Friday, December 19, 2014
This week I had nice conversations with Brad Edmondson (Author of Ice Cream Social: The Struggle for the Soul of Ben & Jerry’s) and Michael Pirron (CEO of ImpactMakers, a certified benefit corporation).*
Both conversations turned to a topic that has been on my mind recently – that of social businesses that are acquired by large conglomerates that do not seem to have a similar mission.
A few of the parent/sub relationships that spring to mind (or that were discussed) include:
- Campbell Soup / Plum Organics
- Coca-Cola / Honest Tea
- Colgate-Palmolive / Tom’s of Maine
- Clorox / Burt’s Bees
- Group Danone / Stonyfield Farm
- Unilever / Ben & Jerry’s
I may update this list from time to time, so feel free to suggest additions in the comments.
At The Guardian, Kyle Westaway argues that Burt Bees worked from within Clorox to make the entire company more sustainable. Similarly, some argue that Unilever has become more sustainable after (and maybe because of) their acquisition of Ben & Jerry’s.
I have heard others argue that social businesses like Burt's Bees and Ben & Jerry’s “sold out,” and that the acquiring large conglomerates tend to cut many socially beneficial initiatives. The conglomerates, these folks argue, are only doing enough for society to keep the customer goodwill and the resulting profits.
While each acquisition is different, I imagine both sides of the argument can find some support in the facts.
As someone interested in corporate governance, I hope to explore the governance issues involved when a conglomerate owns a social subsidiary in future articles. In Ben & Jerry’s case, I know they put a number of interesting clauses into the acquisition agreement, such as restricting certain action by Unilever regarding employees and local operations (for a period of time) and establishing an independent (and I believe self-perpetuating) board of directors for Ben & Jerry’s. I am still investigating exactly how much power the Ben & Jerry’s board of directors has, and Unilever did eventually lay off some Ben & Jerry’s employees and close some local plants. In addition, Unilever and Ben & Jerry’s have not always agreed and have taken different, public stances on issues like GMO labeling. But Unilever has become a champion of sustainability among larger companies.
Personally, I am not sure whether social businesses will tend to have more impact as independent businesses or as social subsidiaries of larger companies – and it may be impossible to generalize – but I will continue to watch future acquisitions and development in this area with interest.
* My co-bloggers Joan Heminway and Marcia Narine may remember Michael Pirron from a Regent Law symposium they spoke at on social enterprise law. That was a fun conference and it was good to catch up with Micheal and hear how much his company has grown in the past year and a half.
In each of the classes I have taught I have offered extra credit for a reflection paper on how the media portrays the particular subject because most Americans, including law students, form their opinions about legal issues from television and the movies. Sometimes the media does a great job. I’m told by my friends who teach and practice criminal law that The Wire gets it right. Although I have never practiced criminal law, I assume that ABC’s How to Get Away With Murder, in which first-year students skip their other classes to both solve and commit murders, is probably less accurate. I do have some students who now watch CNBC because I show relevant clips in class. After a particularly heated on-air debate, one student called the network “the ESPN for business people.”
I’m looking for new fiction movies or TV shows to suggest to my students next semester. In addition to the standard business movies and documentaries, what makes your list of high-quality business-related shows? Friends, colleagues, and students have suggested the following traditional and nontraditional must-sees:
1) Game of Thrones (one student wrote about it in the partnership context)
2) House of Cards (not purely business, but shows how business and politics intersect)
3) House of Lies (a look at the world of management consulting)
4) Silicon Valley (one episode I saw talked about entity selection)
5) The Newsroom (during the last season writers tackled insider trading, hostile takeovers, and white knights)
6) Sons of Anarchy (I don’t watch this one so I can’t judge)
7) Shark Tank (not always a complete or accurate depiction but entertaining)
I look forward to your suggestions and to some binge-watching over the holidays.
Monday, December 15, 2014
. . . here's a relatively new Dodge Challenger commercial (part of a series) that you may find amusing. I saw it during Saturday Night Live the other night and just had to go find it on YouTube. It, together with the other commercials in the series, commemorate the Dodge brand's 100-year anniversary. "They believed in more than the assembly line . . . ." Indeed!
You also may enjoy (but may already have read) this engaging and useful essay written by Todd Henderson on the case. The essay provides significant background information about and commentary on the court's opinion. It is a great example of how an informed observer can use the facts of and underlying a transactional business case to help others better understand the law of the case and see broader connections to transactional business law generally. Great stuff.
On December 10, the press reported the Second Circuit's decision in the insider trading prosecution of Todd Newman and Anthony Chiasson (two of multiple defendants in the original case). In its opinion, the court reaffirms that tippee liability for insider trading is predicated on a breach of fiduciary duty based on the receipt of a personal benefit by the tipper and clarifies that insider trading liability will not result unless the tippee has knowledge of the facts constituting the breach (i.e., "knew that the insider disclosed confidential information in exchange for a personal benefit"). The court summarized its opinion, which addresses these matters in the context of the Newman case, a criminal case, as follows:
[W]e conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
Friday, December 12, 2014
The Delaware Court of Chancery recently denied a motion to dismiss in In re Comverge, Inc. Shareholders Litigation. In this case, the plaintiff claimed bad faith by the board of directors that approved an allegedly unreasonable termination fee in a merger agreement. Transactional attorneys and professors who teach M&A will want to read this case.
I am deep into grading my business associations exams, so I will outsource to a nice client alert on the case by Steven Haas at Hunton & Williams. A bit of the alert is below, and you can access the entire alert here.
The court then found that the termination fees of 5.55% of equity value (or 5.2% of enterprise value) during the go-shop period and 7% of equity value (or 6.6% enterprise value) after the go-shop period “test the limits of what this Court has found to be within a reasonable range for termination fees.” The court also analyzed the termination fee in connection with the convertible note held by the buyer in connection with the bridge financing. The plaintiff alleged that the conversion feature in the note, which allowed the buyer to purchase common stock at a price below the merger consideration, would significantly increase the cost to a topping bidder of acquiring the company. Factoring in that cost to the existing termination fee, the plaintiff argued, would result in a total payment equal to 11.6% of the deal’s equity value during the go-shop period and 13.1% of the deal’s equity value after the go-shop period.
The court concluded that, for purposes of surviving a motion to dismiss, it was “reasonably conceivable that the Convertible Notes theoretically could have worked in tandem with the termination fees effectively to prevent a topping bid” from a buyer that might otherwise offer greater value to the company’s stockholders. Perhaps more importantly, the court found that the plaintiff adequately alleged that the board of directors acted in bad faith in approving these terms....
Despite the amount of litigation challenging M&A transactions, there are not many Delaware rulings that have upheld challenges to deal protections such as termination fees, matching rights, and no-shop provisions. This is because the Delaware courts have generally created a body of precedent that provides helpful guidance to buyers and sellers and also recognized the value of such terms. In Comverge, the parties appear to have deviated from this precedent, but more importantly, the court looked to the bridge loan to view the aggregate effect of the various terms on the ability of a third party to make a topping bid.
Thursday, December 11, 2014
In many companies, executives and employees alike will give a blank stare if you discuss “human rights.” They understand the terms “supply chain” and “labor” but don’t always make the leap to the potentially loaded term “human rights.” But business and human rights is all encompassing and leads to a number of uncomfortable questions for firms. When an extractive company wants to get to the coal, the minerals, or the oil, what rights do the indigenous peoples have to their land? If there is a human right to “water” or “food,” do Kellogg’s, Coca Cola, and General Mills have a special duty to protect the environment and safeguard the rights of women, children and human rights defenders? Oxfam’s Behind the Brands Campaign says yes, and provides a scorecard. How should companies operating in dangerous lands provide security for their property and personnel? Are they responsible if the host country’s security forces commit massacres while protecting their corporate property? What actions make companies complicit with state abuses and not merely bystanders? What about the digital domain and state surveillance? What rights should companies protect and how do they balance those with government requests for information?
The disconnect between “business” and “human rights” has been slowly eroding over the past few years, and especially since the 2011 release of the UN Guiding Principles on Business and Human Rights. Businesses, law firms, and financial institutions have started to pay attention in part because of the Principles but also because of NGO pressures to act. The Principles operationalize a "protect, respect, and remedy" framework, which indicates that: (i) states have a duty to protect against human rights abuses by third parties, including businesses; (ii) businesses have a responsibility to comply with applicable laws and respect human rights; and (iii) victims of human rights abuses should have access to judicial and non-judicial grievance mechanisms from both the state and businesses.
Many think that the states aren’t acting quickly enough in their obligations to create National Action Plans to address their duty to protect human rights, and that in fact businesses are doing most of the legwork (albeit very slowly themselves). The UK, Netherlands, Spain, Italy and Denmark have already started and the US announced its intentions to create its Plan in September 2014. A number of other states announced that they too will work on National Action Plans at the recent UN Forum on Business and Human Rights that I attended in Geneva in early December. For a great blog post on the event see ICAR director Amol Mehra's Huffington Post piece.
What would a US National Action plan contain? Some believe that it would involve more disclosure regulation similar to the Dodd-Frank Conflict Minerals Rule, the Ending Trafficking in Government Contracting Act, Trafficking Victims Protection Act, the Burma Reporting Requirements on Responsible Investment, and others. Some hope that it will provide additional redress mechanisms after the Supreme Court’s decision in Kiobel significantly limited access to US courts on jurisdictional grounds for foreign human rights litigants suing foreign companies for actions that took place outside of the United States.
But what about the role of business? Here are five observations from my trip to Geneva:
1) It's not all about large Western multinationals: As the Chair of the Forum Mo Ibrahim pointed out, it was fantastic to hear from the CEOs of Nestle and Unilever, but the vast majority of people in China, Sudan and Latin American countries with human rights abuses don’t work for large multinationals. John Ruggie, the architect of the Principles reminded the audience that most of the largest companies in the world right now aren’t even from Western nations. These include Saudi Aromco (world’s largest oil company), Foxconn (largest electronics company), and India’s Tata Group (the UK’s largest manufacturing company).
2) It’s not all about maximization of shareholder value: Unilever CEO Paul Pollman gave an impassioned speech about the need for businesses to do their part to protect human rights. He was followed by the CEO of Nestle. (The opening session with both speeches as well as others from labor and civil society was approximately two hours long and is here). In separate sessions, representatives from Michelin, Chevron, Heinekin, Statoil, Rio Tinto, Barrick, and dozens of other businesses discussed how they are implementing human rights due diligence and practices into their operations and metrics, often working with the NGOs that in the past have been their largest critics such as Amnesty International, Human Rights Watch and Oxfam. The US Council for International Business, USCIB, also played a prominent role speaking on behalf of US and international business interests.
3) Investors and lenders are watching: Calvert; the Office of Investment Policy at OPIC, the US government’s development finance institution; the Peruvian Financial Authority; the Supervision Office of the Banco Central do Brasil; the Vice Chair of the Banking Association of Colombia; the European Investment Bank; and Swedfund, among others discussed how and why financial institutions are scrutinizing human rights practices and monitoring them as contractual terms. This has real world impact as development institutions weigh choices about whether to lend to a company in a country that does not allow women to own land, but that will provide other economic opportunities to those women (the lender made the investment). OPIC, which has an 18 billion dollar portfolio in 100 countries, indicated that they see a large trend in impact investing.
4) Integrated reporting is here to stay: Among other things, Calvert, which manages 14 billion in 40 mutual funds, focused on their commitment to companies with solid track records on environmental, social, and governance factors and discussed the benefits of stand alone or integrated reporting. Lawyers from some of the largest law firms in the world indicated that they are working with their clients to prepare for additional non-financial reporting, in part because of countries like the UK that will mandate more in 2016, and an EU disclosure directive that will affect 6,000 firms.
5) Is an International Arbitration Tribunal on the way?: A number of prominent lawyers, retired judges and academics from around the world are working on a proposal for an international arbitration tribunal for human rights abuses. Spearheaded by lawyers for better business, this would either supplement or possibly replace in some people’s view a binding treaty on business and human rights. Having served as a compliance officer who dealt extensively with global supply chains, I have doubts as to how many suppliers will willingly contract to appear before an international tribunal when their workers or members of indigenous communities are harmed. I also wonder about the incentives for corporations, the governing law, the consent of third parties, and a host of other sticking points. Some raised valid concerns about whether privatizing remedies takes the pressure off of states to do their part. But it’s a start down an inevitable road as companies operate around the world and want some level of certainty as to their rights and obligations.
On another note, I attended several panels in which business executives, law firm partners, and members of NGOs decried the lack of training on business and human rights in law schools. Even though professors struggle to cover the required content, I see this area as akin to the compliance conversations that are happening now in law schools. There is legal work in this field and there will be more. I look forward to integrating some of this information into an upcoming seminar.
In the meantime, I tried to include some observations that might be of interest to this audience. If you want to learn more about the conference generally you can look to the twitter feed on #bizhumanrights or #unforumwatch, which has great links. I also recommend the newly released Top 10 Business and Human Rights Issues Whitepaper.
December 11, 2014 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Jobs, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, December 9, 2014
The New York Times reports that LLCs have the ability to do things in New York politics that corporations cannot do:
For powerful politicians and the big businesses they court, getting around New York’s campaign donation limits is easy.
. . .
Corporations like Glenwood are permitted to make a total of no more than $5,000 a year in political donations. But New York’s “LLC loophole” treats limited-liability companies as people, not corporations, allowing them to donate up to $60,800 to a statewide candidate per election cycle. So when Mr. Cuomo’s campaign wanted to nail down what became a $1 million multiyear commitment — and suggested “breaking it down into biannual installments” — the company complied by dividing each payment into permissible amounts and contributing those through some of the many opaquely named limited-liability companies it controlled, like Tribeca North End LLC.
It may appear unseemly to allow LLCs to do things corporations cannot do, but (as usual) I bristle at the implication that LLCs should be treated like corporations just because they are limited-liability entities. Perhaps LLCs and corporations should be treated the same for campaign purposes (and I am inclined to think they should be), but there are lots of reasons to treat LLCs differently than corporations, and it is not inherently "a loophole" when they are treated differently.
A loophole is an ambiguity or inadequacy in the law. Here, the different treatment is not an ambiguity, though it is inadequate to limit funding in campaigns. However, it is not at all clear that the intent was to limit funding through LLCs. The law was likely passed so that the legislature could say it did something to reform finance. It did -- it closed the door for corporations and opened the door for LLCs. Playing entity favorites is permissible, even if it's not sensible.
LLCs and corporations are different entities, and different rules for different entities often makes a whole lot of sense. And even when it doesn't make sense, the idea that different entities should have different rules still does. Let's not conflate the two concepts, even when decrying the impact.
Monday, December 8, 2014
Many of you may have seen this already, but this past week's news brought with it an update to JPMorgan Chase CEO Jamie Dimon's health situation--positive news on his cancer treatment results, for which we all can be grateful. I posted here about Dimon's earlier public disclosure that he was undergoing treatment for this cancer. Based on publicly available information, I give Dimon my (very unofficial) "Power T for Transparency" cheer for 2014. (The "Power T" is The University of Tennessee's key--and now almost exclusive--branding symbol. See my earlier posts on UT's related branding decisions regarding the Lady Volunteers here and here.)
As many of you know, I have written about securities law and corporate law disclosure issues relating to private facts about key executives (which include questions relating to the physical health of these important corporate officers). I do not plan to rehash all that here. But I will note that I think friend and Glom blogger David Zaring gets it just right in his brief report on the recent Dimon announcement (with one small typo corrected and a hyperlink omitted):
Not to pile on, but there's the slightly unsettling trend of CEOs talking, or not, about their health. Surely material information a real investor would want to know about when deciding whether to buy or sell a stock in these days of the imperial CEO. But deeply unprivate. . . . The stock is up 2% on the day. It will be interesting to see whether this email makes its way into a securities filing.
Love that post. Thanks, David.
Sadly, as I was drafting this post, I learned that Kansas City Chiefs safety and former Tennessee Volunteer football standout Eric Berry has been diagnosed with Hodgkin's lymphoma. This obviously is not a matter of public company business disclosure regulation (given that the Kansas City Chiefs franchise, while incorporated, apparently is privately held). But I know I join many in and outside Vol Country in wishing Eric the same success in his cancer treatment that Dimon appears to have had to date with his.
In the comments to my post last week on teaching fiduciary duty in Business Associations, Steve Diamond asked whether I had blogged about why we changed our four-credit-hour Business Associations course at The University of Tennessee College of Law to a three-credit-hour offering. In response, I suggested I might blog about that this week. So, here we are . . . .
Friday, December 5, 2014
An early, brief look at some of the social enterprise data I have been collecting with Kate Cooney (Yale School of Management), Justin Koushyar (Emory University, PHD student) and Matthew Lee (INSEAD, Singapore Campus), is up on the Stanford Social Innovation Review (SSIR).
The charts produced over at SSIR include the number of social enterprise statutes passed per year, total number of L3Cs and benefit corporations formed, and -- the most difficult data to track down -- the number of social enterprises formed by state.
We are still working to refine the state-by-state data, hope to continue to update it, and may use it for future empirical work.
I watch a lot of Shark Tank episodes. Like most “reality shows,” Shark Tank is somewhat artificial. The show does not purport to be an accurate portrayal of how entrepreneurs typically raise capital, but I still think the show can be instructive. From time to time, mostly in my undergraduate classes, I show clips from the show that are available online.
After the break I share some of the lessons I think entrepreneurs (and lawyers advising entrepreneurs) can learn from Shark Tank. After this first list of lessons, I share a second list -- things folks should not take from the show.
Thursday, December 4, 2014
I had planned to blog about the UN Forum on Business and Human Rights this week, but my head is overflowing with information about export credits, development financing, a possible international arbitration tribunal, remarks by the CEOs of Nestle and Unilever, and the polite rebuff to the remarks by the Ambassador of Qatar by a human rights activist in the plenary session. Next week, in between exam grading, I promise to blog about some of the new developments that will affect business lawyers and professors. FYI, I apparently was one of the top live tweeters of the Forum (#bizhumanrights #unforumwatch) and gained many valuable contacts and dozens of new followers.
In the meantime, I recommend reading this great piece from the Legal Skills Prof Blog. As I prepare to teach BA for the third time (which I hear is the charm), I plan to refine the techniques I already use and adopt others where appropriate. The link is below.
Tuesday, December 2, 2014
Okay, so limited liability is probably not going away, though it appears that some would have it that way. "Eroding" is probably a better term, but that's less provocative.
In a piece at Forbes.com Jay Adkisson has posted his take on the Greenhunter case (pdf here), which I wrote about here. Mr. Adiksson is a knowledgeable person, and he knows his stuff, but he seems okay with the recent development of LLC veil piercing law in a way that I am not. For me, many recent cases similar to Greenhunter are off the mark, philosophically, economically, and equitably, in part because they run contrary to the legislation that created things like single-member LLCs.
One of my continuing problems with this case (as is often my problem with veil piercing cases), is that there are often other grounds for seeking payment other than veil piercing. Conflating veil piercing with other theories makes veil piercing and other doctrines murkier. More important, they make planning hard. Neither of these outcomes is productive.
In Greehunter, Adkisson notes the court’s determination of the “circumstances favoring veil piercing.” To begin:
+ There was a considerable overlap of the LLC’s and Greenhunter’s ownership, membership (which is really the same thing), and management. Plus, they used the same mailing address for invoices, and their accounting departments were the same folks.
Okay, first, a shared mailing address is a ridiculous test if we're going to allow subisidiaries at all. Sharing an address or even sharing an accounting department shouldn't really matter for veil piercing. This is really more of an enterprise liability-type issue, though the vertical nature of the entity relationship admittedly makes that harder. However, because an LLC doesn't have to follow formalities this is an absurd test. These facts also don’t, in any way, harm the plaintiffs. Make an agency claim or some other type of guarantor/reliance argument if there is one.
+ The LLC didn’t have any employees of its own, but instead relied upon Greenhunter’s employees to actually do things, including to pay creditors.
So what? Would this be true of a joint venture between partnerships? How about if there were just two LLC members – two people who never worked as employees the entity? Should veil piercing be okay then? No. If there is an agency claim, make that. If there is a guarantor claim, make that one. But this is not enough.
+ The LLC really didn’t have any revenue separate from Greenhunter, since the LLC simply passed through all the revenue to Greenhunter, and Greenhunter only kicked back enough money to the LLC to pay particular bills.
So the LLC would not have any money at all but for that which was put into it by the corporation. This was the structure at the time of deal and the set up at all times. If the creditor plaintiff were concerned, they should have raised that issue (and taken appropriate measures) earlier.
+ Although the LLC contracted with Western to procure services for the benefit of the wind farm, it was Greenhunter that claimed a $884,092 deduction for that project on its tax return.
This is how pass-through tax entities work. If pass-through taxation should not be allowed or single-member LLCs should not be allowed, then fine, but that’s a policy question to be raised with the legislature.
+ Greenhunter manipulated the assets and liabilities of the LLC so that Greenhunter got all the rewards and benefits (including tax breaks), but the LLC was stuck with the losses and liabilities.
This implies something was improperly taken from the LLC, but that's not really explained. If there was an improper transfer of value out of the LLC that should have available for the creditors, then the corporation should have to put those funds (that value) back into the LLC for purposes of creditors. That’s not veil piercing. If there’s not some kind of value that could be transferred back, then the claim doesn’t make sense.
Mr. Adkisson continues:
If one looks a veil piercing law as fundamentally comprising two elements: (1) unity of ownership, and (2) the entity was used as a vehicle to commit some wrong, then the single-member LLC (and the sole shareholder corporation) starts out with one foot in the veil piercing grave.
This is exactly why single-member LLCs are fundamentally lousy asset protection vehicles, despite the gazillion ads appearing in sports pages and classifieds advertising “Form an LLC for Asset Protection!”
This doesn’t mean that single-member LLCs should never be used; to the contrary, they are frequently and properly used in a number of situations for reasons other than liability protection.
First, I suppose this would be right if the premise were accurate, but I don’t see it this way. I don't think a “unity of ownership” is the first element for veil piercing. The above explanation is thus incomplete, and if a court follows it, the court would be wrong because it would be skipping the actual first part of the veil-piercing test. The Greenhunter case explains the proper test:
The veil of a limited liability company may be pierced under exceptional circumstances when: (1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity.
The Greenhunter court even quotes another recent Wyoming case in explaining the rule:
Before a corporation’s acts and obligations can be legally recognized as those of a particular person, and vice versa, it must be made to appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased, and that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.
Ridgerunner, LLC v. Meisinger, 2013 WY 31, ¶ 14, 297 P.3d 110, 115 (Wyo. 2013) (quotation marks and citations omitted).
Thus, it is more than a unity of ownership. There needs to be no separate or individual nature for the entity to satisfy the first prong. It’s not in any way a simple ownership test.
Second, I agree that LLCs are hardly perfect for asset protection and I agree that LLCs or other separate entities can be useful for reasons other than liability protection. Still, I find the idea that an LLC – a limited liability company – should be used for something other than “liability protection” to be an odd assertion. One can more easily set up a general partnership or simply a division of an existing entity to accomplish goals of separateness, if that’s the only point. Thus, one may choose an LLC for more than just limited liability purposes, but there’s no reason limited-liability protection wouldn't be a reason to choose an LLC.
The outcome of this case is, frankly, far less concerning to me than the rationale being put forth both in the case and some of the following analysis. I have to admit much of Mr. Adkisson’s analysis is consistent with how many courts see it. I just continue to believe we can do better in the development of veil piercing doctrine, and if we did, we'd see less need for it.
Creditors working with limited liability entities need to treat those entities as such. Ask the parent entity (or an owner) for a guarantee, get a statement of guaranteed funding, or seek some other type of reassurance.
As for courts, if you plan to pierce the veil of an LLC, fine, but please justify the veil piercing using specific reasons through specific application of the facts to the law. It’s more than unity of ownership, and it’s more than an inability to pay. Steve Bainbridge once noted (citing Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519, 524 (7th Cir. 1991):
As one court opined, “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced.
At least, that’s supposed to be the rule. I hope it still is.
Monday, December 1, 2014
Well, here we are at the end of another semester. I just finished teaching my last class in our new, three-credit-hour, basic Business Associations offering. (Next semester, I take my first shot at teaching a two-credit-hour advanced version of Business Associations. More to come on that at a later date.) The basic Business Associations course is intended to be an introduction to the doctrine and norms of business associations law--it is broad-based and designed to provide a foundation for practice (of whatever kind). I hope I didn't make hash out of everything in cutting back the material covered from the predecessor four-credit-hour version of Business Associations . . . .
I find teaching fiduciary duty in the corporations part of the basic Business Associations course more than a bit humbling. There is a lot there to offer, and one can only cover so much (whether in a three-credit-hour or four-credit-hour course format). Every year, I steel myself for the inevitable questions--in class, on the class website (TWEN), and in the post-term review session (scheduled for today at 5 PM)--about the law of fiduciary duty as it applies to directors. This past weekend, I received a question in that category on the course website. In pertinent part, it read as follows (as edited for fluency in some places):
I am having problems with understanding the duty of loyalty for directors.
First, . . . I don't think I know which transactions are breaches of loyalty. Do they include interested director transactions, competition, officer's compensation, and not acting in good faith? Second, do care, good faith, and loyalty all require that the directors be grossly negligent? I think I am just confused on the standard to determine whether a director has breached the duty of loyalty and/or care.
Wednesday, November 26, 2014
This is the time of year when we craft exam questions and grading grids in anticipation of exams.
Aside from Teaching Law by Design (a fabulous resource that I recommend for all new teachers as a great continuing resource for even those grizzled from years in the trenches), I have used few formal resources to guide my exam writing and grading process. Fortunately, I work with creative, collaborative and generous colleagues who all shared lots of samples and tips when I first started writing exams. Before committing myself to my Corporations exam this year, I decided to see what is out there to guide exam construction and grading. Finding little that was useful on SSRN or Westlaw, I turned to a broader search, which brought me to a general test instruction guideline produced by Indiana University, aptly titled: How to Write Better Tests. It had the following information regarding essay exams that serve as a useful reminder about why we are so meticulous in constructing our grading rubrics and creating grading schemes that, to the greatest extent possible, reduce our individual biases.
Consider the limitations of the limitations of essay questions:
1. Because of the time required to answer each question, essay items sample less of the content.
2. They require a long time to read and score.
3. They are difficult to score objectively and reliably. Research shows that a number of factors can bias the scoring:
A) Different scores may be assigned by different readers or by the same reader at different times
B) A context effect may operate; an essay preceded by a top quality essay receives lower marks than when preceded by a poor quality essay.
C) The higher the essay is in the stack of papers, the higher the score assigned.
D) Papers that have strong answers to items appearing early in the test and weaker answers later will fare better than papers with the weaker answers appearing first.
To combat these common issues the guidelines recommend:
- anonymous grading (check)
- grading all responses to question 1 before moving on to question 2, and so on (check)
- reorganizing the order of exams between questions (check)
- deciding in advance how to handle ambiguous issues (check, thanks to my grading rubric)
- be on the alert for bluffing (CHECK!)
If anyone has found a particularly useful resource regarding exam construction and grading, please share in the comments. I am sure everyone would benefit.
Happy Thanksgiving BLPB readers!
Monday, November 24, 2014
Happy Thanksgiving you all! With my co-blogger colleagues here on the BLPB writing various Thanksgiving posts on retail-related and other holiday-oriented business law issues (here and here), I find myself in a Thanksgiving-kind-of-mood. I honestly have so much to be thankful for, it's hard to know where to start . . . . But apropos of the business law focus of this blog, I am choosing today to be thankful for my students. They make my job really special.
This semester, I have been teaching Business Associations in a new three-credit-hour format (challenging and stressful, but I have wanted to teach Business Associations in this format for fifteen years) and Corporate Finance (which I teach as a planning and drafting seminar). I have 69 students in Business Associations and ten in Corporate Finance. I have two class meetings left in each course.
The 69 students in Business Associations have been among the most intellectually and doctrinally curious folks to which I have taught this material. I have talked to a lot of them after class about the law and its application in specific contexts. Two stayed after class the other day to discuss statutory interpretation rules with me in the context of some problems I gave them. This large group also includes a number of students who have great senses of humor, offering us some real fun on occasion in class meetings and on the class TWEN site. They are not always as prepared as I would like (and, in fact, some of the students have expressed to me their disappointment in their colleagues' lack of preparedness and participation), but they pick up after each other when one of them leaves a mess in his or her wake (volunteering to be "co-counsel" for a colleague--a concept I introduce in class early in the semester). I enjoy getting up on Monday mornings to teach them at 9:00 am.
Corporate Finance includes a more narrow self-selected group. Almost all of these students have or are actively seeking a job in transactional or advocacy-oriented business law. They handed in their principal planning and drafting projects a bit over a week ago, projects that they spend much of the semester working on. (These substantial written projects are described further in this transcribed presentation.) Now, each student is reviewing and commenting on a project drafted by a fellow student. Both the project and the review are constructed in a circumscribed format that I define. I am excited to read their work on these projects, given the great conversations I have had with a number of them over the course of the semester as they puzzled through financial covenants, indemnification provisions, antidilution adjustments, and the like. Great stuff. I teach this class from 1:00 pm to 2:15 pm two days a week--a time in the day when I generally am most sleepy/least enthusiastic to teach. But these folks ask good questions and seem to genuinely enjoy talking about corporate finance instruments and transactions, making the experience much more worthwhile.
So, I am very thankful for each and all of these 79 students. I may not feel that way after I finish all the grading I have to do, but for now, I am both grateful and content. And I didn't consume a single calorie getting there (which is more than I will be able to say Thursday night . . .). Just looking at the picture at the top of this post makes my stomach feel full and me feel heavier. Ugh.
Friday, November 21, 2014
Whole Foods recently launched its first national advertising campaign around the theme “Values Matter.” Some outlets claim that the campaign is a response to weak comparable store sales. Supposedly, Whole Foods is spending between $15 million and $20 million on this campaign in an attempt to convince customers that “value and values go hand in hand.” You can see some of the videos here.
Whole Foods has long been known for its high prices and healthy food. Whole Foods has been actively fighting the high price reputation, but at least in the places I have lived, Whole Foods is usually close to the richest neighborhoods, is entirely absent in less affluent areas, and still seems to have higher prices than most competitors. Whole Foods seems to use a premium product, sold mostly to the upper-class, to fund its commitment to employees, its purchasing from smaller local vendors, and its care for the environment.
Whole Foods seems to focus on impacting society and the environment mostly through the process by which they sell their products and distribute the profits to stakeholders.
Walmart seems to have a very different model. Walmart seems to care much more about low prices than about treating their non-customer stakeholders well. Walmart’s extreme pressuring of suppliers, often contentious relationships with the communities around its stores, and low wages/limited benefits for many of its employees [updated] has been widely reported. Walmart seems to be trying to fight its reputation, and it has certainly engaged in some positive activities for society, but its reputation remains.
In contrast to Whole Foods, Walmarts can be found in rural and less affluent areas, and Super-Walmarts are bringing fresh produce to former food deserts at prices that appear to be more affordable. Walmart could argue that it makes a positive impact on society through its low prices.
In short, Whole Food’s strategy seems to be – proper process, high prices – while Walmart may allow a poor process to obtain low prices.
Should corporate law, especially social enterprise law such as the recent benefit corporation law, encourage one strategy over the other? The benefit corporation laws appear flexible enough to embrace either, though a more traditional understanding of social enterprise might exclude both on the ground that the companies’ primary purpose does not seem to be producing products that serve the disadvantaged. Social enterprise’s definition, however, has become much broader over time, though there is currently no consensus.
This struggle with process and prices can be a difficult one, and I am just glad more companies are attempting to find appropriate solutions.
Tuesday, November 18, 2014
Steve Bainbridge at ProfessorBainbridge.com has posted a couple of discussions of fee-shifting bylaws.
As many of you know, last spring, in the ATP Tour case, the Delaware Supreme Court upheld a bylaw requiring the losing party in shareholder litigation to pay the other side's attorneys' fees. The case involved a non-stock membership corporation, but there's no relevant distinction between non-stock corporations and ordinary corporations in either the opinion or the statute. A bill was introduced in the Delaware legislature to amend the statute to overturn the ATP Tour decision, but the legislature deferred any action pending further study.
I’m starting to think that courts are playing the role of Lucy to my Charlie Brown, and proper description of LLCs is the football. In follow up to my post last Friday, I went looking for a case that makes clear that an LLC’s status as a disregarded entity for IRS tax purposes is insufficient to support veil piercing. And I found one. The case explains:
Plaintiff . . . failed to provide any case law supporting his theory of attributing liability to Aegis LLC because of the existence of a pass-through tax structure of a disregarded entity. Pl.'s Opp'n. . Between 2006 and 2008, when 100% of Aegis LLC's shares were owned by Aegis UK, Aegis LLC was treated as a disregarded entity by the IRS and the taxable income earned by Aegis LLC was reflected in federal and District of Columbia tax returns filed by Aegis UK. Day Decl. Oct. 2012 [48–1] at ¶ 37. In the case of a limited liability corporation with only one owner, the limited liability corporation must be classified as a disregarded entity. 26 C.F.R. § 301.7701–2(c)(2). Instead of filing a separate tax return for the limited liability corporation, the owner would report the income of the disregarded entity directly on the owner's tax return. Id. Moreover, determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders. See United States v. Acambaro Mexican Restaurant, Inc., 631 F.3d 880, 883 (8th Cir.2011). Given the above analysis, the undersigned finds that there is no unity of ownership and interest between Aegis UK and Aegis LLC.
As Charlie Brown would say, "Aaugh!"
So the case makes clear, as I was hoping, that it is not appropriate to use pass-through tax status to find a unity of interest and ownership in a way that will support veil piercing. But the court then screws up the description of the very nature of LLCs. This is not a “case of a limited liability corporation!” It's a case of a limited liability company, which is a not a corporation.
Moreover, to use the court’s language, while it is true that “determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders,” the premise of the case has to do with an LLC’s status. Thus, the court should, at a minimum, make clear it knows the difference. The statement, then, would go something like this: "Determining whether LLC formalities have been disregarded requires more than just recognizing the tax arrangements between an LLC and its members.”
It’s worth noting the entity formalities for LLCs are significantly less that those of corporations, so the formalities portion of LLC veil piecing test should be minimal, but that's a different issue.
Anyway, like Charlie Brown, I will keep kicking at that football, expecting, despite substantial evidence to the contrary, that one day it will be there for me to kick. At least I don't have to go it alone.
Thursday, November 13, 2014
1) Difference between LLCs, corporations and partnerships
2) Del. and ULLCA coverage of fiduciary duties, and especially the issue of contractual waiver and default
19) No right to distributions, and no right to vote for distributions if manager-managed
20) No right to salary or employment
21) Taxable liability for LLC membership
22) Exit rights—voluntary withdrawals vs. restricted withdrawals, and whether or not that comes with the ability to force the return of an investment or a new status as a creditor of the LLC
23) Liability for improper distributions
24) Veil piercing, particularly given the lack of corporate formalities
I would love some feedback from practitioners as well. What do law students and practicing lawyers need to know about LLCs? What's missing from this list? What should I get rid of? Please feel free to comment below or to email your thoughts to email@example.com.
November 13, 2014 in Business Associations, C. Steven Bradford, Corporate Personality, Corporations, Delaware, Law School, LLCs, Marcia Narine, Partnership, Teaching, Unincorporated Entities | Permalink | Comments (1)