Tuesday, March 4, 2014
West Virginia University has a new LLM program in Energy & Sustainable Development Law. At the moment, the program is open only to those with a U.S. law degree. The degree program capitalizes on a wide and deep range of expertise at WVU Law in a one of the nation's most energy-rich states. (Full bias disclosure: I direct the program.)
All students in the program are required to take both the Energy Law Survey and the Environmental Protection Law course. This is because we firmly believe that all lawyers connected to the energy sector need to have a firm grasp on both energy law issues and envirnonmental law issues. Both courses touch on each other's area, but having both courses as a base will lead to better prepared professionals, whether the graduate wants to work for industry, an NGO, or a regulator.
We also require some form of experiential learning, a portfolio of written work, and a Research Paper or Field-Work Project. Full details of the program are here. For this venue, and in my area of interest, I will note our business offerings. I teach my Energy Business: Law & Strategy course, details here, in addition to my Business Organizations course and the Energy Law Survey. We also have great variety of courses in energy law, environmental law, and sustainable development law.
In addition, we have a fellowship opportunity in the Land Use and Sustainable Development Clinic. This fellowship is a part-time (at least twenty hours per week), two-year position from August 2014 through July 2016. The Fellow will receive an annual stipend of $20,000 and tuition remission for the LL.M. program. The Fellow would take 6-7 credits per semester allowing time for part-time work at the Clinic. Details available here.
In a world where the Future of Business is the Future of Energy, this program is one option to consider.
Monday, March 3, 2014
Business law has a broad overlap with tax, accounting, and finance. Just how much belongs in a law school course is often a challenge to determine. We all have different comfort levels and views on the issue, but incorporating some level of financial literacy is essential. Fortunately, a more detailed discussion of what to include and how to include it is forthcoming. Here's the call:
Call For Papers
AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations
Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
2015 AALS Annual Meeting Washington, DC
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014 (preferably by April 15, 2014). The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeff Lipshaw, Chair.
Jeffrey M. Lipshaw
Suffolk University Law School
Click here for contact info
Tuesday, February 25, 2014
Yesterday, Carl Icahn sent a letter to eBay shareholders, which starts like this:
Dear Fellow eBay Stockholders,
We have recently accumulated a significant position in eBay’s common stock because we believe there is great long-term value in the business. However, after diligently researching this company we have discovered multiple lapses in corporate governance. These include certain material conflicts of interest, which we believe could put the future of our company in peril. We have found ourselves in many troubling situations over the years, but the complete disregard for accountability at eBay is the most blatant we have ever seen. Indeed, for the first time in our long history, we have encountered a situation where we believe we should not even have to run a proxy fight to change the board composition. Rather, we believe that in any sane business environment these directors would simply resign immediately from the eBay Board, either out of pure decency or sheer embarrassment at the public exposure of the extent of their self-serving activities.
Wow. You could almost drop the mic there. Icahn does not, though. He goes on to outline a series of transactions from board members and the CEO that raise reasonable questions about the independence of certain board members. (click below for more)
Tuesday, February 18, 2014
This conference is worth a look, with some great people (and great teachers), including Michael Hunter Schwartz. It's relevant to all disciplines, though judging by the AALS panel I attended in January, for the section on Agency, Partnership, LLCs, and Unincorporated Associations, titled "Effective Methods for Teaching LLCs and Unincorporated Business Arrangements," a lot of people in the in the business area have been particularly focused on assessment and outcomes for their students. BLPB's own Anne Tucker, for one.
Assessment Across The Curriculum
Institute for Law Teaching and Learning
Spring Conference 2014
Saturday, April 5, 2014
“Assessment Across the Curriculum” is a one-day conference for new and experienced law teachers who are interested in designing and implementing effective techniques for assessing student learning. The conference will take place on Saturday, April 5, 2014, at the University of Arkansas at Little Rock William H. Bowen School of Law in Little Rock, Arkansas.
Conference Content: Sessions will address topics such as
· Formative Assessment in Large Classes
· Classroom Assessment Techniques
· Using Rubrics for Formative and Summative Assessment
· Assessing the Ineffable: Professionalism, Judgment, and Teamwork
· Assessment Techniques for Statutory or Transactional Courses
By the end of the conference, participants will have concrete ideas and assessment practices to take back to their students, colleagues, and institutions.
Who Should Attend: This conference is for all law faculty (full-time and adjunct) who want to learn about best practices for course-level assessment of student learning.
Conference Structure: The conference opens with an optional informal gathering on Friday evening, April 4. The conference will officially start with an opening session on Saturday, April 5, followed by a series of workshops. Breaks are scheduled with adequate time to provide participants with opportunities to discuss ideas from the conference. The conference ends at 4:30 p.m. on Saturday. Details about the conference are available on the websites of the Institute for Law Teaching and Learning (www.lawteaching.org) and the University of Arkansas at Little Rock William H. Bowen School of Law (ualr.edu/law).
Conference Faculty: Conference workshops will be taught by experienced faculty, including Michael Hunter Schwartz (UALR Bowen), Rory Bahadur (Washburn), Sandra Simpson (Gonzaga), Sophie Sparrow (University of New Hampshire), Lyn Entrikin (UALR Bowen), and Richard Neumann (Hofstra).
Accommodations: A block of hotel rooms for conference participants has been reserved at The DoubleTree Little Rock, 424 West Markham Street, Little Rock, AR 72201. Reservations may be made by calling the hotel directly at 501-372-4371, calling the DoubleTree Central Reservations System at 800-222-TREE, or booking online at www.doubletreelr.com. The group code to use when making reservations for the conference is “LAW.”
Wednesday, February 12, 2014
The Grand Forks City Council Service/Safety Committee recommended Tuesday that the city deny a liquor license transfer for Rumors bar in Grand Forks.
The committee originally recommended the full council deny the license earlier this month because of the previous felony charges against Blake Bond, Jamestown, N.D., one of the partners in Sin City LLC, the applicant of the license.
The council then sent the issue back to the committee, but when representatives from Sin City failed to show up at Tuesday’s meeting, the committee voted to recommend denying the license again. . . . .
A quick note for the reporter, who wouldn't necessarily know this: LLCs don't have partners. They have members. So, the more accurate statement would be that Mr. Bond "is one of the members of Sin City, LLC." The North Dakota Limited Liability Company Act definitions provision explains that:
"Member" means a person, with or without voting rights, reflected in the required
records of a limited liability company as the owner of a membership interest in the
limited liability company.
As for the LLC members, here's a hint: it's probably best not to name your LLC "Sin City, LLC" when you want approval from the council's Safety Committee and need approval of the full council to get the liquor license you need for your bar. This is likely to be even less of a good idea when one of your LLC members apparently has prior felony convictions. It's also probably best to show up for the council meeting to make your case, too, if the council is willing to listen.
In this circumstance, it is entirely possible that Sin City, LLC, was formed (about a month ago) without the services of an attorney. I rather hope so. Although as lawyers we are not necessarily required to opine on entity names or other business decisions, sometimes being a good counselor requires suggesting to one's client the potential implications of such decisions. Here, for example, good counsel might have suggested that other naming options might be preferable.
Clients won't always listen, of course, but it's worth a shot (no pun intended).
Tuesday, February 11, 2014
CVS/Caremark announced, on Feb. 5, 2014, that that the company would cease selling tobacco products in its 7,600 U.S. pharmacies. Given that the entity estimated that it would lose about $2 billion in revenues from the decision, the world took notice. CVS has managed the announcement well, and the company has received generally good press about the whole idea.
Personally, I applaud the decision, both because I think it’s a sensible choice and because I think the board properly exercised its authority to set CVS stores up for long-term success. The company tried to maximize the feel-good story of the decision, but I think that message was tempered by the necessity that CVS explain the profit-seeking role of the decision with the announcement. Clearly, CVS’s counsel read eBay v. Newmark.
The CVS announcement had two components. First, the media spin – for the aren’t-they-great? response:
“We have about 26,000 pharmacists and nurse practitioners helping patients manage chronic problems like high cholesterol, high blood pressure and heart disease, all of which are linked to smoking,” said Larry J. Merlo, chief executive of CVS. “We came to the decision that cigarettes and providing health care just don’t go together in the same setting.”
The decision to exit the tobacco category does not affect the company's 2014 segment operating profit guidance, 2014 EPS guidance, or the company's five-year financial projections provided at its December 18th Analyst Day. The company estimates that it will lose approximately $2 billion in revenues on an annual basis from the tobacco shopper, equating to approximately 17 cents per share. Given the anticipated timing for implementation of this change, the impact to 2014 earnings per share is expected to be in the range of 6 to 9 cents per share. The company has identified incremental opportunities that are expected to offset the profitability impact. This decision more closely aligns the company with its patients, clients and health care providers to improve health outcomes while controlling costs and positions the company for continued growth.
Here’s the thing: CVS shouldn’t have to do this second part, in my view, though I would have advised them to because of the recent language used by the Delaware courts. Unlike some, I still believe in the business judgment rule. Absent conflicts of interest, fraud, or illegality, CVS should be able to make this decision without further justification. The court should abstain. But courts want more.
In eBay v. Newmark, Chancellor Chandler was not satisfied that craigslist was profitable or that the company had achieved market-leading status through its chosen course of operations. He wanted more:
craigslist’s unique business strategy continues to be successful, even if it does run counter to the strategies used by the titans of online commerce. Thus far, no competing site has been able to dislodge craigslist from its perch atop the pile of most-used online classifieds sites in the United States. craigslist’s lead position is made more enigmatic by the fact that it maintains its dominant market position with small-scale physical and human capital. Perhaps the most mysterious thing about craigslist’s continued success is the fact that craigslist does not expend any great effort seeking to maximize its profits or to monitor its competition or its market share.
For Chancellor Chandler, and Delaware courts, it was not sufficient that craigslist’s CEO testified “that craigslist’s community service mission ‘is the basis upon which our business success rests. Without that mission, I don’t think this company has the business success it has. It’s an also-ran. I think it’s a footnote.’” Would it have been sufficient if he had said “our profitability” instead of “business success?” I doubt it.
As such, CVS had to go further to show where this decision fit within their profit-making scenario. Chancellor Strine agrees: “I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.” Chancellor Strine immediately seeks to soften the blow by stating, “The directors, of course, retain substantial discretion, outside the context of a change of control, to decide how best to achieve that goal and the appropriate time frame for delivering those returns.” The problem: that’s not really true if you add this philosophy together with eBay, which appears to require “great effort” to maximize profits, or monitor competition or market share, as opposed to pursuing a corporate philosophy that creates and maintains profitability and market leadership.
To be clear, this is not about CSR. This is about director primacy and keeping the courts out of the boardroom as much as possible. I think CVS should be able to decide to drop tobacco if they wish, just as craigslist should be able to decide that it wants to stay profitable and be a market leader forever. If long-term success, in the board’s judgment, means not selling cigarettes or not monetizing and not taking risks of a boom and bust, they should be able to do that.
Was it essential that Boston Market and Krispy Kreme expand as fast as possible and as seek as much profit at they could in the near term? I hope not. The directors are supposed to be in charge and make such decisions, not the shareholders, and not the courts. The business judgment rule is an abstention doctrine, and courts should stay out of it unless there is a strong indication of a conflict of interest, fraud, or illegality. CVS took the proper steps to minimize the risk of a court intervention. They just shouldn't have had to justify that decision to anyone but their shareholders at election time.
Tuesday, February 4, 2014
I understand that I may be one of the few people who seems to actually care about such a thing, but it seems to me courts really should be careful about their descriptions of limited liability entities. I have written about this before (here, here, and here), but it continues to frustrate me.
One of the things that got me thinking about this again (but let's be honest, it seems I am always thinking about this) is a post over at The Conglomerate. There, Christine Hurt (who, to be clear, is a lot smarter and more knowledgeable than I) discusses the Illinois governor's interest in generating more jobs by shifting to "the $39 limited liability company." In her post, she makes a couple references to incorporation in the context of LLC formation. But, in fairness, that's a blog post, and I can't claim that I have always been as precise as I should be in my blog writing, either.
Courts, however, should be more careful. The U.S. Court of Appeals for the Ninth Circuit, for example, loves to call limited liability companies "limited liability corporations" in their cases. Take, for example, CarePartners, LLC v. Lashway, 545 F.3d 867 (9th Cir. 2008), the caption of which is: "CAREPARTNERS LLC, limited liability corporation under the Laws of the State of Washington doing business as Alderwood Assisted Living . . . ." That is wrong. Washington LLC law provides that an LLC is a limited liability company. Even more significant, Washington LLC law provides specifically that an LLC's name "[m]ust not contain any of the words or phrases: . . . 'corporation,' 'incorporated,' or the abbreviations 'corp.,' 'ltd.," or 'inc.,' . . . ." Wash. Stat. 25.15.010(d) (2014).
Tuesday, January 28, 2014
Last week, after a post here, I received a call from a Charleston (WV) reporter seeking some background on veil piercing as it relates to the company (Freedom Industries) linked to a chemical spill that left 300,000 people without clean drinking water. That conversation led to a rather long article, as newspapers go, on the concepts of veil piercing in West Virginia. The article did a rather good job of relaying the basics (with a few nits), and I hope it at least informs people a little bit about the process to follow on that front.
The article does reflect a little confusion over what I was trying to communicate about personal liability for the president of Freedom Industries. West Virginia law provides: (b)“Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.” W. Va. Code, § 31D-6-622 (emphasis added). I was trying (and I take responsibility for any lack of clarity) to reflect my view that it was conceptually possible that the company president could be found personally liable for the harm if there were activities undertaken in his personal (and not corporate) capacity, but that based on the facts currently available, that seemed unlikely to me.
West Virginia courts have long reinforced the separate nature of the corporation and the shareholder. Consistent with prevailing views, the state recognizes each corporation as a distinct, individual entity that is separate and distinct from other corporations and from their respective shareholders. “The law presumes that two separately incorporated businesses are separate entities and that corporations are separate from their shareholders.” S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 788, 320 S.E.2d 515, 523 (1984). In a proper case, courts will disregard the entity form—pierce the limited liability veil—where necessary to prevent injustice; however, courts take seriously this separate nature of corporations and shareholders, and “the corporate form will never be disregarded lightly.” Laya v. Erin Homes, Inc., 177 W. Va. 343, 347, 352 S.E.2d 93, 97 (1986) (quoting S. States Coop., Inc. v. Dailey, 167 W.Va. 920, 930, 280 S.E.2d 821, 827 (1981)); see also S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 787, 320 S.E.2d 515, 522 (1984) (“The [veil piercing] doctrine is complicated, and it is applied gingerly.”). Thus, while veil piercing is not impossible, it is a significant hurdle.
I mentioned in a prior post that I thought enterprise liability (essentially collapsing various limited liability entities into one) was a more likely possible remedy for unpaid losses, though again it is by no means a given. Much more information about how the various entities involved in the whole situation operated and interacted with one another will need to be discovered before the real likelihood of such an outcome can be reasonably predicted.
Regardless of how that turns out, though, there is another issue worth noting, and that is the lack of government oversight. The classic case on veil piercing and enterprise liability, Walkovszky v. Carlton, explained that complaints about the inadequacy of corporate insurance and others assets are not a problem for the courts to solve. That court explained:
if the insurance coverage required by statute “is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature.” It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, §1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of . . . [such] corporations that they carry . . . liability insurance over and above that mandated by [law].” Walkovszky v. Carlton, 18 N.Y.2d 414, 419-420(N.Y. 1966) (citations omitted).
I don’t know if a court will pierce the veil or apply an enterprise liability theory to expand the available assets for victims of the chemical spill. There is a lot to be determined before we’ll see an outcome. Still, it needs to be clear that where a company acts within the parameters of its grant of limited liability, seeking additional compensation from others after the fact is improper. (Again, whether the companies involved acted appropriately is an open question.)
If we’re uncomfortable with the cap on recovery for harms such as this, then randomly, haphazardly, and retroactively eliminating a state grant of limited liability protection is not the proper response. There are other ways to help protect the public, such as proper permitting, oversight and enforcement at chemical storage sites, and increased insurance and/or bonding requirements. State and federal legislatures should be discussing such options right now, and at least some discussions are occuring. It is, though, disheartening to read that even while discussing stronger standards for chemical storage tank operators, the West Virginia Senate Natural Resources Committee also voted to reduce water quality standards for aluminum in state water.
Tuesday, January 21, 2014
Freedom Industries -- the company apparently responsible for contaminating the Elk River (and, along with it, 300,000 West Virginia residents’ drinking water) – has filed for Chapter 11 bankruptcy. The company wasted little time filing for reorganization, and the process already has some people on edge.
From a public relations perspective, this kind of cases does not serve the concepts of Business Organizations especially well. The use of limited liability vehicles is sanctioned by law, and such use has been credited with creating all kinds of opportunities for growth through pooled resources that would not otherwise occur without the grant of limited liability. I happen to think that’s true. (See, e.g., Corporate Moral Agency and the Role of the Corporation in Society, p. 176, By David Ronnegard)
Still, one of the issues is that figuring out who owned Freedom Industries took some sleuthing (reporter's findings here). It appears the structure is as follows:
Freedom Industries’ Chapter 11 documents list its sole owner as Chemstream Holdings, which is owned by J. Clifford Forrest. Forrest also owned the Pennsylvania company, Rosebud Mining, which is located at the same address Chemstream Holdings lists for its headquarters. The
Reports note that the chapter 11 filing also states that two entities have offered to lend up to $5 million to fund Freedom Industries’ reorganization. The two entities are VF Funding and Mountaineer Funding, the latter of which is a West Virginia LLC formed by its sole owner: J. Clifford Forrest.
The idea that the owner of the company that owns the company that owned the chemicals that harmed the water in West Virginia is now seeking to create a new company to loan money to the company that owned the chemicals is note sitting very well with many of those harmed by the chemical leak.
Some of those harmed by the chemical spill are objecting to the proposed reorganization structure. As reported here, West Virginia American Water (WVAW), the utility providing the tainted water (and the subject of it own lawsuits because of it), claims the water company will be “the largest creditor by far in this bankruptcy case.” As such, WVAW has asked (PDF here) the bankruptcy judge to slow down the reorganization so that the utility and other creditors an opportunity get a better sense of the ownership structure and how the creditors (and possible creditors) will be treated.
This case probably looks even worse because it keeps coming back to a single person, and not a group of investors. Again, one company – Chemstream Holdings, Inc. is owned by one person -- J. Clifford Forrest, who then is the sole owner of a company seeking to loan money to the embattled company.
Keeping with that theme, after a little sleuthing of my own, I found that although the initial reports were of VF Funding and Mounatineer Funding LLC offering to loan $5 million to Freedom Industries, it seems to have gotten even more convoluted. There is yet another company in the mix – WV Funding LLC (pdf), which was formed on January 17, 2014, and on the same date the entity filed to be the Debtor in Possession of Freedom Industries (pdf). WV Funding LLC was organized by same Wheeling attorney who formed Mountaineer Funding LLC for Forrest. The sole listed member of WV Funding LLC? Mountaineer Funding LLC (pdf). Related documents here.
All of this, at least at this point, seems permissible. Still, at some point, it really does start to look like someone is trying to pull a fast one. And even a staunch defender of the corporation and uncorporation has a hard time arguing otherwise. At a minimum, and even though there are good counterarguments (like Steve Bainbridge makes here in a different context), such behavior starts to make an expansive view of enterprise liability a lot more attractive.
Wednesday, January 15, 2014
As a resident of West Virginia, I am especially appalled at the disastrous chemical spill into the Elk River that has left 300,000 without safe water. My family and I are fortunate that we live well north of the spill and we have not been burdened by a lack of safe water. Still, our state, our friends, and our environment have been, and we can sense the suffering.
In the wake of disasters, there often follow what are known as “policy windows” that create opportunities for new legislation. G. Richard Shell describes the concept like this in Make the Rules or Your Rivals Will (Amazon link) :
Policy windows “open” in the wake of a high visibility event such as an expose, a scandal, a public-health crisis, or a disaster. They “close” when the legislature acts to address the problem or when some other news event pushes the issue off the front pages and diverts public attention elsewhere.
Some have noted that the disaster in West Virginia has not gotten its due on some of the news shows (see, e.g., Sunday Shows To West Virginia: Drop Dead!”, but the disaster has still been a high-profile media event.
This chemical spill highlights failures by the corporation and failures by the environmental regulators charged with oversight of such corporations. It is an issues the must be addressed, and should be addressed quickly. However, I am concerned that much of the dialogue related to spill may already be forcing the window closed. (To that point, it’s also not clear to me new legislation is as important as strict enforcement of current rules. Regardless, the window that will lead to mandating better enforcement, with increased funding to do so, will only be open a short period of time.)
Numerous outlets, from the Christian Science Monitor to the Daily Show, have linked the chemical spill to hydraulic fracturing (commonly called “fracking”). Although it’s true that chemicals are used in the hydraulic fracturing process, the spill here has nothing to do with that. It was chemical spill at a site where the chemical was not being used for its purpose, which is to wash coal in preparation for sale in the market. (Again, though, this is neither a coal nor a natural gas problem. It is a chemical spill and a failure of the chemical company involved and the regulators charged with oversight. Solar panels need toxic chemicals, too, so this is not simply a fossil fuel issue.)
As someone who spends a lot of time looking the impacts of energy-related regulation and the related economic, environmental, and social impacts, this misdirection concerns me. The main concern is that the focus will shift away from the clear and present concern presented by the spill: the lack of inspection and oversight of West Virginia chemical plants. That is the immediate and pressing issue raised, and adding separate (and largely distinct) risks and processes raised by the potential harms from hydraulic fracturing to the discussion is likely to distract from the danger staring West Virginia in the face.
To be clear, I am not saying there aren't risks from hydraulic fracturing. But I am saying that most of the risks are different than the one that left 300,000 West Virginian’s without water. I am saying that conflating the two is dangerous and misguided. And I am saying that West Virginia’s regulators need to do better.
In discussing hydraulic fracturing, I have written elsewhere:
One of the paramount concerns for both the oil and gas industry, as well as regulators and communities, should be that a company gets careless with their drilling methods or waste management processes, and that the carelessness leads to a major environmental disaster. The harm to the environment itself would be a concern, of course, but . . . this harm is one that should be universally recognized.
I continue to believe this is true, and it’s why I have called for increased use of baseline standards for all phases of hydraulic fracturing. Still, the best ways to address the risks from hydraulic fracturing are different in most cases from how we must approach increasing safety from chemical plants. It will serve all of us well to recognize that THIS disaster is not a fracking problem, and we should not approach it as if it is. Merging the two issues would be bad economic, environmental, and social policy. We’ve had enough harm to all three areas already.
Tuesday, January 14, 2014
In December, the Deal Professor, Steven Davidoff, wrote a great piece about the grey areas triggered by DISH Network Chairman Charles Ergen's debt purchase from LightSquared (a failing satellite-based broadband comany). This case has several twists and turns, and I plan to write a few posts on some of these areas. Today, we'll start with debt purchase.
As Davidoff explains, Lightsquared's debt could not (per the debt documents) be purchased by “direct competitor” (e.g., Dish Network), so Ergen used a personal investment vehicle to buy the debt. This, the Deal Professor notes, appears acceptable under the debt documents (even if it's not what was intended):
In a court filing, LightSquared contends that Mr. Ergen breached the debt agreement because the documents define a “direct competitor” to also be a subsidiary of a direct competitor. LightSquared is arguing that because Mr. Ergen controls both Dish and the hedge fund that bought the debt, the fund is a subsidiary of Dish.
Yet that argument stretches the plain meaning of a “subsidiary” — a company owned or controlled by a holding company — language that is not in the document. So LightSquared’s claims against Mr. Ergen are tenuous at best.
The acquisition itself seemed to link DISH and Lighsquared, even if that was not technically the case. Although the major outlets seemed to understand the structure of the purchase (see, e.g., here), some early takes from the blogosphere were less precise, such as this headline: Dish Snaps Up Some LightSquared Debt, which links to articles characterizing the purchase correctly. In fact, Lightsquared has its own issues with the purchase. According to a Lightsquared Special Committee Report of November 15, 2013 (pdf here):
45. Although “Lenders” have the right to assign their rights under the Credit
Agreement to third parties, the Credit Agreement contains strict transfer restrictions regarding those assignments. Specifically, section 10.04(b) of the Credit Agreement provides that a Lender can only “assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement.” The Credit Agreement proscribes that “Eligible Assignee” “shall not include Borrower or any of its Affiliates or Subsidiaries, any natural person or any Disqualified Company.” (Credit Agreement, § 1.01.) A “Disqualified Company” is “any operating company that is a direct competitor of the Borrower,” as well as “any known subsidiary thereof.” (Id.) . . . .
49. The parties intended for the transfer restrictions to be as broad as possible,
yet specific about which entities the Credit Agreement forbade from holding the LP Debt. Thus, the Credit Agreement includes a list of “Disqualified Companies.” As of October 10, 2010, EchoStar was on the “Disqualified Company” list. On May 9, 2012, LightSquared added DISH and several other entities. Therefore, DISH, EchoStar, and all entities they control directly or indirectly in any way cannot be “Eligible Assignees.”
The report further states that DISH and EchoStar personnel were used "to handle all trades . . . at Mr. Ergen’s behest."
Still, Ergen is not DISH or EchoStar, nor is he an entity. It seems to me that clauses such as this may need to consider including directors, management, and/or large shareholders of the entities they seek to disqualify if that really is the goal. Now, using DISH and Echostar to further personal investing may be a problem, and in fact, some DISH shareholder have taken issue with how things have transpired (Shareholders Sue Dish, Charlie Ergen Over $2.2 Billion Spectrum Bid). That, however, has to do with Ergen and his role with DISH, and not Lightsquared.
Expanding the limitations on credit agreements like Lightsquared's to include directors, executives, and other shareholders could be argued as excessive. It may be. It certainly would further limit the pool of potential acquirers, but that's okay, if that's the desire. Credit agreements are contracts, and the parties are free to limit their scope of dealing in this way, as well if they so choose. In fact, we see this kind of language in contests all the time: "Employees and agents of [Entity], its respective affiliates and subsidiaries and members of their immediate families and households are not eligible." This kind of language could be adopted (and even expanded) for use in credit agreements.
If that is what a company wants, though, they need to specifically do so to carry out their intent. Maybe this issue is that, with the complaints about corporations being people, perhaps that some have forgotten that people are people, too, something I have known since at least 1984.
Tuesday, January 7, 2014
The Federal Energy Regulatory Commission (FERC) and the Commodity Futures Trading Commission (CFTC) have signed two Memoranda of Understanding (MOU) to address circumstances of overlapping jurisdiction and to share information in connection with market surveillance and investigations into potential market manipulation, fraud or abuse. The MOUs allow the agencies to promote effective and efficient regulation to protect energy market competitors and consumers.
Finally, the CFTC and FERC seem to have resolved some serious jurisdictional overlap problems between the agencies related to Dodd-Frank (section 720(a)(1)), which required the agencies to adopt a Memorandum of Understanding (MOU) to resolve several key issues. It’s taken a while to get here. Recall that settling (or at least improving) jurisdictional questions became especially acute in the wake of the Brian Hunter case, where the CFTC joined the defendant against FERC claiming that the CFTC had exclusive jurisdiction over Hunter’s alleged trading violations. The DC Circuit agreed with Hunter and the CFTC (opinion pdf).
At long last, there are two MOUs, one related to jurisdiction (pdf) and the other related to information sharing (pdf). According to the FERC news release, the jurisdiction MOU provides a process the agencies will use to notify one another of issues “that may involve overlapping jurisdiction and coordinate to address the agencies’ regulatory concerns.“ The information sharing MOU creates procedures for the agencies to share information “of mutual interest related to their respective market surveillance and investigative responsibilities, while maintaining confidentiality and data protection.”
Perhaps the more interesting news (H/T: Craig Silverstein & Nathan Endrud) is the possibility of new licensing for wholesale power and natural gas market participants to deal with the people actually committing fraud and/or manipulating markets. There is not agreement from all the commissioners that this is necessary, but it is an idea of note for this continually evolving market.
Tuesday, December 31, 2013
Happy New Year! 2014 holds much promise and many challenges. One such item: a recent World Bank report (key findings pdf) finds some things we all probably suspected:
The report finds that economies with greater numbers of restrictions on women’s work have, on average, lower female participation in the formal labor force and have fewer firms with female participation in ownership. Conversely, economies which provide a greater measure of incentives for women to work, have greater income equality.
Here's hoping 2014 brings you all you seek. More equality in the workplace, starting by removing legal barriers to gender equity, is high on my list.
Tuesday, December 24, 2013
This paper is a look back, but it seems appropriate for today. Happy holidays, all! Who Owns the Christmas Trees? - The Disposition of Property Used by a Partnership, by Daniel S. Kleinberger. Abstract:
Two partners form an enterprise. One (the K partner) supplies the assets used by the enterprise. The other partner (the L partner) supplies only labor. When the enterprise ends, the partners disagree about how to divide the property used in the partnership business. The K partner wants his or her property returned. The L partner wants his or her share of the business assets. If some of the property has appreciated while in partnership use, the dispute will be especially complicated. How do the partners divide the value of the property as originally brought into the business? Who benefits from the previously unrealized appreciation?
This Article explores the property allocation issues that arise when the members of a K and L partnership lack a dispositive agreement. In such circumstances the default rules should provide clear guidance, and the Uniform Partnership Act (U.P.A.) seeks to do so. Unfortunately, many of the decided cases misapply or distort the U.P.A. As a body, the decided cases point in three different and mutually exclusive directions. Individually, they often ignore basic principles of partnership law.
This Article takes those basic principles as its lodestar and seeks to determine how the law of partnership should analyze a K and L dispute over property disposition. Part II sets the context for the analysis, introducing partnership law as the applicable law. Part III explains the four basic partnership law concepts necessary to a proper analysis of the Christmas tree paradigm. Part IV describes the three different and mutually exclusive ways that courts have applied partnership concepts to evaluate the courts' incompatible approaches.
The analysis presented in Part IV suggests outcomes that some readers may find unfair. Part V confronts the problem of unfairness and tries to determine why courts find K and L property disputes so troublesome. Part V begins by highlighting some of the unbalanced results produced by strict application of partnership law principles. Part V then explores the rationale behind those principles and suggests that courts sometimes disregard the letter of the law in order to serve that underlying, and largely hidden, rationale. Part V next identifies the philosophical and practical problems that arise when courts disregard the clear letter of the law in favor of hidden rationales and instead twist a generally applicable statute in order to avoid reaching a particular unpalatable result. Part V concludes by offering an approach to the Christmas tree problem that substantially alleviates the unfairness problem while remaining faithful to the law. Part VI exemplifies the suggested approach, using concepts developed in previous Parts to resolve correctly the actual Christmas tree case.
Tuesday, December 17, 2013
As someone who has focused his research, scholarship, and teaching on business law and energy law, it's long been my argument that energy is the key to long-term prosperity and quality of life. Access to energy is critical, as are sustainable practices to ensure access to energy goes along with, and is not in lieu of, access to clean air and clean water. See, e.g., my article: North Dakota Expertise: A Chance to Lead in Economically and Environmentally Sustainable Hydraulic Fracturing.
As I often do, this morning I visited the Harvard Business Law Review Online to see what topical issues were taking center stage. A quick look reveals that three of the eight articles under the U.S. Business Law heading were energy related. The articles are worth a look. Here's a quick link to each:
The Regulatory Challenge Of Distributed Generation, by David B. Raskin
Investing in U.S. Pipeline Infrastructure: Could the Proposed Master Limited Partnerships Parity Act Spur New Investment?, by Linda E. Carlisle, Daniel A. Hagan & Jane E. Rueger
Why Are Foreign Investments in Domestic Energy Projects Now Under CFIUS Scrutiny?, by Stephen Heifetz & Michael Gershberg
Tuesday, December 10, 2013
A recent study, Who Owns West Virginia? (full report pdf), gives a glimpse into the land ownership in the state. The report finds that much of the state’s private land is "owned by large, mainly absentee corporations, [but] the list of top owners – once dominated by energy, land holding and paper companies – now includes major timber management concerns."
As reported by Ken Ward Jr. in the Charleston Gazette, the report finds that "[n]one of the state's top 10 private landowners is headquartered in West Virginia." Although it is accurate that the top ten owners are not indivdual owners, I will note that not all of the top ten owners are "corporations." There is at least one master limited partnership and one limited liability company (LLC). That may not mean much in the sense of absentee ownership, but it is a doctrinal distinction I maintain is still important.
It's not shocking that these entity owners would be out of state, especially because that was true back in 1974, too, when the last study was done. There are relatively few large entities chartered or headquartered in West Virginia, and it appears that many of the state chartered companies that were around in 1974 have since been acquired by larger, out-of-state entities. Absentee ownership is hardly a new, or even modern, phenomenon in the state. The report notes: "By 1810, as much as 93 percent of land in present day West Virginia was held by absentee owners, more than any other state in the region and likely any other state in the Union." Much of the ownership is still based in the region, though, as many of the large companies holding West Virginia land are based in Virginia.
Although the purchase of West Virginia’s land by timber management companies is perhaps the most interesting finding by investigators for this report, researchers also found:
The top 25 private owners own 17.6 percent of the state’s approximately 13 million private acres.
In six counties, the top ten landowners own at least 50 percent of private land. Of the six, five are located in the southern coalfields – Wyoming, McDowell, Logan, Mingo and Boone. Wyoming County has the highest concentration of ownership of any county.
Not one of the state’s top ten private landowners is headquartered in West Virginia.
Many of the counties – including Harrison, Barbour, Mineral, Lincoln, and Putnam – that had high concentrations of absentee corporate ownership (over 50%) in Miller’s 1974 study did not in this analysis.
Only three corporations that were among the state’s top ten landowners in 1974 remained on that list in 2011. If the sale of MeadWestvaco properties to Plum Creek Timber is completed, only two of the 1974 top owners will still be on the list.
Nationally timberland management concerns control about half of the nation’s timberlands that had been managed by industrial timber companies until the 1980s.
Finally, another potentially important finding is different level of entity ownership by region as related to the minerals beneath the land -- coal and natural gas. The study found:
There are also large geographical disparities in the share of large private landowners in the state. All but one of the counties where the top ten landowners owned at least 50 percent of the private land is in the southern coalfield coalfields - Wyoming, McDowell, Logan, Mingo and Boone. In the Marcellus gas field counties of the northeast and north-central part of the state, the private land ownership is less concentrated and tends to be owned more by individuals than large out-of-state corporations.
The study looked only at surface ownership, and not mineral rights ownership, so it's hard to tell if this gives an accurate look at the level of entity ownership in the Marcellus Shale. Moreover, mineral estates may be owned by private individuals who have leased their rights to entities, so it may be that even more of the state's property rights are effectively controlled by entities. The report indicates more study would be useful here, and I concur.
The takeaway: This report has the potential to be a good starting point for considering how to move the state forward in trying times. As the study notes: "[S]tudying patterns of land ownership in West Virginia through the lens of the 2011 tax data can help us understand our history, make wise policies in the present and better map the future of the state."
I think that's right. To me, a big cavaet is to ensure that the report be used to react to what is and to plan for what could be, rather then getting bogged down in what was or could have been. If people spend their time lamenting that outside corporations own land in the state, they will be missing the opportunity to do something positive for the future, like figuring out what can be done to promote sustainable development in the state by working with the current landowners. I hope the focus is primarily on the latter. There have already been enough missed opportunities.
Tuesday, December 3, 2013
Here in West Virginia, it's exam time for our law students. For my Business Organizations students, tomorrow is the day. For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.
Here's a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here): In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer. A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck. Andrew filed suit against the employee and M & W Milling claiming personal property damage to the truck and the loss of income derived from the use of damaged truck. Notably, the LLC was not a named plaintiff in the lawsuit.
Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though that was not critical to the issue of whether the LLC had to be named for Andrew to recover.)
A limited liability company is a “hybrid business entity having attributes of both a corporation and a partnership.” Patmon v. Hobbs, 280 S.W.3d 589, 593 (Ky.App.2009). As this Court stated in Spurlock v. Begley, 308 S.W.3d 657, 659 (Ky.2010), “limited liability companies are creatures of statute” controlled by Kentucky Revised Statutes (KRS) Chapter 275. KRS 275.010(2) states unequivocally that “a limited liability company is a legal entity distinct from its members.” Moreover, KRS 275.155, entitled “Proper parties to proceedings,” states:
A member of a limited liability company shall not be a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company, except if the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in an operating agreement.
Not surprisingly, courts across the country addressing limited liability statutes similar to our own have uniformly recognized the separateness of a limited liability company from its members even where there is only one member.
Tuesday, November 19, 2013
Last week, I had the pleasure of being part of the Second Annual Searle Center Conference on Federalism and Energy in the United States. (I had the good fortune to be part of the first one, too.) The conference covered a wide range of energy issues from electricity transmission siting to hydraulic fracturing to natural gas markets. One paper/presentation struck me as particularly interesting for markets generally (I am told an update version will be available soon at the same site: “The Evolution of the Market for Wholesale Power” by Daniel F. Spulber, Kellogg School of Management, Elinor Hobbs Distinguished Professor of International Business and Professor of Management Strategy & R. Andrew Butters, Kellogg School of Management, Northwestern University.
Here is the conclusion:
A national market for wholesale electric power in the US has emerged following industry restructuring in 2000. Tests for correlation and Granger Causality between trading hubs support the presence of a national market. Going beyond pairwise analysis, we introduce an array of multivariate techniques capable of addressing the national market hypothesis, including the common trend test. Although there is strong evidence of integration between the series, the analysis suggests a division between the eastern and western parts of the market. We also find border connects of 300 miles between the three interconnects.
The absence of transmission between the interconnects and significant border effects suggests that the national market is not yet fully integrated, even within the one-month horizon. Construction of transmission facilities between the interconnects would complete the development of the US wholesale market for electric power. Our analysis suggests that transmission facilities connecting the three regions would result in substantial gains from trade.
This conclusion – that “[a] national market for wholesale electric power in the US has emerged following industry restructuring in 2000 – could have a profound effect for how we view (and FERC views) wholesale electricity markets. The study notably does not control for or otherwise address the price of renewable energy credits (RECs), which are required for compliance with renewable portfolio standards in a majority of states. This may not change the conclusion, but it would be interesting to see how if the RECs have any influence on the market operations.
In addition, it’s possible that more than just the 2000 market restructuring is at play here. Since that time, electricity generation from natural gas has grown dramatically, and there is every reason to believe that will continue. According to the Energy Information Administration, “Nearly 237 GW of natural gas-fired generation capacity was added between 2000 and 2010, representing 81% of total generation capacity additions over that period.” If natural gas really is a major driver in facilitating this market, it would mean that that recent shale gas boom is even broader reaching than some may have expected.
There’s more work to be done here to be certain a national market for electricity really is emerging and if more can be done to facilitate that market. If true, such a market could bode well for the consumers, especially those in higher cost regions. It could also be an indicator that the regulatory structure of the market, even if not ideal, it working efficiently. If so (as I am inclined to believe), it suggests that the Congress and FERC should leave the market-related regulations alone, and focus efforts on things that will further develop the market, such as the study’s finding “that transmission facilities connecting the three regions would result in substantial gains from trade.”
Tuesday, November 12, 2013
Today is November 12, 2013, or 11/12/13. (It also happens to be my 43rd birthday. Yay me.)
In honor of the unique date, I decided to take a look at some business cases from the most recent prior 11/12/13. I found a couple of interesting passages. One case, Cotten v. Tyson, 89 A. 113, 116 (Md. Nov. 12, 1913), provides a good overview of some basic corporate principals:
 The principle is elementary that a stockholder, as such, is not an owner of any portion of the property of the corporation and, apart from his stock, has no interest in its assets which is capable of being assigned. [citing cases]
 Where one person is the owner of all the capital stock of a corporation, it has been held bound by his acts in reference to its property. [citing cases]
 But it is entirely clear upon reason and authority that a stockholder of a corporation, while retaining his stock ownership, cannot assign the interest represented by his stock in any particular class of the corporate assets. Such an attempted alienation would not only be incompatible with the retention of title to the stock in the assignor but its enforcement would be altogether impracticable. The stockholder himself could not require the corporation to segregate and distribute a specific portion of its property, and certainly he could not create and confer such a right by assignment.
 . . .Even if a stockholder could effectively assign an interest in the choses in action of his corporation, such a result could obviously not be accomplished by a mere assignment of his interest in the assets of its debtors.
Another, and in contrast, Smith v. Pullum, 63 So. 965 (Ala. Nov. 12, 1913), provides a sound example of terrible legal jargon:
The bill . . . alleges that it was agreed between the three parties, viz., G.W. Smith, William Pullum, and W.K. Pullum, that upon the purchase of the property for the above sum a corporation was to be formed, with a paid in capital of $4,500; that $1,650 of the said capital stock was to be the property of W.K. Pullum, $600 of said capital stock was to be the property of said Wm. Pullum, and $2,250 of said capital stock was to be the property of said G.W. Smith.
The case uses the term "said" seventy-five times. It's a four-page case.
Here's hoping we can dispense with said practice posthaste.
Tuesday, November 5, 2013
As noted over at the Family Law Prof Blog, Stanford Graduate School of Business recently issued a report, "Separation Anxiety: The Impact of CEO Divorce on Shareholders” (pdf), in which a study considered the impact CEO divorces have on the CEO's corporation. The report indicates that recent events "suggest that shareholders should pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions."
The study found that a CEO's divorce has the potential to impact the corporation and shareholders in three primary ways. First, is a possible reduction in influence or control if a CEO as to sell or transfer stock in the company as part of the divorce settlement. Second, divorce can negatively impact "the productivity, concentration, and energy levels of the CEO" or even result in premature retirement. Third, the sudden change in wealth because of the divorce could lead to a change in the CEO's appetite for risk, making the CEO either more risk averse or more willing to take risks.
The report argues that this matters because:
1. Divorce can impact the control, productivity, and economic incentives of an executive—and therefore corporate value. Should shareholders and boards be concerned when a CEO and spouse separate?
2. Rigorous research demonstrates a relation between the size and mix of a CEO’s equity exposure and risk taking. Should the board “make whole” the CEO in order to get incentives back to where they originally intended? Would this decision be a “cost” to shareholders because it represents supplemental pay that could have been used to fund profitable investments, or a “benefit” because it realigns incentives and risk taking?
3. Companies do not always disclose when a CEO gets divorced. Reports only come out much later when shares are sold to satisfy the terms of the settlement. Is divorce a private matter, or should companies disclose this information to shareholders? If so, how detailed should this disclosure be? (citation omitted)
While I think this is somewhat interesting, I am not sure how much it helps shareholders or boards in their consideration of CEOs or their companies. Any major life problems or events -- divorce, death of a close family member, major losses in other investments, addiction, etc. -- could (in varying degrees) have a negative impact on control, performance, and risk tolerance.
In addition, the study cites two high-profile examples: Harold Hamm and Rupert Murdoch. Both such divorces are likely to touch on all the issues the study raises. Still, for both men, their recent divorces are not their first divorces. I'd be curious to know if there is any correlation between the performance of companies with CEOs who have been divorced at least once versus those who have not.
Clearly, a major life event can have a negative impact on the CEO and the company, at least in the short term. But I can't help but wonder how much value this adds as a general matter. That is, it may matter on a case-by-case basis, but I don't think I would want to see it become some kind of Sabmematric analysis of CEO potential. It seems to me risky for a company to look at the likelihood of divorce of a CEO as a determining factor in hiring. Or for a company to encourage a CEO to stay married (or single). And I doubt it's wise to go dumping stock in a company just because the CEO has a wandering eye (or their spouse does).
Perhaps there's more to this, but it seems to me this just confirms that a divorce is an awful experience for everyone. Still, for the companies and their shareholders, just as it is for the people directly involved, divorce may be the best available option.