Friday, April 29, 2016

B Lab and HB2

Earlier this month, B Lab, the 501(c)(3) nonprofit organization that oversees the certification of B corps, announced that it will move its October 2016 retreat from North Carolina because of North Carolina’s controversial House Bill 2 (“HB2”).

In an April 12 e-mail to “Friends of the B Corp Community,” the B Lab team wrote:

Standing for inclusion, the global B Corp community has decided to relocate the 2016 B Corp Champions Retreat and related events from North Carolina in light of the newly-enacted State law HB2 which limits anti-discrimination protections, particularly for members of the LGBT community.

Immediately, B Lab will work with the North Carolina B Corp community and others to get HB2 off the books and make North Carolina more inclusive and business-friendly.

B Lab also linked to this longer statement in that e-mail.

The Model Benefit Corporation Legislation and the laws following the Model require that a third-party standard be used by benefit corporations to measure their social and environmental impact. B Lab’s standard is currently the most popular standard, but it is not required or even mentioned by the benefit corporation statutes. Allowing for various third-party standards helps prevent the benefit corporation law from being overly political. I do wonder, however, if B Lab’s public stand on this issue will make the benefit corporation laws harder to pass in more conservative states, because of B Lab’s large role in cultivating both the certified B corp and benefit corporation communities.

Further, this situation leads to a question I asked in 2012 --- would B Lab exercise their veto power and deny certification to Chick-fil-A, if Chick-fil-A applied for certification and managed the required social score? As I wrote in 2012, I don’t see anything in the benefit corporation laws that would prevent Chick-fil-A from becoming a benefit corporation, but I am less sure if Chick-fil-A would be successful in obtaining certification from B Lab. B Corp certification is separate from the entity formation process, and the certification is under the control of B Lab rather than the government. 

Also, I am not a nonprofit expert, but I wonder whether B Lab is flirting with the lobbying restrictions for 501(c)(3)s, especially when it promises to “work with the North Carolina B Corp community and others to get HB2 off the books.” They also seem to be involved in the attempts to pass benefit corporation laws in states across the country. (Thoughts from nonprofit lawyers or professors welcomed in the comments or by e-mail...I am told that 501(c)(3)s are allowed to do an "insubstantial" amount of lobbying).

In any event, in seems that non-profits, social enterprises, and traditional for-profits are becoming more and more active in social and political debates. And these organizations are often powerful, influential players. 

April 29, 2016 in Business Associations, Corporate Governance, Current Affairs, Ethics, Haskell Murray | Permalink | Comments (0)

Tuesday, April 19, 2016

Veil Piercing or Alter Ego Doctrine in a Criminal Suit? No Thanks.

A recent Illinois case uniquely applied the alter ego doctrine in the context of a criminal case.  See People v. Abrams, 47 N.E.3d 295, ¶¶ 57-61, 399 Ill. Dec. 790 (2015) ( slip op. PDF here ).  In my view, not quite right, either.

In the case, the defendant (Abrams) stole $1.87 million from the victim (Lev), which led to a restitution order for that amount and a twelve-year prison sentence for Abrams.  The conviction was for a Class 1 felony, for the the theft of property exceeding $500,000.  Id.¶ 23 (citing 720 Ill. Comp. Stat. Ann. 5/16-1(a(2) (West 2012)).  The statute provides, "Theft of property exceeding $500,000 and not exceeding $1,000,000 in value is a Class 1 non-probationable felony." 720 Ill. Comp. Stat. Ann. 5/16-1(b)(6.2). 

On appeal, the defendant argued the indictment was wrong in that it stated the money was stolen from Lev, when most of the money actually belonged to Lev's company, The Fred Lev Company (presumably a corporation, but that is not stated expressly).   Abrams claimed: 

the State did not prove he obtained “unauthorized control” of more than $500,000 of Lev’s property. Abrams recognizes the evidence presented at trial established that over $1.8 million was taken. Abrams contests the finding that the entire amount was taken from Lev and not The Fred Lev Company. 

Abrams, 47 N.E.3d 295 ¶ 57.  The court countered: "This is a distinction without a difference. Two separate doctrines of law guide our decision." Id. Although I think the court is probably right on the outcome, one of the rationales is wrongly explained.

The court's first assertion is as follows: 

First, the alter ego doctrine of corporate law was developed for and has been traditionally used by third persons injured due to their reliance on the existence of a distinct corporate entity. In re Rehabilitation of Centaur Insurance Co., 158 Ill. 2d 166, 173 (1994). “The doctrine fastens liability on the individual or entity that uses a corporation merely as an instrumentality to conduct that person’s or entity’s business.” Peetoom v. Swanson, 334 Ill. App. 3d 523, 527 (2002). In the context of “piercing the corporate veil,” an alter ego analysis starts with examining the factors which reveal how the corporation operates and the particular party’s relationship to that operation. A.G. Cullen Construction, Inc. v. Burnham Partners, LLC, 2015 IL App (1st) 122538, ¶ 43. Generally, did the corporation function simply as a facade for the dominant shareholder? Id. Here, without question, the corporate entity, The Fred Lev Company, served as the alter ego or business conduit of Lev, and Abrams’ own testimony confirmed it. 

Id.¶ 58. This is an overreach, as far as I am concerned, and I don't like the ease with which the court uses veil piercing without a detailed analysis. I believe that veil piercing, if it is to be used, should have some consistency, though I know that's now how it tends to work (i.e., without consistency).  Here, would the court have pierced the veil if this were a creditor bringing suit directly against Lev because his corporation couldn't satisfy a judgment? I think it would be wrong to do so on similar facts, so I think it is careless to apply the alter ego doctrine in this manner here.  

The court continues:

Second, the indictments sufficiently apprised Abrams of the charges against him. See People v. Collins, 214 Ill. 2d 206, 219-20 (2005) (any variance was neither material nor prejudicial to defendant). We do not believe that the defendant was in any way prejudiced by the indictments at issue. 

Id.¶ 59. I totally and completely buy this.  And, in addition, the court noted:

Even more convincing is that in opening statements to the jury, defense counsel told the jury that the checking accounts “were not used solely for [Lev’s and Abrams’] corporate work. They didn’t separate the corporation from their personal lives and personal expenses. *** They were using everything that went into that corporate account and writing checks on it for their own personal private, for their own person use. There was a commingling.” Additionally, defense counsel referred to “Fred Lev and Company” as being both Abrams and Lev. In closing argument, defense counsel argued that the company was “a small-time operation” with “one corporate book” that both Lev and Abrams used as “their own personal piggybank.” 

Id.¶ 60.  In the trial, it was determined that the statutory felony monetary amount threshold was met.  And the defendant admitted that he considered the funds to be Lev's and that he (the defendant) disregarded the entity.  I see no notice problem as to the defendant, and I have no concern that a jury couldn't understand whether the theft occurred in the amount claimed. I can see an argument, perhaps, that the prosecution should still get it right as to whom the money actually belonged, but it seems to me correct to say the crime was properly analyzed and assessed as to the criminal elements, so the claim is harmless error in this instance. Lev would have been the one to assert the claim for the Company, so it is hard to see how Abrams was harmed. 

I will maintain, though, that the veil piercing rationale is unnecessary and overstated. (I might be comfortable if they used the analogy to explain harmless error, but the way it was done is too much for me.)  Furthermore, as to the judgment for restitution to Lev, it is wrong. That money (or some portion of it) belongs to The Fred Lev Company.  Suppose there are creditors out there who have gone unpaid.  Or they are unpaid down the road.  At a minimum, the funds stolen from the company should go back through the company so it could be clear what funds were there and should have been available. Thus, as to the charges, I think the court probably got it right.  But as to respecting the entity (and protecting creditors now, and in the future), this could have been handled better. 

H/T Prof. Gary Rosin

April 19, 2016 in Business Associations, Corporations, Joshua P. Fershee, White Collar Crime | Permalink | Comments (1)

Monday, April 18, 2016

Imagine This: First-Semester Second-Year Students in Your Business Associations Class Who Already Have a Sense of Transactional Practice . . .

This is not a pipe dream!  I honestly believe that in the fall of 2017, this will be a reality for me.  (I typically teach Business Associations in the fall semester to a large number of students who understand "cases," not "deals.")

The reason for my good spirits and honest belief in the positive change in my students?  Our new 1L curriculum, which is rolling out this fall.  No doubt, we will find some changes that need to be made as we implement our relatively bold plan.  But I am truly excited that the new first-year curriculum exposes every student to a transactional experience in the first year of law school.  

There are many reasons for implementing this kind of change, of course.  Among other things, this new approach to the first year at UT Law responds to suggestions that we got from our students and represents an effort to better connect the 1L year to our upper division curriculum (on which we have spent a lot of time over the years).  The new 1L transactional offering is part of a larger plan constructed by a College of Law committee, chaired by my colleague (and e-discovery queen) Paula Schaefer, that spent several years looking at our overall curriculum and that of many other schools before fashioning a number of alternative options for the faculty to review.  

The implementation involves a lot of work.  Many colleagues are chipping in to construct new courses and re-fashion existing courses to meet the new curricular requirements.  It takes a village.  I am grateful for all of the work being put in.  I work with a great bunch of folks.

An article in the National Jurist last week describes the new 1L curriculum in general.  Our academic policies, however, add some detail.  I quote from them below, with some reformatting for easier reading in this space.

For students entering in or after Fall 2016, the first-year curriculum is as follows:

First Semester
Civil Procedure I* (3)
Contracts I (3)
Criminal Law (3)
Lawyering & Professionalism (1) Legal Process I (3)
Torts I* (3)

Second Semester
Civil Procedure II (3)
Contracts II (3)
Legal Process II (3)
Property (4)
Torts II (2)
Transactional Lawyering Lab (1)

*First-year students enroll in an experiential section of either Civil Procedure I or Torts I. The experiential sections include three graded, simulation-based assignments. Each simulation places students in the role of lawyer, raises professionalism issues, requires students to perform a lawyering skill, and results in a written and/or oral work product. In addition to a final examination, the course also includes a midterm exam that includes at least one essay question.

We are pretty excited to get this new curricular show on the road.  I look forward to sharing more with you as we see how students react in the short term and long term.  But my UT Law colleagues and I are very hopeful that this new approach to the first year will lay a strong foundation for upper division academic work and for practice.

 

April 18, 2016 in Business Associations, Joan Heminway, Law School, Lawyering, Teaching | Permalink | Comments (4)

Friday, April 15, 2016

Krug on Mutual Fund Governance

I'm at the MALSB Conference in Chicago, but saw Anita Krug's recently posted book chapter entitled Toward Better Mutual Fund Governance. Worth reading. Abstract below.

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This chapter evaluates the implications of an emerging model of mutual fund governance for effective oversight and regulation. As in the traditional model, in which a board of directors or trustees serves as the board of multiple discrete funds managed by a single investment adviser, this alternative model similarly contemplates the creation of multiple funds, but it eschews a single investment adviser charged with managing each fund’s assets. Rather, there are numerous advisers, each managing one or a small number of funds within the group. Although the new model may portend an improvement over the traditional model in some respects, questions arise as to whether it introduces concerns of its own and whether those concerns are more or less manageable than those to which the traditional model gives rise. The chapter contends that, although the new model produces risks not associated with the traditional model, there are reasons to believe, at least preliminarily, that it is at least as effective as the traditional model.

April 15, 2016 in Business Associations, Corporate Governance, Corporations, Haskell Murray | Permalink | Comments (0)

Tuesday, April 12, 2016

So Lucky (And Grateful) in So Many Ways . . . .

There are those I-need-to-pinch-myself moments in life that come along every once in a while.  I was lucky enough to have one last week.  I was invited to attend a conference and comment on two interesting draft papers written by two law faculty colleagues whose work I have long admired and who are lovely people.  And the location was Miami Beach.  Does it get any better than that for a law professor who likes the beach?  I think not.

The event was the annual conference for the Institute for Law and Economic Policy (ILEP).  The conference theme was "Vindicating Virtuous Claims."  The papers will be published in the Duke Law Journal, which co-sponsored the program. 

I will save details on the papers for later (when the papers are finalized).  But I will briefly describe each here.  The first paper on which I commented, written by Rutheford B ("Biff") Campbell (University of Kentucky College of Law), argues for federal preemption of state securities regulation governing the offer and sale of securities, since federal preemption would be more efficient.  The second paper, written by James D. ("Jim") Cox (Duke University School of Law, who was honored at the event and received the most amazing tribute from his Dean, David Levi, at the closing dinner), argues for attaching more value to the normative effects of judicial decisions arising out of indeterminate doctrine (using materiality and the business judgment rule as core examples).  I know that last part is a mouthful, but read it again, and I think you'll get it . . . .

Both papers were intellectually stimulating, and both scholars were quite engaging in their presentations.  The other invited commentators were interesting and thought-provoking.  And the day was filled overall with other interesting academic paper panels and a lively keynote lunch speaker.  Together with the panel discussion on the evolution of Rule 23 and dinner the night before, it was an action-packed, invigorating conference!

 . . . And then there was the time I spent after the conference recollecting myself (and writing student bar recommendation letters).  The weather was cooperative (downright sunny and warm), and the surroundings at the hotel (food, accommodations, etc.) were fabulous.  My Facebook friends got tired of my colorful photos and happy posts, especially since many of those folks were in locales further North and to the East in which it was cold and snowing on Saturday or Sunday.

So, I am taking this opportunity to note and celebrate my good fortune on, and to offer thanks for, being invited to the ILEP conference to comment on the forthcoming scholarly work of two great business law colleagues.  I met some fascinating, pleasant new people among the conference constituents (from the bench, bar, and academy).  And I enjoyed time on a chaise lounge.  [sigh]  But now, it's back to the reality of the final few weeks of the semester.  I wish everyone the best in pushing through.

 

April 12, 2016 in Business Associations, Conferences, Delaware, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Friday, April 1, 2016

Means & Seiner on Navigating the Uber Economy

Benjamin Means and Joseph Seiner, both of University of South Carolina School of Law, have an interesting article out entitled Navigating the Uber Economy. Work is changing quickly, and the employment/independent contractor line is becoming more difficult to draw. The abstract is reproduced below and the article is available here. Last July, Anne Tucker authored a blog post related to this issue, available here

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In litigation against ride-sharing companies Uber and Lyft, former drivers have alleged that they were misclassified as independent contractors and denied employment benefits. The companies have countered that they do not employ drivers and merely license access to a platform that matches those who need rides with nearby available drivers. At stake are the prospects, not only for Uber and Lyft, but for a nascent, multi-billion dollar "on-demand" economy.

Unfortunately, existing laws fail to provide adequate guidance regarding the distinction between independent contractors and employees, especially when applied to the hybrid working arrangements characteristic of a modern economy. Under the Fair Labor Standards Act and analogous state laws, courts consider several factors to assess the "economic reality" of a worker's alleged employment status; yet, there is no objective basis for prioritizing those factors.

This Essay argues that the classification of workers as independent contractors or employees should be shaped by an overarching inquiry: how much flexibility does the individual have in the working relationship? Those who can choose the time, place and manner of the work they perform are more independent than those who must accommodate themselves to a business owner's schedule. Our approach is novel and would provide an objective basis for adjudicating classification disputes, especially those that arise in the context of the on-demand economy. By reducing legal uncertainty, we would ensure both that workers receive appropriate protections under existing law and that businesses are able to innovate without fear of unknown liabilities.

April 1, 2016 in Business Associations, Employment Law, Haskell Murray | Permalink | Comments (0)

Friday, March 25, 2016

Will a Change in Executive Compensation Lead to Safer Food? A Chipotle Shareholder Thinks So

I feel badly for Chipotle. When I have taught Business Associations, I have used the chain’s Form 10-K to explain some basic governance and securities law principles. The students can relate to Chipotle and Shake Shack (another example I use) and they therefore remain engaged as we go through the filings. Chipotle has recently been embroiled in a public relations nightmare after a spate of food poisonings occurred last fall and winter, a risk it pointed out in its February 2015 10-K filings. The stock price has fluctuated from $750 a share in October to as low as $400 in January and then back to the mid $500 range. After some disappointing earnings news the stock is now trading at around $471.

Clean Yield Group, concerned that the company will focus only on bringing its stock back to “pre-crisis levels,” filed a shareholder proposal March 17th asking the company to link executive compensation with sustainability efforts. The proposal claims that the CEO was overpaid by $40 million in 2014 and states in part:

A number of studies demonstrate a firm link between superior corporate sustainability performance and financial outperformance relative to peers. Firms with superior sustainability performance were more likely to tie top executive incentives to sustainability metrics.

Leading companies are increasingly taking up this practice. A 2013 study conducted by the Investor Responsibility Research Institute and the Sustainable Investments Institute found that 43.4% of the S&P 500 had linked executive pay to environmental, social and/or ethical issues. These companies traverse industry sectors and include Pepsi, Alcoa, Walmart, Unilever, National Grid, Intel and many others…

Investor groups focusing on sustainable governance such as Ceres, the UN Global Compact, and the UN Principles for Responsible Investment (which represents investors with a collective $59 trillion AUM) have endorsed the establishment of linkages between executive compensation and sustainability performance.

Even with the adjustments to executive pay incentives announced this week in reaction to Chipotle’s ongoing food-borne illness crisis, Chipotle shareholders have consistently approved excessively large pay packages to our company’s co-chief executives that dangerously elide accountability for sustainability-related risks. This proposal provides the opportunity to rectify this situation.

If shareholders approve the compensation package on our company’s 2016 proxy ballot, by year-end, Mr. Ells and Mr. Moran will have pocketed nearly $211 million for their services since 2011. Shareholders have not insisted upon direct oversight of sustainability matters as a condition of employment or compensation, and the present crisis illustrates the probable error in that thinking.

This week, the Compensation Committee of the Board announced that it would withhold 2015 bonuses for executive officers. It has also announced that executive officers’ 2016 performance bonuses will be solely tied to bringing CMG stock back, over a three-year period, to its pre-crisis level.

This is a shortsighted approach that skirts the underlying issues that may have contributed to the E. coli and norovirus outbreaks that have left hundreds of people sickened, injured sales, led to ongoing investigations by health authorities and the federal government, damaged our company’s reputation, and will likely lead to expensive litigation. For years, Chipotle has resisted calls by shareholders to implement robust and transparent management and reporting systems to handle a range of environmental, social and governance issues that present both risks to operations as well as opportunities. While no one can know for certain whether a more rigorous management approach to food safety might have averted the current crisis, moving forward, shareholders can insist upon a proactive approach to the management of sustainability issues by altering top executives’ compensation packages to incentivize it.

The last sentence of the paragraph above stuck out to me. The shareholder does not know whether more rigorous sustainability practices would have prevented the food poisonings but believes that compensation changes incentivizing more transparency is vital. I’m not sure that there is a connection between the two, although there is some evidence that requiring more disclosure on environmental, social, and governance factors can lead to companies uncovering operational issues that they may not have noticed before. Corporate people are fond of saying that “what gets measured gets treasured.” Let’s see what Chipotle’s shareholders treasure at the next annual meeting.

March 25, 2016 in Business Associations, Compensation, Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Marcia Narine, Securities Regulation, Shareholders | Permalink | Comments (0)

Olympics, Rule 40, Law, and Social Media

I usually look forward to the Olympics for months, if not years, before they start.

This year, however, all of the doping news, and buzz around Rule 40 has left me less enthusiastic.

For now, I am going to leave the doping news to one side, and focus on Rule 40.

From July 27 to August 24, 2016, Rule 40, prohibits Non-Olympic Commercial Partners from using the word "Olympics" and (depending on context) "Olympic-related terms," including:

  • 2016
  • Rio/Rio de Janeiro
  • Gold
  • Silver
  • Bronze
  • Medal
  • Effort
  • Performance
  • Challenge
  • Summer
  • Games
  • Sponsors
  • Victory
  • Olympian

Now, I understand why the International Olympic Committee ("IOC") and the U.S. Olympic Committee ("USOC") might want these restrictions (given the large sums of money official sponsors pay), and from what I understand from experts in this specific area, the IOC & USOC may have a defensible legal stance.

This, however, seems one of the many areas where (1) the law has not kept up with advances in technology, namely social media, and (2) even if the IOC & USOC are right on the law, they may lose in the court of public opinion. Here, it seems, there is a good bit of difference between a company running a detailed TV-ad noting that it sponsors an Olympian and simply wishing an athlete "Good luck in Rio" on Twitter. Also, even if the law treats social media the same as other forms of advertising, I could see the public (including me) judging the IOC & USOC harshly if it punishes brands and/or their athletes for minor violations. Outside of the most popular Olympic athletes, significant sponsorships are difficult to secure and outlawing short displays of appreciation on social media seems like overreaching. Adding to the problem, I think, is that this rule makes the IOC & USOC look like single bottom line, money-hungry organizations, when most of us would like to associate the Olympics with a broader, higher purpose.      

March 25, 2016 in Business Associations, Current Affairs, Haskell Murray, Sports | Permalink | Comments (0)

Friday, March 11, 2016

Sharapova, Sponsors, and Morals Clauses

If you follow sports related news, you know that tennis star Maria Sharapova recently tested positive for a banned performance enhancing drug called Meldonium. Details here and here and here.  According to one source, over 60 athletes have tested positive for Meldonium this year; the drug was just recently added the banned substances list. Sharapova claims she was unaware that she was taking a banned substance. 

A number of Sharapova's biggest sponsors have suspended or ended their relationship with her and/or delayed planned events. These sponsors include, Nike, Porsche, and TAG Heuer. Head and Evian appear to be sticking with her. Head chairman Johan Eliasch claimed that Sharapova simply made an "honest mistake."

The companies that have cut ties with Sharapova have likely been able to do so through what is often called a morals clause or a morality clause in the endorsement contract. Some background on morals clauses can be found here and here and here. And here is an interesting contract law question from Eric Goldman that involves morals clauses

March 11, 2016 in Business Associations, Current Affairs, Haskell Murray, Sports | Permalink | Comments (0)

Does the bar exam test students on the skills and subjects they need to be effective lawyers?

Some of our December graduates haven just taken the Florida bar exam. As always, I asked them about the business associations questions. Florida drastically changed its LLC rules in 2014, but still hasn’t asked any questions about LLCs, focusing instead on partnerships and corporations (at least according to the students). From a review of the released questions, the bar didn’t ask about LLCs before the amendments either.

I teach BA again next year and I’m struggling with what to emphasize. Business Associations is not required in many Florida law schools, but it is at St. Thomas, and many students enter the class with trepidation. Most will only take the one required course and won’t go on to advanced classes in securities regulation, corporate taxation, or other drafting courses. I try to focus the required BA class on skills that graduates will need in the workplace in addition to preparing them for the bar by using released test questions. Now I wonder how to balance the tension between the rise of LLCs and the many changes in laws related to securities regulation with the bar’s continued focus on partnerships and traditional corporations.

Yesterday the Obama administration added Miami to the list of tech hire jurisdictions. The Kauffman Index ranks Miami as second in the country for startups. Last month, a blogger highlighted my city’s proximity to Latin America and our emerging tech scene. With these realities in mind, should I add even more to what I already teach about legal issues that entrepreneurs and startups face even if that’s not what the Florida bar tests? I never want to “teach to the test” but I also want to make sure that I am responsible in my pedagogy, which for me includes marking up operating agreements, spending time demystifying IPO filings, and introducing them to hybrid entities that entrepreneurs ask about.

Unlike 20 other states, Florida has not adopted the Uniform Bar Exam, but I believe that any test that asks students to do the kind of critical analysis they would have to do in practice is a good thing. This week the Florida bar established a new committee to consider the issue, but I don’t have high hopes for a quick change to the bar exam. Lawyers here recently killed a proposal for reciprocity, and some see the UBE as a back door effort to flood Florida with out of staters.

So I have a conflict. How do other professors tackle the coverage issue? Comment below or feel free to email me at mnarine@stu.edu.

March 11, 2016 in Business Associations, Corporations, Current Affairs, Entrepreneurship, Law School, Lawyering, Marcia Narine | Permalink | Comments (2)

Wednesday, March 9, 2016

Defunct Defacto or Undying Doctrine?

Fellow BLPB editor, Stefan Padfield, raised some insightful questions on the continued reach and impact of defacto corporation doctrines and corporation by estoppel in an earlier, offline conversation.  [Stefan uses my Business Organizations casebook offered on the electronic platform ChartaCourse and was graciously providing me some feedback].  The conversation raised two related groups of questions. First what is the continued import and application of defacto corporation doctrine in a world of standardized incorporation processes.  Long gone are the days of lost mail (lost Email maybe) and corrections can be made nearly instanteously and will relatively little cost in the event of typos or other defects.  To what extent does the de facto doctrine, long a staple of the survey law school course on corporations, still play a relevant role in practice. I understand all of the doctrinal reasons law professors may want to continue to teach it because it tests the outer limits of the substance over form debate in corporations and the begs the questions how fragile or strong is the legal fiction of separately incorporated entities.  It is nearly as fun as piercing the corporate veil!  But in [insert finger quotes here] "real life" or "practice" how relevant is this doctrine?  

The MBCA Section 2.04 Liability for Preincorporation Transactions states "All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting." Despite earlier attempts to eliminate the doctrine of de facto corporations ("Therefore a de facto corporation cannot exist under the Model Act. Comments to section 56 in 1969 Model Act), the current version makes clear that the de facto doctrine lives on.  "A number of situations have arisen, however, in which the protection of limited liability arguable should be recognized even though the simple incorporation process established by modern statutes has not been completed."

The MBCA, as a uniform statute, is a guide, but not operative law under individual state corporate charters.  An initial count finds 27 jurisdictions with statutory language expressly acknowledging a knowledge-based standard for de facto corporations similar to that established in the MBCA.  Many other states recognize de facto doctrine solely through case law.  A few jurisdictions, such as Alaska and Idaho explicitly abolish de facto corporations via statutory text.  Idaho recently changed the statute to state:  "All persons purporting to act as or on behalf of a corporation, when there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting."  Idaho Code Ann. § 30-29-204 (West)The highlighted word "when" replaced "knowing".

Academic interest in de facto corporation doctrines, a hot topic in the early 1900's (see, e.g. Edward H. Warren, Collateral Attack on Incorporation A. De Facto Corporations, 20 Harv. L. Rev. 456, 479-80 (1907)), has waned.  One exception is the 2009 article The Doctrine of Defective Incorporation and its Tenuous Coexistence with the Model Business Corporation Act, by Timothy Wyatt, 

This paper revisits the earlier studies and demonstrates that the apparently inconsistent findings were the result of analytical flaws. The paper then presents a new extensive study of post-MBCA defective incorporation cases, and demonstrates by statistical regression that the courts have continued to apply the defective incorporation doctrine (the MBCA notwithstanding) and that the courts have applied the doctrine in a way that is highly predictable: Where the defendant is active in the management of a business entity that is not validly incorporated, he will not be held personally liable for his actions on behalf of the corporation so long as he believed the corporation was valid at the time of the actions.

I conclude that, for the situation where the shareholders of a defective corporation seek limited liability, the concepts of “de facto corporation” and “corporation by estoppel” are largely indistinguishable and are really two different ways of stating the unitary common-law doctrine of defective incorporation. The outcomes of these cases are highly predictable if one considers whether the shareholder of the defectively incorporated entity is acting in good faith—a factor that has been neglected by previous commentators. I also conclude that, while the attempted abolition of the defective-incorporation doctrine by the MBCA injected some uncertainty into the outcomes of cases, the courts largely ignored the MBCA on this point. In fact, the judicial backlash against attempts to legislate defective incorporation out of existence may actually have strengthened the doctrine. 

My initial reading of this is that attempts to eliminate the doctrine have failed.  De facto corporations remains intact and a relevant legal theory.  Justifications for removing de facto incorporation persist even though the process of incorporation has changed.  The bottom line is that human error may still necessitate the doctrine. At a minimum, a variety of jurisdictions agree as evidenced by statute or common law. 

Related to the inquiry on de facto corporations is the extension of any changes or continued relevance to the uncorporate entities space.  Those issues will be tackled in a separate post.

 -Anne Tucker

March 9, 2016 in Anne Tucker, Business Associations, Corporations | Permalink | Comments (2)

Friday, March 4, 2016

Elson, Ferrere, and Goossen on Volkswagen

For those of you who talk about the recent problems at Volkswagen in your classes, this recently posted article may be useful. I connected with Charles Elson briefly when I lived in Delaware, and he is certainly an authority on corporate governance. The article is available here and the abstract is posted below. 

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Although the primary cause of the emissions scandal at Volkswagen appears to have been misfeasance and malfeasance on a corporate-wide scale, we argue that such a problematic culture existed at Volkswagen because of the composition of the board itself in combination with the unique governance structure known as “co-determination,” that defines many German companies, including VW. There are three major problems from a corporate governance standpoint with the Volkswagen board. First, is the interest-conflicting nature of the dual-class stock held by the dominant shareholding Porsche and Piech families. Second, is the presence of a government as a major shareholder. And third is the organization of its characteristically German “two-tier” board around the principle of co-determination, which mandated significant labor representation. We argue that each of these elements of the VW ownership and governance structure contributed in varying degrees to the board failure of oversight that led to the management decision to evade emissions regulations.

March 4, 2016 in Business Associations, Corporate Governance, Corporations, Ethics, Haskell Murray, Teaching | Permalink | Comments (0)

Spring Break Reading: Bruner on The Corporation's Intrinsic Attributes

Christopher Bruner recently posted a book chapter entitled The Corporation's Intrinsic Attributes. I try to read everything Christopher writes, including his excellent Cambridge University Press book, Corporate Governance in the Common Law World, and I am looking forward to reading this new book chapter over spring break next week. The book chapter's abstract is reproduced below for interested readers:

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Numerous treatises, casebooks, and other resources commonly present concise lists of attributes said to be intrinsic to the modern corporation and/or essential to its economic utility. Such descriptions of the corporate form often constitute introductory matter, conditioning how students, professionals, and public officials alike approach corporate law by presenting a straightforward framework to distinguish the corporate form from other types of business entities. There are two significant problems with such frameworks, however, from a pedagogic perspective. First, these frameworks describe the corporation by reference to purportedly fixed intrinsic attributes, conflicting sharply with the flux and dynamism that have in fact characterized the history of corporate law. Second, these frameworks differ markedly from each other in how they characterize the corporation's attributes, each embodying a contestable perspective on the nature of the corporate form.

The diversity of perspectives that such inquiry reveals calls into question the degree to which we can validly deduce a single correct or optimal division of power between boards and shareholders, degree of regard for shareholder interests, and/or degree of liability exposure for boards and shareholders, based exclusively on premises purportedly intrinsic to corporate law itself - that is, without express appeal to external policy considerations and related regulatory fields. These matters map onto three core issues of corporate law and governance - power, purpose, and risk-taking, respectively - and the inability to resolve them by reference to the corporation's purportedly intrinsic features suggests that re-conceptualizing the corporate form might facilitate more effective assessment of its capabilities.

This chapter undertakes that project. Section I begins with an historical discussion of the corporation's emergence and early deployment for business in the United Kingdom and the United States. Section II turns to various contemporary descriptions of the corporation's intrinsic attributes presented in modern reference materials, exploring their commonalities, differences, and theoretical implications. Section III explores the impossibility of resolving core issues of power, purpose, and risk-taking by reference to such conceptions of the corporate form, providing three US examples that map onto these respective issues - the scope of shareholders' bylaw authority, the degree of board discretion to consider non-shareholder interests in hostile takeovers, and the regulation of financial risk-taking following the recent crisis. Each illustrates the necessity of resort to political discourse - a reality underscored through comparison with the United Kingdom, which reveals substantial divergence on such issues notwithstanding broad similarities between the US and UK corporate governance regimes.

The chapter concludes, in Section IV, by proposing that we refrain from describing the corporate form by reference to purportedly fixed intrinsic attributes. I argue that it would pay to re-conceptualize the modern corporation by reference to the tools it offers, and how those tools can be deployed - a series of governance "levers," I suggest, that can be adjusted and calibrated in various ways to pursue a broad range of governance-related goals.    

March 4, 2016 in Business Associations, Corporate Governance, Corporations, Haskell Murray, International Law, Management, Shareholders | Permalink | Comments (0)

Thursday, March 3, 2016

What I Learned at KCON XI

It's fun when students are interested in your scholarship.  Yesterday, one of my students engaged me to talk about my work on limited liability operating agreements as contracts.  (I have mentioned this work in class, and the student also is a regular reader of this blog, where I have referenced this work a number of times, including most prominently here.)  He began the exchange with something akin to the following question: "Why is it that we take two full semesters of contract law during the first year of law school and then all but ignore the connection of contract law to business entities once we get to Business Associations?"

I think I know what he means.  While the segregation of legal doctrine by subject matter in law schools enables instructors to focus students narrowly on a single--often new--body of law, it also tends to obscure the interconnections between and among applicable bodies of law, including connections between contract law and the law of business entities.  Admittedly (and I pointed this out to the student), the typical Business Associations course does typically address contracts at several points.  These junctures include, among others, the course segment in which sole proprietorships are distinguished from statutory forms of business entity, discussions on the nexus of contracts theory of the corporation, and dialog on the validity of shareholder agreements.

This conversation reminded me that I learned an important thing about the Restatement (Second) of Contracts at the 11th International Conference on Contracts (KCON XI) last weekend at St. Mary's University School of Law in San Antonio, Texas.  (Keep in mind as you read this that I do not teach and have never taught the 1L course on contract law.)  What did I learn?  I learned how to use the Restatement properly in assessing the existence and validity of a contract!

Specifically, I learned that the traditional elements of a legally valid contract, those that I had learned in law school (offer, acceptance, and consideration) are, under the Restatement (Second) of Contracts, non-exclusive means of qualifying an agreement as a valid contract.  Specifically, Section 17 of the Restatement provides as follows:

(1) Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

(2) Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts or under the rules stated in §§82-94.

The comments to Section 17 cast additional light on types of contract--including several different kinds of formal contract,--that do not need to meet the requirements of mutual assent and consideration.  Moreover, the sections of the Restatement referenced in Section 17(2) include Section 90, which helpfully provides in subsection 1 that

[a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

I guess I knew that, but somehow I missed remembering or fully understanding it.

All of this, and much more from KCON XI, will come in handy in my future work on contracts in the business entity context, deepening and enriching points I want to make.  It's sometimes really enlightening--a scholarly "breath of fresh air"--to attend a conference of academics focused on a subject matter or scholarly tradition that is different from one's own.  I may try to do this more often.

Also, my student's point on the need to more often and more integrally show the interdisciplinary of law in the upper division classroom is not lost on me.  That's an area in which I can make immediate changes.  And with the help of my contract law brethren from KCON XI, contract law is sure to be a part of the dialogue.

March 3, 2016 in Business Associations, Conferences, Joan Heminway | Permalink | Comments (0)

Friday, February 26, 2016

Bruckner on Bankrupting Higher Education

Matthew Bruckner (Howard) recently posted an interesting article on bankruptcy reorganization and universities. Given the challenges facing many schools, his article should be one that attracts attention. The article can be downloaded here and the abstract is below.

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Many colleges and universities are in financial distress but lack an essential tool for responding to financial distress used by for-profit businesses: bankruptcy reorganization. This Article makes two primary contributions to the nascent literature on college bankruptcies by, first, unpacking the differences among the three primary governance structures of institutions of higher education, and, second, by considering the implications of those differences for determining whether and under what circumstances institutions of higher education should be allowed to reorganize in bankruptcy. This Article concludes that bankruptcy reorganization is the most necessary for for-profit colleges and least necessary for public colleges, but ultimately concludes that all colleges be allowed to reorganize in chapter 11.

February 26, 2016 in Bankruptcy/Reorganizations, Business Associations, Business School, Haskell Murray, Law School, Nonprofits, Research/Scholarhip | Permalink | Comments (0)

Thursday, February 25, 2016

Binging on Billions

Next week is our Spring Break and I plan to catch up on some television and movie watching. Many of my former business associations students have raved about the show Billions, described online as follows:

Wealth, influence and corruption collide in this drama set in New York. Shrewd U.S. Attorney Chuck Rhoades is embroiled in a high-stakes game of predator vs. prey with the ambitious hedge-fund king, Bobby Axelrod. To date, Rhoades has never lost an insider trading case -- he's 81-0 -- but when criminal evidence turns up against Axelrod, he proceeds cautiously in building the case against Axelrod, who employs Rhoades' wife, psychiatrist Wendy, as a performance coach for his company. Wendy, who has been in her position longer than Chuck has been in his, refuses to give up her career for her husband's legal crusade against Axelrod. Both men use their intelligence, power and influence to outmaneuver the other in this battle over billions.

Now that my students are watching it, I feel compelled to do so as well, and not just because Australian papers play up the copious amounts of money and sex depicted in the series. I’m glad that my students are watching any television show that deals with the financial industry but even more gratified that they are emailing me telling me that now they understand some of the concepts that they see in this show and others such as HBO’s Silicon Valley.

Are there any other television shows or movies I should catch up on during Spring Break in between grading, writing, and watching Suits (for my Civil Procedure students)? I like to keep up with what my students watch because I use some of the story lines for in class hypos and exam questions. I also ask students to write reflection papers applying what they have learned in class and analyzing what Hollywood got wrong. I look forward to your suggestions.

February 25, 2016 in Business Associations, Current Affairs, Film, Law School, Marcia Narine, Teaching, Television | Permalink | Comments (0)

On Describing The Limited Liability Partnership . . . .

Our Kentucky "brother," Tom Rutledge, sent me a link to a super blog post yesterday on Mortgage Grader Inc. v. Ward & Olivo, a limited liability partnership case currently before the New Jersey Supreme Court.  Tom's focus in his post was the limited liability aspect of the case, which is fascinating--and more than a bit unsettling for those practicing in jurisdictions like New Jersey and Kentucky that require law firms organizing limited liability partnerships to maintain malpractice insurance.  The question before the court: whether, in the absence of an express provision in the partnership statute, the failure of a law firm organized as a limited liability partnership to maintain required malpractice insurance results in the loss of the partnership's limited liability status.  The trial court ruled that the lapse of malpractice insurance caused a loss of limited liability status; the appeals court reversed.

But Tom also mentions another aspect of the case in his post that I want to call out here.  Specifically, he notes references in the appellate court opinion to the conversion of a partnership to a limited liability partnership.  Here's what he says on that point:

One potentially disturbing aspect of the language used by the Court of Appeals and in the oral argument is the notion that the loss of LLP status and the treatment of the firm as a general partnership is some sort of conversion. But it isn’t. An LLP is a general partnership that has elected into a special status – it is still a general partnership but for the rule of partner limited liability. . . .

This comment reminded me of co-blogger Josh Fershee's super-helpful obsession (maybe too strong a word?) with "limited liability corporation" as an incorrect judicial (and other) descriptor of the limited liability company business form.  (See, e.g., his December 2015 post here.)  And far be it from me to disagree with either of these guys in making their respective points about these labeling inaccuracies!  

As a separate point, I want to call out the fact that this area of partnership law can be important both for bar examinations (thinking of all those folks suffering through that test this week . . .) and IRL.  In fact, I was asked a question recently about the Tennessee provision on limited liability elections by a BARBRI student.  (Little-known fact: I teach the Tennessee BARBRI segments on agency, unincorporated entities, and personal property.)  The student's question did not inappropriately refer to a conversion of a partnership into a limited liability partnership, but it did point out several differences in Tennessee law in this area that I want to mention.

Continue reading

February 25, 2016 in Business Associations, Joan Heminway, Joshua P. Fershee, Partnership, Teaching | Permalink | Comments (2)

Monday, February 22, 2016

Walch on Bitcoin Blockchain as Financial Market Infrastructure

I was fortunate to hear Angela Walch (St. Mary's) present on this paper at SEALS last summer. Her article, The Bitcoin Blockchain as Financial Market Infrastructure: A Consideration of Operational Risk, has now been published in the NYU Journal of Legislation and Public Policy and is available on SSRN. The abstract is reproduced below:

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“Blockchain” is the word on the street these days, with every significant financial institution, from Goldman Sachs to Nasdaq, experimenting with this new technology. Many say that this remarkable innovation could radically transform our financial system, eliminating the costs and inefficiencies that plague our existing financial infrastructures, such as payment, settlement, and clearing systems. Venture capital investments are pouring into blockchain startups, which are scrambling to disrupt the “quadrillion” dollar markets represented by existing financial market infrastructures. A debate rages over whether public, “permissionless” blockchains (like Bitcoin’s) or private, “permissioned” blockchains (like those being designed at many large banks) are more desirable.

Amidst this flurry of innovation and investment, this paper enquires into the suitability of the Bitcoin blockchain to serve as the backbone of financial market infrastructure, and evaluates whether it is robust enough to serve as the foundation of major payment, settlement, clearing, or trading systems.

Positing a scenario in which the Bitcoin blockchain does serve as the technology enabling significant financial market infrastructures, this paper highlights the vital importance of functioning financial market infrastructure to global financial stability, and describes relevant principles that global financial regulators have adopted to help maintain this stability, focusing particularly on governance, risk management, and operational risk.

The paper then moves to explicate the operational risks generated by the most fundamental features of Bitcoin: its status as decentralized, open-source software. Illuminating the inevitable operational risks of software, such as its vulnerability to bugs and hacking (as well as Bitcoin’s unique 51% Attack vulnerability), uneven adoption of new releases, and its opaque nature to all except coders, the paper argues that these technology risks are exacerbated by the governance risks generated by Bitcoin’s ambiguous governance structure. The paper then teases out the operational risks spawned by decentralized, open-source governance, including that no one is responsible for resolving a crisis with the software; no one can legitimately serve as “the voice” of the software; code maintenance and repair may be delayed or imperfect because not enough time is devoted to the code by volunteer software developers (or, if the coders are paid by private companies, the code development may be influenced by conflicts of interest); consensus on important changes to the code may be difficult or impossible to achieve, leading to splits in the blockchain; and the software developers who “run” the Bitcoin blockchain seem to have backgrounds in software coding rather than in policy-making or risk-management for financial market infrastructure.

The paper concludes that these operational risks, generated by Bitcoin’s most fundamental, presumably inalterable, structures, significantly undermine the Bitcoin blockchain’s suitability to serve as financial market infrastructure.

February 22, 2016 in Business Associations, Current Affairs, Financial Markets, Haskell Murray, Private Equity, Venture Capital | Permalink | Comments (0)

University of Cincinnati College of Law │ The 29th Annual Corporate Law Center Symposium │Corporate Social Responsibility and the Modern Enterprise │ Cincinnati, OH │ March 18, 2016

I am looking forward to presenting at this conference next month. Looks like a great group of academics and practitioners.

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University of Cincinnati College of Law

The 29th Annual Corporate Law Center Symposium - Corporate Social Responsibility and the Modern Enterprise

March 18, 2016

8:45 a.m. – 3:30 p.m.

Hilton Netherland Plaza

Pavilion Ballroom

 

This event is free. CLE: 5.0 hours, pending approval.

Presented by the University of Cincinnati College of Law’s Corporate Law Center and Law Review.

Symposium materials will be available on March 14 at: law.uc.edu/corporate-law-center/2016-symposium

Please register by contacting Lori Strait: email Lori.Stait@uc.edu; fax 513-556-1236; or phone 513-556-0117

 

Introduction, 8:45 a.m.

Keynote, 9:00 a.m.

Clare Iery, The Procter & Gamble Company

Social Enterprises and Changing Legal Forms, 9:30 a.m.

Mark Loewenstein, University of Colorado Law School

William H. Clark, Jr., Drinker Biddle & Reath LLP

Haskell Murray, Belmont University College of Business

Russell Menyhart, Taft Stettinius & Hollister LLP

Sourcing Dilemmas in a Globalized World, 11:00 a.m.

Steve Slezak, University of Cincinnati College of Business

Marsha A. Dickson, University of Delaware Department of Fashion & Apparel Studies

Tianlong Hu, Renmin University of China Law School

Anita Ramasastry, University of Washington School of Law

CSR and the Closely Held Company, 1:15 p.m.

Eric Chaffee, The University of Toledo College of Law

Michael Petrucci, FirstGroup America, Inc.

Lisa Wintersheimer Michel, Keating Muething & Klekamp PLL

Sourcing From the Enterprise Perspective, 2:30 p.m.

Christopher Bedell, The David J. Joseph Company

Walter Spiegel, Standard Textile Co. Inc.

Martha Cutright Sarra, The Kroger Co.

Conclusion, 3:30 p.m.

February 22, 2016 in Business Associations, Conferences, Corporate Governance, Corporations, CSR, Ethics, Haskell Murray, Human Rights, Law School, Research/Scholarhip, Shareholders, Social Enterprise | Permalink | Comments (0)

Friday, February 19, 2016

Comin' Back Atcha, Josh, on Partnerships and the Requirement of a Contract

I love your most recent post, Josh, and have been truly enjoying the ensuing commentary/conversation. I took on the “is it a contract?” issue in the LLC context because of questions similar to those raised in your post and in the comments it generated. I admit that the partnership issue on which you posted has fascinated me for quite some time. (I first encountered it when I undertook to teach Business Associations almost 16 years ago . . . .)

I have to push back on your analysis a bit, however.  In particular, here’s the part of your post with which I have some trouble:

There must be an agreement to associate for a purpose. To me, that requires consideration and assent.  If one has associated sufficiently under the law to make one both a partner and an agent of another (and thus liable for the partner), I don’t see how there is a lack of sufficient consideration or assent to form a contract.

Why does an association for a purpose require an agreement? To "associate" is to combine, connect, or link. The concept of an association builds from that: "connection or combination" or "an organization of people with a common purpose and having a formal structure."  It is clear in the comments to the RUPA that the drafters use "associate" and "association" in these common forms. In fact, the drafters refer to various forms of association created under other statutes, including “corporations, limited partnerships, and limited liability companies.” See RUPA Section 202, cmt 2.  

It is the association--of two or more persons to carry on as co-owners a business for profit--that creates an agency relationship and third-party liability for the obligations of the firm (unless the parties separately agree to those matters--which they may do independently or coincident with the formation of a partnership).  Those parts of the relationship are attributes of a partnership--aspects of the relationship that flow from the legal conclusion that a partnership has been formed. In other words, because of the formation of a partnership, the partners are agents of the partnership and are liable for partnership obligations.

Even assuming an agreement, however, it certainly is true that not every agreement is a contract.  Offer, acceptance, and (as you note) consideration would be required at common law to form a contract.  (Mohsen adds value to that analysis as well in his comment, even if he refers to the partnership agreement as opposed to partnership formation.)  Partners may and do, in fact, contract with each other under that legal meaning.  But I am not confident that a contract is required.  

Tell me what I am missing in all this . . . .

Parenthetically, I will note that I am extending my work on LLC operating agreements as contracts (referenced favorably at the outset in your post, for which I thank you) in future work, and I will be presenting the preliminary ideas on that at KCON XI next weekend in San Antonio.  It will be interesting to share some of these ideas with folks for whom contracts is their primary area of legal inquiry.  And since my associate dean is making noises about me teaching contracts sometime soon, I'd best get myself up to speed with the experts in any case . . . .

 

February 19, 2016 in Business Associations, Joan Heminway, Joshua P. Fershee, Partnership | Permalink | Comments (10)