Tuesday, July 28, 2015
A lawyer representing Fordham Law School Professor (and Riverbed Technology shareholder) Sean Griffith argued in Delaware court that a class action settlement related to Riverbed Technology's $3.6 billion sale to private equity firm Thoma Bravo was bad for shareholders and good for the lawyers involved, Reuters reports.
Prof. Griffith told Reuters that "he has been buying stock of companies that have announced merger deals and intends to object to settlements if he feels the litigation is not serving stockholders." He asserts that the shareholders' attorneys "are in cahoots" to reach a settlement, without regard to value.
This raises some interesting questions of law and policy with regard to the Professor's role here. As a shareholder, Griffith has the right to object (assuming his time of ownership satisfies the applicable statute). But how should a court assess the objection of a shareholder who has admitted that he bought stock for the purpose of objecting to settlements not in the interests of shareholders, when that shareholder has expressed ideological concern about the value of all disclosure-only settlements?
Is Prof. Griffith's desire to protect shareholders a desire to enhance short- or long-term wealth of the entity from greedy lawyers and bad managers? Or is it a desire to punish those who abuse class action lawsuits to their own ends? Both would be reasonable motivations (though, for now, I reserve judgment on whether either assessment is accurate), but it seems that the law might view such motivations differently.
Take, for example, Pillsbury v. Honeywell, Inc., 191 N.W.2d 406 (1971), which strikes me as similar in concept, if not law. In that case, the court rejected Charles Pillsbury's request to access the company shareholder list and review books and records of Honeywell. The request was expressly related to Pillsbury's anti-war efforts, and Pillsbury made clear that he sought the records because he thought Honeywell's activities in weapons were immoral. The court denied access stating that
petitioner had already formed strong opinions on the immorality and the social and economic wastefulness of war long before he bought stock in Honeywell. His sole motivation was to change Honeywell's course of business because that course was incompatible with his political views. If unsuccessful, petitioner indicated that he would sell the Honeywell stock.
We do not mean to imply that a shareholder with a bona fide investment interest could not bring this suit if motivated by concern with the long- or short-term economic effects on Honeywell resulting from the production of war munitions. Similarly, this suit might be appropriate when a shareholder has a bona fide concern about the adverse effects of abstention from profitable war contracts on his investment in Honeywell.
If Prof. Griffith is looking to protect the long-term interests of all companies by protecting merging companies from harmful class action settlements, and his mechanism is buying shares in companies that he has reason to believe will merge, then perhaps his Robin Hood-like actions (in that the actions seek to return funds to the rightful owners) have value for shareholder wealth maximization and entity wealth maximization. The fact that he holds out the possibility that he won't object to settlements where the litigation serves the purposes of the shareholder suggests he might be in this camp.
But what if he will object to all settlement proposals? Or perhaps all disclosure-only settlement proposals, even where such settlements are allowable under the law? Does this convert his actions to more of a Charles Pillsbury-like feel in that his actions are about opposing class actions settlements, regardless of whether settlement is in the best interest of the parties?
Of course, his motivations don't necessarily matter under current law in this area, but I can't help but think the motivations will influence how a court views (and eventually decides upon) Prof. Griffith's objections. And I think they should. If, in any given case, Prof. Griffith is right that the settlement is not in the best interest of the shareholders, the court should uphold his objections. But, under current law, it's possible that a disclosure-only settlement might still be the most efficient outcome. It's the court's job to assess that in each case.
Monday, July 27, 2015
As the summer progresses, I have been slowly catching up on all the giant electronic reading pile I slowly built up during the school year. I recently read a very interesting article on personal jurisdiction, of all things. It’s Tanya J. Monestier, Registration Statutes, General Jurisdiction, and the Fallacy of Consent, 36 Cardozo L. Rev. 1343 (2015), available on SSRN here. It's definitely worth reading, whether you're a corporate litigator or just interested in corporate law.
Here’s the abstract, which explains the article much better than I could:
In early 2014, the Supreme Court issued a game-changing decision that will likely put corporate registration as a basis for personal jurisdiction center stage in the years to come. In Daimler AG v. Bauman, the Court dramatically reined in general jurisdiction for corporations. The Court in Daimler held that a corporation is subject to general jurisdiction only in situations where it has continuous and systematic general business contacts with the forum such that it is “at home” there. Except in rare circumstances, a corporation is “at home” only in its state of incorporation and the state of its principal place of business. Plaintiffs who are foreclosed by Daimler from arguing continuous and systematic contacts with the forum as a basis for jurisdiction will now look to registration statutes to provide the relevant hook to ground personal jurisdiction over corporations.
Each of the fifty states has a registration statute that requires a corporation doing business in the state to register with the state and appoint an agent for service of process. A considerable number of states interpret their registration statutes as conferring general, or all-purpose, jurisdiction over any corporation that has registered to do business under the state statute. Those states that regard registration as permitting the exercise of general jurisdiction usually justify the assertion of jurisdiction on the basis of consent. That is, by knowingly and voluntarily registering to do business in a state, a corporation has consented to the exercise of all-purpose jurisdiction over it.
Registration to do business as a basis for general jurisdiction, however, rests on dubious constitutional footing. Commentators have approached the analysis from a variety of perspectives over the years. The analysis tends to focus on how courts have misread historical precedent and failed to account for the modernization of jurisdictional theory post-International Shoe Co. v. Washington. Largely unexplored, however, is the premise underlying registration-based general jurisdiction: that registration equals consent. In this Article, I argue that general jurisdiction based on registration to do business violates the Due Process Clause because such registration does not actually amount to “consent” as that term is understood in personal jurisdiction jurisprudence. I comprehensively explore why it is that registration cannot fairly be regarded as express (or even implied) consent to personal jurisdiction. First, I look at other forms of consent in the jurisdictional context — forum selection clauses and submission — and analyze the salient differences between these and registration. Second, I examine the nature of the consent that is said to form the basis for general jurisdiction and argue that it is essentially coercive or extorted. Coerced consent, an oxymoron, cannot legitimately form the basis for the assertion of general jurisdiction over a corporation. From there, I situate registration statutes in a larger conversation about general jurisdiction. I maintain that registration-based jurisdiction does not fit well into the landscape of general jurisdiction: it could eliminate the need for minimum contacts altogether; it results in universal and exorbitant jurisdiction; it is conceptually misaligned with doing business as a ground for jurisdiction; and it promotes forum shopping.
The subject is not one that I would be naturally attracted to. I don’t teach civil procedure and I don’t spend a lot of my professional time focusing on litigation issues. But I found Professor Monestier’s article very interesting and enjoyable. Even if you, like me, aren't a civil procedure junkie, it's worth checking out.
Wednesday, July 22, 2015
For a number of years now, I have been using group (3-person teams) oral midterm examinations in my Business Associations course. I have found these examinations to be an effective and rewarding assessment tool based on my teaching and learning objectives for this course. At the invitation of the Saint Louis University Law Journal, as part of a featured edition of the journal on teaching business associations law, I prepared a short article giving folks the "why, how, and what" of my experience in taking this approach to midterm assessment. The article was recently published, and I have posted it to SSRN. The abstract reads as follows:
I focus in this Article on a particular way to assess student learning in a Business Associations course. Those of us involved in legal education for the past few years know that “assessment” has been a buzzword . . . or a bugaboo . . . or both. The American Bar Association (ABA) has focused law schools on assessment (institutional and pedagogical), and that focus is not, in my view, misplaced. Until relatively recently, much of student assessment in law school doctrinal courses was rote behavior, seemingly driven by heuristics and resulting in something constituting (or at least resembling) information cascades or other herding behaviors.
In the fall of 2011, I began offering an oral midterm examination to students in my Business Associations course as an additional assessment tool. This Article explains why I started (and have continued) down that path, how I designed that examination, and what I have learned by using this assessment method for three years. Although some (probably most) will not want to do in their Business Associations courses exactly what I have done in mine (as to the midterm examination or any other aspects of the course described in this Article), I am providing this information to give readers ideas for, or courage to make positive changes in, their own teaching (for a course on business associations or anything else).
You may think I am crazy (even--or especially--after reading this article). Regardless, I do hope the article sparks something positive in you regarding your teaching in Business Associations or some other course. Since I am working on finishing a long-overdue book on teaching business associations for Aspen this summer, I would welcome your honest reactions to the article and your additional thoughts on assessment or other aspects of teaching Business Associations.
Tuesday, July 21, 2015
The West Virginia Constitution provides for corporations in Article XI, and states the traditional understanding related to liability:
11-2. Corporate liability for indebtedness.
The stockholders of all corporations and joint-stock companies, except banks and banking institutions, created by laws of this state, shall be liable for the indebtedness of such corporations to the amount of their stock subscribed and unpaid, and no more.
So, suppose that one seeks to pierce the corporate veil. Does this provision allow for that? Typically, common law allowed veil piercing and constitutions often provide that something that existed in common law remains (which appears to be the case here). I guess, then, veil piercing is okay, though I think one could argue that a constitutional basis for limited liability should be stronger than a statutory one.
The better argument, I think, is that veil piercing disregards the entity. Thus, the constitutional protection does not connect, because there is no corporation. If we thought of things this way, we'd probably be more reluctant to veil pierce, because it would be a judicial statement that the corporation that was purportedly formed does not exist because of the failures of those in charge of the entity.
Where the shareholders truly don't intend to have an entity, I am okay with this, but that's really the rarity. Where there is fraud, prove fraud. Where there is a constitutional protection for limited liability, the respect for the entity should be exceedingly strong. Stronger than the common law standard.
I am not arguing that a constitutional right to limited liability is a good idea -- I'm currently agnostic on that. I'm questioning whether constitutional corporate status changing the veil piercing calculation. I am thinking yes, but I am not sure to what degree. I plan to give this some more thought, but I welcome comments on how constitutional limited liability status (once it exists) should change veil piercing analysis.
Friday, July 17, 2015
Earlier this week, I listened to The Aspen Institute's Does Maximizing Shareholder Value Endanger America’s Great Companies, featuring Lynn Stout (Cornell Law), Tom Donaldson (Penn-Wharton), Howard Schultz (Starbucks), and Shelly Lazarus (director of Merck & GE).
The panel discussion is over a year old, but still relevant. Among other things, I found the exchange between a Georgetown professor in the audience and Howard Schultz of Starbucks to be interesting (starting at 46 minutes).
Georgetown Professor: [Asks a roughly 2-minute long question about creating and choosing appropriate metrics for measuring social responsibility.]
Howard Schultz: "I certainly understand that you are a professor and you want a metric, but this is not the real world. We don't sit in a room and measure metrics. Let me tell you a very brief story...[tells a story about Starbucks' company meeting of parents of employees in China]...you can't put a metric on that; there is no metric....it is a narrative..."
Personally, I think Schultz was a bit too quick to dismiss the need for social metrics, and, in practice, I am sure Starbucks has some social metrics that it uses. Without any social metrics, however, even the best intentioned management can deceive itself and the stakeholders. That said, Schultz's basic point is a fair one. Social responsibility is notoriously difficult to measure, and stories are likely needed to give a full sense of the impact. Also, carefully measuring and disclosing social impact can be costly. Using social metrics may even be counter-productive, if the measuring takes focus off of high-impact practices that are more difficult to measure, and moves the focus to other, lower-impact (but easily quantifiable) practices.
One of my summer projects centers around benefit corporation reporting, so I am thinking about social reporting a good bit and welcome any thoughts. Currently, while I fully recognize the limitations and dangers of social metrics, I don't think abandoning metrics altogether is wise due to the possibility of self-deceit and stakeholder-deceit.
In short, with social responsibility, I don't think it is metrics or narrative; I think it is metrics and narrative. Deciding the balance, and the appropriate metrics, however, is quite difficult.
Thursday, July 16, 2015
Love him or hate him, you can’t deny that President Obama has had an impact on this country. Tomorrow, I will be a panelist on the local public affairs show for the PBS affiliate to talk about the President’s accomplishments and/or failings. The producer asked the panelists to consider this article as a jumping off point. One of the panelists worked for the Obama campaign and another worked for Jeb Bush. Both are practicing lawyers. The other panelist is an educator and sustainability expert. And then there’s me.
I’ve been struggling all week with how to articulate my views because there’s a lot to discuss about this “lame duck” president. Full disclosure—I went to law school with Barack Obama. I was class of ’92 and he was class of ’91 but we weren’t close friends. I was too busy doing sit-ins outside of the dean’s house as a radical protester railing against the lack of women and minority faculty members. Barack Obama did his part for the movement to support departing Professor Derrick Bell by speaking (at minute 6:31) at one of the protests. I remember thinking then and during other times when Barack spoke publicly that he would run for higher office. At the time a black man being elected to the president of the Harvard Law Review actually made national news. I, like many students of all races, really respected that accomplishment particularly in light of the significant racial tensions on campus during our tenure.
During my stint in corporate America, I was responsible for our company’s political action committee. I still get more literature from Republican candidates than from any other due to my attendance at so many fundraisers. I met with members of Congress and the SEC on more than one occasion to discuss how a given piece of legislation could affect my company and our thousands of business customers. My background gives me what I hope will be a more balanced set of talking points than some of the other panelists. In addition to my thoughts about civil rights, gay marriage, gun control, immigration reform, Guantanamo, etc., I will be thinking of the following business-related points for tomorrow’s show:
1) Was the trade deal good or bad for American workers, businesses and/or those in the affected countries? A number of people have had concerns about human rights and IP issues that weren’t widely discussed in the popular press.
2) Dodd-Frank turns five next week. What did it accomplish? Did it go too far in some ways and not far enough in others? Lawmakers announced today that they are working on some fixes. Meanwhile, much of the bill hasn’t even been implemented yet. Will we face another financial crisis before the ink is dried on the final piece of implementing legislation? Should more people have gone to jail as a result of the last two financial crises?
3) Did the President waste his political capital by starting off with health care reform instead of focusing on jobs and infrastructure?
4) Did the President’s early rhetoric against the business community make it more difficult for him to get things done?
5) How will the changes in minimum wage for federal contractors and the proposed changes to the white collar exemptions under the FLSA affect job growth? Will relief in income inequality mean more consumers for the housing, auto and consumer goods markets? Or has too little been done?
6) Has the President done enough or too much as it relates to climate change? The business groups and environmentalists have very differing views on scope and constitutionality.
7) What will the lifting of sanctions on Cuba and Iran mean for business? Both countries were sworn mortal enemies and may now become trading partners unless Congress stands in the way.
8) Do we have the right people looking after the financial system? Is there too much regulatory capture? Has the President tried to change it or has he perpetuated the status quo?
9) What kind of Supreme Court nominee will he pick if he has the chance? The Roberts court has been helpful to him thus far. If he gets a pick it could affect business cases for a generation.
10) Although many complain that he has overused his executive order authority, is there more that he should do?
I don’t know if I will have answers to these questions by tomorrow but I certainly have a lot to think about before I go on air. If you have any thoughts before 8:30 am, please post below or feel free to email me privately at firstname.lastname@example.org.
July 16, 2015 in Constitutional Law, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, International Business, Marcia Narine, Securities Regulation, Television, White Collar Crime | Permalink | Comments (0)
Wednesday, July 15, 2015
Scott Killingsworth, a corporate attorney at Bryan Cave who specializes in compliance and technology matters and is a prolific writer (especially for one who still has billable hour constraints!) recently wrote a short and thought-provoking article: How Framing Shapes Our Conduct. The article focuses the link between framing business issues and our ethical choices and motivations noting the harm in thinking of hard choices as merely "business" decisions, viewing governing rules and regulations as a "game" or viewing business as "war." Consider these poignant excerpts:
We know, for example, that merely framing an issue as a “business matter” can invoke narrow rules of decision that shove non-business considerations, including ethical concerns, out of the picture. Tragic examples of this 'strictly business' framing include Ford’s cost/benefit-driven decision to pay damages rather than recall explosion-prone Pintos, and the ill-fated launch of space shuttle Challenger after engineers’ safety objections were overruled with a simple 'We have to make a management decision.' (emphasis added)
Framing business as a game belittles the legitimacy of the rules, the gravity of the stakes, and the effect of violations on the lives of others. By minimizing these factors, the game metaphor takes the myopic “strictly business” framing a step further, into a domain of bendable rules, acceptable transgressions, and limited accountability. (emphasis added)
The war metaphor conditions our thinking in a way distinct from the game frame, but complementary to it. War is a matter of survival: the stakes are enormous, the mission urgent, and all’s fair. Exigent pressures grant us wide moral license, releasing us from adherence to everyday rules and justifying extreme tactics in pursuit of a higher goal; we must, after all, kill or be killed. If business is war, survival is at stake, and competitors, customers, suppliers, rivals or authorities are our enemies, then not only may we do whatever it takes to win, it’s our duty to do so. (emphasis added)
The full article is available here.
In light of the new ABA regulations on Learning Outcomes and Assessment, including the requirement that students have competency in exercising "proper professional and ethical responsibilities to clients and the legal system" this article seems like a great addition to a business organizations/corporations course line up. I know that I will be including it in my corporate governance seminar this coming year. And if I were responsible for new associate training, this would definitely merit inclusion in the materials.
Tuesday, July 14, 2015
A while back, I wrote about CVS's choice to eliminate tobacco products from its stores. I noted that it seemed clear to me that CVS could make that choice, even thought it would mean lower short-term profits, because it was a decision that is clearly protected (or should be) by the business judgment rule.
Today, according to an LA Times piece,
[CVS] stood up for its principles.
The pharmacy giant announced it was quitting the U.S. Chamber of Commerce after reports that the influential business organization was lobbying against anti-smoking laws around the world.
CVS bolted because of the Chamber's views on tobacco sales. In 2009, Apple and Nike made waves with the Chamber of its policy position on climate change. I find this interesting, and I have no reason to doubt that all of these companies are following their corporate values, though I also think they see public relations value in the noisy withdrawal.
That some big companies have stepped away from the Chamber is less surprising to me than the fact that the Chamber has maintained such strength with small business owners, while advocating for many big business positions that don't help, and may hurt, small businesses. I can't help but wonder if the Chamber's success it not so much in promoting policies that benefit of member businesses, and instead that it promotes policies that are consistent with the ideologies of many who work for or own businesses.
If the latter is the case, as I suspect it is, that's a good business model for the Chamber, but not necessarily for the entities it represents. Of course, if business owners, officers, and directors remain aligned with the Chamber, despite a lack of clear benefit to the entity, well, that too is protected by the business judgment rule.
CALL FOR PAPERS: A Workshop on Vulnerability at the Intersection of the Changing Firm and the Changing Family (October 16-17, 2015 in Atlanta, GA)
UPDATE: The deadline for submissions has been extended to July 21.
[The following is a copy of the official workshop announcement. I have moved the "Guiding Questions" to the top to highlight the business law aspects. Registration and submission details can be found after the break.]
A Vulnerability and the Human Condition Initiative Workshop at Emory Law
This workshop will use vulnerability theory to explore the implications of the changing structure of employment and business organizations in the new information age. In considering these changes, we ask:
• What kind of legal subject is the business organization?
• Are there relevant distinctions among business and corporate forms in regard to understanding both vulnerability and resilience?
• What, if any, should be the role of international and transnational organizations in a neoliberal era? What is their role in building both human and institutional resilience?
• Is corporate philanthropy an adequate response to the retraction of state regulation? What forms of resilience should be regulated and which should be left to the 'free market'?
• How might a conception of the vulnerable subject help our analysis of the changing nature of the firm? What relationships does it bring into relief?
• How have discussions about market vulnerability shifted over time?
• What forms of resilience are available for institutions to respond to new economic realities?
• How are business organizations vulnerable? How does this differ from the family?
• How does the changing structure of employment and business organization affect possibilities for transformation and reform of the family?
• What role should the responsive state take in directing shifting flows of capital and care?
• How does the changing relationship between employment and the family, and particularly the disappearance of the "sole breadwinner," affect our understanding of the family and its role in caretaking and dependency?
• How does the Supreme Court's willingness to assign rights to corporate persons (Citizen's United, Hobby Lobby), affect workers, customers and communities? The relationship between public and private arenas?
• Will Airbnb and Uber be the new model for the employment relationships of the future?
July 14, 2015 in Business Associations, Call for Papers, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Law and Economics, Social Enterprise, Stefan J. Padfield | Permalink | Comments (0)
Wednesday, July 8, 2015
Last September, I authored a post here on the BLPB on judicial opinions and related statutes regarding LLCs as non-signatories to LLC operating agreements (simply termed "LLC agreements" in Delaware and a number of other states). I recently posted a draft of an essay to SSRN that includes commentary on that same issue as part of a preliminary exploration of the law on LLC operating agreements as contracts. (Readers may recall that I mentioned this work in a post last month on the Law and Society Association conference.) I am seeking comments on this draft, which is under editorial review at the SMU Law Review as part of a symposium issue of essays in honor of our departed business law colleague, Alan R. Bromberg, who had been an SMU Dedman School of Law faculty member for many years before his death in March 2014. My SSRN abstract for the essay, entitled "The Ties That Bind: LLC Operating Agreements as Binding Commitments," reads as follows:
This essay, written in honor and memory of Professor Alan R. Bromberg as part of a symposium issue of the Southern Methodist University Law Review, is designed to provide preliminary answers to two questions. First: is a limited liability company (“LLC”) operating agreement (now known under Delaware law and in certain other circles as a limited liability company agreement) a contract? And second: should we care either way? These questions arise out of, among other things, a recent bankruptcy court case, In re Denman, 513 B.R. 720, 725 (Bankr. W.D. Tenn. 2014).
The bottom line? An operating agreement may or may not be a common law contract. But that legal categorization may not matter for purposes of simple legal conclusions regarding the force and effect of operating agreements. A state’s LLC law may provide that LLCs are contracts or are to be treated as contracts in general or for specific purposes and may establish the circumstances in which operating agreements are valid, binding, and enforceable. However, in the absence of an applicable statute, the legal conclusion that an operating agreement is or is not a common law contract may matter in legal contexts that depend on the common law of contracts for their rules. In either case, the bar may want to participate in clarifying the status of operating agreements as binding commitments.
Any and all comments on the essay are welcomed. Comments that decrease the length of the essay are especially appreciated, since I am admittedly over the allotted word limit. (These essays are meant to be very short pieces so that many of us can contribute to honoring Alan.) Of course, there's always time to write another, lengthier piece on this topic later, if there's enough more to be said . . . .
Also, I will note that the Association of American Law Schools Section on Agency, Partnership, LLC's and Unincorporated Associations is planning a program on the role of contract in LLCs at the 2016 annual meeting in January. I have been asked to participate, and the panel promises to have some additional members that will attack the embedded issues from a number of interesting angles. Stay tuned for more on that.
For those of you who teach agency (and the related concept of independent contractors) the following recent case example will make for a fun and culturally relevant example for many of your students.
In March, 2015, the California Labor Commissioner’s Office issued an opinion finding that a driver for the ride-hailing service mobile app company, Uber, should be classified as an employee, not an independent contractor. The opinion details the control Uber exercised over the driver including setting the payment rates and terms, quality controls, service platforms, user communications, liability insurance requirements, and background checks all the while maintaining that drivers are independent contractors. Citing to S. G. Borello & Sons, Inc. v. Dep't of Indus. Relations, 48 Cal. 3d 341, 350-51, 769 P.2d 399 (1989), the Commission analyzed the following elements:
(a) whether the one performing services is engaged in a distinct occupation or business;
(b) the kind of occupation, with reference to whether, in the locality, the work is usually done under the direction of the principal or by a specialist without supervision;
(c) the skill required in the particular occupation;
(d) whether the principal or the worker supplies the instrumentalities, tools, and the place of work for the person doing the work;
(e) the length of time for which the services are to be performed;
(f) the method of payment, whether by the time or by the job;
(g) whether or not the work is a part of the regular business of the principal; and
(h) whether or not the parties believe they are creating the relationship of employer-employee.
The Commission explained its finding that Plaintiff was an employee (not an independent contractor) (Commission Opinion, Berwick v. Uber, at 8) with the following:
By obtaining the clients in need of the service and providing the workers to conduct it, Defendants retained all necessary control over the operation as a whole. The party seeking to avoid liability has the burden of proving that persons whose services he has retained are independent contractors rather than employees. In other words, there is a presumption of employment…..The modern tendency is to find employment when the work being done is an integral part of the regular business of the employers, and when the worker, relative to the employer, does not furnish an independent business or professional service.
Id. at 8.
The Commission found that “Plaintiff’s work was integral to Defendants’ business…Without drivers such as Plaintiff, Defendants’ business would not exist.” Id.
Many technology companies, like Uber, contend that their virtual marketplaces facilitate individuals acting as contractors, using their own possession to provide services for a personal profit. The argument is that this empowers workers giving them flexibility and freedom to set their own hours and success. A counter argument raised by labor activists and others is that this type of freelance work strips workers from certainty of wages and job status as well as other benefits of traditional employment such as health care, retirement and sick leave benefits. Opponents argue that what is being touted as good for individuals is just a means to minimize costs and increase corporate, not individual, profits.
[Note, I have included this, along with a host of other case updates and teaching materials, in my new Business Organizations electronic casebook, available through ChartaCourse starting fall 2015.]
Edited on 7/10/15 to add: colleague, friend and fellow blogger Haskell Murray suggested this article (How Crowd Workers Became the Ghosts in the Digital Machine) from The Nation on crowd-workers and the thought-provoking discussion on whether minimum wage laws should apply to these workers. Joan Hemminway, same credentials above, noted that the Wall Street Journal Blog is also commenting on the Uber case.
Tuesday, July 7, 2015
Note to U.K. Supreme Court: LLCs Don't Have Places of Incorporation (But You're Right on Pass-Through Taxation)
A recent unanimous decision from the Supreme Court of the United Kingdom, Anson v. Commissioners for Her Majesty’s Revenue and Customs  UKSC 44, determined that a U.S. limited liability company (LLC) formed in Delaware will be treated for U.K. tax purposes as a partnership, and not a corporation. This is a good thing, as it provides the LLC members the ability to reap more completely the benefits of the entity's choice of form.
What is not so good is that the court left unaddressed a lower court determination as follows, was quoted in para. 47:
“Delaware law governs the rights of the members of [the LLC] as the law of the place of its incorporation, and the LLC agreement is expressly made subject to that law. However, the question whether those rights mean that the income of [the LLC] is the income of the members is a question of domestic law which falls to be determined for the purposes of domestic tax law applying the requirements of domestic tax law ….” (para 71) (emphasis added)
An LLC does not have a place of incorporation! It has a place of formation. Here is the link to Delaware's Certificate of Formation, which is to be filed in accordance with the Limited Liability Company Act of the State of Delaware: https://corp.delaware.gov/llcform09.pdf. In contrast, you can find the Certificate of Incorporation, which is to be filed in accordance with the General Corporation Law of the State of Delaware, here: http://www.corp.delaware.gov/incstk.pdf.
I'm glad the high U.K. court recognized that partnership taxation status can be proper for a U.S. LLC. But, just as You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One, I wish they'd made clear that you can't incorporate an LLC.
Friday, July 3, 2015
Among the DGCL amendments this year were a number of amendments to the Delaware Public Benefit Corporation (“PBC”) Law.
I refer to the Delaware PBC amendments as “The Etsy Amendments” because I believe (without being sure) that a main motivation in passing these amendments was to make it easier for Etsy (among other companies) to become a Delaware PBC. These amendments are effective as of August 1, 2015.
As mentioned in a previous post, Etsy is a certified B corporation and a Delaware C-corporation. According to B Lab’s terms for certified B corporations, Etsy will have to convert to a Delaware PBC by August 1, 2017 or forfeit its certification. This assumes that B Lab will not change its requirements or make an exception for publicly-traded companies.
The amendments to the PBC law are summarized below:
- Eliminates requirement of "PBC" or "Public Benefit Corporation" in the entity’s formal name. This amendment makes it easier and less costly for existing entities to convert, but the amendment also makes it more difficult for researchers (and the rest of the public) to track the PBCs. In addition to the cost of changing names, Rick Alexander notes in his article below that the previous naming requirement was causing issues when PBCs registered in other states because “[s]ome jurisdictions view the term as referring to nonprofit corporations. Other jurisdictions view the phrase ‘'PBC'’ as insufficient to signal corporate identity.”
- Reduces amount of shareholders that must approve a conversion from a traditional corporation to a PBC from 90% to 2/3rds of shareholders. This amendment brings Delaware PBC law in line with most of the benefit corporation statutes and gives Etsy a more realistic shot at converting. The requirement in Delaware to convert from a PBC to a traditional corporation was already approval by 2/3rds of shareholders.
- Provides a “market out” exception to appraisal rights when a corporation becomes a PBC. This amendment brings the Delaware PBC law in line with their general appraisal provision in DGCL 262. This amendment also means that Etsy shareholders would not receive appraisal rights if Etsy converts to a PBC.
Additional posts about the amendments are available below:
- Gregory Williams (Richards, Layton & Finger)
- Rick Alexander (B Lab & Morris Nichols) (Written Prior to Amendments Passing)
Thursday, July 2, 2015
It's barely July and I have received a surprising number of emails from my incoming business association students about how they can learn more about business before class starts. To provide some context, I have about 70 students registered and most will go on to work for small firms and/or government. BA is required at my school. Very few of my graduates will work for BigLaw, although I have some interning at the SEC. I always do a survey monkey before the semester starts, which gives me an idea of how many students are "terrified" of the idea of business or numbers and how many have any actual experience in the field so my tips are geared to my specific student base. I also focus my class on the kinds of issues that I believe they may face after graduation dealing with small businesses and entrepreneurs and not solely on the bar tested subjects. After I admonished the students to ignore my email and to relax at the beach during the summer, I sent the following tips:
If you know absolutely NOTHING about business or you want to learn a little more, try some of the following tips to get more comfortable with the language of business:
1) Watch CNBC, Bloomberg Business, or Fox Business. Some shows are better than others. Once we get into publicly traded companies, we will start watching clips from CNBC at the beginning of every class in the "BA in the News" section. You will start to see how the vocabulary we are learning is used in real life.
2) Read/skim the Wall Street Journal, NY Times Business Section or Daily Business Review. You can also read the business section of the Miami Herald but the others are better. If you plan to stay local, the DBR is key, especially the law and real estate sections.
3) Subscribe to the Investopedia word of the day- it's free. You can also download the free app.
4) Watch Shark Tank or The Profit (both are a little unrealistic but helpful for when we talk about profit & loss, cash flow statement etc). The show American Greed won't teach you a lot about what we will deal with in BA but if you're going to work for the SEC, DOJ or be a defense lawyer dealing with securities fraud you will see these kinds of cases.
5) Listen to the first or second season of The Start Up podcast available on ITunes.
6) Watch Silicon Valley on HBO- it provides a view of the world of re venture capitalists and funding rounds for start ups.
7) Read anything by Michael Lewis related to business.
8) Watch anything on 60 Minutes or PBS' Frontline related to the financial crisis. We will not have a lot of time to cover the crisis but you need to know what led up to Sarbanes-Oxley and Dodd-Frank.
9 Watch the Oscar-winning documentary "Inside Job," which is available on Netflix.
10) Listen to Planet Money on NPR on the weekends.
11) Listen to Marketplace on NPR (it's on weekday evenings around 6 pm).
12) Read Inc, Entrepreneur, or Fast Company magazines.
13) Follow certain companies that you care about (or hate) or government agencies on Twitter. Key agencies include the IRS, SEC, DOJ, FCC, FTC etc. If you have certain passions such as social enterprise try #socent; for corporate social responsibility try #csr, for human rights and business try #bizhumanrights. For entrepreneurs try #startups.
14) Join LinkedIn and find groups related to companies or business areas that interest you and monitor the discussions so you can keep current. Do the same with blogs.
As I have blogged before, I also send them selected YouTube videos and suggest CALI lessons throughout the year. Any other tips that I should suggest? I look forward to hearing from you in the comments section or at email@example.com.
Tuesday, June 30, 2015
Last week, S.E.C Commissioner Daniel M. Gallagher, gave a speech, Activism, Short-Termism, and the SEC: Remarks at the 21st Annual Stanford Directors’ College. I agree with many of Commissioner Gallagher's views on short-termism, and (I will semi-shamelessly note) he cited one of my earlier posts about the role of activists on board decision making. In his remarks, he said, with regard to short-termsim (i.e., companies operating for short term rather than long-term gains):
The current picture is bleak . . .
Clearly, there’s a way for all the parties . . . to co-exist peacefully. The SEC sets a level playing field; companies manage themselves for the long-term with the vigorous oversight of the board; and activists put pressure on those companies that fall short of that ideal. Unfortunately, we are not in that happy place. Rather, there seems to be a predominance of short-term thinking at the expense of long-term investing. Some activists are swooping in, making a lot of noise, and demanding one of a number of ways to drive a short-term pop in value: spinning off a profitable division, beginning a share buy-back program, or slashing capital expenditures or research and development expenses. Having inflated current returns by eliminating corporate investments for the future, these activists can exit their investment and move on.
. . . .
 See, e.g., Joshua Fershee, Shareholder Activists Can Add Value and Still Be Wrong (Apr. 28, 2015) (positing that activists can signal to boards when the company’s strategy may be inefficient; it is then the board’s responsibility to “use the tools before it to make decisions in the best interests of the entity” — that shareholder activists can improve long-term value even if following their recommendations blindly would not).
I absolutely agree with the Commissioner that too many companies are using a short-term philosophy to guide their decision making and that directors are allowing non-controlling institutional investors too much influence in the boardroom. But, as a believer in director primacy, I see that as a director failure, not an S.E.C. failure or an institutional investor/activist failure. Directors need to make the decisions for the entity based on their view of what is best for the entity, not on someone else's view.
Commissioner Gallagher is spot on when he notes his concern "that some institutional investors are paying insufficient attention to their fiduciary obligations to their clients when they determine whether to support a particular activist’s activity."
That concern, though, has nothing to do with how the board of a company responds to its activist institutional investors that urge short-termist actions. The institutional investor activist in that case should be held accountable to its clients, and perhaps it should not be urging such behavior, but that is not relevant to how a board of a company in which an institutional investors owns stock responds to such pressure.
It could be that some boards really believe that short-termism is how best to run a company. The level of complaining about activists suggests otherwise, but then it is up to boards to reject the activist's requests. If boards are being unduly influenced by non-controlling outside forces, then shareholders need to take a break from their rational apathy, and do something. If controlling shareholders are pushing short termism to the detriment of non-controlling shareholders, boards should not follow the controlling shareholder's request or (again) non-controlling shareholders need to push back to ensure the board and the controlling shareholders are honoring their fiduciary obligations.
If it's just that directors like short termism as a strategy, though, and it's not a decision made for any other reason than directors think it's the right one, I believe those directors are wrong. But that's not my call. I'm not on the board.
Thursday, June 25, 2015
In my final post on the subject of “respectability” of lawyers (the first four can be found here, here, here and here), I’d like to tie my thoughts together, discussing what the various parties can do to make Bird and Orozco’s thesis of assimilation of lawyers into corporate business teams the “new normal”. This should give lawyers more career opportunities in the future, slow the loss of influence of the legal profession in businesses, and make legal education a more attractive choice. Much of the discussion in academia has ignored the in-house counsel approach as being a viable option for the woes of the legal industry. Below the fold, this post will discuss the roles that academia, in-house counsel, and business firms each may play in increasing the potential for success of a new model for business lawyers.
It’s always nice to blog and research about a hot topic. Last week I wrote about compliance challenges for those who would like to rush down to do business in Cuba- the topic of this summer’s research. Yesterday, Corporate Counsel Magazine wrote about the FCPA issues; one of my concerns. Earlier this week, I attended a meeting with the Greater Miami Chamber of Commerce and the United States International Trade Commission. Apparently, on December 17th, the very same day that President Obama made his surprise announcement that he wanted to re-open relations with Cuba, Senator Ron Wyden coincidentally sent a request to the USITC asking for an investigation and report on trade with Cuba and an analysis of restrictions. Accordingly, the nonpartisan USITC has been traveling around the country speaking to lawyers and business professionals conducting fact-finding meetings, in order to prepare a report that will be issued to the public in September 2015. Tomorrow the Miami Finance Forum is holding an event titled the New Cuba Revolution.
This will be my third and final post on business and Cuba and in this post I will discuss the focus of my second potential law review article topic. My working thesis is as follows: As relations between the United States and Cuba thaw, American businesses have begun exploring opportunities on the island. Cuba, however, remains a communist nation with a human rights record criticized by exiles, NGOs, and even members of the United States Congress. The EU has taken a "common position" on Cuba stating that the objective of the European Union in its relations with Cuba is to encourage a process of transition to a pluralist democracy, require a respect for human rights and fundamental freedoms, as well as sustainable recovery and improvement in the living standards of the Cuban people." Individual EU member states are free to conduct business with Cuba and many European companies have joined Canadian firms in investing through joint ventures and other state-sanctioned vehicles. This Article will examine whether the US should follow the EU's model in trying to spur reform or whether allowing American firms to do business in Cuba without human rights concessions will in fact perpetuate the status quo.
As I discussed in last week’s blog post, one reason that the U.S. is unlikely to lift the embargo is the nearly 7 billion in claims for confiscated US property. Another reason is Cuba’s human rights record. For example, the island is notorious for violations of rights to freedom of press, association, assembly, and imprisonment of political protesters. The Cuban government continues to control all media limiting the access to information on the Internet due to content-based restrictions and technical limitations. Independent journalists are systematically subjected to harassment, intimidation, and detention for reporting information that was not sanctioned by the state apparatus. My colleague Jason Poblete writes often and critically about the Obama administration’s rapprochement with Cuba. (I highly recommend him for legal advice about Cuba by the way).
Depending on whom you talk to the embargo will be lifted next year, in five year or in ten years. Personally, I don't know that the EU Common Position has been particularly effective in pressuring the Castro brothers to make human rights reforms. I don’t think the U.S. government will be any more successful either. The embargo is Exhibit A.
Most of my academic research thus far has been on what drives corporations to act in the absence of legal obligations vis a vis human rights. With that in mind, I plan to examine a few options related to Cuba. First, I am researching the effect of bilateral investment treaties. A bilateral investment treaty is an "agreement between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country.” These typically grant significant rights to foreign investors, provide safeguards to investments against foreign governments, and allow foreign investors to have investment disputes adjudicated outside of the country, which will be critical for those investing in Cuba. The problem is that these BITS rarely have human rights conditions. Accordingly, some scholars have recommended that they require adherence to the Universal Declaration of Human Rights, the United Nations International Covenant on Civil and Political Rights, the ILO Declaration on Fundamental Principles and Rights at Work, the United Nations Convention Against Corruption, the and the Rio Declaration on Environment and Development. I would also recommend reference to the UN Guiding Principles on Business and Human Rights and the OECD Guidance.
Another option is to condition any renewal of a development bank such as the US’s Ex-Im Bank on requiring human rights impact assessments. The Ex-Im bank is the official export credit agency of the US. It’s used when private sector lenders are unable or unwilling to provide financing to companies entering politically or commercially risky countries. Its charter is set to expire on June 30th although its supporters claim that it financed billions in exports, which supported 200 thousand jobs last year. Opponents claim that it financed exports in countries with abysmal human rights records and/or that it supports corporate welfare. I propose that Ex-Im and other lenders follow the lead of many European financers that require human rights disclosures. I (naively?) believe labor may be the only human right remotely and partially in the control of US companies operating in Cuba in the future.
I have some other ideas but those will have to wait for the upcoming article. In the meantime, if you have some thoughts or critiques of these early ideas, please comment below or send me an email at firstname.lastname@example.org. I’m off to Guatemala on Saturday for a week with a group of academics studying business and human rights (another research topic for this summer). We will be exploring climate change, the extractive industries, maquiladoras, corporate social responsibility, and the effects on the rights of indigenous peoples. You can be sure I will be writing about that in a future post.
Wednesday, June 24, 2015
The AALS Annual meeting will be held in NYC in January, 2016. The Section on Business Associations will be co-hosting a program entitled The Corporate Law and Economics Revolution 40 Years Later: The Impact of Economics and Finance Scholarship on Modern Corporate Law.
Presenters will include Judge Frank Easterbrook, Professor Roberta Romano (Yale) and Professor Kent Greenfield (Boston College).
The full call for papers is available here: Download AALS Call for Papers 2016-1. The deadline for submitting an abstract (please send to Professor Usha Rodrigues at email@example.com) is August 27, 2015.
I had the privilege of sitting in on a stimulating paper session on "Private Fiduciary Law" at the Law and Society Association conference in Seattle last month. The program featured some super work by some great scholars. My favorite piece from the session, however, is a draft book chapter written by Gordon Smith that he recently posted to SSRN. Aptly entitled The Modern Business Judgment Rule, the chapter grapples with the current state of the business judgment rule in Delaware by tracing its development and reading the disparate doctrinal tea leaves. Here is a summary of his "take," as excerpted from his abstract (spoiler alert!): "The modern business judgment rule is not a one-size-fits-all doctrine, but rather a movable boundary, marking the shifting line between judicial scrutiny and judicial deference."
In the mere 18 pages of text he uses to engage his description, analysis, and conclusion, Gordon gives us all a great gift. His summary is useful, his language is clear, and his analysis and conclusions are incredibly useful, imho. I am no soothsayer, but I predict that this will be a popular piece of work.
Gordon posted on his paper the other day on The Glom. He is inviting comments, and I know him to be serious in wanting to receive and incorporate them. So, have at it!
Friday, June 19, 2015
The book is much more “popular press” than academic, as should be clear from the splashy subtitle “liberating the heroic spirit of business.” There is a bit of academic influence in the appendix and notes, but it is mostly social business advocacy and story telling. In fact, the authors state that the primary purpose of the book “is to inspire the creation of more conscious businesses: businesses galvanized by higher purposes that serve and align the interests of all their major stakeholders.” (pg. 8). The book is interesting, passionate, and may accomplish its primary purpose.
The authors paint a compelling picture of Whole Foods Market and similar companies like Trader Joe's, The Container Store, Costco, and Southwest Airlines. These companies appear to take a long-term view and consider what is best for all their stakeholders. I would have appreciated, however, more attention to the struggles the companies must have faced in attempting to satisfy all of their stakeholders. After finishing the book, I was left wishing the authors would have spent more time discussing how to make decisions in situations where certain stakeholder interests irreconcilably conflict.
I may have more to say about this book in future posts, but as someone who has been researching in the social business area for a few years, I continue to be amazed at the proliferation of terms. The authors describe four tenants of their term “conscious capitalism”: (1) Higher Purpose (beyond just generating profits); (2) Stakeholder Integration (“optimizing value creation for all of them”); (3) Conscious Leadership (leaders “motivated primarily by service to the firm’s higher purpose and creating and creating value for all stakeholders.”); (4) Conscious Culture and Management (culture and management centering around traits like “trust, accountability, transparency, integrity, loyalty, egalitarianism, fairness, personal growth, and love and care.) (pg. 32-35)
The authors try to differentiate their term of “conscious capitalism” from similar terms, as discussed below. While some of the distinctions make sense, I wish that these various social business movements would agree on a common vocabulary and work together more consistently. Unfortunately and ironically, many associated with the social business movements seem especially territorial. Perhaps, the lack of focus on financial returns causes some to seek personal returns in the form of recognition and influence. Quotes in the bullet points below come from pages 38, 291-97 in the book.
- Corporate social responsibility. The authors note that CSR is often “grafted onto traditional business model, usually as a separate department or part of public relations," but for Conscious Capitalism “[s]ocial responsibility is at the core of the business.” The authors are not the first to note this difference between CSR and the more recent social business movements, and I think it is a fair distinction, at least in some cases.
- Natural Capitalism. According to the authors, “Conscious Capitalism included the valuable insights that natural capitalism offers about the environment and transcends them with a more comprehensive view of the entire business and economic system.” The authors seem to suggest that their term is more holistic, not merely focused on the environment, and more focused on human ingenuity than simply preserving the environment.
- Triple Bottom Line. The authors seem to think that Conscious Capitalism has a more inclusive view of stakeholders than TBL’s “people, profit, planet.” I don’t think the authors make their case for this distinction, failing to note stakeholders that don’t fall in one of TBL’s three buckets. The authors then note that their theory pays more attention to “purpose, leadership, management, and culture.” I also think this is stretching for distinctions; most of the TBL proponents I know recognize the importance of “purpose, leadership, management, and culture.” The authors admit that the TBL movement is "a fellow traveler," but I think TBL and Conscious Capitalism are roughly synonymous.
- Shared-Value Capitalism. SVC, championed by Michael Porter and Mark Kramer, focuses on creating economic value for shareholders and all of society. Conscious Capitalism, the authors claim, does not only focus on economic value like SVC, but expands to human values and includes “emotional and spiritual motivators” lacking with SVC.
- Creative Capitalism. Bill Gates popularized this term in 2008 at the World Economic Forum, claiming that certain companies can use variable pricing to make products affordable to those at the “base of the pyramid” and still make a profit. The authors claim Creative Capitalism seems like an “add on” similar to CSR, only applies certain companies, and over-focuses on the reputational benefits, rather than changing the core business purpose.
- B Corporations. The authors do not seem optimistic about “[certified] B corporations” which they unfortunately use interchangeably with “benefit corporations,” even though the two terms are distinct. The main reason the authors offer for their pessimism toward B corporations is that “B corporations appear to violate the important principle that owners [shareholders] should ultimately control the corporation.” Most legal readers will notice problems with that statement. First, shareholders don’t control corporations, boards of directors do (see, e.g., DGCL 141(a)). Second, to the extent the authors are talking about aspects of corporate governance like the shareholders’ ability to elect the directors and bring derivative suits, those powers remain for shareholders of both certified B corporations and benefit corporations. Giving the authors (neither of whom are legally trained) the benefit of the doubt – perhaps they are talking about the deprioritization of shareholders in the benefit corporation statutes (shareholders are simply one of many stakeholders that the board must consider in its decision making). The authors seem concerned that shareholders, the most vulnerable of the stakeholders (according to them), will be relatively unprotected. This is a fairly common concern, but the Conscious Capitalism model seems to deprioritize shareholders as well, and even in traditional corporate law, the business judgment rule provides significant protection to the board of directors. Delaware law does give shareholders more power in the M&A context, but benefit corporations and corporations committed to Conscious Capitalism that are incorporated in a constituency statute state seem like they would operate similarly, even in the M&A context. In short, the authors do not clearly express a strong grasp of the benefit corporation statutes, and throughout the book the authors actually seem to advocate operating corporations in line with the benefit corporation statutes (considering all stakeholders in decisions).
While I am a bit critical in some of my comments above, I did appreciate learning more about Whole Foods Market and similar companies. The companies discussed are some of my favorite companies and are certainly making the world better for many of their stakeholders. The book also made a number of claims that spurred additional thinking, for which I am grateful, and which made reading the book worthwhile.