Friday, February 5, 2016
Starting on the first day of my Advanced Business Associations course, I attempt to tease out the policy underpinnings and theoretical conceptions of entity law and, in particular, corporate law. This turns out to be a somewhat difficult task, since most students in the course, to the extent that they remember anything at all from their experience in the foundational Business Associations course, are more focused on what a corporation is and does than why we might have one in the first place. As the semester proceeds and the readings unfold, the students get more comfortable talking about the rationale for certain aspects of the corporate form and why corporate law structures and operating rules promise to achieve the goals of those organizing a firm as a corporation. But it's a slow process.
I have to believe that some of my fellow law professors face similar challenges with their students. I also believe that instructors in other educational settings face analogous difficulties when they incorporate abstract notions into the teaching of more "black letter" (for want of a better term at this point in my day) concepts. My approach has been to assign readings of primary and secondary material and use classroom discussion time and projects to reveal things about why the corporation exists, why venturers form them (as opposed to conducting business as sole proprietors or using another business form), and what issues we observe and might expect to observe as among corporate constituents as time unfolds. So, I plan to cover everything from the general role of entity law in fostering the conduct of business (by offering off-the-shelf rules for use by venturers in structuring and operating businesses) to notions of corporate personhood and the role of the corporation in society.
I am wondering if there is an alternative to my approach that any of you use in a similar course, or whether there is a particularly good set of foundational readings that you use to approach this set of issues in a business law offering. At the end of this semester, I will have taught this course in this general format twice, and I will be taking stock to shore it up to make sure the third time's a charm. [FYI, I start the semester with Bebchuk and Bainbridge, take a tour through the public company using the Disney case and its corporate documents, then move on to compare/contrast the publicly held firm with closely held corporations and unincorporated business associations before moving into some depth topics (M&A, complex business litigation, corporate social responsibility and the benefit corporation, etc.). It is a two-hour course.] Suggestions and other thoughts in comments or by email are welcomed.
Thursday, February 4, 2016
For the past four weeks I have been experimenting with a new class called Transnational Business and Human Rights. My students include law students, graduate students, journalists, and accountants. Only half have taken a business class and the other half have never taken a human rights class. This is a challenge, albeit, a fun one. During our first week, we discussed CSR, starting off with Milton Friedman. We then used a business school case study from Copenhagen and the students acted as the public relations executive for a Danish company that learned that its medical product was being used in the death penalty cocktail in the United States. This required students to consider the company’s corporate responsibility profile and commitments and provide advice to the CEO based on a number of factors that many hadn’t considered- the role of investors, consumer reactions, the pressure from NGOs, and the potential effect on the stock price for the Danish company based on its decisions. During the first three weeks the students have focused on the corporate perspective learning the language of the supply chain and enterprise risk management world.
This week they are playing the role of the state and critiquing and developing the National Action Plans that require states to develop incentives and penalties for corporations to minimize human rights impacts. Examining the NAPs, dictated by the UN Guiding Principles on Business and Human Rights, requires students to think through the consultation process that countries, including the United States, undertake with a number of stakeholders such as unions, academics, NGOs and businesses. To many of those in the human rights LLM program and even some of the traditional law students, this is all a foreign language and they are struggling with these different stakeholder perspectives.
Over the rest of the semester they will read and role play on up to the minute issues such as: 1) the recent Tech Terror Summit and the potential adverse effects of the right to privacy; 2) access to justice and forum non conveniens, arguing an appeal from a Canadian court’s decision related to Guatemalan protestors shot by security forces hired by a company incorporated in Canada with US headquarters; 3) the difficulties that even best in class companies such as Nestle have complying with their own commitments and certain disclosure laws when their supply chain uses both child labor and slaves; 4) the Dodd-Frank conflict minerals debate in the Democratic Republic of Congo and the EU, where students will play the role of the State Department, major companies such as Apple and Intel, the NGO community, and socially-responsible investors debating some key corporate governance and human rights issues; 5) corporate codes of conduct and the ethical, governance, and compliance aspects of entering the Cuban market, given the concerns about human rights and confiscated property; 6) corporate culpability for the human rights impacts of mega sporting events such as the Super Bowl, World Cup, and the Olympics; 7) human trafficking (I’m proud to have a speaker from my former company Ryder, a sponsor of Truckers Against Traffickers); 8) development finance, SEC disclosures, bilateral investment treaties, investor rights and the grievance mechanisms for people harmed by financed projects (the World Bank, IMF, and Ex-Im bank will be case studies); 9) the race to the bottom for companies trying to reduce labor expenses in supply chains using the garment industry as an example; and 10) a debate in which each student will represent the actual countries currently arguing for or against a binding treaty on business and human rights.
Of course, on a daily basis, business and human rights stories pop up in the news if you know where to look and that makes teaching this so much fun. We are focusing a critical lens on the United States as well as the rest of the world, and it's great to hear perspectives from those who have lived in Europe, Africa, Asia, and South America. It's a whole new world for many of the LLM and international students, but as I tell them if they want to go after the corporations and effect change, they need to understand the pressure points. Using business school case studies has provided them with insights that most of my students have never considered. Most important, regardless of whether the students embark on a human rights career, they will now have more experience seeing and arguing controversial issues from another vantage point. That’s an invaluable skill set for any advocate.
February 4, 2016 in Business Associations, Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, International Business, International Law, Investment Banking, Law School, Lawyering, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Wednesday, February 3, 2016
Laurence Fink, CEO of BlackRock, the largest asset manager in the U.S., wrote a letter to the CEO's of S&P 500 Companies urging reforms aimed at fostering long-term valuation creation and curbing a myopic focus on near-term profits. Fink has long been a public advocate of long-term valuation creation for the health of American companies and the wealth of society (for an example see this April 2015 letter on the "gambling nature" of the economy"). His message has been consistent: long term, long term, long term.
Citing to increased dividends and buyback programs as evidence of corrosive short-termism, Fink laid out a modest play for action. He asks every CEO to publish an annual strategic plan signed off on by the board. The CEO strategic plan should communicate the vision for the company and how such long-term growth can be achieved.
[P]erspective on the future, however, is what investors and all stakeholders truly need, including, for example, how the company is navigating the competitive landscape, how it is innovating, how it is adapting to technological disruption or geopolitical events, where it is investing and how it is developing its talent. As part of this effort, companies should work to develop financial metrics, suitable for each company and industry, that support a framework for long-term growth.
Fink wants companies to create these long-term vision statements as a routine part of governance and not just in the context of hedge-fund motivated proxy fights. The idea is that informing the investing public as to the long-term direction of the company and short-term obstacles frames the company message and dampens the "quarterly earnings hysteria". Also interesting to me as I approach a class on corporate social responsibility is Fink's encouragement of companies to pay more attention to social and environmental risks as increasingly difficult obstacles that must be addressed as part of a long term plan. Fink also called upon lawmakers to incentivize a long-term view by thinking beyond the next election cycle as would be needed to enact tax reform (specifically capital gains) and increased resources for infrastructure.
As readers of the blog know, I am in interested in the long-term/short-term debate and have written past posts about it. How controversial would such a CEO statement be? Venture capital/private equity funds investing in companies often require an annual CEO statement. If the language can be crafted to avoid liability for future statements, what are the downsides? Tipping off competitors and losing information advantages or first actor advantages? Letting lesser competitors free ride and adopt market leaders's plans a year or two later? Exposing the board of directors and officers to breached duty claims for failure to meet the objectives? (this last one seems very unlikely given the liability standards and exculpation provisions.)
The financial press and blogs are awash in stories on this. If you are interested in the related commentary, here are a few:
Friday, January 22, 2016
Two weeks ago I posted about whether small businesses, start ups, and entrepreneurs should consider corporate social responsibility as part of their business (outside of the benefit corporation context). Definitions of CSR vary but for the purpose of this post, I will adopt the US government’s description as:
entail[ing] conduct consistent with applicable laws and internationally recognised standards. Based on the idea that you can do well while doing no harm … a broad concept that focuses on two aspects of the business-society relationship: 1) the positive contribution businesses can make to economic, environmental, and social progress with a view to achieving sustainable development, and 2) avoiding adverse impacts and addressing them when they do occur.
During my presentation at USASBE, I admitted my cynical thoughts about some aspects of CSR, discussed the halo effect, and pointed out some statistics from various sources about consumer attitudes. For example:
- Over 66% of people say they will pay more for products from a company with “good values”
- 66% of survey respondents indicated that their perception of company’s CEO affected their perception of the company
- 90% of US consumers would switch brands to one associated with a cause, assuming comparable price and quality
- 26% want more eco-friendly products
- 10% purchased eco-friendly products
- 45% are influenced by commitment to the environment
- 43% are influenced by commitment to social values and community
- Those with incomes of 20k or less are 5% more willing to pay more than those with incomes of $50k or more
- Consumers in developed markets are less willing to pay more for sustainable products than those in Latin America, Asia, the Middle East, and Africa. The study’s author opined that those underdeveloped markets see the effects of poor labor and environmental practices first hand
- 75% of millennial respondents, 72% of generation Z (age 20 and younger) and 51% of Baby Boomers are willing to pay more for sustainable products
- More than one out of every six dollars under professional management in the United States—$6.57 trillion or more—is invested according to socially-responsible investment strategies.
- 64% of large companies increased corporate giving from between 2010 and 2013.
- Among large companies giving at least 10% more since 2010, median revenues increased by 11% while revenues fell 3% for all other companies
From marketing and recruiting perspectives, these are compelling statistics. But from a bottom line perspective, does a company with lean margins have the luxury to implement sustainable business practices? Next week I will post about CSR in larger companies and the role that small suppliers play in global value chains. This leaves some small businesses without a choice but to consider changing their practices. In addition, in some ways, using some CSR concepts factors into enterprise risk management, which companies of all size need to consider.
January 22, 2016 in Business Associations, Corporate Governance, Corporations, CSR, Current Affairs, Entrepreneurship, Ethics, Management, Marcia Narine, Nonprofits, Research/Scholarhip, Social Enterprise | Permalink | Comments (1)
Wednesday, January 13, 2016
This post highlights SIGA Technologies, Inc. v. PharmAthene, Inc., Del. Supr., No. 20, 2015 (Dec. 23, 2015).
At the end of 2015, the Delaware Supreme Court issued an opinion affirming its earlier holding that where parties have agreed to negotiate in good faith, a failure to reach an agreement based upon the bad faith of one party entitles the other party to expectation damages so long as damages can be proven with "reasonable certainty."
Francis Pileggi, on his excellent Delaware Commercial and Business Litigation blog, provides a succinct summary of the case, available here. The parties to the suit entered into merger negotiations to develop a smallpox antiviral drug. Due to the uncertainty of the merger negotiations, the parties also entered into a non-binding license agreement, the terms of which would be finalized if the merger fell through for whatever reason. While nonbinding, the preliminary license agreement contained detailed financial terms and benchmarks. When the merger was terminated, SIGA proposed terms for a collaboration that departed from the preliminary license agreement. The Delaware Supreme Court affirmed the Court of Chancery finding that SIGA's acted in bad faith. The question of the case became what damages were due from the bad faith breach of a preliminary agreement to "negotiate in good faith,” when all essential terms have not been agreed to by the parties?
The first gem in the opinion, and something I'll be working into my damages lectures for first year contracts this spring, is that:
when a contract is breached, expectation damages can be established as long as the plaintiff can prove the fact of damages with reasonable certainty. The amount of damages can be an estimate.
What constitutes reasonable certainty changes whether the party is establishing damages are due versus the amount of the damages. And here is the second gem: the standard of proof can be lessened where willful wrongdoing contributed to the breach and the uncertainty about the amount of damages.
where the wrongdoer caused uncertainty about the final economics of the transaction by its failure to negotiate in good faith, willfulness is a relevant factor in deciding the quantum of proof required to establish the damages amount.
Wednesday, January 6, 2016
Tomorrow afternoon (as Anne promoted earlier today), I will participate in the annual Association of American Law Schools ("AALS") panel discussion for the Section on Agency, Partnerships, LLCs and Unincorporated Associations. The panel discussion this year is entitled "Contract is King, But Can It Govern Its Realm?" and focuses on the contractarian aspects of LLC law. Here's the panel description from the AALS annual meeting program:
This program will explore the role of contract in unincorporated associations, with particular emphasis on the LLC and limited partnership forms. In most jurisdictions, the sparse prescriptions in the default rules imply that the parties will draft an operating agreement that reflects the material points of their bargain. For example, Delaware emphasizes that its policy for LLCs and LPs is to give “maximum effect to the principle of freedom of contract.” Modern contract theory, however, raises significant questions about the extent to which any documentation of a transaction can be “complete,” even if sophisticated parties negotiate at arm’s length and attempt to fully reduce their expectations to writing. If complete contracts are indeed an ideal rather than the reality, can legislatures impose default rules (fiduciary or otherwise) to fill the gaps without undermining the benefits of private ordering? To what extent should judges look outside the operating agreement to determine the parties’ intent? Our format will be a lively moderated discussion, and we will invite significantly more audience participation from the outset than attendees may have come to expect from AALS section meetings.
As you may recall (and as Anne reminded us in her earlier post on the AALS conference sessions), we hosted a weblog micro-symposium on issues relating to this topic in anticipation of this annual meeting program back in November, for which the concluding post is here, and my contributions are here and here.
I expect that we will explore through the conference panel (which, as the program description indicates, will engage the audience for much of the time) the nature and status of LLC agreements as contracts and the coexistence of contract with fiduciary duties and the implied covenant of good faith and fair dealing. I hope that we can cover points of theory, policy, doctrine, and practice. I will be adding some non-Delaware flavor in some areas of the discussion and encouraging folks to contemplate whether LLC operating agreements are contracts or merely treated like contracts for certain LLC law purposes. Please come join in on the fun if you are attending the conference this year! I may have more to say after the discussion has concluded . . . .
The AALS Section on Business Associations and Law is honoring 13 exemplary mentors for their contributions to scholarship, teaching and the development of new business law scholars. Those honored were nominated by fellow members of the AALS Section. The mentors will be recognized at the conclusion of the AALS BA Section meeting on January 8th (1:30-3:15) at the Annual AALS meeting in New York. Please join me in congratulating our colleagues and thanking them for their contributions to our field.
- Lynne L. Dallas (San Diego);
- Claire M. Dickerson (Tulane) (posthumous);
- Christopher R. Drahozal (Kansas);
- Egon Guttman (American);
- William A. “Bill” Klein (UCLA);
- Donald C. Langevoort (Georgetown);
- Juliet M. Moringiello (Widener Commonwealth);
- Marleen O’Connor (Stetson);
- Terry O’Neill (Emerita, Tulane);
- Charles “Chuck” R.T. O’Kelley (Seattle);
- Alyssa Christmas Rollock (formerly of Indiana-Bloomington);
- Roberta Romano (Yale); and
- D. Gordon Smith (BYU)
Kent Greenfield recently published a provocative article with Democracy on ending Delaware's dominance over corporate law. As is Greenfield's way, he makes a familiar story sound fresh and raises an interesting question. Is it democratic for a state with less than 1% of the country's population to have its laws control more than half of the Fortune 500 companies? Greenfield says no.
Power without accountability has no democratic legitimacy. If companies could choose which state’s environmental, employment, or anti-discrimination law applied to them, we’d be outraged. We should be similarly outraged about Delaware’s dominance in corporate law.
Greenfield suggests two alternative paths for ending Delaware's dominance. First: states could amend their business organization statutes so that the law of the state of incorporation (Delaware) doesn't govern the corporation, rather the law of the principal place of business would. Second, and perhaps more radically, nationalize corporate law.
The undemocratic critique is an astute observation. It takes the debate outside of the "race to the bottom" standard trope and into territory with perhaps more broad public appeal. Leaving aside the state competition for headquarters, tax base and jobs with solution one and potential political friction with solution two, both solutions address the undemocratic critique.
Tuesday, January 5, 2016
On Saturday, January 9, 2016, I will be spending the day at the AALS Section on Socio-Economics Annual Meeting at the Sheraton New York Times Square Hotel. Among other things, I will be part of a panel discussion from 9:50 - 10:50 AM, Death of the Firm: Vulnerabilities and the Changing Structure of Employment. My co-panelists will be June Carbone and Katherine Stone (I am very tempted to give up my 15 minutes and just sit back and listen to these two great scholars, but please don't use the comments section to encourage me to do that). As I understand it, the gist of the discussion will be that while firms once supported a significant part of the safety net that provided employee health and retirement benefits, they have recently abdicated more and more of these responsibilities. At the same time, however, what may be described as subsidies granted by the state to firms -- particularly corporations -- as part of a social contract whereby these firms provided the aforementioned benefits, have not been correspondingly reduced. In fact, the rights of corporations have been expanded by, for example, cases like Citizens United and Hobby Lobby -- suggesting a possible windfall for the minority of individuals best positioned to reap the benefits of corporate growth and insulation. Obviously, competing interpretations of the relevant history abound. Regardless, please stop by if you have the opportunity. Continuing to beat a favorite drum of mine (see here, here, and here), I will be applying the lens of corporate personality theory to the foregoing issue and arguing that corporate personality theory has a role to play both in understanding how we got here and how best to move forward. Additional details, including the entire day’s program, can be found here.
On Monday, January 11, 2016, I will also be participating in the Society of Socio-Economists Annual Meeting, also at the Sheraton. Program details are available here. Again, please stop by if you have the opportunity.
January 5, 2016 in Business Associations, Conferences, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Financial Markets, Law and Economics, Shareholders, Stefan J. Padfield | Permalink | Comments (0)
Thursday, December 31, 2015
The Five Corporate Scandals That Defined 2015 and Why I Resolve to Sneak More Ethics and Compliance into My Teaching
This is the time of year when many people make New Year’s resolutions, and I suppose that law professors do so as well. I’m taking a break from teaching business associations next semester. Instead, I will teach Business and Human Rights as well as Civil Procedure II. I love Civ Pro II because my twenty years of litigation experience comes in handy when we go through discovery. I focus a lot on ethical issues in civil procedure even though my 1Ls haven’t taken professional responsibility because I know that they get a lot of their context from TV shows like Suits, in which a young “lawyer” (who never went to law school) has a photographic memory and is mentored by a very aggressive senior partner whose ethics generally kick in just in the nick of time. It will also be easy to talk about ethical issues in business and human rights. What are the ethical, moral, financial, and societal implications of operating in countries with no regard for human rights and how should that impact a board’s decision to maximize shareholder value? Can socially-responsible investors really make a difference and when and how should they use their influence? Those discussions will be necessary, difficult, thought-provoking, and fun.
I confess that I don’t discuss ethics as much as I would like in my traditional business associations class even though some of my 2Ls and 3Ls have already taken professional responsibility. This is particularly egregious for me since I spent several years before joining academia as a compliance and ethics officer. I also use a skills book by Professor Michelle Harner, which actually has an ethics component in each exercise, but I often gloss over that section because many of my students haven't taken professional responsibility and I feel that I should focus on the pure "business" material. Business school students learn about business ethics, but law students generally don’t, even though they often counsel business clients when they graduate.
Yesterday, I tweeted an article naming five corporate scandals that defined 2015: (1) the Volkswagen emissions coverup (2) the "revelation" regarding Exxon’s research warning of man-made climate change as early as 1981 and its decision to spend money on climate change denial; (3) climate lobbying and the “gap between words and action,” in particular the companies that “tout their sustainability credentials” but are “members of influential trade associations lobbying against EU climate policy”; (4) the Brazil mining tragedy, which caused the worst environmental disaster in the country’s history, and in which several companies are denying responsibility; and (5) the “broken culture” (according to the Tokyo Stock Exchange) of Toshiba, which inflated its net profits by hundreds of millions of dollars over several years.
All of these multinational companies have in-house and outside counsel advising them, as did Enron, WorldCom, and any number of companies that have been embroiled in corporate scandal in the past. Stephen Bainbridge has written persuasively about the role of lawyers as gatekeepers. But what are we doing to train tomorrow's lawyers to prepare for this role? Practicing lawyers must take a certain number of ethics credits every few years as part of their continuing legal education obligation but we should do a better job as law professors of training law students to spot some of the tough ethical issues early on in every course we teach. This is especially true because many students who graduate today will work for small and medium-sized firms and will be advising small and medium-sized businesses. They won’t have the seemingly unlimited resources I had when I graduated in 1992 and went to work for BigLaw in New York. Many of the cases I worked on were staffed with layers of experienced lawyers, often in offices from around the world. If I naively missed an issue, someone else would likely see it.
So my resolution for 2016? The next time I teach business associations, I may spend a little less time on some of the background on Meinhard v. Salmon and more time on some of the ethical issues of that and the other cases and drafting exercises that my students work on. If you have ideas on how you weave ethics into your teaching, please comment below or email me at email@example.com.
I wish all of our readers a happy and healthy new year.
December 31, 2015 in Business Associations, Business School, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Human Rights, Law School, Marcia Narine, Teaching | Permalink | Comments (1)
Wednesday, December 30, 2015
OK. No more complaining about grading--at least for another few months. Whew! I think I am getting too old for this crazy few weeks in December that involve holiday preparations and reading for the purpose of assessment.
This week, as I promised last week, I do want to say a bit more about the exams themselves, however. I noticed certain patterns of wrong answers this year (some of them common to ones noted in prior years that I have tried in various ways--unsuccessfully--to address in my teaching). I sent a message to my students that captured those common mistakes. An edited list of the observations I shared with them about those errors is included below.
- Management/Control vs. Agency. Management and control as an entity attribute is not the same as agency. The former involves internal governance--who among the internal constituents of the firm has the power to exercise the firm's rights and keep it operating, from a legal (and practical) point of view. The latter relates to the firm's liability to third parties. These two matters are set forth in different rules in each statute we covered in our course last semester. In the corporation, for example--the most complicated firm we studied, the board has the highest level of management and control rights. The officers have management and control power delegated by the corporation's organizational/organic documents (charter and bylaws, and maybe a shareholder agreement) and by the board. The shareholders have more limited management and control powers (through electing directors and approving charter and bylaw amendments, mergers and acquisitions, sales of all/substantially all the corporation's assets, and voluntary dissolutions). Of those three internal constituents, only the officers are agents of the firm who can bind the corporation to contracts and transactions with third parties. [I continued by offering other examples from partnership and LLC law.] . . . The main point is that one should not conflate management/control and agency. They are separate considerations.
- Compensation vs. Distributions. Rights to compensation and distribution are both financial benefits to the recipient, but they are different from each other in almost all respects. Compensation (salary and benefits) is paid in exchange for services. . . . Distributions represent returns (including current returns, like dividends, as well as amounts paid in dissolution--at the end of wind-up) to owners/equity investors. The MBCA also defines distributions to include amounts received in exchange for shares when the corporation buys them back from its shareholders.
- Limited Liability - Owners vs. Managers. Both shareholders, as corporate owners, and directors/officers, as corporate managers, may enjoy some form of limited liability. Separate those concepts out, however. Shareholders are afforded limited liability under the statutes in a different way than directors/officers. This is largely because the former do not typically have fiduciary duties to the firm, while the latter do. So, the latter must be accountable for the interests of the firm in taking action for or on its behalf.
- The Judicial Process. When asked to convey information about how a court addresses cases in an area, the best approach is to identify the court's standard of review or methodology/process as evidenced in the applicable body of cases--not to summarize each case individually . . . . Although the case summary approach may ultimately respond to the inquiry, it is not a sure way to do that and it is not efficient in any case. Imagine a client sitting through a series of case summaries after asking how a court handles a particular issue . . . . Ask yourself: would the client know that her question was answered in the end, and if so, would she be able to understand the answer?
- Using IRAC. IRAC is a legal reasoning approach used to apply law to facts to resolve a legal question involving a legally cognizable action. If you are asked a question on an exam about a rule of law that does not engage a fact pattern, then you do not need IRAC. Part B of the exam did not involve the application of law to dispute resolution or other activities. Yet, some of you tried to set out an answer in IRAC form for that part of the exam. It wasn't ultimately very successful (since there could not be an "A").
- Avoiding Redundancy/Inconsistency. In using IRAC or another legal reasoning technique, state the legal rule once in all of its relevant detail; then, use it. A number of you repeated the rule several times (sometimes with differing levels of detail) in answering a single exam query. This redundancy cost you time that could have been better spent on other parts of the exam, in many cases, and the approach sometimes led to inconsistent applications of the rule (because it was stated differently). For example, many of you stated (correctly) that the current RULPA allows limited partners to enjoy limited personal liability for the obligations of the limited partnership even if the limited partners exercise control. But later in the same response, some of you took that back by noting (incorrectly) that certain types of control would subject limited partners to personal liability for the obligations of the firm. Both cannot be true . . . .
- Using "Held" and Other Variants of "Holding". . . . [S]tatutes do not have holdings. Lawyers do not say that statutes "hold" particular rules. Rather, statutes "provide" or "state" or "set forth" matters or rules. Also, many of you misuse the word "hold" when referring to information from cases. A holding in a case is the response to a legal issue raised in the case. So, you should not say that a case "held" something unless that something represents the response to a legal issue raised in the case. For example, it's inaccurate to say that a case "held" something that represents a policy consideration or dicta.
That's it. (Although I cannot resist, especially in light of Josh Fershee's post yesterday, adding that one student did refer to LLC owners as shareholders--a bad cut-and-paste job from an earlier answer, imv.) I suspect that many who teach Business Associations see some of these same things with their students. Some of these mistakes are generic errors that also may be observed in other courses. No doubt, as I observed last week, some of these errors would not be made in situations that do not involve the stress and time pressure that an in-class examination entails. To me, however, all of these issues were important enough to bring to the attention to the entire class. I also invited--encouraged--all students to come back and review their exams, whether they "did better, as well as, or less well than . . . expected, hoped, or wanted." I hope that many of my students do take me up on that offer/suggestion. But I am not holding my breath.
Tuesday, December 29, 2015
The Pep Boys – Manny, Moe & Jack (NYSE: PBY) merger triangle with Bridgestone Retail Operations LLC and Icahn Enterprises LP is proving to be an exciting bidding war. The price and the pace of competing bids has been escalating since the proposed Pep Boys/Bridgestone agreement was announced on October 16, 2015. Pep Boys stock had been trading around $12/share. Pursuant to the agreement, Bridgestone commenced a tender offer in November for all outstanding shares at $15.
Icahn Enterprises controls Auto Plus, a competitor of Pep Boys, the nation's leading automotive aftermarket service and retail chain. Icahn disclosed an approximately 12% stake in Pep Boys earlier in December and entered into a bidding war with Bridgestone over Pep Boys. The price climbed to $15.50 on December 11th, then $17.00 on December 24th. Icahn Enterprises holds the current winning bid at $18.50/share, which the Pep Boys Board of Directors determined is a superior offer. In the SEC filings, Icahn Enterprises indicated a willingness to increase the bid, but not if Pep Boys agreed to Bridgestone's increased termination fee (from $35M to 39.5M) triggered by actions such as perior proposals by third parties. Icahn challenged such a fee as a serious threat to the auction process.
Regardless of which company ends up claiming control over Pep Boys, this is a excellent example of sale principles in action and also shows the effect of merger announcements (and the promised control premiums) have on stock prices. This will be a great illustration to accompany corporations/business organizations class discussions of mergers and the role of the board of directors. For those teaching unincorporated entities as a separate course or component of the larger bus.org survey course, Icahn Enterprises is a publicly-traded limited partnership formed as a master limited partnership in Delaware-- BONUS! Bridgestone Retail Operations LLC, as in limited liability company, is a wholly-owned subsidiary of Bridgestone Corporation ADR, a publicly traded corporation.
See you all in the New Year! Anne Tucker
EDITED January 4, 2016. Based on the thoughtful observations of fellow BLPB editor Haskell Murray, I removed the inarticulate references to this bidding war as a "Revlon" transaction. As Haskell pointed out, Pep Boys is a Pennsylvania corporation and subject to a constituency statute. The constituency statute modifies directors' "Revlon" duties by authorizing (but not requiring) directors to consider:
The effects of any action upon any or all groups affected by such action, including shareholders, members, employees, suppliers, customers and creditors of the corporation, and upon communities in which offices or other establishments of the corporation are located.
(2) The short-term and long-term interests of the corporation, including benefits that may accrue to the corporation from its long-term plans and the possibility that these interests may be best served by the continued independence of the corporation.....15 Pa. Stat. and Cons. Stat. Ann. § 515 (West)
Wednesday, December 23, 2015
Still grading, and (in the process) reflecting on the line in Marcia Narine's post from last week on the references to “creepy tender offers” and “limited liability corporations” in her students' final exam submissions . . . . I thought I might share today a few of my own favorite outtakes from my students' Business Associations exams. I know that the time crunch and the nature of the exam software contribute mightily to the typing errors in student submissions, but on the reading end, some of the answers submitted are just . . . well . . . funny. As you'll no doubt note, today's post focuses mostly on closely held corporations (with one typo relating to limited partnerships).
First , there are, of course, the transposed letters. Most of these don't warrant more than a brief mention. The limited partnership act references to UPLA and RUPLA, instead of ULPA and RULPA fit into this category. Similar are the inevitable variants of case names (Donahue becoming Danahue, Donahur, and Donaue, etc.).
Then, there are the many misspelling of fiduciary(ies)--which I have come to believe may just be a hard word to type. (Or maybe no one actually knows how to spell it.) Uncommon misspellings of this often misspelled exam word include three versions that I found in one exam, in the same paragraph: foiducaries, fidurcairy, and fiducaiys. (I should note that all of these correct to "fiduciary" or "fiduciaries" in the spellcheck, which I had to override to make this post. Hmm. Maybe they were not as far off as I thought.)
Perhaps my favorite submission from the closely held corporation parts of the exam, however, was the one from the student who (repeating at the outset of his/her answer a short-form version of the prompt from my exam question) simply wrote: "What is the f duty?" There was a bit of blank space after the letter "f" in that submission, so, given the possible existence of some exam period frustration . . . . I think you can see where my mind went as I read that. (Or maybe that would be--with words transposed--"What the f is duty?") :>) Please forgive the irreverance!
Anyway, more on exams next week, when I am done. Can't wait. To be finished with grading, that is. Look for my holiday post for you all on my state of mind in that regard tomorrow morning. Ho, ho, ho.
Thursday, December 10, 2015
I’m knee deep in grading my business associations exams and so far, I’m pretty pleased. Maybe it’s my in-house background, but I spend a lot of time with my students getting them to focus on providing strategic advice to their fictional clients because that’s what my former clients demanded. My operations and executive colleagues complained that lawyers didn’t understand business or their pressure points and offered legal advice without thinking of the big picture or strategic considerations. With that in mind, my students work in law firms and do a variety of exercises from Michelle Harner’s skills book. When they answer questions in class based on cases or drafting exercises, I force them to think like a client rather than just the lawyer. I drill into them the importance of speaking to their clients in plain English, and I tell them if they can’t break the concepts down in their own words, then they don’t really understand them. Their final exam required them to advise a number of different clients based on the same fact pattern, and I am enjoying reading the different strategies that my 69 students devised based upon the same set of facts.
I get a break from teaching BA next semester but I will be thinking of other ways to teach my students to think like clients. I’ve recently read an article by Professor Alicia J. Davis from Michigan, who uses the HBS case study method in her advanced courses. I agree with her assertion that one drawback is that most law students lack the work experience and business knowledge to understand some of the concepts, but I may adopt some of her methods since my students work in law firms already, which is ideal for this method. The abstract of her article is below:
For the past twenty-five years, my academic and professional pursuits have straddled the line between business and law. I majored in business administration in college and then worked as an analyst in the Corporate Finance department at a bulge bracket Wall Street firm. After completing a JD/MBA, I returned to investment banking with a focus on middle-market mergers and acquisitions (M&A) and subsequently practiced law with a focus on private equity and M&A. Finally, in 2004, I found my current home as a corporate law professor. In my courses, which include Mergers & Acquisitions, Enterprise Organization, and Investor Protection, I strive to teach my students the substantive law, the ethics surrounding the practice of law, the nuts and bolts of how to execute transactions, and how corporations can be better world citizens. Though imparting those skills is a significant undertaking in and of itself, it is not enough. I also want my students to appreciate the underlying business rationales for the transactions we discuss in class and to begin to develop an intuition for sound business strategy.
A basic understanding of a client's business, of course, aids with traditional transactional lawyering tasks, such as due diligence, negotiating a deal, and drafting acquisition agreements. For example, if a lawyer knows that her client's acquisition target derives forty percent of its revenue from a particular customer, she will pay particular attention to that customer's contracts with the target during her due diligence review. She also will draft the M&A agreement's target representations and warranties section so that her client receives contractual assurances of full disclosure about the status of those customer contracts. However, in my teaching, I strive to go beyond giving my students this basic understanding. Perhaps I am too ambitious, but I want more for my students than understanding just enough about business to draft merger agreement provisions effectively. I want them to begin to develop the ability to serve as lawyers who provide legal advice in a strategic context.
A few days ago, co-blogger Steve Bradford posted on law professor complaints about grading under the title Warning: Law Professor Whine Season. OK. I typically am one of those whiners. But today, rather than noting that grading is the only part of the semester I actually need to be paid for (and all that yada yada), I want to briefly extoll one virtue of exam season: the positive things one sees in students as they consciously and appropriately struggle to synthesize the material in a 14-week jam-packed semester.
My Business Associations final exam was administered on Tuesday. Like many other law professors, I gave my students sample questions (with the answers), held a review session, and responded to questions posted to the discussion board on our class course management site. Sometimes, I dread any and all of that post-class madness. This year, I admit that there were few of the thinly veiled (and, by me, expressly discouraged and disdained) "is this on the exam?" or "please re-teach this part of the course . . ." types of questions or requests in any of the forums that I offered for post-class review and learning. That was a relief.
The students' final work product for my Corporate Finance planning and drafting seminar was due Monday. I met with a number of students in the course about that drafting assignment and about the predecessor project in the final weeks before each was due. I watched them work through issues and begin to make decisions, uncomfortable as they might be in doing so, that solve real client problems. Satisfying times . . . .
In fact, there have been a number of moments over the past week in which I was exceedingly proud of the learning that had gone on and was continuing to go on during the post-class exam-and-project-preparation phase of the semester. I offer a few examples here to illustrate my point. They come from both my Business Associations course, for which students take a comprehensive written final examination, and my Corporate Finance planning and drafting seminar, for which students solve a corporate finance problem through planning and drafting and write a review of a fellow student's planning and drafting project.
Wednesday, December 2, 2015
I so often find Keith Bishop's blog, California Corporate & Securities Law, both informative and entertaining. Monday's post in that forum is no exception. In that post, Keith describes three important principles of Delaware corporate law that are not codified in the General Corporation Law of the State of Delaware (commonly and fondly known as the Delaware General Corporation Law or DGCL). No surprise, but the three principles he identifies and describes are:
- the business judgment rule;
- derivative suit pleading requirements; and
- the intermediate standard of review applicable in certain limited fiduciary duty actions.
Great list. And I agree with what he says.
Of course, anyone who teaches corporate law has had to consider (and, to sone degree, call out) the areas of that body of law that derive from decisional, rather than statutory, law. I often have been heard to say, in the basic Business Associations course, that if students forget--or need to leave behind--one of the two required texts (a casebook and a statutory resource book) when they come to class, most days, they should forget/leave behind the casebook, since it is more important for them to have the statutory law in front of them to answer most Business Associations law questions. I note, however, that there are two large areas of exception: veil piercing and fiduciary duty. For those two doctrinal areas, I inform them that they won't need the statutory resource book as much as the casebook.
Monday, November 23, 2015
Last week was the 30th anniversary of the Delaware Supreme Court’s decision in Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985). In Moran, decided on Nov. 19, 1985, the Delaware Supreme Court upheld what has become the leading hostile takeover defensive tactic, the poison pill.
Martin Lipton, the primary developer of the pill, even makes an appearance in the case—and obviously a carefully scripted one: “The minutes reflect that Mr. Lipton explained to the Board that his recommendation of the Plan was based on his understanding that the Board was concerned about the increasing frequency of ‘bust-up’ takeovers, the increasing takeover activity in the financial sector industry, . . . , and the possible adverse effect this type of activity could have on employees and others concerned with and vital to the continuing successful operation of Household even in the absence of any actual bust-up takeover attempt.”
I’m not sure the takeover world would be that different today if Moran had rejected poison pills. I’m reasonably confident the Delaware legislature would have amended the Delaware statute to overturn the ruling, as they effectively did with another ruling decided earlier that same year, Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985). Shortly after Van Gorkom made it clear that directors might actually be liable for violating the duty of care, the legislature added section 102(b)(7) to the Delaware law, allowing corporations to eliminate any possibility of damages for duty-of-care violations.
As my colleague Joan Heminway has pointed out, 1985 was an incredibly important year for M & A practitioners. In addition to Moran and Van Gorkom, a third major case was also decided that year: Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).
Van Gorkom was decided in late January of 1985, Unocal in June, and Moran in November. Corporations casebooks and treatises are filled with Delaware Supreme Court decisions, but that has to be one of the most important ten-month periods in Delaware corporate law jurisprudence—especially in the mergers and acquisitions area.
Friday, November 20, 2015
The micro-symposium has generated interest in a broad range of topics, so we are adding the following post by Peter Molk & Verity Winship discussing their recent scholarship on dispute resolution in LLC operating agreements and its intersection with the "contract is king" discussion this week.
This post highlights a particular area of private ordering within the LLC and other alternative entities: contractual provisions within the operating agreement that set the rules for resolving internal disputes. These terms determine how disputes are resolved, such as by specifying when claims must be submitted to arbitration, where disputes can be heard, and whether parties waive the jury right or impose fee-shifting of litigation costs. They apply to internal disputes, meaning they govern the dispute process among the LLCs’ members, managers, and the LLC itself.
How do these provisions fit with the debate over whether contract should be king? The broadest connection is straightforward. Dispute resolution provisions allocate rights and duties within LLCs, so the debate about the proper bounds of freedom of contract in the LLC space has implications for them as well. But how firms set the rules for internal disputes is also relevant to the particular debate about the imposition of fiduciary duties. Suppose that fiduciary duties were to become mandatory in publicly traded LLCs and LPs, as Delaware Chief Justice Strine and Vice Chancellor Laster have proposed and as Sandra Miller and Mohsen Manesh discuss in their posts in this micro-symposium. Imposing fiduciary duties, by expanding the actions that disgruntled members can bring, in turn puts particular pressure on the dispute resolution clauses.
To see the connection, look no further than the debate in the corporate context about private ordering of shareholder litigation in corporate charters and bylaws. Contract is not king in the corporate context – a host of mandatory rules, including fiduciary duties, are imposed to protect investor rights. Since corporations cannot respond by waiving fiduciary duties, some have instead taken the step of nevertheless effectively eliminating these protections by contracting out of enforcement mechanisms. Recent efforts at imposing fee shifting can be characterized as indirectly weakening mandatory protections by reducing the probability of enforcing them.
For corporations, the Delaware legislature eventually stepped in to ban fee-shifting provisions in the organizational documents of Delaware stock corporations. The legislative response is telling. It targets only stock corporations, using the business form as a proxy for characteristics that trigger a need for additional protections. This takes us back to the question of whether contract should be king, and whether business form is a good rough indicator of characteristics (sophistication, consent) that we care about.
In an empirical study we are conducting, we identified dispute resolution provisions in a sample of operating agreements of privately owned Delaware LLCs. More than a third of the agreements in our sample selected the forum for resolving disputes, primarily through exclusive forum provisions or mandatory arbitration provisions. The agreements also modified litigation processes through terms that imposed fee-shifting, waived jury trials, and, less commonly, through other means like books and records limitations.
We can think of these practices as altering the calculus parties engage in when deciding whether to enforce their rights that exist under the agreement. While looking at dispute resolution provides a more accurate picture for LLCs’ governance regimes, it also complicates the contract-as-king debate. Strengthening LLC members’ mandatory protections beyond the duty of good faith and fair dealing, as several earlier posts propose, does little good if LLCs respond by cutting back parties’ ability to enforce these protections.
Thursday, November 19, 2015
Contract Law, Fiduciary Duties, Good Faith, Fair Dealing, and the Legal Status of LLC Operating Agreements (Contract Is King Micro-Symposium)
The title of this post undoubtedly promises too much. But that won't prevent me from trying to establish a few points that approach the many topics that could be discussed under a title that includes this much great stuff. I make that attempt here.
I start with contract law. As I noted in my prior post for this micro-symposium, one of my appearances at last week's ABA LLC Institute included a debate on whether an operating agreement is a common law contract. This question arose in connection with my teaching of operating agreements (and also has arisen in my teaching of partnership agreements) in Business Associations. Of course, lawyers understand that not all agreements are contracts. A significant amount of energy is spent on this matter in the beginning of the standard contracts course in law school.
Is an LLC operating agreement a contract? I like the question not just for its face value, but because I believe that the answer does or may matter for purposes of resolving other questions arising in and outside LLC law. I captured some thoughts about this question in a draft essay soon to be published in revised form in the SMU Law Review. (I blogged about it here over the summer.) Among other things, with judicial and legislative attention on freedom of contract in the LLC, the status of the LLC as a matter of contract law may shed light on the extent to which contract law can or should be important or imported to legal issues involving LLC operating agreements.
I would like to thank the Business Law Professor Blog for this very important symposium. My brief thoughts are filling in for Marcia Narine. I became well acquainted with LLCs when I practiced in the alternative entities group of a Delaware law firm. What most stood out during my time there was the freedom enjoyed by LLCs and LPs to abridge fiduciary duties and deviate from other corporate orthodoxies. I constantly thought about whether this freedom of contract was a good thing; after all, case law tells only the tragic stories.
As mentioned in other posts, contractual freedom is ideal when sophisticated parties of comparable strengths are allowed to define their relationships. And generally, few problems arise from the LLC form. Law firms typically provide those seeking to form an LLC one of their standard, boilerplate operating agreements, which includes fiduciary duties. In turn, business owners are able to enjoy limited liability while avoiding many of the formalities, transactions costs, and tax burdens associated with traditional corporations. However, there seems to be an increasing number of cases where operating agreements resemble adhesion contracts, creating opportunities for abuse. Is it wise that unsophisticated are more at risk for contractual related harms so that sophisticated parties can contract freely?
The above narrative suggests that sophisticated parties benefit and enjoy the organizational flexibilities provided by the LLC form. It goes unnoticed, though, that sophisticated parties often reject this freedom of contract. Without question the trend in Delaware is towards the formation of LLCs and LPs versus corporations (at seemingly a 3:1 rate). But that doesn’t mean alternative entities always choose to keep their form. I was discussing this issue with a friend and practicing lawyer who mentioned that, in his transactional practice, when Delaware LLCs become big, and attract big funds, a condition of investment almost always requires an LLC to convert into a Delaware corporation. It seems that the lack of predictability associated with the freedom of contract scares potential investors who prefer the comforts of fiduciary duties, among other corporate staples. Upon some reflection, this anecdotally lines up with my experience as best as I can remember. So the parties who ostensibly are best served by contractual freedoms—i.e., sophisticated parties—appear to be the ones most likely to demand the traditional corporate form. And on a related note, this helps to explain why such a paltry number of LLCs and LPs have become public companies.