Tuesday, August 15, 2017

Poor LLC Language Leads to Poor LLC Doctrine (And Unnecessary Veil Piercing)

Earlier this week, Professor Bainbridge posted California court completely bollixes up business law nomenclature, discussing Keith Paul Bishop's post on Curci Investments, LLC v. Baldwin, Cal. Ct. App. Case No. G052764 (Aug. 10, 2017).  The good professor, noting (with approval) what he calls my possibly "Ahabian" obsession with courts and their LLC references, says that "misusing terminology leads to misapplied doctrine."  Darn right.

To illustrate his point, let's discuss a 2016 Colorado case that manages to highlight how both Colorado and Utah have it wrong. As is so often the case, the decision turns on incorrectly merging doctrine from one entity type (the corporation) into another (the LLC) without acknowledging or explaining why that makes sense.  To the court's credit, they got the choice of law right, applying the internal affairs doctrine to use Utah law for veil piercing a Utah LLC, even though the case was in a Colorado court. 

After correctly deciding to use Utah law, the court then went down a doctrinally weak path.  Here we go:

Marquis is a Utah LLC. (ECF No. 1 ¶ 7.) Utah courts apply traditional corporate veil-piercing principles to LLCs. See, e.g., Lodges at Bear Hollow Condo. Homeowners Ass'n, Inc. v. Bear Hollow Restoration, LLC, 344 P.3d 145, 150 (Utah Ct. App. 2015). The basic veil-piercing analysis requires two steps:
The first part of the test, often called the formalities requirement, requires the movant to show such unity of interest and ownership that the separate personalities of the corporation and the individual no longer exist. The second part of the test, often called the fairness requirement, requires the movant to show that observance of the corporate form would sanction a fraud, promote injustice, or condone an inequitable result.
Jones v. Marquis Properties, LLC, 212 F. Supp. 3d 1010, 1021 (D. Colo. 2016). 
 
First, say it with me: You Can’t Pierce the Corporate Veil of an LLC Because It Doesn't Have One.  Second, the so-called "the formalities requirement" is a problem for Utah LLCs if one looks at the Utah LLC Act. The Colorado court does not do that, and neither does the Utah court that decided Bear Hollow Restoration, upon which Colorado relied.  They should have. You see, Utah has adopted the Revised Uniform Limited Liability Act, and the Utah version states expressly: 
The failure of a limited liability company to observe formalities relating to the exercise of its powers or management of its activities and affairs is not a ground for imposing liability on a member or manager of the limited liability company for a debt, obligation, or other liability of the limited liability company.
Utah Code Ann. § 48-3a-304(b). So, that is at least potentially a problem, because the Utah test for the formalities requirement is supposed to be determined by looking at seven factors:
(1) undercapitalization of a one-[person] corporation; (2) failure to observe corporate formalities; (3) nonpayment of dividends; (4) siphoning of corporate funds by the dominant stockholder; (5) nonfunctioning of other officers or directors; (6) absence of corporate records; [and] (7) the use of the corporation as a facade for operations of the dominant stockholder or stockholders....
Lodges at Bear Hollow Condo. Homeowners Ass'n, Inc. v. Bear Hollow Restoration, LLC, 344 P.3d 145, 150 (Utah App. 2015).
 
I know some will argue I am being overly formalistic in highlighting how corporate focused these factors are, but this is problematic.  Virtually all of these factors must, at a minimum, be contorted to apply to LLCs.  If the test is going to be applied, the least a court should do is to rewrite the test so it refers LLCs specifically.  Why? Well, primarily because in doing so, it would make clear just how silly these factors are when trying to do so.  (For example, LLCs don't have stockholders, corporate funds, dividends, and generally don't have an obligation to have officers or directors.) 

 The Marquis Properties court skips actually applying the test saying simply that an SEC investigation report was sufficient to allow veil piercing. The court determined that an SEC report establishes that sole member of the LLC used the entity "to create the illusion of profitable investments and thereby to enrich himself, with no ability or intent to honor" the LLC's obligations. "Given this, strictly respecting [the LLC's] corporate form [ed. note: UGH] would sanction [the member's] fraud."  The Court then found that veil-piercing was appropriate to hold the member "jointly and severally liable for the amounts owed by" the LLC to the plaintiffs.

But veil piercing is both neither appropriate nor necessary in this case.  In discussing the SEC report earlier in the case, the court found that "all elements of mail and wire fraud are present." I see nothing that would absolve either the LLC as an entity of liability for the fraud and I see no reason why the member of the LLC would not be personally liable for the fraud he committed purportedly on behalf of the LLC and for his own benefit.  

This case illustrates another problem with veil piercing: both courts and lawyers are too willing to jump to veil piercing when simple fraud will do. This case illustrates clearly that fraud was evident, and fraud should be sufficient grounds for the plaintiffs to recover from the individual committing fraud. That means the entire veil piercing discussion should be treated as dicta. The entity form did not create this problem, and the entity form does not need to be disregarded, at least as far as I can tell, to allow plaintiffs to recover fully.  Before even considering veil piercing, a court should be able to state clearly why veil piercing is necessary to make the plaintiff whole. Otherwise, you end up with bad case law that can lead to bad doctrine, which leads to inefficient courts and markets.  

Oh, and while I'm at it, Westlaw needs to get their act together, too.  The Westlaw summary and headnotes say "limited liability corporation (LLC)" five times in connection with this case.  Come on, y'all.  

 

August 15, 2017 in Business Associations, Corporations, Joshua P. Fershee, Lawyering, LLCs, Shareholders, Unincorporated Entities | Permalink | Comments (0)

Wednesday, August 9, 2017

AALS Section on Business Associations Call for Papers: Institutional Investors and Corporate Governance

Call for Papers (DEADLINE: August 24, 2017)

AALS Section on Business Associations

Institutional Investors and Corporate Governance

AALS Annual Meeting, January 5, 2018

The AALS Section on Business Associations is pleased to announce a Call for Papers for a joint program to be held on Friday, January 5, 2018 at the 2018 AALS Annual Meeting in San Diego, California.  The topic of the program is “Institutional Investors and Corporate Governance.”

In thinking through the difficulty of agency costs within the public corporation, corporate law academics have turned repeatedly to institutional investors as a potential solution.  The agglomeration of shares within a large investing firm, together with ongoing cooperation amongst a large set of such investors, could overcome the rational apathy the average shareholder has towards participation in corporate governance.  Alternatively, activist investors could exert specific pressure on isolated companies that have been singled out—like the weakest animals in the herd—for extended scrutiny and pressure.  In these examples, the institutionalization of investing offers a counterbalance to the power of management and arguably provides a systematized way of reorienting corporate governance.  These institutional-investor archetypes have, in fact, come to life since the 1970s and have disrupted the stereotype of the passive investor.  But have we achieved a new and stable corporate governance equilibrium?  Or have we instead ended up with an additional set of agency costs – the separation of ownership from ownership from control?  This program seeks to explore these questions and assess the developments in the field since the beginning of the new century. 

The program is cosponsored by the Section on Securities Regulation.

Form and length of submission

Eligible law faculty are invited to submit manuscripts or abstracts that address any of the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of final manuscripts.  Any unpublished manuscripts (including unpublished manuscripts already accepted for publication) may be submitted for consideration.  Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.

The initial review of the papers will be blind.  Accordingly, the author should submit a cover letter with the paper.  However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school.  The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes. 

 

Deadline and submission method

To be considered, manuscripts or abstracts must be submitted electronically to Professor Matthew Bodie, Chair-Elect of the Section on Business Associations, at  mbodie@slu.edu.  Please use the subject line: “Submission: AALS BA CFP.”  The deadline for submission is Thursday, August 24, 2017.  Papers will be selected after review by members of the Executive Committee of the Section on Business Associations.  The authors of the selected papers will be notified by Thursday, September 28, 2017.

 

Eligibility

Full-time faculty members of AALS member law schools are eligible to submit papers.  The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members; graduate students; fellows; non-law school faculty; and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.

The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

August 9, 2017 in Business Associations, Call for Papers, Conferences, Current Affairs, Joshua P. Fershee, Research/Scholarhip | Permalink | Comments (0)

Tuesday, August 8, 2017

GRE or LSAT? Careful: More Options for Schools Means More Options for Students, Too

TaxProf Blog has been passing along the news of law schools choosing to allow applicants to substitute the GRE in place of the LSAT. The most recent post: Georgetown Is Fourth Law School To Accept GRE For Admissions, Finds It Is Just As Accurate As LSAT In Predicting 1L Grades; LSAC Disagrees, Says 'The Rest Of The Top 14 Will Go Like Lemmings Off The Cliff'.

As to the substance of the matter, I don't feel too strongly.  It is my suspicion that combining grade point average with any standardized test (including GMAT and MCAT, along with GRE and LSAT) would do a reasonably good job of predicting success in law school. Sure, the MCAT  would likely be less on target, but probably not that much, especially when we're talking about highly selective schools like Georgetown and Northwestern.  

The value of competition in the testing marketplace does seem valuable to me in a few ways..  For one thing, the LSAT is still administered like it is 1989 (as Christine Hurt noted a while back). There would be value in making the LSAT more accessible, and it is is at least plausible that the highly limited access to the LSAT is negatively impacting the number of students choosing to apply to law school.  LSAC would be well served to catch up with the other tests (that are now offered with more regular testing dates and sometimes online) to give prospective law students more options. 

In addition, I think there is value in letting students have options.  I know there are some concerns that students taking the GRE might apply to law school without really thinking it through because it's easy, but I think that risk is limited.  For one thing, just taking the LSAT doesn't mean someone thought that hard about law school. It just means that planned ahead.  A little. There would be flaky GRE-taking law students, but there'd be highly motivated GRE-taking students who were thinking about a master's degree but would be great law students.

One thing some schools might be missing, though, is that the GRE thing swings both way. That is, if the GRE is acceptable for law school applications, students planning on law school might now choose to take the GRE and end up considering other kinds of graduate programs.  Schools looking to expand their pool may be creating competition in places that did not exist before (or was much milder).  

Ultimately, I support creating more options for students so that they can make better decisions about their future.  As long as the testing option (LSAT, GRE, etc.) serves as a reasonably good predictor of law school and bar passage success (and I think that is still an open question), I am okay with it.  I hope schools that chose to accept the GRE are doing so with an expectation that the admitted students will do well, and I hope schools monitor their students so that adjustments can be made if success rates are not as anticipated.  That, to me, is the biggest issue: whatever we do, we need to make sure we're delivering on our educational promises, regardless of how we assess our potential students' likelihood of success.  

 

August 8, 2017 in Joshua P. Fershee, Law School, Teaching | Permalink | Comments (0)

Tuesday, August 1, 2017

More on Corporations, Accountability, and the Proper Locus of Power

My colleague, Joan Heminway, yesterday posted Democratic Norms and the Corporation: The Core Notion of Accountability. She raises some interesting points (as usual), and she argues: "In my view, more work can be done in corporate legal scholarship to push on the importance of accountability as a corporate norm and explore further analogies between political accountability and corporate accountability."

I have not done a lot of reading in this area, but I am inclined to agree that it seems like an area that warrants more discussion and research.  The post opens with some thought-provoking writing by Daniel Greenwood, including this:  

Most fundamentally, corporate law and our major business corporations treat the people most analogous to the governed, those most concerned with corporate decisions, as mere helots. Employees in the American corporate law system have no political rights at all—not only no vote, but not even virtual representation in the boardroom legislature.
Joan correctly observes, "Whether you agree with Daniel or not on the substance, his views are transparent and his belief and energy are palpable." Although I admit I have not spent a lot of time with his writing, but my initial take is that I do not agree with his premise. That is, employees do have political rights, and they have them where they belong: in local, state, and federal elections.  Employees, in most instances, do not have political rights within their employment at all.  Whether you work for the government, a nonprofit, or a small sole proprietorship, you don't generally have political rights as to your employment.  You may have some say in an employee-owned entity, and you may have some votes via union membership, but even there, those votes aren't really as to your employment specifically. 
 
The idea of seeking democratic norms via the corporate entity itself strikes me as flawed.  If people don't like how corporations (or other entities) operate, then it would seem to me the political process can solve that via appropriate legislation or regulation. That is, make laws that allow entities to do more social good if they are so inclined. Or even require entities to do so, if that's the will of the people (this is not a recommendation, merely an observation).  Scholars like Greenwood and others continue to make assertions that entities cannot make socially responsible choices. He states, " The law bars [corporations], in the absence of unanimous consent, from making fundamental value choices, for example, from balancing the pursuit of profit against other potential corporate goals, such as quality products, interests of non-shareholder participants or even the actual financial interests of the real human beings who own the shares."  And judges and scholars, like Chancellor Chandler and Chief Justice Strine, have reinforced this view, which, I maintain, is wrong (or should be).  
 
Professor Bainbridge has explained, "The fact that corporate law does not intend to promote corporate social responsibility, but rather merely allows it to exist behind the shield of the business judgment rule becomes significant in -- and is confirmed by -- cases where the business judgment rule does not apply." Todd Henderson similarly argued, and I agree, 
Those on the right, like Milton Friedman, argue that the shareholder-wealth-maximization requirement prohibits firms from acting in ways that benefit, say, local communities or the environment, at the expense of the bottom line. Those on the left, like Franken, argue that the duty to shareholders makes corporations untrustworthy and dangerous. They are both wrong.
I don't disagree with Joan (or with Greenwood, for that matter), that accountability matters, but I do think we should frame accountability properly, and put accountability where it belongs.  That is political accountability and corporate accountability are different. As I see it, corporations are not directly accountable to citizens (employees or not) in this sense (they are in contract and tort, of course). Corporations are accountable to their shareholders, and to some degree to legislators and regulators who can modify the rules based on how corporations act.  Politicians, on the other hand, are accountable to the citizens.  If citizens are not happy with how entities behave, they can take that to their politicians, who can then choose to act (or not) on their behalf.  
 
I think entities should consider the needs of employees, and I believe entities would be well served to listen to their employees. I happen to think that is good business. But I think the idea that employees have a right to a formal voice at the highest levels within the entity is flawed, until such time as the business itself or legislators or regulators decide to make that the rule. (I do not, to be clear, think that would be a good rule for legislators or regulators to make for private entities.) The proper balance of laws and regulations is a separate question from this discussion, though. Here, the key is that accountability -- or, as Prof. Bainbridge says, "the power to decide" -- remains in the right place.  I am inclined to think the power structure is correct right now, and whether that power is being used correctly is an entirely different, and separate, issue.  

August 1, 2017 in Business Associations, Corporations, CSR, Delaware, Joan Heminway, Joshua P. Fershee, Legislation, Management, Research/Scholarhip, Shareholders, Social Enterprise | Permalink | Comments (1)

Tuesday, July 25, 2017

Priorities Matter: Energy and Beyond

I am speaking at a plenary session tomorrow during the the Energy Impacts Symposium at the Nationwide & Ohio Farm Bureau 4-H Conference Center in Columbus, Ohio. The program is exciting, and I look forward to being a part of it.  The program is described as follows: 

Energy Impacts 2017 is a energy research conference and workshop, organized by a 9-member interdisciplinary steering committee, focused on synthesis, comparison, and innovation among established and emerging energy impacts scholars from North America and abroad. We invite participation from sociologists, geographers, political scientists, economists, anthropologists, practitioners, and other interested parties whose work addresses impacts of new energy development for host communities and landscapes.

The pace, scale, and intensity of new energy development around the world demands credible and informed research about potential impacts to human communities that host energy developments. From new electrical transmission lines needed for a growing renewable energy sector to hydraulically fracturing shale for oil and gas, energy development can have broad and diverse impacts on the communities where it occurs. While a fast-growing cadre of researchers has emerged to produce important new research on the social, economic, and behavioral impacts from large-scale energy development for host communities and landscapes, their discoveries are often isolated within disciplinary boundaries.

Through facilitated interactive workshop activities, invited experts and symposium participants will produce a roadmap for future cross-disciplinary research priorities.

I will be talking about Community Development and the North Dakota Sovereign Wealth Fund, and we'll discuss the implications of the resource curse.  I am of the view that the resource curse is correlative, not causative, and that natural resource extraction can prove harmful to local communities, but that it doesn't have to be.  From North Dakota's $4.33 billion fund to Norway's Government Pension Fund Global, there are examples of funding that can provide for the future. But there are numerous examples of struggling communities and bankrupt local governments where funds benefited few. And even North Dakota and Norway provide stark contrasts in how the funds are used. The point, for me, is that generalizations overstate the role of the resource and understate the role of local decision making.  What we prioritize matters, and often, I think, we can do better.  It's not preordained.  We can do better, as long as we decide to do so. 

July 25, 2017 in Behavioral Economics, Conferences, Jobs, Joshua P. Fershee, Law and Economics, Legislation, Research/Scholarhip | Permalink | Comments (0)

Tuesday, July 18, 2017

Long Live Director Primacy: Social Benefit Entities and the Downfall of Social Responsibility

The more I read about social enterprise entities, the less I like about them.  In 2014, my colleague Elaine Wilson and I wrote March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well?  We observed:

Regardless of jurisdiction, there may be value in having an entity that plainly states the entity’s benefit purpose, but in most instances, it does not seem necessary (and is perhaps even redundant). Furthermore, the existence of the benefit corporation opens the door to further scrutiny of the decisions of corporate directors who take into account public benefit as part of their business planning, which erodes director primacy, which limits director options, which can, ultimately, harm businesses by stifling innovation and creativity.  In other words, this raises the question: does the existence of the benefit corporation as an alternative entity mean that traditional business corporations will be held to an even stricter, profit-maximization standard?

I am more firmly convinced this is the path we are on.  The emergence of social enterprise enabling statutes and the demise of director primacy threaten to greatly, and gravely, limit the scope of business decisions directors can make for traditional for-profit entities, threatening both social responsibility and economic growth. Recent Delaware cases, as well as other writings from Delaware judges, suggest that shareholder wealth maximization has become a more singular and narrow obligation of for-profit entities, and that other types of entities (such as non profits or benefit corporations) are the only proper entity forms for companies seeking to pursue paths beyond pure, and blatant, profit seeking. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, to the detriment of employees, society, and, yes, shareholders. 

I know there are some who believe that I see the sky falling when it's just a little rain. Perhaps. I would certainly concede that the problems I see can be addressed through law, if necessary.  I am just not a big fan of passing some more laws and regulations, so we can pass more laws to fix the things we added.  My view of entity purpose remains committed to the principle of director primacy.  Directors are obligated to run the entity for the benefit of the shareholders, but, absent fraud, illegality, or self-dealing, the directors decide what actions are for the benefit of shareholders. Period, full stop.  

July 18, 2017 in Corporations, Delaware, Joshua P. Fershee, Legislation, Management, Shareholders, Social Enterprise | Permalink | Comments (4)

Tuesday, July 11, 2017

Central States Law Schools Association 2017 Scholarship Conference

I received this morning an announcement for the Central States Law Schools Association (CSLSA) 2017 Scholarship Conference, and I wanted to pass it along.  When I started teaching, I participated in this CSLSA conference, and I found it to be incredibly useful. It was helpful both in sharing my work in a supportive, yet rigorous, setting, and it also allowed me to meet some great people. I think the program is useful people at all levels, but I would especially encourage newer scholars to participate.  Get to know people at other schools and get used to sharing your work.  A good scholarly community outside of your law school is a valuable asset.  
 
Registration is Open for the CSLSA 2017 Conference
 
Registration is now open for the Central States Law Schools Association 2017 Scholarship Conference, which will be held on Friday, October 6 and Saturday, October 7 at Southern Illinois University School of Law in Carbondale, Illinois. We invite law faculty from across the country to submit proposals to present papers or works in progress.

CSLSA is an organization of law schools dedicated to providing a forum for conversation and collaboration among law school academics. The CSLSA Annual Conference is an opportunity for legal scholars, especially more junior scholars, to present working papers or finished articles on any law-related topic in a relaxed and supportive setting where junior and senior scholars from various disciplines are available to comment. More mature scholars have an opportunity to test new ideas in a less formal setting than is generally available for their work. Scholars from member and nonmember schools are invited to attend. 

Please click here to register. The deadline for registration is September 2, 2017.  

Hotel rooms are now available for pre-booking.  The conference hotel is the Holiday Inn Conference Center in Carbondale.  To reserve a room, call 618-549-2600 and ask for the SIU School of Law rate ($109/night) or book online and use block code SOL.  SIU School of Law will provide shuttle service to and from the Holiday Inn & Conference Center for conference events.  Other hotel options (without shuttle service) are listed on our website.  Please note that conference participants are responsible for all of their own travel expenses including hotel accommodations.

For more information about CSLSA and the 2017 Annual Conference please subscribe to our blog.

July 11, 2017 in Call for Papers, Joshua P. Fershee, Law School, Research/Scholarhip | Permalink | Comments (0)

Tuesday, June 27, 2017

The Business of Minor League Baseball: Antitrust Exemption May Be Wrong, But 9th Circuit is Right

Reuters reports that minor league baseball players lost a claim for artificially low" wages.  The court found, appropriately: "The employment contracts of minor league players relate to the business of providing public baseball games for profit between clubs of professional baseball players."

Samuel Kornhauser, the player's lawyer plan to ask the 9th Circuit to reconsider (probably en banc) or appeal to the U.S. Supreme Court. Kornhasuer, in an interview, stated: 

"Obviously, we think it's wrong, and that the 'business of baseball' is a lot different today than it was in 1922. There is no reason minor leaguers should not have the right to negotiate for a competitive wage."

Kornhauser is certainly correct that things have changed in the last 100 years, though I would argue that the justification for the antitrust exemption was just as unfounded in 1922 as it is today. The origin is the Federal Baseball decision, and it was wrong then, and it is wrong now.  But it is also the law of the land. The 1998 Curt Flood Act, as the court appropriately explains, "made clear [Congress intended] to maintain the baseball exemption for anything related to the employment of minor league players."

There is no question Congress can change the law, and there is no question Congress has not. This is one to be resolved via negotiation or legislation, issue, and not via the courts.  

June 27, 2017 in Current Affairs, Joshua P. Fershee, Legislation, Sports | Permalink | Comments (0)

Tuesday, June 20, 2017

Summer "Work" Reading: Straight Man, by Richard Russo

A friend who is a member of a university faculty (non-law) some years ago recommended that I read Straight Man, by Richard Russo. I am forever thankful.  The book is a novel set in a small town in Pennsylvania and follows the trials and tribulations of an English-department faculty member at a college besieged by budget challenges, a dysfunctional department, and his own lack of motivation.   

The book is funny -- sometimes laugh-out-loud funny -- and for anyone on a faculty, I am willing to wager that, despite occasional absurdity, this faculty will feel like it could be yours.  The main character is sympathetic, to a point, but he is also part of the problem.  It is a fast read, and it's one I come back to every couple years.  Perhaps it is just a guilty pleasure, but the universality of the characters and the bit of hope that emerges are things I find to be comforting in some way. It may be that the book serves as a reminder that we're not alone in our craziness.  Everyone who has taught for a while knows a Hank, a Finny, a Gracie DuBois, Jacob Rose, a Billy Quigley.  

The book also a good reminder of traps we, as faculty (and administrators), can fall into, and hopefully, help us avoid them. If you need a break from research and heavy reading, I highly recommend you put this in the rotation. 

Here's the Amazon.com Review: 

First Jane Smiley came out of the comedy closet with Moo, a campus satire par excellence, and now Richard Russo has gotten in on the groves-of-academe game. Straight Man is hilarious sport, with a serious side. William Henry Devereaux Jr., is almost 50 and stuck forever as chair of English at West Central Pennsylvania University. It is April and fear of layoffs--even among the tenured--has reached mock-epic proportions; Hank has yet to receive his department budget and finds himself increasingly offering comments such as "Always understate necrophilia" to his writing students. Then there are his possible prostate problems and the prospect of his father's arrival. Devereaux Sr., "then and now, an academic opportunist," has always been a high-profile professor and a low-profile parent.

Though Hank tries to apply William of Occam's rational approach (choose simplicity) to each increasingly absurd situation, and even has a dog named after the philosopher, he does seem to cause most of his own enormous difficulties. Not least when he grabs a goose and threatens to off a duck (sic) a day until he gets his budget. The fact that he is also wearing a fake nose and glasses and doing so in front of a TV camera complicates matters even further. Hank tries to explain to one class that comedy and tragedy don't go together, but finds the argument "runs contrary to their experience. Indeed it may run contrary to my own." It runs decidedly against Richard Russo's approach in Straight Man, and the result is a hilarious and touching novel.

June 20, 2017 in Books, Joshua P. Fershee, Law School, Social Enterprise, Teaching | Permalink | Comments (0)

Tuesday, June 13, 2017

My Favorite Business Law Cases, Round 1: Sinclair Oil Corp. v. Levien (Del. 1971)

I am such a fan of Sinclair Oil Corp. v. Levien,  280 A.2d 717 (Del. 1971), that I use the case in both Business Organizations and in Energy Law. The case does a great job of giving a basic overview of parent-subsidiary relationships, some of the basic fiduciary duties owed in such contexts, and it sets up the discussion of why companies use subsidiaries in the first place. 

On fiduciary duties and when the intrinsic (entire) fairness test applies: 

A parent does indeed owe a fiduciary duty to its subsidiary when there are parent-subsidiary dealings. However, this alone will not evoke the intrinsic fairness standard. This standard will be applied only when the fiduciary duty is accompanied by self-dealing — the situation when a parent is on both sides of a transaction with its subsidiary. Self-dealing occurs when the parent, by virtue of its domination of the subsidiary, causes the subsidiary to act in such a way that the parent receives something from the subsidiary to the exclusion of, and detriment to, the minority stockholders of the subsidiary

On what test to apply to parent-subsidiary dividends: 

We do not accept the argument that the intrinsic fairness test can never be applied to a dividend declaration by a dominated board, although a dividend declaration by a dominated board will not inevitably demand the application of the intrinsic fairness standard. Moskowitz v. Bantrell, 41 Del.Ch. 177, 190 A.2d 749 (Del.Supr. 1963). If such a dividend is in essence self-dealing by the parent, then the intrinsic fairness standard is the proper standard. For example, suppose a parent dominates a subsidiary and its board of directors. The subsidiary has outstanding two classes of stock, X and Y. Class X is owned by the parent and Class Y is owned by minority stockholders of the subsidiary. If the subsidiary, at the direction of the parent, declares a dividend on its Class X stock only, this might well be self-dealing by the parent. It would be receiving something from the subsidiary to the exclusion of and detrimental to its minority stockholders. This self-dealing, coupled with the parent's fiduciary duty, would make intrinsic fairness the proper standard by which to evaluate the dividend payments.

. . . . The dividends resulted in great sums of money being transferred from Sinven to Sinclair. However, a proportionate share of this money was received by the minority shareholders of Sinven. Sinclair received nothing from Sinven to the exclusion of its [722] minority stockholders. As such, these dividends were not self-dealing. We hold therefore that the Chancellor erred in applying the intrinsic fairness test as to these dividend payments. The business judgment standard should have been applied. 

On whether shareholder of one subsidiary should be allowed to participate in ventures pursued by other subsidiaries: 

The plaintiff proved no business opportunities which came to Sinven independently and which Sinclair either took to itself or denied to Sinven. As a matter of fact, with two minor exceptions which resulted in losses, all of Sinven's operations have been conducted in Venezuela, and Sinclair had a policy of exploiting its oil properties located in different countries by subsidiaries located in the particular countries.

It makes sense for companies, often, to use subsidiaries to keep certain businesses well organized and to protect assets for shareholder.  That is, I might only want to invest in a subsidiary doing business in Mexico because I trust that the assets there are secure.  I may not want to participate in work in Venezuela, which I might deemed riskier.  And it's not just shareholders who might feel that way.  Creditors, too, may view such investments very differently and may only be willing to participate in ventures where the risks can be more easily assessed. 

June 13, 2017 in Case Law, Corporations, Joshua P. Fershee, Lawyering, Management, Venture Capital | Permalink | Comments (1)

Tuesday, June 6, 2017

GM Votes Show Value of Shareholder Proposals as a Process for Accountability

More than two years ago, I posted Shareholder Activists Can Add Value and Still Be Wrongwhere I explained my view on shareholder proposals: 

I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock.  I don't see activist shareholder as an inherently bad thing.  I do, however, think  it's bad when boards succumb to the whims of activist shareholders just to make the problem go away.  Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.    

Today, the Detroit Free Press reported that shareholders of automaker GM soundly defeated a proposal from billionaire investor David Einhorn that would have installed an alternate slate of board nominees and created two classes of stock.  (All the proposals are available here.) Shareholders who voted were against the proposals by more than 91%.  GM's board, in materials signed by Mary Barra, Chairman & Chief Executive Officer and Theodore Solso, Independent Lead Director, launched an aggressive campaign to maintain the existing board (PDF here) and the split shares proposal (PDF here).  GM argued in the board maintenance piece: 

Greenlight’s Dividend Shares proposal has the potential to disrupt our progress and undermine our performance. In our view, a vote for any of the Greenlight candidates would represent an endorsement of that high-risk proposal to the detriment of your GM investment.

Another shareholder proposal asking the board to separate the board chair and CEO positions was reported by the newspaper as follows: "A separate shareholder proposal that would have forced GM to separate the role of independent board chairman and CEO was defeated by shareholders." Not sure. Though the proposal was defeated, it's worth noting that the proposal would not have "forced" anything.  The proposal was an "advisory shareholder proposal" requesting the separation of the functions.  No mandate here, because such decisions must be made by the board, not the shareholders.  The proposal stated: 

Shareholders request our Board of Directors to adopt as policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it did not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all the necessary steps be taken to accomplish the above.

GM argued against this proposal because the "policy advocated by this proposal would take away the Board’s discretion to evaluate and change its leadership structure." Also not true.  It the proposal were mandatory, then this would be true, but as a request, it cannot and could not take away anything.  If the shareholders made such a request and the board declined to follow that request, there might be repercussions for doing so,  but the proposal would have kept in place the "Board’s discretion to evaluate and change its leadership structure."  

These proposals appear to have been properly brought, properly considered, and properly rejected.  As I suggested in 2015, shareholder activists can help improve long-term value, even when following the activists' proposals would not.  That is just as true today and these proposals may well prime the pumpTM for future board or shareholder actions.  That is, GM has conceded that its stock is undervalued and that change is needed.  GM argues those changes are underway, and for now, most voting shareholder agree.  But we'll see how this looks if the stock price has not noticeably improved next year.  An alternative path forward on some key issues has been shared, and that puts pressure on this board to deliver.  They can do it their own way, but they are on notice that there are alternatives.  An shareholders now know that, too.

This knowledge underscores the value of shareholder proposals as a process.  They can and should create accountability, and that is a good thing. I agree with GM that the board should keep control of how it structures the GM leadership team.  But I agree with the shareholders that if this board doesn't perform, it may well be time for a change.  

June 6, 2017 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Management, Securities Regulation, Shareholders | Permalink | Comments (0)

Tuesday, May 30, 2017

LLCs Are Not Corporations: "Corporate" Disclosure Edition

Regular readers know that I monitor courts and other legal outlets for improper references to LLCs as "limited liability corporations" when the writer means "limited liability companies." I get a Westlaw update every day. Really. Every day. So while it may seem that I write about examples a lot, I tend to think I am showing great restraint.  

At times, this is just a semantic issue, or at least a more amorphous "how one thinks about entities" issue.  Usually, at a minimum such cases can cause confusion about entity type and what laws apply, which may eventually lead courts to an improper analysis and application of the wrong laws.  It certainly leads some lawyers to incorrectly characterize their clients and their cases.  

For example, a recent case from the United States District Court for the Western District of Washington gets the law right, but still creates some potential confusion. Consider this excerpt: 

Cash & Carry asserts that the court's jurisdiction is based on diversity of citizenship. (Not. at 2.) For purposes of assessing diversity, the court must consider the domicile of all members of a limited liability company. Johnson v. Columbia Props. Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006) (“[A]n LLC is a citizen of every state of which its owners/members are citizens.”); see also Local Rules W.D. Wash. LCR 101(e). Plaintiff Deborah Markham alleges that she is a Washington resident. (Compl. (Dkt. # 2) ¶ 1.2.) However, neither the complaint nor the notice of removal identifies Cash & Carry's members or the domicile of those members. (See id. ¶ 1.3 (alleging that Cash & Carry is “a limited liability corporation formed under the laws of the State of Washington”); Not. at 2.)
DEBORAH MARKHAM, Plaintiff, v. CASH & CARRY STORES, LLC, et al., Defendants., No. C17-0746JLR, 2017 WL 2241136, at *1 (W.D. Wash. May 23, 2017) (emphasis added).  It'd have been great for the court to note that Cash & Carry's claim it was "a limited liability corporation" was incorrect.  Instead, the court then stated, "Furthermore, Cash & Carry's corporate disclosure statement fails to establish Cash & Carry's domicile. (CDS (Dkt. # 4).)" Id. As an LLC, Cash & Carry isn't "corporate," but because of the local rules for the Western District of Washington, it does have an obligation to make a "corporate disclosure." See U.S. Dist. Ct. Rules W.D. Wash., Civ LR 7.1.
 
Rule 7.1. Disclosure Statement

(a) Who Must File; Contents. A nongovernmental corporate party must file 2 copies of a disclosure statement that:

(1) identifies any parent corporation and any publicly held corporation owning 10% or more of its stock; or

(2) states that there is no such corporation.

(b) Time to File; Supplemental Filing. A party must:

(1) file the disclosure statement with its first appearance, pleading, petition, motion, response, or other request addressed to the court; and

(2) promptly file a supplemental statement if any required information changes.

However, in Washington, the Local Rule 7.1 adds to the requirements of the federal "disclosure statement":

CORPORATE DISCLOSURE STATEMENT

(a) Who Must File; Copies

Any nongovernmental party, other than an individual or sole proprietorship, must file a corporate disclosure statement identifying:

  1. any parent corporation and any publicly held corporation owning more than 10% of its stock;

  2. any member or owner in a joint venture or limited liability corporation (LLC);

  3. all partners in a partnership or limited liability partnership (LLP); or

  4. any corporate member, if the party is any other unincorporated association

If there is no parent, shareholder, member, or partner to list in response to items (1) through (4), a corporate disclosure statement must still be filed stating that no such entity exists.

In this instance, the Local Rule changes the disclosure to "corporate disclosure," when it would appear this is really an "ownership" or "financial interest" disclosure.  (And, while I am being picky, isn't it odd to have a subpart "a," when there is not subpart "b?" I suspect this subpart notation is to track subpart a of Federal Rule 7.1, but it still looks odd to me.)  
 
This is not the first time a local rule has created some potential trouble with regard to Federal Rule 7.1.  Back in January of this year I posted Oops: Oregon District Court Rule For LLCs that are Defined as Corporations, which discussed some different concerns for the Oregon District Court's expansion of Rule 7.1. I will note that the LLC reference in the Oregon District Court Local Rule remains incorrect
 
I am prepared for the "no harm, no foul" comment. And maybe that's right. But it still seems like courts (and lawyers) should be able to get this right more often. 

May 30, 2017 in Corporations, Joshua P. Fershee, Lawyering, LLCs | Permalink | Comments (0)

Tuesday, May 23, 2017

Just Because You Can, Doesn't Mean You Should, Detroit Lions Edition

Last weekend, retired NFL receiver Calvin Johnson made news when he revealed that he was not pleased with the Detroit Lions and how they handled his retirement. Johnson is apparently frustrated that the Lions required him to pay back about 10% of the  unearned $3.2 million remaining on his $16 million signing bonus from his 2012 contract. This is apparently a thing for the Lions, who sought all of the unearned signing bonus money remaining on Barry Sanders' contract when he abruptly retired in 1999.

This is in contrast to Tony Romo's retirement, in which the Dallas Cowboys released him, making the $5 million remaining on the signing bonus Romo's.  Cowboys owner Jerry Jones said he was following the “Do Right Rule” when he allowed the team to release him.  The Seattle Seahawks made a similar decision with Marshawn Lynch.  

Some have argued that Johnson is being "pettier" than the Lions in this spat.  Mike Florio, a sports writer and graduate of WVU College of Law, where I teach, argued that "while Johnson has every right to be miffed at the Lions, Johnson also should be miffed at himself. Or at whoever advised him to retire instead of biding his time until the Lions would have released him." Florio correctly notes that Johnson had a big cap number likely to come due had he not retired or accepted a restructured deal, so he was coming from a position of power in negotiating, which would have likely forced the Lions to cut him. Still, that doesn't mean Johnson is wrong to be frustrated.  

Perhaps Johnson didn't ever want to be cut in his career, even at that point in his carerr. Maybe he just wanted to retire.  The Lions were worried, perhaps about "precedent" that other players could use to walk away without paying back the bonus, though there is already such precedent out there, as discussed above, and the Lions have non-binding precedent already in the Barry Sanders case, where an arbitrator said Sanders had to pay back some of his signing bonus.  Beyond that, the response to most players would simply be, "I know we didn't ask Calvin Johnson for any money back. You're not Calvin Johnson." 

It is  true that the Lions could seek money from Johnson, and that Johnson almost certainly, from a legal sense, owed the money.  But having a legal right to something doesn't always mean it is a good idea.  And that is important for lawyers to remember.  The question I would have asked the Lions front office is this: "Is it really worth $320,000 when it is possible that one of your greatest players will feel disrespected by the process? Especially when you already created a rift with one of you other greatest players fifteen years ago?"  

Maybe it was asked, and the answer was yes, but I just don't see the upside.  My guess is that the Lions asked for a lot more and the two sides negotiated to this figure.  But that process, not the payment, is likely what irked Johnson.  Why does it matter? Because it tells future people the team wants, especially coaches and free agents, how the Lions do business.  And when choosing between two similar offers, that could very well lead one to choose the other team.  

I often use these kinds of issues facing a business when teaching the importance of the business judgment rule and allowing a board of directors not to pursue claims it can win (as long as there is no fraud or self dealing).  Sometimes, it is better for the entity to let a claim go than to extend a bad story or scare off potential talent.  Back in 2007, for example, Billy Donovan was hired to leave his head coaching job at the University of  Florida to lead the NBA's Orlando Magic.  Just days later, Donovan decided he did not want to leave Florida, and asked the Magic to let him return to the college game. The Magic decided to let him do so without any financial penalty, though they did ask him to agree not to coach in the NBA for five years.

Why let Donovan back out and return to Florida without a payment?  For one, the Magic needed to hire a new coach, and you want to send a message that you are a good employer.  Second, Donovan was beloved in Florida. He had won two NCAA championships in a key market for the team.  Don't irritate your prime audience is always a good bit of advice.  There was little upside to being difficult. The team was almost certainly irritated, but there is little value in letting that lead to bad publicity and unnecessary public spats. This principle extends well beyond the sports realm, but it is especially important in any area where employers fight for talent, which is common in the sports and entertainment areas. 

In assessing the legal (and business) options for the Calvin Johnson situation, good lawyering requires a recognition that key issues were likely related to perception and respect, not money.  As such, the fact that there was an argument about repayment at all was the issue that made Johnson frustrated (and now could have repercussions in the future free agent market).  It is certainly possible the Lions assessed this risk and decided it was worth it.  I disagree that it was worth it, but that would be a reasonable decision.  (As a life-long Lions fan, I will need more evidence the problem was properly assessed, though I do hold out hope for the new front office.) 

Such decisions, if made simply on the legal merits (e.g., Would I win in court?), run the risk of what Jeff Lipshaw calls "pure lawyering," which is essentially legal reasoning without context or assessment of non-legal impacts or opportunities. As Lipshaw explains in the preface to his book, Beyond Legal Reasoning, A Critique of Pure Lawyering

Legal reasoning is merely one way of creating meaning out of circumstances in the real world. In its pure form, it does nothing more than convert a real-world narrative to a set of legal conclusions that have no necessary connection either to truth or morality.

Or the ability to recruit free agents.  

May 23, 2017 in ADR, Compensation, Contracts, Corporate Personality, Current Affairs, Joshua P. Fershee, Lawyering, Sports | Permalink | Comments (1)

Tuesday, May 16, 2017

What is Loyalty?

This past week was a big one for loyalty stories.  First, we have the New York Times reporting that President Trump asked former FBI director James Comey for his pledge of loyalty, to which Comey apparently promised "honesty."  (The White House disputes this report.) 

Then, we have a high school quarterback in Illinois being forced to decommit from the University of Wisconsin's, apparently because he tweeted that the University of Georgia had offered him a scholarship.  The student called Wisconsin Coach Budmayr, telling him he had the offer and said he was "still 100% committed to the Badgers." The next day Budmayr apparently told him that he was no longer a good fit for Wisconsin and that he should keep looking.  The reason: lack of loyalty.  

Obviously, I only have the facts as they have been portrayed in these articles, and there are two sides to every story.  Nonetheless, these anecdotes got me to thinking about loyalty and how people tend to perceive the concept. 

To some, loyalty means fidelity.  This can be in the physical or emotional sense, as in the marriage context.  Some view extend it to ideological loyalty.  And to some, it means undying, uncompromising agreement and support.  It is this last idea that troubles me, because often it means that the loyalty is misguided. 

Merriam-Webster dictionary defines loyal as follows:

1. unswerving in allegiance: such a

a :  faithful in allegiance to one's lawful sovereign or government were loyal to the king    

b:  faithful to a private person to whom faithfulness is due a loyal husband

 c :  faithful to a cause, ideal, custom, institution, or product a loyal churchgoer

2. showing loyalty a loyal friend

3. obsolete :  lawful, legitimate

The Trump-Comey scenario is clearly type 1(a), but I think the same is true of the Badger football situation. The concept of requiring absolute loyalty to the cause as a prerequisite for being part of the team.  

The problem, of course, is what it means to be faithful and to whom.  In the Comey situation, Comey's loyalty is to the FBI, the country, and the truth, not the person in the White House. Trump has sort of acknowledged this, although it is not clear what the president had in mind if he really did ask Comey for such a pledge.  But it is clear that if Comey were to have pledged loyalty to the president, he would clearly have created the risk of compromising his loyalty to the country and the truth.  

For football, this is harder to define.  Is it to the team?  To the coach? To the other players?  To the program?  Everything? 

Blind allegiance is rarely a good thing, and can often lead to bad outcomes.  In the Badger football case, it seems the coach was either (a) looking to get out of the commitment and took an excuse, (b) really believes assurances from one of his commits are hollow, or (c) wanted to send a message about allegiance.  It is entirely possible it was some combination of the three. 

When it comes to the high school player, I can imagine a scenario where the player was excited to be pursued, and he was showing off a little.  Hard to blame a kid for that, frankly.  Despite assurances to the contrary, the Badger coach wanted none of it.  His team, his call, but I don't like it. 

In my view, loyalty runs two ways.  And loyalty should have room for misunderstandings, at a minimum, if not mistakes. Even it it doesn't, in the case of college player and college coach, the coach is the grown up.  He or she should act like it.  That means, if you have a real problem with the player, state it. And if you really don't want them any more, say it.  I have no idea what the coach said, and in fairness to him, he may be the one taking the high road here by not airing issues publicly. 

I can't say these stories raise any clear answers for me.  But they do raise questions about loyalty, and what it means.  I think that's worth thinking about, especially for lawyers and future lawyers. Both of these stories make me uncomfortable. It's worth it to me to think about why and what that means. And I think we should all spend a little time thinking about it. 

May 16, 2017 in Current Affairs, Joshua P. Fershee, Lawyering, Philosophy | Permalink | Comments (1)

Tuesday, May 9, 2017

Leadership: If Done Right, More Women Can Mean Less Incompetence

Back in 2013, Tomas Chamorro-Premuzic wrote Why Do So Many Incompetent Men Become Leaders? on the Harvard Business Law Review site.  He argues,

the main reason for the uneven management sex ratio is our inability to discern between confidence and competence. That is, because we (people in general) commonly misinterpret displays of confidence as a sign of competence, we are fooled into believing that men are better leaders than women. In other words, when it comes to leadership, the only advantage that men have over women (e.g., from Argentina to Norway and the USA to Japan) is the fact that manifestations of hubris — often masked as charisma or charm — are commonly mistaken for leadership potential, and that these occur much more frequently in men than in women.

He further notes that the qualities that the same traits that often lead to a male manager to get hired (i.e., be perceived as a leader) are the characteristics that get in the way of being an effective and successful leader.  ( "[L]eaderless groups have a natural tendency to elect self-centered, overconfident and narcissistic individuals as leaders, and that these personality characteristics are not equally common in men and women.")  Thus, because we mistake confidence for competence, we pass up a lot of good people (and hire the wrong people).  These mistakes apply to both men and women, but Chamorro-Premuzic notes that (by nature and/or nurture) women are less likely to have those traits.  

He concludes 

there is no denying that women’s path to leadership positions is paved with many barriers including a very thick glass ceiling. But a much bigger problem is the lack of career obstacles for incompetent men, and the fact that we tend to equate leadership with the very psychological features that make the average man a more inept leader than the average woman. The result is a pathological system that rewards men for their incompetence while punishing women for their competence, to everybody’s detriment.

This is true, but I would also note that it's also likely that the women who get hired because of the traditional traits he describes are also less likely to be successful. Most leaders, he notes fail, whether in politics or business: "Good leadership has always been the exception, not the norm." 

This suggests that people doing the hiring (or voting) would be well served to change their criteria for assessing talent and quality, at least in some ways. We simply can't keep using the same inputs and be surprised we keep getting the same outputs.    If we change our inputs, there is a good chance that we will have a greater diversity of leaders (particularly increasing the numbers of women) and may, in fact, choose more successful leaders. It seems to me worth a try. 

May 9, 2017 in Jobs, Joshua P. Fershee | Permalink | Comments (0)

Tuesday, May 2, 2017

Fake News! Trump's LLCs Are Not Corporations

It's exam-grading time, so my focus is largely on that.  I did do my usual peruse of the news, though, and I found a whole host of news outlets discussing President Trump's tax plan, which proposes to lower income tax rates on pass-through entities.  As one of the pieces explains

Pass-through income, for those of you who aren’t tax nerds, is business income that’s reported on a personal return. It comes from partnerships, limited-liability corporations and other closely held businesses, including Trump’s own family real estate operation.

First of all, knowing about pass-through income does not make you a tax nerd. I don't think. 

Beyond that, though, limited liability corporations are not a thing.  And, limited liability companies (LLCs) are generally chosen for pass-though tax status, but they don't have to be. They can chose to be taxed as C corporations at the federal level, if they wish.  Furthermore, partnerships, such as MLPs, and LLCs don't have to be closely held. They can be publicly traded.  

Multiple outlets got on the incorrect"limited-liability corporations" bandwagon. Even Barron's! Oh, well.. For now, I guess I will just continue to note that LLCs are still limited liability companies.  

Happy grading to those in the same boat, and good thoughts to the students taking our exams.  We really do want you to succeed, so please, show us what you know. 

 

May 2, 2017 in Corporations, Joshua P. Fershee, LLCs, Partnership | Permalink | Comments (2)

Wednesday, April 26, 2017

What Is Ideological Diversity in the Legal Academy?

More than a few legal blogs and scholars have taken note of a recent paper by Adam Bonica (Stanford University), Adam S. Chilton (University of Chicago), Kyle Rozema (Northwestern University) and Maya Sen (Harvard University), “The Legal Academy’s Ideological Uniformity.”  The paper finds that those in the legal academy are more liberal than those in legal profession generally.  Anecdotally, I have to say I am not surprised. 

The abstract of the piece is as follows:

We find that approximately 15% of law professors are conservative and that only approximately one out of every twenty law schools have more conservative law professors than liberal ones. In addition, we find that these patterns vary, with higher-ranked schools having an even smaller presence of conservative law professors. We then compare the ideological balance of the legal academy to that of the legal profession. Compared to the 15% of law professors that are conservative, 35% of lawyers overall are conservative. Law professors are more liberal than graduates of top 14 law schools, lawyers working at the largest law firms, former federal law clerks, and federal judges. Although we find that professors are more liberal than the alumni at all but a handful of law schools, there is a strong relationship between the ideologies of professors from a law school and the ideologies of alumni from that school. However, this relationship is weaker for schools with more conservative alumni.

Jonathan Adler recently discussed the paper in a piece for The Volokh Conspiracy How ‘ideologically uniform’ is the legal academy? Adler notes, that the paper's "findings are based upon an examination of reported political donations. While this is an admittedly imperfect measure of ideology, it does allow for comparisons across population groups." I agree on both counts.   

I am particularly interested in (and a bit skeptical of) the use of political donations as the proxy for ideology.  I understand why the authors used that proxy: the information is available and it does, as Adler says, provide for comparisons.  My skepticism is not about their process or choice, but merely about whether it tells us very much about legal ideology. I think it tells us primarily about political party. And even there, in a primarily two-party system, it only tells us about preferences between those two parties, and if the data is primarily presidential, about those two specific candidates. 

My point is that legal ideology is often different that political party choice. When choosing between two parties, we all have priorities of our views, too. For example, I am a far bigger believer in the ability of markets to solve problems than many of my colleagues.  I am more skeptical of government intervention and increased regulation than many of my colleagues. But because of a few priorities that tip my balancing test, I would almost certainly come out "liberal" in using my modest contributions to political parties as the assessment of my ideology.  

In assessing legal ideology, though, I would argue diversity comes more from how we view the law than particular candidates or certain social issues. Obviously, it is much harder to assess that, but I think it should matter when considering how law schools teach.  

Some legal programs (like SEALS) have been seeking diversity of viewpoints, along with other measures of diversity, for panel and discussions groups. This is a good thing. It's not always easy to assess, though. Maybe we should just ask. Here's how I'd assess my own legal ideology: When it comes to economic regulation, my thinking is much more in line with former law professor and SEC Commissioner Troy A. Paredes than I am with, say, Elizabeth Warren. When it comes to business entities law, I am far more Bainbridge than Bebchuck.  For environmental law, more Huffman or Adler than Parenteau. Of course, I have at various times agreed and disagreed with them all.  

I, like many others, am very skeptical of an ideological litmus test or quota system. And yet I also think there is value in embracing different perspectives and viewpoints.  Ultimately, I don't care how someone votes when I assess whether they are a good legal scholar, a good colleague, and a good teacher. I do care that they value diversity of all kinds (including ideological), and I care that they believe in encouraging and faciltitating productive discourse. There is little value in lockstep thinking in any arena, and that is particularly true in legal education. I'm glad this discussion is part of how we consider moving forward in legal education.  

April 26, 2017 in Corporate Governance, Current Affairs, Joshua P. Fershee, Law and Economics, Law School, Lawyering, Research/Scholarhip, Teaching | Permalink | Comments (0)

Tuesday, April 11, 2017

Why Do So Many People Assume States Can Disregard Series LLCs?

The Uniform Law Commission is in the process of considering the Limited Liability Company Protected Series Act (f/k/a Series of Unincorporated Business Entities Act), and the final reading is schedule to take place in July 2017.  (Draft is here.) I have been discussing the challenges of Series LLCs with a variety of folks, and it strikes me that a consistent theme about the Series LLC is a concern about asset protection between each LLC in there Series. That is, there is concern that some courts may disregard the separateness of each LLC in the Series and treat the entire Series as a single entity.  I share this concern, but it strikes me that it is a rather outlandish concern that a court would do so without some significant level of fraud or other injustice to warrant whatever the state version of veil piercing would mandate. 

One source goes so far as to state: 

Case law has not been developed on Series LLCs yet, and there is much fear in the professional world that the assets may not be as protected as when the entity is formed. What is clear is that the “corporate formalities” must be carefully followed, such that:

  1. Separate books and records should be maintained for each series;

  2. Creditors need to be made specifically aware of the separate existence of each series; and

  3. The assets of each must be unambiguously identified as belonging to that series.

I don't consider these corporate formalities as at all, given that we're talking about an LLC, but it's true that any Series LLC would be well served to follow the entity formalities we'd expect of any entity seeking to protect limited liability.  Perhaps because the Series LLC as an entity is new, there is a need for heightened vigilance, but I am of the mind these kinds of measures are proper for all entities, if one wants to reduce the likelihood of veil piercing, enterprise liability, or other agency/guarantor concerns.  

Another source warns of the risks of the Series LLC:

The biggest problem with series LLCs is that many states (including California) don’t have series legislation and may choose to ignore the laws of the state where the series was created. That’s because you’re subject to their rules when doing business in their state. The example of the attitude of the California Franchise Tax Board applies to fees, but liability protection is also an issue. Since series LLCs are so new they’ve never been tested by courts, even in the states that permit them. That means there’s no guarantee that limited liability protection will be extended to each series until every state rules on the subject. It’s hard to see how a court would choose to grant this kind of protection inside one entity, and only time will tell if courts will do this. But do you want this type of uncertainty when you are trying to protect your assets?

Again, perhaps valid, but the idea that a state would simply ignore a properly created entity formed in another state is an outrageous proposition, in my mind.  If a state sees fit to define an entity, and such an entity is properly formed, that should be sufficient to follow the entity rules.  That might be different if a state were to write a law that specifically disallows certain kinds of entity structures. (I'd likely have a problem with that, too, but on the merits of such a law.)  And some laws clearly change the analysis, like bankruptcy. But to simply disregard another state's entity structure if the business is properly operating? That's not right.  

Anyway, I agree with those who are cautious about the relative limited liability protections of the Series LLC, especially outside of the eight(?) states that have such laws (Delaware, Nevada, Illinois, Iowa, Oklahoma, Tennessee, Texas and Utah). But I do find it disturbing that so many people are comfortable with the idea that courts would (and perhaps should) be so inherently skeptical of a structure chosen by a state legislature that the court would disregard the concept completely.  I am all for requiring entities to be clear which entity is to bound (and I think those doing business with those entities should seek guarantees, co-signers, or other assurances where they want them).  Courts allowing plaintiffs to expand limited liability beyond a Series entity to include other entities, based only on the use of the Series structure, is different. Like haphazard veil piercing, such decisions run the risk of incentivizing careless or ambiguous drafting and give creditors a chance to pursue a windfall in the form of an un-negotiated guarantee. 

As I often remind my students, to argue against the concept of limited liability is a very different thing than arguing that the current law allows one to disregard an entity in a particular circumstance. One asks, "What should be?,"  while the other asks, "What is?"  And to dislike the idea of a Series LLC is very different than suggesting a Series LLC law is invalid.  There, the former says what the law should be,"  while the latter says that what is, is not.  

 

April 11, 2017 in Corporations, Delaware, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (1)

Tuesday, April 4, 2017

Equal Pay Day Applied to M & A

The Washington Post reports

Back in 2015, Salesforce CEO Marc Benioff admitted something many CEOs wouldn't: The company had found a pay gap between the men and women who worked for the cloud computing giant, and it was spending $3 million to fix it. Now after acquisitions and rampant growth at the company brought in 7,000 new employees in the past year, he's doing it again, announcing Tuesday that the company has spent another $3 million to adjust for a pay gap that affects 11 percent of its more than 25,000 employees.

In an interview with The Washington Post, Benioff said he believed the re-opened gap was largely because of the company's acquisitive streak -- it bought 14 companies in its last fiscal year, the largest in its history. When companies acquire others, Benioff said, "you buy their pay practices, and this pay practice -- of, basically, gender discrimination -- is quite dramatic through our industry and other industries," he said.

If one cares about equal pay, and I think people should (beyond just today), one needs to account for it in the purchase price of another entity.  This is a great reminder about the due diligence process. We need to think about all the things that matter to our clients (and ask them what those things are). The cost of implementing those things that matter, in addition to all the traditional things we worry about in an acquisition, should be accounted for if we want to maximize benefit for clients.   

April 4, 2017 in Compensation, Corporations, Current Affairs, Joshua P. Fershee | Permalink | Comments (0)

Tuesday, March 28, 2017

NFL's Business Judgment Rules: Will Raiders' Move To Vegas Harm the League?

The Oakland/Los Angeles/Oakland Raiders are soon to become the Las Vegas Raiders. This has fans in an uproar, with some saying the move is like losing "family."  Moves of sports teams are rarely well received in the place the team leaves, and this move is no different.  

Teams move for a variety of reasons, though the primary reason comes down to money.  And there's nothing wrong with that.  Although it is a loss for long-time fans, the team will get new fans in the locations (if history is any indication), and it's certainly the right of the business owners to decide what is best for their business.  In the judgment of Raiders' ownership, it's time for Vegas Baby.  

The structure of the NFL is such that team owners need approval of the league to make such a move, which makes sense because a sports league is necessarily dependent on other teams.  As such, the teams have created some obligations to one another and agreed to give up some level of control for the good of the league.  All but one team voted to support the move to Vegas (the Miami Dolphins dissented), giving the Raiders 31 votes, when they only needed 24.  Thus, it means the other league owners (sans the Dolphins' owners) thought the move was in their best interest, too. 

This makes three recently announced NFL team moves. In addition to the Raiders, the former St. Louis Rams returned to Los Angeles, and the former San Diego Chargers are now a second L.A.-based team. This means the super majority of NFL owners feel all of these moves are in the best interest of the league, or are at least neutral to the moves.  This makes some sense, as there had been relative stability for the league teams, with the last move before these three taking place in 1997, when the Houston Oilers left for Tennessee (Memphis temporarily, then Nashville in 1999). 

Moving forward, though, how much will fans take?  If several more teams make a move in the next few years, will it upset fans to the point that they stop watching? Hard to say, but the league will be able to put a stop to it if they are concerned.  There are a number of older stadiums in the league, so there may be more moves to come. There will almost certainly be threats to move, even if teams end up staying put.

If teams keep moving, it's possible the league could be hurt, but that would require the NFL fans in the old league cities to stop watching the NFL. That could happen, but it seems unlikely.  Either way, it probably won't be a move that tells us the league is being harmed.  Instead, it will probably be when teams without a lease don't get a lucrative offer to move another city.  

March 28, 2017 in Contracts, CSR, Joshua P. Fershee, Sports | Permalink | Comments (2)