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:
Wednesday, January 27, 2016
In December, 2015, Dow Chemicals Co. and DuPont announced a proposed merger between their two companies. Under the proposed deal, and with the approval of stockholders and regulators, the two agro/chemical giants will merger their companies in 2016 to create DowDuPont, with an estimated $130 billion value. Within 18-24 months of closing, DowDuPont will be split into three independent, publicly traded companies .
The proposed "merger of equals" is structured to share power equally between Dow and DuPont and its leadership in the new company. Dow and DuPont stockholders will each own roughly half of DowDuPont. There will be 16 members on the new DowDuPont board of directors: 8 from each company. The roles of Chairman and CEO will be split with Andrew Liveris (Dow) serving as Chairman and Edward Breen (DuPont) as CEO.
Questions of equality and perceived power imbalance arise when we examine the relationships between (1) corporate boards and activist investors; (2) various shareholders (hedge funds vs. institutional investors vs. retail investors, etc.), and (3) possibly, CEO's.
Let's tackle the first (and tangentially the second) imbalance by talking about hedge funds. Last year, Trian hedge fund targeted DuPont in a very expensive, public and close proxy contest. DuPont defeated Trian, even with ISS recommendations to vote with Trian. The DuPont defense was widely regarded as a model proxy contest defense strategy (see here, e.g.,) and even more enthusiastically as
"a victory not only for DuPont and its chief executive, Ellen Kullman, but for others in corporate America concerned that activist investors’ influence has grown too strong and that companies have capitulated to their demands too readily." WSJ May 13, 2015
By October, Ellen Kullman, the trimphant CEO of DuPont, however stepped down. By December DuPont announced the mega-merger with Dow. DuPont's role in the mega-merger with Dow is being cast as a reaction to and attempt to seek protection from activist investors, which are increasingly garnering ISS and institutional investor support. DuPont's success against Trian rested largely on their ability to convince its three largest shareholders—Vanguard Group, BlackRock Inc. and State Street Corp.—which all manage index funds to vote with it (and against ISS recommendations). The inference here is that DuPont didn't want to roll the dice again and risk losing control in a future contest with Trian or another activist.
Dow Chemicals hasn't been immune to the hedge fund threat. Third Point LLC, Dan Loeb's hedge fund, has a 2% position in Dow and nearly pursued a proxy fight in 2015. Third Point has been making noise about the continued roll of Andrew Liveris in DowDuPont demonstrating that the hall monitor is still on duty.
The gaining strength of hedge fund campaigns in 2015 and the increasingly alignment of hedge funds and indexed funds has many boards running scared. The DealBook Deal Professor, Steven Davidoff Solomon, writes of the mega-merger:
The proposed combination of Dow Chemical and DuPont shows that in today’s markets, financial engineering prevails and that only activist shareholders matter....
This plan is one easily understood by a hedge fund activist or investment banker in a cubicle in Manhattan with an Excel spreadsheet. To them, it makes perfect sense to merge a company and then almost immediately split it in three.
Merger and acquisition volume was at a record high (too soon to say peak) in 2015 as companies sought, in part, to achieve paper returns and cost efficiencies in a slow-growth economy. When large (and voting) shareholders are index and mutual funds with pressures to earn returns for their investors, it can produce corresponding pressure on operating companies for tactics, if not actions to produce those returns. In the DuPont proxy fight, the large block of retail investors in the old-guard public company was a big barrier to Trian, but in companies with less percentage held by retail investors (e.g., newer companies), the hedge fund agenda can drive the company.
Finally, it is interesting to note the rise and fall of DuPont CEO Ellen Kullman in this story. She successfully warded off a proxy contest and seemed to have fended off hedge fund advances, but ultimately her fate and DuPont's were largely driven by Trian's agenda. Reading about this merger reminded me of the spate of stories last year about how hedge funds disproportionately target companies with female CEO's. This is an issue that as a female law professor, I am particularly sensitive to, but that bias not withstanding, the story received quite a bit of play in the financial press last year: DealBook, Bloomberg, and here, and here.
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)
I am taking a MOOC from University of Illinois and Coursera on digital marketing. I've been trying to take at least one course a semester. Both the underlying material, and the intricacies of online education have been interesting. I chose this course because I have family members in the digital marketing area, and I am taking (and discussing) this course with them.
Later, I may discuss some of the substantive take-aways from the course --- I have completed about 50% of the course so far --- but in this post I want to discuss business/academic entanglement.
In this digital marketing class, an assignment on co-creation (by firms & their customers) consisted of creating an online account with Starbucks, submitting an idea for consideration, and reporting how the idea was received by commenters. This was a useful exercise and it made the concept come alive, but I couldn't help wondering if Starbucks was somehow involved with University of Illinois and/or Coursera in creating this assignment. To be clear, I have no idea whether Starbucks was or was not involved. But, in any event, with the thousands (and maybe 10s of thousands) of people who are taking this course, this assignment seemed like a win for Starbucks. Well, actually, this idea submission portion of Starbucks' website was not functioning properly, leading to many, many complaints from the students on the course discussion boards, but the assignment could have been a big win for Starbucks. And eventually, a work-around was suggested, and I assume that many, many people still created online accounts with Starbucks when they might not have otherwise. The creation of those accounts, and the simple brand exposure, certainly has some value to Starbucks.
Anyway, my question is this: Are course creators ethically obligated to disclose entanglement or abstain from entanglement between businesses and their educational institutions?
Even if there is no entanglement (I am thinking about direct or indirect payments for the assignment), how should potential benefits to the educational institution be treated? For example, what if the University of Illinois plans to pitch Starbucks CEO Howard Schultz on making a contribution toward a new campus building and plans to bring up this assignment? Again, I don't know if there was any entanglement here, and I assume it was just an innocent and useful assignment. But with the increasing corporatization of higher education, I wonder about the appropriate boundaries between businesses and universities.
Thoughts from our readers are welcomed.
Wednesday, January 20, 2016
Second Circuit Affirms High Misconduct Standard for Caremark Claims in Cent. Laborers’ Pension Fund v. Dimon
In early January, the Second Circuit Court of Appeals ruled in Cent. Laborers’ Pension Fund v. Dimon to affirm the dismissal of purported shareholder derivative claims alleging that directors of JP Morgan Chase--the primary bankers of Bernard L. Madoff Investment Securities LLC (“BMIS”) for over 20 years--failed to institute internal controls sufficient to detect Bernard Madoff’s Ponzi scheme. The suit was dismissed for failures of demand excuse. Plaintiffs contended that the District Court erred in requiring them to plead that defendants “utterly failed to implement any reporting or information system or controls,” and that instead, they should have been required to plead only defendants’ “utter failure to attempt to assure a reasonable information and reporting system exist[ed].” (emphasis added). The Second Circuit declined, citing to In re General Motors Co. Derivative Litig., No. CV 9627-VCG, 2015 WL 3958724, at *14–15 (Del. Ch. June 26, 2015), a Chancery Court opinion from earlier this year that dismissed a Caremark/oversight liability claim. In In re General Motors the Delaware Chancery Court, found that plaintiffs' allegations that:
[T]he Board did not receive specific types of information do not establish that the Board utterly failed to attempt to assure a reasonable information and reporting system exists, particularly in the case at hand where the Complaint not only fails to plead with particularity that [the defendant] lacked procedures to comply with its . . . reporting requirements, but actually concedes the existence of information and reporting systems. . . .
In other words, the Plaintiffs complain that [the defendant] could have, should have, had a better reporting system, but not that it had no such system.
The Second Circuit's opinion in Central Laborers' affirms that Caremark claims require allegations misconduct sufficient to satisfy a failure of good faith, and cannot rest solely on after-the-fact allegations of failed reasonableness of the corporate reporting system.
Sunday, January 17, 2016
Development Studies Workshop - Organized by the Banque Populaire Chair in Microfinance of the Burgundy School of Business (Dijon, France)
Development Studies Workshop
Organized by the
Banque Populaire Chair in Microfinance of the Burgundy School of Business (Dijon, France)
In collaboration with
BG Foundation (India)
With Support from
Theme: Spirituality, Organization and Development
Dates: 28th and 29th October, 2016
Venue: Gurgaon/Delhi (India)
At a time of terrorism, war, and general confusion on human values, there is increasing concern to develop the world in a more sustainable manner. Harmony with nature, ethics, morality and even spirituality is being sought at an individual level, at an organizational level and at the macro level, while continuing the focus on development and making life worth living for all our fellow human-beings. At this juncture, more and more academics and practitioners are turning towards religion to see if some spiritual lessons can be incorporated for an enhanced work-life. At the very least, understanding the spiritual culture of different persons is important to work in global corporations. It is even more important to understand large waves of immigrants and to mentally prepare for their differences in values. The theme of this workshop is therefore relevant to promote human understanding in a globalized world.
A research workshop's primary aim is to help each other improve our papers so that we can publish in high ranked international journals and specialized books on a topic. For this, we would like to bring together a large diversity of researchers from different backgrounds to focus on a relevant and interesting theme, which is meaningful to the present moment.
While papers in any of these individual themes is welcome, papers combining two or more elements of spirituality, organization and economic development will be given preference.
Examples of possible topics combining two themes (not exclusive, not exhaustive) to spark your thoughts:
- Spiritual Development
a. Yoga in the workplace
b. Gandhism and sustainable development
c. Organizing Ayurvedic health systems
- Organizational Development
a. Organization Leadership and community development
b. Corporate transformation through Islamic Finance
c. Managing Conflicts through the Art of Living
- Economic Development
a. Microfinance and Hinduism
b. Confucianism and development of intellectual property rights
c. Economics of Spiritual tourism of Christian holy places
Please send abstracts by April 15, 2016 to email@example.com.
Guidelines for Abstracts (150 to 300 words)
Title of the paper
Author Information: Names, designations and affiliations, current locations (city, country)
Impact (on new research or on new practices, policies)
Value added/ Originality
There will be no parallel sessions. A minimum of six and a maximum of fifteen working papers can be presented.
Abstracts will be selected based on conformity to the theme and diversity of origins.
A few people whose abstract is not accepted can opt for being discussants or participants, subject to place availability.
[more below the fold]
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
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)
The AALS Annual meeting starts today in New York. The full program is available here, and listed below are two Section meeting announcements of particular interest to business law scholars:
Thursday, January 7th from 1:30 pm – 3:15 pm the SECTION ON AGENCY, PARTNERSHIP, LLC’S AND UNINCORPORATED ASSOCIATIONS, COSPONSORED BY TRANSACTIONAL LAW AND SKILLS will meet in the Murray Hill East, Second Floor, New York Hilton Midtown for a program titled:
"Contract is King, But Can It Govern Its Realm?"
The program will be moderated by Benjamin Means, University of South Carolina School of Law. Discussants include:
- Joan M. Heminway, University of Tennessee College of Law
- Lyman P.Q. Johnson, Washington and Lee University School of Law
- Mark J. Loewenstein, University of Colorado School of Law
- Mohsen Manesh, University of Oregon School of Law
- Sandra K. Miller, Professor, Widener University School of Business Administration, Chester, PA
BLPB hosted an online micro-symposium in advance of the Contract is King meeting. The wrap up from this robust discussion is available here.
Friday January 8th, from 1:30 pm – 3:15 pm join the SECTION ON BUSINESS ASSOCIATIONS AND LAW
AND ECONOMICS JOINT PROGRAM at the Sutton South, Second Floor, New York Hilton Midtown for a program titled:
"The Corporate Law and Economics Revolution Years Later: The Impact of Economics and Finance Scholarship on Modern Corporate Law".
The program will be moderated by Usha R. Rodrigues, University of Georgia School of Law, and feature the following speakers:
- Frank Easterbrook, Judge, U.S. Court of Appeals for the Seventh Circuit, Chicago, IL
- H. Kent Greenfield, Boston College Law School
- Roberta Romano, Yale Law School
- Tamara C. Belinfanti, New York Law School
- Kathryn Judge, Columbia University School of Law
- K. Sabeel Rahman, Brooklyn Law School
At the conclusion of the program, the officers of the Section on Business Associations would like to honor 13 faculty members
for their mentorship work throughout the year.
I hope to see many of you in New York soon!
January 6, 2016 in Anne Tucker, Conferences, Corporate Governance, Corporations, Delaware, Financial Markets, Joan Heminway, Law and Economics, Law School, Teaching, Unincorporated Entities | Permalink | Comments (0)
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)
Some day, I may tire of calling out courts (and others) that refer to limited liability companies (LLCs) as "limited liability corporations, but today is not that day. Looking back on 2015, I thought I'd take a quick look to see who the worst offenders were, starting with the state courts. I figured I'd start with Delaware.
As a state that is proud of its status as a leader as a key forum of choice for corporations, and Delaware has done well for uncorporations, as well, it seemed logical. The book Why Corporations Choose Delaware, written by Lewis S. Black, Jr., and printed and distributed by the Delaware Department of State, Division of Corporation, explains:
Delaware continues to be the favored state of incorporation for U.S. businesses. Delaware has been preeminent as the place for businesses to incorporate since the early 1900s, and its incorporation business, supplemented by the growth in numbers of such “alternative entities” as limited liability companies, limited partnerships and statutory trusts, continues to grow smartly.
And Delaware does have a generally well-informed and skilled judiciary. Still, even Delaware is not above calling an LLC a "limited liability corporation." Better than many jurisdictions, Westlaw reports that the state had just three cases in 2015 making that error, and no such mistakes were noted after March 2015. Not ideal, but not bad.
Here are some other states I reviewed for 2015 (again, using Westlaw):
- Michigan: 0
- Pennsylvania: 3
- Ohio: 4
- Florida: 5
- Nevada: 6
- California: 7
- New York: 7
- Texas: 8
Overall, state courts called LLCs "corporations" 105 times in 2015. Federal courts did the same 280 times in 2015. As such, it works out to just over once a day that some U.S. court is making this mistake.
Big picture, given the number of cases courts see each year, it may seem that these are small numbers. Not really. A search of federal courts for the term "limited liability company" turns up 2949 cases from 2015, which suggests that around 10% of cases (9.49%) referring to LLCs in some substantive manner made a reference to a "limited liability corporation." NOTE: If one searches for "LLC," the number of cases exceeds 10,000 for 2015, but I decided that a court taking the time to spell out "limited liability company" suggested that the entity choice had a heightened relevance to the case.
At the state level, the numbers are a little better. State courts referred to "limited liability companies" 1691 times in 2015. With 105 cases calling an LLC a corporation, that works out to just over 6% of the time. Not great, but a substantial improvement.
I admit this is not a scientific review of the data and I am making some assumptions, but the sheers number do, I think, support the notion that all our courts can do better on this issue. And give state courts credit -- although federal courts are often viewed the more prestigious courts, state courts are holding their own on this issue. Perhaps state courts are a little more careful because entities are generally (though not always) creatures of state law.
This is not, I am sure, just the courts. I suspect a lot of these errors come from attorneys who call LLCs corporations, then the court just take their lead. Still not okay, but I can imagine that some courts just follow the lead of those arguing the cases before them on such issues.
So, for 2016, I issue a challenge to all U.S. courts and the lawyers who practice in them: let's cut these numbers in half! (I'd like them to go to zero, but one needs to be somewhat realistic, right?)
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 firstname.lastname@example.org.
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)
A quick break from grading for my year-end report on the use of "limited liability corporation" instead if the correct "limited liability company" when referring to LLCs. Hold on to your hats.
Since December 31, 2014, Westlaw reports the following using the term "limited liability corporation":
- Cases View all 381
- Trial Court Orders View all 93
- Administrative Decisions & Guidance View all 169
- Secondary Sources View all 1,071
For example, Massachusetts has the following proposed legislation from, Sen. Tarr, Bruce (R), with the following summary: " An Act relative to limited liability corporation filing fees." 2015 Massachusetts Senate Bill No. 238, Massachusetts One Hundred Eighty-Ninth General Court. Of course, the proposed change is to the state's Limited Liability Company Act, Mass. Gen. Laws Ann. ch. 156C, § 12 (West 2015).
And one proposed change to "limited liability corporations" is not sufficient for that state this year. Rep. Arciero, James (D), similarly proposed "An Act relative to limited liability corporations dealing with children." 2015 Massachusetts House Bill No. 304, Massachusetts One Hundred Eighty-Ninth General Court. The sponsors of these bills show that the "limited liability corporation" mistake is, at least, bipartisan.
Section 104(k)(1) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. 9604(k)(1)) is amended-
. . . .(3) by adding at the end the following:'(I) an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of that Code;'(J) a limited liability corporation in which all managing members are organizations described in subparagraph (I) or limited liability corporations whose sole members are organizations described in subparagraph (I);'(K) a limited partnership in which all general partners are organizations described in subparagraph (I) or limited liability corporations whose sole members are organizations described in subparagraph (I); or'(L) a qualified community development entity (as defined in section 45D(c)(1) of the Internal Revenue Code of 1986).'.
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 17, 2015
A year ago today, President Obama shocked the world and enraged many in Congress by announcing normalization of relations with Cuba. A lot of the rest of the United States didn’t see this as much of a big deal, but here in Miami, ground zero for the Cuban exile community, this was a cataclysmic event. Now Miami is one of the biggest sources of microfinance for the island.
Regular readers of this blog know that I have been writing about the ethical and governance issues of doing business with the island since my 10-day visit last summer. I return to Cuba today on a second research trip to validate some of my findings for my second article on governance and compliance risks and to begin work on my third article related to rule of law issues, the realities of foreign direct investment and arbitration, what a potential bilateral or multilateral investment agreement might look like, and the role that human rights requirements in these agreements could play.
This is an interesting time to be visiting Cuba. The Venezuelan government, a large source of income for Cuba has suffered a humiliating defeat. Will this lead to another “special period” for the nation similar to the collapse of the Soviet Union? Major league baseball players who defected from Cuba just a few years ago announced a homecoming trip today. Yesterday, the US government authorized commercial flights to return to Cuba. The property claims for the multinationals and families who had homes and business confiscated by Castro are being worked out, or so some say.
Over the next few days in between touring Old Havana and fishing villages, I will learn from lawyers and professors discussing arbitration law in Cuba, foreign investment law 118/2014, tax and labor implications for the foreign investor, the 2015 amendments to the Cuban Assets Control Regulations, requirements for gaining government approval and forming state partnerships, and the Cuban banking system.
Strangely, I am excited. While I should be decompressing from the shock of reading student exams discussing “creepy tender offers” and “limited liability corporations,” I can’t wait to delve into the next phase of my research and practice my business Spanish at the bar of the Parque Central in La Habana. My internet access will be spotty and expensive but if you can think of any pressing questions I should ask leave a comment below or email me at email@example.com.
December 17, 2015 in Comparative Law, Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Food and Drink, Human Rights, International Business, International Law, Law Reviews, Marcia Narine, Religion, Writing | Permalink | Comments (0)