Tuesday, December 10, 2013
A recent study, Who Owns West Virginia? (full report pdf), gives a glimpse into the land ownership in the state. The report finds that much of the state’s private land is "owned by large, mainly absentee corporations, [but] the list of top owners – once dominated by energy, land holding and paper companies – now includes major timber management concerns."
As reported by Ken Ward Jr. in the Charleston Gazette, the report finds that "[n]one of the state's top 10 private landowners is headquartered in West Virginia." Although it is accurate that the top ten owners are not indivdual owners, I will note that not all of the top ten owners are "corporations." There is at least one master limited partnership and one limited liability company (LLC). That may not mean much in the sense of absentee ownership, but it is a doctrinal distinction I maintain is still important.
It's not shocking that these entity owners would be out of state, especially because that was true back in 1974, too, when the last study was done. There are relatively few large entities chartered or headquartered in West Virginia, and it appears that many of the state chartered companies that were around in 1974 have since been acquired by larger, out-of-state entities. Absentee ownership is hardly a new, or even modern, phenomenon in the state. The report notes: "By 1810, as much as 93 percent of land in present day West Virginia was held by absentee owners, more than any other state in the region and likely any other state in the Union." Much of the ownership is still based in the region, though, as many of the large companies holding West Virginia land are based in Virginia.
Although the purchase of West Virginia’s land by timber management companies is perhaps the most interesting finding by investigators for this report, researchers also found:
The top 25 private owners own 17.6 percent of the state’s approximately 13 million private acres.
In six counties, the top ten landowners own at least 50 percent of private land. Of the six, five are located in the southern coalfields – Wyoming, McDowell, Logan, Mingo and Boone. Wyoming County has the highest concentration of ownership of any county.
Not one of the state’s top ten private landowners is headquartered in West Virginia.
Many of the counties – including Harrison, Barbour, Mineral, Lincoln, and Putnam – that had high concentrations of absentee corporate ownership (over 50%) in Miller’s 1974 study did not in this analysis.
Only three corporations that were among the state’s top ten landowners in 1974 remained on that list in 2011. If the sale of MeadWestvaco properties to Plum Creek Timber is completed, only two of the 1974 top owners will still be on the list.
Nationally timberland management concerns control about half of the nation’s timberlands that had been managed by industrial timber companies until the 1980s.
Finally, another potentially important finding is different level of entity ownership by region as related to the minerals beneath the land -- coal and natural gas. The study found:
There are also large geographical disparities in the share of large private landowners in the state. All but one of the counties where the top ten landowners owned at least 50 percent of the private land is in the southern coalfield coalfields - Wyoming, McDowell, Logan, Mingo and Boone. In the Marcellus gas field counties of the northeast and north-central part of the state, the private land ownership is less concentrated and tends to be owned more by individuals than large out-of-state corporations.
The study looked only at surface ownership, and not mineral rights ownership, so it's hard to tell if this gives an accurate look at the level of entity ownership in the Marcellus Shale. Moreover, mineral estates may be owned by private individuals who have leased their rights to entities, so it may be that even more of the state's property rights are effectively controlled by entities. The report indicates more study would be useful here, and I concur.
The takeaway: This report has the potential to be a good starting point for considering how to move the state forward in trying times. As the study notes: "[S]tudying patterns of land ownership in West Virginia through the lens of the 2011 tax data can help us understand our history, make wise policies in the present and better map the future of the state."
I think that's right. To me, a big cavaet is to ensure that the report be used to react to what is and to plan for what could be, rather then getting bogged down in what was or could have been. If people spend their time lamenting that outside corporations own land in the state, they will be missing the opportunity to do something positive for the future, like figuring out what can be done to promote sustainable development in the state by working with the current landowners. I hope the focus is primarily on the latter. There have already been enough missed opportunities.
Tuesday, December 3, 2013
Here in West Virginia, it's exam time for our law students. For my Business Organizations students, tomorrow is the day. For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.
Here's a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here): In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer. A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck. Andrew filed suit against the employee and M & W Milling claiming personal property damage to the truck and the loss of income derived from the use of damaged truck. Notably, the LLC was not a named plaintiff in the lawsuit.
Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though that was not critical to the issue of whether the LLC had to be named for Andrew to recover.)
A limited liability company is a “hybrid business entity having attributes of both a corporation and a partnership.” Patmon v. Hobbs, 280 S.W.3d 589, 593 (Ky.App.2009). As this Court stated in Spurlock v. Begley, 308 S.W.3d 657, 659 (Ky.2010), “limited liability companies are creatures of statute” controlled by Kentucky Revised Statutes (KRS) Chapter 275. KRS 275.010(2) states unequivocally that “a limited liability company is a legal entity distinct from its members.” Moreover, KRS 275.155, entitled “Proper parties to proceedings,” states:
A member of a limited liability company shall not be a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company, except if the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in an operating agreement.
Not surprisingly, courts across the country addressing limited liability statutes similar to our own have uniformly recognized the separateness of a limited liability company from its members even where there is only one member.
Tuesday, November 19, 2013
Last week, I had the pleasure of being part of the Second Annual Searle Center Conference on Federalism and Energy in the United States. (I had the good fortune to be part of the first one, too.) The conference covered a wide range of energy issues from electricity transmission siting to hydraulic fracturing to natural gas markets. One paper/presentation struck me as particularly interesting for markets generally (I am told an update version will be available soon at the same site: “The Evolution of the Market for Wholesale Power” by Daniel F. Spulber, Kellogg School of Management, Elinor Hobbs Distinguished Professor of International Business and Professor of Management Strategy & R. Andrew Butters, Kellogg School of Management, Northwestern University.
Here is the conclusion:
A national market for wholesale electric power in the US has emerged following industry restructuring in 2000. Tests for correlation and Granger Causality between trading hubs support the presence of a national market. Going beyond pairwise analysis, we introduce an array of multivariate techniques capable of addressing the national market hypothesis, including the common trend test. Although there is strong evidence of integration between the series, the analysis suggests a division between the eastern and western parts of the market. We also find border connects of 300 miles between the three interconnects.
The absence of transmission between the interconnects and significant border effects suggests that the national market is not yet fully integrated, even within the one-month horizon. Construction of transmission facilities between the interconnects would complete the development of the US wholesale market for electric power. Our analysis suggests that transmission facilities connecting the three regions would result in substantial gains from trade.
This conclusion – that “[a] national market for wholesale electric power in the US has emerged following industry restructuring in 2000 – could have a profound effect for how we view (and FERC views) wholesale electricity markets. The study notably does not control for or otherwise address the price of renewable energy credits (RECs), which are required for compliance with renewable portfolio standards in a majority of states. This may not change the conclusion, but it would be interesting to see how if the RECs have any influence on the market operations.
In addition, it’s possible that more than just the 2000 market restructuring is at play here. Since that time, electricity generation from natural gas has grown dramatically, and there is every reason to believe that will continue. According to the Energy Information Administration, “Nearly 237 GW of natural gas-fired generation capacity was added between 2000 and 2010, representing 81% of total generation capacity additions over that period.” If natural gas really is a major driver in facilitating this market, it would mean that that recent shale gas boom is even broader reaching than some may have expected.
There’s more work to be done here to be certain a national market for electricity really is emerging and if more can be done to facilitate that market. If true, such a market could bode well for the consumers, especially those in higher cost regions. It could also be an indicator that the regulatory structure of the market, even if not ideal, it working efficiently. If so (as I am inclined to believe), it suggests that the Congress and FERC should leave the market-related regulations alone, and focus efforts on things that will further develop the market, such as the study’s finding “that transmission facilities connecting the three regions would result in substantial gains from trade.”
Tuesday, November 12, 2013
Today is November 12, 2013, or 11/12/13. (It also happens to be my 43rd birthday. Yay me.)
In honor of the unique date, I decided to take a look at some business cases from the most recent prior 11/12/13. I found a couple of interesting passages. One case, Cotten v. Tyson, 89 A. 113, 116 (Md. Nov. 12, 1913), provides a good overview of some basic corporate principals:
 The principle is elementary that a stockholder, as such, is not an owner of any portion of the property of the corporation and, apart from his stock, has no interest in its assets which is capable of being assigned. [citing cases]
 Where one person is the owner of all the capital stock of a corporation, it has been held bound by his acts in reference to its property. [citing cases]
 But it is entirely clear upon reason and authority that a stockholder of a corporation, while retaining his stock ownership, cannot assign the interest represented by his stock in any particular class of the corporate assets. Such an attempted alienation would not only be incompatible with the retention of title to the stock in the assignor but its enforcement would be altogether impracticable. The stockholder himself could not require the corporation to segregate and distribute a specific portion of its property, and certainly he could not create and confer such a right by assignment.
 . . .Even if a stockholder could effectively assign an interest in the choses in action of his corporation, such a result could obviously not be accomplished by a mere assignment of his interest in the assets of its debtors.
Another, and in contrast, Smith v. Pullum, 63 So. 965 (Ala. Nov. 12, 1913), provides a sound example of terrible legal jargon:
The bill . . . alleges that it was agreed between the three parties, viz., G.W. Smith, William Pullum, and W.K. Pullum, that upon the purchase of the property for the above sum a corporation was to be formed, with a paid in capital of $4,500; that $1,650 of the said capital stock was to be the property of W.K. Pullum, $600 of said capital stock was to be the property of said Wm. Pullum, and $2,250 of said capital stock was to be the property of said G.W. Smith.
The case uses the term "said" seventy-five times. It's a four-page case.
Here's hoping we can dispense with said practice posthaste.
Tuesday, November 5, 2013
As noted over at the Family Law Prof Blog, Stanford Graduate School of Business recently issued a report, "Separation Anxiety: The Impact of CEO Divorce on Shareholders” (pdf), in which a study considered the impact CEO divorces have on the CEO's corporation. The report indicates that recent events "suggest that shareholders should pay attention to matters involving the personal lives of CEOs and take this information into account when making investment decisions."
The study found that a CEO's divorce has the potential to impact the corporation and shareholders in three primary ways. First, is a possible reduction in influence or control if a CEO as to sell or transfer stock in the company as part of the divorce settlement. Second, divorce can negatively impact "the productivity, concentration, and energy levels of the CEO" or even result in premature retirement. Third, the sudden change in wealth because of the divorce could lead to a change in the CEO's appetite for risk, making the CEO either more risk averse or more willing to take risks.
The report argues that this matters because:
1. Divorce can impact the control, productivity, and economic incentives of an executive—and therefore corporate value. Should shareholders and boards be concerned when a CEO and spouse separate?
2. Rigorous research demonstrates a relation between the size and mix of a CEO’s equity exposure and risk taking. Should the board “make whole” the CEO in order to get incentives back to where they originally intended? Would this decision be a “cost” to shareholders because it represents supplemental pay that could have been used to fund profitable investments, or a “benefit” because it realigns incentives and risk taking?
3. Companies do not always disclose when a CEO gets divorced. Reports only come out much later when shares are sold to satisfy the terms of the settlement. Is divorce a private matter, or should companies disclose this information to shareholders? If so, how detailed should this disclosure be? (citation omitted)
While I think this is somewhat interesting, I am not sure how much it helps shareholders or boards in their consideration of CEOs or their companies. Any major life problems or events -- divorce, death of a close family member, major losses in other investments, addiction, etc. -- could (in varying degrees) have a negative impact on control, performance, and risk tolerance.
In addition, the study cites two high-profile examples: Harold Hamm and Rupert Murdoch. Both such divorces are likely to touch on all the issues the study raises. Still, for both men, their recent divorces are not their first divorces. I'd be curious to know if there is any correlation between the performance of companies with CEOs who have been divorced at least once versus those who have not.
Clearly, a major life event can have a negative impact on the CEO and the company, at least in the short term. But I can't help but wonder how much value this adds as a general matter. That is, it may matter on a case-by-case basis, but I don't think I would want to see it become some kind of Sabmematric analysis of CEO potential. It seems to me risky for a company to look at the likelihood of divorce of a CEO as a determining factor in hiring. Or for a company to encourage a CEO to stay married (or single). And I doubt it's wise to go dumping stock in a company just because the CEO has a wandering eye (or their spouse does).
Perhaps there's more to this, but it seems to me this just confirms that a divorce is an awful experience for everyone. Still, for the companies and their shareholders, just as it is for the people directly involved, divorce may be the best available option.
Tuesday, October 29, 2013
Last week, I posted a response to the New York Times article criticizing law reviews. A friend pointed me to a cover story from the Economist, How science goes wrong: Scientific research has changed the world. Now it needs to change itself. It's an interesting read. This paragraph jumped out at me:
In order to safeguard their exclusivity, the leading journals impose high rejection rates: in excess of 90% of submitted manuscripts. The most striking findings have the greatest chance of making it onto the page. Little wonder that one in three researchers knows of a colleague who has pepped up a paper by, say, excluding inconvenient data from results “based on a gut feeling”. And as more research teams around the world work on a problem, the odds shorten that at least one will fall prey to an honest confusion between the sweet signal of a genuine discovery and a freak of the statistical noise. Such spurious correlations are often recorded in journals eager for startling papers. If they touch on drinking wine, going senile or letting children play video games, they may well command the front pages of newspapers, too.
The article also calls for more acceptance of what it calls "humdrum" or "uninteresting" work that confirms or replicates other trials, a long-standing practice underappreciated by both journals and those who award grants.
Not all is lost. One interesting suggestion: "Peer review should be tightened—or perhaps dispensed with altogether, in favour of post-publication evaluation in the form of appended comments." The article notes that the areas of physics and mathematics have made progress using the latter method.
We do have some versions of the post-publication evaluation in the law review world, often published as responses to the work of others, or articles that build upon such work. Over at The Conglomerate the post, Bebchuk v. Lipton on Corporate Activism, provides a good example of two papers take opposite views, with David Zaring's post itself serving the role of post-publication evaluator (on a small, but I think important, scale):
Some of the studies cited are quite old, and not all of the journals are top-drawer. But others seem quite on point. Perhaps the disputants will next be able to identify some empirical propositions with which they agree, and others with which they do not (other than, you know, sample selection).
Many blogs do this (including, sometimes, the Business Law Prof Blog), and I think it is a important role. Perhaps it is one the should be more formalized so that the value of such commentary can be more clearly recognized as part of the scholarly realm. For example, perhaps law reviews and other journals should consider publishing updates, major citiations, or critiques from various sources made about articles the review/journal has previously published.
There are many ideas out there, and we should keep looking for ways to keep developing useful scholarship. And by useful, I mean complete, thoughtful, and careful work, including what some people might consider "not novel," if not "humdrum" or "uninteresting." We don’t always need the legal equivalent of studies about drinking wine and letting kids play video games, not that there's anything wrong with either of those things.
Tuesday, October 22, 2013
Yesterday, the New York Times published what I consider a medicocre criticism of law reviews. Not that some criticism isn't valid. It is. I just think this one was poorly executed. Consider, for example, these thoughtful responses from Orin Kerr and Will Baude.
As I have thought about it, one thing that struck me was about the Times article was the opening:
“Would you want The New England Journal of Medicine to be edited by medical students?” asked Richard A. Wise, who teaches psychology at the University of North Dakota.
Of course not. Then why are law reviews, the primary repositories of legal scholarship, edited by law students?
I don't disagree with the premise, but note how limiting it is. First, it talks about one journal, one that is highly regarded. I know some people hate all law reviews, but I humbly suggest that most people consider elite journals like the Yale Law Journal a little differently. (It's also true that some journals like the Yale Law Journal happen to use some forms of peer review in their process.)
Second, the implication is that medical journals have it all figured out. That's apparently not true, either. An article from the Journal of the Royal Society of Medicine, What errors do peer reviewers detect, and does training improve their ability to detect them?, had the following goal:
To analyse data from a trial and report the frequencies with which major and minor errors are detected at a general medical journal, the types of errors missed and the impact of training on error detection.
The study concluded:
Editors should not assume that reviewers will detect most major errors, particularly those concerned with the context of study. Short training packages have only a slight impact on improving error detection.
Consider also, for example, this article from National Geographic, Fake Cancer Study Spotlights Bogus Science Journals:
A cancer drug discovered in a humble lichen, and ready for testing in patients, might sound too good to be true. That's because it is. But more than a hundred lower-tier scientific journals accepted a fake, error-ridden cancer study for publication in a spoof organized by Science magazine.
Finally, the problem for all kinds of journals is hardly new. This study, Peer-review practices of psychological journals: The fate of published articles, submitted again, from 1982, determined that the problem can also run in the other direction. From the Abstract:
A growing interest in and concern about the adequacy and fairness of modern peer-review practices in publication and funding are apparent across a wide range of scientific disciplines. Although questions about reliability, accountability, reviewer bias, and competence have been raised, there has been very little direct research on these variables.
The present investigation was an attempt to study the peer-review process directly, in the natural setting of actual journal referee evaluations of submitted manuscripts. As test materials we selected 12 already published research articles by investigators from prestigious and highly productive American psychology departments, one article from each of 12 highly regarded and widely read American psychology journals with high rejection rates (80%) and nonblind refereeing practices.
With fictitious names and institutions substituted for the original ones (e.g., Tri-Valley Center for Human Potential), the altered manuscripts were formally resubmitted to the journals that had originally refereed and published them 18 to 32 months earlier. Of the sample of 38 editors and reviewers, only three (8%) detected the resubmissions. This result allowed nine of the 12 articles to continue through the review process to receive an actual evaluation: eight of the nine were rejected. Sixteen of the 18 referees (89%) recommended against publication and the editors concurred. The grounds for rejection were in many cases described as “serious methodological flaws.” A number of possible interpretations of these data are reviewed and evaluated.
In the interest of full disclosure, I admit I have a fondness for law reviews. I am a former editor in chief of one, have served as an advisor to another, serve as the current president of our law review alumni association, and serve on the review's Advisory Board of Editors. The things I learned, from (usually) patient and careful authors, were exceedingly valuable and help guide me to do what I do now. I also have worked with several journals and reviews from the author side, and I have been usually impressed, and sometimes very frustrated, which is also true of almost every job experience I have ever had. And I am confident every editor in chief of a law review has worked with an author or two who drove them nuts.
I understand the frustrations, and the criticisms are often valid, at least to a point. But let's not undercut the efforts of committed and careful, if not experienced, student editors, who usually work their tails off. And let's not assume that every other discipline has it all figured out. I think it's clear they don't. There may be a better system (and I suspect there is), but let's not keeping dumping on a system (and students who work hard) without proposing some alternatives that we have a reason to believe will actually be better.
Tuesday, October 15, 2013
Early this month, the United States District Court for the Middle District of Pennsylvania decided Gentex Corp. v. Abbott, Civ. A. No. 3:12-CV-02549, (M.D.Pa. 10-10-2013). The outcome of the case is not really objectionable (to me), but some of the language in the opinion is. As with many courts, this court conflates LLCs and corporations, which is just wrong. The court repeatedly applies “corporate” law principles to an LLC, without distinguishing the application. This is a common practice, and one that I think does a disservice to the evolution of the law applying to both corporations and LLCs.
I noted this in a Harvard Business Law Review Online article a while back:
Many courts thus seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).
To be clear, though, Pennsylvania law applies equitable concepts, such as piercing the corporate veil, to LLCs. Still, courts should not discuss LLCs as though they are the same as corporations or improper outcomes are likely to follow. When dealing with LLCs, the concept should be referred to as “piercing the LLC veil” or “piercing the veil of limited liability.” Instead, though, courts tend to discuss LLCs and corporations as equivalents, which is simply not accurate.
By way of example, the Gentex court states:
Helicopterhelmet.com's principal place of business is in South Carolina, while Helicopter Helmet, LLC is a Delaware corporation with its principal place of business also in South Carolina.
Gentex Corp. v. Abbott, 3:12-CV-02549, 2013 WL 5596307 (M.D. Pa. Oct. 10, 2013) (emphasis added). It is not! It is a Delaware LLC!
Further, the court says:
From the record, it does not appear that Helicopter Helmet LLC was anything less than a bona fide independent corporate entity, or that Plaintiff intends to allege as much.
Id. (emphasis added). Again – no. An LLC is NOT a corporate entity. It is as, Larry Ribstein liked to say, an uncorporation. In fact, I would argue that Pennsylvania law, in Title 15, is called Corporations and Unincorporated Associations for a reason. Chapter 89 of that title is called Limited Liability Companies.
In fairness to Judge Brann, who wrote the Gentex opinion, Pennsylvania courts have merged the concepts of LLC and corporate veil piercing in other cases, even when discussing the differences between the two. In Wamsley v. Ehmann, C.A. No. 1845 EDA 2009 (Pa. Super. Ct. Feb. 28, 2012), summarized nicely here, the court explained:
These factors [for determining whether to pierce the veil] include but are not limited to: (1) undercapitalization; (2) failure to adhere to corporate formalities; (3) substantial intermingling of corporate and personal affairs; and (4) use of the corporate form to perpetrate fraud. [citing Village at Camelback Property Owners Assn. Inc.] . . .
Certain corporate formalities may be relaxed or inapplicable to limited liability corporations and closely held companies. Advanced Telephone Systems, Inc., supra at 1272. An LLC does not need to adhere to the same type of formalities as a corporation. Id. (finding lack of financial statements, bank accounts, exclusive office space, and tax returns was not evidence of failure to adhere to corporate formalities because entity was LLC with limited scope). In fact, the appropriate formalities for an LLC “are few” and, depending on the purpose of the LLC, it may not need to be capitalized at all. Id. Moreover, not all corporate formalities are created equal. Id. at 1279. To justify piercing the corporate veil, the lack of formalities must lead to some serious misuse of the corporate form. Id.
Okay, got that? The rules that apply to corporations apply to LLCs. Except when they don’t because LLCs are sometimes different. To justify piercing the “corporate veil,” then, an LLC must have seriously misused the corporate form, even though an LLC is a distinct form from the corporation. This is not especially helpful, I am afraid.
Veil piercing is difficult enough to plan around, and the seemingly random nature of veil piercing is often noted (with some, such as Prof. Bainbridge, arguing that we should do away with it altogether). There has not been much of a move to abolish veil piercing, and there hasn't even been much progress to make the standards for veil piercing more clear. Still, given the prevalence of LLCs, it’s high time courts at least help LLC veil piercing law evolve into murky standards specifically designed for LLCs. That doesn’t seem like too much to ask.
Tuesday, October 8, 2013
I gave a talk today about sustainable development, where I talked about the challenges of trying to balance resource development with the need to preserve the environment and deal with the social issues that come from increased activity.
One thing came to mind: People matter. Whether you work for EQT or the EPA, you're a person who has a job to do, which can have beneficial outcomes. When we discuss sustainable development, we also need to recognize the need for sustainable conversation. Development doesn't happen without conversation, which can lead to compromise, which can lead to progress.
Governments and corporations are both made up of people. Isolating either governments or corporations as inherently evil entities is missing the point. We can disagree about the goals of either, but we need to be more careful about who we vilify. Negotiations don't happen against governments or corporations, they happen with people in governments or in corporations. And we need to remember that.
Thursday, October 3, 2013
Professor Bainbridge takes issue with my analogy between shareholder activists and Congress. I am pretty sure he's missing my point, in part because I have not disagreed with the points he makes. My point (or at least intended one) is not that shareholder rights should equal a strict democracy. My point is that shareholder activists, sometimes with less than a majoity, say 20%, try to improperly impose their will on the currently elected (and properly empowered) board. Further, they are seeking additional powers to further their influence.
I figure we all agree that if a majority of shareholders agree, they can, at the proper time, make the changes they want. In contrast, shareholder activists often try to make those changes before they have the votes -- votes they may never have to support their views. I happen to see at least some of the current Republican House in that same vein. That's my intended point. I am sure lots of people disagree with that, too, but I just want to make clear that I am criticizing what I see as the abuse of a powerful minority messing with a regime that was properly elected and exercising that power that was obtained via election.
I'm not suggesting shareholders should have more power; I am criticizing how they sometimes exercise the power they currenty have.
Tuesday, October 1, 2013
So the government shutdown has me troubled. I think it’s reasonable for the House not like Obamacare and to do everything they can to repeal the law. However, it strikes me as different to force a government shutdown because that’s the only way they can get leverage to make a change the voters, at least at the last election, did not agree with.
As Sen. John McCain explained last week:
Many of those who are in opposition right now were not here at the time and did not take part in that debate. The record is very clear of one of the most hard fought, fair, in my view, debates that has taken place on the floor of the Senate. That doesn't mean that we give up our efforts to try to replace and repair Obamacare, but it does mean that elections have consequences. Those elections were clear in a significant majority that a majority of the American people supported the president of the United States and renewed his stewardship of this country.
The actions of the House right now remind me a lot of the arguments put forth against shareholder activism. That is, the complaints about rent-seeking actions put forth by an influential minority to pursue an agenda that is not consistent with the majority’s wishes. I’m reminded of Steve Bainbridge’s Preserving Director Primacy by Managing Shareholder Interventions. Below (with alterations mine), you can see the parallels (and to be clear, I am not suggesting the good professor agrees with my assessment – I’m the one making this assertion):
[N]ot all shareholder interventions [congressional deadlocks] are created equally. Some are legitimately designed to improve corporate [governmental] efficiency and performance, especially by holding poorly performing boards of directors and top management teams [government actors] to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company [government] than the incumbents [those who passed the current laws of the land], which may be true sometimes but often seems dubious. Worse yet, some interventions [deadlocks] are intended to advance an activist’s agenda that is not shared by other investors [voters].
I concede there are many rather obvious differences, and maybe it’s a stretch, but I don’t think too much of one. Ultimately, we have rules set up to hold our directors, and our elected leaders, accountable for their decisions. Attempting to wield power using procedural methods or other tactical efforts that undermine the will of the majority and shift power to the minority are rarely productive or positive. In my view, the same rules should apply in both instances: either convince a majority you are right and make the changes or move on.
Before I went to law school, I had a career in public relations and brand management. I had the pleasure of having a client that was among the best when it comes to brand reputation, Nintendo, where I was responsible (with our client and a solid team) for product launches like this, this, and this (PDF, p. 3). A few years ago, I even wrote an article combining my interest in branding and my interest in entity law: The North Dakota Publicly Trade Corporations Act: A Branding Initiative Without a (North Dakota) Brand.
Anyway, when I recently received my version of ERN Economics of Networks eJournal, (Vol. 5 No. 68), I took note of the paper, Corporate Reputation and Social Media: A Game Theory Approach, which is available here. The paper states in the abstract, “Corporate reputation is more and more the most valuable asset for a firm. In this day and age, corporate reputation, although an intangible asset, is and will grow as the most essential asset to publicize and also protect.” My first thought: as a general matter, can that possibly be true?
It appears not, though it is obvious that reputation can matter quite a bit to corporate (or other entity) value. (I leave the commentary on congressional reputation to others.) One study found that “Corporate Reputation contributes on average 26% of the value of a company's market cap.” In addition, a 2011 study found:
Analysis found that on average, corporate reputation is delivering proportionately more value to FTSE100 companies (c32 percent of market cap) than to FTSE250 ones (c14 percent). The study found that Royal Dutch Shell, Unilever, BG Group and Tesco are the top performers in terms of reputational contribution to market capitalization in 2010. Others in the top 10 included BHP Billiton, British Sky Broadcasting, Centrica, Rolls-Royce, GlaxoSmithKline and Diageo.
. . . .
The ten most valuable corporate reputations are contributing on average 48 percent to shareholder value (as measured by market cap). That represents a combined value of some £228bn. By contrast, the ten least effective reputations ( alist that includes Yell Group, Sports Direct, Enterprise Inns, UTV and Cable & Wireless) eroded value in 2010, by on average 10.7 percent of market cap worth a total of £720m.
Reputation contributions vary considerably by business sector. They range from an average 51 percent in the oil and gas sector to 16 percent in technology and utility companies.
One would expect that the value of reputation would vary by sector. It is not shocking to me that the value of reputation in the oil and gas sector is high or that the value for utility companies would be low. Technology companies on the low end seems odd, if you think Apple, Google, or Samsung. Apparently this study was talking more about tech companies like Molex, who most of us had never heard of until recently.
The harm that comes from reputational harms, though, is clearly a corporate concern. Just ask BP and for, that matter, other industry players, following the Deepwater Horizon disaster. Much of my current research is in the oil and gas area, especially related to hydraulic fracturing for those resources. Hydraulic fracturing already has a reputational problem, to say the least, but a major disaster could have fair reaching effects. And there are ways to drastically reduce the risk of bad events. As I have explained elsewhere (footnotes omitted):
A massive hydraulic fracturing accident could cause broad-reaching harm to the environment, landowners, drinking water, industry employees, and consumers. As witnessed when BP’s Deepwater Horizon oil platform suffered a blowout in the Gulf of Mexico, everyone can suffer when an industry actor errs. In that circumstance, one industry leader stated, “[i]t certainly appears that not all the standards that we would recommend or that we would employ were in place.” Nonetheless, all of the companies in the industry were negatively impacted by the moratorium placed on offshore drilling following the disaster.
Although companies need latitude to determine their own course on many business decisions, API and industry leaders seem to agree that there are some parts of the drilling process that must be followed. Industry leaders, trade associations, environmental leaders, engineers, scientists, and state and federal regulators should be working together to ensure that there are baseline standards in place to create a list of, and then avoid, “never events” for oil and gas drilling.
All involved need to avoid allowing the enemy of their version of “the perfect” to be the enemy of the overall good. Instead, we need to learn from the BP disaster and we need to learn from the experiences of those drilling, regulating, and studying hydraulic fracturing. As Laurence J. Peter, once said, “[t]here’s only one thing more painful than learning from experience, and that is not learning from experience.”
As it turns out, protecting against reputational harm does not only protect company value. It often also has corresponding economic, environmental, and social value.
Tuesday, September 24, 2013
Over at the New York Times Dealbook, the man responsible for a $6 billion hedge funds says just that in an article by Alexandra Stevenson:
Mr. Spitznagel, the founder of Universa Investments, which has around $6 billion in assets under management, says the stock market is going to fall by at least 40 percent in one great market “purge.” Until then, he is paying for the option to short the market at just that point, losing money each time he does.
Mr. Spitznagel’s approach is unusual approach for a money manager: To invest with him, you’ve got to believe in a philosophy that is grounded in the Austrian school of economics (which originated in the early 20th century in Vienna). The Austrians don’t like government to meddle with any part of the economy and when it does, they argue, market distortions abound, creating opportunities for investors who can see them.
When those distortions are present, Austrian investors will position themselves to wait out any artificial effect on the market, ready to take advantage when prices readjust.
Apparently his primary reason for this coming purge, which he says is needed, is that the Fed will have to readjust its monetary policies at some point. When they do, he says, the purge will come.
I am no expert in monetary policy, but I have wondered how long we can sustain an economy with interest rates so low. My recollection was that one of the Fed's key powers was to be able to raise and lower interest rates to spur growth or temper inflation. With interest rates this low, it seems that power is greatly restricted on both counts. I tend not to be one who thinks the sky is falling, but there is at least some reason to believe it may be getting a bit cloudy.
Tuesday, September 17, 2013
Okay, so maybe I am overstating that a bit, but it’s only a bit. This is not exactly timely, as the following case was decided in the December 2012, but I was recently reviewing it as I taught these cases and helped update Unincorporated Business Entities (Ribstein, Lipshaw, Miller, and Fershee, 5th ed., LexisNexis). (semi-shameless plug). Despite the passage of time, this case has, apparently, gotten me riled up again. So here we go . . .
Synectic Ventures I, LLC v. EVI Corp., 294 P.3d 478 (Or. 2012): several investment funds organized as LLCs (the Synectic LLCs or LLCs). The LLCs made a loan to the defendant corporation, EVI Corp. The loan agreement was secured by EVI’s assets, and provided that EVI would pay back $3 million in loans, plus 8% interest by December 31, 2004. The loan agreement provided that if EVI obtained $1 million in additional financing by December 31, 2004, the loan amount would be converted into equity (i.e., EVI shares) and the security interest would be eliminated. If the money were not raised by the deadline, the LLCs could foreclose on EVI’s assets (mostly IP in medical devices).
To make things interesting, the LLCs appointed Berkman the manager of the LLCs (thus, they were manager-managed LLCs). “At all relevant times, Berkman—the managing member of plaintiffs—was also the chairman of the board and treasurer of defendant [EVI].” In mid-2003, the Synectic LLCs' members sought to have Berkman removed, and Berkman signed an agreement not to enter into new obligations for the LLCs without getting member approval.
I (Josh Fershee) will follow up with a post of some (I hope) substance shortly, but I thought I’d take a moment to briefly re-introduce myself. When I last wrote for BLPB, I was teaching at the University of North Dakota School of Law. Last fall, we made the move to West Virginia University College of Law. (I say “we” because my wife (Kendra Huard Fershee) not only moved with me, but because she is also on the law faculty.) I joined WVU as part of a university-wide energy-law expansion and work with the Center for Energy and Sustainable Development.
I teach business law courses and energy law courses, with most of my research relating somehow to energy business and regulation. I teach Business Organizations, Energy Law Survey, Energy Business: Law & Strategy, and Energy Law and Practice. I plan to add a Hydraulic Fracturing Seminar, too, in the near future.
Of perhaps some interest to our readers, I have taught my Energy Business: Law & Strategy course once, and I plan to do so again in the spring. I think it is a unique class, especially in the law school environment, with its focus on how law comes to be and how businesses are strategic in their use of law and regulation. (Note: I am of the mind that this reality is important to understand whether you want to work for businesses and employ such strategies or if you want to work to limit businesses in the ability to do so.) I have the students work in groups, and they draft a written final project, which they also present to the class.
Below the jump, I provide the books, course description, goals, and assessment items for the course. I welcome any comments or suggestions for additional teaching materials or concepts.