Wednesday, March 25, 2015

Despite Low Oil and Gas Prices, the Energy Sector Is Relatively Healthy

The Economist has a helpful brief outline -- here -- of why oil prices are so low.  I continue to think that oil prices will stabilize in the $55-$65 range, but now that it's apparent that most Bakken oil is profitable around $42, I would not be surprised to see prices bounce around in that range periodically for a while, too. 

A few things to keep in perspective when you hear about how the energy sector is suffering: 

(1) It's not very often through the years that anyone would be upset by low energy prices.  That usually is a sign of good things to come in terms of markets because low energy prices can reduce costs of manufacturing, they tend to increase demand (in energy and beyond), and it tends to mean more money in consumers' pockets. Those are usually very good things. 

(2) Despite layoffs are some energy sector companies, and a dramatic slow down of drilling, if you looked back to 2005 0r 2006 (an even more recently) people would have been thrilled to see the sector with this many jobs. Even another 20-30% slow down represents a strong and viable industry.

(3) Legal work for the sector is likely to carry on at a strong pace. A slow down will mean a slower pace in many sectors, and mineral leasing and other title work will likely slow significantly, but slow downs can lead to increases in M&A, restructuring, and litigation. 

There are concerns, but it's always helpful to keep things in perspective. It's fair to raise questions and highlight the rapid changes, but it's not all gloom and doom.    

March 25, 2015 in Current Affairs, Joshua P. Fershee | Permalink | Comments (0)

Thursday, March 19, 2015

This I Believe: On Corporate Purpose and the Business Judgment Rule

Prof. Bainbridge yesterday posted about The Modern Corporation Statement on Company Law.  The statement has ten fundamental rules, of which number ten is:

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

Prof. Bainbridge is with Delaware Chief Justice Strine in that profit maximization is the only role (or at least only filter) for board members.  As he asserts, “The relationship between the shareholder wealth maximization norm and the business judgment rule, . . . explains why the business judgment rule is consistent with the director's  "legal obligation to maximise profits for their shareholders." 

CJ Strine has noted that the eBay decision, which I have written about a lot, says that if “you remain incorporated in Delaware, your stockholders will be able to hold you accountable for putting their interests first.”  I think this is right, but I remain convinced that absent self-dealing or a “pet project,” directors get to decide that what is in the shareholders best interests.

I have been criticized in some sectors for being too pro-business for my views on corporate governance, veil piercing law, and energy policy.  In contrast, I have also been said to be a “leftist commentator,” in some contexts, and I have been cited by none other than Chief Justice Strine as supporting a “liberal” view of corporate norms for my views on the freedom of director choice. 

When it comes to the Business Judgment Rule, I think it might be just that I believe in a more hands-off view of director primacy more than many of both my “liberal” and “conservative” colleagues. Frankly, I don’t get too exercised by many of the corporate decisions that seem to agitate one side or the other.  I thought I’d try to reconcile my views on this in a short statement. I decided to use the model from This I Believe, based on the 1950s Edward R. Murrow radio show.  (Using the Crash Davis model I started with was a lot less family friendly.) Here’s what I came up with:   

I believe in the theory of Director Primacy.  I believe in the Business Judgment Rule as an abstention doctrine, and I believe that Corporate Social Responsibility is choice, not a mandate. I believe in long-term planning over short-term profits, but I believe that directors get to choose either one to be the focus of their companies.  I believe that directors can choose to pursue profit through corporate philanthropy and good works in the community or through mergers and acquisitions with a plan to slash worker benefits and sell-off a business in pieces. I believe that a corporation can make religious-based decisions—such as closing on Sundays—and that a corporation can make worker-based decisions—such as providing top-quality health care and parental leave—but I believe both such bases for decisions must be rooted in the directors’ judgment such decisions will maximize the value of the business for shareholders for the decision to get the benefit of business judgment rule protection. I believe that directors, and to shareholder or judges, should make decisions about how a company should pursue profit and stability.  I believe that public companies should be able to plan like private companies, and I believe the decision to expand or change a business model is the decision of the directors and only the directors. I believe that respect for directors’ business judgment allows for coexistence of companies of multiple views—from CVS Caremark and craigslist to Wal-Mart and Hobby Lobby—without necessarily violating any shareholder wealth maximization norms. Finally, I believe that the exercise of business judgment should not be run through a liberal or conservative filter because liberal and conservative business leaders have both been responsible for massive long-term wealth creation.  This, I believe.      

March 19, 2015 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Delaware, Joshua P. Fershee, LLCs, M&A, Social Enterprise | Permalink | Comments (5)

Tuesday, March 17, 2015

How to Get in Your Own Way: Tesla Shut Out of West Virginia

West Virginia (like Michigan and New Jersey, among others) has decided to follow other states in limiting options for Tesla sales.  As the Charleston Gazette reports: 

On the floor later Friday evening, the House put an amendment in a bill designed to shore up car dealers’ legal standings in dealings with auto manufacturers that effectively blocks innovative electric car manufacturer Tesla from doing business in the state.

The floor debate is best left forgotten: Several delegates played the crony capitalism card, talking about how their local car dealers are generous in sponsoring Little League teams and community events (not to mention campaign contributions), while other sneered about the company being owned by California billionaire Elon Musk (some called him “Monk,” but fortunately no one referred to him as “Elton”), and claiming the company relies on federal subsidies.

Never mind that it was stated that fewer than a dozen West Virginians own Teslas, or that a boom in demand for electric-powered cars might just be a good thing for a state that provides coal for electric power plants.

If you're about a free (or at least more free) markets, why stop a competitor from competing?  Sorry, but the federal subsidy argument for the auto industry went out the window when the government bailed out GM and Chrysler.  

Beyond that, for the life of me, I can't understand why coal friendly constituencies seem so often to be hostile to electric vehicles. (In fairness, Kentucky just added a Tesla charging station.)  If it uses electricity, you should be all for it. Why is running a car on electricity any different than leaving the lights on all night?  If you're for consumption, who cares who does it? 

There is some debate about whether electric cars are better for the environment than gasoline powered cars.  This remains an open question.  But there's little doubt that increased demand for electricity is generally good for the coal industry.  

More important, though, if consumers want to buy a Tesla, why not let them?  What's the value in blocking consumers from buying the vehicles they want?  Oh yeah, rent seeking and cronyism.  By the way, the West Virginia legislature knows we can buy cars in other states, right? 

March 17, 2015 in Corporations, Current Affairs, Joshua P. Fershee, Law and Economics | Permalink | Comments (1)

Tuesday, March 10, 2015

Practical Lessons in the Business World: You Don't Have to Use Their Draft

Today in my Energy Law Seminar, I sprung an exercise on my class.  I gave each member of the class a confidentiality and non-disclosure agreement (NDA).  Half the class works for a venture fund and the other half works for a technology inventor who was seeking investment. (I give them some more details about the proposed deal the NDA would help facilitate. (The exercise is based on an issue I worked on some years ago.)

I instruct them to read the  NDA, then they can meet with others assigned the same side. They can come up with their negotiating points, then I turn them loose with the other side.  

I always enjoy watching students work like this.  They are forced to react, and it lets them be a little creative.  I also like this exercise, because it has multiple layers. They get to ask me me what they need to know for the business points, and I later get to talk to them about the options they may not have considered.  

I have done this a few times, and the students always negotiate what they see as the key issues. Their issue spotting is usually good, but they often miss a big option (a couple students do often have an idea what's up).  Here's the twist: the NDA I give them is absurdly one-sided and in fact reserves the secret information for the venture fund (who is only providing money), and not the inventor (who has the technology and information they want kept secret).    

They can, of course, negotiate with this document and try to get a workable NDA based on the deal points, but the better answer for the investor representatives is to decline the entire document. The NDA is so one sided, there is no fixing it.  The better answer is to ask for a more balanced version or to offer to draft one for the potential counterparty  to consider.  

Sometimes, of course, you have no room for negotiations, such as when you rent a car.  You can mark up the contract, but with Avis, it's take it or leave it.  The same can be true for certain clients who need funding or a supply contract, but often, there is room to talk.  The real life version of the negotiation provides a perfect example:  I told the venture fund the NDA was too one-sided and that it couldn't work for us. I suggested that we could try a draft or that we'd be happy to look at a different option.  The venture fund's reply: "Oh sure, we have one that is far more balanced that doesn't have the provisions that seem to concern you most. You'll have an email in a few minutes."  

When we talk about deal points and key issues, sometimes it's easy to forget to teach students some other big keys to business law.  The takeaways: 

(1) If at all possible, only use draft documents that reflect a sense of mutuality (e.g., reciprocal indemnification clauses). "Fixing" one-sided documents is fraught with risk.  

(2) Don't be afraid to ask. Often, though I don't care for it, people like to start with offers to "see what I can get." (I see this as counterproductive, at least where a long-term relationship could be built.)

(3) Negotiate in proportion to the issue before you. The NDA is often so you can negotiate the deal. If you make that initial part too antagonistic, you may never even get to negotiating the actual deal, which can mean everyone loses. 

March 10, 2015 in Entrepreneurship, Joshua P. Fershee, Law School, Negotiation, Teaching | Permalink | Comments (1)

Tuesday, March 3, 2015

A Delaware Law Insider: A Nexus between Shareholder Activism & Hobby Lobby?

The Fordham Journal of Corporate and Financial Law recently published a March 6, 2014, lecture from Former Delaware Supreme Court Chief Justice Myron T. Steele, Continuity and Change in Delaware Corporate Law Jurisprudence (available on Westlaw, but fee may apply).  As an aside, I'll note that it appears to have taken a full calendar year for this to get published (at least on Westlaw), which seems crazy to me.  If there's any question why legal blogs can fill such a critical role in providing timely commentary on legal issues, this is a big part of the answer.

In the lecture, Chief Justice Steele discusses three main areas: (1) multi-forum jurisdiction, (2) shareholder activism, and (3) the Nevada, Delaware, and North Dakota Debate (a "competition for charters"). 

As to multi-forum jurisdiction, he makes the unsurprising point that Delaware courts are of the view that first impressions of the Delaware General Corporation Law or other "internal affairs doctrine" issues should be handled in Delaware courts.  Of note, he explains that the Delaware constitution (art. IV, § 11(8)) now allows federal courts, the top court from any state, the SEC, and bankruptcy courts to certify questions directly to the Delaware Supreme Court.  This option is one that lawyers litigating such cases in other forums won't want to miss.    

With regard to shareholder activism, Chief Justice Steele states, 

In my preferred system for the world, and I think in the minds of all Delaware judges, engaged if not antagonistic stockholders add positive value as a check on director authority and are a catalyst for corrective accountability, so long as their efforts focus on improved performance and not the advancement of political or personal agendas--a major caveat in my view. Delaware courts, it seems to me, will increasingly recognize the benefits that engaged investors bring to the table.

This is an interesting take, and it seems consistent with my read of most Delaware law. I am of the view that shareholders should have a lot of latitude to engage and even agitate, if they wish, as long as they follow the rules they agreed to in the corporate charter and bylaws (and applicable state law, of course).  There is concern that a court might determine an action to be political or personal in nature if it something with which the court does not agree, but that could happen on the political left or right, and judgment is always a risk at some point.  Delaware courts are usually up to the task.
 
Chief Justice Steele's view on this lends further credence to a view I have held since the Burwell v. Hobby Lobby Stores decision came out: Delaware corporations cannot use the Religious Freedom Restoration Act (RFRA) to justify their business decisions.  That is, RFRA applies in Delaware, but RFRA does not pre-empt Delaware corporations law, so RFRA cannot be used as a rationale for decision making, at least where a shareholder objects. In Hobby Lobby, Justice Alito wrote:
State corporate law provides a ready means for resolving any conflicts by, for example, dictating how a corporation can establish its governing structure. See, e.g.ibid; id., §3:2; Del. Code Ann., Tit. 8, §351 (2011) (providing that certificate of incorporation may provide how “the business of the corporation shall be managed”). Courts will turn to that structure and the underlying state law in resolving disputes.
Combine this with Chief Justice Steele's warning against company governance for the "advancement of political or personal agendas" and recent cases requiring Delaware corporation to seek profit, it seems Delaware courts are skeptical of non-profit-seeking rationales for shareholder or director action.  As Chancellor Chandler explained in eBay v. Newmark (more here):

The corporate form in which [an Delaware corporation] operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment. . . . Having chosen a for-profit corporate form, . . . directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.

Thus, in Delaware a for-profit corporation cannot promote or practice the religious views of even a majority of directors or shareholders where such actions do not promote the value of the corporation for shareholders. 

Finally, as to the Nevada, Delaware, North Dakota debate, Chief Justice Steele questions the value of Nevada allowing "charters to exculpate directors for breaches of duty of loyalty," because he thinks such a massive change in widely held views of fiduciary duty law could invite federal "meddling."  I think he's exactly right on this.  He notes with skepticism the North Dakota Publicly Traded Corporations Act because there are only two companies that have adopted the law, but the law's failure in the competition for charter does not raise the same concerns of a race to the bottom (my words) that Nevada's law provides.

I think Chief Justice Steele's article provides interesting and useful insight into the workings of the Delaware court system, and I recommend the sort read.  I just wish I had seen it about nine months ago.  

March 3, 2015 in Business Associations, Corporate Governance, Corporate Personality, Corporations, Delaware, Joshua P. Fershee, Social Enterprise | Permalink | Comments (0)

Tuesday, February 24, 2015

Breaking News: Obama Vetoes Keystone XL

President Obama just vetoed the bill approving construction of the Keystone XL pipeline.  The President has said the veto is not about the value of the pipeline, but that it represents the President's view the pipeline should not go around the State Department evaluation process. 

The veto comes at a time when oil transportation is a increasingly an area of concern, especially in light of recent rail accidents in Quebec and West Virginia.  I was recently part of a news story discussing the rail safety concerns in my part of country -- here -- and pipeline transportation tends to be much safer for human safety, though it raises other environmental concerns.

It's not clear whether Keystone XL would be built any time soon, in light of low oil prices, but the veto will certainly keep people talking.  More on this soon.  

February 24, 2015 in Corporations, Current Affairs, Joshua P. Fershee, Law and Economics | Permalink | Comments (0)

Tuesday, February 17, 2015

Look it Up: The Value of Google (or Bing or Yahoo)

The internet age has brought tremendous access to information.  As kids, many of us were used to the familiar refrain from our parents, "Go look it up."  That meant getting out a dictionary or the Encyclopedia Britannica (volumes of books) to see if we could figure out unique facts about the Tasmanian Devil (my fourth-grade report subject), which is "the world's largest carnivorous marsupial."   Things have changed.

Today, telling someone to look it up means a trip to the computer, and probably Google, Bing, Yahoo or some other search engine.  Maybe it could mean a news service like the New York Times, and of course Westlaw, LexisNexis, or Bloomberg for legal issues. If I needed any evidence things have changed for all of us, I recently asked my nine-year-old son to put the "word book" he got out to help with his homework. He looked at me and asked, "You mean the dictionary?"  Um, yeah.  

Anyway, with all this information at our fingertips, I am regularly amazed how often I could tell people to, "Look it up."  Students regularly ask me questions that they could easily look up themselves, and it happens with colleagues or vendors, too. I have always liked finding the answers to questions, so it usually doesn't bother me much. I like to be the source of information.  But when it's really easy to find -- as in "What's the population of  West Virginia?" -- it's a little disappointing. 

In a time where people are often looking for an edge to make themselves more valuable to their employer, I suggest that people should be more inclined to look things up.  Try to save questions for times when you really need the help.   

February 17, 2015 in Joshua P. Fershee, Teaching | Permalink | Comments (2)

Tuesday, February 10, 2015

The Regulatory State: Fracking Bans and Proper Exercise of Local Control

Business law is filled with a wide range of regulation and regulatory issues, and one of the main areas of business law for my research is energy law.  Regulation impacts energy businesses at many levels. Energy companies have to deal land use regulations, air and water quality regulations, work place regulations, and (often) securities regulations.  

On the land use and permitting side of things, oil and gas law has long been considered primarily a state issue, making such regulations relatively local (i.e., not federal).  In recent years, with the increased use of high-volume hydraulic fracturing, many local governments have decided to restrict the process in their localities, splitting from state regulatory regimes that would allow the process. Interesting cases related to fracking bans from New York, Colorado, and Pennsylvania provide good examples of this process. 

Texas Professor David B. Spence’s article about local hydraulic fracturing bans: The Political Economy of Local Vetoes, 93 Texas L. Rev. 351 (2015), discusses the debate about whether local governments should be ale to overrule the state law on oil and gas operations.  Here's the abstract:

As the controversy over fracking continues to sweep the nation, many local communities have enacted ordinances banning the practice, creating conflicts between these ordinances and statewide regulation schemes. This has given rise to state–local preemption challenges within state courts. In this Article, Professor Spence analyzes these conflicts, focusing on the best way to distribute the costs and benefits of fracking and how courts have attempted to address these distributional concerns. He begins by describing the conflicts between state law and local ordinances and the court decisions that have resolved these preemption issues. He next discusses how future takings claims would affect the distribution of the costs and benefits of fracking.

I think Prof. Spence is right on a lot of the issues, though I have come to believe that, at least for most oil and gas issues, as long as state-level regulation is the primary regulation in the sector, whether localities have the ability to ban hydraulic fracturing in their jurisdictions is irrelevant.  That is, I see oil and gas as a state-level issue, and if state's have or wish to grant counties or municipalities local control, then great.  If the state chooses to maintain control, that's fine, too.  

My main concern is that legislators and regulators, and courts who review their decisions, seek sufficient information to balance the costs and benefits of oil and gas operations.  This is not an outcome driven analysis. That is, decision makers can, in my view, properly assess the costs and benefits of the hydraulic fracturing process and have different outcomes (such as one court upholding a ban and another striking a ban).  But one must gather information and assess the broader range of issues raised by oil and gas operations, which are not that different from many other industrial operations, as I have argued previously, here.

I'll close with a shameless plug for my response to Prof. Spence's article, which appears in Texas Law Review See Also, along with responses from two outstanding scholars: Alexandra Klass  (Fracking and the Public Trust Doctrine: A Response to Spence) and Hannah Wiseman  (Governing Fracking from the Ground Up).  I highly recommend these three pieces, and if you want more, you can check out mine.  

Here's my abstract for How Local is Local?: A Response to Professor David B. Spence's the Political Economy of Local Vetoes:

Abstract:      

Professor Fershee responds to Professor David B. Spence’s article about local hydraulic fracturing bans: The Political Economy of Local Vetoes, 93 Texas L. Rev. 351 (2015). Professor Spence notes that the shale oil and gas debate provides an example of “an age-old political problem that the law is called upon to solve: the conflict between an intensely held minority viewpoint and a less intense, contrary view held by the majority.” In resolving such conflicts, Spence suggests that courts should resolve such “conflicts in ways that encourage states and local governments to regulate in ways that weigh both the costs and the benefits of shale oil and gas production fairly and fully.” 

This Response suggests the Professor Spence’s test for local control is a sound, but adds another factor contributing to local control. As noted above, another way of considering local control over oil and gas operations is to view local control as state-level control. This Response proceeds under the premise that each state should decide whether it wishes to allow its municipalities to exercise oil and gas related vetoes. In analyzing whether local vetoes are efficient under Professor Spence’s test, this article analyzes recent decisions in New York, Pennsylvania, and Colorado. 

This Response concludes that as long as state-level regulation is the primary basis for oil and gas regulation, Professor Spence’s overarching rule that state and local governments pursue regulations seeking to balance the costs and the benefits of shale oil and gas production “fairly and fully” is a foundation for good regulation. In this sense, local (meaning state or smaller subdivisions) vetoes are critical, but how “local” the vetoes are is less important. The key, then, is ensuring that courts and regulators are actually balancing costs and benefits.

February 10, 2015 in Current Affairs, Joshua P. Fershee, Law and Economics | Permalink | Comments (0)

Tuesday, February 3, 2015

A Jogger's Story: A Nike+ Marketing Reminder About Loyalty, Transparency, and Expectations

Anyone who has followed me on Twitter knows that I am a pretty regular runner. I try to run at least four times a week, and depending on the time of year, my schedule, and other variables, I have run as much as six times a week.

It was not always this way. I have asthma, which didn’t help much as a kid, but that problem has been controlled by medication for years. And although I was a soccer player, I was not much of a runner. Goalkeepers often aren’t.  In my older years, I was known to say from time to time, “I only run when being chased.”

Sometime in 2011, that changed. I started running three miles, most days.  I got a pair of the Nike Free Run Shoes, which may or may not have helped, but I was less sore then I was with the old, stable, and heavy, running shoes I would previously tried to run.  Not long after that I got the Nike+ running app, which tracked my runs and served as a motivator and something of a personal accountability measure, as I shared my run with friends.   

In a little more than three years, I ran 769 times and logged 2569 miles on the Nike+ running app.  Not bad. 

For me, it was figuring out that I didn't have to commit to a marathon, or even a 10K.  I went for three-mile runs each time, and about a year ago I upped that run to about 3.5 miles each time out, and I never worry about a longer run.  I found what I could stick to, and the Nike+ app helped me see just how much I was accomplishing in relatively short, but regular, outings.  I recommend giving it a try, if you'd like to run, but it always seemed to hard. 

So, this is a long introduction to my breakup with Nike+.  Nike created a thing at the end of 2014 called the “Out Do You Challenge.” It made a nice (kind of goofy) little video that chronicled the year for some of my friends who have accomplished some impressive feats.  Things like marathons. That's great, and a nice, if a bit cheesy reward for a year of effort. 

The site offers a place to click to see if you “made the cut for the challenge.”  I did not.  Okay, so it’s not that I deserve anything or that Nike kept something from me that I had a right to. Their site and app; their rules.  But it still seemed a little odd, given that I am a connected and regular user, who shared all his runs on social media, and had run as much as 200 miles more than others deemed “worthy.” 

Being the connected user that I am, I inquired.  The response from Nike was as follows: “We are sorry to hear that you weren't selected for the Nike+ Outdo You Challenge. We selected our top Nike+ users who met the highest level of engagement and had complete profile information.” 

Again, they get to make the rules, but it’s hard to see how I wouldn’t make the grade based on how often I used the app. For some reason, this irked (and still irks) me, and I couldn’t figure out why.  Then it dawned on me: in my own stupid way, I felt betrayed. I was thinking: We had been in this together for 2,500 miles.  I had stuck with it when the app was not working and the only way to fix it was to email support for help.  I had run with Nike+ in Warsaw and Krakow and London and Spain and all over the United States.  We did it together. And now I was left out.

So, it occurred to me that I was being silly.  It is pretty silly, but it's still how I felt.  And it’s also a lesson in how to keep people connected and engaged.  

If there had been a target or a message – “you need to run at least a half marathon” or “we need your home address” – that made clear what was required, then I can choose if I am in.  Instead, Nike decided to create a post hoc award for certain participants.  Again, their choice, but in doing so they excluded someone who thought they were part of the team.  And that undermines loyalty.

I’m not saying I won’t run in Nike shoes any more or that I’ll never use the Nike+ app.  I might.  But I am also auditioning others.  Currently, I am running with MapMyRun to see how I like that.  In addition to Nike, I will be trying some other options – maybe Brooks, Rebook, or Adidas – in my next trip to the running shop.

This is a good lesson in marketing, I think, but also in teaching.  The best teachers cultivate trust.  They have high expectations, and if they aren’t met, the students usually know.  I try to be transparent with my students about what I expect, and why, so that they know whether they are on track or not.  I am sure, though, that during my career, I have surprised some students who felt betrayed because they thought they were on track, yet their grade did not coincide with what they thought they put in. 

I know I am a lot better today about sharing and explaining those expectations today than I was when I started as a teacher, but it’s good to be reminded of just how critical it can be as transparent as possible with your expectations. So, thanks, Nike+, for the reminder.  Maybe I’ll be back.  Maybe not. 

 

February 3, 2015 in Joshua P. Fershee, Law School, Social Enterprise, Sports | Permalink | Comments (1)

Tuesday, January 27, 2015

Cunningham on Corporate Leadership: A Few Additional Thoughts

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

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

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

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

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

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

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

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

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

Tuesday, January 20, 2015

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, January 13, 2015

UCLA Hosts Teaching Conference on Engaging the Entire Class

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

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

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

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

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

Register and pay online
(through UCLA website)

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

Conference Structure

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

Workshop presenters include:

·         Patti Alleva, University of North Dakota

·         Steven Friedland, Elon University

·         Steven K. Homer, University of New Mexico

·         Nancy Levit, University of Missouri-Kansas City

·         Hiroshi Motomura, UCLA

By the end of the conference, participants will have concrete ideas for enhancing participation and inclusion in law school classrooms to take back to their students, colleagues, and institutions.

Who Should Attend

This conference is for all law faculty (full-time and adjunct) who want to learn about enhancing participation and inclusion in law school.

Conference Schedule

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

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

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

·         9:00-10:00 a.m.: Workshop 1

·         10:00-10:20 a.m.: Break

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

·         11:20-11:40 a.m.: Break

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

·         12:40-1:30 p.m.: Lunch

·         1:30-2:30 p.m.: Workshop 4

·         2:30-2:50 p.m.: Break

·         2:50-3:50 p.m.: Workshop 5

·         3:50-4:10 p.m.: Break

·         4:10-4:30 p.m.: Closing

·         4:30 p.m.: Adjourn

Registration Fee

Through February 12, 2015

·         $250 - General Attendance

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

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

After February 12, 2015

·         Registration is on-site only

·         $300 - General Attendance

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

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

Registration fee includes:

·         all materials, and

·         breakfast, lunch, and snacks.

Location

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

Transportation

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

Lodging

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

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

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

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

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

Tuesday, January 6, 2015

Larry Ribstein Being Right Doesn't Make Anyone Else Wrong

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

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

So here's how Usha explains her thinking:

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

 

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

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

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

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

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

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

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

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

Tuesday, December 30, 2014

Courts and the LLC, End of the Year Edition

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

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

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

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

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

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

Tuesday, December 23, 2014

New York’s Fracking Failure

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

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

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

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

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

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

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

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

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

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

Tuesday, December 16, 2014

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

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

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

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

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

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

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

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

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

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

Tuesday, December 9, 2014

LLC Loophole Is Not Clearly a Loophole

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

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

. . .

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

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

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

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

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

Tuesday, December 2, 2014

The Beginning of the End of Limited Liability?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Mr. Adkisson continues:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tuesday, November 25, 2014

A Chance at the Top for Boys AND Girls

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

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

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

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

But then she continued reading.

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

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

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

Sigh. 

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

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

* * * 

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

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

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

Tuesday, November 18, 2014

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

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

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

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

 As Charlie Brown would say, "Aaugh!

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

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

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

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

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