Tuesday, December 6, 2016

Seeking Economic Prosperity and Social Justice: Getting Out of Our Own Way

The political discourse of this election cycle, and the respective postures of the two main political parties, suggest that social justice and economic prosperity are in opposition to one another. At times, it seems that some believe pursuing racial and gender equality are (at best) distractions from “real problems” like jobs and the economy. Others seem to think any form of business or industrial development is essentially sanctioning the destruction of the Earth and its people. Both are wrong.

Equity and fairness are not anathema to economic progress. In fact, in the big picture, they are essential. There is nothing inconsistent about being pro-business and supporting social justice. One can believe in social justice and still think there are too many regulations that hamper businesses. There are, for example, regulations that disproportionately keep women and minorities from opening their own businesses. And there are laws and regulations that create barriers to entry and help maintain market power businesses where competition is both warranted and necessary..

My colleague, Haskell Murray recently posted Faith and Work in Universities, which lists some resources related to religion and scholarly activity, particularly as it related to business. This is a worthwhile discussion, and far too often we see discussions of business and morality as separate areas – silos related to separate and competing goals. 

This is not unlike the separation in environmental law and energy law I discussed in a recent short piece about the changing role of natural gas in the clean energy movement where I noted:

Electricity generation for industrial and residential consumers was one of the major drivers behind environmental regulation, but despite this long-standing connection, environmental law and energy law have often operated in separate silos. This fact has led to disjointed and ineffective policy and a poor understanding of the full scope of legal, regulatory, and business issues in the energy sector. (footnote omitted)

This is true in the broader business and social justice realm, as well. As Haskell’s compilation shows, though, that business and social justice (including, but not limited to, religion) are interrelated is hardly novel.  When Pope Francis visited the U.S. Congress, he explained:

The right use of natural resources, the proper application of technology and the harnessing of the spirit of enterprise are essential elements of an economy which seeks to be modern, inclusive and sustainable. "Business is a noble vocation, directed to producing wealth and improving the world. It can be a fruitful source of prosperity for the area in which it operates, especially if it sees the creation of jobs as an essential part of its service to the common good" (Laudato Si', 129). 

Social justice and economic development are not either-or propositions, despite what recent election choices may have implied. There is, I think, a vast underrepresented center in America that cares both about pragmatic economic decisions and basic fairness and equity. This past election, I hope and believe, demonstrated more about the priorities of various voters rather than clear divides about the issues themselves.  To be sure, there are large numbers of people for whom this is not true -- there is some fundamental disagreement out there -- but I think the vast majority of people are decent caring people who have different ideas about the hierarchy of what is most important to move the country forward. 

This is not to ignore the repugnant behavior, language and acts, from some people before and since the election. There have been outrageous acts of violence and intimidation.  Shortly after the election, some of our law students were victims of such acts. As examples, one student was spit upon and racial epithets were shouted at another. There is no place hateful behavior, and it is unacceptable. A recent speaker invited to our campus said hateful and hurtful things about a valued faculty member. Free speech is a virtue, but this is simply not how we should treat each other, and it is shameful. And although racism, misogyny, anti-LGBT and anti-religious sentiment, and xenophobia have been part of virtually every government at some point, no government has found lasting peace or prosperity based on any of those things.

My point is not intended to suggest a Pollyanna-esque view of the world. I am not blindly asking, “Can’t we all just get along?”  I am asking whether we can agree to try.

It's going to take a lot of work, and there are no simple answers. But we must start somewhere. Here are three modest principles to get started moving forward together:

  1. Stop succumbing to base and visceral reactions. We need to stop assuming everyone is lying and cheating and taking something from us so that we notice those who really are lying and cheating and taking something from us.
  1. Be skeptical of uncompromising absolutists. There are some absolutes in this world, to sure, but not nearly as many as we have been led to believe. And this is not a conservative or liberal issue. It’s an issue. Anyone who thinks they are right all the time is wrong. 
  1. Reaffirm our nation’s founding principles and self-evident truths, that all people are “created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.” I think it is right to say we have evolved from knowing such rights belong to men to know such rights belong to us all.

These principles require seeing compromise as valuable. Virtually all of us agree about that, because most of us have jobs and friends and loved ones. Compromise is a big reason why or we wouldn’t have those people in our lives. Compromise does not mean sacrificing one’s beliefs or values.  It means recognizing the value and autonomy of others. It means seeing the mutual value of others in the world around us.  But also, to be clear, compromise is not one side listening and being nice while the other side sits obstinately waiting to get what they want.  Compromise requires that both sides work and give up something. Compromise is not, and cannot be, unilateral disarmament.   

Let’s debate vigorously the best way to achieve economic prosperity.  Let’s argue respectfully about how best to care for the nation’s poor and elderly.  But let’s value and respect each other. In short, let’s get out of our own way. We have work to do. 

December 6, 2016 in Current Affairs, Jobs, Joshua P. Fershee, Religion | Permalink | Comments (2)

Tuesday, November 29, 2016

Note to Trump and the New Congress: Play Conservative and Leave It Alone

When it comes to regulations and economic policy, I am quite conservative.  Not a Republican-type conservative (probably more Libertarian in a political sense), but in the sense that I often advocate for less regulation, and even more often, for less changes to laws and regulations. People need to be able to count on a system and work within it. As such, whether it is related to securities law, energy and environmental law, or other areas of the law, I find myself advocating for staying the course rather than adding new laws and regulations.  

For example, a while back, co-blogger Joan Heminway quoted one of my comments about securities law, where I noted "my ever-growing sense that maybe we should just take a break from tweaking securities laws and focus on enforcing rules and sniffing out fraud. A constantly changing securities regime is increasingly costly, complex, and potentially counterproductive." 

After the BP oil blowout of the Deepwater Horizon well in the Gulf of Mexico, I similarly argued that we should approach new laws with caution, and that we might be better served with existing law, rather than seeking new laws and regulation in a hasty manner. I explained, 

[T]here are times when new laws and regulations are necessary to handle new ways of perpetrating a fraud or to address new information about what was previously viewed as acceptable conduct. But often, new laws and regulations are not a reaction to new information or technology; they are a reaction to a unique and unfortunate set of facts that is more likely related to timing or circumstances than an emerging trend. Other times, it is a lack of enforcement of existing protections meaning the problem is not the law itself; it is the enforcement of the law that is the problem.

Choosing a Better Path: The Misguided Appeal of Increased Criminal Liability After Deepwater Horizon, 36 Wm. & Mary Envt'l L & Pol. Rev. 1, 19 (2011) (footnotes omitted). More recently, I have taken the same view with regard to hydraulic fracturing regulations:

There may well be a need for new regulations to improve oversight of hydraulic fracturing and other industries that pose environmental risks, but new regulations do not necessary lead to better oversight. . . . There is a strong argument that the problems related to hydraulic fracturing (and, for that matter, coal extraction, chemical storage, and hazardous waste operations) are more linked to a lack of enforcement and not a lack of regulation.

Facts, Fiction, and Perception in Hydraulic Fracturing: Illuminating Act 13 and Robinson Township v. Commonwealth of Pennsylvania, 116 W. Va. L. Rev. 819, 847 (2014). 

I swear I have a point, beyond just quoting myself.  Here it is: I'd like to urge the President-Elect and the 115th Congress to sit back and stay the course for a little bit to see where things are headed. I have a strong suspicion things are headed in the right direction from an economic perspective. This is not to suggest that there are not holes in the economy or people in desperate need of jobs, training, and education (there are -- I live in West Virginia. I know.). But with a White House and a Congress controlled by the same party, the GOP play should be simply: we're in charge now, and the economy is ready to move ahead.  

We have already seen it -- the stock market is up and economic indicators look better.  And there has been no new legislation or regulation (or repeals of either).  It's just consumers believing the economy will get better.  And consumer confidence is key to expansion.  Who cares that it started before the election?  What matters is whether we're going in the right direction.  And it seems we are. The Financial Times reported today

A gauge of US consumer sentiment has hit a post-recession high, painting a positive outlook ahead of the key holiday shopping season as recent data point to a strengthening US economy.

The Conference Board’s consumer confidence index climbed to 107.1 in November from 100.8 in October, the highest since July 2007 and above analysts’ forecast of 101.5.

Most of the survey was conducted before the presidential election on November 8. But “it appears from the small sample of post-election responses that consumers’ optimism was not impacted by the outcome,” said Lynn Franco, director of economic indicators at the Conference Board. “With the holiday season upon us, a more confident consumer should be welcome news for retailers.”

 

And, just to reinforce that is not a post-election position, I have been making this argument on this blog since at least 2010, when I wrote, How to Fix the "Broken" Financial System: Stop Trying to Fix It

So, let's stay the course for a bit and see how people respond to a little stability. Let's see what a surge in consumer confidence can do for the U.S. and world economies. Let's make sure it's broken (and if so, how), before anyone tries to fix it. And maybe, in the meantime, we can spend a little time treating each other better.

November 29, 2016 in Behavioral Economics, Current Affairs, Jobs, Joshua P. Fershee, Law and Economics, Legislation, Securities Regulation | Permalink | Comments (2)

Wednesday, November 23, 2016

Can/Should We Focus Capital on the Long Term?

I have been thinking about the long-short term investment horizon debate, definitions, empirics and governance design consequences for some time now (see prior BLPB post here and also see Joshua Fershee's take on the topic).  This has been on mind so much  that I am now planning a June, 2017 conference on that very topic in conjunction with the Adolf A. Berle Jr. Center on Corporations, Law & Society (founded by Charles “Chuck” O’Kelley at Seattle University School of Law). In planning this interdisciplinary conference where the goal is to invite corporate governance folks, finance and economics scholars, and psychologists and neuroscientist, I have had the pleasure of reading a lot of out-of-discipline work and talking with the various authors.  It has been an unexpected benefit of conference planning.   I also want some industry voices represented so I have reached out to Aspen Institute, Conference Board and a new group, Focusing Capital on the Long Term (FCLT), which I learned about through this process.

I share this with BLPB readers for several reasons.  The first is that the FCLT, is a nonprofit organization, a nonprofit organization for BUSINESS issues created and funded by BUSINESSES.  In July 2016, the Canada Pension Plan Investment Board, McKinsey & Company together with BlackRock, The Dow Chemical Company and Tata Sons founded FCLT. Other asset managers, owners, corporations and professional services firms (approximately 20) have joined FCLT as members.  Rather than the typical application of a chamber of commerce style organization or trade industry group, here the stated missing of FCLT is to “actively engage in research and public dialogue regarding the question of how to encourage long-term behaviors in business and investment decisions.” 

Second, FCLT has access to otherwise proprietary information—like C-suite executive surveys---and is conducting original research and publishing white papers and research reports on the issues of management pressures, and governance designs that may promote a long-term time horizon.

I know for some folks reading, especially those strongly aligned with a shareholder rights camp, will view this with skepticism as a backdoor campaign to promote executive/management power and bolster the reputation of professional service firms hired by those managers.**  For me, though the anecdotal experience is a valuable component to considering all sides to the debate.  It also helps articulate why and how the feedback loop of short-term pressures—even if it is only perceived rather than structurally quanitifable—may exist. 

Third, I found some of the materials, particularly the Rising to the Challenge of Short-termism, written by Dominic Barton, Jonathan Bailey, and Joshua Zoffer in 2016 to be a useful reading for my corporate governance seminar.  It helped to explain the gap between the law and the pressure of short-termism.  It also helped provide a window into at least some aspects of decision making and payoffs in the governance setting. It can be quite hard to give students a window in the C-suite and BOD dynamics that they are naturally curious about while in law school.  Even if you ideologically or empirically disagree with the claim of short-termism when trying to structure balanced reading materials that provide an introduction to the full scope of measures, these are resources worth considering. 

Rising to the Challenge of Short-termism, written by Dominic Barton, Jonathan Bailey, and Joshua Zoffer in 2016, draws upon a McKinsey survey of over 1,000 global C-Suite executives and board members.  The report describes increasing pressures on executives to meet short-term financial performance metrics and that the window to meet those metrics was decreasing.   The shortening time horizon shapes both operations decisions as well as strategic planning where the average plan has shrunk to 2 years or less.  Culture matters.  Firms with self-reported long-term cultures reported less willingness to take actions like cut discretionary spending or delay projects when faced with a likely failure to meet quarterly benchmarks compared with firms that didn’t self-report a long-term culture.  Sources of the pressure are perceived to come from within the board and executives, but also cite to greater industry-wide competition, vocal activist investors, earning expectations and economic uncertainty.  The article concludes with 10 elements of a long-term strategy as a mini action plan.

Straight talk for the long term: How to improve the investor-corporate dialogue published in March 2015.

Investing for the future: How institutional investors can reorient their portfolio strategies and investment management to focus capital on the long term, published in March 2015.  The paper identifies 5 core action areas for institutional investors focusing on investment beliefs, risk appetite statement, bench-marking process, evaluations and incentives and investment mandates to evaluate investment horizons.

A roadmap for focusing capital on the long term: A summary of ideas for asset owners, asset managers, boards of directors, and corporate management to focus on long-term value creation, published March 2015.

Long-term value summit in 2015 with a published discussion report made available February 2016.  “120 executives, investors, board members, and other leaders from around the world gathered in New York City for the Long-Term Value Summit. Their mandate: to identify the causes and mechanisms of the short-term thinking that has come to pervade our markets and profit-seeking institutions and, more importantly, to brainstorm actionable solutions”

**The initial board of directors, announced on September 28, 2016 at the first board meeting, include some well positioned folks within BlackRock (Mark Wiseman), McKinsey & Co. (Dominic Barton), Dow Chemical (Andrew Liveris), Unilever (Paul Polman) and more. The BOD will be advised by Larry Fink, Chairman and CEO of BlackRock, as well.

 

-Anne Tucker

November 23, 2016 in Anne Tucker, Business Associations, Financial Markets, Joshua P. Fershee, Management, Shareholders | Permalink | Comments (0)

Tuesday, November 22, 2016

For Coal Jobs, Rhetoric Trumps Truth

Back in May, I discussed Donald Trump’s campaign dubious promises to bring back coal jobs to places like West Virginia and Kentucky.  He promised (and continues to promise) that reduced regulation and elimination of the Clean Power Plan will bring back job.  Voters in West Virginia bought the claim, and they believed it from incoming governor, Democrat Jim Justice, a billionaire coal magnate.   

Trump and Justice spoke the other day, with the Governor-Elect saying in a statement:

“It’s an exciting day for West Virginia because we now have a pathway to the White House and a president-elect who is totally committed to putting our coal miners back to work. President-elect Trump made it clear that he won’t forget about West Virginia when it comes to our nation’s energy policies. I will work closely with the President-elect and his administration on clean coal technology, rolling back the job-killing EPA regulations on coal, and growing West Virginia’s other job opportunities.”

How this will work to improve coal jobs remains an open question.  Trump has yet to announce his energy-related appointments, which will include the EPA, Department of Energy, and Department of Interior.  His energy secretary short list (and possibly Interior) still includes Harold Hamm, CEO of the oil and gas company, Continental Resources. Forrest Lucas (of Lucas Oil) remains on the list, as well.  So, how are oil and gas executives going to help coal?  Well, by “rolling back the job-killing EPA regulations on coal,” of course. (Note: that is really an EPA issue, not a Department of Energy issue.)

The problem with this for coal country, as I have noted before, is that rolling back these regulations also has the effect of rolling back regulations that impact the natural gas industry, meaning that even as coal gets cheaper, so does natural gas. 

Further, there is talk in the administration about opening up more federal lands to coal mining and oil and gas exploration.  (This would be a Department of Interior action, not Energy.)  This move, too, is curious, as it is hard to see how increased access to more supply is going to move up prices to support the struggling industries.  A greater supply of oil or gas or coal will lead to even lower prices.  Lower taxes and reduced regulations equals means a lower cost of exploration and production, which leads to more resources and lower prices.  

Absent a commitment to increasing the cost of natural gas, coal is simply not going to compete.  Natural gas burns cleaner than coal, is substantially more flexible, and despite criticisms of the process of hydraulic fracturing, it is environmentally preferable to coal mining. With oil and gas executives playing a large role in the new administration, there is no reason to expect coal will get a preference over natural gas.  Perhaps renewable energy sources will be less attractive, though the prices of those sources continues to drop, and natural gas can actually work to facilitate those such energy sources.  Recent reports suggest renewables and natural gas are the future.  This does not bode well for coal. 

Increased research on clean coal would have value. There are still millions of people around the world without access to electricity, and millions more getting power from old coal-fired plants that create health and environmental problems. But that research is not likely to change markets in the near term, and it is not likely to benefit U.S. coal miners as long as cheap natural as remains.  And it is expected to remain.   

Finally, reduced regulations may help move the energy sector forward more quickly, and it may help facilitate related businesses who use natural resources as a feedstock or energy-intensive processes.  That remains to be seen.  Any plan that does that, though, still likely leaves coal, and the people who work in the industry, behind. Just saying you will save coal jobs, doesn’t make it true.  But apparently it does make some people feel better.  I doubt that will last very long. 

November 22, 2016 in Jobs, Joshua P. Fershee, Law and Economics, Legislation | Permalink | Comments (5)

Penn State Journal of Law & International Affairs Call for Papers: Spring 2017

The Penn State Journal of Law & International Affairs (“JLIA”) is conducting a call for papers for an upcoming publication in spring 2017. The publication will focus on areas of taxation, corporate law, banking and finance, and related subject areas. Current papers accepted for publication cover areas of international taxation, international financial regulation for cryptocurrencies, and regulations resulting from the global financial crisis.

JLIA is an interdisciplinary journal that is jointly published by Penn State’s Law School and the Penn State School of International Affairs. As a result, deference will be given to papers that incorporate international elements. However, papers with a purely domestic focus will be given full consideration based on their fit within the publication.                                              

Submissions will be considered for publication on a rolling basis. Authors interested in submitting papers should refer to http://elibrary.law.psu.edu/jlia/policies.html for submission procedures and policies. Please note that text and citations should conform to The Bluebook: A Uniform System of Citation, and that submissions through ExpressO are the best way to ensure quick response times as it is the internal platform for reviewing all official submissions to JLIA.

Please direct all questions regarding this Call for Papers to Zach Bollman, Editor in Chief, at rzb185@psu.edu or Camman Piasecki, Managing Editor of Articles, at cxp494@psu.edu.

 

November 22, 2016 in Joshua P. Fershee, Research/Scholarhip | Permalink | Comments (0)

Tuesday, November 15, 2016

A Congressional Punt on Chevron Deference

Rep. John Shimkus (R-Ill.) has already started soliciting support as he seeks to chair the House Energy & Commerce Committee. He says in his letter: 

[W]e will use our oversight and investigative authority to rebalance the federal government, recommending changes so future administrations won’t have the same ability to abuse their power.  In particular, this will entail building the case against the Chevron Deference, which has enabled executive agencies to upend congressional intent through the courts.

Our success in this area will restore Congress as the sole lawmaking apparatus of the federal government.

This is rather funny to me.  First of all, Chevron was a case during the Reagan Administration in which the Administration decided to take a view of the Clean Air Act with which the Natural Resources Defense Council, Inc. disagreed. The court sided with the Administration.  The power of deference has value to who ever is in charge of the executive branch.  

More important, though, Congress has always been the sole lawmaking apparatus of the federal government. Congress can eliminate Chevron deference by statute. Congress can repeal Massachusetts v. EPA by statute.  Congress has the power.  They are just unwilling or unable to wield it.  This is true as to the EPA and SEC and FCC and any other agency.  So, sure, one can blame the role of the courts and the executive if they don't like how agencies operate.  But I'd suggest that, for members of Congress who don't like that, the first place they should look is in the mirror.  

November 15, 2016 in Joshua P. Fershee, Securities Regulation | Permalink | Comments (1)

Wednesday, November 9, 2016

Director Primacy and the BJR: Reconciling Strine v. Signatories

Prof. Bainbridge the other day commented on the following, which is item 10 from the Modern Corporation Statement on Company Law (available here):  

Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.

Bainbridge take a contrary position, citing Delaware Supreme Court Chief Justice Strine, who says, "a clear-eyed look at the law of corporations in Delaware reveals that, within the limits of their discretion, directors must make stockholder welfare their sole end, and that other interests may be taken into consideration only as a means of promoting stockholder welfare." Strine further notes that "advocates for corporate social responsibility pretend that directors do not have to make stockholder welfare the sole end of corporate governance, within the limits of their legal discretion."

I read these positions as consistent, though I think the scope of what is permissible is certainly implicitly different. I agree that Strine is right to say that "directors must make stockholder welfare their sole end."  But I also agree that "disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity." My read of the business judgment rule (BJR) is that, absent fraud, illegality, or self-dealing, courts should abstain from reviewing director decisions, meaning that the directors decide what"stockholder welfare" means and what ends to use in pursuit of that end.  That is, I think it's wrong to say "directors generally are not under a legal obligation to maximise profits for their shareholders," but I do think directors usually get to decide what it means to "maximise profits." 

I am a firm believer in director primacy, and I believe directors should have a lot of latitude in their choices, subject to the BJR requirements.  Thus, if a plaintiff can show self dealing (like maybe via giving to a "pet charity" described in A.P. Smith v. Barlow), then the BJR might be rebutted (if the gift is inconsistent with state law and/or constituency statutes).   But otherwise, it's the board's call. Furthermore, where a company builds its brand and acts consistently with its prior actions, that might expand the scope of permissible behavior for a company (i.e., not be evidence of self-dealing).  Thus, companies like Tom's Shoes and Ben and Jerry's should be able to continue to operate as they always have when they bring in new directors, because what might look like self-dealing in another context, is consistent with the business model.  

eBay v. Newmark (pdf here) is often used to rebut that notion, but I still maintain that case is really about self-dealing  -- the actions taken by Jim and Craig were impermissible not because they were working toward "purely philanthropic ends," but because they took actions that benefited themselves to the detriment of their minority shareholder, such as use of poison pills).  

Anyway, I am still a believer in the BJR as abstention doctrine.  Show me some fraud, illegality, or self-dealing or I'm leaving the board's decision alone. 

November 9, 2016 in Corporate Governance, Corporations, CSR, Delaware, Joshua P. Fershee | Permalink | Comments (1)

Tuesday, November 1, 2016

NY Court Refuses to Bail Out Sophisticated Party Via Veil Piercing

I often complain about courts and their unwillingness to require plaintiffs to make appropriate claims about veil piercing in the context of limited liability companies (LLCs).  That is, courts too often allow plaintiffs to seek to "pierce the corporate veil" of LLCs, which (of course) do not have corporate veils.  They have limited liability veils, but they are decidedly not corporate.  I will complain about that again, but in the process, I will note that the court does a great job of general veil piercing analysis that is worthy noting.  
 
In Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, on Oct. 20, 2016, the Supreme Court, Appellate Division, First Department, New York, decided to dismiss a veil piercing claim based on what I see as very sound reasoning.  I would have like the court to note it was not a corporation, and instead an LLC, that the plaintiff sought to pierce, but nonetheless, I think the court got the rest right.  The court found that the plaintiff failed to plead a sufficient veil-piercing claim and explained, "both parties were very sophisticated, and negotiated in minute detail all aspects of their agreements to build [defendant] using innovative technology. That the project failed does not lead to a veil-piercing claim, especially since plaintiff failed to identify the alleged fraud or other wrongdoing. Skanska USA Bldg. Inc. v. Atl. Yards B2 Owner, LLC, No. 1352, 2016 WL 6106652, at *1 (N.Y. App. Div. Oct. 20, 2016) (emphasis added). 
 
The court continued:
Far from alleging that FCRC used B2 Owner to perpetrate a fraud, plaintiff, a sophisticated party, admits that it knowingly entered into the CM Agreement with B2 Owner, an entity formed to construct the project. Nowhere in the complaint does plaintiff allege that it believed it was contracting with or had rights vis-à-vis FCRC or any entity other than B2 Owner. Indeed, plaintiff could have negotiated for such rights. Having failed to do so, plaintiff cannot now claim that it was tricked into contracting with B2 owner only and thus should be allowed to assert claims against FCRC . . . . Thus, the veil-piercing claim should be dismissed.

Id. at *7.
 
I think this is spot on. Far too often courts seem to give credence to veil-piercing claims that seem predicated primarily on a lack of ability to pay or the fact that there is a financially sound parent company.  That is simply not the standard.  This is not true only for sophisticated parties, but it is especially true of them. Although I feel badly for an entity that is not able to recover all it is owed, I do not think courts should provide what amounts to a guarantee from another entity when such resources were neither promised nor bargained for in the contracting process. Judge Acosta got this part right.  Now if he would just be sure to distinguish veil piercing by entity ... 
  
 
 

November 1, 2016 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, October 18, 2016

The War on Coal is Also a Technology Issue (Despite the Politics)

Last week, I explained that the "War on Coal" Is Really A Competition Issue, with cheap natural gas prices as a major reason coal production and use have declined. Beyond the impact of natural gas on coal jobs, technology is also an issue. Technology is making mining more efficient, but it is making the market harder for coal miners. Following is a chart I created from Energy Information Administration data that shows coal production and employment statistics for 2013 and 2014.

Coal Production Data

  2014 2013 Percent Change
Coal-Producing Number of Mines Production Number of Mines Production Number of Mines Production
State and Region1
             
Appalachia Total 804 266,979 877 269,672 -8.3 -1
-- Underground 292 193,434 339 188,090 -13.9 2.8
-- Surface 512 73,545 538 81,582 -4.8 -9.9
Powder River Basin (surface) 16 418,156 16 407,567 - 2.6

Coal-Related Employment Data

Coal-Producing Underground Surface Total Underground Surface Total Underground Surface Total
State and Region
                   
Appalachia Total 32,545 12,141 44,686 35,740 14,115 49,855 -8.9 -14 -10.4
Powder River Basin - 6,592 6,592 - 6,635 6,635 - -0.6 -0.6

The data show the coal-production and employment figures for 2013 and 2014.  Surface mining in the Powder River Basin (the highest producing region in the country) increased coal production 2.6% and employment dropped 0.6%, while underground mining production for Appalachia increased 2.8% even though employment dropped 8.9%.  For the United States, overall coal production increased 1.5% between 2013 and 2014, while the number of employees dropped 6.8%. Thus, even as coal production increased modestly, the number of employees holding those jobs declined significantly. 

This doesn't deter politicians from making other claims, though.  As I noted last week, the presidential race has included rhetoric claiming anti-coal regulations are what really hurt coal jobs. And it's not just at the presidential level.  Coal states often feature politicians promising to bring back coal jobs. In my home state of West Virginia, for example, both candidates for governor are making such a promise.  

As an aside, in the Ohio U.S. Senate race between Rob Portman and Ted Strickland, Sen. Portman has made use of this similar line of attack, claiming that former Ohio and governor and U.S. Representative Strickland "turned his back" on Ohio by not supporting coal jobs. The advertisement, available here, features workers from (at least for a West Virginian) an interesting choice of mine: Rosebud Mining.  (A perceptive former student, Ken Bannon, alerted me to the ad or I would have missed it.)  

People outside of West Virginia may not recall the chemical spill in January 2014 that contaminated the Elk River and left 300,000 West Virginians without drinking water.  As I noted in a post back then, the company that owned the chemical site was Freedom Industries, which listed as its sole owner, Chemstream Holdings, a company owned by J. Clifford Forrest.  Forrest also owns the Pennsylvania company (that also has Ohio operations) Rosebud Mining, which was located at the same address Chemstream Holdings listed for its headquarters. It appears that Portman has a solid lead in the race, and if I were part of the campaign, I'd probably not feature a mining company that had been linked (through an executive) to such a major recent environmental disaster.  

Despite the data (and the economic realities), claims of a war on coal continue. Even where there is some truth to the idea -- recent regulations are not especially coal friendly -- there are simply too many hurdles to overcome for coal employment numbers to go back to prior levels.  One can conceivably win a war on regulations, but technology and the marketplace are far less forgiving. It's time we embrace that reality.  

 

October 18, 2016 in Current Affairs, Joshua P. Fershee, Law and Economics, Technology | Permalink | Comments (3)

Tuesday, October 11, 2016

The "War on Coal" Is Really A Competition Issue

The Trump-Pence campaign has adopted a common West Virginia criticism of U.S. energy policy under the Obama administration that is known as the "war on coal." This phrase is used to describe the current administration's support for U.S. Environmental Protection Agency (EPA) policies to reduce greenhouse gas emissions (via the proposed Clean Power Plan) and other environmental protections that relate to consumption of fossil fuels, especially coal.  In the vice presidential debate Republican Mike Pence repeated the phrase several times, asserting that the EPA was killing coal jobs, especially in places like West Virginia and Kentucky.  The problem is that regardless of the EPA's goals, it is not environmental regulation that is coal's main challenge.  It is price. 

As Charlie Patton, president of West Virginia-based Appalachian Power explained, "Forget the clean power plan. You cannot build a coal plant that meets existing regulation today that can compete with $5 gas. It just cannot happen."  Cheap natural gas, made available by horizontal drilling and hydraulic fracturing in shale formations, has led to a significant increase in natural gas-fired electric power generation, most of which replaced coal as the fuel of choice. The shale gas boom, which started approximately in 2008, can account for most of this change.  Here's the U.S. electricity generation data by fuel (my chart using Energy Information Administration data) for 2006 to 2015):  

U.S. Electricity Generation, by fuel

Annual Total Coal  Natural Gas Renewables
2006 48.97% 20.09% 2.36%
2007 48.51% 21.57% 2.52%
2008 48.21% 21.43% 3.04%
2009 44.45% 23.31% 3.63%
2010 44.78% 23.94% 4.02%
2011 42.28% 24.72% 4.69%
2012 37.40% 30.29% 5.29%
2013 38.89% 27.66% 6.01%
2014 38.64% 27.52% 6.39%
2015 33.18% 32.66% 6.65%

 

Note the drop in coal begins modestly in 2008 and drops from 48.21% to 33.18% in 2015. In that time frame, coal lost 15.03% of the market, while natural gas increased 11.23%.  Renewable sources (not including solar and hydropower) increased 3.61% to 6.65% overall. That means that natural gas and renewables picked up 14.84% of the market -- or 98.7% of the market lost by coal. 

Coal production in my home state of West Virginia has declined from the peak of 158 million short tons in 2008 down to 95 million in 2015, with further decline expected for 2016.  And the state is feeling the devastating effect of lost jobs -- West Virginia was the only state in 2015-16 to lose a statistically significant number of jobs.  Tax revenues are down dramatically, and that decline, too, is expected to continue.  The harm to the state of these lost jobs is real, but there is no reasonable governmental policy that could change this decline, even if we wanted it to.  The reality is that natural gas is a cheaper option, it has long-term potential to work alongside renewables, and no energy proposal from any major candidate has suggested a proposal that would help coal take back marketshare from natural gas (despite promises to simply bring back coal jobs).  

Living in West Virginia, a place I love to live, it is easy to want hope.  We need hope, and we need a plan, but that plan has to include educating our workforce and expanding economic opportunities in other industries, not harkening back to another time that will never return. The reality is that the war on coal is not one that can be won. In the end, as a pricing problem, trying to win the war on coal is really trying to win a war on math.  It just can't happen. The numbers don't add up.  

 

October 11, 2016 in Current Affairs, Joshua P. Fershee, Law and Economics, Legislation | Permalink | Comments (1)

Tuesday, October 4, 2016

Veil Piercing Virgin Island LLCs (Not Corporations)

Here we go again: 

Plaintiff seeks to collect the outstanding balance owed from Defendant Healthcare Enterprises, L.L.C. d/b/a Princesse Pharmacy and Defendant Octavio RX, Enterprises, L.L.C., d/b/a Christian's Pharmacy & Medical Supplies (collectively “Corporate Defendants”) as well as Defendant Christian. (Dkt. No. 13 at 3). Plaintiff alleges that Corporate Defendants “are shell corporations or alter egos of [Defendant] Christian, owner of the different establishments known as Princesse Pharmacy, [and] Christian's Pharmacy & Medical Supplies.”
Cesar Castillo, INC. v. Healthcare Enterprises, L.L.C., CV 2012-108, 2016 WL 5660437, at *1 (D.V.I. Sept. 27, 2016). 
 
So, the "Corporate Defendants" are actually formed as a limited liability company (LLC).  As so often happens, the court get this wrong. This is one of the challenges that come from veil piercing law that treats all such cases a "piercing the corporate veil" instead of "piercing the entity veil" or piecing the veil of limited liability."  The court ultimately dismisses the veiling piercing claim as to Christian individually because there were no factual allegations in the complaint sufficient to support veil piercing.  I would have dismissed it for making an impossible assertion.  Following is the from th complaint: 
The defendants Octavio Rx Enterprises, LLC and Healthcare Enterprises, LLC are shell corporations or alter egos of Gerard Christian, owner of the different establishments known as Princesse Pharmacy, Christian’s Pharmacy & Medical Supplies.
These are LLCs, which cannot be "shell corporations." We're done.  Furthermore, it's not at all clear that the Virgin Islands recognize veil piercing for LLCs. I admit, they almost certainly do, as even when statutes don't mention veil piercing, courts usually adopt it. Still, it would be nice for someone to cite the authority that extend veil piercing to LLCs or state that they are extending the doctrine.  Instead, even the defendant assumes the veil piercing option exists, stating," [A] court will permit the plaintiff to pierce the corporate veil only when it determines that the corporation is 'little more than a legal fiction.' Pearson v. Component Technology Corp., 247 F.3d 471, 485 (3rd Cir.2001)." 
 
This is a case where the complaint gets wrong the entity type, and which then means it messes up how the entity should be analyzed. The defendant's counsel doesn't hold the plaintiff accountable. And the court allows it all.  I think the court did get the outcome right, at least.
 
The thing is, though, if even one of these parties got it right, the whole thing probably ends up right. It's obviously going to be a long road to get this right, but for the record, I am willing to fly to the Virgin Islands to help out.  
 

October 4, 2016 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Wednesday, September 28, 2016

In Support of Self-Interested Voting: A Reply to RUPA § 404(e) Confusion

On Monday, Doug Moll posted a great question about RUPA 404(e), which also got some great comments. I started to write a reply comment, but it got so long, I though it worked better as a separate post.  Doug asks the following (whole post here):

Under the “cabining in” language of RUPA (1997), the action has to fit within § 404(b) to be considered a breach of the duty of loyalty.  Section 404(b)(1) prevents the “appropriation of a partnership opportunity.”  When a partner attempts to block the partnership from taking an opportunity to protect the partner’s own related business, can it be argued that the partner is, at least indirectly, seeking to appropriate the opportunity for himself?

Alternatively, might the partner’s vote violate the § 404(b)(3) obligation to “refrain from competing with the partnership”?

Here's where I come out it: 

As I think about it, I am with Frank Snyder's comment that "a partner is entitled to pursue her own interests in voting her partnership interest, unless there's some agreement to the contrary."  I also think, though, that § 404(e) sanctions self-interested votes, subject to “the obligation of good faith and fair dealing” required under § 404(d).  

So, I am not that troubled by the example from the comments that Doug cites, though I see where his concern comes from. To repeat the comment:  

For example, a partner who, with consent, owns a shopping center may, under subsection (e), legitimately vote against a proposal by the partnership to open a competing shopping center.

First, because it’s clear that the partner first got consent to own the shopping center, the partner is not competing with the partnership, as I see it. Actually, the partnership wants to compete with the existing center, which one partner owns with consent of the partnership. As such, because of the consent, I don’t think § 404(b)(3) is a concern here. Section 404(e) says a self-interested vote is permissible, so the question is whether such a vote is consistent with the obligation of good faith and fair dealing from § 404(d). 

Given that the partnership consented to ownership of the shopping center, it seems that the rest of the partnership would reasonably expect that the partner would not be excited to create a competitive shopping center. With this knowledge on both sides, it seems to me that casting a vote against a new shopping center can occur in good faith and mean the partner dealt fairly. The rest of the partnership can still proceed with the plan if they have enough votes under the partnership agreement, and if not (e.g., unanimous vote was needed), too bad.  

Even without disclosure and consent, this might be permissible.  Suppose existing partnership A owns a car dealership. The dealership was a Pontiac, Oldsmobile, and Saturn, dealer, and they are done and new use for the property will be needed. Suppose that one of the partners also owns a shopping center with another group of people, as part of partnership B. Should that partner be precluded from voting against converting the dealership in partnership A to a shopping center?  I don’t think so.

In addition, Gottacker v. Monnier, 697 N.W.2d 436 (Wis. 2005) provides an interesting LLC parallel to this situation.  Under the Wisconsin LLC act, the court says:

We determine that the WLLCL does not preclude members with a material conflict of interest from voting their ownership interest with respect to a given matter. Rather, it prohibits members with a material conflict of interest from acting in a manner that constitutes a willful failure to deal fairly with the LLC or its other members. We interpret this requirement to mean that members with a material conflict of interest may not willfully act or fail to act in a manner that will have the effect of injuring the LLC or its other members. This inquiry contemplates both the conduct along with the end result, which we view as intertwined. The inquiry also contemplates a determination of the purpose of the LLC and the justified expectations of the parties.

Id. ¶ 31. In that case, two members effectively transferred property from one entity to another, leaving a third member out. There was no question they were conflicted in their votes, but the test was not whether they could act vote in a conflicted manner (as they did). Instead, the question was whether they dealt fairly and in good faith, which had to be decided on remand (the court said they did).  In assessing whether the entity or other members are injured, then, as long at the voting was done consistent with the organizing agreement, I think the test is whether the partner in question is getting something unfairly to the detriment of the other members. 

Lastly, to Doug's example, in the comments to his post, he said:  “[W]hen I vote to, for example, block the partnership from raising the rent on a property that I originally leased several years ago from the partnership (and with the partnership's permission), it is hard for me to understand why that vote should not be considered a breach of duty.” It seems to me that should not be a breach of fiduciary duty unless it violates some express agreement to the contrary. 

There can be good faith and fair dealing under § 404(d) in such a case, and the partnership agreed to the terms up front. The question to me is simply, what kind of vote is needed to raise the rent? Again, if it requires unanimous consent, that’s the partnership’s problem. They could have changed that when they originally agree to the deal.  If it’s majority vote, the other partners can change the rent despite the conflicted partner's no vote.  I see no need to protect this kind of transaction with mandatory fiduciary duties. There’s not a disclosure or fair dealing problem to me, so I would sanction it, and I think that's the specific intent of § 404(e).

I admit, I am sometimes amazed at how much of a contractarian I have become. 

 

September 28, 2016 in Joshua P. Fershee, LLCs, Partnership | Permalink | Comments (0)

Tuesday, September 27, 2016

Connecting with Millennials: Politics and Teaching

As law professor, most of my students are Millennials. What does that mean?  Well, Neil Howe and William Strauss, in their book Generations: The History of America's Future, 1584 to 2069, published in 1991, defined Millennials as those born between 1982 and 2004. I'll go with that.  As one who is firmly part of Generation X (the age group and not the band, though that would be cool), I'm curious. It seems that some people think so.  I don't think Gen Xers think of themselves as such very often. 

What made me think of this?  A political ad from NextGen Climate, funded by hedge fund billionaire/environmental activist Tom Steyer, apparently seeks to generate more support for Hillary Clinton by targeting Gary Johnson. The ad is below.  The ad begins: "Thinking about voting for Gary Johnson? In case you missed it, climate change will cost millennials over $8 billion if no one does anything about it."

 

 That's just weird to me.  I know it's trying to motivate that age group of voters, but I am not sure many Millennials would think of themselves as such.  That is -- does it resonate at all to have this ad targeted at them in that way? 

I guess age-group labels like this are thrown around a lot, and I just forgot.  The ABA has a mentoring article from 2004 called Generation X and The Millennials: What You Need to Know About Mentoring the New Generations It's for "Boomers" who have to deal with us Gen Xers and Millennials. The piece makes some pretty bold assertions (some of which certainly aren't true twelve years later). For example:

All Millennials have one thing in common: They are new to the professional workplace. Therefore, they are definitely in need of mentoring, no matter how smart and confident they are. And they'll respond well to the personal attention. Because they appreciate structure and stability, mentoring Millennials should be more formal, with set meetings and a more authoritative attitude on the mentor's part.  

Perhaps most of that is right.  There is some value here, even though my experience is that formal mentoring is not always well received. Then again, maybe that's my bias. After all, "members of Generation X dislike authority and rigid work requirements. An effective mentoring relationship with them must be as hands-off as possible. . . .Gen Xers work best when they're given the desired outcome and then turned loose to figure out how to achieve it." I don't know about the first part, but last two sentences are definitely me.  

So, while I find the description of Millennials a little overbearing, as I think about it, it explains a lot. I think a lot of us from the Gen X world can't understand why we can't tell students what we want and have them come back with a solution.  That's what WE do, not necessarily what they do (unless we make it clear that's what we want).  

I don't like broad generalizations of groups, but I have to admit that the 2004 article's suggestions for working with Millennials is actually consistent with a lot of what I have been doing (and working toward). I just never thought of it as trying to reach Millennials.  I thought of it as trying to reach students.  Turns out, in most cases, that's the same thing.  

I remain skeptical of the likely efficacy of the ad, but maybe there's more here than I originally thought.  Still, I'm not sure an anti-Gary Johnson ad gets anyone very far right about now.  

September 27, 2016 in Current Affairs, Joshua P. Fershee, Teaching | Permalink | Comments (0)

Tuesday, September 20, 2016

Hermés: The Limited Liability Corporation That's Actually A Corporation

Here’s a new one on the “LLC as corporation” front.  A court in the Southern District of New York says the following:

[T]his Court has subject matter jurisdiction, since the parties are diverse and the amount in controversy exceeds $75,000. Hermes and Swain are “citizens” of different states; Hermes, a French limited liability corporation, has its headquarters in New York, while Swain is a New Jersey resident.

Hermés of Paris, Inc. v. Swain, 2016 WL 4990340, at *2 (S.D.N.Y., 2016)

In most such circumstances, when a court refers to a “limited liability corporation,” it meant to say “limited liability company.” See, e.g., Avarden Investments, LLC v. Deutsche Bank Nat'l Trust Co., No. 16-CV-014-LM, 2016 WL 4926155, at *2 (D.N.H. Sept. 15, 2016) (“Avarden is a limited liability company organized under the laws of New Hampshire. New Hampshire law permits a limited liability corporation to assign management responsibility of a limited liability company to a ‘manager.’ RSA 304-C:13.”). But not this time.

Bloomberg says Hermès of Paris, Inc. operates as a subsidiary of Hermes International SA.  The French version of an LLC is not an SA, it often viewed as an SARL.  

So, technically, a corporation is a “limited liability corporation” because corporations come with a grant of limited liability. The source of this language in this opinion is, in seems, the petition to compel arbitration, which states in paragraph 10: “Petitioner Hermés, an entity engaged in ‘commerce’ as defined in the FAA §1, is a limited liability corporation, with its United States headquarters in New York, New York.” 

Another interesting (to me) note is that that court and the pleadings don’t ever say where Hermés is incorporated. They just say where it is headquartered.  I see nothing that says its state of origin. I am not as up on my civil procedure (jurisdiction) as maybe I should be, but couldn’t that matter? That is, if Hermés of Paris, Inc., is a New Jersey corporation with headquarters in New York, might that not be a problem for diversity jurisdiction? (It looks like it’s not, though. I looked. But they do have a New Jersey warehouse. Still, the state of formation seems mildly important to note.)

Anyway, although I don’t like the use of the term at all, because it creates potential for confusion (is it an LLC or a corporation?), at least this time the words are correct, even if that’s not generally how we refer to the entity type. I’d still prefer the court to have just called it a corporation, though.

 

September 20, 2016 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (2)

Tuesday, September 13, 2016

Free Speech and Free Markets Go Together

I think, by now, most people have heard about Colin Kaepernick's protest, which he manifested by his refusal to stand for the national anthem before the 49ers' August 26 preseason game against the Green Bay Packers.  Kaepernick explained his actions as follows: 

I am not going to stand up to show pride in a flag for a country that oppresses black people and people of color. To me, this is bigger than football and it would be selfish on my part to look the other way. There are bodies in the street and people getting paid leave and getting away with murder.

Many were offended by his decision; others have applauded it.  What is it that makes people (particularly white people) so upset about someone choosing not to stand for the national anthem? I thought the anthem and flag were supposed to stand for freedom, which includes the freedom to dissent and disagree. It fascinates me that one football player could get this much press for deciding not to do something he was under no obligation to do (as his employer made clear). But it certainly explains why he did it. If nothing else, Colin Kaepernick reminded of us both of our ability to speak freely and that there are potential costs when doing so. He got people to talk about an important issue, and he used his platform to focus on a necessary conversation.

Free speech can, though, have consequences. And in many ways, it should. The Bill of Rights just protects our right to speech and limits the government's ability to impose consequences for exercising that right. The Denver Broncos' Brandon Marshall lost a credit union sponsorship for his actions in support of Kaepernick's protest. Personally, if I did business with that sponsor, they'd lose my money because I support his Marshall's right to protest and because I think the the protest, conducted in a peaceful way, raised issues worthy of discussion.  (I will note that the sponsor cut ties in what appears to be a respectful and above-board way. I just disagree with the decision).  That's the free market working in a (mostly) free country.  I don't have any problem with the sponsor acting as they did, either.  They, too, were exercising their rights (assuming they did not breach a contract, and I have seen no evidence they did). I am not mad the credit union made the decision it did; I just disagree with the decision, and I would let them know that by walking away. 

Most striking to me about this uproar is the apparently binary way so many people view protests. One can love this country and hate injustice. We can protest as we try to reach our ideals. And we can disagree about the method of protest or the ideals themselves. But let's consider the point and be respectful of one another as we try to work through our differences. Brandon Marshall stated this position especially well. He explained, "I'm not against the military. I’m not against the police or America. I’m just against social injustice.”

Businesses, like people, have the right to associate with those they choose, and consumers (in turn) have a right to respond.  That is not just free speech, it is how a free market operates. 

Th United States, to me, is a great, yet greatly flawed, nation. The flag (and our national anthem) can represent the best of this nation and its people. The song and flag, like almost anything related to this nation that is more than 200 years old, also has ties to some of our very worst history, including slavery. That is also a reality. We have real and significant remaining institution problems related to race and gender, even if we're better than we used to be.  

No matter what, the national anthem and the flag are neither bigger than, nor more important than, the citizens they are intended to represent. Speaking freely, even when it is not popular, is honoring the best of what the flag should represent, the best of this nation’s history, and (I sincerely hope) a sign of a great future. Free speech is not a liberal or conservative issue, and exercising our right to speak should be celebrated, whether you agree with the speech or not.  Free speech begets free markets. 

“All we say to America is, ‘Be true to what you said on paper.’ If I lived in China or even Russia, or any totalitarian country, maybe I . . . could understand the denial of certain basic First Amendment privileges, because they hadn’t committed themselves to that over there. But somewhere I read of the freedom of assembly. Somewhere I read of the freedom of speech. Somewhere I read of the freedom of press. Somewhere I read that the greatness of America is the right to protest for right.”
— Martin Luther King, Jr., Civil Rights Leader

 

“We are so concerned to flatter the majority that we lose sight of how very often it is necessary, in order to preserve freedom for the minority, let alone for the individual, to face that majority down.”
— William F. Buckley Jr., founder of National Review magazine

 

“We cannot have a society half slave and half free; nor can we have thought half slave and half free. If we create an atmosphere in which [people] fear to think independently, inquire fearlessly, express themselves freely, we will in the end create the kind of society in which [people] no longer care to think independently or to inquire fearlessly.”
— Henry Steele Commager, U.S. historian

 

September 13, 2016 in Corporations, Current Affairs, Human Rights, Joshua P. Fershee, Law and Economics, Sports | Permalink | Comments (2)

Tuesday, September 6, 2016

Private Ordering in the Uncorporation: Modified and Eliminated Fiduciary Duties Are Often the Same Thing

What does it mean to opt out of fiduciary duties?  In follow-up to my co-blogger Joan Heminway's post, Limited Partnership Law: Should Tennessee Follow Delaware's Lead On Fiduciary Duty Private Ordering?, I will go a step further and say all states should follow Delaware's lead on private ordering for non-publicly traded unincorporated business associations. 

Here's why:  At formation, I think all duties between promoters of an unincorporated business association (i.e., not a corporation) are always, to some degree, defined at formation. This is different than the majority of other agency relationships where the expectations of the relationship are more ingrained and less negotiated (think employee-employer relationship).  

As such, I'd make fiduciary duties a fundamental right by statute that can be dropped (expressly) by those forming the entity.  I'd put an additional limit on the ability to drop fiduciary duties: the duties can only be dropped after formation if expressly stated in formation documents (or agreed unanimously later). That is, if you didn't opt out at formation, tell all those who could potentially join the entity how you can change fiduciary duties later. This helps limit some (though not all) freeze-out options, and I think it would encourage investors to check the entity documents closely (as they should).

At formation, the concerns we might have of, for example, an employee without fiduciary duties, are not the same as they are for co-venturers. Those starting an entity have long negotiated what is a breach of the duty of loyalty, for example.  In contrast, I think fiduciary duties in most employer-employee (and similar) relationships reflect the majoritarian default and they facilitate the relationship existing at all. For LLCs and partnership entities, I think that's less clear. Entity formation is relatively rare compared to how often we enter other agency relationships, and they almost always involve significant negotiation (if not planning).  And if they don't, the rules we expect traditionally should be the default. But where the parties talk about it, and they usually do, allowing a more robust sense of freedom of contract has value.  

Even in Delaware, where one can negotiate out of fiduciary duties, there remains the duty of good faith and fair dealing. I think of that as meaning that the parties still have a right to the essence of the contract.  That is, the contract has to mean something.  It has to have had a purpose and potential value at formation, and no party can eliminate that.  But, the parties only have a right to what was bargained for.  As such, what we might traditionally consider a breach of the duty of loyalty could also breach the duty of good faith and fair dealing, but a traditional breach of the duty of loyalty might not be sufficient to find liability where there is expressly no duty of loyalty. Instead, the act must so contradict the purpose of the contract that it rises to the level of a breach the duty of good faith and fair dealing. 

Part of the reason I support this option is that I think case law has already validated it, but in such an inartful manner that it confuses existing doctrine. See, e.g.McConnell v. Hunt Sports Enterprises132 Ohio App. 3d 657, 725 N.E.2d 1193 (Ct. App. 1999) (“An LLC, like a partnership, involves a fiduciary relationship. Normally, the presence of such a relationship would preclude direct competition between members of the company. However, here we have an operating agreement that by its very terms allows members to compete with the business of the company.”).

In closing, I will note that I am all for express provisions that require investors to pay attention at the outset. I don't believe in helping cheaters hide the ball. I just think law that encourages investors and others joining new ventures to pay attention is useful and will provide long-term value to entities.  I don't think that eliminated fiduciary duties at formation raise any more of a risk than we already have with limited or modified fiduciary duties at formation. With the more limited protections described above, freedom of contract should reign. 

September 6, 2016 in Corporations, Delaware, Joan Heminway, Joshua P. Fershee, Legislation, LLCs, Negotiation, Partnership, Unincorporated Entities | Permalink | Comments (1)

Tuesday, August 30, 2016

Criminal LLC Law: Shares in a What?

So, I am very anti-fraud, and I think cheaters should not prosper.  But I also think courts should know what they are talking about, especially in criminal cases. The following is from a new Second Circuit case: 
Although we review claims of insufficiency de novo, United States v. Harvey, 746 F.3d 87, 89 (2d Cir. 2014), it is well recognized that “a defendant mounting such a challenge bears a heavy burden” because “in assessing whether the evidence was sufficient to sustain a conviction, we review the evidence in the light most favorable to the government, drawing all inferences in the government's favor and deferring to the jury's assessments of the witnesses' credibility.”  . . . 
[W]e reject Jasmin's challenge to her Hobbs Act conviction. The evidence presented at trial more than sufficiently describes the consideration received by Jasmin in exchange for her official actions as Mayor, including the $5,000 in cash from Stern, “advance” cash for their partnership, and shares in the limited liability corporation that would develop the community center.
United States v. Jasmin, No. 15-2546-CR, 2016 WL 4501977, at *2 (2d Cir. Aug. 29, 2016). 
 
I can't actually figure out exactly what's going on here, but I know a few things: (1) "advance" cash for a partnership probably needs to be assessed more closely because, what partnership? and (2) there should not be shares in a "limited liability corporation." Or maybe there should be, if they just mean "corporation." But I think they mean an LLC, which should provide membership interests.  At a minimum, I would love to see a court call people out in such situations for perpetrating frauds with incorrect entity forms. Yeah, I'm that kind of law nerd. 

August 30, 2016 in Corporations, Joshua P. Fershee, LLCs, Shareholders, White Collar Crime | Permalink | Comments (2)

Tuesday, August 23, 2016

New Paper: Political Theories and Fiduciary Duities

I am still working my way through this new paper, Seeking an Angle of Repose in U.S. Business Organization Law: Fiduciary Duty Themes and Observations, from J. William Callison of Faegre Baker Daniels LLP. It's an interesting premise, and worth a look. Here's the abstract:

This article applies liberal, neoliberal, critical, feminist and communitarian political theories to limited liability company and partnership fiduciary duty law; discusses developments in that law over the last two decades by focusing on theory; suggests a pragmatic and balanced approach to fiduciary duty law that incorporates desirable features of different approaches; and suggests that law, as developed in uniform acts, has been moving toward a balanced approach.

The paper is available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827771

August 23, 2016 in Joshua P. Fershee | Permalink | Comments (0)

Friday, August 19, 2016

A Look at Investor Risk and Community Risk In Private Prisons

The concept of private prisons has always seemed off to me.  Prisons have a role in society, but the idea of running such institutions for profit, it seems to me, aligns incentives in an improper way. The U.S. Justice Department apparently agrees and said yesterday that it plans to end the use of private prisons.  The announcement sent stocks tumbling for two private prison companies, Corrections Corp. of America (CCA) and GEO.  Both dropped as much as 40% and remain down more than 30% from where they were before the announcement.   

Obviously, this can't make shareholders happy, but I figured this had to be a known risk. I was right -- CCA's 10-K makes clear that such government decisions related to future contracts could lead to a reduction in their profitability.  So, the disclosure seems proper from a securities regulation perspective. Still, reading the disclosure raises some serious questions for me about the proper role of government.  I frankly find this kind of outsourcing chilling.  For example, CCA states: 

Our results of operations are dependent on revenues generated by our jails, prisons, and detention facilities, which are subject to the following risks associated with the corrections and detention industry.

We are subject to fluctuations in occupancy levels, and a decrease in occupancy levels could cause a decrease in revenues and profitability.  . . . We are dependent upon the governmental agencies with which we have contracts to provide inmates for our managed facilities.

. . . .

We are dependent on government appropriations and our results of operations may be negatively affected by governmental budgetary challenges. . . . [and] our customers could reduce inmate population levels in facilities we own or manage to contain their correctional costs. . . .

The idea of "customers" in this contest simply does not sit well with me.  It suggests a desire for something that is not a positive. CCA's 10-K continues: 

Competition for inmates may adversely affect the profitability of our business. We compete with government entities and other private operators on the basis of bed availability, cost, quality, and range of services offered, experience in managing facilities and reputation of management and personnel. While there are barriers to entering the market for the ownership and management of correctional and detention facilities, these barriers may not be sufficient to limit additional competition. In addition, our government customers may assume the management of a facility that they own and we currently manage for them upon the termination of the corresponding management contract or, if such customers have capacity at their facilities, may take inmates currently housed in our facilities and transfer them to government-run facilities. . . .

Competition is a good thing in many (I think most), but this is not one of them. These companies are responding to the existing demand for prison services, but there can be no question the real opportunity for market growth is to increase demand for such services (e.g., increase the number of prisoners, seek longer sentences).  This, too, is made clear in the disclosures:

Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional and detention facilities. This possible growth depends on a number of factors we cannot control, including crime rates and sentencing patterns in various jurisdictions, governmental budgetary constraints, and governmental and public acceptance of privatization. The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them. Immigration reform laws are currently a focus for legislators and politicians at the federal, state, and local level. Legislation has also been proposed in numerous jurisdictions that could lower minimum sentences for some non-violent crimes and make more inmates eligible for early release based on good behavior. Also, sentencing alternatives under consideration could put some offenders on probation with electronic monitoring who would otherwise be incarcerated. Similarly, reductions in crime rates or resources dedicated to prevent and enforce crime could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities. 

CCA does note that their "policy prohibits [them] from engaging in lobbying or advocacy efforts that would influence enforcement efforts, parole standards, criminal laws, and sentencing policies." These disclosures, though, sure make clear what kind of policies their shareholders would want to support.  

I don't have any illusion that government run prisons are much (if any) better, but I do think that government's incentives are at least supposed to be aligned with the public good when it comes to the prison system.  I often think government should take a more limited role than it does when it comes to regulations.  That is especially true when it comes to criminal law. But privatizing prisons is not reducing the role of government in our lives -- it is simply outsourcing one key portion of the government's role.  Private prisons do not equate to smaller government. Fewer laws, or relaxed enforcement and punishment, do. If the government is paying for it, it's still a government program.  

Here's hoping that the reduction in use of private prisons leads to a reduction in the use of all prisons.  Let's save those for truly the dangerous folks.  

August 19, 2016 in Corporations, Current Affairs, Human Rights, Joshua P. Fershee, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, August 16, 2016

Back to (Law) School: More Advice for New 1Ls

Whether we're ready or not (we mostly are), classes start tomorrow for West Virginia University College of Law. Orientation for new students started last week, and I had the chance to teach a group of our new students. I had three sessions with the group where we discussed some cases, how to brief a case, and did some writing exercises.  It's been a while since I worked with first-year students, and it was a lot of fun.  

In addition to the assigned work, I answered a lot of questions, in and out of the classroom.  Questions focused mostly on how to succeed as a law student. Although there's plenty of advice on the internet, and whole books dedicated to subject, and even my own blog posts.  Last year, I provided my Ten Promises For New Law Students to Consider.   This year, I had enough similarly themed questions, that I thought I'd add some detail to my basic advice for new law students. 

1) Do the work. 

Some students ask -- if I work law school like a job, is that a good idea?  As with everything, it depends.  I don't know how you work.  If you work regular hours, every day, where you focus on the task before you, then it can work well.  If you're someone who sits in front of a computer doing everything but your work until a deadline is looming, it's not so likely to work for you. 

So, if you work it like a job where you are the boss, and you have no employees.  And the work absolutely has to get done, then yes.  There will be days when you can work a normal 8 to 5 with a lunch break and get your work done, and there will be times when 80 hours a week is insufficient. If you work until the job is done, you'll be served well.  

1A) Doing the work does not mean looking at the cases.

Reading for class is not about checking the box. There may have been times when "looking" at all 40 pages that were assigned would do the trick. Maybe as an undergrad.  Of course, I was a mostly terrible undergrad, so I didn't even do that often enough.  But law school is about figuring out what matters. That means you need to read the cases more than once.  I have seen twice as the rule of thumb, though I think three times is the right place to start.  It's not just about recognizing that something happened.  It's knowing what happened and what that means, in the context of the case and beyond.  And that requires time and careful reading. And, by the way, class is far more interesting when you know what's being discussed. Seriously. 

2) Be a good classmate and be the best possible you.

You can be competitive without being a jerk.  Your competition is really with yourself.  UCLA basketball coach John Wooden always reminded his players to be the best they could be -- not to try to be better than someone else.  If you always use someone else as the bench mark, you may be holding yourself back, even if you do better than them.  Try to remember that. There will be people who are better than you, at some point, at everything.  Be the best you that you can be.  Good things will follow.  And if it doesn't go as well as you hoped, if you did the work the best you could, you will still be okay.  (See 1 and 1A above.) 

3) Most people aren't cheating, but if they are, turn them in.

Every once in a while, I hear some students who are convinced that there is rampant cheating. "Some people worked together on their memo." Maybe, but usually not.  "Someone's (uncle/sister/cousin) who is a (prosecutor/M&A lawyer/judge), wrote their memo!"  Probably not.   Most lawyers understand the ethical problems with that. And who wants to write another law school memo after you passed the bar exam?  It would take a pretty odd combination of work ethic and lack of basic morals to make that a common occurrence.   

But even worse -- give us some evidence if you do know something.  Or some names, and we will investigate.  I hate cheating, and I want it stopped.  I went to law school with my wife, and we didn't even leave out any of our legal writing materials in our home.  The rules matter.  And you need to practice following them from day one.  That said, I don't think most of my students are or were cheaters, and they have rarely given me any reason to doubt their integrity.  

More than once over the years, I have also heard students say, "well, I don't want to hurt anyone's career."  First, what?  If you know someone is not following the rules, they need to be turned in. Lawyers have such an obligation, though I think it is one that is not often enough fulfilled.  I have heard of attorneys who had opposing counsel forge their signature, and the attorney still did not turn them in.  If we allow it, it continues.  

In addition, I have also heard students say, "I can't prove it, but I KNOW they are cheating."  If you can't point to facts that show it it, you probably don't KNOW, anything.  Your strongly suspect. And might be wrong. Don't forget, lots of people posture when they are stressed or fearful.  Focus on your work, and good things are likely to follow. 

4) Everything is harder.

I wonder if poor grades are sometimes the reason some students decided others are cheating.  I suspect it is sometimes.  The numbers suggest that most of our students are used to getting good grades, so a B can seem like something went wrong.  But law school is the next step up.  I often use a sports analogy -- law school is like an athlete going from college to the pros (or the olympics).  The competition is better because everyone at the next level has a better skill set.  If there is a curve (and there usually is, official or unofficial, in the first year), then students are being compared to one another.  It's not just how well did you do -- it's how well did you do relative to others.  That may seem unfair, but those are (usually) the rules.  Be prepared to work hard, and know others will be, too.  There is room for everyone to succeed, but not everyone can be at the top.  

5) You are not your grades.

Don't let a grade define you.  Your paper may be a C+.  But you are not.  Your A* (which was how the highest grade in the course was noted when I was in law school), doesn't make you an A*, either.  Your work can be a reflection of you, but it is not you. Sometimes things don't go well. Sometimes you might not have worked hard enough.  Sometimes you're sick.  And, yes, sometimes the professor's view of the world is flawed.  Other times, a student might have studies three things all semester. And it's the three things tested on the exam.  You can only control your work and your effort.  You must react and respond to the rest.  

So, I know I am biased.  I loved law school. It's why I do what I do.  Not everyone will feel that way.  But give yourself a chance. Prepare. Engage. Ask questions. Be wrong.  And learn.  

Have a great year!  Oh, and by the way, take Business Organizations before your graduate.  It's pretty much essential.  

August 16, 2016 in Joshua P. Fershee, Law School, Teaching | Permalink | Comments (0)