work (i.e., without consistency). Here, would the court have pierced the veil if this were a creditor bringing suit directly against Lev because his corporation couldn't satisfy a judgment? I think it would be wrong to do so on similar facts, so I think it is careless to apply the alter ego doctrine in this manner here.
The court continues:
Second, the indictments sufficiently apprised Abrams of the charges against him. See People v. Collins, 214 Ill. 2d 206, 219-20 (2005) (any variance was neither material nor prejudicial to defendant). We do not believe that the defendant was in any way prejudiced by the indictments at issue.
Id.¶ 59. I totally and completely buy this. And, in addition, the court noted:
Even more convincing is that in opening statements to the jury, defense counsel told the jury that the checking accounts “were not used solely for [Lev’s and Abrams’] corporate work. They didn’t separate the corporation from their personal lives and personal expenses. *** They were using everything that went into that corporate account and writing checks on it for their own personal private, for their own person use. There was a commingling.” Additionally, defense counsel referred to “Fred Lev and Company” as being both Abrams and Lev. In closing argument, defense counsel argued that the company was “a small-time operation” with “one corporate book” that both Lev and Abrams used as “their own personal piggybank.”
Id.¶ 60. In the trial, it was determined that the statutory felony monetary amount threshold was met. And the defendant admitted that he considered the funds to be Lev's and that he (the defendant) disregarded the entity. I see no notice problem as to the defendant, and I have no concern that a jury couldn't understand whether the theft occurred in the amount claimed. I can see an argument, perhaps, that the prosecution should still get it right as to whom the money actually belonged, but it seems to me correct to say the crime was properly analyzed and assessed as to the criminal elements, so the claim is harmless error in this instance. Lev would have been the one to assert the claim for the Company, so it is hard to see how Abrams was harmed.
I will maintain, though, that the veil piercing rationale is unnecessary and overstated. (I might be comfortable if they used the analogy to explain harmless error, but the way it was done is too much for me.) Furthermore, as to the judgment for restitution to Lev, it is wrong. That money (or some portion of it) belongs to The Fred Lev Company. Suppose there are creditors out there who have gone unpaid. Or they are unpaid down the road. At a minimum, the funds stolen from the company should go back through the company so it could be clear what funds were there and should have been available. Thus, as to the charges, I think the court probably got it right. But as to respecting the entity (and protecting creditors now, and in the future), this could have been handled better.
H/T Prof. Gary Rosin
Monday, April 18, 2016
Imagine This: First-Semester Second-Year Students in Your Business Associations Class Who Already Have a Sense of Transactional Practice . . .
This is not a pipe dream! I honestly believe that in the fall of 2017, this will be a reality for me. (I typically teach Business Associations in the fall semester to a large number of students who understand "cases," not "deals.")
The reason for my good spirits and honest belief in the positive change in my students? Our new 1L curriculum, which is rolling out this fall. No doubt, we will find some changes that need to be made as we implement our relatively bold plan. But I am truly excited that the new first-year curriculum exposes every student to a transactional experience in the first year of law school.
There are many reasons for implementing this kind of change, of course. Among other things, this new approach to the first year at UT Law responds to suggestions that we got from our students and represents an effort to better connect the 1L year to our upper division curriculum (on which we have spent a lot of time over the years). The new 1L transactional offering is part of a larger plan constructed by a College of Law committee, chaired by my colleague (and e-discovery queen) Paula Schaefer, that spent several years looking at our overall curriculum and that of many other schools before fashioning a number of alternative options for the faculty to review.
The implementation involves a lot of work. Many colleagues are chipping in to construct new courses and re-fashion existing courses to meet the new curricular requirements. It takes a village. I am grateful for all of the work being put in. I work with a great bunch of folks.
An article in the National Jurist last week describes the new 1L curriculum in general. Our academic policies, however, add some detail. I quote from them below, with some reformatting for easier reading in this space.
For students entering in or after Fall 2016, the first-year curriculum is as follows:
Civil Procedure I* (3)
Contracts I (3)
Criminal Law (3)
Lawyering & Professionalism (1) Legal Process I (3)
Torts I* (3)
Civil Procedure II (3)
Contracts II (3)
Legal Process II (3)
Torts II (2)
Transactional Lawyering Lab (1)
*First-year students enroll in an experiential section of either Civil Procedure I or Torts I. The experiential sections include three graded, simulation-based assignments. Each simulation places students in the role of lawyer, raises professionalism issues, requires students to perform a lawyering skill, and results in a written and/or oral work product. In addition to a final examination, the course also includes a midterm exam that includes at least one essay question.
We are pretty excited to get this new curricular show on the road. I look forward to sharing more with you as we see how students react in the short term and long term. But my UT Law colleagues and I are very hopeful that this new approach to the first year will lay a strong foundation for upper division academic work and for practice.
Friday, April 15, 2016
I'm at the MALSB Conference in Chicago, but saw Anita Krug's recently posted book chapter entitled Toward Better Mutual Fund Governance. Worth reading. Abstract below.
This chapter evaluates the implications of an emerging model of mutual fund governance for effective oversight and regulation. As in the traditional model, in which a board of directors or trustees serves as the board of multiple discrete funds managed by a single investment adviser, this alternative model similarly contemplates the creation of multiple funds, but it eschews a single investment adviser charged with managing each fund’s assets. Rather, there are numerous advisers, each managing one or a small number of funds within the group. Although the new model may portend an improvement over the traditional model in some respects, questions arise as to whether it introduces concerns of its own and whether those concerns are more or less manageable than those to which the traditional model gives rise. The chapter contends that, although the new model produces risks not associated with the traditional model, there are reasons to believe, at least preliminarily, that it is at least as effective as the traditional model.
Tuesday, April 12, 2016
There are those I-need-to-pinch-myself moments in life that come along every once in a while. I was lucky enough to have one last week. I was invited to attend a conference and comment on two interesting draft papers written by two law faculty colleagues whose work I have long admired and who are lovely people. And the location was Miami Beach. Does it get any better than that for a law professor who likes the beach? I think not.
The event was the annual conference for the Institute for Law and Economic Policy (ILEP). The conference theme was "Vindicating Virtuous Claims." The papers will be published in the Duke Law Journal, which co-sponsored the program.
I will save details on the papers for later (when the papers are finalized). But I will briefly describe each here. The first paper on which I commented, written by Rutheford B ("Biff") Campbell (University of Kentucky College of Law), argues for federal preemption of state securities regulation governing the offer and sale of securities, since federal preemption would be more efficient. The second paper, written by James D. ("Jim") Cox (Duke University School of Law, who was honored at the event and received the most amazing tribute from his Dean, David Levi, at the closing dinner), argues for attaching more value to the normative effects of judicial decisions arising out of indeterminate doctrine (using materiality and the business judgment rule as core examples). I know that last part is a mouthful, but read it again, and I think you'll get it . . . .
Both papers were intellectually stimulating, and both scholars were quite engaging in their presentations. The other invited commentators were interesting and thought-provoking. And the day was filled overall with other interesting academic paper panels and a lively keynote lunch speaker. Together with the panel discussion on the evolution of Rule 23 and dinner the night before, it was an action-packed, invigorating conference!
. . . And then there was the time I spent after the conference recollecting myself (and writing student bar recommendation letters). The weather was cooperative (downright sunny and warm), and the surroundings at the hotel (food, accommodations, etc.) were fabulous. My Facebook friends got tired of my colorful photos and happy posts, especially since many of those folks were in locales further North and to the East in which it was cold and snowing on Saturday or Sunday.
So, I am taking this opportunity to note and celebrate my good fortune on, and to offer thanks for, being invited to the ILEP conference to comment on the forthcoming scholarly work of two great business law colleagues. I met some fascinating, pleasant new people among the conference constituents (from the bench, bar, and academy). And I enjoyed time on a chaise lounge. [sigh] But now, it's back to the reality of the final few weeks of the semester. I wish everyone the best in pushing through.
Friday, April 1, 2016
Benjamin Means and Joseph Seiner, both of University of South Carolina School of Law, have an interesting article out entitled Navigating the Uber Economy. Work is changing quickly, and the employment/independent contractor line is becoming more difficult to draw. The abstract is reproduced below and the article is available here. Last July, Anne Tucker authored a blog post related to this issue, available here.
In litigation against ride-sharing companies Uber and Lyft, former drivers have alleged that they were misclassified as independent contractors and denied employment benefits. The companies have countered that they do not employ drivers and merely license access to a platform that matches those who need rides with nearby available drivers. At stake are the prospects, not only for Uber and Lyft, but for a nascent, multi-billion dollar "on-demand" economy.
Unfortunately, existing laws fail to provide adequate guidance regarding the distinction between independent contractors and employees, especially when applied to the hybrid working arrangements characteristic of a modern economy. Under the Fair Labor Standards Act and analogous state laws, courts consider several factors to assess the "economic reality" of a worker's alleged employment status; yet, there is no objective basis for prioritizing those factors.
This Essay argues that the classification of workers as independent contractors or employees should be shaped by an overarching inquiry: how much flexibility does the individual have in the working relationship? Those who can choose the time, place and manner of the work they perform are more independent than those who must accommodate themselves to a business owner's schedule. Our approach is novel and would provide an objective basis for adjudicating classification disputes, especially those that arise in the context of the on-demand economy. By reducing legal uncertainty, we would ensure both that workers receive appropriate protections under existing law and that businesses are able to innovate without fear of unknown liabilities.
Friday, March 25, 2016
I feel badly for Chipotle. When I have taught Business Associations, I have used the chain’s Form 10-K to explain some basic governance and securities law principles. The students can relate to Chipotle and Shake Shack (another example I use) and they therefore remain engaged as we go through the filings. Chipotle has recently been embroiled in a public relations nightmare after a spate of food poisonings occurred last fall and winter, a risk it pointed out in its February 2015 10-K filings. The stock price has fluctuated from $750 a share in October to as low as $400 in January and then back to the mid $500 range. After some disappointing earnings news the stock is now trading at around $471.
Clean Yield Group, concerned that the company will focus only on bringing its stock back to “pre-crisis levels,” filed a shareholder proposal March 17th asking the company to link executive compensation with sustainability efforts. The proposal claims that the CEO was overpaid by $40 million in 2014 and states in part:
A number of studies demonstrate a firm link between superior corporate sustainability performance and financial outperformance relative to peers. Firms with superior sustainability performance were more likely to tie top executive incentives to sustainability metrics.
Leading companies are increasingly taking up this practice. A 2013 study conducted by the Investor Responsibility Research Institute and the Sustainable Investments Institute found that 43.4% of the S&P 500 had linked executive pay to environmental, social and/or ethical issues. These companies traverse industry sectors and include Pepsi, Alcoa, Walmart, Unilever, National Grid, Intel and many others…
Investor groups focusing on sustainable governance such as Ceres, the UN Global Compact, and the UN Principles for Responsible Investment (which represents investors with a collective $59 trillion AUM) have endorsed the establishment of linkages between executive compensation and sustainability performance.
Even with the adjustments to executive pay incentives announced this week in reaction to Chipotle’s ongoing food-borne illness crisis, Chipotle shareholders have consistently approved excessively large pay packages to our company’s co-chief executives that dangerously elide accountability for sustainability-related risks. This proposal provides the opportunity to rectify this situation.
If shareholders approve the compensation package on our company’s 2016 proxy ballot, by year-end, Mr. Ells and Mr. Moran will have pocketed nearly $211 million for their services since 2011. Shareholders have not insisted upon direct oversight of sustainability matters as a condition of employment or compensation, and the present crisis illustrates the probable error in that thinking.
This week, the Compensation Committee of the Board announced that it would withhold 2015 bonuses for executive officers. It has also announced that executive officers’ 2016 performance bonuses will be solely tied to bringing CMG stock back, over a three-year period, to its pre-crisis level.
This is a shortsighted approach that skirts the underlying issues that may have contributed to the E. coli and norovirus outbreaks that have left hundreds of people sickened, injured sales, led to ongoing investigations by health authorities and the federal government, damaged our company’s reputation, and will likely lead to expensive litigation. For years, Chipotle has resisted calls by shareholders to implement robust and transparent management and reporting systems to handle a range of environmental, social and governance issues that present both risks to operations as well as opportunities. While no one can know for certain whether a more rigorous management approach to food safety might have averted the current crisis, moving forward, shareholders can insist upon a proactive approach to the management of sustainability issues by altering top executives’ compensation packages to incentivize it.
The last sentence of the paragraph above stuck out to me. The shareholder does not know whether more rigorous sustainability practices would have prevented the food poisonings but believes that compensation changes incentivizing more transparency is vital. I’m not sure that there is a connection between the two, although there is some evidence that requiring more disclosure on environmental, social, and governance factors can lead to companies uncovering operational issues that they may not have noticed before. Corporate people are fond of saying that “what gets measured gets treasured.” Let’s see what Chipotle’s shareholders treasure at the next annual meeting.
March 25, 2016 in Business Associations, Compensation, Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Shareholders | Permalink | Comments (0)
I usually look forward to the Olympics for months, if not years, before they start.
This year, however, all of the doping news, and buzz around Rule 40 has left me less enthusiastic.
For now, I am going to leave the doping news to one side, and focus on Rule 40.
From July 27 to August 24, 2016, Rule 40, prohibits Non-Olympic Commercial Partners from using the word "Olympics" and (depending on context) "Olympic-related terms," including:
- Rio/Rio de Janeiro
Now, I understand why the International Olympic Committee ("IOC") and the U.S. Olympic Committee ("USOC") might want these restrictions (given the large sums of money official sponsors pay), and from what I understand from experts in this specific area, the IOC & USOC may have a defensible legal stance.
This, however, seems one of the many areas where (1) the law has not kept up with advances in technology, namely social media, and (2) even if the IOC & USOC are right on the law, they may lose in the court of public opinion. Here, it seems, there is a good bit of difference between a company running a detailed TV-ad noting that it sponsors an Olympian and simply wishing an athlete "Good luck in Rio" on Twitter. Also, even if the law treats social media the same as other forms of advertising, I could see the public (including me) judging the IOC & USOC harshly if it punishes brands and/or their athletes for minor violations. Outside of the most popular Olympic athletes, significant sponsorships are difficult to secure and outlawing short displays of appreciation on social media seems like overreaching. Adding to the problem, I think, is that this rule makes the IOC & USOC look like single bottom line, money-hungry organizations, when most of us would like to associate the Olympics with a broader, higher purpose.
Friday, March 11, 2016
If you follow sports related news, you know that tennis star Maria Sharapova recently tested positive for a banned performance enhancing drug called Meldonium. Details here and here and here. According to one source, over 60 athletes have tested positive for Meldonium this year; the drug was just recently added the banned substances list. Sharapova claims she was unaware that she was taking a banned substance.
A number of Sharapova's biggest sponsors have suspended or ended their relationship with her and/or delayed planned events. These sponsors include, Nike, Porsche, and TAG Heuer. Head and Evian appear to be sticking with her. Head chairman Johan Eliasch claimed that Sharapova simply made an "honest mistake."
The companies that have cut ties with Sharapova have likely been able to do so through what is often called a morals clause or a morality clause in the endorsement contract. Some background on morals clauses can be found here and here and here. And here is an interesting contract law question from Eric Goldman that involves morals clauses.
Some of our December graduates haven just taken the Florida bar exam. As always, I asked them about the business associations questions. Florida drastically changed its LLC rules in 2014, but still hasn’t asked any questions about LLCs, focusing instead on partnerships and corporations (at least according to the students). From a review of the released questions, the bar didn’t ask about LLCs before the amendments either.
I teach BA again next year and I’m struggling with what to emphasize. Business Associations is not required in many Florida law schools, but it is at St. Thomas, and many students enter the class with trepidation. Most will only take the one required course and won’t go on to advanced classes in securities regulation, corporate taxation, or other drafting courses. I try to focus the required BA class on skills that graduates will need in the workplace in addition to preparing them for the bar by using released test questions. Now I wonder how to balance the tension between the rise of LLCs and the many changes in laws related to securities regulation with the bar’s continued focus on partnerships and traditional corporations.
Yesterday the Obama administration added Miami to the list of tech hire jurisdictions. The Kauffman Index ranks Miami as second in the country for startups. Last month, a blogger highlighted my city’s proximity to Latin America and our emerging tech scene. With these realities in mind, should I add even more to what I already teach about legal issues that entrepreneurs and startups face even if that’s not what the Florida bar tests? I never want to “teach to the test” but I also want to make sure that I am responsible in my pedagogy, which for me includes marking up operating agreements, spending time demystifying IPO filings, and introducing them to hybrid entities that entrepreneurs ask about.
Unlike 20 other states, Florida has not adopted the Uniform Bar Exam, but I believe that any test that asks students to do the kind of critical analysis they would have to do in practice is a good thing. This week the Florida bar established a new committee to consider the issue, but I don’t have high hopes for a quick change to the bar exam. Lawyers here recently killed a proposal for reciprocity, and some see the UBE as a back door effort to flood Florida with out of staters.
So I have a conflict. How do other professors tackle the coverage issue? Comment below or feel free to email me at email@example.com.
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.
Friday, March 4, 2016
For those of you who talk about the recent problems at Volkswagen in your classes, this recently posted article may be useful. I connected with Charles Elson briefly when I lived in Delaware, and he is certainly an authority on corporate governance. The article is available here and the abstract is posted below.
Although the primary cause of the emissions scandal at Volkswagen appears to have been misfeasance and malfeasance on a corporate-wide scale, we argue that such a problematic culture existed at Volkswagen because of the composition of the board itself in combination with the unique governance structure known as “co-determination,” that defines many German companies, including VW. There are three major problems from a corporate governance standpoint with the Volkswagen board. First, is the interest-conflicting nature of the dual-class stock held by the dominant shareholding Porsche and Piech families. Second, is the presence of a government as a major shareholder. And third is the organization of its characteristically German “two-tier” board around the principle of co-determination, which mandated significant labor representation. We argue that each of these elements of the VW ownership and governance structure contributed in varying degrees to the board failure of oversight that led to the management decision to evade emissions regulations.
Christopher Bruner recently posted a book chapter entitled The Corporation's Intrinsic Attributes. I try to read everything Christopher writes, including his excellent Cambridge University Press book, Corporate Governance in the Common Law World, and I am looking forward to reading this new book chapter over spring break next week. The book chapter's abstract is reproduced below for interested readers:
Numerous treatises, casebooks, and other resources commonly present concise lists of attributes said to be intrinsic to the modern corporation and/or essential to its economic utility. Such descriptions of the corporate form often constitute introductory matter, conditioning how students, professionals, and public officials alike approach corporate law by presenting a straightforward framework to distinguish the corporate form from other types of business entities. There are two significant problems with such frameworks, however, from a pedagogic perspective. First, these frameworks describe the corporation by reference to purportedly fixed intrinsic attributes, conflicting sharply with the flux and dynamism that have in fact characterized the history of corporate law. Second, these frameworks differ markedly from each other in how they characterize the corporation's attributes, each embodying a contestable perspective on the nature of the corporate form.
The diversity of perspectives that such inquiry reveals calls into question the degree to which we can validly deduce a single correct or optimal division of power between boards and shareholders, degree of regard for shareholder interests, and/or degree of liability exposure for boards and shareholders, based exclusively on premises purportedly intrinsic to corporate law itself - that is, without express appeal to external policy considerations and related regulatory fields. These matters map onto three core issues of corporate law and governance - power, purpose, and risk-taking, respectively - and the inability to resolve them by reference to the corporation's purportedly intrinsic features suggests that re-conceptualizing the corporate form might facilitate more effective assessment of its capabilities.
This chapter undertakes that project. Section I begins with an historical discussion of the corporation's emergence and early deployment for business in the United Kingdom and the United States. Section II turns to various contemporary descriptions of the corporation's intrinsic attributes presented in modern reference materials, exploring their commonalities, differences, and theoretical implications. Section III explores the impossibility of resolving core issues of power, purpose, and risk-taking by reference to such conceptions of the corporate form, providing three US examples that map onto these respective issues - the scope of shareholders' bylaw authority, the degree of board discretion to consider non-shareholder interests in hostile takeovers, and the regulation of financial risk-taking following the recent crisis. Each illustrates the necessity of resort to political discourse - a reality underscored through comparison with the United Kingdom, which reveals substantial divergence on such issues notwithstanding broad similarities between the US and UK corporate governance regimes.
The chapter concludes, in Section IV, by proposing that we refrain from describing the corporate form by reference to purportedly fixed intrinsic attributes. I argue that it would pay to re-conceptualize the modern corporation by reference to the tools it offers, and how those tools can be deployed - a series of governance "levers," I suggest, that can be adjusted and calibrated in various ways to pursue a broad range of governance-related goals.
Thursday, March 3, 2016
It's fun when students are interested in your scholarship. Yesterday, one of my students engaged me to talk about my work on limited liability operating agreements as contracts. (I have mentioned this work in class, and the student also is a regular reader of this blog, where I have referenced this work a number of times, including most prominently here.) He began the exchange with something akin to the following question: "Why is it that we take two full semesters of contract law during the first year of law school and then all but ignore the connection of contract law to business entities once we get to Business Associations?"
I think I know what he means. While the segregation of legal doctrine by subject matter in law schools enables instructors to focus students narrowly on a single--often new--body of law, it also tends to obscure the interconnections between and among applicable bodies of law, including connections between contract law and the law of business entities. Admittedly (and I pointed this out to the student), the typical Business Associations course does typically address contracts at several points. These junctures include, among others, the course segment in which sole proprietorships are distinguished from statutory forms of business entity, discussions on the nexus of contracts theory of the corporation, and dialog on the validity of shareholder agreements.
This conversation reminded me that I learned an important thing about the Restatement (Second) of Contracts at the 11th International Conference on Contracts (KCON XI) last weekend at St. Mary's University School of Law in San Antonio, Texas. (Keep in mind as you read this that I do not teach and have never taught the 1L course on contract law.) What did I learn? I learned how to use the Restatement properly in assessing the existence and validity of a contract!
Specifically, I learned that the traditional elements of a legally valid contract, those that I had learned in law school (offer, acceptance, and consideration) are, under the Restatement (Second) of Contracts, non-exclusive means of qualifying an agreement as a valid contract. Specifically, Section 17 of the Restatement provides as follows:
(1) Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.
(2) Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts or under the rules stated in §§82-94.
The comments to Section 17 cast additional light on types of contract--including several different kinds of formal contract,--that do not need to meet the requirements of mutual assent and consideration. Moreover, the sections of the Restatement referenced in Section 17(2) include Section 90, which helpfully provides in subsection 1 that
I guess I knew that, but somehow I missed remembering or fully understanding it.
All of this, and much more from KCON XI, will come in handy in my future work on contracts in the business entity context, deepening and enriching points I want to make. It's sometimes really enlightening--a scholarly "breath of fresh air"--to attend a conference of academics focused on a subject matter or scholarly tradition that is different from one's own. I may try to do this more often.
Also, my student's point on the need to more often and more integrally show the interdisciplinary of law in the upper division classroom is not lost on me. That's an area in which I can make immediate changes. And with the help of my contract law brethren from KCON XI, contract law is sure to be a part of the dialogue.
Friday, February 26, 2016
Matthew Bruckner (Howard) recently posted an interesting article on bankruptcy reorganization and universities. Given the challenges facing many schools, his article should be one that attracts attention. The article can be downloaded here and the abstract is below.
Many colleges and universities are in financial distress but lack an essential tool for responding to financial distress used by for-profit businesses: bankruptcy reorganization. This Article makes two primary contributions to the nascent literature on college bankruptcies by, first, unpacking the differences among the three primary governance structures of institutions of higher education, and, second, by considering the implications of those differences for determining whether and under what circumstances institutions of higher education should be allowed to reorganize in bankruptcy. This Article concludes that bankruptcy reorganization is the most necessary for for-profit colleges and least necessary for public colleges, but ultimately concludes that all colleges be allowed to reorganize in chapter 11.
Thursday, February 25, 2016
Next week is our Spring Break and I plan to catch up on some television and movie watching. Many of my former business associations students have raved about the show Billions, described online as follows:
Wealth, influence and corruption collide in this drama set in New York. Shrewd U.S. Attorney Chuck Rhoades is embroiled in a high-stakes game of predator vs. prey with the ambitious hedge-fund king, Bobby Axelrod. To date, Rhoades has never lost an insider trading case -- he's 81-0 -- but when criminal evidence turns up against Axelrod, he proceeds cautiously in building the case against Axelrod, who employs Rhoades' wife, psychiatrist Wendy, as a performance coach for his company. Wendy, who has been in her position longer than Chuck has been in his, refuses to give up her career for her husband's legal crusade against Axelrod. Both men use their intelligence, power and influence to outmaneuver the other in this battle over billions.
Now that my students are watching it, I feel compelled to do so as well, and not just because Australian papers play up the copious amounts of money and sex depicted in the series. I’m glad that my students are watching any television show that deals with the financial industry but even more gratified that they are emailing me telling me that now they understand some of the concepts that they see in this show and others such as HBO’s Silicon Valley.
Are there any other television shows or movies I should catch up on during Spring Break in between grading, writing, and watching Suits (for my Civil Procedure students)? I like to keep up with what my students watch because I use some of the story lines for in class hypos and exam questions. I also ask students to write reflection papers applying what they have learned in class and analyzing what Hollywood got wrong. I look forward to your suggestions.