Thursday, January 19, 2017

The Importance of the Business Judgment Rule

Bernard Sharfman, a prolific author on corporate governance, has written his fourth article on the business judgment rule. The piece provides a thought-provoking look at a subject that all business law professors teach. He also received feedback from Myron Steele, former Chief Justice of the Delaware Supreme Court, and William Chandler III, former Chancellor of the Delaware Court of Chancery during the drafting process. I don’t think I will assign the article to my students, but I may take some of the insight when I get to this critical topic this semester. Sharfman has stated that he aims to change the way professors teach the BJR.

The abstract is below:

Anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the business judgment rule (Rule) is so important. To provide a better explanation of why this is so, this Article takes the approach that the Aronson formulation of the Rule is not the proper starting place. Instead, this Article begins by starting with a close read of two cases that initiated the application of the Rule under Delaware law, the Chancery and Supreme Court opinions in Bodell v. General Gas & Elec. By taking this approach, the following insights into the Rule were discovered that may not have been so readily apparent if the starting point was Aronson.

First, without the Rule, the raw power of equity could conceivably require all challenged Board decisions to undergo an entire fairness review. The Rule is the tool used by a court to restrain itself from implementing such a review. This is the most important function of the Rule. Second, as a result of equity needing to be restrained, there is no room in the Rule formulation for fairness; fairness and fiduciary duties must be mutually exclusive. Third, there are three policy drivers that underlie the use of the Rule. Protecting the Board’s statutory authority to run the company without the fear of its members being held liable for honest mistakes of judgment; respect for the private ordering of corporate governance arrangements which almost always grants extensive authority to the Board to make decisions on behalf of the corporation; and the recognition by the courts that they are not business experts, making deference to Board authority a necessity. Fourth, the Rule is an abstention doctrine not just in terms of precluding duty of care claims, but also by requiring the courts to abstain from an entire fairness review if there is no evidence of a breach in fiduciary duties or taint surrounding a Board decision. Fifth, stockholder wealth maximization (SWM) is the legal obligation of the Board and the Rule serves to support that purpose. The requirement of SWM enters into corporate law through a Board’s fiduciary duties as applied under the Rule, not statutory law. In essence, SWM is an equitable concept.

 

 

January 19, 2017 in Business Associations, Corporate Governance, Corporate Personality, Corporations, Delaware, Law School, Marcia Narine Weldon, Teaching, Writing | Permalink | Comments (1)

Tuesday, January 17, 2017

Oops: Oregon District Court Rule For LLCs that are Defined as Corporations

Here we go again. Oregon Federal District Court has a new rule on the books: 

In diversity actions, any party that is a limited liability corporation (L.L.C.), a limited liability partnership (L.L.P.), or a partnership must, in the disclosure statement required by Fed. R. Civ. P. 7.1, list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens. If any owner/member/partner of the L.L.C., L.L.P., or partnership is another L.L.C., L.L.P., or partnership, then the disclosure statement must also list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens.
U.S. Dist. Ct. Rules D. Or., Civ LR 7.1-1 (emphasis added). This rules is designed to assist with earlier disclosure to assist in determining diversity jurisdiction and other related issues. As the Practice Tip explains, 
The certification requirements of LR 7.1-1 are broader than those established in Fed. R. Civ. P. 7.1. The Ninth Circuit has held that, “[L]ike a partnership, an LLC is a citizen of every state of which its owners/members/partners are citizens.” Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). Early state citizenship disclosure will help address jurisdictional issues. Therefore, the disclosure must identify each and every state for which any owner/member/partner is a citizen. The disclosure does not need to include names of any owner/member/partner, nor does it need to indicate the number of owners/members/partners from any particular state.
The problem, of course, is the the rule defines and LLC as a limited liability corporation, while the Ninth Circuit case cited in the Practice Tip was referring to limited liability companies, which are different entities than corporations. The language from Johnson v. Columbia Properties is correct, but the Oregon District Court rule does not include traditional LLCs. It includes corporations, as per the rule's definition of LLC.  Corporations, of course, have shareholders, not members or partners, and for diversity jurisdiction purposes, "a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business." 28 U.S.C. § 1332 (2016).  Shareholders are not part of the equation. Cf. Hertz Corp. v. Friend, 559 U.S. 77, 88 (2010). 

For federal law purposes, it appears that the rule has excluded LLCs, despite the intent (and likely specific purpose) of the rule. Interestingly, Oregon law, has extended "unless context requires otherwise" the concept of LLCs to apply to partnership and corporate law. Oregon law provides: 
Unless the context otherwise requires, throughout Oregon Revised Statutes:
(1) Wherever the term “person” is defined to include both a corporation and a partnership, the term “person” shall also include a limited liability company. 
(2) Wherever a section of Oregon Revised Statutes applies to both “partners” and “directors,” the section shall also apply:
(a) In a limited liability company with one or more managers, to the managers of the limited liability company.
(b) In a limited liability company without managers, to the members of the limited liability company.
 (3) Wherever a section of Oregon Revised Statutes applies to both “partners” and “shareholders,” the section shall also apply to members of a limited liability company.
 
Beyond potentially leaving limited liability companies out of the disclosure requirement, the rule could have another effect. The way the rule reads, although it does not change the underlying jurisdictional law, it could be read to change disclosure requirements. Though not the only possible reading, one could certainly read "owner" to include shareholders, which would require a corporation to disclose the states of citizenship of all shareholders.  
 
This is pretty obviously an error in drafting, as the court almost certainly intended to define LLCs as "limited liability companies." See Or. Rev. Stat. § 63.002 (2015).  And the court almost certainly did not intend to compel disclosure of all shareholders' states of citizenship.  Nonetheless, courts generally read statutes for what they say, not for what they meant to say.  This might just get a little interesting.   

January 17, 2017 in Corporations, Joshua P. Fershee, Lawyering, Legislation, Litigation, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (0)

Friday, January 13, 2017

Controlling Corruption: Possibilities, Practical Suggestions & Best Practices

On Friday, I will present as part of the American Society of International Law’s two-day conference entitled Controlling Corruption: Possibilities, Practical Suggestions & Best Practices. The ASIL Conference is co-sponsored by the University of Miami School of Business Administration, the Business Ethics Program of the University of Miami School of Business Administration, UM Ethics Programs & the Arsht Initiatives, the Zicklin Center for Business Ethics Research, Wharton, University of Pennsylvania, Bentley University, and University of Richmond School of Law.

I am particularly excited for this conference because it brings law, business, and ethics professors together with practitioners from around the world. My panel includes:

Marcia Narine Weldon, St. Thomas University School of Law, “The Conflicted Gatekeeper: The Changing Role of In-House Counsel and Compliance Officers in the Age of Whistle Blowing and Anticorruption Compliance”

Todd Haugh, Kelley School of Business, Indiana University, “The Ethics of Intercorporate Behavioral Ethics”

Shirleen Chin, Institute for Environmental Security, Netherlands, “Reducing the Size of the Loopholes Caused by the Veil of Incorporation May lead to Better Transparency”

Edwin Broecker, Quarles &Brady LLP, Indiana,& Fernanda Beraldi Cummins, Inc, Indiana, “No Good Deed Goes Unpunished: Possible Unintended Consequences of Enforcing Supply Chain Transparency”

Stuart Deming, Deming PLLC, Michigan, “Internal Controls and Compliance Programs”

John W. Fanning, Kroll Compliance, “Lessons from ‘Sully’: Parallels of Flight 1549 and the Path to Compliance and Organizational Excellence”

I will discuss some of the same themes that I blogged about here last July related to how the Department of Justice Yates Memo (requiring companies to turn over culpable individuals in order to get cooperation credit) and to a lesser extent the SEC Dodd-Frank Whistleblower program may alter the delicate balance of trust in the attorney-client relationship. Additionally, I will address how President-elect Trump’s nomination of Jay Clayton may change the SEC’s FCPA enforcement priorities from pursuing companies to pursuing individuals, and how that will change corporate investigations. If you’re in Miami on Friday the 13th and Saturday the 14th, please consider attending the conference.

January 13, 2017 in Behavioral Economics, Compliance, Conferences, Corporate Governance, Corporations, Current Affairs, Ethics, International Business, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)

Thursday, January 5, 2017

Can Sustainability Issues Ever Be Material to Investors? SASB Says Yes

As regular readers of this blog know, I am skeptical of many disclosure regimes, particularly those related to conflict minerals. I am, however, a fan of the Sustainability Accounting Standard Board’s (SASB's) efforts to streamline the disclosure process and provide industry-specific metrics that tie into accepted definitions of materiality.

Dr. Jean Rogers, the CEO and Founder of SASB, presented at the Association of American Law Schools yesterday with other panelists discussing the pros and cons of environmental, social, and governance disclosures. To prove SASB’s case that investors care about sustainability, Dr. Rogers noted that in 2016, sustainable investment strategies came into play in one out of every five dollars under professional management. She cited a number of key sustainability initiatives that investors considered including the United Nations Principles for Responsible Investments ($59 trillion AUM), the Carbon Disclosure Project ($95 trillion AUM), the International Corporate Governance Network ($26 trillion AUM), and the Investor Network on Climate Risk ($13 trillion AUM).

Despite this interest, SASB argues, investors lack information that equips them with an apples to apples comparison on material information related to sustainability. What might be material in the beverage industry such as water usage for example, may not be material in another industry.

Dr. Rogers cited a 2014 PwC study reporting that 89% of global institutional investors request sustainability information directly from companies, 67% are more likely to consider ESG information if it is based on a common framework or standard, and 50% are “very likely” to sponsor or co-sponsor a shareholder proposal.

Many who criticize the disclosure regime talk about disclosure overload and challenge the assumptions that investors care as much about sustainability as they care about earnings per share. On the flip side, companies experience what SASB acknowledges is “questionnaire fatigue.” GE for example, indicated that 75 people took months to answer 650 questionnaires with no value to the customers, shareholders, or the environment.

SASB is an independent 501(c)(3) with a who’s who of heavy hitters on the board, including Michael Bloomberg, former SEC Chair Mary Schapiro, the CEO of CalSTRS, and the former Chair of the FASB, among others. The organization first started this initiative in 2011 right after I left in-house life, and I remember thinking that this was an idea whose time has come. Over the years, SASB has worked to develop specific standards for 79 industries in 10 sectors to be used in Form 10-K and 20-F. Although it is a voluntary process, the goal is to allow investors to look at peers across an industry with standards that those industries have helped to develop.The SASB standards integrate into MD & As and risk factors without the requirement of any new regulation.

Some criticize SASB’s mission and fear more disclosure could lead to more lawsuits from investors or consumers. I don’t share this fear, but companies such as Nestle have been sued for fraud and other state law claims after disclosure required under the California Transparency in Supply Chain Act.

I’m a fan of SASB’s work so far. I hope that more organizations and advocacy groups continue to provide constructive feedback. Eventually, using the SASB methodology should become an industry standard that provides value to both investors and the company. Take a look at their 2016 State of Disclosure Report for more information and to find out how you can contribute to the effort.

January 5, 2017 in Conferences, Corporate Governance, Corporations, CSR, Current Affairs, Marcia Narine Weldon | Permalink | Comments (0)

Tuesday, January 3, 2017

LLCs Are Still Not Corporations, Despite 1898 New Contrary Claims

Today is my annual check-up on the use of "limited liability corporation" in place of the correct “limited liability company.”  I did a similar review last year about this time, and revisiting the same search led to remarkable consistency. This is disappointing in that I am hoping for improvement, but at least it is not getting notably worse. 

Since January 1, 2016, Westlaw reports the following using the phrase "limited liability corporation":

  • Cases: 363 (last year was 381)
  • Trial Court Orders: 99 (last year was 93)
  • Administrative Decisions & Guidance: 172 (last year was 169)
  • Secondary Sources: 1116 (last year was 1071)
  • Proposed & Enacted Legislation: 148 (last year was 169)

As was the case last year, I am most distressed by the legislative uses of the phrase, because codifying the use of "limited liability corporation" makes this situation far murkier than a court making the mistake in a particular application. 

New York, for example, passed the following legislation:

Section 1. Subject to the provisions of this act, the commissioner of parks and recreation of the city of New York is hereby authorized to enter into an agreement with the Kids' Powerhouse Discovery Center Limited Liability Corporation for the maintenance and operation of a children's program known as the Bronx Children's Museum on the second floor of building J, as such building is presently constructed and situated, in Mill Pond Park in the borough of the Bronx. The terms of the agreement may allow the placement of signs identifying the museum.

NY LEGIS 168 (2016), 2016 Sess. Law News of N.Y. Ch. 168 (S. 5859-B) (McKINNEY'S).

This creates a bit of a problem, as Kids' Powerhouse Discovery Center Limited Liability Corporation does not exist.  The official name of the entity is as Kids' Powerhouse Discovery Center LLC and it is, according to state records, an LLC (not a corporation). Does this mean the LLC will have to re-form as a corporation so that the commissioner of parks and recreation has authority to act?  It would seem so.  On the one hand, it could be deemed an oversight, but New York law, like other states, makes clear that an LLC and a corporation are distinct entities. 

Several other states enacted legislation using “limited liability corporation” in contexts that clearly intended to mean LLCs.  Hawaii, West Virginia (sigh), Minnesota, Alabama, California, and Rhode Island were also culprits.  

There was one bit of federal legislation, too. The “Communities Helping Invest through Property and Improvements Needed for Veterans Act of 2016” or the “CHIP IN for Vets Act of 2016." PL 114-294, December 16, 2016, 130 Stat. 1504.  This act authorizes the Secretary of Veterans Affairs to carry out a pilot program in which donations of certain property (real and facility construction) donated by the following entities:

(A) A State or local authority.

(B) An organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and is exempt from taxation under section 501(a) of such Code.

(C) A limited liability corporation.

(D) A private entity.

(E) A donor or donor group.

(F) Any other non-Federal Government entity.

I have to admit, it is not at all clear to me why one needs any version of (C) if one has (D) as an option.  Nonetheless, to the extent it was not intended to be redundant of (D), part (C) would appear to be incorrect.  

I addition, I'd be remiss not to note the increase to 1116 uses in secondary sources last year, though only 43 were in law reviews and journals.  That part is, at least a little, encouraging.

Last year, I wished “everyone a happy and healthy New Year that is entirely free of LLCs being called ‘limited liability corporations.’”  This year, I have learned to temper my expectations.  I still wish everyone a happy and healthy New Year, but as to the use of “limited liability corporations” I am hoping to reduce the uses by half in all settings for 2017, and I hope at least three legislatures will fix errors in their existing statutes. That seems more reasonable, if not any more likely. 

January 3, 2017 in Corporate Personality, Corporations, Joshua P. Fershee, Legislation, LLCs, Partnership | Permalink | Comments (0)

Tuesday, December 27, 2016

New Book from Martin & Kunz: When the Levees Break: Re-visioning Regulation of the Securities Markets

My friend and colleague, Jena Martin's coauthored book (which she wrote with another West Virginia University professor Karen Kunz) has just been released: When the Levees Break: Re-visioning Regulation of the Securities Markets. I have just started the book, and I look forward to working my way through it. I cannot say Prof. Martin and I always see eye to eye on things (though we often do), she always has a thoughtful and interesting take. It's been an interesting read so far, and I recommend taking a look. Following is a synopsis of the book: 

The stock markets. Whether you invest or not, the workings of the stock market almost certainly touch your life. Either through your retirement fund, your mutual fund or just because you work for a place that invests (or is invested in)—the reach of the securities markets is expanding, like an ever growing tidal wave. 

This book discusses what happens when that wave hits the shore. Specifically, this book argues that, given the mounting deluge from misplaced regulation, fast-paced technology, and dominant financial players, the current US regulatory structure is woefully inadequate to hold back the tide. 

Using vivid imagery and plain language, Karen Kunz and Jena Martin take the problems involved in regulating the complex world of securities head on. Examining everything from the rise of technology and the role of hedge funds to our bloated agency system, Kunz and Martin argue that the current structure is doomed to fail and, when it does, the consequences will be disastrous. 

Sending out a call to action, the authors also offer a bold vision for how to fix the mess we’ve made—not by tinkering around the edges—but instead by building a whole new structure, one that can withstand the next storm that is sure to come.

December 27, 2016 in Corporate Finance, Corporations, Joshua P. Fershee, Securities Regulation | Permalink | Comments (0)

Wednesday, December 21, 2016

Delaware Supreme Court to Rehear Appraisal Action

In July, Delaware Chancellor Andre Bouchard found that payday lender DFC Global Corp was sold too cheaply to private equity firm Lone Star Funds in 2014.  Chancellor Bouchard held that four DFC shareholders were entitled to $10.21 a share at the time of the deal, or about 7 percent above the $9.50 per share deal price that was approved by a majority of DFC shareholders.

A Gibson Dunn filing related to the DFC case on appeal before the Delaware Supreme Court sheds light on the appraisal process in Delaware.  The claim is the Chancellor Bouchard manipulated the calculations to reach the $10.21 prices.  The full brief is available here, but this summary might provide easier reading.  Reuters reports:

Bouchard made a single clerical error that led him to peg DFC’s fair value at $10.21 per share.

DFC’s lawyers at Gibson Dunn & Crutcher spotted the mistake and asked Chancellor Bouchard to fix the erroneous input. If he did, the firm said, he’d come up with a fair value for the company that was actually lower than the price Lone Star paid. The chancellor agreed to recalculate – but in addition to fixing the mistaken input, Bouchard adjusted DFC’s projected long-term growth rate way up, to a number even higher than the top of the range proposed by the plaintiffs’ expert. The offsetting changes brought the recalculated valuation back in line with Chancellor Bouchard’s original, mistaken analysis.

Gibson Dunn is now arguing at the Delaware Supreme Court that the chancellor’s tinkering shows just why appraisal litigation – in which shareholders dissatisfied with buyout prices ask Chancery Court to come up with a fair price for their stock – has become a big problem for companies trying to sell themselves.

Last week The Chancery Daily reported on a December 16th appraisal case, Merion Capital, where Chancellor Laster held that a fair price was paid. The questions remains what is the significance of deal price and what is the significance of expert opinion shifting these technical cases in or outside of fair value?

-Anne Tucker

 

December 21, 2016 in Anne Tucker, Corporate Finance, Corporations, Delaware, M&A, Shareholders | Permalink | Comments (0)

Monday, December 19, 2016

The Conflicting Interests of the POTUS through a Corporate Lawyer's Eyes

In her post on Saturday, co-blogger Ann Lipton offered observations about possible legal issues resulting from the President-Elect's tweets regarding public companies.  She ends her post with the following:

So, it's all a bit unsettled. Let's just say these and other novel legal questions regarding the Trump administration are sure to provide endless fodder for academic analysis in the coming years.

Probably right.

Today, I take on a somewhat related topic.  I briefly explore the President-Elect's conflicting interests through the lens of a corporate law advisor.  For the past few weeks, the media (see, e.g., here and here and here) and many folks I know have been concerned about the potential for conflict between the President-Elect's role as the POTUS, public investor and leader of the United States, and his role as "The Donald," private investor and leader of the Trump corporate empire.

The existence of a conflicting interest in an action or transaction is not, in and of itself, fatal or even necessarily problematic.  In a number of common situations, fiduciaries have interests in both sides of a transaction.  For example, a business founder who serves as a corporate director and officer may lease property she owns to the corporation.  What matters under corporate law is whether the fiduciary's participation in the transaction on both sides results in a deal made in a fully informed manner, in good faith, and in the bests interests of the corporation.  Conflicting interests raise a concern that the fiduciary is or may be acting for the benefit of himself, rather than for and in the best interest of the corporation. 

Corporate law generally provides several possible ways to overcome concerns that a fiduciary has breached her duty because of a conflicting interest in a particular action or transaction:

  • through good faith, fully informed approval of the action or transaction (e.g., after disclosure of information about the nature and extent of the conflicts) by either the corporation's shareholders or members of the board of directors who are not interested in the transaction; and
  • through approval of a transaction that is entirely fair--fair as to process and price. 

See, e.g., Delaware General Corporation Law Section 144.  Yet, if I believe what I read, no similar processes exist to combat concerns about actions or transactions in which the POTUS has or may have conflicting interests.  In particular, to the extent one does not already exist, should a disinterested body of monitors be identified or constituted to receive information about actual and potential conflicting interests of the POTUS and approve the action or transaction involving the conflicting interests?  Perhaps the Office of Government Ethics ("OGE") already has something like this in place . . . .  If it does, then both the public media and I are underinformed about it.  While there seems to be OGE guidance on the President-Elect's nominees for executive branch posts (see, e.g.here and here) and on overall executive branch standards of conduct (see here), I have not found or read about anything applicable to the President-Elect or POTUS.

In making these observations, I recognize that our federal government is different in important ways from the corporation.  I also understand that the leadership of a country/nation is different from the leadership of a corporation.  Having said that, however, conflicting interests can have similar deleterious effects in both settings.  The analogy I raise here and this overall line of inquiry may be worth some more thought . . . .

December 19, 2016 in Ann Lipton, Business Associations, Corporate Governance, Corporations, Current Affairs, Family Business, Joan Heminway | Permalink | Comments (8)

Thursday, December 15, 2016

What happens when a company is as powerful as a country?

This post is not about politics, although it does concern President-elect Trump's cabinet pick, ExxonMobil head, Rex Tillerson. I first learned about Tillerson during some research on business and human rights in the extractive industries in 2012. I read the excellent book, "Private Empire" by Pultizer-prize winner Steve Coll to get insight into what I believe is the most powerful company in the world.

Although Coll spent most of his time talking about Tillerson's predecessor, Lee Raymond, the book did a great job of describing the company's world view on climate change, litigation tactics, and diplomatic relations. Coll writes, “Exxon’s far flung interests were at times distinct from Washington’s.” The CEO “did not manage the corporation as a subordinate instrument of American foreign policy; his was a private empire.” Raymond even boasted, “I am not a U.S. company and I don’t make decisions based on what’s good for the U.S.” Indeed, the book describes how ExxonMobil navigated through Indonesian guerilla warfare, dealt with kleptocrats in Africa, and deftly negotiated with Vladmir Putin and Hugo Chavez. 

Before I read the book, I knew that big business was powerful--after all I used to work for a Fortune 500 company. But Coll's work described a company that was in some instances more influential to world leaders than the UN, the US State Department, or the World Bank. I don't know if Trump has read the book, but no doubt he knows about the reach of Tillerson's power. I won't comment about whether this pick is good for the country. I will say that this choice is not outrageous or even surprising given Trump's stated view of what he wants for America. The key will be for Tillerson, if he's confirmed, to use the skills he has honed working for ExxonMobil for the country. 

If you have time after grading for a really good read (it's a fast 700 pages), pick up the book. Coll's view on the Tillerson nomination is available here.

December 15, 2016 in Books, Corporations, Current Affairs, Human Rights, International Business, Marcia Narine Weldon | Permalink | Comments (0)

Wednesday, December 14, 2016

Scholarship Highlight: David Min on Corporate Political Activity

UC Irvine law professor, David Min, has a new article titled, Corporate Political Activity and Non-Shareholder Agency Costs, in theYale Journal on Regulation.  Professor Min examines corporate constitutional law  in recent examples such as Citizens United, through the lens of nonshareholder dissenters.  

The courts have never considered the problem of dissenting nonshareholders in assessing regulatory restrictions on corporate political activity. This Article argues that they should. It is the first to explore the potential agency costs that corporate political activity creates for nonshareholders, and in so doing, it lays out two main arguments. First, these agency costs may be significant, as I illustrate through several case studies. Second, neither corporate law nor private ordering provides solutions to this agency problem. Indeed, because the theoretical arguments for shareholder primacy in corporate law are largely inapplicable for corporate political activity, corporate law may actually serve to exacerbate the agency problems that such activity creates for non-shareholders. Private ordering, which could take the form of contractual covenants restricting corporate political activity, also seems unlikely to solve this problem, due to the large economic frictions facing such covenants. These findings have potentially significant ramifications for the Court’s corporate political speech jurisprudence, particularly as laid out in Bellotti and Citizens United. One logical conclusion is that these decisions, regardless of their constitutional merit, make for very bad public policy, insofar as they preempt much-needed regulatory solutions for reducing non-shareholder agency costs, and thus may have the effect of inhibiting efficient corporate ordering and capital formation. Another outgrowth of this analysis is that nonshareholder agency costs may provide an important rationale for government regulation of corporate political activity.

In examining corporate political activity, Professor Min, expertly blends and connects agency theory to corporate theories of the firm.  He rebuts traditional arguments against nonshareholder constituents such as residual interest holders (shareholders), the role of private ordering and provides 3 detailed case studies illustrating the costs of CPA on nonshareholder constituents. Among the proposals and options explored to mitigate these agency costs, Professor Min suggests that the existence of agency costs to nonshareholders--an area heretofore unexamined in corporate law--could justify a regulatory intervention.

 

AT

 

December 14, 2016 in Anne Tucker, Constitutional Law, Corporate Personality, Corporations, Current Affairs, Research/Scholarhip | Permalink | Comments (0)

Friday, December 9, 2016

Faith and Work in Business

Thursday, December 8, 2016

Trump as a Teaching Tool for Business Associations

A friend of mine is considering teaching his constitutional law seminar based almost entirely on current and future decisions by the President-elect. I would love to take that class. I thought of that when I saw this article about Mr. Trump’s creative use of Delaware LLCs for real estate and aircraft. Here in South Florida, we have a number of very wealthy residents, and my Business Associations students could value from learning about this real-life entity selection/jurisdictional exercise. Alas, I probably can’t squeeze a whole course out of his business interests. However, I am sure that using some examples from the headlines related to Trump and many of his appointees for key regulatory agencies will help bring some of the material to life.

Happy Grading!

December 8, 2016 in Business Associations, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Delaware, LLCs, Marcia Narine Weldon, Teaching | Permalink | Comments (1)

Monday, November 28, 2016

Last Class? Coggins to the Rescue!

Today, I share a quick teaching tip/suggestion.

I taught my last classes of the semester earlier today.  For my Business Associations class, which met at 8:00 am, I was looking for a way to end the class meeting, tying things from the past few classes up in some way.  I settled on using the facts from a case that I used to cover in a former casebook that is not in my current course text:  Coggins  et al. v. New England Patriots Football Club, Inc., et al.  Here are the facts I presented:

  • New England Patriots Football Club, Inc. (“NEPFC”), the corporation that owns the New England Patriots, has both voting and nonvoting shares of stock outstanding.
  • The former president and owner of all of the voting shares of NEPFC, Sullivan, takes out a personal loan that only can be repaid if he owns all of the NEPFC stock outstanding.
  • The board and Sullivan vote to merge NEPFC with and into a new corporation in which Sullivan would own all the shares.
  • In the merger, holders of the nonvoting shares receive $15 per share for their common stock cashed out in the merger.

From this, I noted that three legal actions are common when shareholders are discontented with a cash-out merger transaction: appraisal actions, derivative actions for breach of fiduciary duty, and securities fraud actions.  Shareholders in NEPFC brought all three types of action.  (Footnote 9 of the Coggins case and the accompanying text explain that.)  

Having just covered business combinations, including approval and appraisal rights, and wanting to address some new information about the process of derivative litigation, the facts from the case worked well.  I am sure there are other cases or materials that also could have done the job.  (Feel free to leave suggestions in the comments.)  But adding a little football and conflicting interests to the last class seemed like the right idea . . . .

 

 

November 28, 2016 in Business Associations, Corporations, Joan Heminway, M&A, Teaching | Permalink | Comments (0)

Thursday, November 24, 2016

Can "Doing Good" Pay Off for Carnival Cruise Line?

Happy Thanksgiving from the Dominican Republic. I'm blogging from the Fathom Adonia, Carnival's fledgling social impact cruise line. I've spent the past few days in Puerto Plata teaching English in schools and local communities. Other passengers worked on reforestation projects, built water filtration systems, installed concrete floors in homes, worked with women on cocoa farms, and learned how to recycle paper with local workers. Passengers can  also do typical excursions such as zip lining and snorkeling, or can lounge around in the $80 million dollar Amber Cove built up like a resort. But most people come on this cruise for the volunteer activities and don't expect frills (our bus got stuck in the mud and we needed pig farmers in a truck to help push us out on the way back from teaching English 75 minutes outside of town). Fathom has restaurants, a spa, dancing, bars, onboard activities such as wine and paint, extremely friendly staff, and enthusiastic, young "impact guides" but no Vegas-style shows and only carries approximately 700 passengers.

Carnival has banked on profiting from people's stated desire to do good in the world. Lots of surveys support this idea in theory. However, as regular readers of this blog know, I have written several posts skeptical of those who claim to care about corporate social responsibility, but choose to buy based on convenience, quality, and price. I have also repeatedly and publicly acknowledged that I am one of those people who selectively boycotts products and vendors. Although the idea of a social impact cruise line excited me, I wondered about whether It would succeed when I first heard of it because most people I know want to relax and not work on a vacation.

Unfortunately, it appears that Carnival's bet may not be paying off. Yesterday, the Miami Herald had an article discussing the future of the social impact product. Apparently, the Fathom, which also goes to Cuba, may stop doing these impact cruises, although Carnival promises that passengers will have "voluntourism" opportunities on its other cruise lines. Carnival also plans to continue its trips to Cuba on a different line starting next summer.

This change in direction, if true, does not surprise me. The Fathom trips to the Dominican Republic have never sold out, even at prices that are one third the price of the Cuba trip- my husband and I paid less than $1000 between the two of us for a seven day cruise, and were upgraded because they had capacity. We learned from one of Fathom's partners on the ground that there have been layoffs in Puerto Plata  because they don't have enough volunteers traveling on the ship. Fathom has even had to cancel some of the sailings altogether. 

Although the trips have not been popular with the masses, everyone that I have met on this trip has raved about their activities (particularly the English teaching) and the interactions with the warm Dominican people. Carnival may have hoped that word of mouth would suffice and that they wouldn't need heavy marketing. It's possible that Carnival believed all of the surveys of millennials who claim they want to change the world. Either way, it appears that there won't be a cruise line dedicated to social impact after next summer. That will be a huge loss for Puerto Plata and for those who want this kind of experience and are willing to pay to work with reputable, caring organizations.

I'm pulling for Fathom to survive in some form and for this idea to spread to other cruise lines. My husband and I both found that teaching English to 5th graders in a crowded classroom in a rain storm was the best Thanksgiving we have ever spent. When the students and volunteers spoke about the expeierence at the end of today's tutoring, there wasn't a dry eye in the house. That may not be profitable for Carnival, but it was priceless for those of us who experienced it. 

November 24, 2016 in Corporations, CSR, Marcia Narine Weldon, Social Enterprise, Travel | Permalink | Comments (0)

Thursday, November 10, 2016

Eleven Corporate Governance and Compliance Questions for President-Elect Trump

I have been on hiatus for a few weeks, and had planned to post today about the compliance and corporate governance issues related to Wells Fargo. However, I have decided to delay posting on that topic in light of the unexpected election results and how it affects my research and work.

I am serving as a panelist and a moderator at the ABA's annual Labor and Employment meeting tomorrow. Our topic is Advising Clients in Whistleblower Investigations. In our discussions and emails prior to the conference, we never raised the election in part because, based on the polls, no one expected Donald Trump to win. Now, of course, we have to address this unexpected development in light of the President-elect's public statements that he plans to dismantle much of President Obama's legacy, including a number of his executive orders.

President-elect Trump's plan for his first 100 days includes, among other things: a hiring freeze on all federal employees to reduce federal workforce though attrition (exempting military, public safety, and public health); a requirement that for every new federal regulation, two existing regulations must be eliminated; renegotiation or withdrawal from NAFTA; withdrawal from the Trans-Pacific Partnership; canceling "every unconstitutional executive action, memorandum and order issued by President Obama; and a number of rules related to lobbyists and special interests.

Plaintiffs' lawyers I have spoken to at this conference so far are pessimistic that standards will become even more pro-business and thus more difficult to bring cases. That's probably true. However,  I have the following broader business-law related questions:

  1. What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minumum, may not be out of the question.
    2. What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency?
    3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
    4. How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
    5. In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
    6. How will a more conservative Supreme Court deal with the business cases that will appear before it?
    7. Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
    8. What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
    9. What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
    10. What happens to the Public Company Accounting Board, which has had an interim director for several months?
    11. Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?

Of course, there are many more questions and I have no answers but I will be interested to see how future announcements affect the world financial markets, which as of the time of this writing appear to have calmed down.

November 10, 2016 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Law, Legislation, Marcia Narine Weldon, Securities Regulation, White Collar Crime | Permalink | Comments (2)

Wednesday, November 9, 2016

Director Primacy and the BJR: Reconciling Strine v. Signatories

Prof. Bainbridge the other day commented on the following, which is item 10 from the Modern Corporation Statement on Company Law (available here):  

Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.

Bainbridge take a contrary position, citing Delaware Supreme Court Chief Justice Strine, who says, "a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare." Strine further notes that "advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion."

I read these positions as consistent, though I think the scope of what is permissible is certainly implicitly different. I agree that Strine is right to say that "directors must make stockholder welfare their sole end."  But I also agree that "disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity." My read of the business judgment rule (BJR) is that, absent fraud, illegality, or self-dealing, courts should abstain from reviewing director decisions, meaning that the directors decide what"stockholder welfare" means and what ends to use in pursuit of that end.  That is, I think it's wrong to say "directors generally are not under a legal obligation to maximise profits for their shareholders," but I do think directors usually get to decide what it means to "maximise profits." 

I am a firm believer in director primacy, and I believe directors should have a lot of latitude in their choices, subject to the BJR requirements.  Thus, if a plaintiff can show self dealing (like maybe via giving to a "pet charity" described in A.P. Smith v. Barlow), then the BJR might be rebutted (if the gift is inconsistent with state law and/or constituency statutes).   But otherwise, it's the board's call. Furthermore, where a company builds its brand and acts consistently with its prior actions, that might expand the scope of permissible behavior for a company (i.e., not be evidence of self-dealing).  Thus, companies like Tom's Shoes and Ben and Jerry's should be able to continue to operate as they always have when they bring in new directors, because what might look like self-dealing in another context, is consistent with the business model.  

eBay v. Newmark (pdf here) is often used to rebut that notion, but I still maintain that case is really about self-dealing  -- the actions taken by Jim and Craig were impermissible not because they were working toward "purely philanthropic ends," but because they took actions that benefited themselves to the detriment of their minority shareholder, such as use of poison pills).  

Anyway, I am still a believer in the BJR as abstention doctrine.  Show me some fraud, illegality, or self-dealing or I'm leaving the board's decision alone. 

November 9, 2016 in Corporate Governance, Corporations, CSR, Delaware, Joshua P. Fershee | Permalink | Comments (1)

Tuesday, November 8, 2016

Teaching Corporate Fiduciary Duty Law; Teaching Complexity

Each year, I rethink how I teach fiduciary duties in the corporate law context in my Business Associations course.  My learning objectives for the students are both limited and involved.  On the one hand, there's little room in my three-credit-hour course for a nuanced understanding of all of the contexts in which corporate fiduciary duty claims typically occur.  In particular, I have determined to leave out the public company mergers and acquisitions context almost completely.  On the other hand, I find myself juggling uncertain classifications of duty components, explanations of seemingly mismatched standards of conduct and liability, and judicial review standards in and outside the Delaware corporate law context.  It's a handful.  It's teaching complexity.

Of course, fiduciary duty is not the only complex matter that one must teach in Business Associations.  But it is, for me, one of the topics I am least confident that I "get right" in my interactions with students in and outside the classroom.  Accordingly, as I again head toward the end of the semester, I find myself wondering whether I could have done--or could do--more with the students in my Business Associations course this semester.  This leads me to ask my fellow business law professors (that's you!) whether any of you have materials, teaching techniques, exercises (in-class or out-of-class), etc. that you find to be particularly effective in educating law students the basics and nuances of corporate fiduciary duties.  

So, have at it!  Share your corporate fiduciary duty teaching successes in the comments, if you would.  I am all ears.  I know that what you report will benefit me and others (including our students), and I hope that your comments will generate a continuing conversation . . . .

 

November 8, 2016 in Business Associations, Corporate Governance, Corporations, Joan Heminway | Permalink | Comments (7)

Wednesday, November 2, 2016

Ripped from the Headlines: GE & Baker Hughes Proposed Merger

General Electric (GE)  and Baker Hughes (BHI) announced on Monday, October 31st, a proposed merger to combine their oil and gas operations.  GE and Baker Hughes will form a partnership, which will own a publicly-traded company.   GE shareholders will own 62.5% of the "new" partnership, while Baker Hughes shareholders will own 37.5% and receive a one-time cash dividend of $17.50 per share.  The new company will have 9 board of director seats:  5 from GE and 4 from Baker Hughes.  GE CEO Jeff Immelt will be the chairman of the new company and Lorenzo Simonelli,  CEO of GE Oil & Gas, will be CEO. Baker Hughes CEO Martin Craighead will be vice chairman.

Reuters is describing the business synergies between the two companies as leveraging GE's oilfield equipment manufacturing ("supplying blowout preventers, pumps and compressors used in exploration and production") and data process services with Baker Hughes' expertise in " horizontal drilling, chemicals used to frack and other services key to oil production."

Baker Hughes had previously proposed a merger with Halliburton (HAL), which failed in May, 2016, after the Justice Department filed an antitrust suit to block the merger. Early analysis suggests that the proposed GE & Baker Hughes will pass regulatory scrutiny because of the limited business overlap of GE and Baker Hughes.

As I plan to tell my corporations students later today: this is real life!  A high-profile, late-semester merger of two public companies is a wonderful gift.  The proposed GE/Baker Hughes merger illustrates, in real life, concepts we have been discussing (or will be soon) like partnerships, the proxy process, special shareholder meetings, SEC filings, abstain or disclose rules, and, of course, mergers.

 

Continue reading

November 2, 2016 in Anne Tucker, Corporate Finance, Corporations, Current Affairs, Law School, M&A, Partnership, Securities Regulation | Permalink | Comments (0)

Tuesday, November 1, 2016

NY Court Refuses to Bail Out Sophisticated Party Via Veil Piercing

I often complain about courts and their unwillingness to require plaintiffs to make appropriate claims about veil piercing in the context of limited liability companies (LLCs).  That is, courts too often allow plaintiffs to seek to "pierce the corporate veil" of LLCs, which (of course) do not have corporate veils.  They have limited liability veils, but they are decidedly not corporate.  I will complain about that again, but in the process, I will note that the court does a great job of general veil piercing analysis that is worthy noting.  
 
In Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, on Oct. 20, 2016, the Supreme Court, Appellate Division, First Department, New York, decided to dismiss a veil piercing claim based on what I see as very sound reasoning.  I would have like the court to note it was not a corporation, and instead an LLC, that the plaintiff sought to pierce, but nonetheless, I think the court got the rest right.  The court found that the plaintiff failed to plead a sufficient veil-piercing claim and explained, "both parties were very sophisticated, and negotiated in minute detail all aspects of their agreements to build [defendant] using innovative technology. That the project failed does not lead to a veil-piercing claim, especially since plaintiff failed to identify the alleged fraud or other wrongdoing. Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, No. 1352, 2016 WL 6106652, at *1 (N.Y. App. Div. Oct. 20, 2016) (emphasis added). 
 
The court continued:
Far from alleging that FCRC used B2 Owner to perpetrate a fraud, plaintiff, a sophisticated party, admits that it knowingly entered into the CM Agreement with B2 Owner, an entity formed to construct the project. Nowhere in the complaint does plaintiff allege that it believed it was contracting with or had rights vis-à-vis FCRC or any entity other than B2 Owner. Indeed, plaintiff could have negotiated for such rights. Having failed to do so, plaintiff cannot now claim that it was tricked into contracting with B2 owner only and thus should be allowed to assert claims against FCRC . . . . Thus, the veil-piercing claim should be dismissed.

Id. at *7.
 
I think this is spot on. Far too often courts seem to give credence to veil-piercing claims that seem predicated primarily on a lack of ability to pay or the fact that there is a financially sound parent company.  That is simply not the standard.  This is not true only for sophisticated parties, but it is especially true of them. Although I feel badly for an entity that is not able to recover all it is owed, I do not think courts should provide what amounts to a guarantee from another entity when such resources were neither promised nor bargained for in the contracting process. Judge Acosta got this part right.  Now if he would just be sure to distinguish veil piercing by entity ... 
  
 
 

November 1, 2016 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Sunday, October 23, 2016

AALS 2017 Annual Meeting: Overview of Socio-Economics Programs

 

The Association of American Law Schools (AALS) Annual Meeting will be held Tuesday, January 3 – Saturday, January 7, 2017, in San Francisco.  Readers of this blog who may be interested in programs associated with the AALS Section on Socio-Economics & the Society of Socio-Economics should click on the following link for the complete relevant schedule: 

Download Socio-Economic AALS Participants + Descriptions 161018

Specifically, I'd like to highlight the following programs:

On Wednesday, Jan. 4:

9:50 - 10:50 AM Concurrent Sessions:

  1. The Future of Corporate Governance:
    How Do We Get From Here to Where We Need to Go?
    andre cummings (Indiana Tech)                            Steven Ramirez (Loyola - Chicago)
    Lynne Dallas (San Diego) - Co-Moderator        Janis Sarra (British Columbia)
    Kent Greenfield (Boston College)                        Faith Stevelman (New York)
    Daniel Greenwood (Hofstra)                                 Kellye Testy (Dean, Washington)
    Kristin Johnson (Seton Hall)                                 Cheryl Wade (St. John’s ) Co-Moderator
    Lyman Johnson (Washington and Lee)
  2. Socio-Economics and Whistle-Blowers
    William Black (Missouri - KC)                                 Benjamin Edwards (Barry)
    June Carbone (Minnesota) - Moderator             Marcia Narine (St. Thomas)

1:45 - 2:45 PM Concurrent Sessions:

1. What is a Corporation?
Robert Ashford (Syracuse) Moderator                             Stefan Padfield (Akron)
Tamara Belinfanti (New York)                                             Sabeel Rahman (Brooklyn)
Daniel Greenwood (Hofstra)

On Thursday, Jan. 5:

3:30 - 5:15 pm:
Section Programs for New Law Teachers
Principles of Socio-Economics
in Teaching, Scholarship, and Service
Robert Ashford (Syracuse)                                                     Lynne Dallas (San Diego)
William Black (Missouri - Kansas City)                             Michael Malloy (McGeorge)
June Carbone (Minnesota)                                                     Stefan Padfield (Akron)

On Saturday, Jan. 7:

10:30 am - 12:15 pm:
Economics, Poverty, and Inclusive Capitalism
Robert Ashford (Syracuse)                                                     Stefan Padfield (Akron)
Paul Davidson (Founding Editor                                          Delos Putz (San Francisco)
Journal of Post-Keynesian Economics)                             Edward Rubin (Vanderbilt)
Richard Hattwick (Founding Editor,
Journal of Socio-Economics)

October 23, 2016 in Business Associations, Conferences, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Financial Markets, Law and Economics, Law School, Marcia Narine Weldon, Research/Scholarhip, Stefan J. Padfield, Teaching | Permalink | Comments (0)