Tuesday, February 6, 2018
A brand new Arizona case continues the trend of incorrectly discussing limited liability companies (LLCs) as limited liability corporations, but it does allow for an interesting look at how entities are sometimes treated (or not) in laws and regulations. Here’s the opening paragraph of the case:
Noah Sensibar appeals from the superior court's ruling affirming the Tucson City Court's finding that he had violated the Tucson City Code (TCC). He argues that the municipal ordinance in question is facially invalid because it conflicts with a state statute shielding members or agents of a limited liability corporation from personal liability.
City of Tucson v. Noah Sensibar, No. 2 CA-CV 2017-0087, 2018 WL 703319 (Ariz. Ct. App. Feb. 5, 2018).
About three years ago, the City of Tucson alleged that Sensibar, as “the managing member and statutory agent of Blue Jay Real Estate LLC, an Arizona corporation, was responsible for building code violations.” Id. (emphasis added). Notwithstanding the incorrect characterization of the entity type, it looks like the court at least reasonable (though not clearly correct) to hold Sensibar individually liable. Here’s why:
The Tuscon City Code states that “Any owner or responsible party who commits, causes, permits, facilitates or aids or abets any violation of any provision of this chapter . . . is responsible for a civil infraction and is subject to a civil sanction of not less than one hundred dollars ($100.00) nor more than two thousand five hundred dollars ($2,500.00).” Tucson Code Sec. 16-48(2) (Violations and penalties).
The Code Definitions in Sec. 16-3 provide the following:
Owner means, as applied to a building, structure, or land, any part owner, joint owner, tenant in common, joint tenant or tenant by the entirety of the whole or a part of such building, structure or land.
. . . .
Person means any natural person, firm, partnership, association, corporation, company or organization of any kind, but not the federal government, state, county, city or political subdivision of the state.
. . . .
Responsible party means an occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land; and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.
As such, the Code seems to contemplate holding both entities and individuals liable. Still, Sensibar had an argument. The use of the term “manager” here causes some potential confusion because one can be a manager of an LLC, while the LLC might serve as the manager of the property. Thus, it could be that only the LLC should be liable. Another plausible reading, though, is that “manager” meant the natural person doing the managing as is common in property situations. Manager, like occupant, lessee, and lessor, is not defined in the Code, so it would seem the intended source of the definitions should be from a property perspective, not an entity perspective.
Similarly, the Code could mean a natural “person having control over a structure” can be liable. If that’s the case, and the court seems to have gone down this road, the argument would be that Sensibar was being held liable directly for his role as manager or person in control of the property and not vicariously for violations of the LLC. Given that occupants, lessors, and lessees, among others, can be held liable, it does appear that the Code could have intended to impose liability directly on multiple parties, including both individuals and entities. This would be sensible, in many contexts, though it would also be sensible to say explicitly, especially given that the term “person” clearly includes entities.
A simple improvement might be to update the definition of “responsible party,” as follows:
Responsible party means an, whether as an individual or entity, any occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.
That would, at least, be consistent with the decision. Because if the court is holding Sensibar liable for merely being the manager of the LLC, and not as the manager of the property, the case is wrongly decided. Too bad the notice of appeal was not timely filed – maybe we could have found out.
UPDATE: Based on a good comment from Tom N., I did a little more research. As of an LLC filing in 2009, Noah Sensibar owned at least a 20% interest. (It may be 50% because there were two listed members, but it was at least 20%.) As such, this suggests that the LLC does not have funding to cover the fines or that express indemnification is lacking and the other member(s) won't agree to cover the costs from LLC funds.
I will also note that a 2016 decision denying Sensibar's appeal stated, "The court also heard evidence that Sensibar, the managing partner of the LLC, was 'the person in charge' of the property." City of Tucson v. Sensibar, No. 2 CA-CV 2016-0051, 2016 WL 5899737, at *1 (Ariz. Ct. App. Oct. 11, 2016). Seriously? He's an LLC manager. That's all. LLCs are not corporations OR partnerships. THEY ARE LLCS!
Monday, February 5, 2018
WOMEN’S LEADERSHIP IN ACADEMIA CONFERENCE
Advancing women professors, librarians, and clinicians in leadership positions in the academy.
Thursday & Friday July 19-20, 2018
University of Georgia School of Law
Call for Proposals!
DEADLINE: Thursday, March 15, 2018
Sunday, February 4, 2018
"ruling noted that some business-led discrimination is allowed by California state law, but it agreed with Candelore's argument that Tinder's age-targeted pricing is not" https://t.co/FrrIf27UBj #corpgov— Stefan Padfield (@ProfPadfield) February 2, 2018
"One critical regulatory tool during the Crisis was “regulation by deal,” in which healthy financial firms (“acquirers”) would hastily acquire failing firms (“targets”) to mitigate the crisis." https://t.co/3ndI8s0WCY #corpgov— Stefan Padfield (@ProfPadfield) February 3, 2018
"Beyond the board chair and the lead independent director, those chairing the audit, compensation, nominating, and governance committees hold the real power positions." https://t.co/sNAFypEhk4 #corpgov ht @KimWhitler— Stefan Padfield (@ProfPadfield) February 3, 2018
Saturday, February 3, 2018
Time's Up for Board Members: Sexual Misconduct Allegations Against CEOs of Wynn and the Humane Society Should Send a Message
Perhaps I'm a cynic, but I have to admit that I was stunned when the news of hotelier Steve Wynn's harassment allegations at the end of January caused a double-digit drop in stock price. What began as an unseemly story of a $7.5 million settlement to a manicurist at one his of his resorts later morphed into a story about his resignation as head of the finance chair of the Republican National Committee. Not only did he lose that job, he also lost at least $412 million (the company at one point lost over $3 billion in value). His actions have also led regulators in two states to scrutinize his business dealings and settlements to determine whether he has violated "suitability standards." Nonetheless, Wynn has asked his 25,000 employees to stand by him and think of him as their father. The question is, will the board stand by him as it faces potential liability for breach of fiduciary duty?
The Wynn board members should take a close look at what happened with the Humane Society yesterday. That board chose to retain the CEO after ending an investigation into harassment allegations. A swift backlash ensued. Major donors threatened to pull funding, causing the CEO to resign. A number of board members also reportedly resigned. However, not all of the board members resigned out of principle. One female director resigned after stating, " Which red-blooded male hasn’t sexually harassed somebody? ... [w]omen should be able to take care of themselves.” Unfortunately, the reaction of this board member did not surprise me. She's in her 80s and in my twenty years practicing employment law on the defense side, I've heard similar sentiments from many (but not all) men and women of that generation. Indeed, French actress Catherine Deneuve initially joined other women in denouncing the #MeToo movement before bowing to public pressure to apologize. We have five generations of people in the workplace now, and as I have explained here, companies need to reexamine the boundaries. What may seem harmless or "normal" for some may be traumatic or legally actionable to someone else.
As the Wynn and the Humane Society situations illustrate, the sexual harassment issue is now front and center for boards so general counsels need to put the issue on the next board agenda. As I wrote here, boards must scrutinize current executives as well as those they are reviewing as part of their succession planning roles to ensure that the executives have not committed inappropriate conduct. Because definitions differ, companies must clarify the gray areas and ensure everyone knows what's acceptable and what's terminable (even if it's not per se illegal).This means having the head of human resources report to the board that company policies and training don't just check a box. In fact, board members need to ask about the effectiveness of policies and training in the same way that they ask about training on bribery, money laundering, and other highly regulated compliance areas. Boards as part of their oversight obligation must also ensure that there are no uninvestigated allegations against senior executives. Prudent companies will review the adequacy of investigations into misconduct that were closed prematurely or without corroboration.Companies must spend the time and the money with qualified, credible legal counsel to investigate claims that they may not have taken seriously in the past. Because the #MeToo movement shows no signs of abating, boards need to engage in these uncomfortable, messy conversations. If they don't, regulators, plaintiffs' counsel, and shareholders will make sure that they do.
All circuits agree that loss causation can be shown via “corrective disclosures” – some kind of explicit communication to the market that prior statements were false, followed by a drop in stock price.
However … there has been an alternative theory that plaintiffs can use to show loss causation, even without an explicit corrective disclosure. The theory is usually described as “materialization of the risk.” It requires the plaintiff to show that the fraud concealed some condition or problem that, when revealed to the market, caused the stock price to drop, even if the market was not made aware that the losses were due to fraud. For example, a company may report a slowdown in sales, causing its stock price to fall, while concealing the fact that the slowdown was due to an earlier period of channel stuffing. By the time the channel stuffing is revealed, it may communicate no new information about the company’s prospects, so the stock price remains unmoved. Under a materialization of the risk theory, the price drop upon disclosure of the fall in sales would be sufficient to allege loss causation.
To be sure, very often cases fall along something more akin to a spectrum, with district courts demanding more or less of a connection between the disclosure and the underlying fraud before permitting plaintiffs to proceed; nonetheless, the broad guidance offered at the circuit level influences those determinations. Thus it was significant that, for a time, three circuits – the Fifth, Sixth, and Ninth – were reluctant to recognize “materialization of the risk” theory, and required plaintiffs to clear the more restrictive “corrective disclosure” hurdle.
In July 2016, as I previously described, the Sixth Circuit joined the majority of circuits and endorsed “materialization of the risk” theory. That left just the Fifth and the Ninth Circuit on the side of corrective-disclosure-only, with a case then-pending before the Ninth Circuit that directly presented the question.
That decision has just been released. In Mineworkers’ Pension Scheme, et al v. First Solar Incorporated, et al, the Ninth Circuit, as well, held that “A plaintiff may also prove loss causation by showing that the stock price fell upon the revelation of an earnings miss, even if the market was unaware at the time that fraud had concealed the miss…. This rule makes sense because it is the underlying facts concealed by fraud that affect the stock price. Fraud simply causes a delay in the revelation of those facts.”
The per curiam opinion stated that the matter had already been resolved by an earlier Ninth Circuit case, which … I, ahem … dispute, but regardless, it’s apparently settled now.
By my count, that leaves the Fifth Circuit standing alone. Your move, Fifth Circuit.
Thursday, February 1, 2018
Earlier this week the SEC announced that it had halted another fraudulent initial coin offering (ICO). AriseBank claimed to have raised about $600 million and that it had purchased an FDIC-insured bank. AriseBank had promised investors that it would allow them to access FDIC-insured bank accounts and other consumer banking products. The SEC alleges that these representations were false. It also alleges that AriseBank omitted to disclose the criminal background of key executives. A gripping American Banker article has more color on the ICO:
The agency said AriseBank’s initial offering of AriseCoin is illegal because there’s no registration filed with the SEC. It also said the offering materials “use many materially false statements and omissions to induce investment in the ICO,” such as AriseBank’s earlier claim that it had bought a commercial bank and could offer FDIC-insured accounts.
The SEC further said in its complaint that AriseBank “omitted to disclose the criminal background of key executives — most notably, Rice, who is currently on probation for felony theft and tampering with government records."
This particular initial coin offering also obtained celebrity endorsements. Most notably, Evander Holyfield endorsed AriseBank through social media.
Celebrities should be careful about endorsing ICOs. In November, the SEC Division of Enforcement released a statement on Potentially Unlawful Promotion of Initial Coin Offerings and Other Investments by Celebrities and Others. That statement warned that "endorsements may be unlawful if they do not disclose the nature, source, and amount of any compensation paid, directly or indirectly, by the company in exchange for the endorsement."
Although it might be unpopular at times, the SEC's increased involvement in the ICO space should be a good thing for investors. By taking some of the frauds out of the market, the SEC may make it easier for honest projects to raise funds.
Wednesday, January 31, 2018
My article "Reconsidering Contractual Consent" is now up on SSRN. In it I argue that consent is not as big a deal in k law as we have assumed and that is probably just fine. Enjoy!https://t.co/mSv3pYJ5qA— Nathan Oman (@nate_oman) January 26, 2018
"system, known as investor-state dispute settlement, or ISDS": "U.S. ... says [it] erodes the sovereignty of the U.S. by allowing multinational companies to circumvent domestic courts" https://t.co/gI3Q8jzXEo #corpgov— Stefan Padfield (@ProfPadfield) January 30, 2018
"class action lawsuits challenging ... mergers have driven most of the growth in federal securities litigation since 2016. These cases migrated from Delaware ... following the Delaware Court of Chancery’s In re Trulia, ... decision" https://t.co/JTVpeKjs8X #corpgov— Stefan Padfield (@ProfPadfield) January 31, 2018
After spending a little time with the new tax bill, I couldn't help but think, "there must be a better way." That reminded me of an article from a little while back in the West Virginia Law Review, titled, Legislation's Culture, by Richard K. Neumann, of Hofstra University - School of Law (PDF). Here’s the abstract:
American statutes can seem like labyrinthine mazes when compared to some countries’ legislation. French codes are admired for their intellectual elegance and clarity. Novelists and poets (Stendhal, Valéry) have considered the Code civil to be literature. Swedish legislation might be based on empirical research into problems the legislation is intended to remedy, and the drafting style, though modern today, is descended from an oral tradition of poetic narrative.
Comparing these legislative cultures with our own reveals that the main problem with American legislation is not too many words. It is too many ideas — a high ratio of concepts per legislative goal. When American, French, and Swedish legislatures address similar problems, the French and Swedes draft using far fewer concepts than Americans do. In both countries, simple solutions are preferred over convoluted ones. The drafters of the Code civil thought the highest intellectual and legislative accomplishment to be simplicity. The Swedes got to approximately the same place through a cultural value that law be understandable to the public. Where the American legislative process can seem chaotic, there has been some respect for Cartesian rationality in France and for empirical evidence in Sweden.
Even if American statutes were to be translated into ordinary English, they would still be labyrinths because our legislatures insist on addressing every conceivable detail that legislators can imagine. The result is excessively conceptualized legislation, imposing large numbers of duties. Statutory concepts cost money. They create issues, which must be decided by publicly funded courts and agencies with additional costs to the parties involved. Every unnecessary statutory concept wastes social and economic resources. And to the extent law seems incomprehensible to the public, it loses moral authority.
Having studied law in Louisiana, I admit to a certain soft spot for the civil code, even if my fondness is rooted firmly in this country. (In fact, about one year ago, we lost a giant in the civil law, Athanassios Nicholas "Thanassi" Yiannopoulos. See, for example, his work, A.N. Yiannopoulos, Requiem for a Civil Code: A Commemorative Essay, 78 TUL. L. REV. 379 (2003), available via Hein Online here.)
I digress. Back to my point, I think this statement from Neumman is spot on: "[T]o the extent law seems incomprehensible to the public, it loses moral authority." Absolute truth. And the same applies to regulations.
Monday, January 29, 2018
At The University of Tennessee College of Law, we have a four-credit-hour, four-module course called Representing Enterprises that is one of three capstone course offerings in our Concentration in Business Transactions. In Representing Enterprises, each course module focuses on a different aspect of transactional business law, often a specific transaction or task. We try to both ask the enrolled students to apply law that they have learned in other courses (doctrinal and experiential) and also introduce the students to applied practice in areas of law to which they have not or may not yet have been exposed.
I have been teaching the first module over the past few weeks. We finish up tomorrow. My module focuses on disclosure regulation. I have five class meetings, two hours for each meeting, to cover this topic. Each class engages students with a hypothetical that raises disclosure questions.
The first class focused on general rule identification regarding the applicable laws governing disclosure in connection with the purchase of limited liability membership interests. Specifically, our client had bought out his fellow members of a member-managed Tennessee limited liability company at a nominal price and without giving them full information about a reality television opportunity our client had with his wife. As things turned out, the television show was picked up and popularized the brand name of the limited liability company, making the husband and wife, over the next few years, significant income. Now, of course, the former limited liability company members are contending that, had they known the complete facts, they would have demanded a higher price for their limited liability membership interests from our client. The students did some nice, creative thinking here in identifying applicable legal rules, pointing to Tennessee limited liability company fiduciary duty law (although they missed our closely held limited liability company doctrine), federal and state securities law, business torts, potential contract law issues, etc.
Subsequent class meetings broke disclosure law down into component pieces commonly seen in a business transactional law context. The second class centered on work for another client, a Delaware corporation, concerning fiduciary duty disclosure issues under Delaware corporate law in connection with a merger. The third class focused on a client's obligations under mandatory disclosure and antifraud elements of the federal securities laws. The fourth class involved a hypothetical that raises specialized disclosure regulation questions for a talent agency that is an indirect subsidiary of a New York Stock Exchange ("NYSE") listed company. I may post later about the fifth class meeting, which will take place tomorrow. It involves Uber's recently publicized data security breach and related disclosure matters.
I want to focus today on the fourth class meeting. In that class, one of the things the students had to wrestle with was determining how the parent's status and regulation as a NYSE-listed firm might impact or be impacted by disclosure compliance at the subsidiary level. The NYSE Listed Company Manual provides, e.g.,
The market activity of a company's securities should be closely watched at a time when consideration is being given to significant corporate matters. If rumors or unusual market activity indicate that information on impending developments has leaked out, a frank and explicit announcement is clearly required. If rumors are in fact false or inaccurate, they should be promptly denied or clarified. A statement to the effect that the company knows of no corporate developments to account for the unusual market activity can have a salutary effect. It is obvious that if such a public statement is contemplated, management should be checked prior to any public comment so as to avoid any embarrassment or potential criticism. If rumors are correct or there are developments, an immediate candid statement to the public as to the state of negotiations or of development of corporate plans in the rumored area must be made directly and openly. Such statements are essential despite the business inconvenience which may be caused and even though the matter may not as yet have been presented to the company's Board of Directors for consideration. . . .
Having identified this and other related rules, we posited situations in which operations or activities at the subsidiary level might require disclosure by the parent company under the NYSE listed company rules. We dug in most specifically on what might lead to market rumors or cause unusual market activity. Having just discussed in the prior class meeting disclosure standards under the federal securities laws, the students understood that materiality was a distinct, separate disclosure-triggering standard and that the parent firm might have different--even conflicting--disclosure obligations under the federal securities laws and the NYSE listed company rules. With these observations as a foundation, I asked the students what types of conduct or information at the subsidiary level might generate market rumors or unusual market activity.
Given that the firm was a talent agency, I was not surprised when one of the first answers referenced the allegations against Harvey Weinstein. The disparate pay issues relating to the Mark Wahlberg/Michelle Williams affair that I wrote about in a different context a few weeks ago (w/r/t which the same talent agency advised both actors) also came up. In each case we tried to envision what the subsidiary should be disclosing to the parent, and when, to enable the parent to satisfy its NYSE obligations. Among other things, we discussed the financial and non-financial impacts of the facts we were generating on the trading price and volume of parent's stock. It was a great brainstorming session, imv. By the end of class, we could see that a communication-oriented compliance plan for the subsidiary seemed to be in order.
Interestingly, the Steve Wynn story then broke the next day. I was pleased in the aftermath to see this article in The New York Times that validated the nature of our discussion and the complexity involved in assessing market risk in these kinds of situations.
The question, though, is what specifically investors are now pricing in. One risk is that regulators make it difficult for Wynn Resorts to expand. The Massachusetts gaming watchdog said on Friday that it would review plans for a new casino in Boston.
The threat of parting ways with an influential executive, until now a reasonable steward of shareholder value, is also potent. Over the past decade, Wynn Resorts’ average 10.5 percent shareholder return is a shade higher than that of the Standard & Poor’s 500-stock index — despite a slump in 2014 after China toughened rules on holiday gamblers.
Investors’ strong response to the reports is now the problem of Wynn Resorts’ 10-person board, which contains just one woman. Others surely will learn from how the Wynn board responds.
My students did identify regulatory risk (and the rest of the class was spent talking about California and New York laws regulating talent agencies, which are regulated and require licensure) and the risks associated with an iconic founder or chief executive at the heart of a controversy. I love it when current events dovetail with classroom activities!
Have any of you taught a course or course component like this before? I would be interested to know. I found it hard to teach the securities regulation issues to the students who were not interested in securities regulation work. I tried to break the legal foundations down into relatively small policy and doctrinal chunks, and I told them that every business lawyer needs to know a little bit about securities regulation, whether advising or litigating in connection with business transactions. But those who had not taken and were not taking our Securities Regulation course (a majority of the class) seemed to mentally almost shut down. Some of that may be 3L-itis. But I am rethinking how to engage students more happily with this part of the course. I will be asking the students for help on this. But any thoughts you have from your own experience (or otherwise) would be a great help to me as I think this through.
Indiana University legal studies professor Abbey Stemler sent along this description of an article she co-wrote with Harvard Business School Professor Ben Edelman. They recently posted the article to SSRN and would love any feedback you may have, in the comments or via e-mail.
Perhaps the most beloved twenty-six words in tech law, Section 230 of the Communications Decency Act of 1996 has been heralded as a “masterpiece” and the “law that gave us the modern Internet.” While it was originally designed to protect online companies from defamation claims for third-party speech (think message boards and AOL chat rooms), over the years Section 230 has been used to protect online firms from all kinds of regulation—including civil rights and consumer protection laws. As a result, it is now the first line of defense used by online marketplaces to shield them from state and local regulation.
In our article recently posted to SSRN, From the Digital to the Physical: Federal Limitations on Regulating Online Marketplaces, we challenge existing interpretations of Section 230 and highlight how it and other federal laws interfere with state and local government’s ability to regulate online marketplaces—particularly those that dramatically shape our physical realities such as Uber and Airbnb. We realize that the CDA is sacred to many, but as Congress pays renewed attention to this law, we hope our paper will support a richer discussion about what the CDA should and should not be expected to do.
Sunday, January 28, 2018
"If other fast food establishments have been reluctant to raise wages, Jayaraman added, it’s because pressure from investors has elevated quarterly gains above the potential long-term benefits of happy workers. In-N-Out has no public shareholders" https://t.co/PL2O2aY7WE #corpgov— Stefan Padfield (@ProfPadfield) January 26, 2018
Saturday, January 27, 2018
The Delaware Supreme Court finally issued its decision in Cal. State Teachers Ret. Sys. v. Alvarez, and it appears we don’t have one neat trick for dealing with races to the courthouse in derivative litigation after all.
As I’ve discussed in previous blog posts, Delaware has a substance and procedure problem. Namely, it uses its own court procedures as supplemental mechanisms to substantively police the behavior of corporate actors, but those procedures don’t apply in non-Delaware forums. That leaves Delaware vulnerable to being undercut by other states – and encourages an unhealthy race to the courthouse in other jurisdictions.
As I explained before, in the context of derivative cases, “Delaware’s recommendation that derivative plaintiffs seek books and records before proceeding with their claims simply invites faster filers to sue in other jurisdictions – and invites defendants to seek dismissals against the weakest plaintiffs, which will then act as res judicata against the stronger/more careful ones.”
That’s what happened in Alvarez. While the Delaware plaintiffs spent years litigating a books and records request, defendants won a dismissal for failure to plead demand futility against a competing plaintiff group in Arkansas. The Chancery court then held that the dismissal was res judicata against the Delaware plaintiffs.
On appeal, the Supreme Court remanded with a curious request: to determine whether the dismissal violated the Delaware plaintiffs’ federal Due Process rights. The reasoning, first articulated by VC Laster in In re EZCORP Inc. Consulting Agreement Deriv. Litig., 130 A.3d 934 (Del. Ch. 2016), was that until a court concludes demand is futile, the plaintiff has no right to bring suit on the corporation’s behalf, and therefore acts individually. Laster analogized to the Supreme Court’s decision in Smith v. Bayer Corp., 564 U.S. 299 (2011), which held that a named plaintiff in a class action cannot bind the class until after certification.
On remand the Chancery court couldn’t quite bring itself to hold that federal Due Process was violated, exactly, but did suggest that the Delaware Supreme Court adopt a rule prohibiting preclusion in these circumstances, in part because such a rule would further public policy.
That decision was appealed back up to the Delaware Supreme Court, which has now rejected the recommendation. The Supreme Court concluded that a derivative case is unlike a class action, because in a class action, pre-certification, the named plaintiff is suing on his or her own behalf, bringing a claim that he or she is entitled to bring individually. By contrast, in a derivative action, the stockholder plaintiff never has the right to bring a claim individually; the claim always belongs to the corporation. Thus, even absent demand futility, the plaintiff must be viewed as standing in the corporate shoes. By this reasoning, derivative plaintiffs are in privity with each other, and there is a sufficient alignment of interests to satisfy Due Process.
In short, absent a showing of inadequate representation by the first plaintiffs, res judicata applies.
The Delaware Supreme Court did have a curious footnote though and I wonder if it provides an opening in future cases. The Court noted that had Delaware plaintiffs attempted to intervene in the Arkansas action – or, failing grounds to intervene, at least filed a statement of interest or sought to participate as amici – they might “have a more compelling argument before this Court that the Arkansas Plaintiffs failed to adequately represent them.” We’ll see if anyone tries to take advantage of that going forward.
Friday, January 26, 2018
On Wednesday, I spoke with Kimberly Adams, a reporter for NPR Marketplace regarding CSX's decision to require its CEO to disclose health information to the board. I don't have a link to post, sorry. As you may know, CSX suffered a significant stock drop in December when its former CEO died shortly after taking a medical leave of absence and after refusing to disclose information about his health issues. CSX has chosen the drastic step of requiring an annual CEO physical in response to a shareholder proposal filed on December 21st stating, “RESOLVED, that the CEO of the CSX Corporation will be required to have an annual comprehensive physical, performed by a medical provider chosen by the CSX Board, and that results of said physical(s) will be provided to the Board of Directors of the CSX Corporation by the medical provider.” Adams asked my thoughts about a Wall Street Journal article that outlined the company's plans.
I'm not aware of any other company that asks a CEO to provide the results of an annual physical to the board. As I informed Adams, I hope the board has good counsel to avoid running afoul of the Americans with Disabilities Act, HIPAA, the Genetic Information Nondiscrimination Act of 2008, and other state and federal health and privacy laws. While I believe that the board must ensure that it takes its role of succession planning seriously, I question whether this is the best means to achieve that. I also remarked that although a CEO would know in advance that this is a condition of employment and would negotiate with the aid of counsel what the parameters would be, I was concerned about the potential slippery slope. How often would the CEO have to update the board on his/her health condition? Who else would have access to the information? Will this deter talented executives from seeking the top spot at a corporation?
One could argue that the health of the CEO is material information. But if that's the case, why haven't more shareholders made similar proposals? Perhaps there haven't been more of these proposals because the CSX situation was extreme. Shareholders were asked to bless the $84 million compensation package of a man who was so ill that he required a portable oxygen tank but who refused to disclose his condition or prognosis. Hopefully, other companies won't take the same approach.
Thursday, January 25, 2018
If you write about regulated industries or securities and banking topics, it can be challenging to keep track of developments in the regulatory space. There is a startup that I've found useful for seeing new developments. It's called Compliance.ai. Mostly, I now use it to track of news from FINRA and the SEC. They have been reaching out to law schools and offering training and access to students and faculty. They also allow users to track news from the CFPB, DOJ, Treasury, NYSE, DOL, and a bunch of other regulators.
I haven't yet seen anything on it that I could not find elsewhere. Much of the material can be found in the federal register, on the websites of self-regulatory organizations, or on the SEC's website. Instead of constantly canvasing all these websites, Compliance.ai allows users to put together a feed from the regulators they want to follow. It's also made it easier for me to see things like enforcement actions as they come out. For example, two days ago FINRA published Letter of Acceptance, Waiver, and Consent NO. 2016051672301. This fascinating AWC details how Paul Martin Betenbaugh consented to a three month suspension for:
In September and October 2015, on three separate occasions Bettenbaugh pretended to be a competing registered representative and posted internet ads explicitly soliciting sex that included that registered representative's business cell phone number as the contact number for responses. By doing so, Betenbaugh violated FINRA Rule 2010.
Of course, not all of the regulatory updates are as interesting.
Compliance.ai has have not paid me anything or asked me to write this post. It's useful, new, and has a relatively slick interface for tracking regulatory developments. The only benefit I've received from them is access.
As many of this blog’s readers know, RUPA § 404 (1997) “cabins in” the duty of loyalty by stating that “[a] partner’s duty of loyalty to the partnership and the other partners is limited to the following.” The situations then described all involve harm to the partnership itself—not harm to an individual partner. Setting forth a duty that is owed to a partner, but that is defined solely by reference to harm to the partnership, is peculiar. http://lawprofessors.typepad.com/business_law/2016/06/is-cardozo-wrong-of-partner-to-partner-fiduciary-duties-.html
In the 2013 version of RUPA, this problem was squarely addressed. RUPA § 409(b) (2013) eliminates the “limited to” language and instead states that the duty of loyalty simply “includes” the standard partnership-harm situations. The Official Comment explains:
This section originated as UPA (1997) § 404. The 2011 and 2013 Harmonization amendments made one major substantive change; they “un-cabined” fiduciary duty. UPA (1997) § 404 had deviated substantially from UPA (1914) by purporting to codify all fiduciary duties owed by partners. This approach had a number of problems. Most notably, the exhaustive list of fiduciary duties left no room for the fiduciary duty owed by partners to each other – i.e., “the punctilio of an honor the most sensitive”). Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928). Although UPA (1997) § 404(b) purported to state “[a] partner’s duty of loyalty to the partnership and the other partners” (emphasis added), the three listed duties each protected the partnership and not the partners.
Even before the 2013 RUPA, however, a number of states had deviated from RUPA (1997) by omitting the “limited to” language which restricted the duty of loyalty. California’s partnership statute, for example, simply states that “[a] partner’s duty of loyalty to the partnership and the other partners includes all of the following . . . .” Cal. Corp. Code § 16404(b). Thus, California appears to be a state that believes, as does RUPA (2013), that the “limited to” language associated with the duty of loyalty is too restrictive.
But . . . wait a minute. In the 2013 version of the Uniform LLC Act, the duty of loyalty is again described without the restrictive “limited to” language. Section 409(b) simply states that the duty of loyalty “includes the duties . . . .” California has adopted the revised Act, but it alters the language of § 409(b) to add back the “limited to” language when describing the duty of loyalty. Cal. Corp. Code § 17704.09.
What am I missing? Why does California reject the “cabining in” of the duty of loyalty for the general partnership, but it adds that language back for the LLC? Is this a legislative goof, a purposeful change, or something else? Thoughts from those steeped in California law?
Wednesday, January 24, 2018
"the Dodge mandate ... requires only that directors and other corporate managers run the corporation 'primarily for the profit of the stockholders,' leaving room for other secondary considerations" 58 B.C. L. Rev. 1425 #corpgov #socent— Stefan Padfield (@ProfPadfield) January 22, 2018
"Activist hedge fund Pershing Square agreed to pay $193.75 million of the settlement in connection with its scheme to deliver Allergan into Valeant’s hands.... Pershing Square made over a billion dollars on the trade" https://t.co/gdceOtPPcZ #corpgov— Stefan Padfield (@ProfPadfield) January 22, 2018
"empirical literature on ... (i) state competition to produce corporate law, (ii) independent boards, (iii) takeover defenses, and (iv) the use of corporate governance indices" https://t.co/GEmMOK3fDy #corpgov— Stefan Padfield (@ProfPadfield) January 23, 2018
Tuesday, January 23, 2018
As regular readers know, I am particular about language and meaning, especially in the business-entity space related to limited liability companies (LLCs). I think because of that, I was drawn to a new paper from Shu-Yi Oei (Boston College), The Trouble with Gig Talk: Choice of Narrative and the Worker Classification Fights, 81 Law & Contemp. Probs. ___ (2018). The abstract:
The term “sharing economy” is flawed, but are the alternatives any better? This Essay evaluates the uses of competing narratives to describe the business model employed by firms like Uber, Lyft, TaskRabbit, and GrubHub. It argues that while the term “sharing economy” may be a misnomer, terms such as “gig economy,” “1099 economy,” “peer-to- peer economy” or “platform economy” are just as problematic, possibly even more so. These latter terms are more effective in exploiting existing legal rules and ambiguities to generate desired regulatory outcomes, in particular the classification of workers as independent contractors. This is because they are plausible, speak to important regulatory grey areas, and find support in existing laws and ambiguities. They can therefore be deployed to tilt outcomes in directions desired by firms in this sector.
This Essay’s analysis suggests that narratives that are at least somewhat supportable under existing law may be potent in underappreciated ways. In contrast, clearly erroneous claims may sometimes turn out to be hyperbolic yet harmless. Thus, in evaluating the role of narrative in affecting regulatory outcomes, it is not only the obviously wrong framings that should concern us but also the less obviously wrong ones.
There are several interesting points in the piece, and find this part of the conclusion especially compelling:
I cannot prove that the deployment of gig characterization is the only reason certain legal treatments and outcomes (such as independent contractor classification for workers) seem to be sticking, at least for the moment. My narrower point is that while gig and related characterizations appear innocuous and accurate relative to the sharing characterization, this set of descriptors may actually be doing more work in terms of advancing a desired regulatory outcome. The reasons they are able to do more work are that (1) gig characterization speaks to an important and material legal ambiguity, (2) the gig characterization is plausibly accurate, even if deeply contested, and (3) the proponents of gig characterization have been able to use procedural and other tools to shore up gig characterization and defeat its competitors. These observations may be generalized beyond the gig context: While the temptation is to focus on narratives and characterizations that are clearly wrong, this Essay suggests that we should also pay attention to more subtle narratives that are less clearly wrong, because such narratives may be doing more work by virtue of being “almost right.”
This last point is one that resonates with me on the LLC front, where people insist on comparing or analogizing LLCs to corporations. There are times when such a comparison or analogy is "almost right," and it is in these circumstances that the perils of careless language can cause the most trouble because the same comparison or analogy can get made later when doing so is clearly wrong.
Monday, January 22, 2018
Just over a month ago, I published a post on meal delivery kits, describing the nature of the service and noting a few points about the market, including some information about legal claims. In that post, I promised more--specifically, a review of the kits themselves. That review will come in two parts. This is the first. Today, I want to note some of the advantages and disadvantages of using meal kits, from my perspective.
First, the advantages:
- delivery to your doorstep
- the convenience of food and recipe in one box
- little food waste (tailored quantities of food and fixings)
- exposure to new recipes
- introduction to new ingredients (most recently for us, spaghetti squash)
- the chance to learn new cooking techniques
- recipe cards that
- lay out sequential steps
- include helpful pictures and tips
- have a glossy finish and wipe clean
- fit in a magazine rack or storage unit
Now, the disadvantages:
- undue packaging waste? (box, internal containers, cold packs)
- uneven quality instructions (e.g., herbs divided . . . how--by type or by volume?)
- expense (depending on what your household would do instead)
As for the cost, here's what we pay for each:
Hello Fresh (4 people, 3 meals) - $129, including shipping
Plated (3 people, 2 meals) - $59.70 + $7.95 shipping
In a third post, I will say more about the relative merits of the individual services. My husband orders Blue Apron for us from time to time, and I also will try to get some information from him for my next post. Feel free to post observations or ask questions in the comments.
Sunday, January 21, 2018
"#corpgov mechanisms have been relied on to equalise wealth distribution, promote equality in the labour force, & pursue environmental goals. This article assesses the justification, utility, & efficacy of using corporate governance to promote public aims" https://t.co/GblhJX9dpp— Stefan Padfield (@ProfPadfield) January 16, 2018
"analyzing all of the current 39 state enactments of 'benefit legislation' to determine whether the new ... laws require accountability through financial &/or accounting reporting requirements, & thus, enable measurement of the ... benefit" 42 Del. J. Corp. L. 1 #corpgov #socent— Stefan Padfield (@ProfPadfield) January 21, 2018
"GE faces a monumental task when it reports results on Wed.... 'Nobody trusts the numbers. People think something is buried there. That’s why GE is a falling knife right now,' said Alicia Levine, head of global investment strategy at BNY Mellon" https://t.co/rYQELKniHY #corpgov— Stefan Padfield (@ProfPadfield) January 21, 2018
Saturday, January 20, 2018
Sometimes it feels like I’m on the litigation-limiting-bylaw beat.
To briefly recap, in several prior posts, a law review article, and a forthcoming chapter, I’ve argued that corporate governance documents are not contracts in the traditional sense and thus should not be read to impose contract-like obligations on shareholders (critical for, among other things, the applicability of the Federal Arbitration Act). I’ve also argued that a corporation’s governing documents cannot impose forum-selection or other limitations on shareholders’ ability to press federal claims or claims that arise under the law of a nonchartering state.
This is relevant because some companies have gone public with forum selection provisions in their charters purporting to restrict Securities Act claims to federal court. Snap was one, as I discuss in more detail here; apparently, other companies include Blue Apron, Stitch Fix, and Roku. The Supreme Court is set to decide this term whether SLUSA requires that Section 11 class actions be brought in federal court, but that’s a separate issue from whether corporations can use private ordering to require that all Section 11 claims be brought in federal court.
Anyhoo, it looks like New Jersey is getting ready to pass a bill – modeled to some extent on a statute passed by Delaware a couple of years ago – that would allow corporations to include forum-selection provisions in their charters and bylaws. Under the New Jersey bill, forum-selection bylaws and charter provisions could only be used to restrict plaintiffs to New Jersey federal and state courts (i.e., they could not be used to select other fora, including arbitral fora), and - critically - it appears the intent of the provision is to limit its application to state law claims. The text reads:
N.J.S.14A:2-9 is amended to read as follows…
[T]he by-laws may provide that the federal and State courts in New Jersey shall be the sole and exclusive forum for:
(i) any derivative action or proceeding brought on behalf of the corporation;
(ii) any action by one or more shareholders asserting a claim of a breach of fiduciary duty owed by a director or officer, or former director or officer, to the corporation or its shareholders, or a breach of the certificate of incorporation or by-laws;
(iii) any action brought by one or more shareholders asserting a claim against the corporation or its directors or officers, or former directors or officers, arising under the certificate of incorporation or the "New Jersey Business Corporation Act," N.J.S.14A:1-1 et seq.;
(iv) any other State law claim, including a class action asserting a breach of a duty to disclose, or a similar claim, brought by one or more shareholders against the corporation, its directors or officers, or its former directors or officers; or
(v) any other claim brought by one or more shareholders which is governed by the internal affairs or an analogous doctrine.
Now, we usually think of derivative claims as state law claims but they don’t have to be (i.e., Section 10(b) claims can be brought derivatively, etc). Still, I think language like “any other claim … which is governed by the internal affairs or analogous doctrine” suggests the intent here was to limit the bill to state law.
In any event, we may get some clarity on these issues. D&O Diary is reporting that a shareholder lawsuit has been filed against Blue Apron, Roku, and Stitch Fix, seeking a declaratory judgment that the forum-selection provisions of those companies’ governing documents are invalid to the extent they purport to extend to federal law claims.
We’ll see how far along the case gets; it would be nice for courts to explore this issue in more depth.