Wednesday, April 23, 2014
In March, the Fourth Circuit held in Carnell Construction Corp. v. Danville Redevelopment & Housing Authority, that racial identity can be imputed to a corporation for purposes of standing under Title VI, citing to case precedent from the several circuits allowing 1981 claims to be raised by corporations.
“[W]e observe that several other federal appellate courts have considered this question, and have declined to bar on prudential grounds race discrimination claims brought by minority-owned corporations that meet constitutional standing requirements.”
The Fourth Circuit had to deal with the following language in Arlington Heights, 429 U.S. 252, 263 (1977): “As a corporation, MHDC has no racial identity and cannot be the direct target of the petitioners' alleged discrimination. In the ordinary case, a party is denied standing to assert the rights of third persons.” In Arlington Heights, the Supreme Court however did not need to “decide whether the circumstances of this case would justify departure from that prudential limitation and permit MHDC to assert the constitutional rights of its prospective minority tenants. For we have at least one individual plaintiff who has demonstrated standing to assert these rights as his own.” (citations omitted). The dicta in Arlington Heights was not a barrier to imputing a racial identity to the corporation in the Fourth Circuit case.
In a clear statement, the Fourth Circuit concluded that:
“We agree with the Ninth Circuit that a minority-owned corporation may establish an “imputed racial identity” for purposes of demonstrating standing to bring a claim of race discrimination under federal law. We hold that a corporation that is minority-owned and has been properly certified as such under applicable law can be the direct object of discriminatory action and establish standing to bring an action based on such discrimination.”
Chief Justice Roberts was concerned about the connection of racial identities for corporations and corporate free exercise of religion as raised in the Hobby Lobby and related cases. Note that fellow BLPB blogger Josh Fershee wrote about the racial identity of a corporation on BLPB here arguing why religious discrimination claims by corporations should be allowed and how the analysis would work. Professor Bainbridge weighed in on the issue as well.
Here is my best response as to why holding that corporations can have a racial identity is not necessarily fatal to the claim that corporations cannot have a religious identity for purposes of free exercise under the 1st Amendment, and why religious discrimination cases for corporations may also be more difficult than racial discrimination cases.
Line drawing. In the Carnell case as well as in others, the corporations at issue had been certified as a minority/women owned business at the state level, which is treated as a form of pre-requisite for such standing to assert a racial discrimination claim. There is no similar bright line test or religious entity process for a for-profit corporations. Indeed the very process of such a certification may implicate other 1st Amendment protections for freedom of speech and association.
Third Parties & Equity. Second, imputing the racial identity to the corporation for purposes of a Title VI claim of racial discrimination upholds the minimum anti-discrimination standard against third parties. So in the race cases, the identity of the owners is imputed to the corporation to prevent third parties from evading a legal standard. In the corporate free exercise of religion context, the owners are requesting that their individual religious beliefs be imputed to the corporation to allow it to evade compliance with a law. Anti-discrimination laws are applied generally and don’t allow a person to discriminate whether it is with an individual or through a corporation rather than exempting a corporation from a neutrally-applied, generally applicable law.
This last points get to the debate, in part, about the relevance of reverse veil piercing (RVP) on which Professor Stephen Bainbridge has advocated as a framework to resolve the mandate issue in Hobby Lobby. The corporate veil is rejected in both CVP and RVP when equity requires and that is usually dependent upon a third party interest that is best protected by rejecting the legal fiction of a separate corporate form. In the anti-discrimination/racial identity there is an equitable argument that the third party cannot discriminate against the corporation simply because it is owned by minorities. What is the equitable argument in Hobby Lobby? The fairness rationale is weakened here, especially in light of the interests of the 13.5K employees receiving health care coverage as a form of compensation for their work for the company. Instead RVP, it must rest, if at all, on the public policy justification advanced by Professor Bainbridge. But again, the public policy argument cuts both for and against RVP. There is a public policy argument in protecting/promoting religious freedom as there is in facilitating access to health care, including forms of health care that Congress has determined to be necessary for women (and families) under the ACA.
Friday, April 18, 2014
Earlier this semester, Belmont undergraduate students competed for a total of $8,000 in a business plan competition. The first place team, What’s Hubbin’, won $5,000. Law firm Baker Donelson was one of the sponsors.
Each competition team was required to provide: (1) an executive summary, (2) a description of the business (including mission and vision), (3) plans for marketing, operating, finances, and growth, and (4) financial statements (historical, if applicable, and projected). The finalists presented in front of a team of judges, which included local attorneys, investors, and entrepreneurs. The event also attracted a strong audience of faculty members (myself included), staff, and students.
Given the evolving legal industry, and the increasing focus on Law & Technology and Law & Entrepreneurship, I could see business plan competitions like this one being a success at law schools (perhaps in coordination with their sister business schools).
One of the three What’s Hubbin’ team members is Makenzie Stokel. She is also one of my undergraduate business law students. I asked her if she would mind answering a few, short questions about the competition and about her team's business, which is one of the competition’s businesses that is already up and running. My questions and her answers are below.
HM: Will you please briefly describe your business, What’s Hubbin’, for our readers?
MS: What's Hubbin’ is a website that promotes music here in Nashville. We highlight local artists and promote events going on around town. Our site allows users to "hub" (RSVP) events and artists and have an organized profile of their music preferences. We also allow users to filter events based on their preferences to ensure that everyone finds something that they will want to do. We host events around Nashville and will be hosting a day-long festival at the end of this month. Our goal is to have everything music related all in one place so users don't have trouble finding events or discovering new music. You can find us online at www.whatshubbin.com and on Twitter at @WhatsHubbin
HM: How has participating in the competition helped your business?
MS: Participating in the business plan competition has helped promote our business a great deal. We have had multiple blogs write about us, and were even named Belmont's hottest start-up by Southern Alpha. It has really helped us get our name out there with the Belmont community and provided some validation of our business.
HM: How has participating in the competition enriched your college experience, especially your experiences in your classes?
MS: I am so glad that the What's Hubbin' team was able to participate in this competition. The competition definitely helped us with our public speaking skills, which is necessary to have in classes and after college. It also forced us to think quickly when answering the judges’ questions. When preparing for the questions that we thought they might ask, we had to determine who was best at the different aspects of our business. The competition, and the start-up process part in general, has been more relevant to some classes than others. Business Law and Foundations of Entrepreneurship are two examples of relevant classes. Also, as a result of being involved in What’s Hubbin’, I have seen ways to apply what I am learning in classes outside of school.
HM: Congratulations and best of luck.
MS: Thank you!
Thursday, April 17, 2014
Back in August, Bloomberg reported that the legal costs for the six largest U.S. banks since 2008 totaled over $100 billion. (Yes, billion with a "B.") Bloomberg included settlement amounts in that huge number, as well as fees to lawyers.
The financial and emotional costs of litigation, not to mention the tremendous amount of time required, amazes me. Litigation has its place, but the vast majority of disputes eventually settle and many times all parties would have been better off settling earlier using some form of alternative dispute resolution (ADR).
A former colleague recently pointed me to the University of Missouri School of Law's listserv for ADR educators.
I know many of our readers only teach business law courses, but adding negotiations to my teaching package has made me see the various intersections between negotiations and business law. This semester, I set aside some time in my business law classes to discuss a bit of the negotiations literature, and the students seemed to appreciate it. I just signed up for the listserv, so I cannot speak to its quality yet, but I do think more business law professors should consider exploring the world of ADR.
Tuesday, April 15, 2014
Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
2015 AALS Annual Meeting--Agency, Patnerships, LLCs & Unincorporated Assoc. Section
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014. The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeff Lipshaw, Chair ([email protected])
Monday, April 14, 2014
Delaware, like most states, has a provision in its corporate statutes allowing corporations to limit directors’ liability for breaches of fiduciary duty. Delaware section 102(b)(7) allows corporations to include in their charter “a provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages" for certain breaches of fiduciary duty.
A recent Delaware case plows a huge hole through the protection provided by a section 102(b)(7) charter provision. In the Rural Metro case [In Re Rural Metro Corp. Stockholders Litigation, 2014 WL 971718 (Del. Ch. Mar. 7, 2014)], the Delaware Court of Chancery held that a 102(b)(7) provision does not protect against claims that non-directors aided and abetted a duty-of-care violation by directors, even when the directors themselves are protected.
The Chancery Court’s reasoning is sound. Section 102(b)(7), and the associated charter provision, don’t say there’s no breach of fiduciary duty, just that directors aren’t personally liable for damages. The underlying conduct by the directors is still a breach of fiduciary duty, and injunctive relief is still available, just no money damages.Since there’s still a breach of duty, and the statute says nothing about the liability of aiders and abettors, the court concluded that aiders and abettors can still be liable if: (1) the directors breached their fiduciary duties; (2) the third party knew the directors were breaching their fiduciary duties; and (3) the third party participated in the breach.
The court ultimately held that RBC Capital Markets, LLC was liable for aiding and abetting. I can't do justice to the facts in the space available here; I highly recommend a reading of this important opinion.
The real question is whether the Delaware legislature will let this holding stand. The Chancery Court’s statutory reasoning is sound, but that doesn’t mean the result is necessarily good policy. Investment bankers, brokers, accounting firms, and other third party providers, perhaps even lawyers in some cases, are exposed to the risk of liability under this holding. Even if they ultimately win on the merits, as I suspect many will, the litigation itself will be costly. That cost will, of course, be passed on to the corporations using the services of those third parties.
There’s a possible gain associated with that cost, of course: the possible increased deterrence of breaches of fiduciary duty by corporate directors. But the Delaware legislature, in adopting section 102(b)(7), has already decided that other considerations outweigh the deterrent effect of imposing liability on the directors themselves.
Two Legislative Options
Plugging the Rural Metro hole is easy. A simple amendment to 102(b)(7) would do the trick. But how the Delaware legislature chooses to amend the statute (if it does) is important.
One way would be to authorize corporations to include provisions in their charters protecting not only directors, but also people who aid and abet violations by the directors. If that's all the Delaware legislature did, the protection from liability would not be automatic. Companies with 102(b)(7) exculpation provisions would have to amend their charters to protect aiders and abettors.
A simpler, neater solution would make the protection of aiders and abettors automatic. The legislature could just add a sentence at the end of 102(b)(7) providing that aiders and abettors are not liable when the directors themselves are protected from liability. Something like the following would work: “Unless otherwise specified in the certificate of incorporation, no person shall be liable for money damages for aiding and abetting an action protected by such a provision.” If the legislature did this, no further corporate action would be needed to make this protection effective. Only companies that did not want aiders and abettors protected would have to amend their charters.
Stay tuned to see what, if anything, the Delaware legislature does.
Friday, April 11, 2014
On March 24, the petition for certiorari was denied in the Strine v. Delaware Coalition For Open Government, Inc. case, ending the Delaware Court of Chancery's experiment with arbitration by their sitting judges. (H/T Brian Quinn).
As far as I know, however, sitting judges on the Delaware Court of Chancery still conduct mediation. A Chancellor or Vice Chancellor does not mediate his own cases, but rather mediates the cases assigned to one of the other four judges on the court (if the parties agree to submit to mediation).
More information about the Delaware Court of Chancery's mediation process is here. The benefits of the mediation include:
- Expertise. You would be hard pressed to find someone more knowledgable about Delaware corporate law and the merits of a Delaware Court of Chancery case than a sitting Delaware Chancellor or Vice Chancellor.
- Relatively Inexpensive. The fee is only $5,000 a day, for cases that are already on the Chancery docket, which is a decent amount of money, but is dwafted by the legal fees spent in almost all of these cases. For mediation only cases (cases not already on the docket), there is a $10,000 initial fee and a $5,000 for each additional day.
- Confidential. All mediation proceedings are strictly confidential.
These are many of the same main benefits as the Delaware Court of Chancery arbitration, but, of course, in mediation, the judge is not making a decision, but rather assisting the parties in reaching a voluntary settlement.
According to Steven Davidoff, in the Strine case, "the federal court found that the arbitration proceedings were effectively a civil trial, with no difference in judges, place or proceeding except the secrecy and the arbitral nature."
Mediation, however, is quite a bit different than a civil trial. While the comments of a sitting Chancellor may carry a lot weight with the parties, a mediator does not come to a determination for the party and the parties are able to walk away from the mediation at any time.
In short, judicial mediation carries many of the benefits of judicial arbitration, but the practice of judicial mediation seems to be more difficult to challenge.
Thursday, April 10, 2014
[I]t is counterproductive for investors to turn the corporate governance process into a constant Model U.N. where managers are repeatedly distracted by referenda on a variety of topics proposed by investors with trifling stakes. Giving managers some breathing space to do their primary job of developing and implementing profitable business plans would seem to be of great value to most ordinary investors. -Hon. Leo E. Strine Jr., Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, 114 COLUMBIA L. REV. 449, 475 (2014).
When was the last time you remember the U.S. Chamber of Commerce, the National Association of Corporate Directors, the National Black Chamber of Commerce, American Petroleum Institute, the Latino Coalition, Financial Services Roundtable, Center On Executive Compensation, and the Financial Services Forum joining forces on an issue? Well yesterday they signed on to a petition for rulemaking that was submitted to the SEC regarding the resubmission of shareholder proposals that “fail to elicit meaningful shareholder support.”
Shareholders who own at least $2,000 worth of a company’s stock for at least one year may require a company to include one shareholder proposal in the company’s proxy statement to all shareholders under Rule 14a-8(b) of the ’34 Act. Under Rule 14a-8(i)(12), companies may exclude shareholder proposals from proxy materials under thirteen circumstances, including but not limited to proposals that deal with substantially the same subject matter as another proposal that has been previously included in the company’s proxy materials within the preceding 5 calendar years and did not receive a specified percentage of the vote on its last submission. Specifically a company can exclude a proposal (or one with substantially the same subject matter) if it failed to receive 3% support the last time it was voted on if voted on once in the last five years, 6% if it was voted on twice in the last five years, and 10% if it was voted on three or more times in the past five years for resubmission. Note that the SEC itself proposed and then withdrew the idea of raising the threshold to 6%, 15% and 30% in 1997. The Resubmission Rule is supposed to protect the interests of the majority of shareholders so that a small minority cannot burden the rest of the shareholders with proposals that the majority have repeatedly expressed that they have no interest in and to ensure that management can focus on issues that are important to the company.
Why is this important? The petition includes the following enlightening statistics:
1) The two largest proxy advisory firms, Institutional Shareholder Services (ISS) and Glass Lewis command 97% of the market for proxy advisory firms meaning that they can, in the petitioners view, “dictate” what should be included in proxy solicitations. Proposals favored by ISS may receive up to 24.7% greater support than those do not have their support and proposals favored by Glass Lewis may receive up to 12.9% greater support, all independent of other factors.
2) According to the Manhattan Institute, since 2011, 437 shareholder proposals relating to questions of social policy have been submitted just to the Fortune 250. These proposals have been opposed by an average of 83.7% of votes cast.
3) Between 2005-2013, 420 shareholder proposals focusing on environmental issues were proposed to US companies but only one passed (I would note that many environmental issues never make it to the proxy because shareholders are now engaging with management earlier).
4) Between 2005-2013, 237 labor-related proposals were submitted to US companies. Only three proposals received majority support and the other 234 labor-related proposals received less than 20% support.
5) A Navigant study estimates that companies incur direct costs of $87,000 per proposal or $90 million annually in the aggregate.
6) The website shareholderactivist.com calls shareholder activism a "participatory sport" where investor activists submit similar proposals to multiple companies so that they can "advance a larger agenda.”
The petitioners argue that the current Resubmission Rule fails to protect shareholders and forces the majority of shareholders to “wade through and evaluate” numerous proposals that have already been “viewed unfavorably” by 90% or more of shareholders year after year and have no realistic likelihood of winning the support of a substantial number of shareholders. The petitioners recommend that the SEC reconsider the Resubmission Rule because the existing rule was adopted without cost-benefit analysis. To better serve shareholders, the petitioners contend that SEC should significantly increase the voting percentage of favorable votes a proposal must receive before the company is obligated to include a repeat proposal in subsequent years in its proxy. To read the Petition for Rulemaking click here. The comment period for the SEC will be open soon.
As a side note, my business associations class studied Rule 14a-8 and drafted their own shareholder proposals last week. I saw one of my students today and excitedly told her I was working on this blog post and that we were going to discuss this proposal on Monday. Her response- oh no- will we have to know this for the final? Must be the end of the semester.
April 10, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Financial Markets, Law School, Marcia L. Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Continuing with the theme, I want to highlight a new hybrid resource, JURIFY, which is a mostly-free, online transactional law resource.
“Jurify provides instant access to high-credibility, high-relevance legal content, including forms and precedent in Microsoft Word® format written by the world’s best lawyers, white papers and webinars from top-tier law firms, articles in prestigious law journals, reliable blog posts and current versions of statutory, regulatory and case law, all organized by legal issue.”
Here are the stats: Jurify, launched in 2012, covers 5 broad transactional areas: General Corporate, Governance, Mergers & Acquisitions, Securities and Startup Companies. The 11,000+ sources that the website currently contains have been verified by transactional attorneys and generated from free on-line platforms or submitted by private attorneys who are voluntarily sharing their work. Documents are organized according to 586 tags. Three transactional attorneys started this website (husband/wife duo and their former law-firm colleague); none take compensation from editors, publishers or law firms.
Jurify is a unique transactional law resource for the following reasons:
- FREE (mostly). Website contents including primary law, secondary sources and template agreements and forms. All content is searchable; most is free; some templates/forms, available in Microsoft word version, require either a fee or a paid membership. In the future, Jurify founders hope to generate revenue by providing performance metrics and career services components.
- Emphasis on Primary Sources—collecting the most current and complete versions of governing statutes, and here is the important part—putting relevant sources together. Want to find out registration obligations? A search on Jurify will pull from several different sources to give you a comprehensive look at the governing law.
- Organization. The website resources are organized in a consumer-friendly, vertically integrated platform (like the searching functions on YouTube). If you search for one term of art, (the example used was break-up fees), the search results pull all related terms of art (i.e., termination fees, reverse break-up fees, etc.). The data base has been encoded with 1600 corporate law synonyms in the platform to facilitate more robust natural language searches.
- Multiple search modes (i.e., accessible for the novice). Non-experts can search for information using tags and drop down boxes to sort information by source type (news articles, videos, journals, statutes and regs, etc.). The site also includes a glossary of terms, and those terms serve as searchable categories that have documents associated with them.
- Narrowing the field. You don’t need every document- you just need the right document. Researchers can narrow search results through subcategories, which include definitions on all of the subcategories to assist the non-expert (i.e., students, generalist attorneys like some in-house teams). Within general categories, researchers can also conduct granular searches within a topic and can narrow by specific fields (i.e., M&A).
- Sorting the results. Search results are displayed in order of relevance. Relevance, in Jurify, is determined by the tags assigned by Jurify attorneys reviewing and labeling each document in the database. While a document may have 15 tags, 2 or 3 tags will be the primary tag, and the document will be flagged as “noteworthy” for that particular topic. The idea is that you review the most relevant documents first not just any document that contains any reference to your search fields.
- Networking Component. Some of the documents are voluntarily provided by practicing attorneys and their names remain associated with the document(s). If an attorney wants to establish herself as an expert in an area, she may do so in part, by contributing high-quality documents on that topic. Top contributors are highlighted on the website, using in part, a Credibility Score. In the future, a ranking/review feature will be added so that users can provide feedback on the quality/relevance of a document as well.
Erik Lopez, co-founder of Jurify, contacted the BLPB editors earlier this spring. As a result, I test drove the site with Erik a few weeks ago, which formed the basis of my comments above. Thanks Erik! (Note: Neither BLPB nor I, individually, received any compensation as a result of this post. I am passing it along because I genuinely am intrigued by the platform, business model, and potential for the website to be a valuable transactional resource.)
If anyone currently uses Jurify, or test drives the site after reading this post, please share your experience in the comments.
Wednesday, April 9, 2014
On March 27th, SEC commissioner Daniel M. Gallagher’s delivered the keynote address at the 26th Annual Corporate Law Institute at Tulane University Law School. Addressing the intersection of governance and securities disclosure, Commissioner’s Gallagher’s remarks (available here) are summarized below:
Dodd Frank increased the federalization of corporate law.
“This mandated intrusion into corporate governance will impose substantial compliance costs on companies, along with a one-size-fits-all approach that will likely result in a one-size-fits-none model instead.”
Shareholder proposals are costly, problematic and used by only a small group of shareholders with particular interests and agendas that may not be alligned with other shareholders. Citing first to the 41% increase in shareholder proposals post Dodd-Frank, and the meager 7% passage rate, Commission Gallagher outlined which shareholders use the proposal process and the punch line is that only 1% are brought by ordinary institutional investors.
- 34% are from organized labor;
- 25% are from social, policy or religious institutions; and
- 24% of the proposals were brought by just two individuals whom the Commissioner described as “corporate gadflies.”
The shareholder proposal process should be reformed by narrowing the scope of those eligible to bring proposals and the subject matter of the proposals.
- Increase holding amounts and time (specifics not provided);
- Clarify the application guidelines for the “ordinary business operations” exclusion and the “significant policy issue” exception to the exclusion;
- Have commissioners vote on exclusions, not leave it to the staff;
- Create greater authority to exclude misstatements; and
- Substantially strengthen resubmission thresholds (suggesting a three strikes you are out rule).
While not a heading of the remarks, another clear take away is the Commissioner’s stance against viewing climate change as a serious policy issue and that conflict mineral reports do not “provide investors with the information they need to make informed investment decisions.” To further this point, he discredited third parties, like the Sustainability Accounting Standards Board, as having no role in shaping disclosure requirements.
You should read the full remarks, if nothing else, for this line: “Mike D. of the Beastie Boys—who, by helping to bring the proposal to a vote, at least succeeded in his fight for the right to proxy.”
Tuesday, April 1, 2014
As I discussed briefly last week, I think reverse veil piercing in the Hobby Lobby case is a bad idea, in part because it uses a doctrine designed to prevent fraud to impute characteristics to the entity. One of the reasons this concerns me is that there are other recent decisions that imply courts may be missing the point about the separate and distinctive nature of entities, even as the individual rights of entities appear to be expanding.
In a recent West Virginia case, for example, a lower court allowed a wildly improper use of the statutory provision, “Unknown claims against dissolved corporation” to be the basis what became a $25 million jury award for punitive damages for emotional impact to a former entity’s shareholders. In the Order Addressing AIG Posttrial Motions (pdf) of May 1, 2012 (“Order”) Ryan Environmental, Inc. v. Hess Oil Co., Inc., Civil Action No. 10-C-20, the court adopted a plaintiff’s argument that, under W. Va. Code § 31D-14-1407(d), “the interests of the shareholders are joined with the interests of the corporation after a corporation’s dissolution.” See Order at 7. The court later explained its view that, because the plaintiff’s former entity was dissolved, damages and hardships attributable to the shareholders were a sufficient basis for the defendants’ liability directly to the shareholders and that such damages and hardships did not need to attributed to the former entity. That is, the defendants’ liability ran to the entity’s shareholders post-dissolution even though the harms claimed were never attributable to the entity. Click below to read more.
Sunday, March 30, 2014
Our friends at The Conglomerate recently conducted an excellent online symposium on the Hobby Lobby case.
All of the posts have been collected here.
It was refreshing to read such a thoughtful and balanced set of posts.
In my article, “The Silent Role of Corporate Theory in the Supreme Court’s Campaign Finance Cases,” 15 U. Pa. J. Const. L. 831, I criticized the Supreme Court justices for failing to acknowledge the role of competing conceptualizations of the corporation in their corporate political speech cases. I noted, however, that former Chief Justice Rehnquist was arguably the lone modern justice to deserve at least some praise in this area.
Justice Rehnquist's stand-alone dissent in Bellotti provides arguably the sole example in these opinions of a Justice affirmatively adopting a theory of the corporation for purposes of determining the constitutional rights of corporations--though not via the express adoption of one of the traditionally recognized theories. Specifically, Justice Rehnquist relied on Justice Marshall's Dartmouth College opinion to conclude that: “Since it cannot be disputed that the mere creation of a corporation does not invest it with all the liberties enjoyed by natural persons . . . our inquiry must seek to determine which constitutional protections are ‘incidental to its very existence.”’ Thus, while it may be true that “a corporation's right of commercial speech . . . might be considered necessarily incidental to the business of a commercial corporation[, i]t cannot be so readily concluded that the right of political expression is equally necessary to carry out the functions of a corporation organized for commercial purposes.” I would argue that this is a formulation most aligned with concession theory because not only does Justice Rehnquist rely on Dartmouth College, but he also goes on to say: “I would think that any particular form of organization upon which the State confers special privileges or immunities different from those of natural persons would be subject to like regulation, whether the organization is a labor union, a partnership, a trade association, or a corporation.” Stefan J. Padfield, The Silent Role of Corporate Theory in the Supreme Court's Campaign Finance Cases, 15 U. Pa. J. Const. L. 831, 853 (2013) (quoting First Nat'l Bank of Bos. v. Bellotti, 435 U.S. 765 (1978)).
While this is only one data point, I think it suggests the former Chief Justice would have been hesitant to grant corporations any form of free exercise rights, since it is difficult to see how free exercise rights are more incidental to a corporation’s existence than political speech rights. Cf. Kent Greenawalt, Religion and the Rehnquist Court, 99 Nw. U. L. Rev. 145, 146 (2004) (“With limited qualifications, the Rehnquist Court has abandoned the possibility of constitutionally-required free exercise exemptions.”).
For more on concession theory, I shamelessly suggest my more recent article, “Rehabilitating Concession Theory,” 66 Okla. L. Rev. 327 (2014) (“the reports of concession theory's demise have been greatly exaggerated”). And if you find that of interest, you can check out my latest SSRN posting, “Corporate Social Responsibility & Concession Theory.”
Friday, March 28, 2014
This short post caught my eye for two reasons.
Second, since my move to a business school last fall, I have heard the term “networking” with increasing frequency. Sure, “networking” is discussed in law schools and there are some networking events, but in business schools the term “networking” is ubiquitous and the events focused on “networking” are constant.
"Networking" has some negative connotations, but I think Blumenthal’s attack is misplaced. Instead of attacking “networking,” Blumenthal would have done better to attack “selfishness.”
There is nothing wrong, and much good, in the dictionary definition of “networking”:
the exchange of information or services among individuals, groups, or institutions; specifically: the cultivation of productive relationships for employment or business.
Networking can be a wonderful thing, for everyone involved, if you can keep the selfishness at a minimum. Unfortunately, many people network in a selfish manner.
Blumenthal also writes about breaking down the walls between our work and personal lives, but sometimes those walls are healthy. He writes about the joys of involving friends in business, but sometimes involving friends in business is unwise.
Those of us in the corporate law world have seen and read about countless businesses that turned friend against friend, mentor against mentee, and family member against family member.
I am thankful that my professional and personal contacts overlap significantly. Just yesterday, I had two long phone conversations with people I consider both professional contacts and valued personal friends. That said, I am also thankful that I have friends who have nothing to do with work and some professional contacts who never venture outside of my work circles.
In short, while I understand Blumenthal’s negative reaction to “networking,” I think "selfishness" is the real problem. Further, I understand the great happiness he may be experiencing by involving friends in his business, but I also hope he recognizes that business may put great strain on those personal relationships.
Wednesday, March 26, 2014
A little more than six weeks ago The Lego Movie hit theaters. Without getting into too much detail for those of you who have not yet seen the movie or who will never get around to seeing the movie, in essence it’s about an ordinary guy who’s mistakenly identified as an extraordinary “MasterBuilder”. He is recruited to fight against a Lego villain (President Business-we can call him P.B.) who is intent on gluing everything together. The anti-PB crusaders like having the freedom to dismantle, break, and re-make their Lego creations and shudder at the thought of having everything permanently fixed in place. PB, on the other hand, is intent on perma-gluing the Lego bricks together because he likes the certainty and control of knowing where everything is, and he is wary of innovation or change. Hence, his admonition- “EVERYTHING MUST STAY IN PLACE.”
Now as I watched this battle unfold between President Business’ pro-gluing supporters on one hand, and the pro-change supporters on the other, I could not help but see some similarities between the Lego people’s contested views on the purpose of Legos and our society’s contested views on the purpose of corporations. In The Lego Movie it is a contest between staying in place and the freedom to innovate and create, while in the corporate purpose debate it is a contest between profit maximization/shareholder primacy and ANYTHING ELSE THAT DARES TO SAY ANYTHING OTHER THAN SHAREHOLDER PRIMACY (e.g., creating shared value; stakeholder theory; team production).
While shareholder primacy has both normative and pragmatic appeal, one cannot help but wonder whether this traditional conceptualization of corporations is open to being re-made, or must it be immovable and “stay in place”. In other words, if we accept that our world today is markedly different from the one that existed when shareholder primacy came into vogue, are we selling ourselves short by clinging to a mantra that may no longer be ideal or that may need to be revamped?
Consider a new report by McKinsey [Dr. Maximilian Martin of Impact Economy], titled “Impact Economy, Driving Innovation through Corporate Impact Venturing – A Primer on Business Transformation”. In essence, the report finds that pursuing a profit-as-usual model with “CSR” as a tangential activity is “fast coming to an end.” According to the report, this is because “[a] new paradigm is emerging in its place that is responding to structural changes in the operating environments of business.” The McKinsey [Impact Economy] report points to four “megatrends” that are nudging corporations towards a more transformative and holistic view of their role and purpose – what McKinsey [Impact Economy] terms “sustainable value creation.” These four trends are: (i) significant opportunities at the Base of the Pyramid (BoP); (ii) a $540 billion market for “Lifestyles of Health and Sustainability Consumption”; (iii) the growth in markets “resulting from green growth and the circular economy”; and (iv) the “modernization of the welfare state.” The conclusion reached by the report is that “companies are well advised to grasp the changing tectonics of value creation and tackle markets accordingly if they want to remain competitive in the long run.”
This new McKinsey [Impact Economy] report is of course not alone in making the case for a more expansive view of corporate purpose (for example, the Aspen Business & Society Program’s report on long-term value creation, or Michael Porter’s work on creating shared value). But what does it take to move the needle? In the Lego Movie, it took President Business and the head of the pro-change supporters realizing that their views were really not that far apart. Maybe that too is the winning answer for the corporate purpose debate – those corporations who are successful in responding to the aforementioned mega trends and other societal needs stand to be the ones who provide the most value creation for society and their shareholders.
UPDATE 4/15/14: The original version of this post improperly identified McKinsey as the source of the “Impact Economy, Driving Innovation through Corporate Impact Venturing – A Primer on Business Transformation” report. The post has been corrected to reflect the fact that the report was written by Dr. Maximilian Martin of Impact Economy.
Tuesday, March 25, 2014
(1) As I explained here, entities should be able to take on a racial, religious, or gender identity in discrimination claims. I would add that I feel similarly about sexual orientation, but (though I think it should be) that is still not generally federally protected. To the extent the law otherwise provides a remedy, I’d extend it to the entity.
(2) It is reasonable to inquire, why is discrimination different than religious practice? For me, I just don’t think religious exercise by an entity is the same as extending discrimination protection to an entity. There is something about the affirmative exercise of religion that I don’t think extends well to an entity. That is, discrimination happens to a person or an entity. Religious practice is an affirmative act that is different. Basically, reification of the entity to the point of religious practice crosses a line that I think is unnecessary and improper because discrimination protection should be sufficient.
As a follow up to that, I also think it's a reasonable question to ask: Why is religion different than speech? To me it is different because entities must speak, but entities don’t have to practice religion. The entity needs speech to conduct business. A public entity speaks in its public filings. Speech is not just something an entity could do. It is something it must do. Religion, at the entity level is not necessary.
(3) Reverse piercing is not as good a solution as it might appear. Professor Bainbridge suggests that reverse veil piercing is one way in which the religion of the shareholders could be used to justify extending a religious identity to the Hobby Lobby entity, thus allowing the entity to object to certain provisions of the federal healthcare mandate. His argument is, as usual, reasonable and plausible. Still, as explained above, I don't think this is necessary.
More important, though, I don’t like expanding the use of any form of veil piercing. Veil piercing is supposed to be used (at least in my view) solely as a heightened level of fraud protection. It is already used too often and too haphazardly, and further degradation of the line between the entity and others is a dangerous proposition, regardless of the purpose. That is, as people (and courts) get more comfortable with disregarding the entity, they are more likely to disregard the entity. As a general proposition, I think that’s a bad outcome. That alone is reason enough for me to hope the Court will pass on reverse veil piercing as a potential remedy.
Sunday, March 23, 2014
I'm trying out a new weekly blog post theme, "The Weekly BLT," wherein I highlight a few interesting business law tweets that I've come across in the past week that have not yet made it to the BLPB.
"The problem ... is that ... Kiobel ... ignore[s] the robust corporate identity [recognized in Citizens United]" http://t.co/RI0BefWUUr— Stefan Padfield (@ProfPadfield) March 18, 2014
"Only ... 10 percent of S&P 500 companies reported the number of environmental fines paid." http://t.co/rthzXPwy2w— Stefan Padfield (@ProfPadfield) March 17, 2014
John Cunningham: "one of the best discussions I’ve ever seen about the application of veil-piercing doctrine to LLCs" http://t.co/xJae7nGqQm— Stefan Padfield (@ProfPadfield) March 17, 2014
"traditional theory about shareholder voting..does not reflect recent fundamental changes as to who shareholders are" http://t.co/e9LsR4YUtp— Stefan Padfield (@ProfPadfield) March 17, 2014
Friday, March 21, 2014
Statutory provisions allowing for the formation of Delaware Public Benefit Corporations ("PBCs") went effective August 1, 2013. According to the latest data I have, 87 PBCs have been formed in Delaware .
While 87 is an extremely small number when compared to the more than 1 million entities formed in Delaware, Delaware has already bested all states that have passed a benefit corporation statute, except for California. California, which has a 20 month head-start on Delaware, has 139 benefit corporations.
Some states, like New Jersey and South Carolina have been stuck at fewer than 5 benefit corporations for well over a year.
The group of researchers I am working with now estimates that there are about 350 benefit corporations in the U.S. (including PBCs), though the data is relatively difficult to obtain from the secretary of state's offices and obtaining reliable, complete data is even more difficult.
Currently, there are no significant tax benefits (at the state or federal level) for social enterprises (like PBCs and benefit corporations) in the U.S., but the U.K. recently announced 30% tax relief for their social enterprises. (The U.K. social enterprises are a good bit different than those in the U.S.).
It will be interesting to see if the benefit corporation form increases in popularity or languishes.
Obviously, if tax breaks were given to benefit corporations in the U.S., popularity would likely rise. That said, tax breaks would also likely lead to misuse of the form and the need for additional oversight. (Additional oversight is already in place in the U.K.)
On spring break, I found a hardcover copy of Professor David Nasaw’s biography of Andrew Carnegie in a Boone, NC thrift shop for $1. (Good books and good deals are two of my favorite things). A New York Times book review is available here.
I only made it about 200 pages into the fascinating 801 page biography before returning to work. I am currently on page 293, but already have some thoughts to share.
Before digging into this book, “failure” was one of the last words I would have associated with Andrew Carnegie. Carnegie is well known as one of the “captains of industry” (in the steel business) and as an extremely generous philanthropist. Even the word “struggle” is not a word I would have associated with Andrew Carnegie; from a distance, everything seemed to come easily for him.
But, like most of us, Carnegie experienced failure, and his life was marked by numerous struggles.
[More after the break]
Thursday, March 20, 2014
It’s proxy season and the Conference Board has released a series of reports on investor engagement and corporate governance. In “The Conference Board Governance Center White Paper: What is the Optimal Balance in the Relative Roles of Management, Directors, and Investors in the Governance of Public Corporations?” the authors provide a 76-page overview of the evolution of US corporate governance, describing key trends and issues.
The report begins by discussing the history of the allocation of roles and responsibilities for governance of public companies. If I thought my law students would read it, I would assign this section to them. The second part of the paper addresses the legal, social and market trends that have influenced the historical allocation of rights. Specifically, it reviews:
a) the increasing influence of institutional investors resulting from the concentration of ownership in institutional investment, changes in voting rules and practices and more assertive shareholder activism;
b) shifting conceptions about the purpose of the corporation and the duty to maximize corporate value, with a strong emphasis on shareholder wealth maximization;
c) decreased public trust of business leaders following the corporate scandals of 2001-2002 and 2007-2008;
d) federal regulation intended to enhance the influence of shareholders and increase board and management accountability;
e) continuing related to executive compensation and incentives; and
f) the growth of proxy advisory firms in the shareholder voting process.
Some interesting statistics:
a) in 2013, 25% of all shareholder proposals were sponsored by two individuals and their family members and family trusts;
b) from 2006-2013, 33% of shareholder proposals submitted to Fortune 250 companies were sponsored by investors affiliated with labor; 26% by corporate gadflies; 25% by religious, social impact and public policy organizations; and 15% by other individual investors;
c) 241 activist campaigns were launched in 2012 up from 187 in 2009;
d) 69% of proxy contests against the management of Russell 3000 companies during the 2013 proxy season were launched by activist hedge funds; and
e) one third of the activist hedge fund contests sought full control of the board.
The third part of the report briefly summarizes but does not provide any conclusions about the work of Professors Bainbridge, Stout, Anabtawi, Bebchuk, Laverty, and others. It considers the following questions (but does not answer them):
a) Do federal mandates undermine the benefits of a historically state-driven corporate law?
b) Are further changes to board processes and composition desirable?
c) Should shareholders assume a more active role in corporate governance?
d) Do proxy advisory firms replace, rather than augment, the shareholder voice, and should the proxy advisory industry be subject to greater regulation and oversight?
e) Can changes to voting mechanisms improve the effectiveness of corporate governance?
f) Is short-termism a cause of concern, and is so, what are its causes and remedies?
g) What new challenges are presented by vote decoupling, high-speed trading, and hyper portfolio diversification?
In next week’s post I will discuss the “Guidelines for Engagement” and the “Recommendations of the Task Force on Corporate/Investor Engagement.” In the meantime, I highly recommend downloading these complimentary reports.
Governor Markell today announced the nomination of Andre G. Bouchard, widely recognized as one of the country’s premier corporate law practitioners, to serve as the 21st Chancellor of the Court of Chancery. If confirmed by the Delaware Senate, Bouchard would succeed the Honorable Leo E. Strine, Jr., who was sworn in as Chief Justice of the Delaware Supreme Court in February.
Bouchard is a graduate of Boston College and Harvard Law School. Currently, he is the managing partner of Bouchard Margules & Friedlander, P.A in Wilmington, Delaware.
Looks like my friends in Delaware accurately predicted this nomination back in January.