Tuesday, January 27, 2015

Cunningham on Corporate Leadership: A Few Additional Thoughts

Lawrence Cunningham has written an interesting piece for the Wall Street Journal, The Secret Sauce of Corporate Leadership: Splitting the CEO and chairman jobs is beside the point. What’s needed is a skeptical No. 2.

Cunningham argues that measures to split the role of board chair and CEO largely miss the point because such a move, and similar moves, don't clearly lead to the desired goal.  He explains:

Research on the effects of splitting the chief and chairman roles shows that results can depend on where the split takes place: It tends to improve performance at struggling companies—but it impairs prosperous firms. Yet exact effects vary depending on the circumstances, such as whether the switch happened with the appointment of a new CEO or with the demotion of an incumbent.

The movement to split the two roles is part of corporate America’s tendency to address problems with procedural remedies such as expanding board size, adding independent directors, adopting a new code of ethics, updating firm compliance programs, and appointing a monitor to oversee it all. While such steps get attention and can improve an organization’s health, the informal norms that define a corporate culture are more powerful, and Bank of America is right to examine itself in the light of basic principles.

There is a better way to foster excellence in chief executives: Appoint a noncombative but skeptical partner as second in command. This model has been the secret sauce in outstanding corporate cultures at dozens of America’s best companies.

I have a few thoughts to add to this.  First, I agree that whether to allow a single person to hold the chair and CEO position is case dependent. I am inclined to defer to the board of directors on that decision, but if enough shareholders want the positions separate (or combined), more power to them.  

Second, I think there is a bigger issue at play here in corporate (and other group) decision making. That is, as a general matter, rules and policies should be made based on the desired goals and the long-term plans, and not based on an individual.  Thus, deciding to never allow a combined CEO and chair position because we don't want a particular person to hold the role is silly.  Just don't let that person have both roles.  Any time we create rules designed to punish (or benefit) a particular person, we often create unintended consequences that punish or benefit others in ways that were not contemplated.  

Finally, Cunningham is certainly correct when he says, "Effective corporate leaders also stress that a strong culture matters because it translates into economic gain."  That said, sometimes its seems some boards (and other entities and institutions seeking leaders) believe a strong culture can be built overnight.  Tweaking rules and policies can sometimes help, but trying to rush that culture sometimes simply ensures mediocrity.  Just ask the New York Jets

January 27, 2015 in Corporate Governance, Corporations, Joshua P. Fershee | Permalink | Comments (3)

Tuesday, January 20, 2015

A Sports Reminder From Jay Bilas About Human Nature in Law and Regulation

I was watching the Michigan State-Iowa basketball game a couple weeks ago, and commentator Jay Bilas noted his view (which he has stated previously) that the lane violation rule is wrong. I am teaching Sports Law and an Energy Law Seminar this semester, so (naturally) I linked his comments to a broader framework. 

So start, here's the current rule.  Basketball for dummies explains

Lane violation: This rule applies to both offense and defense. When a player attempts a free throw, none of the players lined up along the free throw lane may enter the lane until the ball leaves the shooter's hands. If a defensive player jumps into the lane early, the shooter receives another shot if his shot misses. An offensive player entering the lane too early nullifies the shot if it is made.

Bilas argues that a defensive lane violation should result in the ball being awarded to shooter's team instead of another attempt at the free throw for the shooter.  His rationale is, "The advantage to be gained going in early is on the rebound, not the shot. Give the ball to the non-violating team." This is probably right, though a player might enter the lane early to distract the shooter, too.  I suppose one could award a reshot for a lane violation if the ball is not live (e.g., the violation occurs on the first freethrow of a two-shot foul), and award the ball to the shooter's team on a missed live ball.  

I think there is some merit to Bilas's argument, but I think there's a practical reason the rule remains as it is: the penalty is not too harsh, making it something referees are willing to call.  A favorite quote of mine comes from Ben Franklin, who once warned, "Laws too gentle are seldom obeyed; too severe, seldom executed."   

Here, I think Bilas is probably right on the penalty-incentive link, but the rule he proposes may prove too severe for lane violations to be called as willingly as they are today.  In addition, practically speaking, if the shooter makes the free throw anyway, the shooter's team would still need to get the ball after a lane violation, if the punishment is really about discincentivizing cheating for a rebound.  This could be the rule, and it might be right, too, but that would make the penalty even more severe, making referees even less likely to make the call. (You could, I suppose, give the shooter's team a choice -- the the point or the ball -- but that gets messy.)  

I used the Ben Franklin quote in my article from a few years back, Choosing a Better Path: The Misguided Appeal of Increased Criminal Liability after Deepwater Horizon, which was  published in the William & Mary Environmental Law and Policy Review (available here). In the article, I argued that increased criminal liability for energy company employees was not likely to be any more effective in preventing disasters like the blowout of BP oil well in the Gulf of Mexico because the likelihood of actually sending people to jail is highly unlikely.

I still believe this is true in a many contexts.  It's not to say we should not have harsh penalties for certain behaviors, but we need to be sure the laws or rules are more than justifiable.  We also need to be sure they will be executed in a manner that the laws or rules serve the actual purpose for which they were designed.  

To be clear, we also need to be sure that the penalties are not so gentle that no one will follow the rule.  In the energy and business sector, I am of the mind that we regularly err on both sides -- some rules are too gentle and others too severe.  Sports can be that way, too, though we often don't even know the penalty for certain acts like, say, allegedly deflating a few footballs.  

As for lane violations, though, I think the rule has the balance right, even if there is a justification for a harsher rule.  

January 20, 2015 in Joshua P. Fershee, Securities Regulation, Sports | Permalink | Comments (1)

Tuesday, January 13, 2015

UCLA Hosts Teaching Conference on Engaging the Entire Class

When I first started teaching at the University of North Dakota School of Law, I had the pleasure of having Patti Alleva as a colleague and mentor. She is one of the workshop presenters of the program listed below. Patti is an oustanding teacher, and a teacher of teachers.  

One of the great things I took away from my time with her is to teach intentionally.  That is, we all have different styles and goals, and that's okay.  In fact, it's a good thing.  We don't all need to teach the same way, but we all should think about what we do, learn about how others learn, and then make decisions in the classroom for a reason.  Risks are okay (and, with Patti, encouraged)  -- some things we try don't work. We learn from that, too, and they can make us better.  The key is to try to maximize the learning experience for students.

I think, in the big scheme of things, I am an okay teacher.  I work at it; I care, and I genuinely want my students to learn and succeed.  And I do things in my classes for a reason.  How good I am, is really for others to answer. I know I am not as good as some.  I'm not in the same ballpark as Patti, or, for that matter, my wife.  She and Patti are two of the best I know.  But, without question, I'm a better teacher for having learned some of the craft from Patti, and I know many others who agree.  

If this kind of conference is an option and you're interested, I highly recommend you give it a shot.  

Engaging the Entire Class: Strategies for Enhancing Participation and Inclusion in Law School Classroom Learning 

Register and pay online
(through UCLA website)

"Engaging the Entire Class: Strategies for Enhancing Participation and Inclusion in Law School Classroom Learning" is a one-day conference being presented by the UCLA School of Law and the Institute for Law Teaching and Learning (ILTL) in Los Angeles, California on February 28, 2015.

Conference Structure

The conference will include an opening and closing led by ILTL Co-Directors and Consultants, and five workshop sessions. Each workshop session will be presented by a teacher featured in What the Best Law Teachers Do.

Workshop presenters include:

·         Patti Alleva, University of North Dakota

·         Steven Friedland, Elon University

·         Steven K. Homer, University of New Mexico

·         Nancy Levit, University of Missouri-Kansas City

·         Hiroshi Motomura, UCLA

By the end of the conference, participants will have concrete ideas for enhancing participation and inclusion in law school classrooms 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 enhancing participation and inclusion in law school.

Conference Schedule

All Sessions will take place at the UCLA School of Law on Saturday, February 28, 2015.

·         8:00-8:40 a.m.: Registration and Continental Breakfast

·         8:40-9:00 a.m.: Welcome and Opening

·         9:00-10:00 a.m.: Workshop 1

·         10:00-10:20 a.m.: Break

·         10:20-11:20 a.m.: Workshop 2

·         11:20-11:40 a.m.: Break

·         11:40 a.m.-12:40 p.m.: Workshop 3

·         12:40-1:30 p.m.: Lunch

·         1:30-2:30 p.m.: Workshop 4

·         2:30-2:50 p.m.: Break

·         2:50-3:50 p.m.: Workshop 5

·         3:50-4:10 p.m.: Break

·         4:10-4:30 p.m.: Closing

·         4:30 p.m.: Adjourn

Registration Fee

Through February 12, 2015

·         $250 - General Attendance

·         $100 - Gonzaga University, University of Arkansas Little Rock, or Washburn University full/part-time faculty

·         $0 - UCLA Law full/part-time faculty (registration required)

After February 12, 2015

·         Registration is on-site only

·         $300 - General Attendance

·         $300 - Gonzaga University, University of Arkansas Little Rock, or Washburn University full/part-time faculty

·         $0 - UCLA Law full/part-time faculty (registration required)

Registration fee includes:

·         all materials, and

·         breakfast, lunch, and snacks.

Location

Conference activities will be held at UCLA School of Law, 385 Charles E. Young Drive East, 1242 Law Building, Los Angeles, California 90095 (Directions and Maps).

Transportation

Participants are responsible for their own travel arrangements to the conference.

Lodging

A block of rooms has been reserved until January 25, 2015 for the nights of February 27 and February 28 at:

·         UCLA Guest House
330 Charles E. Young Dr. East
Los Angeles, CA 90095
$177.00: queen bed
$182.00: queen bed with kitchenette
$182.00: queen bed with twin bed

Make reservations by calling the hotel directly at (310) 825-2923 and mentioning that you are participating in the UCLA School of Law's "Institute for Law Teaching and Learning Conference at UCLA".

Please note: UCLA Guest House offers complimentary continental breakfast each morning but is not a full-food service hotel - meaning that they do not provide the service of ordering food via room service, and there is not a lobby restaurant. There are, however, many restaurants in Westwood Village, which is less than a 15 minute walk from the hotel. Also: On-site parking at the Guest House is free, but limited, on a first-come, first-served basis. If the hotel parking lot is full, the Guest House sells parking passes for the closest UCLA parking structure number 3.

January 13, 2015 in Joshua P. Fershee, Law School, Technology | Permalink | Comments (0)

Tuesday, January 6, 2015

Larry Ribstein Being Right Doesn't Make Anyone Else Wrong

Over at The Conglomerate, Usha Rodrigues says, "Larry Ribstein was wrong." Usha argues that she's right to teach LLCs at the end of the course, and Larry was of the mind that LLCs should play a more prominent role in the business entities course.  

For my teaching, I'm with Larry on this, though I am also of the mind that Usha (and other teachers) may have different goals, so taking another tack is not wrong.  I'm pretty sure we're all better teachers when we are true to ourselves and our thinking.  For me, anyway, I am, without a doubt, at my worst in the classroom (and probably out) when I try to mimic someone else. 

So here's how Usha explains her thinking:

I don't leave LLCs til the end of the semester because I think they're unimportant.  It's because the cases are so damn thin.  It's still such a new form, I just don't see much there there.  Most of them wind up being trial courts who read the statute in completely stupid ways.  Blech.

 

So I teach corporations and partnerships emphasizing fiduciary duty, default vs. mandatory rules, and the importance of the code.  In fact, one semester I confess that I would ask a question and then intone, "Look to the code!" so often I felt like a Tolkien refugee.  By the time I get to the LLCs cases, which are pretty basic, the class is ready for my message: the LLC is a new form.  When dealing with something new, judges look both to the organizational statutes and to the organizational forms they know as they shape the law.  Plus the LLC is such an interesting mix between the corporate and partnership form, it just makes sense to get through them both before diving in.

It's hard to argue with Usha's rationale.  Like Larry, she's smart, and this is a reasonable take.  For me, though, it doesn't work toward my goals, so I have a different point of view.  I think it's more in line with where Larry was coming from, though I admit I don't know.  

Here's why:  I want students (and lawyers and courts) to treat LLCs as unique entities.  Leaving them to the end of the course reinforces the idea that LLCs are hybrid entities the combine partnerships and corporations.  I just don't think that's the right way to think about LLCs.  

Certainly, it is true that LLCs share characteristics of partnerships and corporations.  But partnerships and corporations can have similarities, too. We can, for example, refer back to the partnership case of Meinhard v. Salmon when discussing corporate fiduciary duties and corporate opportunity.

In my experience, teaching LLCs at the end of the course seemed to frame the LLC as an entity that is just pulling from partnership or corporate law.  As such, it seemed the students were thinking that the real challenge for LLCs was figuring out whether to pull from partnership law or corporate law for an analogy.  Part of the reason for that, I think, is that so many of the LLCs cases seem to think so, too.  See, e.g., Flahive.  As Usha would say, "Blech."

The LLC is prominent enough in today's world that I think it warrants a more prominent role in the introductory business organizations course.  If we don't bring the LLCs more to the fore, we allow courts to continue to misconstrue the entity form, in part because we aren't giving students the tools they need to ensure courts understand the unique nature of the LLC. 

I figure Usha can get students where she needs to on this regardless of how she teaches business associations.  She is a lot smarter than I am.  Given my goals and how I think about the LLC, though, I'll keep starting my class with an introduction to LLC formation, and I'll keep teaching LLC cases and issues throughout the semester.  

January 6, 2015 in Business Associations, Corporations, Joshua P. Fershee, LLCs, Partnership, Teaching | Permalink | Comments (2) | TrackBack (0)

Tuesday, December 30, 2014

Courts and the LLC, End of the Year Edition

I continue to document how courts (and lawyers) continue to conflate (and thus confuse) LLCs and corporations, so I did a quick look at some recent cases to see if anything of interest was recently filed. Sure enough, there are more than few references to "limited liability corporations" (when the court meant "limited liability companies."  That's annoying, but not especially interesting at this point.  

One case did grab my eye, though, because because of the way the court lays out and resolves the plaintiffs' claim.  The case is McKee v. Whitman & Meyers, LLC, 13-CV-793-JTC, 2014 WL 7272748 (W.D.N.Y. Dec. 18, 2014).  In McKee, theplaintiff filed a complaint claiming several violations of the Fair Debt Collection Practices Act against defendants Whitman & Meyers, LLC and Joseph M. Goho, who failed to appear and defend this action, leading to a default judgment. After the default judgment was entered, defense counsel finally responded.  

This case has all sorts of good lessons.  Lesson 1: don't forget that all named parties matter.  Get this: 

Defense counsel admits that he was under the mistaken assumption that default was to be taken against the corporate entity only. See Item 17. However, default was entered as to both the corporate and individual defendants on July 3, 2014 (Item 9). Defense counsel did not move to vacate the default and in fact did not respond in any way until the default judgment was entered on September 17, 2014. Item 12. Even then, the defense motion was framed as one for an extension of time in which to file an answer (Item 14), rather than a motion to vacate the default or default judgment. Inexplicably, in his papers, defense counsel states that a default judgment has not been entered. See Item 17. Since good cause is to be construed generously and doubts resolved in favor of the defaulting party, see Enron Oil Corp., 10 F.3d at 96, the court will accept the explanation of defense counsel as evidence of a careless lack of attention to procedural detail rather than an egregious and willful default on the part of defendant Goho [the individual and apparent owner of the LLC].
McKee v. Whitman & Meyers, LLC, No. 13-CV-793-JTC, 2014 WL 7272748, at *1 (W.D.N.Y. Dec. 18, 2014).  A link to a free version of the case is here.
 
Wow.  I concede there are some procedural details here, but this sure sounds substantive to me, as well.  
 
Lesson 2: if you name someone in the caption, you probably want to have some allegations about them as a defendant.  Fortunately for defense counsel, the plaintiff's counsel was not on the ball, either.  Though Goho was named in the caption, the complaint did not describe Goho as a party or contain allegations about Goho's individual liability for the FDCPA violations. The defendant's Prayer for Relief also only sought judgment from the Whitman & Myers, LLC. (The court conveniently skips the fact that court probably should have noticed these deficiencies the first time around, before entering default judgment against Goho.)  

Finally, the moment regular readers (see, e.g.,  here, hereherehere, and here) saw coming:
 
Lesson 3: You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One.  The plaintiff argued that "the court should pierce the corporate veil and hold defendant Goho personally liable." The court's response: "[T]here is nothing on the face of the complaint or in the record that would support individual liability for defendant Goho on the basis of corporate veil-piercing . . ."  
 
The court is, of course, correct. However, the sentence should be followed by one that says, "This is because there is no corporation named as a party to this case, so there is no corporate veil to pierce."  Obviously, the court could have gone on to note that even if the plaintiffs meant for the court to pierce the limited liability veil of the LLC, the allegations were insufficient for that, too.
 
As a side note, it would have been interesting to see how the court would have dealt with the argument that Goho and his LLC were so intertwined that they share legal counsel and that even his own counsel did not immediately recognize the individual and the entity as separate until after default judgment was entered.  (I don't see that as a winning argument, but it's better than what was argued.) 
 
Moving forward, I'd like to see courts tell plaintiffs that a request to "pierce the corporate veil" of an LLC amounts to a failure to state a claim.  The court should allow counsel to amend the complaint to get the language right. Until there is a consequence, even a minor one, for merging LLCs and corporations, attorneys and courts will continue to get it wrong.  
 
Thus, a New Year's Resolution for Courts:  "We will treat corporations and LLCs as separate entity types."  And, please, after making sure to always call LLCs "limited liability companies," move on to creating separate veil piercing language.  

December 30, 2014 in Business Associations, Corporations, Haskell Murray, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (2)

Tuesday, December 23, 2014

New York’s Fracking Failure

Environmental groups and other opponents of high-volume hydraulic fracturing (also known as fracking) for oil and natural gas have roundly applauded Governor Cuomo’s decision to ban the process in the state of New York. The ban, which confirms New York’s more than five-year moratorium on the process, has been lauded as an environmental success and a model for other states.   The ban is neither. 

Oil and natural gas prices are at their lowest prices in years. Interest in expanding drilling in the Marcellus Shale, which is the geologic formation holding natural gas deposits under New York, Pennsylvania, and West Virginia, is correspondingly low.  That makes the fracking ban an easy decision because there is relatively limited interest in drilling in state.

There are those with interest in drilling in New York, of course, but as long as prices are low and there are other places to drill (like Pennsylvania and West Virginia), that interest will remain modest.  The ban also raises the value of Pennsylvania and West Virginia mineral rights by reducing competition, so companies with interests in the entire region have little reason to weigh in forcefully.

In this environment, then, an outright ban was easier to put in place than real and stringent regulations to help ensure the fracking process is done with minimal risk and maximum gain. An outright ban is the easy road because it minimizes the potential fight. Companies engaging in hydraulic fracturing around the country would object to new regulations in New York, even if they don’t have interest in drilling in the state because they are afraid the states where they drill would follow New York’s lead.  But no one will fight about a ban in a state where they don’t want to drill. 

When natural gas prices rebound – and they will rebound – money will flow into the state to overturn the ban and allow access to the natural gas.  The economic pressure will be enormous and when the financial potential reaches the point that large and diverse groups in the state see the possibility of significant gain, it’s highly likely the ban will be reversed through legislative or other political action.  At that point, the debate will not be about the quality of regulations or enforcement – it will be about whether the state will allow fracking or not. 

Done properly, the risks of hydraulic fracturing are comparable to traditional oil and gas exploration and to other common extractive and industrial processes.  The better course of action now would have been to put in place stringent safeguards that would made New York the leader in environmental protection in hydraulic fracturing. Such rules could have banned the process in areas that could put New York City’s water supply at risk, and allowed in the southwestern part of the state, as was proposed in 2012 for Broome, Chemung, Chenango, Steuben and Tioga Counties.  The rules could have required significant recycling and cradle-to-grave tracking of waste water created by the process, added the highest level well casing standards, and enacted stringent air and water quality standards.

Such a set of rules would be expensive for those seeking to drill in the state and would have served as a model for other states (and nations around the world) in how best to regulate hydraulic fracturing.  The rules would be expensive enough for exploration companies that few, if any, would start drilling in the state.  But when prices reach the level where the cost of compliance becomes economic, the state would have been ready with strong and enforceable rules.

Creating stringent rules would also have forced companies to seek to rollback specific environmental protections, which would mean discussing and explaining specific risks.   Instead, the governor has taken the easy path, and in doing so he pushed the real debate down the road.  Rather than talking about the risks inherent in this and any industrial process, and seeking to address those risks, the ban reduces the discourse to a simple “yes” or “no.” A “no” answer is easy when prices are low, but “yes” is likely to follow when prices are high. 

The governor had a chance to be a leader on this issue, and instead chose to score easy political points.  That’s his and his administration’s prerogative, but time will show that the outright ban was a mistake because it was a missed opportunity in New York and beyond. 

December 23, 2014 in Current Affairs, Financial Markets, International Business, Joshua P. Fershee, Law and Economics | Permalink | Comments (0)

Tuesday, December 16, 2014

What Stock Prices and Oil Prices Don't Have in Common: You Can't Chart Stocks

In September, Myles Udland  wrote an article citing Burton G. Malkiel and his book, A Random Walk Down Wall Street, noting, "The past history of stock prices cannot be used to predict the future in any meaningful way." This is a great point.

I also saw Udland's article from today, which notes oil prices (and stock prices) have gone bonkers. Both prices have fluctuated wildly, and oil has been mostly trending mostly downward. As I have said before, I don't expect prices to stay low (sub-$70 per barrel) for long, but time will tell.  

Low oil and gas prices are certainly having an impact on markets and economies. The big one right now is Russia, which is struggling, in major part because of low oil prices.  The ruble has taken a beating, and the nation's central bank raised interest rates from 10.5 to 17 percent. Wow.  

The bulk of U.S. oil production appears safe well in the low- to mid-$40 per barrel price range, and I don't think it will stay below $55 for long.  Then again, as much as I follow all of this, I am still a law professor, and not a financial analyst, so keep that in mind.  

Anyway, having read all of this, I was reminded that people are sometimes inclined to view stock prices and commodities markets similarly. That would be wrong. Despite my views that oil is likely to go back up, at least some, it's also worth noting that using history as a predictor of markets is a dangerous game.  It's reasonable to assume that, eventually, a market will go up, but whether it will take three weeks, three months, or three years (or more) is hard to say.  

One recent report notes that oil price histories suggest we're near the bottom, and that (on average) prices should rebound significantly. The timing here is unpredictable, too, but the history of oil prices do suggest a rebound will happen sooner rather than later, even with global markets struggling. 

Uland's articles keep the issues separate, but still, lest anyone get confused (and history suggest they might), it is worth noting that charting commodity markets is different than charting stock prices.  As Professor Bainbridge's Safety Tip of the Day: Charting Doesn't Work  from ten years ago notes, "Consistently, empirical studies have demonstrated that securities prices move randomly and, moreover, have shown that charting is not a long term profitable trading strategy." Bainbridge similarly cites Burton G. Malkiel, A Random Walk Down Wall Street  (1996)  in that post, and in an earlier one from 2003, Random stock traders and the ECMH; with a review of Malkiel's Random Walk.  

I learned a lot about stock markets (and Business Organizations) from reading the good professor's writing, and I thought it worthwhile to continue to spread the message: Even though some people like to think that stock prices will follow historical trends and that stocks are like commodities and currencies, you follow their lead at your own peril. 

December 16, 2014 in Corporate Finance, Current Affairs, International Business, Joshua P. Fershee, Law and Economics | Permalink | Comments (3)

Tuesday, December 9, 2014

LLC Loophole Is Not Clearly a Loophole

The New York Times reports that LLCs have the ability to do things in New York politics that corporations cannot do: 

For powerful politicians and the big businesses they court, getting around New York’s campaign donation limits is easy.

. . .

Corporations like Glenwood are permitted to make a total of no more than $5,000 a year in political donations. But New York’s “LLC loophole” treats limited-liability companies as people, not corporations, allowing them to donate up to $60,800 to a statewide candidate per election cycle. So when Mr. Cuomo’s campaign wanted to nail down what became a $1 million multiyear commitment — and suggested “breaking it down into biannual installments” — the company complied by dividing each payment into permissible amounts and contributing those through some of the many opaquely named limited-liability companies it controlled, like Tribeca North End LLC.

It may appear unseemly to allow LLCs to do things corporations cannot do, but (as usual) I bristle at the implication that LLCs should be treated like corporations just because they are limited-liability entities. Perhaps LLCs and corporations should be treated the same for campaign purposes (and I am inclined to think they should be), but there are lots of reasons to treat LLCs differently than corporations, and it is not inherently "a loophole" when they are treated differently.

A loophole is an ambiguity or inadequacy in the law.  Here, the different treatment is not an ambiguity, though it is inadequate to limit funding in campaigns. However, it is not at all clear that the intent was to limit funding through LLCs.  The law was likely passed so that the legislature could say it did something to reform finance.  It did -- it closed the door for corporations and opened the door for LLCs.  Playing entity favorites is permissible, even if it's not sensible.  

LLCs and corporations are different entities, and different rules for different entities often makes a whole lot of sense.  And even when it doesn't make sense, the idea that different entities should have different rules still does. Let's not conflate the two concepts, even when decrying the impact. 

December 9, 2014 in Business Associations, Corporations, Current Affairs, Joshua P. Fershee, LLCs | Permalink | Comments (1)

Tuesday, December 2, 2014

The Beginning of the End of Limited Liability?

Okay, so limited liability is probably not going away, though it appears that some would have it that way. "Eroding" is probably a better term, but that's less provocative.  

In a piece at Forbes.com Jay Adkisson has posted his take on the Greenhunter case  (pdf here), which I wrote about here. Mr. Adiksson is a knowledgeable person, and he knows his stuff, but he seems okay with the recent development of LLC veil piercing law in a way that I am not. For me, many recent cases similar to Greenhunter are off the mark, philosophically, economically, and equitably, in part because they run contrary to the legislation that created things like single-member LLCs.

One of my continuing problems with this case (as is often my problem with veil piercing cases), is that there are often other grounds for seeking payment other than veil piercing.  Conflating veil piercing with other theories makes veil piercing and other doctrines murkier. More important, they make planning hard.  Neither of these outcomes is productive.  

In Greehunter, Adkisson notes the court’s determination of the “circumstances favoring veil piercing.”  To begin:

+ There was a considerable overlap of the LLC’s and Greenhunter’s ownership, membership (which is really the same thing), and management. Plus, they used the same mailing address for invoices, and their accounting departments were the same folks.

Okay, first, a shared mailing address is a ridiculous test if we're going to allow subisidiaries at all.  Sharing an address or even sharing an accounting department shouldn't really matter for veil piercing.  This is really more of an enterprise liability-type issue, though the vertical nature of the entity relationship admittedly makes that harder.  However, because an LLC doesn't have to follow formalities this is an absurd test.  These facts also don’t, in any way, harm the plaintiffs. Make an agency claim or some other type of guarantor/reliance argument if there is one.  

+ The LLC didn’t have any employees of its own, but instead relied upon Greenhunter’s employees to actually do things, including to pay creditors. 

So what?  Would this be true of a joint venture between partnerships?  How about if there were just two LLC members – two people who never worked as employees the entity? Should veil piercing be okay then?  No. If there is an agency claim, make that.  If there is a guarantor claim, make that one. But this is not enough.  

+ The LLC really didn’t have any revenue separate from Greenhunter, since the LLC simply passed through all the revenue to Greenhunter, and Greenhunter only kicked back enough money to the LLC to pay particular bills.

So the LLC would not have any money at all but for that which was put into it by the corporation.  This was the structure at the time of deal and the set up at all times. If the creditor plaintiff were concerned, they should have raised that issue (and taken appropriate measures) earlier. 

+ Although the LLC contracted with Western to procure services for the benefit of the wind farm, it was Greenhunter that claimed a $884,092 deduction for that project on its tax return.

This is how pass-through tax entities work. If pass-through taxation should not be allowed or single-member LLCs should not be allowed, then fine, but that’s a policy question to be raised with the legislature. 

+ Greenhunter manipulated the assets and liabilities of the LLC so that Greenhunter got all the rewards and benefits (including tax breaks), but the LLC was stuck with the losses and liabilities.

This implies something was improperly taken from the LLC, but that's not really explained.  If there was an improper transfer of value out of the LLC that should have available for the creditors, then the corporation should have to put those funds (that value) back into the LLC for purposes of creditors.  That’s not veil piercing. If there’s not some kind of value that could be transferred back, then the claim doesn’t make sense. 

Mr. Adkisson continues:

If one looks a veil piercing law as fundamentally comprising two elements: (1) unity of ownership, and (2) the entity was used as a vehicle to commit some wrong, then the single-member LLC (and the sole shareholder corporation) starts out with one foot in the veil piercing grave.

This is exactly why single-member LLCs are fundamentally lousy asset protection vehicles, despite the gazillion ads appearing in sports pages and classifieds advertising “Form an LLC for Asset Protection!”

This doesn’t mean that single-member LLCs should never be used; to the contrary, they are frequently and properly used in a number of situations for reasons other than liability protection.

First, I suppose this would be right if the premise were accurate, but I don’t see it this way. I don't think a “unity of ownership” is the first element for veil piercing.  The above explanation is thus incomplete, and if a court follows it, the court would be wrong because it would be skipping the actual first part of the veil-piercing test.  The Greenhunter case explains the proper test:

The veil of a limited liability company may be pierced under exceptional circumstances when: (1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity. 

The Greenhunter court even quotes another recent Wyoming case in explaining the rule:

Before a corporation’s acts and obligations can be legally recognized as those of a particular person, and vice versa, it must be made to appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased, and that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.

Ridgerunner, LLC v. Meisinger, 2013 WY 31, ¶ 14, 297 P.3d 110, 115 (Wyo. 2013) (quotation marks and citations omitted). 

Thus, it is more than a unity of ownership.  There needs to be no separate or individual nature for the entity to satisfy the first prong.  It’s not in any way a simple ownership test.  

Second, I agree that LLCs are hardly perfect for asset protection and I agree that LLCs or other separate entities can be useful for reasons other than liability protection.  Still, I find the idea that an LLC – a limited liability company – should be used for something other than “liability protection” to be an odd assertion.  One can more easily set up a general partnership or simply a division of an existing entity to accomplish goals of separateness, if that’s the only point.  Thus, one may choose an LLC for more than just limited liability purposes, but there’s no reason limited-liability protection wouldn't be a reason to choose an LLC.

The outcome of this case is, frankly, far less concerning to me than the rationale being put forth both in the case and some of the following analysis.  I have to admit much of Mr. Adkisson’s analysis is consistent with how many courts see it. I just continue to believe we can do better in the development of veil piercing doctrine, and if we did, we'd see less need for it. 

Creditors working with limited liability entities need to treat those entities as such.  Ask the parent entity (or an owner) for a guarantee, get a statement of guaranteed funding, or seek some other type of reassurance.  

As for courts, if you plan to pierce the veil of an LLC, fine, but please justify the veil piercing using specific reasons through specific application of the facts to the law. It’s more than unity of ownership, and it’s more than an inability to pay. Steve Bainbridge once noted (citing Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519, 524 (7th Cir. 1991): 

As one court opined, “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced.

At least, that’s supposed to be the rule.  I hope it still is.  

December 2, 2014 in Business Associations, Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (1)

Tuesday, November 25, 2014

A Chance at the Top for Boys AND Girls

We want the best for both of our kids, and we are working to help them learn as much as they can about being good people and successful people. We're fortunate that we have a (relatively) stable life, we've had good health, and we're able to provide our children a lot of opportunities.  For my daughter, as I have noted before, I do worry about institutional limits that are placed on her in many contexts. 

She's in first grade, but expectations are already being set.  On her homework last week: a little boy in her reading comprehension story builds a tower with sticks and bricks and stones.  Next story: a little girl gets fancy bows in her hair instead of her usual ponytails.  I wish I were making this up.  

This is more pervasive than I think many people appreciate.  Take, for example, the Barbie computer science book that had people raising their eyebrows (and cursing).  NPR has a report explaining the basic issues here. The basics:

A book called Barbie: I Can Be A Computer Engineer was originally published in 2010. Author and Disney screenwriter Pamela Ribon discovered the book at a friend's house and was initially excited at the book's prospects, she tells guest host Tess Vigeland.

But then she continued reading.

"It starts so promising; Barbie is designing a game to show kids how computers work," Ribon says. "She's going to make a robot puppy do cute tricks by matching up colored blocks."

But then Barbie's friend Skipper asks if she can play it, and the book continues:

" 'I'm only creating the design ideas,' Barbie says, laughing. 'I'll need Steven's and Brian's help to turn it into a real game.' "

Sigh. 

Harvard Business Review recently published a piece, Research: How Female CEOs Actually Get to the Top, that offers some insights.  It's a good read, and is shows that success at the highest levels  is often limited to women pursuing a different path and in companies with a particular culture. At a minimum, the article suggest that the advice we give women about how to get ahead may not be useful. (Not shocking given that the advice is often coming from men.) Here's an excerpt with my biggest takeaways, but I recommend the whole things (it's a short read): 

The consistent theme in the data is that steady focus wins the day. The median long stint for these women CEOs is 23 years spent at a single company in one stretch before becoming the CEO. To understand whether this was the norm, we pulled a random sample of their male Fortune 500 CEO counterparts. For the men in the sample, the median long stint is 15 years. This means that for women, the long climb is over 50% longer than for their male peers. Moreover, 71% of the female CEOs were promoted as long-term insiders versus only 48% of the male CEOs. This doesn’t leave a lot of time for hopscotch early in women’s careers.

* * * 

It may be that the playbook for advising young women with their sights set on leading large companies needs to be revised. Just as important, there is something inspiring for young women in the stories of these female CEOs: the notion that regardless of background, you can commit to a company, work hard, prove yourself in multiple roles, and ultimately ascend to top leadership. These female CEOs didn’t have to go to the best schools or get the most prestigious jobs. But they did have to find a good place to climb.

To be clear, I am thankful things have progressed to the point that my daughter really does have a legitimate shot at the same success as my son. Things are better than they were, and I see that.  I'm just not satisfied that we're where we need to be, because her access to opportunities do not mean she has the same likelihood of success. We'll keep working on it, as I'd like to think we all should.  

November 25, 2014 in Compensation, Corporations, Current Affairs, Jobs, Joshua P. Fershee | Permalink | Comments (0)

Tuesday, November 18, 2014

Good Grief! Courts Can Only Get So Much Right on LLC Law

I’m starting to think that courts are playing the role of Lucy to my Charlie Brown, and proper description of LLCs is the football.  In follow up to my post last Friday, I went looking for a case that makes clear that an LLC’s status as a disregarded entity for IRS tax purposes is insufficient to support veil piercing.  And I found one.  The case explains:

Plaintiff . . . failed to provide any case law supporting his theory of attributing liability to Aegis LLC because of the existence of a pass-through tax structure of a disregarded entity. Pl.'s Opp'n. [50]. Between 2006 and 2008, when 100% of Aegis LLC's shares were owned by Aegis UK, Aegis LLC was treated as a disregarded entity by the IRS and the taxable income earned by Aegis LLC was reflected in federal and District of Columbia tax returns filed by Aegis UK. Day Decl. Oct. 2012 [48–1] at ¶ 37. In the case of a limited liability corporation with only one owner, the limited liability corporation must be classified as a disregarded entity. 26 C.F.R. § 301.7701–2(c)(2). Instead of filing a separate tax return for the limited liability corporation, the owner would report the income of the disregarded entity directly on the owner's tax return. Id. Moreover, determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders. See United States v. Acambaro Mexican Restaurant, Inc., 631 F.3d 880, 883 (8th Cir.2011). Given the above analysis, the undersigned finds that there is no unity of ownership and interest between Aegis UK and Aegis LLC.

Alkanani v. Aegis Def. Servs., LLC, 976 F. Supp. 2d 1, 9-10 (D.D.C. 2013).

 As Charlie Brown would say, "Aaugh!

So the case makes clear, as I was hoping, that it is not appropriate to use pass-through tax status to find a unity of interest and ownership in a way that will support veil piercing.  But the court then screws up the description of the very nature of LLCs.  This is not a “case of a limited liability corporation!” It's a case of a limited liability company, which is a not a corporation. 

Moreover, to use the court’s language, while it is true that “determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders,” the premise of the case has to do with an LLC’s status. Thus, the court should, at a minimum, make clear it knows the difference.  The statement, then, would go something like this:  "Determining whether LLC formalities have been disregarded requires more than just recognizing the tax arrangements between an LLC and its members.” 

It’s worth noting the entity formalities for LLCs are significantly less that those of corporations, so the formalities portion of LLC veil piecing test should be minimal, but that's a different issue.

Anyway, like Charlie Brown, I will keep kicking at that football, expecting, despite substantial evidence to the contrary, that one day it will be there for me to kick. At least I don't have to go it alone.  

November 18, 2014 in Business Associations, Corporations, Delaware, Joshua P. Fershee, LLCs | Permalink | Comments (2)

Friday, November 14, 2014

Wyoming S.C. Makes LLC Veil Piercing Easier, Says LLCs can have "Corporate Assets"

 The Supreme Court of Wyoming recently decided to pierce the limited liability veil of a single-member LLC.   Green Hunter Wind Energy, LLC (LLC), had a single member: Green Hunter Energy, Inc. (Corp). LLC entered into a services contract with Western Ecosystems Technology, Inc. (Western).  The court determined that veil piercing – thus allowing Western to recover LLC’s debts from Corp – was appropriate for several reasons. I think the court got this wrong.  The case can be accessed here (pdf).  

The court provides the following rule for piercing the veil of a limited liability company, providing three basic factors 1) fraud; 2) undercapitalization; and 3) “intermingling the business and finances of the company and the member to such an extent that there is no distinction between them.”  The court noted that the failure to following company formalities was recently dropped as a factor by changes to the state LLC statute.

Here’s where the court goes wrong: 

(1) As to undercapitalization, the court completely ignores the fact that Western freely contracted with the LLC with little to no cash.  If Western wanted the parent Corp to be a guarantor, it could have required that. If Western thought LLC was acting as an agent for Corp, Western should have claimed that.  It seems to me this is directly analogous to an actual parent-child relationship.  Western contracted with adult (but penniless) child.  Child didn't have money when the contract was signed or when the bill was submitted.  Western then calls parent and says, "Pay up." Western is free to call, but parent can say, “No.  You dealt with my kid, not me, and I didn't agree to this debt.”   

(2) There is a better argument this should be different if this were a tort suit where Western did not choose to engage with the LLC, but that's not the case here.  I don't see how Western can claim undercapitalization now when they had the opportunity to ask before the contract was formed.  Western is the least cost avoider here and assumed the risk of dealing with a lightly capitalized company.  It seems to me that should be part of the assessment.  Undercapitalization is, as the court notes, “a relative concept.” The court cites potential abuse of LLC laws if they were to adopt such a rule that motivates companies to ask for guarantees. instead adopting a rule that could incentivize companies like Western actively avoid ask ingfor guarantees. Why? Because if you ask for a guarantee and are refused, it could be used against you later.  But if you don’t ask, you may get to piece the veil and seek a windfall recovery by getting a post hoc guarantee that was not available via negotiation. 

The court’s rationale is as follows:

It makes good business sense for a contract creditor to try to obtain a guarantee  from the member or retainer from the limited liability company itself. But we are mindful of the reality of the marketplace that many businesses are not in a position—competitively or economically—to insist on guarantees. For that reason, we decline Appellant’s invitation to find piercing inappropriate in this case because Western did not protect itself from Appellant’s misuse of the LLC by attempting to obtain a guarantee or other form of security. To do so would invite abuse of entities, as is the case here. 

No way.  If you can’t “competitively or economically” secure a guarantee, then too bad.  If the legislature wants to create guarantees or minimum capitalization requirements for all entities, fine.  Otherwise, this is absurd. 

(3) Further, Court state that "the district court correctly concluded that the LLC 'failed to adequately capitalize the LLC, that LLC was undercapitalized at all times relevant to this suit and the LLC lacks corporate assets."  Wrong.  Again, if Western knew the finances of LLC at the time of contracting (as it could and should have), then it wasn’t undercapitalized.  LLC simply existed and Western did not seek to avoid the risk of dealing with such an entity. 

More important, though LLCs cannot have “corporate assets.” It’s a limited liability company, not a corporation.  Sheesh.  I’ll add this one to my list of courts getting LLC distinctions wrong.  (See, e.g., here, herehere, and here.) I would have loved to see the Supreme Court correct the district court on that, at least.  

(4) The court incorrectly suggests that the tax filings of the parent corporation and a subsidiary LLC can be a factor in the veil piercing analysis.  Sorry, but no.  For a single-member LLC, for federal tax purposes, the LLC will probably be a disregarded entity.  As such, the LLC will usually (if not always) look like part of the parent corporation. To even consider the tax filing necessarily makes one factor weigh toward piercing.  That’s wrong. 

Early in the opinion, the court notes, “Piercing seems to happen freakishly. Like lightning, it is rare, severe, and unprincipled.” (quoting Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89 (1985) (internal quotation marks omitted)).  In this case the court seems to be trying to make veil-piercing law in LLCs more predictable.   I’m concerned they are – they are making is more likely the veil piecing will occur, at least in the single-member LLC context.  To the extent we’re going to allow single-member LLCs, that’s unfortunate. 

November 14, 2014 in Agency, Joshua P. Fershee, LLCs | Permalink | Comments (1)

Tuesday, November 11, 2014

Better Teaching Idea: Try to Notice When the Wind Is at Your Back

About four years ago, despite decades of actively avoiding the idea, I started running. I am no Forrest Gump, but I run 3.5 miles on a reasonably regular basis– usually four or five times a week, sometimes more, and rarely less.   My primary running locations, North Dakota and then along the Monongahela River in West Virginia, are both quite windy.  The North Dakota winds so are significant, that they can mimic hills, which is what allowed cyclist Andy Hampsten to train for hills in “one of the flattest areas in the world.” 

I do a lot of out-and-back runs – out 1.75 miles and back along the same route.  During such runs, I often notice a similar phenomenon: I may not have any idea it’s windy if the wind is at my back when I start running.  When I get to my turnaround, though, I find a stiff wind in my face. This happens enough that I should probably figure out it is windy before I get to the turnaround, especially since it can lead to a faster pace on the way out, but I still rarely notice.  I just think I’m having a good pace day.

In contrast, it’s pretty hard to miss when the wind is in your face.  Everything feels hard. Everything feels sluggish and slow.  And it feels like, all of a sudden, you have barriers in your way. 

During these runs, it often makes me think about how many other places (in the figurative sense) this happens.  We all have our challenges, and we often have much to overcome.  But some have more challenges than others.  Because our individual challenges are real, it can be easy to miss that we may have fewer challenges than other people have.  

The things that are barriers to our goals are sometimes obvious to us. For example, as those in the current job hunt for a law professorship likely know, a lack of a top-14 law degree can be a significant limit on the number of options one might have entering the legal academy.  It certainly felt like a barrier to certain jobs when I was on the market, anyway. 

Because of that, it would be easy to discount other benefits I have because of who I am. I grew up in a safe neighborhood with good schools.  I am a white male, which means people have expectations for me that are different than others.  There is a level of presumed competence.  And, comparatively, presumed authority and ability.  If there's no more text visible, please click below to read the whole post. 

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November 11, 2014 in Ethics, Joshua P. Fershee, Law School, Teaching | Permalink | Comments (2)

Tuesday, November 4, 2014

Election Impact: Capital Allocation, Corporate Investments, and Stock Prices

Back in 2010, Art Durnev published a short paper, The Real Effects of Political Uncertainty: Elections and Investment Sensitivity to Stock Prices, available here.  The article studies the interaction between national elections and corporate investment.  Today is not a national election -- we get two more years before we have to choose our next president -- but it's still seems like an apt day to think about the role of elections on corporate activity.

The most interesting part of the article, to me anyway, is the test of the relationship between political uncertainty and firm performance. As the article explains, 

If prices reflect future profitability of investment projects, investment-to-price sensitivity can be interpreted as a measure of the quality of capital allocation. This is because if capital is  allocated efficiently, capital is withdrawn from sectors with poor prospects and invested in profitable sectors. Thus, if political uncertainty reduces investment efficiency, firm performance is likely to suffer. Consistent with this argument, we show that firms that experience a drop in investment-to-price sensitivity during election years perform worse over the two years following elections.

The conclusion: this signifies that political uncertainty significantly impacts real economic outcomes.  Therefore, "political uncertainty can deteriorate company performance because of inferior capital allocation."

So, it's election day.  Please vote, regardless of your views.  Voting is a right, a privilege, and duty. And if you're in charge of a firm's investment decisions, consider this study.  As we approach the next national election, you might want to be wary of dropping your investment-to-price sensitivity leading up to the next election.  If you do, odds are your firm will do worse in the two years following the election. 

And, while we're talking presidential politics, here's another study worth considering: Effects of Election Results on Stock Price Performance: Evidence from 1980 to 2008.  Here's the abstract (and, please, go vote!):

We analyze whether the results of the 1980 to 2008 U.S. presidential elections influence the stock market performance of eight industries and we examine factors that are expected to affect firms’ stock returns around these elections. Our empirical analysis reflects firms’ exposure to government policies in two ways. First, to determine whether investors presume any Democratic or Republican favoritism towards or biases against certain industries we perform an event study for each of the eight industries around the eight elections. Second, we include the firms’ marginal tax rate as proxy for the firms’ exposure to uncertainty about fiscal policy in a regression analysis. We do not find a consistent pattern in industry returns when comparing the effect of Democratic versus Republican victories. However, the extent of the reaction differs among industries. The victory of a Democratic candidate rather negatively influences overall stock returns, while the results are rather mixed for Republican victories. Furthermore, a change in presidency from either a Democratic to a Republican candidate or from a Republican to a Democratic candidate causes stronger stock market effects than re-election or the election of a president from the same party. We also find that the firms’ marginal tax rate is positively correlated with abnormal stock price returns around the election day. The results are relevant for academics, investors and policy makers alike because they provide insight on the question whether stock market participants respond to expected changes in policy making as a result of presidential elections.

November 4, 2014 in Corporate Finance, Corporations, Current Affairs, Financial Markets, International Business, Joshua P. Fershee | Permalink | Comments (1)

Wednesday, October 29, 2014

Dean Search: WVU College of Law

The West Virginia University College of Law is seeking applications and nominations to replace our former dean, Joyce McConnell, who is now the provost of the University. The College of Law just completed the addition of a new wing (part of a $26 million infrastructure project), and has made significant and exciting progress. We're seeking a dean who can help continue that trend.  

WVUSunrise
Sunrise at WVU College of Law

 

Admitting my bias, WVU is a great place to be. It's beautiful, especially in the fall, and we have access to much more than many people recognize.  In addition to a solid opportunities to enjoy music and the arts in Morgantown, we're a lot closer to other areas of interest, if big city access is desired. We're 75 miles to Pittsburgh; about 3 hours and 15 minutes to Baltimore, Washington, DC, and Cleveland, OH; 6 hours to New York City; a little less to Niagara Falls; 5 hours to Philadelphia, PA, and Lexington, KY. You get the idea.  

Sunset
Sunset at the WVU College of Law

The posting is below. Please apply if you are interested, and please share this with anyone else you think might be interested.  And, of course, please feel free to contact me directly with any questions. 

http://employmentservices.hr.wvu.edu/wvu_jobs/non-classified_positions/dean-of-the-west-virginia-university-college-of-law

The full posting is available at the link above or just click the button below. 

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October 29, 2014 in Joshua P. Fershee, Law School, Teaching | Permalink | Comments (0)

Tuesday, October 28, 2014

In Oil Boom or Bust, Health, Safety & Economic Opportunity Still Matter

Many financial industry analysts are bearish on the oil industry right now. I'm not sure they're right, as I note below, but I also think it's important to recognize that financial market impact of oil price fluctuations is not the only impact U.S. oil production has on markets generally.

One thing I want to make clear at the outset, though, is that I am not a financial analyst, or an economist (as I have previously noted). My comments here are reactions to things analysts are saying based on my experience researching U.S. shale oil markets and activity, as well as the U.S. transportation sector in recent years.  My thoughts are related to my expectations for how I think the companies and people in the industry are likely to react, and reflect my hope that financial market changes don't negatively impact other essential planning, in areas related to health, safety, and the environment, the industry desperately needs.

Back to the market predictions:  Goldman Sachs and some other analysts see the oil sector as over saturated and anticipate continued supply gluts to keep prices down.  According to a report from Goldman analysts, U.S. price indicator West Texas Intermediate (WTI) crude will fall to $75 a barrel and Brent crude is expected to be at $85 a barrel in the first quarter of 2015. That would be a $15 per barrel discount from the last such report.  

In accord is Jim Cramer, of MSNBC fame, who says, "This is uniquely a perfect storm against oil." Several others see an OPEC "price war" with some saying oil is teetering on the brink of collapse.  I'm even less sure that's right, in part because of where Jim Cramer comes out on this. (I'm not a huge fan of his advice or style, but for those who don't know, I'll let Jon Stewart catch you up on that here.)  I don't see a "perfect storm" or even much more than a "light shower" coming in the oil sector from pricing or demand problems.

I'm not alone.  Others see this recent price dip as real, but short lived. Dan Dicker, president of money manager MercBloc, sees oil prices increasing within the next two years going up to $125 per barrel or even $140.  Dicker called the pricing a "Mirage." (I think these predictions are a bit bold in the other direction, too, as I expect to some fluctuation but think prices will reside mostly north of $85-$90 barrel, then increase into the $100s. Again, though, remember this is a law professor's opinion.) 

Though I am sure he is not alone, Jim Cramer is the one person I have seen suggesting that a U.S. oil slowdown is likely, at least if oil prices drop to $70 a barrel.  Possible, but I still don't see it.  As I have suggested elsewhere, I don't think the price of oil, which is largely a global price, will drop to a point where it is not profitable to oil companies.   Obviously the price can (and will) fluctuate, and the reality is that oil demand increases and decreases, but it has a higher baseline than I think some people are appreciating.  

For years we heard about Peak Oil and the end of oil, but what we were really seeing was the end of really cheap oil.  As the recent shale boom has demonstrated, there's plenty of oil available at the right price. The current price dip, I think, just an indication that supply is more abundant than expected, but not that the oil market is about to crater. Thus, perhaps we will see a slowing of the rate of new drilling activity, but I don't see an actual slowdown in growth in the sector -- just in the rate of growth. 

Historically, we've had other ways to deal with price drops, too. The Complete Idiot's Guide to Options And Futures, 2nd EditionBy Scott Barrie, repeats the old trader's adage, "the best cure for low prices is low prices," and "the best cure for high prices is high prices." Low oil prices in the 1990s helped lead the way for the boom of SUVs. Before that, in the 1970s, companies like Honda and Toyota made their way into the U.S. market with their fuel-efficient vehicles following the oil embargo and high gas prices.  Unlike when those market changes occurred, though, we have a full complement of both SUV and hybrids available to take advantage of price changes in the relatively near term when gas prices change.  

Ultimately, if stock price is why people care about oil prices and production in the United States, it's entirely possible the bears are right that company valuations will come down in the near term. In the mid to long term, though, oil production is going to at least stay steady. As such, regardless of the market impact of the oil boom, oil will continue to flow, which will mean it will continue to need transportation.  Therefore, it's important that we assess safety risks for infrastructure improvements, such as oil and gas pipelines, that can improve safety in areas that like rail and trucking, which are currently being taxed by the current level of oil and gas development in the country. In addition, a potential slowing of growth rates does not mean that other environmental and social challenges will go away soon.

Of course it makes sense to plan for a financial future and predicting how oil will fare in the coming months is part of the analysis for some.  But changes in market expectations don't quickly, or necessarily significantly, impact the real world experience for those in affected areas.  Frankly, a slow down in growth rates likely would be welcome in many areas experiencing the oil boom, but a slow down doesn't mean the work necessary to maximize economic opportunity, minimize environmental harm, boost social conditions, and improve safety can come to an end.  It might simply be a chance for impacted areas to catch up before the next boom begins (or this one continues).  We shouldn't miss that chance. 

October 28, 2014 in Current Affairs, Financial Markets, Joshua P. Fershee, Law and Economics | Permalink | Comments (0)

Tuesday, October 21, 2014

Remaining Vigilant: Getting Courts to Recognize LLCs Aren't Corporations

In Business Organizations today, I spent some time reviewing the differences between varying entity types.  I made the point that courts often make mistakes on this front, especially with LLCs and corporations, and it reminded me I needed to follow up on my own pet LLC protection project. 

Over the years, I have taken more than a passing interest in how often courts refer to (and ultimately treat) LLCs. I have this thing where I think LLCs are not treated as well doctrinally as they should. In February of this month, I made the argument,  Courts Should Get the Doctrinal Distinction Between LLCs and Corporations, and I have made other similar arguments (herehere, and here).  

As part of this I committed to noting when courts refer to LLCs as "limited liability corporations" and not "limited liability companies," as they should.  Almost one year ago, I noted this continuing theme, repeating the search I did for a 2011 article, where I found in a May 2011 search of Westlaw’s “ALLCASES” database that there were 2,773 documents with the phrase “limited liability corporation," in describing an LLC. (That article is here.)  Things are not getting much better.  Since Oct. 15, 2013, there have been 410 more cases making that same mistake. Just since my February 4, 2014 post, reference above, there have been 300 of those cases.  

As I read through some of these cases, many of which don't seem to turn on whether the entity is a limited liability company or a corporation, I have noticed that some of the cases may have an entity structure issue that no one is raising.  That's a failure of at least one of the parties, and potentially the court.  I plan to follow up with a few example of such cases, but for now, I'll part with my familiar refrain: as long as courts keeping describing limited liability companies as corporations, I'll keep pointing it out.

 

October 21, 2014 in Business Associations, Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, October 14, 2014

Economics in Business Law: Regulatory Capture and The Nobel Laureate

To be clear, I'm not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics.  I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law.   This week's announcement of  Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.  

I admit I did not much about Tirole before the announcement, and after just a little reading, it's clear to me that I need to know more.  A nice summary of Tirole's work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:

A theory prize!  A rigor prize!  I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics.  He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too.  He is a broader economist than many of his fans realize.

Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s.  In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory.  Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs.  The idea of mechanism design runs throughout his papers in many different guises.  Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts.  That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession.  He has shown a remarkable breadth and depth over the course of the last thirty or so years.

Cowen then summarizes (or at least introduces) much of Tirole's work. I am now working my through a paper Tirole wrote with Jean-Jacques Laffont that discusses when regulatory capture is likely to happen. (Cowen notes, " I have yet to see the insights of this paper incorporated into the rest of the literature adequately.") 

The papers is called The Politics of Government Decision-Making: A Theory of Regulatory Capture. Two of my favorite lines:

  • "The assumption that Congress is a benevolent maximizer of a social welfare function is clearly an oversimplification, as its members are themselves subject to interest-group influence."
  • "In contrast with the conventional wisdom on interest-group politics, an interest group may be hurt by its own power."

Here's the abstract (paper available on JSTOR):

The paper develops an agency-theoretic approach to interest-group politics and shows the following: (1) the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation. (2) The threat of producer protection leads to low-powered incentive schemes for regulated firms. (3) Consumer politics may induce uniform pricing by a multiproduct firm. (4) An interest group has more power when its interest lies in inefficient rather than efficient regulation, where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal (Congress).

It's worth a read, even if the math part is a little beyond some of us. 

H/T: Geoffrey Manne

October 14, 2014 in Business Associations, Current Affairs, Joshua P. Fershee, Law and Economics, Securities Regulation | Permalink | Comments (1)

Tuesday, October 7, 2014

The Internal Affairs Doctrine, State Power, and Citizens United

Maryland State Senator and American University Washington College of Law professor Jamie B. Raskin recently wrote an opinion piece for the Washington Post, A shareholder solution to ‘Citizens United’. In the piece, he explains that 

Supreme Court Justice Anthony M. Kennedy’s majority opinion in Citizens United essentially invites a shareholder solution. The premise of the decision was that government cannot block corporate political spending because a corporation is simply an association of citizens with free-speech rights, “an association that has taken on the corporate form,” as Kennedy put it. But if that is true, it follows that corporate managers should not spend citizen-shareholders’ money on political campaigns without their consent.

Senator Raskin further notes that the Congress doesn't appear interested in moving forward with the Disclose Act, and the Securities and Exchange Commission has not pursued requiring campaign spending disclosures.  In response, the senator has a proposal:

Our best hope for change is with the state governments that regulate corporate entities throughout the year and receive regular filings from them. I am introducing legislation in January that will require managers of Maryland-registered corporations who wish to engage in political spending for their shareholders to post all political expenditures on company Web sites within 48 hours and confirm that any political spending fairly reflects the explicit preference of shareholders owning a majority interest in the company.

Further, if no “majority will” of the shareholders can form to spend money for political candidates — because most shares are owned by institutions forbidden to participate in partisan campaigns — then the corporation will be prohibited from using its resources on political campaigns.

Back in early 2010, as a guest blogger here, I wrote a post, Citizens United: States, where I noted my reaction to the case, which was that I wondered how states would react and that the case made the issue "an internal governance issue, which is a state-level issue." (Please click below to read more.)

Continue reading

October 7, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Joshua P. Fershee | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 30, 2014

Why I Don't Ban Laptops (Yet)

There is a growing drumbeat for banning laptops in the classroom, as a recent New Yorker article explained. The current case for banning laptops appeared on a Washington Post blog (among other places), in a piece written by Clay Shirky, who is a professor of media studies at New York University, and holds a joint appointment as an arts professor at NYU’s graduate Interactive Telecommunications Program in the Tisch School of the Arts, and as a Distinguished Writer in Residence in the journalism institute.

The piece makes a compelling case for banning laptops, and I agree there are a number of good reasons to do so.  I’ll not recount the whole piece here (I recommend reading it), but here’s a key passage:

Anyone distracted in class doesn’t just lose out on the content of the discussion but creates a sense of permission that opting out is OK, and, worse, a haze of second-hand distraction for their peers. In an environment like this, students need support for the better angels of their nature (or at least the more intellectual angels), and they need defenses against the powerful short-term incentives to put off complex, frustrating tasks. That support and those defenses don’t just happen, and they are not limited to the individual’s choices. They are provided by social structure, and that structure is disproportionately provided by the professor, especially during the first weeks of class.

I am sympathetic to this line of thinking, and I am even more sympathetic to another point made in the article: that the laptop distractions can leak from one student engaging in social media or other non-classroom activities to those around them. That is a serious concern. 

Still, I don’t ban laptops in my classes, though I have thought about it.  I let students use them in my larger-enrollment classes: Business Organizations, which usually is near the cap of 70, and Energy Law, which is usually in the 34-55 range. There is no doubt the risk of distraction in those courses is higher than in others.  Interestingly, in my last two seminar-style classes, I did not have a ban, either, but students rarely used laptops.  They opted-in for the discussions (self-selection for certain topics can certainly help on that front). 

I continue to think about how I want to proceed, but for now, I see value in allowing my students the option to choose how they wish to engage. There have been some other defenses of the idea of keeping laptops in the classroom (see, e.g.,  here), but my views are an amalgam of different styles and rationales.

First, part of learning, especially in becoming a life-long learner (which is what lawyers need to be), one must choose to engage. Law students are grown ups, and they must learn how they learn. They must decide.  I won’t be there when they get to their job and they have to use the computer to actually do the work of a lawyer.  They will, at some point, have to decide when to focus and when to play. 

Second, I value diversity of styles in the classroom.  That is, if most other professors are using open-book exams or take home exams, mine will probably be closed book, and closed note.  I have taught using quizzes, blog posts, midterms, short papers, etc., to add some variety to the experience.  Now that more classes, at least at my school, are without laptops, it actually gives me a reason to consider keeping them. 

Finally, at least so far, allowing laptops is part of my deal with students. It’s part of how I connect and model for them my view and expectation that they are grown ups.  I give them power, and I expect them to act appropriately.  As my friend, former colleague, and teaching mentor Patti Alleva (recognized as one of the nation's best law teachers) explained in a recent National Law Journal piece, teaching is ultimately about respect and what she calls “intentionality.”  She explains:

The simple fact is that teaching does not always produce learning, even if thoughtfully done. Creating that causal link between the two can be a mystifying challenge, especially given the infinite number of unknowable factors and forces that may reduce a teacher's effectiveness or a student's willingness or ability to learn.

 . . . .

Teachers, as fiduciaries of their students' educational experience, owe them compassionate deference, based on a benefit of the doubt, coupled with high but reasonable expectations for a meaningful learning collaboration.

. . . .

Ultimately, the best professors are themselves students who learn as much as they teach. And they seek, not to impose ideas on students, but to help equip them with the metacognitive tools to test those ideas and use them in service of problem-solving. Hopefully, students will develop their own senses of respect — for the legal profession, for themselves as aspiring lawyers and for the learning partnership we share. So, if years ago, in that tense seminar room, each of us left with respect for our disagreements and for the pedagogic processes that allowed us to critically and creatively examine, and grow from, those differences, then invaluable learning did take place that day with respect providing a bridge between teaching and learning when other things may have temporarily obscured the connection.

I hope that as teachers we can all appreciate that we, like our students, have different views on the best way to teach and to learn.  Just because we choose different paths, it doesn't make any path wrong.  As long as the path is thoughtfully chosen, with a purpose and a goal, there’s a good chance it’s right for that teacher, in that moment, for that class.  And if it’s not, the key is not about dwelling on the mistake. It’s about learning, adjusting, and doing a better job next time, because the best teachers really are the ones who are trying to “learn as much as they teach.”  

September 30, 2014 in Joshua P. Fershee, Law School, Teaching | Permalink | Comments (4)