Wednesday, August 16, 2017

The CEOs of Corporate America vs. The CEO of America

Business leaders probably didn’t think the honeymoon would be over so fast. A CEO as President, a deregulation czar, billionaires in the cabinet- what could possibly go wrong?

When Ken Frazier, CEO of Merck, resigned from one of the President’s business advisory councils because he didn’t believe that President Trump had responded appropriately to the tragic events in Charlottesville, I really didn’t think it would have much of an impact. I had originally planned to blog about How (Not) To Teach a Class on Startups, and I will next week (unless there is other breaking news). But yesterday, I decided to blog about Frazier, and to connect his actions to a talk I gave to UM law students at orientation last week about how CEOs talk about corporate responsibility but it doesn’t always make a difference. I started drafting this post questioning how many people would actually run to their doctors asking to switch their medications to or from Merck products because of Frazier’s stance on Charlottesville. Then I thought perhaps, Frazier’s stance would have a bigger impact on the millennial employees who will make up almost 50% of the employee base in the next few years. Maybe he would get a standing ovation at the next shareholder meeting. Maybe he would get some recognition other than an angry tweet from the President and lots of news coverage.

By yesterday afternoon, Under Armour’s CEO had also stepped down from the President’s business advisory council. That made my draft post a little more interesting. Would those customers care more or less about the CEO's position? By this morning, still more CEOs chose to leave the council after President Trump’s lengthy and surprising press conference yesterday. By that time, the media and politicians of all stripes had excoriated the President. This afternoon, the President disbanded his two advisory councils after a call organized by the CEO of Blackstone with his peers to discuss whether to proceed. Although Trump “disbanded” the councils, they had already decided to dissolve earlier in the day.

I’m not teaching Business Associations this semester, but this is a teachable moment, and not just for Con Law professors. What are the corporate governance implications? Should the CEOs have stayed on these advisory councils so that they could advise this CEO President on much needed tax, health care, immigration, infrastructure, trade, investment, and other reform or do Trump’s personal and political views make that impossible? Many of the CEOs who originally stayed on the councils believed that they could do more for the country and their shareholders by working with the President. Did the CEOs who originally resigned do the right thing for their conscience but the wrong thing by their shareholders? Did those who stayed send the wrong message to their employees  in light of the Google diversity controversy? Did they think about the temperament of their board members or of the shareholder proposals that they had received in the past or that they were expecting when thinking about whether to stay or go? 

Many professors avoid politics in business classes, and that’s understandable because there are enough issues with coverage and these are sensitive issues. But if you do plan to address them, please comment below or send an email to mweldon@law.miami.edu.

August 16, 2017 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Law School, Marcia Narine Weldon, Shareholders, Teaching | Permalink | Comments (1)

Tuesday, August 15, 2017

Poor LLC Language Leads to Poor LLC Doctrine (And Unnecessary Veil Piercing)

Earlier this week, Professor Bainbridge posted California court completely bollixes up business law nomenclature, discussing Keith Paul Bishop's post on Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017).  The good professor, noting (with approval) what he calls my possibly "Ahabian" obsession with courts and their LLC references, says that "misusing terminology leads to misapplied doctrine."  Darn right.

To illustrate his point, let's discuss a 2016 Colorado case that manages to highlight how both Colorado and Utah have it wrong. As is so often the case, the decision turns on incorrectly merging doctrine from one entity type (the corporation) into another (the LLC) without acknowledging or explaining why that makes sense.  To the court's credit, they got the choice of law right, applying the internal affairs doctrine to use Utah law for veil piercing a Utah LLC, even though the case was in a Colorado court. 

After correctly deciding to use Utah law, the court then went down a doctrinally weak path.  Here we go:

Marquis is a Utah LLC. (ECF No. 1 ¶ 7.) Utah courts apply traditional corporate veil-piercing principles to LLCs. See, e.g., Lodges at Bear Hollow Condo. Homeowners Ass'n, Inc. v. Bear Hollow Restoration, LLC, 344 P.3d 145, 150 (Utah Ct. App. 2015). The basic veil-piercing analysis requires two steps:
The first part of the test, often called the formalities requirement, requires the movant to show such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist. The second part of the test, often called the fairness requirement, requires the movant to show that observance of the corporate form would sanction a fraud, promote injustice, or condone an inequitable result.
Jones v. Marquis Properties, LLC, 212 F. Supp. 3d 1010, 1021 (D. Colo. 2016). 
 
First, say it with me: You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One.  Second, the so-called "the formalities requirement" is a problem for Utah LLCs if one looks at the Utah LLC Act. The Colorado court does not do that, and neither does the Utah court that decided Bear Hollow Restoration, upon which Colorado relied.  They should have. You see, Utah has adopted the Revised Uniform Limited Liability Act, and the Utah version states expressly: 
The failure of a limited liability company to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager of the limited liability company for a debt, obligation, or other liability of the limited liability company.
Utah Code Ann. § 48-3a-304(b). So, that is at least potentially a problem, because the Utah test for the formalities requirement is supposed to be determined by looking at seven factors:
(1) undercapitalization of a one-[person] corporation; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) siphoning of corporate funds by the dominant stockholder; (5) nonfunctioning of other officers or directors; (6) absence of corporate records; [and] (7) the use of the corporation as a facade for operations of the dominant stockholder or stockholders....
Lodges at Bear Hollow Condo. Homeowners Ass'n, Inc. v. Bear Hollow Restoration, LLC, 344 P.3d 145, 150 (Utah App. 2015).
 
I know some will argue I am being overly formalistic in highlighting how corporate focused these factors are, but this is problematic.  Virtually all of these factors must, at a minimum, be contorted to apply to LLCs.  If the test is going to be applied, the least a court should do is to rewrite the test so it refers LLCs specifically.  Why? Well, primarily because in doing so, it would make clear just how silly these factors are when trying to do so.  (For example, LLCs don't have stockholders, corporate funds, dividends, and generally don't have an obligation to have officers or directors.) 

 The Marquis Properties court skips actually applying the test saying simply that an SEC investigation report was sufficient to allow veil piercing. The court determined that an SEC report establishes that sole member of the LLC used the entity "to create the illusion of profitable investments and thereby to enrich himself, with no ability or intent to honor" the LLC's obligations. "Given this, strictly respecting [the LLC's] corporate form [ed. note: UGH] would sanction [the member's] fraud."  The Court then found that veil-piercing was appropriate to hold the member "jointly and severally liable for the amounts owed by" the LLC to the plaintiffs.

But veil piercing is both neither appropriate nor necessary in this case.  In discussing the SEC report earlier in the case, the court found that "all elements of mail and wire fraud are present." I see nothing that would absolve either the LLC as an entity of liability for the fraud and I see no reason why the member of the LLC would not be personally liable for the fraud he committed purportedly on behalf of the LLC and for his own benefit.  

This case illustrates another problem with veil piercing: both courts and lawyers are too willing to jump to veil piercing when simple fraud will do. This case illustrates clearly that fraud was evident, and fraud should be sufficient grounds for the plaintiffs to recover from the individual committing fraud. That means the entire veil piercing discussion should be treated as dicta. The entity form did not create this problem, and the entity form does not need to be disregarded, at least as far as I can tell, to allow plaintiffs to recover fully.  Before even considering veil piercing, a court should be able to state clearly why veil piercing is necessary to make the plaintiff whole. Otherwise, you end up with bad case law that can lead to bad doctrine, which leads to inefficient courts and markets.  

Oh, and while I'm at it, Westlaw needs to get their act together, too.  The Westlaw summary and headnotes say "limited liability corporation (LLC)" five times in connection with this case.  Come on, y'all.  

 

August 15, 2017 in Business Associations, Corporations, Joshua P. Fershee, Lawyering, LLCs, Shareholders, Unincorporated Entities | Permalink | Comments (0)

Wednesday, August 2, 2017

How (Not) To Teach A Course in Compliance and Corporate Social Responsibility

Good morning from gorgeous Belize. I hope to see some of you this weekend at SEALS. A couple of weeks ago, I posted about the compliance course I recently taught. I received quite a few emails asking for my syllabus and teaching materials. I am still in the middle of grading but I thought I would provide some general advice for those who are considering teaching a similar course. I taught thinking about the priorities of current employers and the skills our students need.

1) Picking materials is hard- It's actually harder if you have actually worked in compliance, as I have, and still consult, as I do from time to time. I have all of the current compliance textbooks but didn't find any that suited my needs. Shameless plug- I'm co-authoring a compliance textbook to help fill the gap. I wanted my students to have the experience they would have if they were working in-house and had to work with real documents.  I found myself either using or getting ideas from many primary source materials from the Society of Corporate Compliance and Ethics, the  Institute of Privacy ProfessionalsDLA Piper, the Federal Sentencing Guidelines for Organizational Defendants, policy statements from various governmental entities in the US (the SEC, DOJ Banamex case, and state regulators), and abroad (UK Serious Frauds Office and Privacy Office). Students also compared CSR reports, looked at NGO materials, read the codes of conducts of the guest speakers who came in, and looked at 10-Ks, the Carbon Disclosure Project, and other climate change documents for their companies. I also had students watch YouTube videos pretending that they went to CLEs and had to write a memo to the General Counsel so that s/he could update the board on the latest developments in healthcare compliance and risk assessments. 

2) This should be a 3-credit course for it to be an effective skills course- My grand vision was for guest speakers to come in on Mondays  for an hour and then I would lecture for the remaining time or I would lecture for two hours on Monday and then students would have simulations on Wednesday.This never happened. Students became so engaged that the lecturers never finished in an hour. We were always behind. Simulations always ran over. 

3) Don't give too much reading- I should have known better. I have now taught at three institutions at various tiers and at each one students have admitted- no, actually bragged- that they don't do the reading. Some have told me that they do the reading for my classes because I grade for class participation, but I could actually see for my compliance course how they could do reasonably well without doing all of the reading, which means that I gave too much. I actually deliberately provided more than they needed in some areas (especially in the data privacy area) because I wanted them to build a library in case they obtained an internship or job after graduation and could use the resources. When I started out in compliance, just knowing where to look was half the battle. My students have 50 state surveys in employment law, privacy and other areas that will at least give them a head start.

4) Grading is hard- Grading a skills course is inherently subjective and requires substantive feedback to be effective.  40% of the grade is based on a class project, which was either a presentation to the board of directors or a training to a group of employees. Students had their choice of topic and audience but had to stay within their industry and had the entire 6-week term to prepare. Should I give more credit to the team who trained the sales force on off-label marketing for pharmaceuticals because the class acting as the sales force (and I) were deliberately disrespectful (as some sales people would be in real life because this type of  training would likely limit their commissions)? This made their training harder. Should I be tougher on the group that trained  the bored board on AML, since one student presenter was in banking for years? I already know the answers to these rhetorical questions. On individual projects, I provide comments as though I am a general counsel, a board member, or a CEO depending on the assignment. This may mean that the commentary is "why should I care, tell me about the ROI up front." This is not language that law students are used to, but it's language that I have tried to instill throughout the course. I gave them various versions of the speech, "give me less kumbaya, we need to care about the slave labor in the factories, and less consumers care about company reputation, and more statistics and hard numbers to back it up."  Some of you may have seen this recent article about United and the "non-boycott, which validates what I have been blogging about for years. If it had come out during the class, I would have made students read it because board members would have read it and real life compliance officers would have had to deal with it head on.

5) Be current but know when to stop- I love compliance and CSR. For the students, it's just a class although I hope they now love it too. I found myself printing out new materials right before class because I thought they should see this latest development. I'm sure that  what made me think of myself as cutting edge and of the moment made me come across to them as scattered and disorganized because it wasn't on the syllabus.

6) Use guest speakers whenever possible- Skype them in if you have to. Nothing gives you credibility like having someone else say exactly what you have already said.

If you have any questions, let me know. I will eventually get back to those of you who asked for materials, but hopefully some of these links will help. If you are teaching a course or looking at textbook, send me feedback on them so that I can consider it as I work on my own. Please email me at mweldon@law.miami.edu.

Next week, I will blog about how (not) to teach a class on legal issues for start ups, entrepreneurs, and small businesses, which I taught last semester.

August 2, 2017 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Employment Law, Human Rights, Law School, Lawyering, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Tuesday, August 1, 2017

More on Corporations, Accountability, and the Proper Locus of Power

My colleague, Joan Heminway, yesterday posted Democratic Norms and the Corporation: The Core Notion of Accountability. She raises some interesting points (as usual), and she argues: "In my view, more work can be done in corporate legal scholarship to push on the importance of accountability as a corporate norm and explore further analogies between political accountability and corporate accountability."

I have not done a lot of reading in this area, but I am inclined to agree that it seems like an area that warrants more discussion and research.  The post opens with some thought-provoking writing by Daniel Greenwood, including this:  

Most fundamentally, corporate law and our major business corporations treat the people most analogous to the governed, those most concerned with corporate decisions, as mere helots. Employees in the American corporate law system have no political rights at all—not only no vote, but not even virtual representation in the boardroom legislature.
Joan correctly observes, "Whether you agree with Daniel or not on the substance, his views are transparent and his belief and energy are palpable." Although I admit I have not spent a lot of time with his writing, but my initial take is that I do not agree with his premise. That is, employees do have political rights, and they have them where they belong: in local, state, and federal elections.  Employees, in most instances, do not have political rights within their employment at all.  Whether you work for the government, a nonprofit, or a small sole proprietorship, you don't generally have political rights as to your employment.  You may have some say in an employee-owned entity, and you may have some votes via union membership, but even there, those votes aren't really as to your employment specifically. 
 
The idea of seeking democratic norms via the corporate entity itself strikes me as flawed.  If people don't like how corporations (or other entities) operate, then it would seem to me the political process can solve that via appropriate legislation or regulation. That is, make laws that allow entities to do more social good if they are so inclined. Or even require entities to do so, if that's the will of the people (this is not a recommendation, merely an observation).  Scholars like Greenwood and others continue to make assertions that entities cannot make socially responsible choices. He states, " The law bars [corporations], in the absence of unanimous consent, from making fundamental value choices, for example, from balancing the pursuit of profit against other potential corporate goals, such as quality products, interests of non-shareholder participants or even the actual financial interests of the real human beings who own the shares."  And judges and scholars, like Chancellor Chandler and Chief Justice Strine, have reinforced this view, which, I maintain, is wrong (or should be).  
 
Professor Bainbridge has explained, "The fact that corporate law does not intend to promote corporate social responsibility, but rather merely allows it to exist behind the shield of the business judgment rule becomes significant in -- and is confirmed by -- cases where the business judgment rule does not apply." Todd Henderson similarly argued, and I agree, 
Those on the right, like Milton Friedman, argue that the shareholder-wealth-maximization requirement prohibits firms from acting in ways that benefit, say, local communities or the environment, at the expense of the bottom line. Those on the left, like Franken, argue that the duty to shareholders makes corporations untrustworthy and dangerous. They are both wrong.
I don't disagree with Joan (or with Greenwood, for that matter), that accountability matters, but I do think we should frame accountability properly, and put accountability where it belongs.  That is political accountability and corporate accountability are different. As I see it, corporations are not directly accountable to citizens (employees or not) in this sense (they are in contract and tort, of course). Corporations are accountable to their shareholders, and to some degree to legislators and regulators who can modify the rules based on how corporations act.  Politicians, on the other hand, are accountable to the citizens.  If citizens are not happy with how entities behave, they can take that to their politicians, who can then choose to act (or not) on their behalf.  
 
I think entities should consider the needs of employees, and I believe entities would be well served to listen to their employees. I happen to think that is good business. But I think the idea that employees have a right to a formal voice at the highest levels within the entity is flawed, until such time as the business itself or legislators or regulators decide to make that the rule. (I do not, to be clear, think that would be a good rule for legislators or regulators to make for private entities.) The proper balance of laws and regulations is a separate question from this discussion, though. Here, the key is that accountability -- or, as Prof. Bainbridge says, "the power to decide" -- remains in the right place.  I am inclined to think the power structure is correct right now, and whether that power is being used correctly is an entirely different, and separate, issue.  

August 1, 2017 in Business Associations, Corporations, CSR, Delaware, Joan Heminway, Joshua P. Fershee, Legislation, Management, Research/Scholarhip, Shareholders, Social Enterprise | Permalink | Comments (1)

Monday, July 31, 2017

Democratic Norms and the Corporation: The Core Notion of Accountability

The corporate form has been compared and contrasted favorably and unfavorably with government.  The literature is broad and deep.  Having said that, there is, perhaps, no one who writes more passionately on this topic than Daniel Greenwood.  Set forth below are two examples of text from his work that illustrate my point.

We live in a democratic age, in which the sole legitimate source of political power is the consent of the governed. Yet our business corporations defy every norm of democracy.
 
Most fundamentally, corporate law and our major business corporations treat the people most analogous to the governed, those most concerned with corporate decisions, as mere helots. Employees in the American corporate law system have no political rights at all—not only no vote, but not even virtual representation in the boardroom legislature. Board members owe a fiduciary duty to the corporation, according to most of the statutes, and to the shareholders, according to the popular shareholder primacy narratives, but they owe no consideration at all to employees.
 
Daniel J.H. Greenwood, Essay: Telling Stories of Shareholder Supremacy, 2009 Mich. St. L. Rev. 1049, 1060 (2009).
 
The corporation as a state-within-the-state . . . cannot be justified under any democratic theory, because this state-like entity defies all democratic norms internally. No corporation operates by the principle of one person, one vote. All economically significant corporations disenfranchise a substantial portion of the affected populace, while even shareholders vote according to the number of shares they hold. Moreover, standard corporate law sharply limits the control that even the “voters” have over “their” entity. The law bars them, in the absence of unanimous consent, from making fundamental value choices, for example, from balancing the pursuit of profit against other potential corporate goals, such as quality products, interests of non-shareholder participants or even the actual financial interests of the real human beings who own the shares. Moreover, it even bars them from electing directors pledged to particular interests: directors, unlike ordinary politicians, are bound by law to pursue the interests of all (and only) shares, and courts will enforce this duty-subject to the often significant limitations of the business judgment rule-at the behest of any shareholder, regardless of election results. Theorists, therefore, usually resort to market-based explanations of why the corporation is unable to exert any power over its shareholders, employees and other participants.
 
Daniel J.H. Greenwood, Markets and Democracy: The Illegitimacy of Corporate Law, 74 UMKC L. Rev. 41, 54–55 (2005) (footnotes omitted).  Whether you agree with Daniel or not on the substance, his views are transparent and his belief and energy are palpable.
 
With politics in the news every day and corporations on my mind, I have been pondering certain elements of democracy as they play themselves out in corporate governance.  In particular, of late, I have focused in on accountability as a core democratic norm.  

Continue reading

July 31, 2017 in Corporate Governance, Corporations, Current Affairs, Joan Heminway | Permalink | Comments (2)

Tuesday, July 18, 2017

Long Live Director Primacy: Social Benefit Entities and the Downfall of Social Responsibility

The more I read about social enterprise entities, the less I like about them.  In 2014, my colleague Elaine Wilson and I wrote March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well?  We observed:

Regardless of jurisdiction, there may be value in having an entity that plainly states the entity’s benefit purpose, but in most instances, it does not seem necessary (and is perhaps even redundant). Furthermore, the existence of the benefit corporation opens the door to further scrutiny of the decisions of corporate directors who take into account public benefit as part of their business planning, which erodes director primacy, which limits director options, which can, ultimately, harm businesses by stifling innovation and creativity.  In other words, this raises the question: does the existence of the benefit corporation as an alternative entity mean that traditional business corporations will be held to an even stricter, profit-maximization standard?

I am more firmly convinced this is the path we are on.  The emergence of social enterprise enabling statutes and the demise of director primacy threaten to greatly, and gravely, limit the scope of business decisions directors can make for traditional for-profit entities, threatening both social responsibility and economic growth. Recent Delaware cases, as well as other writings from Delaware judges, suggest that shareholder wealth maximization has become a more singular and narrow obligation of for-profit entities, and that other types of entities (such as non profits or benefit corporations) are the only proper entity forms for companies seeking to pursue paths beyond pure, and blatant, profit seeking. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, to the detriment of employees, society, and, yes, shareholders. 

I know there are some who believe that I see the sky falling when it's just a little rain. Perhaps. I would certainly concede that the problems I see can be addressed through law, if necessary.  I am just not a big fan of passing some more laws and regulations, so we can pass more laws to fix the things we added.  My view of entity purpose remains committed to the principle of director primacy.  Directors are obligated to run the entity for the benefit of the shareholders, but, absent fraud, illegality, or self-dealing, the directors decide what actions are for the benefit of shareholders. Period, full stop.  

July 18, 2017 in Corporations, Delaware, Joshua P. Fershee, Legislation, Management, Shareholders, Social Enterprise | Permalink | Comments (4)

Wednesday, July 12, 2017

Should we be steering more law students to compliance careers?

Prior to joining academia, I served as a compliance officer, deputy GC, and chief privacy officer for a Fortune 500 company. I had to learn everything on the job by attending webinars and conferences and reading client alerts. Back then, I would have paid a law school graduate a competitive salary to work in my compliance group, but I couldn’t find anyone who had any idea about what the field entailed.

The world has changed. Now many schools (including mine) offer relevant coursework for this JD-advantage position. I just finished teaching a summer skills course in compliance and corporate social responsibility, and I’m hoping that I have encouraged at least a few of the students to consider it as a viable career path. Compliance is one of the fastest growing corporate positions in the country, and the number of compliance personnel has doubled in the past 6 years. Still, many business-minded law students don’t consider it in the same vein as they consider jobs with Big Law.

This summer, my twelve students met twice a week for two hours at 7:30 pm. In the compressed six-week course, they did the following:

  • Heard from compliance officers and outside counsel for public companies and government entities
  • Read the same kinds of primary source material that compliance officers and counsel read in practice (such as the Federal Sentencing Guidelines, the Yates Memo, deferred prosecution agreements, and materials from the EU on the upcoming changes to data protection regulation)
  • Compared and contrasted CSR reports from WalMart and Target, and reviewed the standards for the Global Reporting Initiative and the UN Global Compact
  • Advocated before a board as a worker safety NGO for a company doing business in Bangladesh
  • Served as a board member during a meeting (using actual board profiles)
  • Wrote a reflection paper on the ideal role and reporting structure of compliance officers
  • Considered top employment law and data protection risks for fictional companies to which they were assigned
  • Looked at the 10-Ks and CDP report for climate change disclosures after examining the role of socially responsible investors and shareholder resolutions
  • Drafted industry-specific risk assessment questionnaires
  • Drafted three code of conduct policies
  • Wrote a short memo to the GC on health care compliance and the DOJ Yates memo
  • Did a role play during a crisis management simulation acting as either a board member, SEC or DOJ lawyer, the CEO, compliance officer or GC and
  • Conducted a 20-minute board presentation or employee compliance training (worth the biggest part of the grade).

Perhaps the most gratifying part of the semester came during tonight’s final presentations. The students could pick any topic relevant to the fictional company that they were assigned. They chose to discuss child labor in the supply chain for a clothing company, off-label marketing in the pharmaceutical industry, anti-money laundering compliance in a large bank, and environmental and employment law issues for a consumer product conglomerate. Even though I was not their BA professor, I was thrilled to hear them talk about the Caremark duty, the duty of care, and the business judgment rule in their presentations. Most important, the students have left with a portfolio of marketable skills and real-world knowledge in a fast growing field.

If you have your own ideas on how to teach compliance and CSR, please leave them below or email me at mweldon@law.miami.edu.

July 12, 2017 in Compliance, Corporate Governance, Corporate Personality, Corporations, CSR, Law School, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Friday, July 7, 2017

New Article by Bernard Sharfman on Dual Class Shares and IPOs

Bernard Sharfman has written another interesting article on shareholder empowerment. I wish I had read A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs before I discussed the Snap IPO last semester in business associations.

The abstract is below:

The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

This Article utilizes Zohar Goshen and Richard Squire’s “principal-cost theory” to argue that the use of the dual class share structure in IPOs is a value enhancing result of the bargaining that takes place in the private ordering of corporate governance arrangements, making the movement’s renewed advocacy unwarranted.

As he has concluded:

It is important to understand that while excellent arguments can be made that the private ordering of dual class share structures must incorporate certain provisions, such as sunset provisions, it is an overreach for academics and shareholder activists to dictate to sophisticated capital market participants, the ones who actually take the financial risk of investing in IPOs, including those with dual class share structures, how to structure corporate governance arrangements. Obviously, all the sophisticated players in the capital markets who participate in an IPO with dual class shares can read the latest academic articles on dual class share structures, including the excellent new article by Lucian Bebchuk and Kobi Kastiel, and incorporate that information in the bargaining process without being dictated to by parties who are not involved in the process. If, as a result of this bargaining, the dual class share structure has no sunset provision and perhaps even no voting rights in the shares offered, then we must conclude that these terms were what the parties required in order to get the deal done, with the risks of the structure being well understood.… capital markets paternalism is not required when it comes to IPOs with dual class share structures.

Please be sure to share your comments with Bernard below.

July 7, 2017 in Corporate Finance, Corporate Governance, Corporate Personality, Corporations, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Tuesday, June 13, 2017

My Favorite Business Law Cases, Round 1: Sinclair Oil Corp. v. Levien (Del. 1971)

I am such a fan of Sinclair Oil Corp. v. Levien,  280 A.2d 717 (Del. 1971), that I use the case in both Business Organizations and in Energy Law. The case does a great job of giving a basic overview of parent-subsidiary relationships, some of the basic fiduciary duties owed in such contexts, and it sets up the discussion of why companies use subsidiaries in the first place. 

On fiduciary duties and when the intrinsic (entire) fairness test applies: 

A parent does indeed owe a fiduciary duty to its subsidiary when there are parent-subsidiary dealings. However, this alone will not evoke the intrinsic fairness standard. This standard will be applied only when the fiduciary duty is accompanied by self-dealing — the situation when a parent is on both sides of a transaction with its subsidiary. Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary

On what test to apply to parent-subsidiary dividends: 

We do not accept the argument that the intrinsic fairness test can never be applied to a dividend declaration by a dominated board, although a dividend declaration by a dominated board will not inevitably demand the application of the intrinsic fairness standard. Moskowitz v. Bantrell, 41 Del.Ch. 177, 190 A.2d 749 (Del.Supr. 1963). If such a dividend is in essence self-dealing by the parent, then the intrinsic fairness standard is the proper standard. For example, suppose a parent dominates a subsidiary and its board of directors. The subsidiary has outstanding two classes of stock, X and Y. Class X is owned by the parent and Class Y is owned by minority stockholders of the subsidiary. If the subsidiary, at the direction of the parent, declares a dividend on its Class X stock only, this might well be self-dealing by the parent. It would be receiving something from the subsidiary to the exclusion of and detrimental to its minority stockholders. This self-dealing, coupled with the parent's fiduciary duty, would make intrinsic fairness the proper standard by which to evaluate the dividend payments.

. . . . The dividends resulted in great sums of money being transferred from Sinven to Sinclair. However, a proportionate share of this money was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its [722] minority stockholders. As such, these dividends were not self-dealing. We hold therefore that the Chancellor erred in applying the intrinsic fairness test as to these dividend payments. The business judgment standard should have been applied. 

On whether shareholder of one subsidiary should be allowed to participate in ventures pursued by other subsidiaries: 

The plaintiff proved no business opportunities which came to Sinven independently and which Sinclair either took to itself or denied to Sinven. As a matter of fact, with two minor exceptions which resulted in losses, all of Sinven's operations have been conducted in Venezuela, and Sinclair had a policy of exploiting its oil properties located in different countries by subsidiaries located in the particular countries.

It makes sense for companies, often, to use subsidiaries to keep certain businesses well organized and to protect assets for shareholder.  That is, I might only want to invest in a subsidiary doing business in Mexico because I trust that the assets there are secure.  I may not want to participate in work in Venezuela, which I might deemed riskier.  And it's not just shareholders who might feel that way.  Creditors, too, may view such investments very differently and may only be willing to participate in ventures where the risks can be more easily assessed. 

June 13, 2017 in Case Law, Corporations, Joshua P. Fershee, Lawyering, Management, Venture Capital | Permalink | Comments (1)

Wednesday, June 7, 2017

Why Do Companies Bother With Corporate Social Responsibility Reports?

In 2016, a number of news outlets focused on Wal-Mart’s reputation crisis and outdated management style. Many, including union leaders, doubted the sincerity behind the company’s motivation in raising wages last year. I’ve blogged about Wal-Mart before, but today, there appears to be a different story to tell. Wal-Mart, the bogeyman of many NGOs and workers’ rights groups, actually believes that “serving the customers and society is the same thing… [and] putting the customer first means delivering for them in ways that protect and preserve the communities they live in and the world they will pass on to future generations.” This comes from the company’s 148-page 2016 Global Responsibility Report. Target’s report is a paltry 43 pages in comparison.

What accounts for the difference? Both use the Global Reporting Initiative framework, which aims to standardize sustainability reporting using materiality factors and items in the 10-K. Key GRI disclosures include: a CEO statement; key impacts, risks, and opportunities; markets; collective bargaining agreements; supply chain description; organizational changes; internal and external CSR standards (such as conflict mineral policy, LEED etc); membership associations; governance structure; high-level accountability for sustainability; consultation between stakeholders and the board; board composition; board knowledge of sustainability; board pay; helplines or hotlines for reporting unethical or unlawful behavior; climate change risks; energy consumption; GhG emissions; employee benefits; health and safety; performance appraisal process; human rights assessments; wage and hour audits; supplier diversity; community engagement; PAC contributions by party; and more.

Whew! Companies can of course glean a lot of this information from their proxy, 10-K and other disclosures, but it still takes the average company months to complete. It may not even be worth it. Although 82% of consumers say they want to buy from a socially-responsible company, only 17% have actually read a CSR report, according to one study.  To be honest, I’m surprised the number of CSR report readers is that high. My informal survey during Monday's class revealed that one student out of the 12 had read a CSR report, and this is in a group that chose to take a two-hour course in compliance and CSR that meets at 7:30 pm in the summer.

Here’s what I learned about Wal-Mart by reading the first four pages its report (it cleverly has big colorful picture blocks of statistics). I knew from press reports that Wal-Mart is currently facing numerous employment law class actions and may soon pay $300 million to the DOJ settle its bribery scandal. But the CSR report made Wal-Mart look like the model corporate citizen. The company earned 482 billion in revenue, employs 2.3 million employees, operates in 28 countries, and had 260 million weekly customer visits in 2016. It has invested 2.7 billion over 2 years in wages and benefits for its employees. It will train 1 million female farmers and factory workers around the world. It has eliminated 35.6 million metric tons of greenhouse gas emissions from its supply chain. Target, which has settled for 18.5 million with several states over data breaches, took a different approach for its report. Its first few pages has pictures and charts too but focuses on what it has achieved/exceeded and what it hasn’t based on its own 20 goals. The Target 2015 report is a decidedly more humble looking document than the Wal-Mart product (the next Target report is due this year). 

I tend to believe that these CSR reports are designed for the consumption of regulators and lawmakers- hence the longer and more robust Wal-Mart report. Although Target claims in its report that CSR can enhance its reputation, the average Wal-Mart and Target consumer will not stop to read the report and many who boycott these stores will not likely change their minds be reading these reports. Instead, they may view them as an expensive marketing tool. Although Target doesn't face the same level of legal problems or reputational issues as Wal-Mart, it has still lost market share to Wal-Mart and Amazon, proving my theory that no matter what consumers say about shopping ethically, they really focus on convenience, quality, and price. 

I look forward to hearing what my students think at tonight’s class. I fear I may already traumatize them with the videos they will see about Nike, fair trade, and whether boycotting sweatshops make sense.

June 7, 2017 in Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Marcia Narine Weldon | Permalink | Comments (0)

Tuesday, June 6, 2017

GM Votes Show Value of Shareholder Proposals as a Process for Accountability

More than two years ago, I posted Shareholder Activists Can Add Value and Still Be Wrongwhere I explained my view on shareholder proposals: 

I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock.  I don't see activist shareholder as an inherently bad thing.  I do, however, think  it's bad when boards succumb to the whims of activist shareholders just to make the problem go away.  Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.    

Today, the Detroit Free Press reported that shareholders of automaker GM soundly defeated a proposal from billionaire investor David Einhorn that would have installed an alternate slate of board nominees and created two classes of stock.  (All the proposals are available here.) Shareholders who voted were against the proposals by more than 91%.  GM's board, in materials signed by Mary Barra, Chairman & Chief Executive Officer and Theodore Solso, Independent Lead Director, launched an aggressive campaign to maintain the existing board (PDF here) and the split shares proposal (PDF here).  GM argued in the board maintenance piece: 

Greenlight’s Dividend Shares proposal has the potential to disrupt our progress and undermine our performance. In our view, a vote for any of the Greenlight candidates would represent an endorsement of that high-risk proposal to the detriment of your GM investment.

Another shareholder proposal asking the board to separate the board chair and CEO positions was reported by the newspaper as follows: "A separate shareholder proposal that would have forced GM to separate the role of independent board chairman and CEO was defeated by shareholders." Not sure. Though the proposal was defeated, it's worth noting that the proposal would not have "forced" anything.  The proposal was an "advisory shareholder proposal" requesting the separation of the functions.  No mandate here, because such decisions must be made by the board, not the shareholders.  The proposal stated: 

Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it did not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all the necessary steps be taken to accomplish the above.

GM argued against this proposal because the "policy advocated by this proposal would take away the Board’s discretion to evaluate and change its leadership structure." Also not true.  It the proposal were mandatory, then this would be true, but as a request, it cannot and could not take away anything.  If the shareholders made such a request and the board declined to follow that request, there might be repercussions for doing so,  but the proposal would have kept in place the "Board’s discretion to evaluate and change its leadership structure."  

These proposals appear to have been properly brought, properly considered, and properly rejected.  As I suggested in 2015, shareholder activists can help improve long-term value, even when following the activists' proposals would not.  That is just as true today and these proposals may well prime the pumpTM for future board or shareholder actions.  That is, GM has conceded that its stock is undervalued and that change is needed.  GM argues those changes are underway, and for now, most voting shareholder agree.  But we'll see how this looks if the stock price has not noticeably improved next year.  An alternative path forward on some key issues has been shared, and that puts pressure on this board to deliver.  They can do it their own way, but they are on notice that there are alternatives.  An shareholders now know that, too.

This knowledge underscores the value of shareholder proposals as a process.  They can and should create accountability, and that is a good thing. I agree with GM that the board should keep control of how it structures the GM leadership team.  But I agree with the shareholders that if this board doesn't perform, it may well be time for a change.  

June 6, 2017 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Management, Securities Regulation, Shareholders | Permalink | Comments (0)

Friday, June 2, 2017

"Even Bank Robbers Can Tithe"

One of the most striking lines in Provost Jeff Van Duzer's talk at the Nashville Institute of Faith and Work a few months ago was his statement that "even bank robbers can tithe."

See a somewhat similar version of that talk here.

Jeff Van Duzer's point seemed to be that you cannot be a truly socially responsible company simply by giving some money to good causes. I think he was exactly right. He went on to explain that socially responsible businesses should focus on creating good products and good jobs. 

This week I was thinking about Jeff Van Duzer's talk when I considered, for about the one hundredth time, how to define social enterprises.

Think about Ben & Jerry's, a company that comes up at almost every social enterprise conference. While I can think of some good that ice cream does, I wonder if Ben & Jerry's main products are, on the whole, socially beneficial. We have a serious, deadly obesity problem in the country, and Ben & Jerry's products seem to be contributing to this problem. Perhaps Ben & Jerry's ice cream is more healthy than most options or uses more natural ingredients (I am unsure if this is true), but are Ben & Jerry's core products a net benefit to society? Perhaps Ben & Jerry's tip the scale in the social direction by providing good jobs with good benefits. However, Ben & Jerry's is best known for their giving and advocacy, which any business (no matter how socially destructive) could do.

The same arguments could be made against Hershey and Mars Corp., both of which are also well known for their focus on social responsibility. Are there certain industries that social enterprises should avoid altogether? Or should social enterprises enter all industries and try to make them incrementally better?

As a consumer, I am becoming more convinced that providing good products should among the very highest priorities. High quality products and thoughtful customer service is becoming increasingly difficult to find.

Given that I have two young children, Melissa & Doug toys come to mind as a company that is doing it right. Their products are durable and well-designed. Their products are designed to encourage Free Play, Creativity, Imagination, Learning, Discovery. Little Tikes is an older, but similar, company. I have never heard Melissa & Doug or Little Tikes referred to as "social enterprises," but, in my opinion, both companies benefit society much more than many of the frequently mentioned "social enterprises." 

June 2, 2017 in Corporations, CSR, Current Affairs, Haskell Murray, Social Enterprise | Permalink | Comments (5)

Tuesday, May 30, 2017

LLCs Are Not Corporations: "Corporate" Disclosure Edition

Regular readers know that I monitor courts and other legal outlets for improper references to LLCs as "limited liability corporations" when the writer means "limited liability companies." I get a Westlaw update every day. Really. Every day. So while it may seem that I write about examples a lot, I tend to think I am showing great restraint.  

At times, this is just a semantic issue, or at least a more amorphous "how one thinks about entities" issue.  Usually, at a minimum such cases can cause confusion about entity type and what laws apply, which may eventually lead courts to an improper analysis and application of the wrong laws.  It certainly leads some lawyers to incorrectly characterize their clients and their cases.  

For example, a recent case from the United States District Court for the Western District of Washington gets the law right, but still creates some potential confusion. Consider this excerpt: 

Cash & Carry asserts that the court's jurisdiction is based on diversity of citizenship. (Not. at 2.) For purposes of assessing diversity, the court must consider the domicile of all members of a limited liability company. Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006) (“[A]n LLC is a citizen of every state of which its owners/members are citizens.”); see also Local Rules W.D. Wash. LCR 101(e). Plaintiff Deborah Markham alleges that she is a Washington resident. (Compl. (Dkt. # 2) ¶ 1.2.) However, neither the complaint nor the notice of removal identifies Cash & Carry's members or the domicile of those members. (See id. ¶ 1.3 (alleging that Cash & Carry is “a limited liability corporation formed under the laws of the State of Washington”); Not. at 2.)
DEBORAH MARKHAM, Plaintiff, v. CASH & CARRY STORES, LLC, et al., Defendants., No. C17-0746JLR, 2017 WL 2241136, at *1 (W.D. Wash. May 23, 2017) (emphasis added).  It'd have been great for the court to note that Cash & Carry's claim it was "a limited liability corporation" was incorrect.  Instead, the court then stated, "Furthermore, Cash & Carry's corporate disclosure statement fails to establish Cash & Carry's domicile. (CDS (Dkt. # 4).)" Id. As an LLC, Cash & Carry isn't "corporate," but because of the local rules for the Western District of Washington, it does have an obligation to make a "corporate disclosure." See U.S. Dist. Ct. Rules W.D. Wash., Civ LR 7.1.
 
Rule 7.1. Disclosure Statement

(a) Who Must File; Contents. A nongovernmental corporate party must file 2 copies of a disclosure statement that:

(1) identifies any parent corporation and any publicly held corporation owning 10% or more of its stock; or

(2) states that there is no such corporation.

(b) Time to File; Supplemental Filing. A party must:

(1) file the disclosure statement with its first appearance, pleading, petition, motion, response, or other request addressed to the court; and

(2) promptly file a supplemental statement if any required information changes.

However, in Washington, the Local Rule 7.1 adds to the requirements of the federal "disclosure statement":

CORPORATE DISCLOSURE STATEMENT

(a) Who Must File; Copies

Any nongovernmental party, other than an individual or sole proprietorship, must file a corporate disclosure statement identifying:

  1. any parent corporation and any publicly held corporation owning more than 10% of its stock;

  2. any member or owner in a joint venture or limited liability corporation (LLC);

  3. all partners in a partnership or limited liability partnership (LLP); or

  4. any corporate member, if the party is any other unincorporated association

If there is no parent, shareholder, member, or partner to list in response to items (1) through (4), a corporate disclosure statement must still be filed stating that no such entity exists.

In this instance, the Local Rule changes the disclosure to "corporate disclosure," when it would appear this is really an "ownership" or "financial interest" disclosure.  (And, while I am being picky, isn't it odd to have a subpart "a," when there is not subpart "b?" I suspect this subpart notation is to track subpart a of Federal Rule 7.1, but it still looks odd to me.)  
 
This is not the first time a local rule has created some potential trouble with regard to Federal Rule 7.1.  Back in January of this year I posted Oops: Oregon District Court Rule For LLCs that are Defined as Corporations, which discussed some different concerns for the Oregon District Court's expansion of Rule 7.1. I will note that the LLC reference in the Oregon District Court Local Rule remains incorrect
 
I am prepared for the "no harm, no foul" comment. And maybe that's right. But it still seems like courts (and lawyers) should be able to get this right more often. 

May 30, 2017 in Corporations, Joshua P. Fershee, Lawyering, LLCs | Permalink | Comments (0)

Wednesday, May 24, 2017

Should social entrepreneurs form nonprofits or benefit corporations?

On June 8, I will answer this and other questions during an interactive session for a group of social entrepreneurs at Venture Cafe in Miami. Fortunately, I will have an accountant with me to talk through some of the tax issues. I was invited by the director of Radical Partners, a social impact accelerator. We estimate that 75% of the audience members will work for a nonprofit and the rest will work in traditional for profit entities with a social mission.

Many entrepreneurs in South Florida have an interest in benefit corporations, but don't really know much about them. Our job is to provide some guidance on entity selection and demystify these relatively new entities. Some of the issues I plan to address in my 20 minutes are:

1) the differences between nonprofits, for profits, and benefit corporations

2) the differences between benefit and social purpose corporations (focusing on Florida law)

3) the biggest myths about benefit corporations (such as perceived tax benefits)

4) tax issues (for the accountant)

5) director duties

6) funding- changing funding model from donors to investors; going public

7) reporting, auditing, and certification requirements

8) benefit enforcement proceedings

9) the role of B Lab and the difference between a B Corp and a benefit corporation (currently 15 Florida companies are certified through B Lab)

10) transparency and accountability issues

We plan to leave about 45 minutes for questions. Not many lawyers in Florida have experience with benefit or social purpose corporations, so I am seeking guidance from our readers. If you are a practitioner and have dealt with these entities in your states, I'm interested in your thoughts. Are a lot of your clients asking about these entities? Have they converted? How do you help them decide whether this change is good for them? I'm also fortunate to have colleagues on this blog who are real thought leaders in the area, and am looking forward to their comments. Personally, I believe that for many business owners, benefit corporations may provide a perceived marketing edge, but not much more, Author Tina Ho has raised concerns about greenwashing. If I'm wrong, let me know below or send me an email at mweldon@law.miami.edu.

 

May 24, 2017 in Corporate Personality, Corporations, CSR, Entrepreneurship, Marcia Narine Weldon, Nonprofits, Social Enterprise | Permalink | Comments (2)

Monday, May 22, 2017

Shareholder Wealth Maximization at the Firm Level

I ask my Advanced Business Associations students to recognize and process theory and policy and relate them to doctrine at the practical level.  This is, as most of you will recognize, a tall order of business for students who have just recently learned what business associations law is and may not yet (at the time they take the course) have applied the law in a practical context outside the classroom.  (The course is open to 2L and 3L students who have already taken Business Associations.)

So, when it came time to lionize my friends Lyman Johnson and David Millon at a symposium honoring their work (which, as you may recall, I first heralded on the BLPB a year ago and wrote a bit about back in October), I decided to put my scholarship pen (keyboard) where my teaching mouth is.  My goal for the symposium was to write something that linked theory and policy through doctrine to law practice and, at the same time, incorporated Lyman's and David's work. The essay I produced in fulfillment of these objectives was recently released and posted to SSRN.  I excerpted from it in my post on Saturday.  The full SSRN abstract follows.

In context, corporate law is often credited with creating, hewing to, or reinforcing a shareholder wealth maximization norm. The now infamous opinion in Dodge v. Ford Motor Co. describes the norm in a relatively bald and narrow way: “A business corporation is organized and carried on primarily for the profit of the stockholders." As a matter of theory and policy, commentators from the academy (law and business) and practice (lawyers and judges) have taken various views on this asserted norm—ranging from characterizing the norm as nonexistent or oversimplified to maintaining it as simple fact.

In an effort to broaden the conversation about the shareholder wealth maximization norm in an applied context, this essay describes shareholder wealth maximization under various state laws (in and outside Delaware) as a function of firm-level corporate governance—corporate law statutes, decisional law interpreting and filling gaps in that statutory law, and corporate charter and bylaw provisions—as applicable to both publicly held and privately held corporations in a variety of states. In this overall context, the essay considers the possibility that holders of shares in for-profit corporations may desire to maximize overall utility in their shareholdings of a particular firm, rather than merely the financial wealth arising from those holdings. To accomplish its purpose, the essay first briefly and generally addresses shareholder wealth maximization as a function of applicable statutory and decisional law and as a matter of private ordering (collecting, synthesizing, and characterizing, in each case, points made in the extant literature) before suggesting the broad implications of that analysis for corporate governance and shareholder wealth maximization and concluding. Ultimately, the essay makes a case for a more nuanced look at the shareholder wealth maximization norm. Given differences in doctrine and public policy among the states and variance in that doctrine and public policy among public, private, and statutory close or closely held corporations within individual states, answers to open questions are likely to (and should) depend on individualized facts assessed through the lens of specific statutory and decisional law and applicable public policy.

I fear that this short piece does not do the subject (or Lyman and David's amazing work) justice.  But my biggest regret is that the essay went to press without the addition of thanks to two special folks in my author's footnote.  I want to call those two colleagues out here.  

Continue reading

May 22, 2017 in Business Associations, Corporate Governance, Corporations, Haskell Murray, Joan Heminway, Teaching | Permalink | Comments (2)

Saturday, May 20, 2017

Loyalty to Whom (or What)?

Loyalty has been in the news lately.  The POTUS, according to some reports, asked former Federal Bureau of Investigation ("FBI") Director James Comey to pledge his loyalty.  Assuming the basic veracity of those reports, was the POTUS referring to loyalty to the country or to him personally?  Perhaps both and perhaps, as Peter Beinart avers in The Atlantic, the POTUS and others fail to recognize a distinction between the two.  Yet, identifying the object of a duty can be important.

I have observed that the duty of government officials is not well understood in the public realm. Donna Nagy's fine work on this issue in connection with the proposal of the Stop Trading on Congressional Knowledge ("STOCK") Act, later adopted by Congress, outlines a number of ways in which Congressmen and Senators, among others, may owe fiduciary duties to others.  If you have not yet been introduced to this scholarship, I highly recommend it.  If we believe that government officials are entrusted with information, among other things, in their capacity as public servants, they owe duties to the government and its citizens to use that information in authorized ways for the benefit of that government and those citizens.  In fact, Professor Nagy's congressional testimony as part of the hearings on the STOCK Act includes the following in this regard:

Given the Constitution's repeated reference to public offices being “of trust,” and Members’ oath of office to “faithfully discharge” their duties, I would predict that a court would be highly likely to find that Representatives and Senators owe fiduciary-like duties of trust and confidence to a host of parties who may be regarded as the source of material nonpublic congressional knowledge. Such duties of trust and confidence may be owed to, among others:

  • the citizen-investors they serve;
  • the United States;
  • the general public;
  • Congress, as well as the Senate or the House;
  • other Members of Congress; and
  • federal officials outside of Congress who rely on a Member’s loyalty and integrity.

There is precious little in federal statutes, regulations, and case law on the nature--no less the object--of any fiduciary the Director of the FBI may have.  The authorizing statute and regulations provide little illumination.  Federal court opinions give us little more.  See, e.g., Banks v. Francis, No. 2:15-CV-1400, 2015 WL 9694627, at *3 (W.D. Pa. Dec. 18, 2015), report and recommendation adopted, No. CV 15-1400, 2016 WL 110020 (W.D. Pa. Jan. 11, 2016) ("Plaintiff does not identify any specific, mandatory duty that the federal officials — Defendants Hornak, Brennan, and the FBI Director— violated; he merely refers to an overly broad duty to uphold the U.S. Constitution and to see justice done.").  Accordingly, any applicable fiduciary duty likely would arise out of agency or other common law.  Section 8.01 of the Restatement (Third) of Agency provides "An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connect with the agency relationship."  

But who is the principal in any divined agency relationship involving the FBI Director?  

Continue reading

May 20, 2017 in Agency, Business Associations, Corporate Governance, Corporations, Current Affairs, Joan Heminway, Securities Regulation | Permalink | Comments (4)

Wednesday, May 17, 2017

Seven Ted Talks that Will Change the Way You Look at Business (According to Entrepreneur Magazine)

I try to watch at least one Ted Talk a day. I learn new substantive topics and I also learn from listening to the speakers break down complex topics in an engaging way--a key skill for the classroom. I don’t know that any of the videos in a recent article written for business people really transformed my thinking about business, but I did find some parts interesting and inspiring.

Here they are for your viewing pleasure:

May 17, 2017 in Corporate Personality, Corporations, Entrepreneurship, Marcia Narine Weldon | Permalink | Comments (0)

Thursday, May 11, 2017

Does the Bar Exam Put Business Clients At Risk?

The Legal Skills Prof Blog has posted an article entitled Our Broken Bar Exam by Deborah Jones Merritt. The post discusses Merritt’s proposal for a task force on the bar exam. Merritt’s article states, among other things:

The bar exam is broken: it tests too much and too little. On the one hand, the exam forces applicants to memorize hundreds of black-letter rules that they will never use in practice. On the other hand, the exam licenses lawyers who don’t know how to interview a client, compose an engagement letter, or negotiate with an adversary.
 
This flawed exam puts clients at risk. It also subjects applicants to an expensive, stressful process that does little to improve their professional competence... The bar examination should test the ability of an applicant to identify legal issues in a statement of facts, such as may be encountered in the practice of law, to engage in a reasoned analysis of the issues, and to arrive at a logical solution by the application of fundamental legal principles, in a manner which demonstrates a thorough understanding of these principles... Why doesn’t our definition of minimum competence include cognitive skills that are essential for effective client representation? The answer does not lie in the fact that these skills are difficult to test on a written exam. Research, fact gathering, interviewing, and other lawyering skills are cognitive abilities.

We could test for these skills by directing test-takers to outline a research plan, interview approach, or negotiation strategy based on a mock client file. Test-takers could also identify potential pitfalls, fall back positions, and ethical issues associated with their plan. These questions are no more difficult to draft and grade than classic issue-spotter essay questions. The primary reason we don’t test bar candidates on these skills is that law schools don’t stress them. Schools teach some professional competencies (like appellate advocacy) quite effectively, but relegate others to a corner of the curriculum. Employers and state supreme courts have urged law schools to teach a fuller range of lawyer competencies, but most schools have resisted…

Here are some of the many ideas that the task force could consider:

  • Develop MBE and essay questions that test fundamental principles and legal reasoning, rather than memorization. As proposed above, practicing lawyers could serve as test subjects to validate these questions.
  • Allow test-takers to refer to notes, codes, and other sources while taking the bar exam. This practice would more accurately measure professional knowledge.
  • Develop tests for more of the competencies that new lawyers perform.
  • Replace some (or all) multiple-choice and essay questions with performance-oriented case files like those presented on the Multistate Performance Test (MPT).
  • Allow examinees to take portions of the exam at different times, including after the first year of law school.
  • Work with law schools to create lawyering classes that would substitute for portions of the bar exam, as the University of New Hampshire has done. Bar examiners could audit these classes for content and rigor.
  • Encourage bar associations, law schools, and other organizations to develop postgraduate lawyering institutes to replace some (or all) of the bar exam. Law graduates currently spend more than $100 million annually on bar review courses—in addition to the fees they pay to take the bar. That money could support six to eight week intensive summer programs to teach and assess new graduates’ lawyering competence.

I thought about these criticisms and recommendations as I graded my Business Associations exam this week. Every year, I dutifully spend time on GPs, LPs, and LLPs in class and test on them during exam time because the Florida bar tests on these business subjects every year. The bar pays scant attention to LLCs even though that’s the fastest growing business entity in my state. Indeed, I have had almost a dozen guest speakers in my startup law skills class, and all of the attorneys indicated that they deal almost exclusively with LLCs and corporations. I worry when I spend time on interviewing and negotiation skills in the doctrinal class because the bar won’t test on these topics, but these are precisely the skills my students will need in practice.

Perhaps I worry for nothing. After the administration of every bar exam, I receive notes from students indicating that they felt prepared for both the exam and for life after law school. But I fear that schools do too little to prepare students for either. I highly recommend that you read Merritt’s article and if you agree with her, work with your state bar and the NCBE on reform.


 


 

 

May 11, 2017 in Corporations, Current Affairs, Law School, Lawyering, LLCs, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Tuesday, May 2, 2017

Fake News! Trump's LLCs Are Not Corporations

It's exam-grading time, so my focus is largely on that.  I did do my usual peruse of the news, though, and I found a whole host of news outlets discussing President Trump's tax plan, which proposes to lower income tax rates on pass-through entities.  As one of the pieces explains

Pass-through income, for those of you who aren’t tax nerds, is business income that’s reported on a personal return. It comes from partnerships, limited-liability corporations and other closely held businesses, including Trump’s own family real estate operation.

First of all, knowing about pass-through income does not make you a tax nerd. I don't think. 

Beyond that, though, limited liability corporations are not a thing.  And, limited liability companies (LLCs) are generally chosen for pass-though tax status, but they don't have to be. They can chose to be taxed as C corporations at the federal level, if they wish.  Furthermore, partnerships, such as MLPs, and LLCs don't have to be closely held. They can be publicly traded.  

Multiple outlets got on the incorrect"limited-liability corporations" bandwagon. Even Barron's! Oh, well.. For now, I guess I will just continue to note that LLCs are still limited liability companies.  

Happy grading to those in the same boat, and good thoughts to the students taking our exams.  We really do want you to succeed, so please, show us what you know. 

 

May 2, 2017 in Corporations, Joshua P. Fershee, LLCs, Partnership | Permalink | Comments (2)

Wednesday, April 26, 2017

What's next for conflict minerals legislation? My views and the GAO report

Last week, a reporter interviewed me regarding conflict minerals.The reporter specifically asked whether I believed there would be more litigation on conflict minerals and whether the SEC's lack of enforcement would cause companies to stop doing due diligence. I am not sure which, if any, of my remarks will appear in print so I am posting some of my comments below:

I expect that if conflict minerals legislation survives, it will take a different form. The SEC asked for comments at the end of January, and I've read most of the comment letters. Many, including Trillium Asset Management, focus on the need to stay the course with the Rule, citing some success in making many mines conflict free. Others oppose the rule because of the expense. However, it appears that the costs haven't been as high as most people expected, and indeed many of the tech companies such as Apple and Intel have voiced support for the rule. It's likely that they have already operationalized the due diligence. The SEC has limits on what it can do, so I expect Congress to take action, unless there is an executive order from President Trump, which people have been expecting since February. 
 
The Senate Foreign Relations subcommittee on Africa held a hearing on conflict minerals on April 5, and some of the witnesses and Senators talked about what hasn't worked with the rule. Although the situation has improved, the violence continues, most notably with the murder of a member of the UN Group of Experts just last week. Rick Goss from the Information Technology Council testified the while the Rule has had some benefits such as increased transparency and raising global awareness, there are also things that don't work. He discussed fact that the illicit trade in gold continues and criminal elements are still exploiting other resources. A number of his and other witness' proposed solutions were more holistic and geopolitical and went beyond the SEC's purview, and I think that's where the government should look when trying to address these issues. You may see a push toward a safe harbor, which came up in some of the comment letters, and which was a point of discussion during the Senate testimony. With a safe harbor, the issuer could rely on supplier certifications.
 
Lack of enforcement or less enforcement could cause more issuers to continue to do business or start doing business there because it will be less onerous. On the other hand, with with the EU's conflict mineral rules, which will come into play in 2021 and which covers the same minerals (but is not limited in geography) you may find that the big issuers decide to stay the course with due diligence.
 
I have been focusing my research on the consumer aspect of these name and shame laws. While there have been conflict-free campuses and conflict-free cities (and some of them sent letters to the SEC), I haven't seen solid evidence that shows that consumers are boycotting the companies that aren't doing the full due diligence that 1502 requires or rewarding those that do. Apple is a stand-out in conflict minerals compliance but they also happen to sell something that people really want.
 
Although firms like Trillium state that investors like the transparency, they are likely benefitting from an improved supply chain in general because companies that attempted to follow 1502 by necessity had to upgrade systems and supplier protocols.
 
So in sum, I think that the firms that are already doing what they are supposed to may continue to do so (or scale back just a little) and may tout these voluntary efforts in their CSR reports. Those who have been unable to determine the origin of their minerals won't likely do any more than they have to or may just source their minerals elsewhere.
 
If Congress keeps the rule, I recommend that the SEC:
 
1) limit reporting obligations to those companies that manufacture products;
2) add a de minimis exception to the Conflict Minerals Rule; and
3) include a safe harbor provision to allow issuers to rely upon defined contract provisions and supplier certifications.
 
Ideally, theTrump government should take the onus of the responsibility for solving this human rights crisis off the private sector and instead work with the Congolese government, other governments, and NGOs on holistic solutions, especially as it relates to the members of the armed forces, who are also involved in illegal mineral trade and human rights abuses.
 

Just today, the GAO issued a report on conflict minerals. Dodd-Frank requires an annual report on the effectiveness of the rule "in promoting peace and security in the DRC and adjoining countries." Of note, the report explained that:

After conducting due diligence, an estimated 39 percent of the companies reported in 2016 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 23 percent in 2015. Almost all of the companies that reported conducting due diligence in 2016 reported that they could not determine whether the conflict minerals financed or benefited armed groups, as in 2015 and 2014. (emphasis added).

The Trump Administration, some SEC commissioners, and many in Congress have already voiced their concerns about this legislation. I didn't have the benefit of the GAO report during my interview, but it will likely provide another nail in the coffin of the conflict minerals rule. 

 

 

 

April 26, 2017 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (1)