Thursday, October 19, 2017
Faculty Development Opportunity -- Business Innovation in Chile: A Case Study of the Wine Export Sector
If you're a fan of wine (I am) and international business if of interest (it is), this Faculty Development might be for you. It overlaps with the AALS Annual Meeting, so it won't work for me this year, but it looks like a good program. Have a look:
Temple University’s Center for International Business Education and Research (CIBER) presents
Faculty Development in International Business: Santiago, Chile (January 5-11, 2018)
Business Innovation in Chile: A Case Study of the Wine Export Sector
Leave winter behind this January and join us for a summer experience in Chilean wine country. As an innovation-driven economy, the United States prides itself on developing and delivering innovative goods and services domestically and globally through high-tech exports, creative branding, and in-demand services. Among those exports is our growing wine sector, led by Napa Valley but recently expanding into other parts of California, Oregon, Virginia, and other lesser-known wine producing regions of the United States. Despite this expansion, the United States remains behind old world wine producers in Europe. Chile and Australia also outpace the United States in terms of wine exports and have been leading the way in innovative production and marketing techniques.
On this faculty/professional-oriented immersion experience, participants will visit a number of innovative businesses in the wine export sector and related industries in Chile to better understand how innovation in a highly-regulated sector can disrupt the traditional approaches taken by Old World producers in Europe and provide a comparative advantage for modern producers.
Some of the key learning outcomes on this immersion include:
- An understanding of how innovation is utilized to drive growth in emerging markets;
- A comparative perspective of an innovative sector active in the home and target market;
- A better sense of the supply chain for a commodity such as wine and how innovation can accelerate movement along that supply chain and;
- Tools that can be used to leverage enhancements in innovation for U.S. exporters.
The immersion experience is being led by Fox School of Business Assistant Professor, Dr. Kevin Fandl, a Latin America specialist with deep knowledge of the region. Dr. Fandl’s research emphasizes the relationship between law, policy, and business in global markets. He takes his extensive experience at senior levels of federal government policymaking to the marketplace by examining how laws and regulations drive or inhibit innovation and business opportunity. His knowledge of Chile, as well as the wine industry, add significant academic value to this immersion experience.
Program Fee: $2,700 per person (fee includes: hotel accommodations, corporate visits, cultural activities, some meals, visits to Chilean Vineyards, and in-country transportation)
Deposit: A $500 non-refundable deposit is due at initial time of registration. Final payment will be due on October 27, 2017. To register: https://noncredit.temple.edu/templeciberfdib
Space is limited. A guest package is also available.
For questions or additional information, please contact Lauren Letko at firstname.lastname@example.org
Tuesday, October 17, 2017
Guest Post: Zohar Goshen and Richard Squire’s “Principal Costs: A New Theory for Corporate Law and Governance”
The following is a guest post from Bernard S. Sharfman*:
The foundation of my understanding of corporate governance rests on a small but growing number of essays, articles, and books. These writings include Henry Manne’s Mergers and the Market for Corporate Control, Michael Dooley’s Two Models of Corporate Governance, Stephen Bainbridge’s Director Primacy: The Means and Ends of Corporate Governance and The Business Judgment Rule as Abstention Doctrine, Kenneth J. Arrow, The Limits of Organization, Frank H. Easterbrook & Daniel R. Fischel, The Economic Structure of Law, Zohar Goshen & Gideon Parchomovsky’s The Essential Role of Securities Regulation, and Alon Brav, Wei Jiang, Frank Partnoy & Randall Thomas’ Hedge Fund Activism, Corporate Governance, and Firm Performance. Recently, I have added to this esteemed list Zohar Goshen and Richard Squire’s Principal Costs: A New Theory for Corporate Law and Governance.
Goshen and Squire put forth a new theory, the “principal-cost theory,” which posits that a firm’s optimal corporate governance arrangements result from a calculus that seeks to minimize total control costs, not just agency costs (“the economic losses resulting from managers’ natural incentive to advance their personal interests even when those interests conflict with the goal of maximizing their firm’s value”):
The theory states that each firm’s optimal governance structure minimizes total control costs, which are the sum of principal costs and agent costs. Principal costs occur when investors exercise control, and agent costs occur when managers exercise control. Both types of cost can be subdivided into competence costs, which arise from honest mistakes attributable to a lack of expertise, information, or talent, and conflict costs, which arise from the skewed incentives produced by the separation of ownership and control. When investors exercise control, they make mistakes due to a lack of expertise, information, or talent, thereby generating principal competence costs. To avoid such costs, they delegate control to managers whom they expect will run the firm more competently. But delegation separates ownership from control, leading to agent conflict costs, and also to principal conflict costs to the extent that principals retain the power to hold managers accountable. Finally, managers themselves can make honest mistakes, generating agent competence costs.
Moreover, it is important to understand that the theory is firm specific:
Principal costs and agent costs are substitutes for each other: Any reallocation of control rights between investors and managers decreases one type of cost but increases the other. The rate of substitution is firm specific, based on factors such as the firm’s business strategy, its industry, and the personal characteristics of its investors and managers. Therefore, each firm has a distinct division of control rights that minimizes total control costs. Because the cost-minimizing division varies by firm, the optimal governance structure does as well. The implication is that law’s proper role is to allow firms to select from a wide range of governance structures, rather than to mandate some structures and ban others.
The bottom line is that “A firm that seeks to maximize total returns will weigh principal costs against agent costs when deciding how to divide control between managers and investors.”
A minimization of total control costs approach to the identification of optimal governance arrangements allows for the fundamental value of authority in large organizations to be respected and acknowledged, something which is missing in many academic works that only focus on agency costs. According to Michael Dooley, “Where the residual claimants are not expected to run the firm and especially when they are many in number (thus increasing disparities in information and interests), their function becomes specialized to risk-bearing, thereby creating both the opportunity and necessity for managerial specialists.” According to Rose and Sharfman, “Especially where there are a large number of shareholders, it is much more efficient, in terms of maximizing shareholder value, for the Board and executive management—the corporate actors that possess overwhelming advantages in terms of information, including nonpublic information, and whose skills in the management of the company are honed by specialization in the management of this one company—to make corporate decisions rather than shareholders.”
The calculus of the principal-cost theory also allows for the potential for Bainbridge’s director primacy as a positive theory to be proven correct for any particular firm: “As a positive theory of corporate governance, the director primacy model strongly emphasizes the role of fiat - i.e., the centralized decisionmaking authority possessed by the board of directors.” In the context of Goshen and Squire’s calculus, Bainbridge is arguing that principal costs will greatly outweigh agency costs when total control costs are minimized.
Finally, Goshen and Squire’s theory allows for an understanding of why dual-class share structures continue to persist and why they have been successfully implemented at companies such as Alphabet (Google) and Facebook. Their theory is critical to the argument I make in my most recent paper, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs. In sum, Goshen and Squire’s theory allows for a more robust understanding of what is meant by optimal corporate governance arrangements, something that an exclusive focus on agency costs does not allow.
*This post comes to us from Bernard S. Sharfman, who is an associate fellow at the R Street Institute, a member of the Journal of Corporation Law’s editorial advisory board, a visiting professor at the University of Maryland School of Law (Spring 2018), and a former visiting assistant professor at Case Western Reserve University School of Law (Spring 2013 and 2014).
Wednesday, October 11, 2017
From our friend and BLPB colleague, Anne Tucker, following is nice workshop opportunity for your consideration:
We (Rob Weber & Anne Tucker) are submitting a funding proposal to host a works-in-progress workshop for 4-8 scholars at Georgia State University College of Law, in Atlanta, Georgia in spring 2018 [between April 16th and May 8th]. Workshop participants will submit a 10-15 page treatment and read all participant papers prior to attending the workshop. If our proposal is accepted, we will have funding to sponsor travel and provide meals for participants. Interested parties should email email@example.com on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals. Please direct all inquiries to Rob Weber (mailto:firstname.lastname@example.org) or Anne Tucker (email@example.com).
Call for Proposals: Organizing, Deploying & Regulating Capital in the U.S.
Our topic description is intentionally broad reflecting our different areas of focus, and hoping to draw a diverse group of participants. Possible topics include, but are not limited to:
- The idea of financial intermediation: regulation of market failures, the continued relevance of the idea of financial intermediation as a framework for thinking about the financial system, and the legitimating role that the intermediation theme-frame plays in the political economy of financial regulation.
- Examining institutional investors as a vehicle for individual investments, block shareholders in the economy, a source of efficiency or inefficiency, an evolving industry with the rise of index funds and ETFs, and targets of SEC liquidity regulations.
- The role and regulation of private equity and hedge funds in U.S. capital markets looking at regulatory efforts, shadow banking concerns, influences in M&A trends, and other sector trends.
This workshop targets works-in-progress and is intended to jump-start your thinking and writing for the 2018 summer. Our goal is to provide comments, direction, and connections early in the writing and research phase rather than polishing completed or nearly completed pieces. Bring your early ideas and your next phase projects. We ask for a 10-15 page treatment of your thesis (three weeks before the workshop) and initial ideas to facilitate feedback, collaboration, and direction from participating in the workshop. Interested parties should email firstname.lastname@example.org on or before November 15th with a short abstract (no more than 500 words) of your proposed contribution that is responsive to the description below. Please include your name, school, and whether you will require airfare, miles reimbursement and/or hotel. We will notify interested parties in late December regarding the funding of the workshop and acceptance of proposals. Please direct all inquiries to Rob Weber (email@example.com) or Anne Tucker (firstname.lastname@example.org).
Anne & Rob
October 11, 2017 in Anne Tucker, Call for Papers, Corporate Finance, Financial Markets, Joshua P. Fershee, Law School, M&A, Research/Scholarhip, Securities Regulation, Writing | Permalink | Comments (0)
UNIVERSITY OF NEW MEXICO SCHOOL OF LAW
BUSINESS LAW AND/OR INTELLECTUAL PROPERTY
OPEN RANK FACULTY POSITION
The University of New Mexico ("UNM") School of Law invites applications for a faculty position in Business Law and/or Intellectual Property. The faculty position is a full-time tenured or tenure-track position starting in Fall 2018. Entry-level and experienced teachers are encouraged to apply. Courses taught by this faculty member could include general business courses, intellectual property courses, and commercial law courses. Candidates must possess a J.D. or equivalent legal degree. Preferred qualifications include a record of demonstrated excellence or the promise of excellence in teaching and academic scholarship and who demonstrate a commitment to diversity, equity, inclusion, and student success, as well as working with broadly diverse communities. Academic rank and salary will be based on experience and qualifications. For best consideration, applicants should apply by October 22, 2017. The position will remain open until filled. For complete information, visit the UNMJobs website: https://unmjobs.unm.edu/. The position is listed as Open Rank – Business Law Requisition Number 2761.
The University of New Mexico is an Affirmative Action/Equal Opportunity Employer.
Wednesday, October 4, 2017
Yesterday, Professor Bainbridge posted "Is there a case for abolishing derivative litigation? He makes the case as follows:
A radical solution would be elimination of derivative litigation. For lawyers, the idea of a wrong without a legal remedy is so counter-intuitive that it scarcely can be contemplated. Yet, derivative litigation appears to have little if any beneficial accountability effects. On the other side of the equation, derivative litigation is a high cost constraint and infringement upon the board’s authority. If making corporate law consists mainly of balancing the competing claims of accountability and authority, the balance arguably tips against derivative litigation. Note, moreover, that eliminating derivative litigation does not eliminate director accountability. Directors would remain subject to various forms of market discipline, including the important markets for corporate control and employment, proxy contests, and shareholder litigation where the challenged misconduct gives rise to a direct cause of action.
If eliminating derivative litigation seems too extreme, why not allow firms to opt out of the derivative suit process by charter amendment? Virtually all states now allow corporations to adopt charter provisions limiting director and officer liability. If corporate law consists of a set of default rules the parties generally should be free to amend, as we claim, there seems little reason not to expand the liability limitation statutes to allow corporations to opt out of derivative litigation.
I think he makes a good point. And included in the market discipline and other measures that Bainbridge notes would remain in place to maintain director accountability, there would be the shareholder response to the market. That is, if shareholders value derivative litigation as an option ex ante, the entity can choose to include derivative litigation at the outset or to add it later if the directors determine the lack of a derivative suit option is impacting the entity's value.
Professor Bainbridge's post also reminded me of another option: arbitrating derivative suits. A friend of mine made just such a proposal several years ago while we were in law school:
There are a number of factors that make the arbitration of derivative suits desirable. First, the costs of an arbitration proceeding are usually lower than that of a judicial proceeding, due to the reduced discovery costs. By alleviating some of the concern that any D & O insurance coverage will be eaten-up by litigation costs, a corporation should have incentive to defend “frivolous” or “marginal” derivative claims more aggressively. Second, and directly related to litigation costs, attorneys' fees should be cut significantly via the use of arbitration, thus preserving a larger part of any pecuniary award that the corporation is awarded. Third, the reduced incentive of corporations to settle should discourage the initiation of “frivolous” or “marginal” derivative suits.
Andrew J. Sockol, A Natural Evolution: Compulsory Arbitration of Shareholder Derivative Suits in Publicly Traded Corporations, 77 Tul. L. Rev. 1095, 1114 (2003) (footnote omitted).
Given the usually modest benefit of derivative suits, early settlement of meritorious suits, and the ever-present risk of strike suits, these alternatives are well worth considering.
Tuesday, September 26, 2017
The United States District Court for the Northern District of Mississippi seems to understand that LLCs are different than corporations, but they don't really want to keep them separate. See this passage, to which I have added notes:
Regarding complete diversity, the citizenship of a limited liability corporation [no, limited liability company] is determined by the citizenship of all its members. Tewari De-Ox Sys., Inc. v. Mtn. States/Rosen, Ltd. Liab. Corp., 757 F.3d 481, 483 (5th Cir. 2014). The “citizenship of an unincorporated [yes!] association must be traced through each layer of the association, however many there may be.” Deep Marine Tech., Inc. v. Conmaco/Rector, L.P., 515 F.Supp.2d 760, 766 (S.D. Tex. 2007). Further, “§ 1332(c)(1), which deems a corporation [wait, what?] of ‘every State and foreign state’ in which it is incorporated and the ‘State or foreign state’ where it has its principal place of business, applies to alien corporations.” Vantage Drilling Co. v. Hsin-Chi Su, 741 F.3d 535, 537 (5th Cir. 2014). The defendants submitted an upstream analysis of their organizational structure, tracing through each layer of association, to properly allege the citizenship of each member, ultimately establishing that they and Tubwell are citizens of different states.
Tuesday, September 19, 2017
A recent New Republic article states:
The Community Law Center, a local legal services group, launched an investigation into 1906 Boone and hundreds of other vacant properties around Baltimore. The hunt took more than a year. In many cases, the identity of a property owner was hidden behind a maze of shell companies; an operation called Baltimore Return Fund LLC, for example, had purchased 1906 Boone at a city tax sale for $5,452. Eventually, the investigation revealed a Texas-based web of nearly a dozen LLCs—limited liability corporations, a form of legal tax shelter—that controlled more than 300 properties in Baltimore. Nearly all had been purchased at tax sales, often online, between 2001 and 2010. Most sold for less than $5,000. Many were vacant and in bad shape.
Okay, so we all know LLCs are not limited liability corporations (right?). But the entity form is a "legal tax shelter?" As a pass-through entity? What does this word salad mean? Would this be less of a scourge if some guy owned them instead of the magical LLC? I don't understand what the entity form has to do with any such concerns at all.
Suppose they did the research and found out Benefit Corporation, Inc., owned all of them. Would they have breathed a sigh of relief?
So many questions, so few answers.
H/T to our astute and helpful reader Gregory J. Corcoran.
Sunday, September 17, 2017
As I earlier reported, on Saturday, The University of Tennessee College of Law hosted "Business Law: Connecting the Threads", a conference and continuing legal education program featuring most of us here at the BLPB--Josh, me, Ann, Doug, Haskell, Stefan, and Marcia. These stalwart bloggers, law profs, and scholars survived two hurricanes (Harvey for Doug and Irma for Marcia) and put aside their personal and private lives for a day or two to travel to Knoxville to share their work and their winning personalities with my faculty and bar colleagues and our students. It was truly wonderful for me to see so many of my favorite people in one place together enjoying and learning from each other.
Interestingly (although maybe not surprisingly), in many of the presentations (and likely the essays and articles that come from them), we cite to each other's work. I think that's wonderful. Who would have known that all of this would come from our decision over time to blog together here? But we have learned a lot more about each other and each other's work by editing this blog together over the past few years. As a result, the whole conference was pure joy for me. And the participants from UT Law (faculty, students, and alums) truly enjoyed themselves. Papers by the presenters and discussants are being published in a forthcoming volume of Transactions: The Tennessee Journal of Business Law.
My presentation at the conference focused on the professional responsibility and ethics challenges posed by complexity and rapid change in business law. I will post on my related article at a later date. But if you have any thoughts you want to share on the topic, please let me know. A picture of me delivering my talk, courtesy of Haskell, is included below. (Thank you, Haskell!) So, now you at least know the title, in addition to the topic . . . . :>) Also pictured are my two discussants, my UT Law faculty colleague George Kuney and UT Law 3L Claire Tuley.
Tuesday, September 12, 2017
A reader of the Business Law Prof Blog, Kevin Fandl, from Temple University's Fox School of Business asked that I share this. It looks like a great opportunity, so please get in touch with him if you're interested.
Call for Contributors/ Chapter Authors: Law and Public Policy Textbook
The field of public policy has exploded in recent years as our regulatory environment becomes more complex and challenging for individuals and businesses to navigate. Law schools, business schools, and schools in related disciplines are developing seminars on the policy environment that discuss issues such as economic policy, social policy, and foreign policy. However, in many cases, the linkages between government policies and the laws and precedent that interpret (or in some cases create) them are not made clear. But as we know, laws and policies do not exist in a vacuum—they must be understood in their contextual environment. Currently, no single text offers a complete picture of the law and policy environment, depriving students across many disciplines of the deeper understanding necessary to operate in today’s business and legal environment. That is the impetus for this new book.
If you would like to contribute to the drafting of this new textbook either by submitting a chapter or insights for an existing chapter, please get in touch with me promptly. The fields in which authors might contribute include (but are not limited to):
If any of these topics are within your area of expertise and you are interested in contributing, or if you have questions about how you might contribute, please contact me at Kevin.Fandl@Temple.edu. Thank you.
Tuesday, September 5, 2017
Reading closely is a highly valuable skill for both lawyers and law students. But reading closely is not the only key to getting the most out of reading materials. Often, knowing what to look for can help us discern what we're really being told. An article at LawFare, How to Read a News Story About an Investigation: Eight Tips on Who Is Saying What, by Benjamin Wittes, does a nice job of providing some tools to help read news stories more carefully, and perhaps accurately, especially when it comes to sources. Note that this piece applies to reputable reporters, not everyone who has written something about current events.
One solid takeaway:
Reporters publish what they know. If a story describes a series of interactions between a witness or a subject of an investigation and the investigators and the story contains information about one side’s thinking but not the other’s, that’s a powerful sign of where the disclosure came from.
Many of the skills here would translate into other settings, too. For example, Wittes' first rule: The Words Describing a Source Should Be Presumed Accurate. He says, "Always start with the precise words the journalist is using to describe her sources. An ethical journalist will never write a sentence that is not on its own terms true." This should be true of a SEC filings or other corporate disclosure documents, too, but it does not mean that the words will clearly communicate the same thing to all readers.
Wittes' Rule No. 2 also applies: Don’t Make Hasty Assumptions About Vague Sourcing.
While the words have to be true, they emphatically do not have to be evocative of some larger truth. While the words have to be true, they emphatically do not have to be evocative of some larger truth. The conventions associated with sourcing stories like these permit a certain degree of misdirection about which the reasonable reader should be savvy. Reporters have a duty to inform the public; they also have a duty to protect their sources. These goals often conflict, and the solution is sometimes to inform the public in a fashion that is technically accurate but is not what a naive reader would expect certain words to mean.
As to this rule, I would not say that "misdirection" is permitted in SEC filings, but this last part seems generally true of many SEC disclosures: they inform the public in a "technically accurate" way but not necessarily in a way that "a naive reader would expect certain words to mean." I know some people will disagree with my cynical view on this, but that's my take. The closing advice: "Read sourcing sentences both literally and broadly." Same with disclosures.
I recommend reading Wittes' piece for its intended purpose and to see what you might take away for application in other settings. It's a solid and thought-provoking overview, whether you agree with my assessment or not.
Tuesday, August 29, 2017
And so it continues:
In a recent case in the United States District Court, District of Columbia, a court messes up the entity (referring to one of the parties as “Howard Town Center Developer, LLC, is a limited liability corporation (‘LLC’)") and also does a fine job of improperly stating (or really, failing to state) the law for veil piercing.
I took the initiative to pull the initial complaint and the answer to see if either of the parties were responsible for calling the LLC a corporation. Both sides properly referred to the LLC as a “limited liability company,” so it appears the corporation reference is a court-created issue.
In the case, a property developer brought action to require a university landowner to reinstate a ground lease and development agreement between developer and university, after the university sent notices of termination. The University counterclaimed to recover unpaid rent. The court determined, among other things, that the university was entitled to the damages it sought of $1,475,000 for unpaid rents and to attorney fees related to the developer's breach of a ground lease and development agreement. But the opinion doesn’t stop there.
It is quite clear that the developer LLC does not have the funds to pay the judgment, so the question of whether the LLC’s veil could be pierced was also raised. The court, I think properly, determined that “a targeted asset or individual must be named before veil-piercing may be considered.” Howard Town Ctr. Developer, LLC v. Howard U., CV 1075 (BAH), 2017 WL 3493081, at *56 (D.D.C. Aug. 14, 2017). The court continued: “The University should not lament, nor the Developer celebrate, that conclusion, however, on the erroneous assumption that the University has waived its right to veil-piercing in this matter.” Id.
The court then determined that, because of “considerations of justice and equity,” the university could later seek a veil-piercing action if it were unable to satisfy its judgment. “Any such action will be fairly straightforward given the instant decision, including the Court's observations regarding the inadequacy of the Developer's capitalization . . . and the University may then be entitled to the additional discovery it presently seeks.” Id.
Wow. That’s some heavy dicta. First, the court never states what the rule is for veil piercing an LLC, so it is a pretty bold assertion to say veil-piercing will be “straightforward.” Is the sole test adequate capitalization? What does that mean? And what is that test? Well, the court gives us an explanation in footnote 22:
The Developer's status as an inadequately capitalized shell company is an ongoing demonstration of bad faith. LLCs are a legitimate corporate form, and the societal benefits of such entities are significant. Dickson testified that the use of such entities in transactions like this one is “typical[ ],” explaining that “single-asset entities are established as borrowers” so that “the borrower[ ] contains one asset,” the advantage from a “liability standpoint” being that “on a transaction of this size, the asset couldn't be pulled into bankruptcy.” Trial Tr. Day 7 AM at 49:25–50:7. Yet, even a single-asset entity must be capitalized to the extent necessary to satisfy its obligations to the project it was created to support. See Lawlor v. District of Columbia, 758 A.2d 964, 975 (D.C. 2000) (noting inadequate capitalization as factor in determining whether a given entity's corporate form should be respected). Consequently, abuse of the corporate form to render a company judgment-proof is impermissible and reflects bad faith.
Um, no. First, the LLC is not a corporate form. And an entity not being able to pay its debts is not, in and of itself, a showing of bad faith. Otherwise, what’s the point of limited liability? The court seems to think that being judgment proof because of a lack of funds is not allowed. But it is specifically allowed. If there is fraud or deception, that is not allowed. But an inability to pay the bills is not, alone, at all improper. It is unfortunate, and perhaps awful, but it is not improper.
Ultimately, it may be that veil piercing could be justified under DC law, but first, we’d need to know what that law is. And it should be clear that it is LLC-veil-piercing law that is to be applied, and not the “corporate” veil piercing this court has apparently relied upon. Once again, I will repeat my call for courts to state specifically the law (and the test) they are applying in LLC-veil-piercing cases, explain why the factors of the test are appropriate in the LLC setting, and then apply that test.
Instead, the court suggests that veil piercing is essentially inevitable, which could have a strong role in forcing a settlement. This language amounts to phantom veil piercing. The court never stated a veil-piercing test, never ran the test, and yet, there it is: the specter of a pierced limited liability veil.
The court seemed frustrated with the developer, and that may be well founded. Maybe the developer committed fraud. Maybe the developer and other representatives made binding promises that should make them all guarantors. The case also suggests that there may be an argument for enterprise liability among some of the entities mentioned. And those are all issues that should have been considered. But none of them are veil piercing claims, and if the court is going to go down that road, the court needs to be more precise to ensure justice and equity prevail.
Monday, August 28, 2017
I am excited and proud to make the following announcement about a cool (!) upcoming program being held on Saturday, September 16 at UT Law in Knoxville:
The University of Tennessee College of Law will host a conference and CLE program that will focus on trends in business law. Discussions will take place throughout the day featuring panel discussions that center upon business law scholarship, teaching and law practice.
Topics will include business transaction diagramming; risks posed by social enterprise enabling statutes; fiduciary obligations and mutual fund voting; judicial dissolution in LLCs; Tennessee for-profit benefit corporation law and reporting; corporate personality theory in determining the shareholder wealth maximization norm; and professional responsibility issues for business lawyers in the current, evolving business environment.
The presenters for the program panels are . . . well . . . us! All of the BLPB editors and contributing editors, except Anne Tucker (we'll miss you, Anne!), are coming to Knoxville to share current work with each other and conference attendees. Each editor will anchor a panel that also will include a faculty and student discussant. The BLPB blogger papers and the discussants' written commentaries will all be published in a future issue of our business law journal, Transactions: The Tennessee Journal of Business Law. We also have secured one of our former visiting professors as a lunch-time speaker.
UT Law looks forward to hosting this event. For more information, you can look here. I expect some of us will post on the conference and the conference papers at a later date.
Wednesday, August 23, 2017
So, don't. Over at Above the Law, Prof. Kerriann Stout wrote 10 Things That Will Absolutely Piss Off Your Law Professor. She notes it is not an exhaustive list, but it is a good one and worth a read. This year, I added a new bit of information to my first day of class about how to interact with me about absences and workload. (I often discuss this in class at some point, but I don't recall ever doing it in both of my classes on day one.)
So, here's the deal. In my classes, I allow a certain number of absences (depending on number of credits and days we meet) without questions for personal reasons, interviews, etc. Here is an example of my attendance clause:
Students are expected to attend every class. Students are permitted to miss up to four classes for other obligations without explanation. This number is to include virtually all absences, including sickness, out-of-town interviews, etc. (but does not include classes missed for religious observance). If classes in excess of four are missed, to avoid withdrawal from the course, a written explanation may be required, including the reason for missing additional classes, the student’s plan to ensure the materials covered in the missed classes will be learned, and the reasons the student should be permitted to continue in the course. The policy is designed to facilitate learning, not impose hardship.
This way, students can plan ahead (and most do), and they can make decisions as professionals must about how they prioritize their time. Despite this policy, every year I have students email me to say they will (or did) miss class because they:
- Have to finish a paper for another class
- Have a law review note or moot court brief due
- Must study for a midterm
- Need to prepare for a clinic meeting/hearing
- Plan to attend an out-of-town football game/baseball game/concert
Again, I do not require nor do I ask for an explanation (unless it is related to excess absences, and no one has tried these reasons for that). My new tack is to explain:
I am interested in you as a human being, so please do not hear me saying I don't care what you do or why. And if you need help, you should ask. And if you can't ask me, talk to our Dean of Students or Dean of Academic Affairs or ask a friend. There is help available; please let us help. What I am about to tell you is not about when you need help. It is about what you say when you can't make it to class or be prepared for that class and about what you say to me (or my colleagues) in communicating that information.
Though I do not require it, I appreciate it when you tell me you cannot be in class on a given day. I am am fine if you very rarely request a pass for the day because you are not prepared. But I don't ask you for reasons for your absence or why you are not prepared. So, if you volunteer that information and tell me that you have to miss class or are unprepared because you need to finish a paper for another class, that says to me, "I have prioritized another class over yours." You may not mean to be saying that, but it is in many ways what you are saying.
I understand that you may be sharing to be honest. I appreciate that, and if I were to ask you, honesty is the best policy. I get that you might be trying to communicate that you are not missing my class for a frivolous reason. Okay, but you have still told me your priorities. I also understand that you might want some level of absolution. I can't and shouldn't give you that. We all have a lot to do, and sometimes life gets in the way of life, so we must make tough choices. That does not make me mad. Just don't volunteer that you made such a choice when you don't need to volunteer that you did.
I raise this for you not because it really upsets me. It doesn't. It may annoy me on a given day, but I can handle it. But it really, really irritates some of my colleagues, even if they don't tell you. And it is an incredibly risky thing to share with a client or boss, who definitely don't want to hear someone else's work is more important than their's.
So, be honest when asked, and take responsibility for your actions. Don't share information unnecessarily. Don't seek external absolution from professors, or clients, or bosses. I am here to teach, and I am here to help you learn, and grow, and find the resources you need to thrive. But I am not here to make you feel better about not doing the work I have asked of you.
Tuesday, August 22, 2017
The following posting looks like an incredible opportunity to take a year to work with the Air Force cadets in Colorado Springs and maybe even check out the Olympic Training Center.
Visiting Faculty Position: Business Law
The Department of Law at the U.S. Air Force Academy in Colorado Springs, Colorado, offers an undergraduate Legal Studies Program. We seek a career employee at an American graduate or undergraduate institution or government agency to fill a 10.5 month position as a visiting faculty member to teach, among other things, an undergraduate Business Law course. This visiting position will be from July 2018 to May 2019.
In addition to being a fulltime career employee at an academic institution or federal agency, applicants must have a J.D. degree from an accredited law school and at least five years fulltime teaching experience. Preference will be given to experience teaching Business Law and related courses as well as on-going scholarship and practice-related activities. Visiting Faculty responsibilities in addition to teaching include development, review, and assessment of related learning outcomes, courses and programs, and engagement with students and faculty. The successful applicant may also teach the core (required) course, Law for Air Force Officers, a survey course covering topics such as criminal and constitutional law, law of armed conflict, jurisprudence, and legal tools of military discipline. The person selected may also teach upper-level law courses as part of the Legal Studies major.
The Visiting Professor Program allows the Air Force Academy to reimburse the sending institution/agency the costs of salary and benefits and pays costs of personal transportation and movement of household goods to Colorado Springs and back. Housing is available on or off the Academy grounds, but is at the visiting faculty member’s expense. Teaching expectations are negotiable, but would likely involve one or two courses both fall and spring semesters teaching sections of about 20 cadets. The Academy faculty is an integrated group of military and civilian educators. The curriculum includes core academic and professional courses, and 27 disciplinary and interdisciplinary majors. The Department of Law is composed of 18 military and civilian attorneys and a small administrative staff.
The United States Air Force Academy (USAFA), located just north of Colorado Springs, Colorado, is an undergraduate institution that awards the Bachelor of Science degree as part of its mission to educate, train, and inspire men and women to become officers of character, motivated to lead in the United States Air Force and in service to our nation. The student body consists of approximately 4,000 men and women representing every state and several foreign countries.
USAFA is dedicated to the goal of building a pluralistic faculty committed to a multicultural environment that enriches the educational experience of our students. Hence, we are especially interested in candidates whose teaching, life experience and/or research interests contribute to a climate that values and uses diversity in all its forms. Interested persons should submit a curriculum vitae and a statement of interest that addresses the ways in which the applicant’s qualifications meet the requirements of the ad to include evidence of teaching excellence, promise of research productivity, and commitment to diversity/inclusion.
Email applications are preferred and should contain: A resume/CV, list of three references, and a cover letter. Please send them to Professor John Hertel at John.Hertel@usafa.edu or Department of Law, 2354 Fairchild Drive, USAF Academy, CO 80840. Review of applications will begin as soon as possible and will continue until the position is filled. For more information, please contact Professor John Hertel at: John.Hertel@usafa.edu or 719-333-2832.
Tuesday, August 15, 2017
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.
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.
(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....
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.
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 email@example.com. 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.
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.
Tuesday, August 8, 2017
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.
Tuesday, August 1, 2017
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.
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.
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
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.
Tuesday, July 18, 2017
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.