Wednesday, March 22, 2017
What does the EU know that the U.S. Doesn’t About the Effectiveness of Conflict Minerals Legislation?
Earlier this month, the EU announced plans to implement its version of conflict minerals legislation, which covers all “conflict-affected and high-risk areas” around the world. Once approved by the Council of the EU, the law will apply to all importers into the EU of minerals or metals containing or consisting of tin, tantalum, tungsten, or gold (with some exceptions). Compliance and reporting will begin in January 2021. Importers must use OECD due diligence standards, report on their progress to suppliers and the public, and use independent third-party auditors. President Trump has not yet issued an executive order on Dodd-Frank §1502, aka conflict minerals, but based on a leaked memo, observers believe that it's just a matter of time before that law is repealed here in the U.S. So why is there a difference in approach?
In response to a request for comments from the SEC, the U.S Chamber of Commerce, which led the legal battle against §1502, claimed, “substantial evidence shows that the conflict minerals rule has exacerbated the humanitarian crisis on the ground in the Democratic Republic of the Congo…The reports public companies are mandated to file also contribute to ―information overload and create further disincentives for businesses to go public or remain public companies. Accordingly, the Chamber strongly supports Congressional repeal of Section 1502 due to its all-advised and fundamentally flawed approach to solving a geopolitical crisis, and the substantial burden it imposes upon public companies and their shareholders.”
The Enough Project, which spearheaded the passage of §1502, submitted an eight-page statement to the SEC last month stating, among other things, that they “strongly oppose any suspension, weakening, or repeal of the current Conflict Minerals Rule, and urge the SEC to increase enforcement of the Rule….The Rule has led to improvements in the rule of law in the mining sectors of Congo, Rwanda, and other Great Lakes countries, contributed to improvements in humanitarian conditions in Congo and a weakening of key insurgent groups, and resulted in tangible benefits for U.S. corporations and their supply chains.”
I agree that the Rule has led to increased transparency and efficiency in supply chains (although some would differ), and less armed control of mines. But I’m not sure that the overall human rights conditions have improved as significantly as §1502’s advocates (and I) would have liked.
As Amnesty International’s 2016/2017 report on DRC explains in graphic detail, “armed groups committed a wide range of abuses including: summary executions; abductions; cruel, inhuman and degrading treatment; rape and other sexual violence; and the looting of civilian property... various ... armed groups (local and community-based militias) were among those responsible for abuses against civilians. The Lord’s Resistance Army (LRA) continued to be active and commit abuses in areas bordering South Sudan and the Central African Republic. In… North Kivu, civilians were massacred, usually by machetes, hoes and axes. On the night of 13 August, 46 people were killed … by suspected members of the Allied Democratic Forces (ADF), an armed group from Uganda that maintains bases in eastern DRC…Hundreds of women and girls were subjected to sexual violence in conflict-affected areas. Perpetrators included soldiers and other state agents, as well as combatants of armed groups…Hundreds of children were recruited by armed groups...”
Human Rights Watch’s 2017 report isn’t any better. According to HRW, “dozens of armed groups remained active in eastern Congo. Many of their commanders have been implicated in war crimes, including ethnic massacres, killing of civilians, rape, forced recruitment of children, and pillage. In … North Kivu, unidentified fighters continued to commit large-scale attacks on civilians, killing more than 150 people in 2016 … At least 680 people have been killed since the beginning of the series of massacres in October 2014. There are credible reports that elements of the Congolese army were involved in the planning and execution of some of these killings. Intercommunal violence increased as fighters … carried out ethnically based attacks on civilians, killing at least 170 people and burning at least 2,200 homes.
Finally, according to a February 17, 2017 statement from the Trump Administration, “the United States is deeply concerned by video footage that appears to show elements of the armed forces of the Democratic Republic of Congo summarily executing civilians, including women and children. Such extrajudicial killing, if confirmed, would constitute gross violations of human rights and threatens to incite widespread violence and instability in an already fragile country. We call upon the Government of the Democratic Republic of Congo to launch an immediate and thorough investigation, in collaboration with international organizations responsible for monitoring human rights, to identify those who perpetrated such heinous abuses, and to hold accountable any individual proven to have been involved.”
Most Americans have no idea of the atrocities occurring in DRC or other conflict zones around the world. I have spent the past few years researching business and human rights, particularly in conflict zones in Latin America and Africa. I filed an amicus brief in 2013 and have written and blogged about the failure of disclosure regimes a dozen times because I don’t believe that name and shame laws stop the murder, rape, conscription of child soldiers, and the degradation of innocent people. I applaud the EU and all of the NGOs that have attempted to solve this intractable problem. But it doesn't seem that enough has changed since my visit to DRC in 2011 where I personally saw 5 massacre victims in the road on the way to visit a mine, and met with rape survivors, village chiefs, doctors, members of the clergy and others who pleaded for help from the U.S. Unfortunately, I don’t think this legislation has worked. Ironically, the U.S. and EU legislation go too far and not far enough. I hope that if the U.S. and EU focus on a more holistic, well-reasoned geopolitical solution with NGOS, stakeholders, and business.
Tuesday, March 21, 2017
I write often about how courts often incorrectly treat LLCs as corporations. Last week, I reported on a case about a court that misstated, in my view, the state of the law regarding LLCs and veil piercing. When I do so, I often get comments about how veil piercing should go away. Prof. Bainbridge replies similarly here.
I am on record as being open to the elimination of veil piercing (I am actually, at least in theory, working on an article tentatively called Abolishing Veil Piercing Without Abolishing Equity), and I am especially open to the idea of abolishing veil piercing with regard to contract-based claims. (Texas largely does this by requiring "actual fraud" for cases arising out of contract. For a great explanation of Texas law on the subject, please see Elizabeth Miller's detailed description here.)
Several courts over the years, most notably the Wyoming court in Flahive, have extended the concept of veil piercing to LLCs, even where a statute did not explicitly provide the concept of veil piercing. Although I think these courts got it wrong, now that concept of veil piercing is well established for corporations and LLCs in virtually all (if not all) U.S. jurisdictions, I think any rollback must properly be done by statute.
In the past, I have been critical of courts like the one in Flahive, because I agree with Prof. Bainbridge and others who argue that veil piercing, when not expressly stated, may well have not been intended. Minnesota, for example, has at least made the concept clear. Minnesota LLC law provides:
322B.303 PERSONAL LIABILITY OF MEMBERS AS MEMBERS.
Subdivision 1. Limited liability rule.
Subject to subdivision 2, a member, governor, manager, or other agent of a limited liability company is not, merely on account of this status, personally liable for the acts, debts, liabilities, or obligations of the limited liability company.
Subd. 2. Piercing the veil.
The case law that states the conditions and circumstances under which the corporate veil of a corporation may be pierced under Minnesota law also applies to limited liability companies. . . . .
Like most states, Minnesota courts are willing to pierce the corporate veil where (1) an entity ignores corporate formalities and serves as the alter ego of a shareholder and (2) enforcing the liability limitations of the corporate form leads to injustice or is fundamentally unfair. I have often used this example of how a state should, if they want to have LLC veil piercing, proceed. That is, although I would not advocate for doing so, if a state is going to have veil piercing of LLCs, it should be expressly stated. The statute may be flawed in concept, but that's a call for the legislature.
The Minnesota statute is well crafted to achieve its apparent goals, in that it makes clear that one can, in fact, be "personally liable for the acts, debts, liabilities, or obligations of the limited liability company" merely on account of being a member of an LLC. That is, the general rule is that members are not liable for the LLC's debts, but where an LLC veil is pierced, all members become personally liable for the debts, regardless of the their actions. In Minnesota, this includes "corporate formalities" as a factor for corporate veil piercing and thus it applies to LLCs, even though LLCs have few, if any, statutory formalities (and many states disclaim formalities as an obligation to maintain limited liability for an LLC).
This seems wrong to me, especially the part about making those who did not participate in the bad behavior potentially liable and adding a corporate-formalities requirement to an entity that is not supposed to have them. As Prof. Bainbridge argues in Abolishing Veil Piercing, "Abolishing veil piercing would refocus judicial analysis on the appropriate question-did the defendant-shareholder do anything for which he or she should be held directly liable." I agree.
Still, because veil-piercing of entities is well-settled law, I don't think judges have latitude to eliminate it. Judges must focus on proper limitations and clarity of the law that is still subject to interpretation (or plainly inconsistent with the law), where possible. At this point, abolishing veil piercing must be done by statute. Maybe some bold legislators will heed the call.
Monday, March 20, 2017
No. This is not a travelogue. Rather, it's a brief additional bit of background on a case that business associations law professors tend to enjoy teaching (or at least this one does).
In Ringling Bros. Inc. v. Ringling, 29 Del. Ch. 610 (Del. Ch. 1947), the Delaware Chancery Court addresses the validity of a voting agreement between two Ringling family members, Edith Conway Ringling (the plaintiff) and Aubrey B. Ringling Haley (the defendant). The fact statement in the court's opinion notes that John Ringling North is the third shareholder of the Ringling Brothers corporation.
I spent two days in Sarasota Florida at the end of Spring Break last week. While there, I spent a few hours at The Ringling Circus Museum. It was fascinating for many reasons. But today I will focus on just one. I noted this summary in one of the exhibits, that seems to directly relate to the Ringling case:
Interestingly, 1938 is the year in which the plaintiff and defendant in the Ringling case created their original voting trust (having earlier entered into a joint action agreement in 1934). The agreement at issue was entered into in 1941. Could it be that, perhaps, the two women entered into this arrangement as a reaction to John Ringling North's desire to acquire--or successful acquisition of--management control of the firm? I want to do some more digging here, if I can. But I admit that the related history raised some new questions in my mind. John Ringling North was all but forgotten in my memory and teaching of the case, until the other day . . . . The case takes on new interest in my mind (more broadly as a close corporation case) because of my museum visit and discovery.
[Postscript - March 21, 2017: Since posting this, I have been blessed by wonderful, helpful email messages offering general support, PowerPoint slides (thanks, Frank Snyder), a video link (thanks, Frances Fendler), and referrals to/copies of Mark Ramseyer's article on the Ringling case, Ringling Bros.-Barnum & Bailey Combined Shows v. Ringling: Bad Appointments and Empty-Core Cycling at the Circus, which offers all the detail I could want (thanks, again, Frances, and thanks, Jim Hayes) to help fill in the gaps--while still creating a bit of mystery . . . . I am a much better informed instructor as a result of all this! Many thanks to all who wrote.]
Friday, March 17, 2017
Professor Keith Diener of Stockton University School of Business, who is a former law school classmate of mine and the current managing editor of the Atlantic Law Journal, agreed to answer some questions related to the journal.
The flagship journals for the Academy of Legal Studies in Business ("ALSB") are the American Business Law Journal (ABLJ) and the Journal of Legal Studies Education (JLSE, primarily pedagogy articles and teaching cases). In addition to these two journals, each regional association is generally responsibly for at least one journal with the Atlantic Law Journal coming out of the Mid-Atlantic region.
As Keith explains below, these journals are open to a wide range of scholars, including professors from law schools. I would encourage legal scholars who have not published in a traditional peer reviewed journal to consider submitting to one of the ALSB journals. I have published in both the ABLJ and the JLSE, and I have had good experiences in both cases.
Please provide us a brief overview of the Atlantic Law Journal and the MAALSB.
The Mid-Atlantic Academy for Legal Studies in Business (MAALSB) is an association of teachers and scholars primarily in the fields of business law, legal environment, and law-related courses outside of professional law schools with members from the Mid-Atlantic states, including Delaware, Maryland, Pennsylvania, Virginia & West Virginia. Residence in those states is not required for membership in the MAALSB, and many of our members come from different regions and states. In addition to sponsoring the Atlantic Law Journal, MAALSB holds an annual conference for our region usually in April of each year, where our members meet, present papers, and exchange ideas. The MAALSB is one of the regional branches of the national Academy of Legal Studies in Business (ALSB).
For over a decade, the Atlantic Law Journal was tied to the MAALSB annual conference. Presentation at the conference provided an opportunity for publication in the journal. A few years ago, the journal restructured and began accepting articles on a rolling basis, year-round. We welcome submissions from law professors, whether in law schools or not, but generally do not accept student-authored articles. We are soon entering our twentieth year as a viable legal publication.
What is your current role with the journal and what roles do other faculty members play?
The Atlantic Law Journal has a dedicated team of editors who, depending on classification, perform different roles within the journal.
Our Editor-and-Chief, Professor Cynthia Gentile, leads the journal, manages its website, publishes the annual volume, manages its listings in Cabell’s and Washington and Lee’s Journal Rankings, and coordinates indexing and archiving on Westlaw. As Editor-and-Chief, Professor Gentile is primarily responsible for journal outreach, growth, and sustainability.
I currently serve the journal as the Managing Editor. In this capacity, I receive all submissions to the journal, sanitize them for double, blind peer review, send the sanitized articles to our staff editors for review, receive their recommendation and feedback forms, and notify authors of publication decisions.
We currently have two Articles Editors, Professors Laura Dove and Evan Peterson, who work with the accepted authors to prepare their manuscripts for publication, by editing the articles and making suggestions for improvement even after acceptance.
We also have a team of roughly 30-40 professors from around the country who serve the journal as Staff Editors. Without our Staff Editors, our journal would not function. They are responsible for peer-reviewing the submitted articles, and making recommendations for (i) acceptance, (ii) conditional acceptance, (iii) revision and resubmission, or (iv) rejection of the submitted articles.
What details can you provide about the submission process, including contact information, desired word-count range, typical article topics, etc.?
We generally publish annually, usually in July or August. September through January are typically the best months to submit if you are seeking to be published in the following summer. Spring semester submissions are also welcome, but are often more competitive. Although there are no per se word ranges, article lengths typically span 7,500 to 15,000 words. We publish a wide range of articles, but to be published in the Atlantic Law Journal, the article must have a nexus to business law theory or pedagogy, broadly construed.
The acceptance rate remains at or below 25%. This means that for every article we accept, at least three are initially turned down (although some are given the opportunity to resubmit).
You can submit by emailing the Managing Editor a complete copy and a blind copy, with Bluebook formatted footnotes, in accordance with the instructions and contact information found on our website.
What details can you provide about the review process and editing process?
Upon submission, you will receive a response, typically within a few days, confirming receipt of your article. From there, soon after, the article is typically sent to Staff Editors for peer review. To the extent possible, we match article content with the expertise of our Staff Editors to ensure a fair and professional review. We also find that the feedback provided by Staff Editors to authors is most helpful when they have expertise related to the article. Once appropriate and available Staff Editors are identified, they then review the article and return their recommendations to the Managing Editor. The Managing Editor then notifies the author of the publication decision. If an article is accepted, then the author is introduced to one of our Articles Editors for finalization of the essay.
We strive to inform authors of publication decisions within eight (8) weeks of submission.
In your opinion, what are the advantages and disadvantages of publishing with the Atlantic Law Journal?
In my opinion, there are many advantages to publishing with the Atlantic Law Journal.
The first advantage is that (unlike many law reviews today), if you submit to the Atlantic Law Journal, someone will respond to you when you submit it. Yet, not only will you receive a response, but you will also have your article read and reviewed by professional academics in the field of business law (who are also lawyers). We do not utilize law students in our publication process, and all our editors are professional academics.
Second, the Atlantic Law Journal is listed in Cabell’s, ranked by Washington and Lee, and available on Westlaw. This means that articles appear not only in our volumes linked on our website, but are also indexed, searchable, and fully archived on Westlaw. This produces the potential for a broad impact and increased author visibility.
Third, while there appears to be a trend towards some law reviews accepting shorter articles, the Atlantic Law Journal already accepts shorter pieces (circa 7500 words). Let’s face it, sometimes there’s just not 50,000 words to say about certain topics. If you have a shorter piece that might not be long enough for a law review, the Atlantic Law Journal may be interested in it.
Fourth, unlike many law reviews, the Atlantic Law Journal is interested in articles, not only as to theoretical and scholastic topics, but also topics related to business law pedagogy. If you’ve tried something new in the classroom, had good results, and desire to share it with others, the Atlantic Law Journal may be interested. Our primary readership includes business law professors, who are always looking for new and innovative pedagogical techniques. We also welcome scholarly and theoretical articles, and try to include a mix of both scholarly and pedagogical articles in each edition.
Finally, all articles are double, blind peer reviewed. If your article is not accepted, we endeavor to provide high quality feedback that will allow you to improve your article as you continue your work on it. Our blind review is a genuine process. As Managing Editor of the journal, I am committed to ensuring the journal’s integrity by sanitizing all submissions (removing all meta-data) prior to sending the articles for review.
For more on the MAALSB and the Atlantic Law Journal, see our website.
- Dr. Keith William Diener
Tuesday, March 14, 2017
A new case, out just yesterday from the Southern District of Ohio, makes a mess of LLC veil piercing law. It appears that the legal basis put forth by the court in granting a motion to dismiss a veil piercing claim was probably right, but the statement of veil piercing law was not quite there.
The case is ACKISON SURVEYING, LLC, Plaintiff, v. FOCUS FIBER SOLUTIONS, LLC, et al., Defendants., No. 2:15-CV-2044, 2017 WL 958620, at *1 (S.D. Ohio Mar. 13, 2017). Here are the parties: the defendant is FTE Networks, Inc. (FTE), which filed a motion to dismiss claiming a failure to state a claim. FTE is the parent company of another defendant, Focus Fiber Solutions, LLC (Focus). The plaintiff, Ackison Surveying, LLC (Ackison) filed a number of claims against Focus, added an alter ego/veil piercing claim against FTE. Thus, Ackison is, among other things, seeking to pierce the veil of an LLC (Focus). Focus appears to be a Pennsylvania LLC, based on a search here.
Pennsylvania law provides the liability cannot be imposed on a member of an LLC for failing to observe formalities. The law states:
The failure of a limited liability partnership, limited partnership, limited liability limited partnership, electing partnership or 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 partner, member or manager of the entity for a debt, obligation or other liability of the entity.
(1) grossly inadequate capitalization,(2) failure to observe corporate formalities,(3) insolvency of the debtor corporation at the time the debt is incurred,(4) [the parent] holding [itself] out as personally liable for certain corporate obligations,(5) diversion of funds or other property of the company property [ ],(6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the [parent company].
Monday, March 13, 2017
As you may know, I have had an abiding curiosity about the line between the U.S private and public securities markets in large part because of my work on crowdfunding. Almost three years ago, I published a post on the topic here at the BLPB. I posted on the referenced paper here. That paper recently was republished in a slightly updated form by The Texas Journal of Business Law, the official publication of the Business Law Section of the State Bar of Texas (available here).
As a result of this work, my interest was (perhaps unsurprisingly) piqued by a this paper by Amy and Bert Westbrook. Enticingly titled "Unicorns, Guardians, and the Concentration of the U.S. Equity Markets," the article documents concentrations in both private and public equity markets in the United States and makes a number of interesting observations. I was especially intrigued by the article's identification of a potential resulting peril of this market concentration: the aggregation of both corporate management and ownership in the hands of the few.
[W]ealth has concentrated and private equity markets have emerged that serve as alternatives to the public equity market. At the same time, the public equity market has become dominated by highly concentrated shareholding, in the form of institutional investors, especially index funds, and the occasional founder. Both developments have resulted in concentrations of capital that mirror the concentration of management that concerned Berle and Means. For Berle and Means, the concern was concentrated management and dispersed ownership. The concern now is that both management and ownership are concentrated in the hands of very few people.
Very interesting . . . . And this is only one of the conclusions that the authors draw. As a foundation for its assertions, the article documents the concentration of ownership in both private and public markets, tying current participation in both markets back to salient economic and social data and trends. The full abstract from SSRN is set forth below, for your convenience.
Developments in the private and public equity markets are changing the role equity investment plays in the United States, and therefore what "stock market" means as a matter of political economy. During the 20th century, securities and other laws did much to tame the "animal spirits" of industrial capitalism, epitomized by the "Robber Barons." In order to raise large sums, businesses offered stock to the public, thereby subjecting themselves to the securities laws. Compliance required not only disclosure, transparency, but more subtly, that the firms themselves undergo a process of Weberian rationalization. A relatively broad middle class was comfortable investing in such corporations, and the governance of firms and thus much of the economy was understood to be answerable to this class. Citizens understood such arrangements as theirs, part of "the American way."
In recent years, in conjunction with rising inequality in the United States, there has been a decisive shift from broad-based ownership of firms to much more concentrated forms of ownership in both private and public markets. Private equity markets are concentrated by legal definition: relatively few people are qualified to participate directly. Yet private equity has become the preferred method of capital formation, epitomized by "unicorns," firms valued at over $1 billion without being publicly traded. Public equity markets are dominated by funds with trillions of dollars under management, and small staffs, who are in effect "guardians" for the portfolios that ensure long-term stability for individuals and institutions, notably through retirement and endowments. The governance of the U.S. economy has to a surprising degree become a matter of grace: the nation now relies on a small elite to make good decisions on its behalf about the allocation of capital, the governance of firms, and the preservation of portfolio value. This consolidation of ownership rivals that of the late 19th century, and may challenge the law to address the equity markets in new ways.
I think you'll enjoy this one. At the very least, it's a great read for those of you who, like me, are interested in analyses of the U.S securities markets. But perhaps more broadly, with contentious changes in federal business regulation in the offing under the current administration in Washington, this work should contribute meaningfully to the debate.
Friday, March 10, 2017
On of the many interesting things discussed during the social enterprise law workshop at Notre Dame Law School was the "FairShares Model." Nina Boeger (University of Bristol-UK) brought the model to the group's attention, and the model was new news to me.
The FairShares Model was "created during a research programme on democratising charities, co-operatives and social enterprises involving academics at Sheffield Hallam University and Manchester Metropolitan University in the UK."
The FairShares Model cites the "Social Enterprise Europe Ltd" when noting that social enterprises "aim to generate sustainable sources of income, but measure their success through:
Specifying their purpose(s) and evaluating the impact(s) of their trading activities;
Conducting ethical reviews of their product/service choices and production/consumption practices;
- Promoting socialized and democratic ownership, governance and management."
To address theses aims, the FairShares Model offers social audits and suggests the issuing some combination of (1) founder shares, (2) labour shares, (3) investor shares, (4) user shares.
While I agree that significant corporate governance changes should be considered, at first glance this model seems a bit unwieldy if all four types of shares are issued. Still, I am interested in learning more.
Wednesday, March 8, 2017
Every year, I offer my students the option of writing an extra credit paper on what Hollywood gets wrong about business. They can also apply what they've learned to a popular movie, television show, or book (the Godfather, Game of Thrones, and Sex and the City have provided some of the more interesting analogies). Often I provide a list of TV shows or movies that they can consider. Today, I’m asking my co-bloggers and our readers for their binge-worthy movie or TV choices. Some movie lists for business students are here, here, here, and here but I welcome your suggestions. For those of you who aren’t in my class and just want a break from the news, these lists may come in handy.
Monday, March 6, 2017
Most of us editors here at the Business Law Prof Blog obsess and blog in one way or another about disclosure issues. Marcia has written passionately about conflict minerals disclosure (see a recent post here) and the SEC's efforts to revamp--or at least reconsider--Regulation S-K (including here). Anne also wrote about the Regulation S-K revision efforts here. Ann wrote about mining industry disclosures here and focuses ongoing attention on securities litigation issues in the disclosure realm (including, e.g. here). Josh wrote about the intersection of corporate governance and disclosure regulation in this post. I have written about "disclosure creep" here and most of my research and writing has a disclosure bent to it, one way or another . . . .
Last summer, at the National Business Law Scholars Conference at The University of Chicago Law School, I listened with some fascination to the presentation of an early-stage project by Todd Henderson (whose work always makes me think--and this was no exception). His thesis¹ was a deceptively simple one: that the age-old disclosure debate could best be solved by creating a contextual market for disclosure (rather than by, e.g., continuing its the current system of "federal government mandates and issuer pays" or leaving market participants to their own devices as to what to disclose and punishing malfeasance merely through fraud and misstatement liability or state sanctions). The paper resulting from that presentation, coauthored by Todd and Kevin Haeberle from the University of South Carolina School of Law (but moving to William & Mary Law School in July), has recently been released on SSRN. The title of the piece is Making a Market for Corporate Disclosure, and here's the abstract:
One of the core problems that law seeks to address relates to the sub-optimal production and sharing of information. The problem manifests itself throughout the law — from the basic contracts, torts, and constitutional law settings through that of food and drug, national security, and intellectual property law. Debates as to how to best ameliorate these problems are often contentious, with those on one end of the political spectrum preferring strong government intervention and those on the other calling for market forces to be left alone to work.
When it comes to the generation and release of the information with the most value for the economy (public-company information), those in favor of the command-and-control approach have long had their way. Exhibit A comes in the form of the mandatory-disclosure regime around which so much of corporate and securities law centers. But this approach merely leaves those who value corporate information with the government’s best guess as to what they want. A number of fixes have been offered, ranging from more of the same (adding to the 100-plus-page list of what firms must disclose based on the latest Washington fad), to the radical (dump the federal regime and its fraud and insider-trading overlays altogether in favor of state-level regulation). This Article, however, offers an innovative approach that falls in middle of the traditional spectrum: Make relatively small changes to the law to allow a market for tiered access to disclosures, thereby allowing firm supply and information-consumer demand to interact in a way that would motivate better disclosure. Thus, we propose a market for corporate disclosure — and explains its appeal.
I have skimmed the article and am looking forward to reading it in full over my spring break in a week's time. I write here to encourage you to make time in your day/week/month to read it too--and to consider both the critiques of federally mandated disclosure and the article's response to those critiques. I am confident that the thinking it will make me do (again) will sharpen my teaching and scholarship; it might just do the same for you . . . .
¹ After publishing this post, I learned that the paper actually was drafted by Kevin well before Todd presented it last summer. My apologies to Kevin for leaving him out of this part of the story! :>)
Tuesday, February 28, 2017
I don't know if it's the time of year or if I am just a little off, but I am generally grumpy today. So, I am going to vent a bit.
First, a regular irritation that is no shock to regular readers is the "limited liability corporation." I probably should have stopped the Westlaw alert for that terms, which comes through nearly every single day with multiple cases and news items. A new case from the U.S. District Court in Kansas, Pipeline Prods., Inc. v. Horsepower Entm't, No. CV 15-4890-KHV, 2017 WL 698504, at *1 (D. Kan. Feb. 22, 2017), is typical. The court states:
Pipeline Productions, Inc. is a Kansas corporation with its principal place of business in Lawrence, Kansas. Backwood Enterprises, LLC is an Arkansas limited liability corporation with its principal place of business in Lawrence, Kansas. . . .The Madison Companies, LLC is a Delaware limited liability company with its principal place of business in Greenwood Village, Colorado. Horsepower Entertainment, a Delaware limited liability company, is a wholly-owned subsidiary of Madison with its principal place of business in Greenwood Village, Colorado.
Irritation 1: Arkansas does not have an entity called a "limited liability corporation." Arkansas, as is typical, has a corporation entity and a limited liability company entity. They are different. The fact that the court gets the entity right for the two Delaware LLCs suggests to me that the filings from Backwood Enterprises, LLC, is the likely source of the language. Still, courts should be getting this right. (It won't shock me if my obsession with this is irritating more than one reader. C'est la vie.)
Irritation 2: The case also references a "wholly-owned subsidiary." This is a common reference, but "wholly owned" does not need a hyphen when used a compound adjective. This source cites the one I tend to follow, from my public relations days:
When a compound modifier–two or more words that express a single concept–precedes a noun, use hyphens to link all the words in the compound except the adverb very and all adverbs that end in -ly. —AP Stylebook, 2013 edition. Boldface added.
Spot on. The site also provides a good hint:
*Warning: Not every word that ends in -ly is an adverb. Watch out for nouns like family and supply, and adjectives like only. For example, “family-oriented websites”; supply-side economics”; “only-begotten son.”
Since Americans (in particular) love threes, I will follow the Rule of 3s, and add one more.
Irritation 3: The word "articulate." Yeah, this is kind of random, but I am done with that word. I cannot come up with a time when another word won't serve as a good substitute, and the loaded way in which the term has evolved means it should be skipped. See, e.g., here. This article provides more good background and quotes Condoleezza Rice's former communications counselor, Anna Perez:
The word perfectly conveys, to quote George Bush, the soft bigotry of low expectations. It literally comes down to that. When people say it, what they are really saying is that someone is articulate ... for a black person.
Before anyone wants to get mad at me for being too "PC," calm down. I am not saying you can't say it. I am saying you will irritate me if you do. And if you say it to or about an African-American person, you probably are showing the bias Ms. Perez described. And, yeah, I have heard it said about and to African-Americans in my presence, and it's usually pretty clear the bias is there. It's an irritation to me, and it's demeaning, even though I think it is, from time to time, well intentioned, if ignorant. Time to move forward. What was once "progressive thinking" is not anymore. Try to catch up if you're really trying to be nice.
I know, everyone has things that irritate them. It's good to vent now and again. No person attacks or freak outs. Just a good, old-fashioned vent. Happy Mardi Gras.
Friday, February 24, 2017
A few weeks ago I blogged about the spate of boycotts and buycotts responding to President Trump’s travel ban. Since that time, the #grabyourwallet campaign has taken credit for a number of stores dropping Ivanka Trump’s merchandise. In response, celebrities and others flocked to Nordstrom after criticism by the President’s surrogates about the retailer’s decision to drop the products, even though Nordstrom cited falling sales. Within days, news outlets reported that her perfume was a top seller on Amazon, and that many reviewers indicated that they had bought the product to show support for the President.
Yesterday, NPR reported that the United Auto Workers will revive its 1980s Buy American campaign, which will not only promote American-made products but will also encourage the boycott of cars made by American companies overseas. I’ve argued in the past that boycotts don’t work, and the NPR story provided some support from a professor who noted, “these campaigns, even with catchy song lyrics, almost never work. For instance, garment work essentially left the U.S. almost completely a few years after [the look for the union label ad] ran, and after the last UAW campaign, the American car companies continued to lose market share.” The New York Times has also examined whether these boycotts have long term effect.
The back and forth between boycotts and buycotts related to the President’s family may prove conventional wisdom wrong. It may be time for an empirical study (not by me) of when and how the boycott/boycott movement can sustain itself.
Wednesday, February 22, 2017
Here is a rundown of recent business news headlines:
The Snapchat parent company, SNAP, scheduled blockbuster IPO ($20-23B) is plagued with news that it lost $514.6 million in 2016, there are questions about the sustainability of its user base, and, for the governance folks out there, there is NO VOTING STOCK being offered.
In what is being called a "whopper" of a deal, Restaurant Brands, the owner of Burger King and Tim Hortons, announced earlier this week a deal to acquire Popeye's Louisiana Kitchen, the fried chicken restaurant chain, for $1.8 billion in cash.
Kraft withdrew its $143B takeover offer for Unilever less than 48 hours after the announcement amid political concerns over the merger. While Unilever evaluates its next steps, Kraft is perhaps feeling the effects of its controversial takeover of Britain's beloved Cadbury.
A final item to note, for me personally, is that today is my last regular contribution to the Business Law Professor Blog. I will remain as a contributing editor, but will miss the ritual of a weekly post--a habit now nearly 4 years in the making. Thanks to all of the readers and other editors who gave me great incentive to learn new information each week, think critically, connect with teaching, and generally feel a part of a vibrant and smart community of folks with similar interests.
Thursday, February 16, 2017
This post does not concern President Trump’s own business empire. Rather, this post will be the first of a few to look at how the President retains, repeals, or replaces some of the work that President Obama put in place in December 2016 as part of the National Action Plan on Responsible Business Conduct. Many EU nations established their NAPS year ago, but the U.S. government engaged in two years of stakeholder consultations and coordinated with several federal agencies before releasing its NAP.
Secretary of State Tillerson will play a large role in enforcing or revising many of the provisions of the NAP because the State Department promotes the Plan on its page addressing corporate social responsibility. Unlike many federal government pages, this page has not changed (yet) with the new administration. As the State Department explained in December, “the NAP reflects the government's commitment to promoting human rights and fighting corruption through partnerships with domestic and international stakeholders. An important part of this commitment includes encouraging companies to embrace high standards for responsible business conduct.” Over a dozen federal agencies worked to develop the NAP.
We now have a new Treasury Secretary and will soon have a new Secretary of Labor, presumably FIU Law Dean and former US Attorney Alex Acosta, a new SEC Chair, presumably Jay Clayton, and a new Secretary of Commerce, presumably Wilbur Ross. These men, along with Attorney General Jeff Sessions and Secretary of State Tillerson will lead the key agencies enforcing or perhaps revising the country’s commitment to responsible business conduct.
The following list of priorities and initiatives comes directly from the Fact Sheet:
Strengthening laws preventing the import of goods produced by forced labor to ensure products made under exploitative conditions do not gain U.S. market access.
Updating social and environmental standards criteria for financing through the Overseas Private Investment Corporation, to promote high standards through U.S.-supported private investment.
Creating guidance on social safeguards for USAID’s development programs.
Funding efforts to promote awareness and implementation of the United Nations Guiding Principles on Business and Human Rights.
Publishing, for the first time, an annual report by the U.S. National Contact Point for the OECD Guidelines.
Identifying means through trade agreements to encourage companies to engage in RBC.
Enhancing information sharing with sub-national governments on public procurement best practices, to ensure that governments at all levels promote RBC through purchasing.
Collaboration with Stakeholders
In order to achieve shared RBC goals, it is essential for governments to work with the private sector, as well as with civil society, labor, and other stakeholders, to leverage each other’s resources and strengths. The USG’s measures to collaborate with such stakeholders include:
Establishing a formal mechanism for increased government participation in “multi-stakeholder initiatives” that promote RBC in various sectors and regions.
Convening stakeholders to develop and promote effective metrics for measuring and managing labor rights impacts in supply chains.
Facilitating a dialogue with stakeholders on implementation of the Sustainable Development Goals.
Promoting worker voice and empowerment in global supply chains via new tools that allow workers in national supply chains to directly report potential labor abuses and workplace safety violations, as well as leveraging public-private partnerships to more fully incorporate the perspectives of workers.
Facilitating RBC by Companies
The USG encourages companies to follow the best domestic and international practices and is supportive of company efforts to voluntarily report on certain aspects of their operations. The USG produces a number of reports that can be useful for companies as they seek to uphold high standards, sometimes in challenging environments. The NAP sets forth an illustrative list of USG initiatives to further that work, including the following commitments:
Creating an online database containing government reports on issues such as human rights, human trafficking including forced labor, child labor, and investment climates so that companies can more effectively make investment decisions and mitigate risk.
Providing new and increased training for USG officers and officials, including those who serve abroad, on RBC issues so that government officials are well-equipped to advise companies on considerations such as the status of labor rights, human rights and transparency, in a particular operating environment.
Training for USG officials on the Foreign Corrupt Practices Act and related issues.
Updating country-level public land governance profiles that explain land laws, land use patterns, gender concerns, land administration, and land markets within a given country. These profiles are an important tool for businesses making responsible land-based investments in a given country.
Recognizing Positive Performance
U.S. companies make tremendous contributions to communities around the world by generating economic growth, creating jobs, spurring innovation, and providing solutions to pressing challenges such as access to clean energy, healthcare, and technology. The USG recognizes and highlights when companies achieve high standards with meaningful results for workers and communities. Such items include...
Developing an online mechanism to identify, document, and publicize lessons learned and best practices related to corporate actions that promote and respect human rights.
Providing Access to Remedy
Even when governments and companies seek to act responsibly, challenges can arise. Both governments and companies should have mechanisms in place by which affected parties can raise concerns, report problems, and seek remedies, as appropriate. Through the NAP, the USG is furthering its commitment to this objective by:
Improving the performance of the U.S. National Contact Point for the OECD Guidelines for Multinational Enterprises, including by announcing a fall 2017 peer review, organizing workshops to promote RBC, and publishing an outreach plan.
Hosting a forum for dialogue with stakeholders on opportunities and challenges regarding issues of remedy, as well as how the USG can best support effective remedy processes.
I will continue to follow up on this issue as well as how corporate compliance and governance may change under the Trump Administration.
Tuesday, February 14, 2017
I hope this Valentine's Day is a good one for you, dear readers. Mine started with a random (minor) dog bite on my morning run, followed by some time with some very nice health care professionals and quite a few less pleasant needles.
A friend alerted me to the law-related Twitter hashtag #AppellateValentines. Some of them are quite funny. See, e.g.,
Your wish is my mandamus. #AppellateValentines— Emil J. Kiehne (@EmilKiehne) February 14, 2017
There is also a #BusinessValentines hashtag, which is less creative, but has its moments. Of course, there was no #BusinessLawValentines, but there should be and there is now. I went first. Join in, if you're so inclined.
Even if we lived in Delaware, I'd never disclaim my duty of loyalty to you #BusinessLawValentines— Joshua Fershee (@jfershee) February 14, 2017
If you loved me back, we could be Citizens United #BusinessLawValentines— Joshua Fershee (@jfershee) February 14, 2017
And, of course, I could not resist:
Friday, February 10, 2017
Laureate Education recently became the first standalone publicly traded benefit corporation. They are organized under Delaware's public benefit corporation (PBC) law, are also a certified B corporation, and will be trading as LAUR on NASDAQ.
Plum Organics, also a Delaware PBC, is a wholly owned subsidiary of publicly-traded Campbell Soup Company. And Etsy is a publicly traded certified-B corporation, but is organized under traditional Delaware corporation law.
Whether the for-profit educator Laureate will hurt or help the popularity of benefit corporations remains to be seen, but some for-profit educators have not been getting good press lately.
Inside Higher Ed reports on Laureate Education's IPO as a benefit corporation below:
The largest U.S.-based for-profit college chain became the first benefit corporation to go public Wednesday morning.
Laureate Education, which has more than a million students at 71 institutions across 25 countries, had been privately traded since 2007. Several major for-profit higher education companies have over the last decade bounced back and forth between publicly and privately held status; also yesterday, by coincidence, the Apollo Group, owner of the University of Phoenix, formally went back into private hands….In its public debut, the company raised $490 million….
Becker said the move to become the first benefit corporation that is public is one way to show that Laureate is putting quality first.“There is certainly plenty of skepticism about whether for-profit companies can add value to society, and I feel strongly we can,” Becker said, adding that Laureate received certification from the nonprofit group B Lab after years of “rigorous” evaluations….
But the certification and the move to becoming a benefit corporation doesn’t prove a for-profit will not make bad decisions or commit risky actions that hurt students, said Bob Shireman, a senior fellow at the Century Foundation and for-profit critic.
"The one thing that being a benefit corporation does is reduce the likelihood that shareholders would sue the corporation for failing to operate in the shareholders' financial interest," Shireman said. "So it makes a marginal difference, and there's no evidence that benefit corporations, in the 10 or so years they've existed in the economy, cause better behavior."
Companies and investors could make better choices and decisions for their students without needing a benefit corporation model to do that, Shireman said, adding that the legal protection it provides is small.
"What's more important are what commitments are being made under the rubric of being a benefit corporation," he said. "How is that going to be measured and enforced … and how can they be changed or overruled by stockholders."
Head of Legal Policy at B Lab Rick Alexander, also authored a post on Laureate Education. For those who do not know, B Lab is the nonprofit responsible for the B Corp Certification and an important force behind the benefit corporation legislation that has passed in 30 states.
Thursday, February 9, 2017
Shortly after the election in November, I blogged about Eleven Corporate Governance and Compliance Questions for the President-Elect. Those questions (in italics) and my updates are below:
- What will happen to Dodd-Frank? There are already a number of house bills pending to repeal parts of Dodd-Frank, but will President Trump actually try to repeal all of it, particularly the Dodd-Frank whistleblower rule? How would that look optically? Former SEC Commissioner Paul Atkins, a prominent critic of Dodd-Frank and the whistleblower program in particular, is part of Trump's transition team on economic issues, so perhaps a revision, at a minimum, may not be out of the question.
Last week, via Executive Order, President Trump made it clear (without naming the law) that portions of Dodd-Frank are on the chopping block and asked for a 120-day review. Prior to signing the order, the President explained, “We expect to be cutting a lot out of Dodd-Frank…I have so many people, friends of mine, with nice businesses, they can’t borrow money, because the banks just won’t let them borrow because of the rules and regulations and Dodd-Frank.” An executive order cannot repeal Dodd-Frank, however. That would require a vote of 60 votes in the Senate. To repeal or modify portions, the Senate only requires a majority vote.
Some portions of Dodd-Frank are already gone including the transparency provision, §1504, which NGOs had touted because it forced US issuers in the extractive industries to disclose certain payments made to foreign governments. I think this was a mistake. By the time you read this post, the controversial conflict minerals rule, which requires companies to determine and disclose whether tin, tungsten, tantalum, or gold come from the Democratic Republic of Congo or surrounding countries, may also be history. The President may issue another executive order this week that may spell the demise of the rule, especially because others in Congress have already introduced bills to repeal it. I agree with the repeal, as I have written about here, because I don’t think that the SEC is the right agency to address the devastating human rights crisis in Congo.
As for the whistleblower provisions, it is too soon to tell. See #7 below.
Based on an earlier Executive Order meant to cut regulations in general and the President’s reliance on corporate raider/activist Carl Icahn as regulation czar, we can assume that the financial sector will experience fewer and not more regulations under Trump.
- What will happen with the two SEC commissioner vacancies? How will this president and Congress fund the agency? 3. Will SEC Chair Mary Jo White stay or go and how might that affect the work of the agency to look at disclosure reform?
President Trump has nominated Jay Clayton, a lawyer who has represented Goldman Sachs and Alibaba to replace former prosecutor Mary Jo White. Based on his background and past representations, we may see less enforcement of the FCPA and more focus on capital formation and disclosure reform. Observers are divided on the FCPA enforcement because 2016 had some record-breaking fines. As for the other SEC vacancies, I will continue to monitor this.
- How will the vow to freeze the federal workforce affect OSHA, which enforces Sarbanes-Oxley?
The Department of Labor enforces OSHA, and the current nominee for Secretary, Andy Pudzer, is a fast food CEO with some labor issues of his own. His pro-business stance and his opposition to increases in the minimum wage and the DOL white-collar exemption changes don’t necessarily predict how he would enforce SOX, but we can assume that it won’t be as much of a priority as rolling back regulations he has already publicly opposed.
- In addition to the issues that Trump has with TPP and NAFTA, how will his administration and the Congress deal with the Export-Import (Ex-IM) bank, which cannot function properly as it is due to resistance from some in Congress. Ex-Im provides financing, export credit insurance, loans, and other products to companies (including many small businesses) that wish to do business in politically-risky countries.
- How will a more conservative Supreme Court deal with the business cases that will appear before it?
I will comment on this after the confirmation hearings of nominee Neil Gorsuch. Others have already predicted that he will be pro-business.
- Who will be the Attorney General and how might that affect criminal prosecution of companies and individuals? Should we expect a new memo or revision of policies for Assistant US Attorneys that might undo some of the work of the Yates Memo, which focuses on corporate cooperation and culpable individuals?
Senator Jeff Sessions was confirmed yesterday after a contentious hearing. During his hearing, he indicated that he supported whistleblower provisions related to the False Claims Act, and many believe that he will retain retain the Yates Memo. Ironically, prior to that confirmation, President Trump fired Acting Attorney General Sally Yates, for refusing to defend the President’s executive order on refugees and travel.
- What will happen with the Consumer Financial Protection Bureau, which the DC Circuit recently ruled was unconstitutional in terms of its structure and power?
Despite, running on a populist theme, Trump has targeted a number of institutions meant to protect consumers. Based on reports, we will likely see some major restrictions on the Consumer Financial Protection Bureau and the rules related to disclosure and interest rates. Trump will likely replace the head, Richard Cordray, whom many criticize for his perceived unfettered power and the ability to set his own budget. The Financial Stability Oversight Council, established to address large, failing firms without the need for a bailout, is also at risk. The Volker Rule, which restricts banks from certain proprietary investments and limits ownership of covered funds, may also see revisions.
- What will happen with the Obama administration's executive orders on Cuba, which have chipped away at much of the embargo? The business community has lobbied hard on ending the embargo and eliminating restrictions, but Trump has pledged to require more from the Cuban government. Would he also cancel the executive orders as well?
I will comment on this in a separate post.
- What happens to the Public Company Accounting Board, which has had an interim director for several months?
The PCAOB is not directly covered by the February 3rd Executive Order described in #1, and many believe that the Executive Order related to paring back regulations will not affect the agency either, although the agency is already conducting its own review of regulations. In December, the agency received a budget increase.
- Jeb Henserling, who has adamantly opposed Ex-Im, the CFPB, and Dodd-Frank is under consideration for Treasury Secretary. What does this say about President-elect Trump's economic vision?
President Trump has tapped ex-Goldman Sachs veteran Steve Mnuchin, and some believe that he will be good for both Wall Street and Main Street. More to come on this in the future.
I will continue to update this list over the coming months. I will post separately today updating last week’s post on the effects of consumer boycotts and how public sentiment has affected Superbowl commercials, litigation, and the First Daughter all in the past few days.
February 9, 2017 in Compliance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Human Rights, International Business, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)
Thursday, February 2, 2017
Donald Trump has had a busy two weeks. Even before his first official day on the job, then President-elect Trump assembled an economic advisory board. On Monday, January 23rd, President Trump held the first of his quarterly meetings with a number of CEOs to discuss economic policy. On January 27th, the President issued what some colloquially call a “Muslim ban” via Executive Order, and within days, people took to the streets in protest both here and abroad.
These protests employed the use of hashtag activism, which draws awareness to social causes via Twitter and other social media avenues. The first “campaign,” labeled #deleteuber, shamed the company because people believed (1) that the ride-sharing app took advantage of a work stoppage by protesting drivers at JFK airport, and (2) because they believed the CEO had not adequately condemned the Executive Order. Uber competitor Lyft responded via Twitter and through an email to users that it would donate $1 million to the ACLU over four years to “defend our Constitution.” Uber, which is battling its drivers in courts around the country, then established a $3 million fund for drivers affected by the Executive Order. An estimated 200,000 users also deleted their Uber accounts because of the social media campaign, and the CEO resigned today from the economic advisory board.
Other CEOs, feeling the pressure, have also issued statements against the Order. In response, some companies such as Starbucks, which pledged to hire 10,000 refugees, have faced a boycott from many Trump supporters, which in turn may lead to a “buycott” from Trump opponents and actually generate more sales. This leads to the logical question of whether these political statements are good or bad for business, and whether it's better to just stay silent unless the company has faced a social media campaign. Professor Bainbridge recently blogged about the issue, observing:
The bulk of Lyft's business is conducted in large coastal cities. In other words, Obama/Clinton country. By engaging in blatant virtue signaling, which it had to know would generate untold millions of dollars worth of free coverage when social media and the news picked the story up, Lyft is very cheaply buying "advertising" that will effectively appeal to its big city/blue state user base.
Bainbridge also asks whether “Uber's user base is more evenly distributed across red and blue states than Lyft? And, if so, will Uber take that into account?” This question resonates with me because some have argued on social media (with no evidentiary support) that Trump supporters don’t go to Starbucks anyway, and thus their boycott would fail.
All of this boycott/boycott/CEO activism over the past week has surprised me. I have posted in the past about consumer boycotts and hashtag activism/slacktivism because I am skeptical about consumers’ ability to change corporate behavior quickly or meaningfully. The rapid response from the CEOs over the past week, however, has not changed my mind about the ultimate effect of most boycotts. Financial donations to activist groups and statements condemning the President’s actions provide great publicity, but how do these companies treat their own employees and community stakeholders? Will we see shareholder proposals that ask these firms to do more in the labor and human rights field and if so, will the companies oppose them? Most important, would the failure to act or speak have actually led to any financial losses, even if they are not material? Although 200,000 Uber users deleted their accounts, would they have remained Lyft customers forever if Uber had not changed its stance? Or would they, as I suspect, eventually patronize whichever service provided more convenience and better pricing?
We may never know about the consumers, but I will be on the lookout for any statements from shareholder groups either via social media or in shareholder proposals about the use or misuse of corporate funds for these political causes.
Wednesday, February 1, 2017
On Monday President Trump signed an Executive Order on Reducing Regulation and Controlling Regulatory Costs. The Order uses budgeting powers to constrict agencies and the regulatory process requiring that for each new regulation, two must be eliminated and that all future regulations must have a net zero budgeting effect (or less). The Order states:
"Unless prohibited by law, whenever an executive department or agency (agency) publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed."
Two points to note here. First, the Executive Order does not cover independent agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission, agencies that crafted many of the rules required by the 2010 Dodd-Frank Wall Street reform law--an act that President Trump describes as a "disaster" and promised to do "a big number on". The SEC, the CFTC and Dodd-Frank are not safe, they will just have to be dealt with through even more sweeping means. Stay tuned. The 2-for-1 regulatory special proposed on Monday is a part of President Trump's promise to cut regulation by 75%.
Second, the Order is intended to remove regulatory obstacles to Americans starting new businesses. President Trump asserted that it is "almost impossible now to start a small business and it's virtually impossible to expand your existing business because of regulations." Facts add nuance to this claim, if not paint an all-together different story. The U.S. Department of Labor Statistics documents a steady increase in the number of new American businesses formed since 2010. The U.S. small business economy grew while regulations were in place. President Trump asks us to believe that they will grow more without regulation. Some already do. The U.S. Chamber of Commerce "applauded" the approach decrying the "regulatory juggernaut that is limiting economic growth, choking small business, and putting people out of work."
Yet, as shocking as this feels (to me), the U.K. and Canada both have experience with a similar framework. The U.K.'s two for one regulation rule has been touted as saving businesses £885 million from May 5, 2015 to May 26, 2016 and there is now a variance requiring three regulations to be removed for each one. Canada takes a more modest one in- one out approach. No information is available yet on any externalities that may be caused by decreased regulations. For some, and I count myself in this camp, the concern is that the total cost of failed environmental protection, wage fairness, safety standards, etc. may outweigh individual gains by small business owners.
The 2-for-1 special evokes some odd memories for me (Midwestern, of modest means) of a K-Mart blue-light special. The Trump Administration is flashing a big, blue light with the promise to cut regulation by 75% without reference to the content of those regulations. The first tool, a "two for one approach" strikes me as a gimmick where the emphasis is on marketing the message of deregulation through quantity, not quality. Not to mention the arbitrariness of the numerical cut off (why not 1 or 13?). It is the type of solution, that if offered in answer to a law school hypo, would quickly be refuted by all of the unanswered questions. Can it be any two regulations? Can the new regulation just be longer and achieve the work of several? Should there be a nexus between the proposed regulation and the eliminated ones? What is the administrative process and burden of proof for identifying the ones to be removed? The Executive Order, targeted at business regulation, but in doing so has created the most "significant administrative action in the world of regulatory reform since President Reagan created the Office of Information and Regulatory Affairs (OIRA) in 1981." Hold on folks, this is going to be a bumpy ride.
Wednesday, January 25, 2017
Spoiler alert: wrongful refusal of demand and bad faith standards are the same in recent Delaware Court of Chancery case: Andersen v. Mattel, Inc., C.A. No. 11816-VCMR (Del. Ch. Jan. 19, 2017, Op by VC Montgomery-Reeves).
But sometimes a reminder that the law is the same and can be clearly stated is worth a blog post in its own right. Professors can use this as a hypo or case note and those in the trenches can update case citations to a 2017 (and 2016) case.
In Andersen v. Mattel, Inc., VC Montgomery-Reeves dismissed a derivative suit, holding that plaintiff did not prove wrongful refusal of pre-suit demand. The derivative action claimed that the Mattel board of directors refused to bring suit to recover up to $11.5 million paid in severance/consulting fees to the former chairman and chief executive officer who left in the wake of a falling stock price. Plaintiff challenged disclosure discrepancies over whether Stockton resigned or was terminated and the resulting entitlement to severance payments. Mattel's board of directors unanimously rejected the demand after consultation with outside counsel, 24 witness interviews and a review of approximately 12,400 documents.
The relied upon case law is unchanged, but the clear recitation of the law is worth noting:
Where, as here, a plaintiff makes demand on the board of directors, the plaintiff concedes that the board is disinterested and independent for purposes of responding to the demand. The effect of such concession is that the decision to refuse demand is treated as any other disinterested and independent decision of the board—it is subject to the business judgment rule. Accordingly, the only issues the Court must examine in analyzing whether the board’s demand refusal was proper are “the good faith and reasonableness of its investigation. (internal citations omitted)
To successfully challenge the good faith and reasonableness of the board's investigation, Plaintiff's complaint was required to state particularized facts raising a reasonable doubt that:
(1) the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or (2) the board acted in good faith, consistent with its duty of loyalty. Otherwise, the decision of the board is entitled to deference as a valid exercise of its business judgment.
First, Plaintiff challenged the board's demand refusal on the grounds that they did not disclose the investigation report or the supporting documents in conjunction with the demand refusal. The Court was unpersuaded given that Plaintiff had the right to seek the report and records through a Section 220 demand, but chose not to do so.
Second, Plaintiff challenged the board's demand refusal on the grounds that it failed to form a special committee. Absent any facts that the Mattel board considering the demand was not independent, there was no requirement for the board to form a special committee.
Third, and final, Plaintiff challenged the board's good faith in rejecting the demand on the grounds that Stockton's employment was not voluntarily terminated. The court cautioned that:
[T]he question is not whether the [b]oard’s conclusion was wrong; the question is whether the [b]oard intentionally acted in disregard of [Mattel’s] best interests in deciding not to pursue the litigation the Plaintiff demanded. [T]he fact that the [b]oard’s justifications for refusing [the] demand fall within ‘the bounds of reasonable judgment’ is fatal to [the] claim that the refusal was made in bad faith. (citing to Friedman v. Maffei, (Del. Ch. Apr. 13, 2016))
Francis Pileggi at the excellent Delaware Corporate and Commercial Litigation Blog first brought this case to my attention. Practitioners and Professors alike should be certain to include his blog on your weekly round up. He is a sure source of concise and insightful summaries of the latest Delaware court developments.
Tuesday, January 24, 2017
Friend and co-blogger Marcia Narine Weldon sent me a news article from Alaska discussing a "piercing of the corporate veil" claim for an LLC.
The City and Borough of Juneau demolished the Gastineau Apartments and is trying to get hold members of Gastineau Apartments LLC, apparent owners of the building liable for the $1.4 million demolition costs. Demolition cost more than the land is worth, so the suit is seeking to have the owners of the LLC, Camilla and James Barrett, pay the bill because they missed deadlines to repair or demolish the property.
The article reports:
At issue before Juneau Superior Court Judge Philip Pallenberg is the legal concept of “piercing the corporate veil.” It would allow legal action against the Barretts, who controlled Gastineau Apartments LLC.
Defense Attorney Robert Spitzfaden had argued that the Barretts should remain shielded from liability. But the judge noted that the defendants had allowed their limited liability corporation to be dissolved after missing filing deadlines with the state.
“It’s clear that the Barretts were not always clear to observe the formal legal requirements of their LLC,” Judge Pallenberg said from the bench.
A quick review of Alaska LLC law did not make clear to me that LLCs in the state have formal requirements that would be implicated in this case. If the main reason that the LLC did not pay the bills was a mere lack of money, there is no reason to pierce the veil. It's just a failed venture. Sure, the Barretts should have gone followed the appropriate processes, but it cannot be that the fact that the Barretts "allowed their limited liability corporation [author's note: it's an LLC] to be dissolved after missing filing deadlines with the state" is sufficient to support veil piercing."
Imagine the same scenario, but the building had value. Would missing deadlines and allowing the land owned by LLC to be automatically transferred to the Barretts? Even if there were other creditors? I think not.
Perhaps there is more to this case than the article reveals, but this looks a lot like a lack of entity funds is the only issue, and a lack of funds (on its own) should not be sufficient for veil piercing, especially in a property case where the property can be forfeited. If the city or state wants to make a law making individuals liable, then fine, but this looks like a bad case for veil piercing and a possible summary judgment case. I look forward to seeing if Alaska analyzes this one right at trial.