Tuesday, January 27, 2015
Lawrence Cunningham has written an interesting piece for the Wall Street Journal, The Secret Sauce of Corporate Leadership: Splitting the CEO and chairman jobs is beside the point. What’s needed is a skeptical No. 2.
Cunningham argues that measures to split the role of board chair and CEO largely miss the point because such a move, and similar moves, don't clearly lead to the desired goal. He explains:
Research on the effects of splitting the chief and chairman roles shows that results can depend on where the split takes place: It tends to improve performance at struggling companies—but it impairs prosperous firms. Yet exact effects vary depending on the circumstances, such as whether the switch happened with the appointment of a new CEO or with the demotion of an incumbent.
The movement to split the two roles is part of corporate America’s tendency to address problems with procedural remedies such as expanding board size, adding independent directors, adopting a new code of ethics, updating firm compliance programs, and appointing a monitor to oversee it all. While such steps get attention and can improve an organization’s health, the informal norms that define a corporate culture are more powerful, and Bank of America is right to examine itself in the light of basic principles.
There is a better way to foster excellence in chief executives: Appoint a noncombative but skeptical partner as second in command. This model has been the secret sauce in outstanding corporate cultures at dozens of America’s best companies.
I have a few thoughts to add to this. First, I agree that whether to allow a single person to hold the chair and CEO position is case dependent. I am inclined to defer to the board of directors on that decision, but if enough shareholders want the positions separate (or combined), more power to them.
Second, I think there is a bigger issue at play here in corporate (and other group) decision making. That is, as a general matter, rules and policies should be made based on the desired goals and the long-term plans, and not based on an individual. Thus, deciding to never allow a combined CEO and chair position because we don't want a particular person to hold the role is silly. Just don't let that person have both roles. Any time we create rules designed to punish (or benefit) a particular person, we often create unintended consequences that punish or benefit others in ways that were not contemplated.
Finally, Cunningham is certainly correct when he says, "Effective corporate leaders also stress that a strong culture matters because it translates into economic gain." That said, sometimes its seems some boards (and other entities and institutions seeking leaders) believe a strong culture can be built overnight. Tweaking rules and policies can sometimes help, but trying to rush that culture sometimes simply ensures mediocrity. Just ask the New York Jets.
Thursday, January 15, 2015
Greetings from Dublin. Between the Guinness tour, the champagne afternoon tea, and the jet lag, I don’t have the mental energy to do the blog I planned to write with a deep analysis of the AALS conference in DC. I live tweeted for several days and here my top 25 tweets from the conference. I have also added some that I re-tweeted from sessions I did not attend. I apologize for any misspellings and for the potentially misleading title of this post:
Posner: judges ought to give reasons for rulings but shouldn't pretend they're interpreting intention of the statute drafters #AALS2015— Dalie Jimenez (@daliejimenez) January 5, 2015
Studies show that scholars are more productive if they write 15-30 minutes every day- more so if they are accountable for time #AALS2015— Marcia Narine (@mlnarine) January 4, 2015
#AALS2015 Judge Rosenthal-lots of questions are so practical re access to courts that academics haven't focused on them.— Marcia Narine (@mlnarine) January 3, 2015
Next week I will write about the reason I'm in Dublin.
January 15, 2015 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporate Personality, Corporations, CSR, Delaware, Financial Markets, Marcia Narine, Securities Regulation, Travel | Permalink | Comments (0)
Monday, January 12, 2015
I recently was afforded the opportunity to draft a short article for the William & Mary Journal of Women and the Law that combines my research on crowd theory (from the crowdfunding space) and my research on women and corporate governance. The opportunity arose out of a celebration of the 20th anniversary of the journal, for which I had been a published author in the past. (The journal published my article on women as investors in the context of securities fraud, Female Investors and Securities Fraud: Is the Reasonable Investor a Woman?, back in 2009.)
I just posted the recently released final version of the 20th anniversary article, entitled Women in the Crowd of Corporate Directors: Following, Walking Alone, and Meaningfully Contributing, to the Social Sciences Research Network. My application of crowd theory to the gender composition of corporate boards of directors in this article does not provide significant new insights on the decision making of female corporate directors. However, it does result in the observation that women on corporate boards may foster the establishment of new board structures and policies that have the potential to favorably impact board decision making. The bottom line? More--and more novel--research still is needed on the presence and contribution of women on corporate boards of directors.
My article represents a brief exploration, but I may well continue my work in this general area. Accordingly, I would be interested in knowing about others doing similar or related research. Let me know in the comments or by email message if you would like to alert me to your relevant research and writing.
Friday, January 9, 2015
There are many Delaware cases from 2014 that are worth reading, but below are three relatively recent Delaware cases that I found worthwhile. I provide the case name, my very short takeaway, and links to the case and additional commentary for those who wish to dive deeper.
In re Zhongpin Inc. Stockholders Litigation, controlling stockholders, decided Nov. 26, 2014. In denying a motion to dismiss, the Delaware Court of Chancery found a reasonable inference that a 17.3% stockholder/CEO could be a “controlling stockholder.” I have not done an exhaustive search on this issue, but this is a lower percentage of ownership for a “controlling stockholder” than I have seen in most cases, though (of course) the analysis is case specific. Additional commentary by Toby Myerson (Paul Weiss).
C.J. Energy Services, Inc. et al v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust, M&A/Revlon, decided Dec. 19, 2014. The Delaware Court of Chancery held that “there was a ‘plausible’ violation of the board’s Revlon duties because the board did not affirmatively shop the company either before or after signing.” (pg. 3). The Delaware Court of Chancery enjoined the shareholder vote on the transaction at issue for 30-days and “required [the defendant] to shop itself in violation of the merger agreement . . . which prohibited [the defendant] from soliciting other bids.” Id. In this case, the Delaware Supreme Court reserved, stating that the Court of Chancery did not fulfill the stringent requirements for issuing a mandatory injunction, reminding that there are various ways to satisfy Revlon, and mentioning that this case did not have evidence of “defensive, entrenching motives,” as seen in Revlon and QVC. Note that the 38-page opinion was cranked out in just two days after the case was submitted. The handling of these expedited cases by the Delaware courts is one of the things that make Delaware attractive to corporations. Additional commentary by Brian Quinn (Boston College).
United Technologies Corp. v. Lawrence Treppel, books and records, decided Dec. 23, 2014. The Delaware Supreme Court reversed the Delaware Court of Chancery’s holding that the Court of Chancery did not have authority to restrict documents produced in a books and records inspection to use only in cases filed in Delaware courts. The Delaware Supreme Court remanded to the Delaware Court of Chancery to decide whether the Court of Chancery will exercise its discretion to so restrict the use of the information obtained in the books and records inspection. In this case, United Technologies insisted that Treppel sign a confidentiality agreement when he sought to inspect books and records, which is fairly common, but the confidentiality agreement also limited the forum, of any claim brought using the information inspected, to Delaware courts. At the time of the inspection request, United Technologies did not have a forum selection clause in its bylaws, but it later adopted one. As the broader forum selection debates continue, it will be interesting to see how the Delaware Court of Chancery handles this case in the books and records context, especially because the Delaware Court of Chancery has been encouraging plaintiffs to use the “tools at hand,” such as books and records requests, before filing derivative lawsuits. Beyond the substance, one remarkable thing about this decision is that Chief Justice Leo Strine authored an opinion that was only 14 pages. When he was on the Court of Chancery he would author 100+ page opinions with some regularity. Granted, the Court of Chancery is a trial court and their opinions tend to be a good bit longer than the Delaware Supreme Court opinions, regardless of the judge. Additional commentary by Celia Taylor (Denver Law).
For reading beyond these three cases, former Delaware Supreme Court Justice Jack Jacobs comments on two additional recent Delaware cases here (M&A related).
Wednesday, January 7, 2015
I had very limited time at AALS this year (unfortunately) but I still walked away with some great ideas (and a chance to say hello to a few, but not enough, friendly faces). I am borrowing from many ideas shared in the panel cited below, as well as a few of my own. As many of you prepare to teach BA/Corporations for the spring (or making notes on how to do it next time), here are a few fun new resources to help illustrate common concepts:
- HBO's The Newsroom. A hostile takeover, negotiations with a white knight-- all sorts of corporate drama unfolded on HBO's Season 3 of The Newsroom. I couldn't find clips on youtube, but episode recaps (like this) are available and provide a good reference point/story line/hypo/exam problem for class.
- Related, for those of you who teach or encourage the use of Bloomberg services, the Bloomberg terminal was even featured prominently in the season.
- This American Life-- Wake Up Now Act 2 (Dec. 26, 2014). This brief radio segment/podcast tells the story of two investors trying to reduce the pay of a company CEO. The segment discusses board of director elections, board duties, board functions and set up some large questions about whether or not shareholders are the owners of the corporation and their profit maximization is the ultimate goal for a company. This could be followed with Lynn Stout's 2012 NYT Dealbook article proposing the opposite view.
- HBO's Silicon Valley. For all things tech, start up, entrepreneurship and basic corporate formation, clips (you will want to find something without all of the swears, I suspect) and episode recaps from this popular show illustrate concepts and connect with students. Again, great for discussion, hypos, and exam fact patterns.
- The Shark Tank!. I have to thank Christyne Vachon at UD for this idea. There are tons of clips on youtube and most offer the opportunity to talk about investors bringing different things to the table, how to apportion control, etc. Here is an episode involving patent issues. I think that I am going to open my experiential Unincorporated/Drafting class with a Shark Tank clip on Monday.
- Start Up Podcasts. These 30-minute episodes cover a wide range of topics. Here is one podcast on how to value a small business. At a minimum, I will post some of these to my course website this spring. (Thank you Andrew Haile at Elon for this recommendation.).
- Planet Money. The podcasts are a great resource, but what I love is the Planet Money Twitter page because it is a great way to digest daily news, current events and topical developments that may be incorporated into your class.
- Wall Street Journal--TWEETS. (that felt like an oxymoron to write). Aside from the obvious, I find the Twitter feed to be the most useful way to use/monitor the WSJ. I will admit it, I don't "read" it every day, but this is my proxy.
Special thanks to the participants in the Agency, Partnership & the Law's panel on Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
Moderator: Jeffrey M. Lipshaw, Suffolk University Law School
Lawrence A. Cunningham, The George Washington University Law School
Andrew J. Haile, Elon University School of Law
Usha R. Rodrigues, University of Georgia School of Law
Christyne Vachon, University of North Dakota School of Law
Eric C. Chaffee, University of Toledo College of Law
Franklin A. Gevurtz, University of the Pacific, McGeorge School of Law
And Happy New Year BLPB Readers!
Tuesday, January 6, 2015
Over at The Conglomerate, Usha Rodrigues says, "Larry Ribstein was wrong." Usha argues that she's right to teach LLCs at the end of the course, and Larry was of the mind that LLCs should play a more prominent role in the business entities course.
For my teaching, I'm with Larry on this, though I am also of the mind that Usha (and other teachers) may have different goals, so taking another tack is not wrong. I'm pretty sure we're all better teachers when we are true to ourselves and our thinking. For me, anyway, I am, without a doubt, at my worst in the classroom (and probably out) when I try to mimic someone else.
So here's how Usha explains her thinking:
I don't leave LLCs til the end of the semester because I think they're unimportant. It's because the cases are so damn thin. It's still such a new form, I just don't see much there there. Most of them wind up being trial courts who read the statute in completely stupid ways. Blech.
So I teach corporations and partnerships emphasizing fiduciary duty, default vs. mandatory rules, and the importance of the code. In fact, one semester I confess that I would ask a question and then intone, "Look to the code!" so often I felt like a Tolkien refugee. By the time I get to the LLCs cases, which are pretty basic, the class is ready for my message: the LLC is a new form. When dealing with something new, judges look both to the organizational statutes and to the organizational forms they know as they shape the law. Plus the LLC is such an interesting mix between the corporate and partnership form, it just makes sense to get through them both before diving in.
It's hard to argue with Usha's rationale. Like Larry, she's smart, and this is a reasonable take. For me, though, it doesn't work toward my goals, so I have a different point of view. I think it's more in line with where Larry was coming from, though I admit I don't know.
Here's why: I want students (and lawyers and courts) to treat LLCs as unique entities. Leaving them to the end of the course reinforces the idea that LLCs are hybrid entities the combine partnerships and corporations. I just don't think that's the right way to think about LLCs.
Certainly, it is true that LLCs share characteristics of partnerships and corporations. But partnerships and corporations can have similarities, too. We can, for example, refer back to the partnership case of Meinhard v. Salmon when discussing corporate fiduciary duties and corporate opportunity.
In my experience, teaching LLCs at the end of the course seemed to frame the LLC as an entity that is just pulling from partnership or corporate law. As such, it seemed the students were thinking that the real challenge for LLCs was figuring out whether to pull from partnership law or corporate law for an analogy. Part of the reason for that, I think, is that so many of the LLCs cases seem to think so, too. See, e.g., Flahive. As Usha would say, "Blech."
The LLC is prominent enough in today's world that I think it warrants a more prominent role in the introductory business organizations course. If we don't bring the LLCs more to the fore, we allow courts to continue to misconstrue the entity form, in part because we aren't giving students the tools they need to ensure courts understand the unique nature of the LLC.
I figure Usha can get students where she needs to on this regardless of how she teaches business associations. She is a lot smarter than I am. Given my goals and how I think about the LLC, though, I'll keep starting my class with an introduction to LLC formation, and I'll keep teaching LLC cases and issues throughout the semester.
Monday, January 5, 2015
I just left the Association of American Law Schools annual meeting this morning. I came back to a flat tire at the airport, but let's not dwell on that . . . . The conference was a good one, as these zoo-like mega conferences go.
I presented at the conference as part of a panel that focused on teaching courses and topics at the intersection of animals and the law. (Thanks for the plug, Stefan!) Yes, although it is a little known fact, I do teach courses involving animals and the law. Regrettably, it is a somewhat rare thing for me, since I always have to teach these courses as an overload. However, I also am the faculty advisor to our campus chapter of the Student Animal Legal Defense Fund and UT Pro Bono's Animal Law Project (which compiled and annually updates a Tennessee statutory resource used by animal control and other law enforcement officers, as well as other animal-focused professionals, in the State of Tennessee). In addition, I coach our National Animal Law Competitions team. These non-classroom activities give me ample time to teach in different ways . . . .
I will not rehash all of my remarks from the panel presentation here. In fact, I want to make a very limited point in this post. While my calling to legal issues involving non-human animals is rooted in large part in being the "animal mom" of a rescue dog and rescue cat, I also participate in educational efforts in this area because I see it as my professional responsibility as a lawyer--and in particular, as a business lawyer.
Friday, January 2, 2015
To the extent you will be attending the Association of American Law Schools Annual Meeting in DC, here are a couple of panel recommendations that come with the added benefit of meeting a BLPB blogger in person:
1. Keeping it Current: Animal Law Examples Across the Curriculum (01/03/2015, 5:15-6:30 pm)
Moderator: Katherine M. Hessler, Lewis and Clark
Speaker: Susan J. Hankin, Maryland
Speaker: Joan M. Heminway, Tennessee
Speaker: Courtney G. Lee, McGeorge
Speaker: Kristen A. Stilt, Harvard
2. The Role of Corporate Personality Theory in Regulating Corporations (1/5/2015, 2:00-3:00 pm)
Moderator: Stefan Padfield, Akron
Speaker: Margaret Blair, Vanderbilt
Speaker: Elizabeth Pollman, Loyola
Speaker: Lisa Fairfax, George Washington
Speaker: David Yosifon, Santa Clara
PS--For more information on the day-long program of the AALS Section on Socio-Economics on Monday, Jan. 5, as well as the day-long Annual Meeting of the Society of Socio-Economists on Tuesday, Jan. 6, go here.
Thursday, January 1, 2015
Happy New Year.
Starting Saturday morning (or maybe tomorrow night), I'll be live tweeting from the Association of American Law Schools (AALS) conference. Because I teach both civil procedure and business associations, my tweets will largely relate to those sessions as well as sessions for new law professors.
Next Thursday I will summarize the high points of the conference, at least from my perspective.
My twitter handle is @mlnarine and the AALS hashtag is #AALS2015. If you're at the conference and a blog reader, please say hello.
Tuesday, December 30, 2014
I continue to document how courts (and lawyers) continue to conflate (and thus confuse) LLCs and corporations, so I did a quick look at some recent cases to see if anything of interest was recently filed. Sure enough, there are more than few references to "limited liability corporations" (when the court meant "limited liability companies." That's annoying, but not especially interesting at this point.
One case did grab my eye, though, because because of the way the court lays out and resolves the plaintiffs' claim. The case is McKee v. Whitman & Meyers, LLC, 13-CV-793-JTC, 2014 WL 7272748 (W.D.N.Y. Dec. 18, 2014). In McKee, theplaintiff filed a complaint claiming several violations of the Fair Debt Collection Practices Act against defendants Whitman & Meyers, LLC and Joseph M. Goho, who failed to appear and defend this action, leading to a default judgment. After the default judgment was entered, defense counsel finally responded.
This case has all sorts of good lessons. Lesson 1: don't forget that all named parties matter. Get this:
Defense counsel admits that he was under the mistaken assumption that default was to be taken against the corporate entity only. See Item 17. However, default was entered as to both the corporate and individual defendants on July 3, 2014 (Item 9). Defense counsel did not move to vacate the default and in fact did not respond in any way until the default judgment was entered on September 17, 2014. Item 12. Even then, the defense motion was framed as one for an extension of time in which to file an answer (Item 14), rather than a motion to vacate the default or default judgment. Inexplicably, in his papers, defense counsel states that a default judgment has not been entered. See Item 17. Since good cause is to be construed generously and doubts resolved in favor of the defaulting party, see Enron Oil Corp., 10 F.3d at 96, the court will accept the explanation of defense counsel as evidence of a careless lack of attention to procedural detail rather than an egregious and willful default on the part of defendant Goho [the individual and apparent owner of the LLC].
Friday, December 19, 2014
This week I had nice conversations with Brad Edmondson (Author of Ice Cream Social: The Struggle for the Soul of Ben & Jerry’s) and Michael Pirron (CEO of ImpactMakers, a certified benefit corporation).*
Both conversations turned to a topic that has been on my mind recently – that of social businesses that are acquired by large conglomerates that do not seem to have a similar mission.
A few of the parent/sub relationships that spring to mind (or that were discussed) include:
- Campbell Soup / Plum Organics
- Coca-Cola / Honest Tea
- Colgate-Palmolive / Tom’s of Maine
- Clorox / Burt’s Bees
- Group Danone / Stonyfield Farm
- Unilever / Ben & Jerry’s
I may update this list from time to time, so feel free to suggest additions in the comments.
At The Guardian, Kyle Westaway argues that Burt Bees worked from within Clorox to make the entire company more sustainable. Similarly, some argue that Unilever has become more sustainable after (and maybe because of) their acquisition of Ben & Jerry’s.
I have heard others argue that social businesses like Burt's Bees and Ben & Jerry’s “sold out,” and that the acquiring large conglomerates tend to cut many socially beneficial initiatives. The conglomerates, these folks argue, are only doing enough for society to keep the customer goodwill and the resulting profits.
While each acquisition is different, I imagine both sides of the argument can find some support in the facts.
As someone interested in corporate governance, I hope to explore the governance issues involved when a conglomerate owns a social subsidiary in future articles. In Ben & Jerry’s case, I know they put a number of interesting clauses into the acquisition agreement, such as restricting certain action by Unilever regarding employees and local operations (for a period of time) and establishing an independent (and I believe self-perpetuating) board of directors for Ben & Jerry’s. I am still investigating exactly how much power the Ben & Jerry’s board of directors has, and Unilever did eventually lay off some Ben & Jerry’s employees and close some local plants. In addition, Unilever and Ben & Jerry’s have not always agreed and have taken different, public stances on issues like GMO labeling. But Unilever has become a champion of sustainability among larger companies.
Personally, I am not sure whether social businesses will tend to have more impact as independent businesses or as social subsidiaries of larger companies – and it may be impossible to generalize – but I will continue to watch future acquisitions and development in this area with interest.
* My co-bloggers Joan Heminway and Marcia Narine may remember Michael Pirron from a Regent Law symposium they spoke at on social enterprise law. That was a fun conference and it was good to catch up with Micheal and hear how much his company has grown in the past year and a half.
Monday, December 15, 2014
. . . here's a relatively new Dodge Challenger commercial (part of a series) that you may find amusing. I saw it during Saturday Night Live the other night and just had to go find it on YouTube. It, together with the other commercials in the series, commemorate the Dodge brand's 100-year anniversary. "They believed in more than the assembly line . . . ." Indeed!
You also may enjoy (but may already have read) this engaging and useful essay written by Todd Henderson on the case. The essay provides significant background information about and commentary on the court's opinion. It is a great example of how an informed observer can use the facts of and underlying a transactional business case to help others better understand the law of the case and see broader connections to transactional business law generally. Great stuff.
On December 10, the press reported the Second Circuit's decision in the insider trading prosecution of Todd Newman and Anthony Chiasson (two of multiple defendants in the original case). In its opinion, the court reaffirms that tippee liability for insider trading is predicated on a breach of fiduciary duty based on the receipt of a personal benefit by the tipper and clarifies that insider trading liability will not result unless the tippee has knowledge of the facts constituting the breach (i.e., "knew that the insider disclosed confidential information in exchange for a personal benefit"). The court summarized its opinion, which addresses these matters in the context of the Newman case, a criminal case, as follows:
[W]e conclude that, in order to sustain a conviction for insider trading, the Government must prove beyond a reasonable doubt that the tippee knew that an insider disclosed confidential information and that he did so in exchange for a personal benefit. Moreover, we hold that the evidence was insufficient to sustain a guilty verdict against Newman and Chiasson for two reasons. First, the Government’s evidence of any personal benefit received by the alleged insiders was insufficient to establish the tipper liability from which defendants’ purported tippee liability would derive. Second, even assuming that the scant evidence offered on the issue of personal benefit was sufficient, which we conclude it was not, the Government presented no evidence that Newman and Chiasson knew that they were trading on information obtained from insiders in violation of those insiders’ fiduciary duties.
Thursday, December 11, 2014
In many companies, executives and employees alike will give a blank stare if you discuss “human rights.” They understand the terms “supply chain” and “labor” but don’t always make the leap to the potentially loaded term “human rights.” But business and human rights is all encompassing and leads to a number of uncomfortable questions for firms. When an extractive company wants to get to the coal, the minerals, or the oil, what rights do the indigenous peoples have to their land? If there is a human right to “water” or “food,” do Kellogg’s, Coca Cola, and General Mills have a special duty to protect the environment and safeguard the rights of women, children and human rights defenders? Oxfam’s Behind the Brands Campaign says yes, and provides a scorecard. How should companies operating in dangerous lands provide security for their property and personnel? Are they responsible if the host country’s security forces commit massacres while protecting their corporate property? What actions make companies complicit with state abuses and not merely bystanders? What about the digital domain and state surveillance? What rights should companies protect and how do they balance those with government requests for information?
The disconnect between “business” and “human rights” has been slowly eroding over the past few years, and especially since the 2011 release of the UN Guiding Principles on Business and Human Rights. Businesses, law firms, and financial institutions have started to pay attention in part because of the Principles but also because of NGO pressures to act. The Principles operationalize a "protect, respect, and remedy" framework, which indicates that: (i) states have a duty to protect against human rights abuses by third parties, including businesses; (ii) businesses have a responsibility to comply with applicable laws and respect human rights; and (iii) victims of human rights abuses should have access to judicial and non-judicial grievance mechanisms from both the state and businesses.
Many think that the states aren’t acting quickly enough in their obligations to create National Action Plans to address their duty to protect human rights, and that in fact businesses are doing most of the legwork (albeit very slowly themselves). The UK, Netherlands, Spain, Italy and Denmark have already started and the US announced its intentions to create its Plan in September 2014. A number of other states announced that they too will work on National Action Plans at the recent UN Forum on Business and Human Rights that I attended in Geneva in early December. For a great blog post on the event see ICAR director Amol Mehra's Huffington Post piece.
What would a US National Action plan contain? Some believe that it would involve more disclosure regulation similar to the Dodd-Frank Conflict Minerals Rule, the Ending Trafficking in Government Contracting Act, Trafficking Victims Protection Act, the Burma Reporting Requirements on Responsible Investment, and others. Some hope that it will provide additional redress mechanisms after the Supreme Court’s decision in Kiobel significantly limited access to US courts on jurisdictional grounds for foreign human rights litigants suing foreign companies for actions that took place outside of the United States.
But what about the role of business? Here are five observations from my trip to Geneva:
1) It's not all about large Western multinationals: As the Chair of the Forum Mo Ibrahim pointed out, it was fantastic to hear from the CEOs of Nestle and Unilever, but the vast majority of people in China, Sudan and Latin American countries with human rights abuses don’t work for large multinationals. John Ruggie, the architect of the Principles reminded the audience that most of the largest companies in the world right now aren’t even from Western nations. These include Saudi Aromco (world’s largest oil company), Foxconn (largest electronics company), and India’s Tata Group (the UK’s largest manufacturing company).
2) It’s not all about maximization of shareholder value: Unilever CEO Paul Pollman gave an impassioned speech about the need for businesses to do their part to protect human rights. He was followed by the CEO of Nestle. (The opening session with both speeches as well as others from labor and civil society was approximately two hours long and is here). In separate sessions, representatives from Michelin, Chevron, Heinekin, Statoil, Rio Tinto, Barrick, and dozens of other businesses discussed how they are implementing human rights due diligence and practices into their operations and metrics, often working with the NGOs that in the past have been their largest critics such as Amnesty International, Human Rights Watch and Oxfam. The US Council for International Business, USCIB, also played a prominent role speaking on behalf of US and international business interests.
3) Investors and lenders are watching: Calvert; the Office of Investment Policy at OPIC, the US government’s development finance institution; the Peruvian Financial Authority; the Supervision Office of the Banco Central do Brasil; the Vice Chair of the Banking Association of Colombia; the European Investment Bank; and Swedfund, among others discussed how and why financial institutions are scrutinizing human rights practices and monitoring them as contractual terms. This has real world impact as development institutions weigh choices about whether to lend to a company in a country that does not allow women to own land, but that will provide other economic opportunities to those women (the lender made the investment). OPIC, which has an 18 billion dollar portfolio in 100 countries, indicated that they see a large trend in impact investing.
4) Integrated reporting is here to stay: Among other things, Calvert, which manages 14 billion in 40 mutual funds, focused on their commitment to companies with solid track records on environmental, social, and governance factors and discussed the benefits of stand alone or integrated reporting. Lawyers from some of the largest law firms in the world indicated that they are working with their clients to prepare for additional non-financial reporting, in part because of countries like the UK that will mandate more in 2016, and an EU disclosure directive that will affect 6,000 firms.
5) Is an International Arbitration Tribunal on the way?: A number of prominent lawyers, retired judges and academics from around the world are working on a proposal for an international arbitration tribunal for human rights abuses. Spearheaded by lawyers for better business, this would either supplement or possibly replace in some people’s view a binding treaty on business and human rights. Having served as a compliance officer who dealt extensively with global supply chains, I have doubts as to how many suppliers will willingly contract to appear before an international tribunal when their workers or members of indigenous communities are harmed. I also wonder about the incentives for corporations, the governing law, the consent of third parties, and a host of other sticking points. Some raised valid concerns about whether privatizing remedies takes the pressure off of states to do their part. But it’s a start down an inevitable road as companies operate around the world and want some level of certainty as to their rights and obligations.
On another note, I attended several panels in which business executives, law firm partners, and members of NGOs decried the lack of training on business and human rights in law schools. Even though professors struggle to cover the required content, I see this area as akin to the compliance conversations that are happening now in law schools. There is legal work in this field and there will be more. I look forward to integrating some of this information into an upcoming seminar.
In the meantime, I tried to include some observations that might be of interest to this audience. If you want to learn more about the conference generally you can look to the twitter feed on #bizhumanrights or #unforumwatch, which has great links. I also recommend the newly released Top 10 Business and Human Rights Issues Whitepaper.
December 11, 2014 in Business Associations, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, International Business, Jobs, Law School, Marcia Narine, Securities Regulation, Teaching | Permalink | Comments (0)
Tuesday, December 9, 2014
The New York Times reports that LLCs have the ability to do things in New York politics that corporations cannot do:
For powerful politicians and the big businesses they court, getting around New York’s campaign donation limits is easy.
. . .
Corporations like Glenwood are permitted to make a total of no more than $5,000 a year in political donations. But New York’s “LLC loophole” treats limited-liability companies as people, not corporations, allowing them to donate up to $60,800 to a statewide candidate per election cycle. So when Mr. Cuomo’s campaign wanted to nail down what became a $1 million multiyear commitment — and suggested “breaking it down into biannual installments” — the company complied by dividing each payment into permissible amounts and contributing those through some of the many opaquely named limited-liability companies it controlled, like Tribeca North End LLC.
It may appear unseemly to allow LLCs to do things corporations cannot do, but (as usual) I bristle at the implication that LLCs should be treated like corporations just because they are limited-liability entities. Perhaps LLCs and corporations should be treated the same for campaign purposes (and I am inclined to think they should be), but there are lots of reasons to treat LLCs differently than corporations, and it is not inherently "a loophole" when they are treated differently.
A loophole is an ambiguity or inadequacy in the law. Here, the different treatment is not an ambiguity, though it is inadequate to limit funding in campaigns. However, it is not at all clear that the intent was to limit funding through LLCs. The law was likely passed so that the legislature could say it did something to reform finance. It did -- it closed the door for corporations and opened the door for LLCs. Playing entity favorites is permissible, even if it's not sensible.
LLCs and corporations are different entities, and different rules for different entities often makes a whole lot of sense. And even when it doesn't make sense, the idea that different entities should have different rules still does. Let's not conflate the two concepts, even when decrying the impact.
Monday, December 8, 2014
In the comments to my post last week on teaching fiduciary duty in Business Associations, Steve Diamond asked whether I had blogged about why we changed our four-credit-hour Business Associations course at The University of Tennessee College of Law to a three-credit-hour offering. In response, I suggested I might blog about that this week. So, here we are . . . .
Thursday, December 4, 2014
I had planned to blog about the UN Forum on Business and Human Rights this week, but my head is overflowing with information about export credits, development financing, a possible international arbitration tribunal, remarks by the CEOs of Nestle and Unilever, and the polite rebuff to the remarks by the Ambassador of Qatar by a human rights activist in the plenary session. Next week, in between exam grading, I promise to blog about some of the new developments that will affect business lawyers and professors. FYI, I apparently was one of the top live tweeters of the Forum (#bizhumanrights #unforumwatch) and gained many valuable contacts and dozens of new followers.
In the meantime, I recommend reading this great piece from the Legal Skills Prof Blog. As I prepare to teach BA for the third time (which I hear is the charm), I plan to refine the techniques I already use and adopt others where appropriate. The link is below.
Tuesday, December 2, 2014
Okay, so limited liability is probably not going away, though it appears that some would have it that way. "Eroding" is probably a better term, but that's less provocative.
In a piece at Forbes.com Jay Adkisson has posted his take on the Greenhunter case (pdf here), which I wrote about here. Mr. Adiksson is a knowledgeable person, and he knows his stuff, but he seems okay with the recent development of LLC veil piercing law in a way that I am not. For me, many recent cases similar to Greenhunter are off the mark, philosophically, economically, and equitably, in part because they run contrary to the legislation that created things like single-member LLCs.
One of my continuing problems with this case (as is often my problem with veil piercing cases), is that there are often other grounds for seeking payment other than veil piercing. Conflating veil piercing with other theories makes veil piercing and other doctrines murkier. More important, they make planning hard. Neither of these outcomes is productive.
In Greehunter, Adkisson notes the court’s determination of the “circumstances favoring veil piercing.” To begin:
+ There was a considerable overlap of the LLC’s and Greenhunter’s ownership, membership (which is really the same thing), and management. Plus, they used the same mailing address for invoices, and their accounting departments were the same folks.
Okay, first, a shared mailing address is a ridiculous test if we're going to allow subisidiaries at all. Sharing an address or even sharing an accounting department shouldn't really matter for veil piercing. This is really more of an enterprise liability-type issue, though the vertical nature of the entity relationship admittedly makes that harder. However, because an LLC doesn't have to follow formalities this is an absurd test. These facts also don’t, in any way, harm the plaintiffs. Make an agency claim or some other type of guarantor/reliance argument if there is one.
+ The LLC didn’t have any employees of its own, but instead relied upon Greenhunter’s employees to actually do things, including to pay creditors.
So what? Would this be true of a joint venture between partnerships? How about if there were just two LLC members – two people who never worked as employees the entity? Should veil piercing be okay then? No. If there is an agency claim, make that. If there is a guarantor claim, make that one. But this is not enough.
+ The LLC really didn’t have any revenue separate from Greenhunter, since the LLC simply passed through all the revenue to Greenhunter, and Greenhunter only kicked back enough money to the LLC to pay particular bills.
So the LLC would not have any money at all but for that which was put into it by the corporation. This was the structure at the time of deal and the set up at all times. If the creditor plaintiff were concerned, they should have raised that issue (and taken appropriate measures) earlier.
+ Although the LLC contracted with Western to procure services for the benefit of the wind farm, it was Greenhunter that claimed a $884,092 deduction for that project on its tax return.
This is how pass-through tax entities work. If pass-through taxation should not be allowed or single-member LLCs should not be allowed, then fine, but that’s a policy question to be raised with the legislature.
+ Greenhunter manipulated the assets and liabilities of the LLC so that Greenhunter got all the rewards and benefits (including tax breaks), but the LLC was stuck with the losses and liabilities.
This implies something was improperly taken from the LLC, but that's not really explained. If there was an improper transfer of value out of the LLC that should have available for the creditors, then the corporation should have to put those funds (that value) back into the LLC for purposes of creditors. That’s not veil piercing. If there’s not some kind of value that could be transferred back, then the claim doesn’t make sense.
Mr. Adkisson continues:
If one looks a veil piercing law as fundamentally comprising two elements: (1) unity of ownership, and (2) the entity was used as a vehicle to commit some wrong, then the single-member LLC (and the sole shareholder corporation) starts out with one foot in the veil piercing grave.
This is exactly why single-member LLCs are fundamentally lousy asset protection vehicles, despite the gazillion ads appearing in sports pages and classifieds advertising “Form an LLC for Asset Protection!”
This doesn’t mean that single-member LLCs should never be used; to the contrary, they are frequently and properly used in a number of situations for reasons other than liability protection.
First, I suppose this would be right if the premise were accurate, but I don’t see it this way. I don't think a “unity of ownership” is the first element for veil piercing. The above explanation is thus incomplete, and if a court follows it, the court would be wrong because it would be skipping the actual first part of the veil-piercing test. The Greenhunter case explains the proper test:
The veil of a limited liability company may be pierced under exceptional circumstances when: (1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity.
The Greenhunter court even quotes another recent Wyoming case in explaining the rule:
Before a corporation’s acts and obligations can be legally recognized as those of a particular person, and vice versa, it must be made to appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased, and that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.
Ridgerunner, LLC v. Meisinger, 2013 WY 31, ¶ 14, 297 P.3d 110, 115 (Wyo. 2013) (quotation marks and citations omitted).
Thus, it is more than a unity of ownership. There needs to be no separate or individual nature for the entity to satisfy the first prong. It’s not in any way a simple ownership test.
Second, I agree that LLCs are hardly perfect for asset protection and I agree that LLCs or other separate entities can be useful for reasons other than liability protection. Still, I find the idea that an LLC – a limited liability company – should be used for something other than “liability protection” to be an odd assertion. One can more easily set up a general partnership or simply a division of an existing entity to accomplish goals of separateness, if that’s the only point. Thus, one may choose an LLC for more than just limited liability purposes, but there’s no reason limited-liability protection wouldn't be a reason to choose an LLC.
The outcome of this case is, frankly, far less concerning to me than the rationale being put forth both in the case and some of the following analysis. I have to admit much of Mr. Adkisson’s analysis is consistent with how many courts see it. I just continue to believe we can do better in the development of veil piercing doctrine, and if we did, we'd see less need for it.
Creditors working with limited liability entities need to treat those entities as such. Ask the parent entity (or an owner) for a guarantee, get a statement of guaranteed funding, or seek some other type of reassurance.
As for courts, if you plan to pierce the veil of an LLC, fine, but please justify the veil piercing using specific reasons through specific application of the facts to the law. It’s more than unity of ownership, and it’s more than an inability to pay. Steve Bainbridge once noted (citing Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519, 524 (7th Cir. 1991):
As one court opined, “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced.
At least, that’s supposed to be the rule. I hope it still is.
Monday, December 1, 2014
Well, here we are at the end of another semester. I just finished teaching my last class in our new, three-credit-hour, basic Business Associations offering. (Next semester, I take my first shot at teaching a two-credit-hour advanced version of Business Associations. More to come on that at a later date.) The basic Business Associations course is intended to be an introduction to the doctrine and norms of business associations law--it is broad-based and designed to provide a foundation for practice (of whatever kind). I hope I didn't make hash out of everything in cutting back the material covered from the predecessor four-credit-hour version of Business Associations . . . .
I find teaching fiduciary duty in the corporations part of the basic Business Associations course more than a bit humbling. There is a lot there to offer, and one can only cover so much (whether in a three-credit-hour or four-credit-hour course format). Every year, I steel myself for the inevitable questions--in class, on the class website (TWEN), and in the post-term review session (scheduled for today at 5 PM)--about the law of fiduciary duty as it applies to directors. This past weekend, I received a question in that category on the course website. In pertinent part, it read as follows (as edited for fluency in some places):
I am having problems with understanding the duty of loyalty for directors.
First, . . . I don't think I know which transactions are breaches of loyalty. Do they include interested director transactions, competition, officer's compensation, and not acting in good faith? Second, do care, good faith, and loyalty all require that the directors be grossly negligent? I think I am just confused on the standard to determine whether a director has breached the duty of loyalty and/or care.
Thursday, November 27, 2014
As regular readers know, I research and write on business and human rights. For this reason, I really enjoyed the post about corporate citizenship on Thanksgiving by Ann Lipton, and Haskell Murray’s post about the social enterprise and strategic considerations behind a “values” message for Whole Foods, in contrast to the low price mantra for Wal-Mart. Both posts garnered a number of insightful comments.
As I write this on Thanksgiving Day, I’m working on a law review article, refining final exam questions, and meeting with students who have finals starting next week (being on campus is a great way to avoid holiday cooking, by the way). Fortunately, I gladly do all of this without complaint, but many workers are in stores setting up for “door-buster” sales that now start at Wal-Mart, JC Penney, Best Buy, and Toys R Us shortly after families clear the table on Thanksgiving, if not before. As Ann pointed out, a number of protestors have targeted these purportedly “anti-family” businesses and touted the “values” of those businesses that plan to stick to the now “normal” crack of dawn opening time on Friday (which of course requires workers to arrive in the middle of the night). The United Auto Workers plans to hold a series of protests at Wal-Mart in solidarity with the workers, and more are planned around the country.
I’m not sure what effect these protests will have on the bottom line, and I hope that someone does some good empirical research on this issue. On the one hand, boycotts can be a powerful motivator for firms to change behavior. Consumer boycotts have become an American tradition, dating back to the Boston Tea Party. But while boycotts can garner attention, my initial research reveals that most boycotts fail to have any noticeable impact for companies, although admittedly the negative media coverage that boycotts generate often makes it harder for a companies to control the messages they send out to the public. In order for boycotts to succeed there needs to be widespread support and consumers must be passionate about the issue.
In this age of “hashtag activism” or “slacktivism,” I’m not sure that a large number of people will sustain these boycotts. Furthermore, even when consumers vocalize their passion, it has not always translated to impact to lower revenue. For example, the CEO of Chick-Fil-A’s comments on gay marriage triggered a consumer boycott that opened up a platform to further political and social goals, although it did little to hurt the company’s bottom line and in fact led proponents of the CEO’s views to develop a campaign to counteract the boycott.
Similarly, I’m also not sure of the effect that socially responsible investors can have as it relates to these labor issues. In 2006, the Norwegian Pension Fund divested its $400 million position (over 14 million shares in the US and Mexico operations) in Wal-Mart. In fact, Wal-Mart constitutes two of the three companies excluded for “serious of systematic” human rights violations. Pension funds in Sweden and the Netherlands followed the Fund’s lead after determining that Wal-Mart had not done enough to change after meetings on its labor practices. In a similar decision, Portland has become the first major city to divest its Wal-Mart holdings. City Commissioner Steve Novick cited the company’s labor, wage and hour practices, and recent bribery scandal as significant factors in the decision. Yet, the allegations about Wal-Mart’s labor practices persist, notwithstanding a strong corporate social responsibility campaign to blunt the effects of the bad publicity. Perhaps more important to the Walton family, the company is doing just fine financially, trading near its 52-week high as of the time of this writing.
I will be thinking of these issues as I head to Geneva on Saturday for the third annual UN Forum on Business and Human Rights, which had over 1700 companies, NGOs, academics, state representatives, and civil society organizations in attendance last year. I am particularly interested in the sessions on the financial sector and human rights, where banking executives and others will discuss incorporation of the UN Guiding Principles on Business and Human Rights into the human rights policies of major banks, as well as the role of the socially responsible investing community. Another panel that I will attend with interest relates to the human rights impacts in supply chains. A group of large law firm partners and professors will also present on a proposal for an international tribunal to adjudicate business and human rights issues. I will blog about these panels and others that may be of interest to the business community next Thursday. Until then enjoy your holiday and if you participate in or see any protests, send me a picture.
November 27, 2014 in Ann Lipton, Conferences, Corporate Finance, Corporate Governance, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Haskell Murray, International Business, Marcia Narine, Securities Regulation, Social Enterprise | Permalink | Comments (0)