Monday, November 16, 2015

Daniel Kleinberger: Delineating Delaware’s Implied Covenant of Good Faith & Fair Dealing (Contract Is King Micro-sympsium)

Guest post by Daniel Kleinberger:

Part I - Introduction

My postings this week will seek to delineate Delaware’s implied contractual covenant of good faith and fair dealing and the covenant’s role in Delaware entity law

An obligation of good faith and fair dealing is implied in every common law contract and is codified in the Uniform Commercial Code (“U.C.C”). The terminology differs:  Some jurisdictions refer to an “implied covenant;” others to an “implied contractual obligation;” still others to an “implied duty.”  But whatever the label, the concept is understood by the vast majority of U.S. lawyers as a matter of commercial rather than entity law.  And, to the vast majority of corporate lawyers, “good faith” does not mean contract law but rather conjures up an important aspect of a corporate director’s duty of loyalty.

Nonetheless, Delaware’s “implied contractual covenant of good faith and fair dealing” has an increasingly clear and important role in Delaware “entity law” – i.e., the law of unincorporated business organizations (primarily limited liability companies and limited partnerships) as well as the law of corporations.

Because to the uninitiated “good faith” can be frustratingly polysemous, this first blog “clears away the underbrush” by explaining what Delaware’s implied covenant’s “good faith” is not.

Part II – A Couple of Major “Nots”

  1. Not the Looser Approach of the Uniform Commercial Code

The Uniform Commercial Code codifies the common law obligation of good faith and fair dealing for matters governed by the Code: “Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.”  The Code defines “good faith” as “mean[ing] [except for letter of credit matters] honesty in fact and the observance of reasonable commercial standards of fair dealing.” An official comment elaborates: “Although ‘fair dealing’ is a broad term that must be defined in context, it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed.”

The UCC standard thus incorporates facts far beyond the words of the contract at issue and furthers a value (fairness) which in the entity context is usually the province of fiduciary duty.  The UCC  definition provides some constraint by referring to “reasonable commercial standards,” but “[d]etermining . . . unreasonableness inter se owners of an organization is a different task than doing so in a commercial context, where concepts like ‘usages of trade’ are available to inform the analysis.” ULLCA (2013) § 105(e), cmt.

The Delaware Supreme Court has flatly rejected the U.C.C. approach for Delaware unincorporated businesses.

  1. Not the Corporate Good Faith of Disney, Stone v. Ritter, and Caremark

An obligation to act in good faith has long been part of a corporate director’s duty under Delaware law, but the concept became ever more important following the landmark case of Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).  In Van Gorkom, the Delaware Supreme Court held directors liable for gross negligence in approving a merger transaction, a holding that “shocked the corporate world.”

 Spurred by the Delaware corporate bar, the Delaware legislature promptly amended Delaware’s corporate statute.  The amendment permits Delaware  corporations to essentially opt out of the Van Gorkom rule.  The now famous Section 102(b)(7) authorizes a Delaware certificate of incorporation to:

eliminat[e] or limit[] the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty …, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; [or] (ii) for acts or omissions not in good faith….

In effect, the provision authorizes exculpation from damages arising from claims of director negligence, but for some time the exception “for acts or omissions not in good faith” was controversial.  Where plaintiffs could not allege breach of the duty of loyalty, they sought to equate “not in good faith” with extreme negligence.

Notably, the meaning of “not in good faith” was pivotal in the lengthy and costly litigation arising from the Disney corporation’s termination of Michael Ovitz.  However, the Supreme Court’s decision in In re Walt Disney Co. Derivative Litig. left the issue murky.  Eventually, in Stone v. Ritter, the court made clear that in this context “good faith” is an aspect of the duty of loyalty.  The Court then equated a lack of this type of good faith with a director’s utter failure to attend to his or her oversight obligations (the so-called Caremark I duties).

Thus, a Delaware director’s fiduciary duty of good faith has nothing to do with the “good faith” of the Delaware implied covenant of good faith and fair dealing.

This posting is derived from Daniel S. Kleinberger, “Delaware’s Implied Contractual Covenant of Good Faith and “Sibling Rivalry” Among Equity Holders,” a paper presented at the 21st Century Commercial Law Forum: 15th International Symposium in Beijing, at Tsinghua University’s School of Law, November 1, 2015 (all footnotes and most citations omitted).

November 16, 2015 in Agency, Business Associations, Conferences, Corporate Governance, Corporations, Delaware, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (0)

Mohsen Manesh: Strine & Laster’s “Modest” Proposal to Limit Contract’s Realm (Contract Is King Micro-Symposium)

Guest post by Mohsen Manesh:

First, I want to give a big thanks to Anne and the rest of the Business Law Professor Bloggers for graciously hosting this mirco-symposium! As a longtime BLPB reader, it is a privilege to now contribute to the online conversation.

In this post, I want to explore the boundaries of the proposal recently made by Delaware Chief Justice Strine and Vice Chancellor Laster to address the problem, as they see it, that has been created by the unbound freedom of contract in the alternative entity context.  In their provocative “Siren Song” book chapter, the judicial pair advocate limits on the freedom of contract by making the fiduciary duty of loyalty mandatory.[1] But, importantly, they limit their proposal to publicly traded LLCs and LPs. [2]

This limitation is striking because it makes their proposal, in one respect at least, so very modest. There exists literally hundreds of thousands of Delaware LLCs and LPs. (121,592 LLCs were formed in Delaware in 2014 alone!) Only around 150 are publicly traded. [3] Thus, the Strine and Laster proposal for curtailing the freedom of contract affects only a tiny fraction of the alternative entity universe.

But in another respect, the Strine and Laster proposal is quite audacious and radical. Imposing mandatory fiduciary duties fundamentally cuts at their state’s famously strong statutory commitment to freedom of contract and the reputation that that has fostered in legal and business circles. After all, there is a reason why our symposium and AALS program are titled “Contract is King.” As a pragmatic matter, it is hard to see how Delaware could back away from its commitment to the freedom of contract.

Certainly, there is reason to single out publicly traded entities for special treatment. The agreements governing publicly traded alternative entities bear all of the hallmarks of contracts of adhesion: prolix and confusing, often unread and unnegotiated, offered on a take-it-or-leave it basis, and arguably stuffed full of terms that favor the drafting party (the firm’s managers and sponsors) at the expense of often unsophisticated, public investors. Indeed, my own research has shown that these agreements commonly contain clauses that eliminate the default fiduciary duty of loyalty or exculpate for damages arising therefrom, replacing the default duty with less rigorous contractual obligations.

And anyone who closely follows Delaware case law knows how these agreements have played out in practice. In recent years, the Delaware Supreme Court and Court of Chancery have dismissed case after case in which the public investors of alternative entities have alleged self-dealing on the part of the managers or controllers of the entity.[3]  And it’s clear that oftentimes the courts are dismissing these cases begrudgingly, despite their own feelings of fairness. [4] 

So, there might well be reason to change the rules for publicly traded entities to limit the freedom of contract by imposing a mandatory fiduciary duty of loyalty. But on the other hand, as I suspect others in this micro-symposium will argue, many of critiques that Strine and Laster levy at publicly traded alternative entities– unsophisticated investors, the absence of true bargaining, and confusing contract terms that often unduly favor the managers—could be levied at many private entities as well. If so, then why should Strine & Laster’s proposal be limited to public entities?

Moreover, even if public investors do not read or understand the terms that they are agreeing to by investing, and even if those terms are unduly favorable to the managers of the entity, the units purchased by investors in a publicly traded alternative entity have been priced by a liquid market that is—to at least some degree—efficient, meaning that those management-friendly terms have been already priced into the units. So, to some extent, public investors are getting exactly what they pay for. [5] In contrast, the investors in private entities do not benefit from this kind of built-in market wisdom. So, don’t they deserve the judicial protection of a mandatory fiduciary duty even more so than their public investor counterparts?

Given all of this, even if one accepts Strine and Laster’s account of the problems created by the freedom of contract, does it makes sense to limit their solution to the narrow sliver of publicly held entities? Or is their proposed solution simply a pragmatic recognition that for better or worse “Contract is King” and that any reform to that bedrock principle must be modest and incremental.

As I’ll explain in my next post, from my perspective, it is hard to see Delaware stepping back wholesale from its commitment to the freedom of contract in the alternative entity context. But for publicly traded firms at least, I do see reasons why we might see a curtailment of the unlimited freedom of contracting.

-Mohsen Manesh

[1] The Siren Song of Unlimited Contractual Freedom, in Research Handbook on Partnerships, LLCs and Alternative Forms of Business Organizations 13 (Robert W. Hillman & Mark J. Loewenstein eds., 2015) (“In light of these problems, it seems to us that a sensible set of standard fiduciary defaults might benefit all constituents of alternative entities…. For publicly traded entities, the duty of loyalty would be nonwaivable.”)

[2]  Id.

[3] See, e.g., In re Encore Energy Partners LP Unitholder Litig., 2012 WL 3792997 (Del. Ch. Aug. 31, 2012) aff’d 72 A.3d 93 (Del. 2013); Gerber v. EPE Holdings, LLC, 2013 WL 209658 (Del. Ch. Jan. 18, 2013); Brinckerhoff v. Enbridge Energy Co., Inc., 2011 WL 4599654 (Del. Ch. Sept. 30, 2011) aff’d 67 A.3d 369 (Del. 2013); In re K-Sea Transp. Partners L.P. Unitholders Litig. 2012 WL 1142351 (Del. Ch. Apr. 4, 2012) aff’d, 67 A.3d 354, 360-61 (Del. 2013). But see In re El Paso Pipeline Partners, 2015 WL 1815846 (Del. Ch. Apr. 20, 2015) (judgment for damages against general partner for breach of contractual duty).

[4] See, e.g., Encore Energy Partners, 2012 WL 3792997, *13 (Parsons, V.C.) (acknowledging the “near absence under the [LP agreement] of any duties whatsoever [owed] to the public equity holders,” and advising “[i]nvestors apprehensive about the risks inherent in waiving the fiduciary duties of those with whom they entrust their investments may be well advised to avoid master limited partnerships.”);  Gerber v. Enterprise Prods. Holdings, LLC, 2012 WL 34442, *13 (Del. Ch. Jan. 6, 2012) (Noble, V.C.) (“The facts of this case take the reader and the writer to the outer reaches of conduct allowable under [Delaware law]. It is easy to be troubled by the allegations.”); Gerber v. EPE Holdings, 2013 WL 209658, *10 (Noble, V.C.) (“It is not difficult to understand [the plaintiff-investor’s] skepticism and frustration, but his real problem is the contract that binds him and his fellow limited partners.”).

[5] See Gerber v. Enterprise Prods. Holdings, LLC, 2012 WL 34442, *10 n.42 (Del. Ch. Jan. 6, 2012) (Noble, V.C.) (“This [case] raises the issue of just what protection Delaware law affords the public investors of limited partnerships that take full advantage of [the freedom of contract]. If the protection provided by Delaware law is scant, then the LP units of these partnerships might trade at a discount….”).

November 16, 2015 in Conferences, Corporate Governance, Corporations, Delaware, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (4)

State Crowdfunding Exemptions and Rule 147: Time for Amendment?

One final post on the SEC’s proposed changes to Rule 147 and I promise I’m finished—for now. Today’s topic is the effect the proposed changes will have on state crowdfunding exemptions. If the SEC adopts the proposed changes to Rule 147, many state legislatures will have to (or at least want to) amend their state crowdfunding legislation.

As I explained in my earlier posts here and here, the SEC has proposed amendments to Rule 147, currently a safe harbor for the intrastate offering exemption in section 3(a)(11) of the Securities Act. If the proposed amendments are adopted, Rule 147 would become a stand-alone exemption rather than a safe harbor for section 3(a)(11). There would no longer be a safe harbor for intrastate offerings.

That creates some issues for the states. Many states have adopted state registration exemptions for crowdfunded securities offerings that piggyback on the federal intrastate offering exemption. That makes sense, because, if the offering isn’t also exempted at the federal level, the state crowdfunding exemption is practically worthless. (An offering pursuant to the federal crowdfunding exemption is automatically exempted from state registration requirements, but these state crowdfunding exemptions provide an alternative way to sell securities through crowdfunding.)

The SEC’s proposed amendments would actually make it easier for a crowdfunded offering to fit within Rule 147. (In fact, the SEC release says that’s one of the purposes of the amendments.) Most importantly, the SEC proposes to eliminate the requirement that all offerees be residents of the state. That change would facilitate publicly accessible crowdfunding sites which, almost by definition, are making offers to everyone everywhere. The securities would still have to be sold only to state residents, but it’s much easier to screen purchasers than to limit offerees.

Problem No. 1: Dual Compliance Requirements

Unfortunately, many state crowdfunding exemptions require that the crowdfunded offering comply with both section 3(a)(11) and Rule 147 in order to be eligible for the state exemption. Here, for example, is the relevant language in the Nebraska state crowdfunding exemption: “The transaction . . . [must meet] . . . the requirements of the federal exemption for intrastate offerings in section 3(a)(11) of the Securities Act of 1933 . . . and Rule 147 under the Securities Act of 1933.” (emphasis added).

Currently, that double requirement doesn’t matter. An offering that complies with the Rule 147 safe harbor by definition complies with section 3(a)(11). That would no longer true if the SEC adopts the proposed changes. Since Rule 147 would no longer be a safe harbor, an issuer that complied with Rule 147 would still have to independently determine if its offering complied with section 3(a)(11). Because of the uncertainty in the case law under 3(a)(11), that determination would be risky. (But see my argument here.) The leniency the SEC proposes to grant in the amendments to Rule 147 would not be helpful unless state legislators amended their crowdfunding exemptions to eliminate the requirement that offerings also comply with section 3(a)(11).

Problem No. 2: State-of-Incorporation/Organization Requirements

There’s another potential issue. Many state crowdfunding exemptions include an independent requirement that the issuer be incorporated or organized in that particular state. That’s inconvenient, and reduces the value of the state crowdfunding exemption, because corporations and LLCs are often incorporated or organized outside their home states. But, until now, that state requirement hasn’t mattered because both section 3(a)(11) and Rule 147 also impose such a requirement.

The SEC proposes to eliminate that requirement from Rule 147, so it now matters whether the state crowdfunding exemption independently imposes such a requirement. Issuers won’t be able to take full advantage of the proposed changes to Rule 147 unless states eliminate the state-of-incorporation/organization requirements from their state crowdfunding exemptions as well.

On to More Important Things

That’s the end of my Rule 147 discussion for now. I promise! Now, we can turn to more important questions, such as why your favorite team belongs in the college football playoff. (I know for sure that my college football team won't be there. I would be happy just to have my college football team in a bowl game.)

November 16, 2015 in C. Steven Bradford, Corporate Finance, Crowdfunding, Securities Regulation | Permalink | Comments (0)

Jeffrey Lipshaw: Regarding Uncorporations, Is Contract a King or Mere Pretender to the Throne? (Micro-symposium)

Guest post by Jeffrey Lipshaw:

I’m honored to be asked to participate in this micro-symposium, and will (sort of) address the first two questions as I have restated them here.

  1. Does contract play a greater role in “uncorporate” structures than in otherwise comparable corporations and, more importantly, do I care?

                  Yes, as I’ll get to in #2, but indeed I probably don’t care. My friend and casebook co-author, the late great Larry Ribstein, was more than a scholar-analyst of the non- or “un-” corporate form; he was an enthusiastic advocate. It’s pretty clear that had to do with his faith in the long-term rationality of markets and their constituent actors and a concomitant distrust of regulatory intervention. Indeed, he argued the uncorporate form, based in contract, was more amenable than the regulatory-based corporate form to the creation of that most decidedly immeasurable quality, trust, and therefore the reduction of transaction costs. I confess I never quite understood the argument and tried to explain why, but only after Larry passed away, so I never got an answer. 

                  Unlike Larry (and a number of my fellow AALS Agency, Partnership, & LLC section members), I was never able to generate a lot of normative fervor about the ultimate superiority of the non-corporate form. I view all organizational and transactional structures, including corporations, LLCs, and contracts, as models or maps.  The contractual, corporate, and uncorporate models are always reductions in the bits and bytes of information from the complex reality, and that’s what makes them useful, just as a map of Cambridge, Massachusetts that was as complex as the real Cambridge would be useless.  

                  The difference between city maps and word maps is that the latter are artifacts we lawyers create to chart or control a reality that, in all its damnable uncooperativeness, insists upon moving forward through time and not necessarily respecting all that hard work we did trying to map its possible twists and turns. City maps may also become obsolete over time, but streets and buildings tend not to evolve and adapt quite as quickly or fluidly as human desires and relationships. So we have fewer issues with the gaps between physical maps and physical reality (notwithstanding the desire of my car’s GPS to sell me annual updates) than with the gaps between what we want now and what we wrote down some time ago (whether by way of bylaws, operating agreement, or supply contract) to see that we got it.  

                  Hence, if uncorporations differ from corporations, it’s more a matter of degree than of any real difference.  Both are textual artifacts.  We have created or assumed obligations pursuant to the text at certain points in time, and we use the artifacts and their associated legal baggage opportunistically when we can.  I am not convinced that organizing in the form or corporations or uncorporations makes much difference on that score.

  1. Is the unfettered ordering in LLCs and limited partnerships – like being able to eliminate wholly all fiduciary duties among the members or partners, as Delaware permits – a good thing?  Or should there be some standardized (and I presume therefore mandatory) fiduciary obligations for uncorporations, as Chief Justice Strine and Vice-Chancellor Laster suggest?

                  Having now gotten my general curmudgeonly-ness out of the way about the whole subject, and believing that a foolish consistency is the hobgoblin of little minds, I want to point out an area where the corporate model and its baggage indeed don’t match up to what normal human beings would expect as reasonable.  I confess it’s something that has been a bug up my backside for a number of years, in that I personally had to counsel on the dilemma, and would have loved it if we had organized this particular company as a Delaware limited partnership with only limited and specified fiduciary obligations.

                  Here’s the circumstance.  ABC Corporation spins off one of its businesses into a majority-owned subsidiary, DEF Corporation, possibly as the first step in a complete divestiture.  (There’s possibly a tax benefit doing it this way, but let’s not go there right now.)  DEF is now publicly traded, with a substantial minority, but ABC controls it both as to ownership (a majority share percentage) and management (posit that ABC appoints a majority of the board of the subsidiary).  Assume that DEF’s common stock is now trading at, say, $15 per share on the NASDAQ.  A third party, XYZ Corporation, contacts ABC’s CEO, and says the following: “We are prepared to pay $32 per share for all of DEF, both yours and the public minority, but we view this as pre-emptive, and if you shop the bid, we will walk away.”  ABC’s CEO’s visceral reaction is to tell XYZ that if it will send over the check, she will deliver the share certificate this afternoon.  Indeed, were DEF still wholly owned, that’s probably what would happen soon, if not that afternoon. 

                  But Delaware corporate law doesn’t like that at all when there’s a public minority.  See McMullin v. Beran, 765 A.2d 910 (Del. 2000) and Lyondell Chemical Co. v. Ryan, 970 A.2d 235 (Del. 2009).  DEF’s board is going to have to create a special committee of the independent (i.e. public) directors to undertake diligence satisfying the duty of care obligation.  That committee will feel obliged to hire independent counsel and its own investment banker.  It may believe that its duty requires a shopping of the bid, which could cause the pre-emptive offer to go away.  But how do we know that there isn’t a $35 per share offer just waiting out there?  (I commented on this in connection with Lyondell back in 2008.)  As any transactional lawyer knows, time means deal risk.

                  I’m not suggesting that the duty of care obligations imposed by the corporate law are wrong in change of control cases, but their imposition in Smith v. Van Gorkom (where the essence of the decision was that, regardless of the attractiveness of the offer, the board went too fast and wasn’t careful enough) provoked the adoption of §102(b)(7), exculpating the directors from monetary liability on account of any breach of the duty of care largely because they were held liable in a “devil if you do – devil if you don’t” circumstance.  That is to say, §102(b)(7) is an implicit acknowledgment that broad and standardized fiduciary obligations are sometimes overbroad.  But there’s really no way, at least logically, to tell a board when a bid is sufficiently pre-emptive as to trump the ordinary procedural precautions.

                  The great benefit of Delaware LLC and LP law, in providing that the usual fiduciary duties apply as a default matter, but permitting the parties to eliminate or modify them, as one cannot under the corporate law, is precisely the customization that would have been useful here.  Assuming no penalty in the market for having organized as a public limited partnership or LLC (see Blackstone Group LP), that form would have allowed the governing organizational document to waive any fiduciary obligation of the board or the majority owner in connection with the consideration of a seemingly pre-emptive offer, and avoided delay and the associated risk to the deal.

                  With all due respect to Chief Justice Strine and Chancellor Laster, I still don’t believe this has anything to do with the magic of private ordering in contract.  As I’ve written extensively, I think there’s significant illusion among lawyers and law professors about the extent to which any text capable of colorable competing interpretations actually reflects any mutual intention even if it was the subject of arm’s-length negotiation. That’s because I tend to believe that even sophisticated parties to sophisticated contracts put in a lot of boilerplate they hope maps accurately the twists and turns of future events or, more importantly, clearly favors them if there’s ever a dispute.  And when there is a later dispute, they turn to the text and hope to hell there’s something helpful in it.  So I’ve never been under the misapprehension that the operating agreement or partnership agreement of a publicly held LLC or LP reflects real intentions about the resolution of later disputes any more than corporate bylaws or the rights and preferences of a class of stock.

                  The LLC or LP form is just an alternative map or model, with alternative rights and obligations.  In the case that bugged me, it would have been a way to avoid a problem the corporate model really couldn’t quite get right.  Whether that’s “contract” or something else, reinstating standardized or mandatory fiduciary obligations strikes me as eliminating the very choice the different forms were meant to offer.

-Jeff Lipshaw

November 16, 2015 in Business Associations, Conferences, Corporate Governance, Corporations, Delaware, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (1)

Sunday, November 15, 2015

ICYMI: Tweets From the Week (Nov. 15, 2015)

November 15, 2015 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, November 14, 2015

The Fifth Circuit Must Be So Sick of This Case

Well, it turns out Halliburton is going – you guessed it – back to the Fifth Circuit on 23(f) review.

If you recall, the Fifth Circuit overturned the district court’s class certification order in the first go-round – a decision that was vacated by the Supreme Court in Erica P. John Fund, Inc. v. Halliburton Co., 563 U.S. 804 (2011).  The district court recertified the class; the Fifth Circuit granted 23(f) review, and the Supreme Court vacated – again!  And then the district court certified the class for a third time, and the defendants petitioned for 23(f) review, and the Fifth Circuit has – again! – granted the petition. 

The thing that's so amazing, of course, is that this case has hit the Supreme Court twice, the district court three times, and now the Fifth Circuit three times, and it's the exact same argument, over and over and over, on the same evidence - just using slightly different words.  Namely, the defendants' position that if there is no price increase at the time of an initial false statement, and no price drop in reaction specifically to news that later reveals the earlier statements to have been false at the time they were made, therefore it must be concluded that the false statements never impacted prices in the first place. 

This time, however, the 23(f) grant comes with a concurrence.  I’ve actually never heard of a 23(f) concurrence before – are there others?   They can’t be common, and in this case, the concurrence is by Judge Dennis – who has long been hostile to the Fifth Circuit’s strict approach to class certification in Section 10(b) cases.  See Erica P. John Fund, Inc. v. Halliburton Co., 2015 U.S. App. LEXIS 19519 (5th Cir. Nov. 4, 2015).

In his concurrence, Judge Dennis expresses open skepticism of the defendants’ argument that they can rebut Basic’s presumption of price impact by demonstrating that any alleged corrective disclosures were not, in fact, corrective.  He chides the defendants for rehashing points that the Supreme Court rejected in the first Halliburton case, namely, that if the “truth” was never disclosed in a fraud on the market case, the class cannot be certified.  But, given the issue’s importance, he “reluctantly” concurs in the panel’s decision to grant the 23(f) petition, in order to allow the Circuit to clarify the law.

In my view, Judge Dennis is absolutely correct that the defendants’ argument rehashes territory that the Supreme Court has already rejected, but, to be fair, at least some of the problem can be laid at the feet of the plaintiffs – who appear to have accepted defendants’ premise, namely, that there must be some affirmative evidence of price impact – either an upward movement when the statement is first made, or downward movement upon its correction – before a class can be certified.  That, of course, is contrary to the notion of a presumption; it is the defendants’ burden, not the plaintiffs’, to show not only that any price movements were not due to the fraud, but also that even price stability means that the fraud had no effect (i.e., that the fraud did not, say, operate to keep prices level instead of falling).  Or to put it another way, even if defendants are entirely right that the corrective statements did not reveal any truths, that still does not answer the question whether the initial false statements had an impact on price.

Anyway, in light of Judge Dennis’s concurrence, the defendants must be grateful that 23(f) petitions are usually transferred to a merits panel after being granted.  But see Margaret V. Sachs, Superstar Judges as Entrepreneurs: The Untold Story of Fraud-on-the-Market, 48 U.C. Davis L. Rev. 1207 (2015) (arguing that Judges Easterbrook and Posner of the Seventh Circuit have chosen to assign Rule 23(f) petitions to themselves for merits review in Section 10(b) cases).

Meanwhile, we can at least look forward to seeing these issues  explored in a novel setting.  The Eighth Circuit recently heard oral arguments on a 23(f) appeal from the certification decision in IBEW Local 98 Pension Fund v. Best Buy Co., 2014 U.S. Dist. LEXIS 108409 (D. Minn. Aug. 6, 2014), where - again - the defendants contend that they can rebut price impact by showing that the market did not react to the false statements initially, nor were any later statements corrective of the earlier ones.  The case has attracted a degree of industry attention; defense-side amicus briefs have been filed by the Chamber of Commerce and the Securities Industry and Financial Markets Association.  

It's a race to see which circuit produces an opinion first; the Eighth Circuit has a large head start but then, it's not like the Fifth Circuit needs any extra time to familiarize itself with the facts.


November 14, 2015 in Ann Lipton | Permalink | Comments (0)

Friday, November 13, 2015

Cobras and Housing Markets

Just a few days ago, San Franciscans voted against Proposition F, a referendum that would have placed restrictions on AirBnBs and other short-term housing rentals. This type of legislation is far from unique. Fueled by arguably the United States’ most prominent housing crisis, San Francisco has enacted layers of housing laws intended to protect tenants from skyrocketing rents, arbitrary evictions, and diminished rental supplies. Notable examples include laws governing rent controls (landlords have little ability to raise rents), market exoduses (the Ellis Act often incentives landlords to withdraw from the San Francisco rental market for five years), and buyout restrictions (landlords face numerous obstacles in buying out a tenant’s lease). Although the motives behind these statutes is admirable—considering affordable housing’s position as a social justice issue—many housing laws intended to benefit tenants are misguided, harming both tenants and landlords.

The folly of housing laws is neatly described by an economics term known as the “cobra effect,” which refers to solutions that exacerbate an original problem. The term was coined after cobras overran Delhi, prompting city officials to issue bounties for each killed cobra. Upon learning that local residents had begun farming cobras to generate additional bounties, city officials terminated the program. Left with no use for their farm-raised cobras, residents released their snakes back into the city, creating a far greater cobra crisis. It seems that a similar cobra effect is attributable to urban housing statutes, which—despite their remedial intent—are actually causing rents to rise.

The problem is this: many remedial laws ignore the economics of human behavior. In response to new incentives, rational actors typically adjust their behaviors as opposed to remaining passive. Landlords are no different. Take rent controls for example, which prevent landlords from raising a unit’s rental price. While ostensibly protecting tenants, they also produce unintended consequences by raising rents on future tenants. This is because, knowing that rental rates generally increase over time, landlords tend to charge more upfront to compensate for future years of below-market rent income. For instance, if a unit’s current price is $800, but may rise to $1,200 in five years, a landlord is likely charge $1,000 upfront to mitigate the lost profits occurring in years four and five of the lease (assuming that tenants typically remain for five years). This is why rent control laws can generate rate increases that exceed what the market would have otherwise rendered.

A related problem concerns the propensity of landlords to completely abandon rental markets due to the burdens of inflexible rental laws. An alternative landlord strategy which avoids a complete marketplace withdrawal is to reject yearlong leases in favor of short-term rentals such as AirBnBs. Since squatter rights take effect only after 30 days of occupancy, opting for short-term rentals sidesteps certain landlord/tenant laws. This later trend was the impetus behind the now-defeated Proposition F. And as economics tells us, when a good’s supply decreases (e.g., standard yearlong leases) while demand stays constant, prices rise.

I’m not suggesting that all remedial housing laws are entirely bad and that unfettered free markets are always preferable. For instance, I would argue that a law vesting tenants with the right to sublease their apartment’s unused bedrooms would be a great law (i.e., a singular renter living in a three bedroom apartment could co-lease to two additional individuals). It would increase the number of rental leases on a market without overly burdening landlords; and when supply goes up, prices go down. The lesson to be learned is that remedial (housing) laws must consider the manner in which rational actors respond to incentives (i.e., laws) or else suffer the likelihood of making a crisis worse.

November 13, 2015 | Permalink | Comments (2)

Building a Socially Responsible Brand

Last week I shared my thoughts on REI's #OptOutside campaign and concluded that the campaign appeared, in my opinion, to be more of a marketing ploy than anything truly socially responsible. 

I promised to discuss what I think it takes to build a respected socially responsible brand.

In my opinion, respected socially responsible brands are: (1) Authentic; (2) Humble; and (3) Consistent. 

These three work together. Authenticity comes, at least in part, from not over-claiming (also seen in humility) and from showing social responsibility in many areas over time (consistency). Authenticity with regard to social responsibility requires some serious sacrifice, at least in the short term. Humble companies admit their imperfections, work to right wrongs, and seek to improve. Building a socially responsible brand takes time, often decades.  As Warren Buffett supposedly said, "It takes 20 years to build a reputation and 5 minutes to ruin it."

Patagonia's "Don't Buy This Jacket" campaign was probably one of the best socially responsible advertising campaigns I have seen. This campaign seemed authentic because of Patagonia's consistent history of social responsibility and because it seemed clear that Patagonia was going to take a serious financial hit from this campaign. Patagonia's add was also humble in admitting the social costs of the goods it produces. Patagonia is not a perfect company, and their executives often admit that, and Patagonia may experience mission drift, but they continue to be one of the most socially responsible companies I know.  

November 13, 2015 in Business Associations, Corporations, CSR, Haskell Murray | Permalink | Comments (0)

ABA LLC Institute: A Great Bunch of LLC Nerds--I Mean Wonks!

Just a quick report from the 2015 ABA LLC Institute, an annual event held in the fall in Washington, DC that attracts anally compulsive (and I do mean that in the most positive way possible) business lawyers (academics and practitioners) interested in limited liability companies (LLCs) and other alternative business entities.  The agenda for this year's program is full of nifty stuff and great presenters (present company excepted).  Co-blogger Josh Fershee would love the LLC Institute.  No one here confuses the LLC with the corporation!  (I will just link to one of Josh's fabulous posts on that topic as a reference point.)

For this year's institute, I chaired a panel on dissolution in the LLC and also participated in a panel that explored just what an LLC operating agreement really is.  I was wowed in each case by my co-paneleists.  Because the norm at this conference is to interrupt the panelists and comment on their presentations as they speak, the discourse was engaged and lively.

I will save my comments on the operating agreement panel for next week's micro-symposium.  Today, I want to briefly cover highlights from  the dissolution panel.  Specifically, we focused a lot of attention on the evolution of dissolution events under the uniform and prototype LLC acts and various state LLC statutes since the adoption of the federal income tax "check the box" rules.  There's more in and related to that topic than you might think . . . .

Continue reading

November 13, 2015 in Business Associations, Conferences, Joan Heminway, Joshua P. Fershee, LLCs | Permalink | Comments (2)

Thursday, November 12, 2015

The Rise of the Whistleblowers

I have spent the past week immersed in whistleblower discussions. On Saturday, I served on a panel with plaintiffs and defense counsel at the ABA Labor and Employment Law Mid-Year meeting using a hypothetical involving both a nursing home employee and a compliance officer as potential whistleblowers under the False Claims Act, Dodd-Frank, and Sarbanes-Oxley. My co-panelist Jason Zuckerman represents plaintiffs and he reminded the audience both through a recent article and his presentation that Dodd-Frank has not replaced SOX, at least for his clients, as a remedy. Others in the audience echoed his sentiment that whistleblower claims are on the rise.

A fellow member on the Department of Labor Whistleblower Protection Advisory Committee, Greg Keating, represents defendants, and has noticed a significant increase in claims by in house counsel, as he told the Wall Street Journal recently. More alarmingly, a San Francisco federal judge found last month that board members can be held personally liable for retaliation under Sarbanes-Oxley and Dodd-Frank when they take part in the decision to terminate a whistleblower. This case of first impression involved the termination of a general counsel who complained of FCPA violations, but it is possible that other courts may follow the court’s reasoning, even though the judge acknowledged that it was a close call.

As the SEC continues to award whistleblower bounties to compliance officers and auditors, and as law firms continue to see in-house counsel raising concerns about their own companies, board members will have to walk the fine line between exercising appropriate oversight and not enmeshing themselves in the decisionmaking process.

November 12, 2015 in Compliance, Conferences, Corporate Governance, Corporations, Marcia Narine | Permalink | Comments (0)

Micro-symposium: Contract Is King, But Can It Govern Its Realm?

Next week, the BLPB is hosting a micro-symposium organized by the AALS section on Agency, Partnership, LLCs, and Unincorporated Associations.  Confirmed participants include Joan MacLeod Heminway (BLPB editor), Dan Kleinberger, Jeff Lipshaw, Mohsen Manesh, and Sandra Miller.

The micro-symposium will explore the role of private ordering in LLCs and other alternative business entities, a broad topic that encompasses many interesting questions:

(1) To what extent, and in what ways, does contract play a greater role in LLCs and LPs than in otherwise comparable corporations? Is it helpful to conceptualize private ordering in this context as contractual?

(2) Does unfettered private ordering reliably advance the interests of even the most sophisticated parties? Does it waste judicial resources? In their book chapter, The Siren Song of Unlimited Contractual Freedom, two distinguished Delaware jurists, Chief Justice Leo Strine and Vice Chancellor J. Travis Laster, raise these concerns and argue in favor of more standardized fiduciary default rules. 

(3) Should the law impose fiduciary duties of loyalty and care as safeguards against abuse of the unobservable discretion managers enjoy because those duties reflect widely held social norms that most investors would expect to govern the conduct of managers?

(4) If the parties themselves would choose to waive their fiduciary obligations, is there nevertheless a continuing role for mandatory terms and judicial monitoring of the parties' relationship?

(5) Does it matter whether an LLC or alternative business entity is closely held or publicly traded?

We look forward to an engaging discussion next week via blog, and we invite everyone who will be at AALS to attend our section meeting on January 7 at 1:30pm.  Joined by panelists Lyman Johnson and Mark Loewenstein, we will continue the conversation in person. 

-Anne Tucker

November 12, 2015 in Anne Tucker, Business Associations, Conferences, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (1)

Wednesday, November 11, 2015

Locked In: The Competitive Disadvantage of Citizen Shareholders

My recent article:  Locked In: The Competitive Disadvantage of Citizen Shareholders, appears in The Yale Law Journal’s Forum.  In this article I examine the exit remedy for unhappy indirect investors as articulated by Professors John Morley and Quinn Curtis in their 2010 article, Taking Exit Rights Seriously.  Their argument was that the rational apathy of indirect investors combined with a fundamental difference between ownership of stock in an operating company and a share of a mutual fund.  A mutual fund redeems an investor’s fund share by cashing that investor out at the current trading price of the fund, the net asset value (NAV). An investor in an operating company (a direct shareholder) exits her investment by selling her share certificate in the company to another buyer at the trading price of that stock, which theoretically takes into account the future value of the company. The difference between redemption with the fund and sale to a third party makes exit in a mutual fund the superior solution over litigation or proxy contests, they argue, in all circumstances. It is a compelling argument for many indirect investors, but not all.

In my short piece, I highlight how exit remedies are weakened for citizen shareholders—investors who enter the securities markets through defined contribution plans.  Constrained investment choice within retirement plans and penalties for withdrawals means that “doing nothing” is a more likely option for citizen shareholders.  That some shareholders are apathetic and passive is no surprise. The relative lack of mobility for citizen shareholders, however, comes at a cost.  Drawing upon recent scholarship by Professors Ian Ayres and Quinn Curtis (Beyond Diversification), I argue that citizen shareholders are more likely to be locked into higher fee funds, which erode investment savings.  Citizen shareholders may also be subsidizing the mobility of other investors.  These costs add up when one considers that defined contribution plans are the primary vehicle of individual retirement savings in this country aside from social security. If the self-help remedy of exit isn’t a strong protection for citizen shareholders, then it is time to examine alternative remedies for these crucial investors. 

-Anne Tucker

November 11, 2015 in Anne Tucker, Corporate Finance, Corporate Governance, Corporations, Financial Markets, Shareholders | Permalink | Comments (0)

Tuesday, November 10, 2015

Academics, Football, and Activism: A Resignation at the University of Missouri

Missouri’s president recently resigned amid protests about how his institution responded to racist and other deplorable acts on his campus.  A graduate student staged a hunger strike, and players from the Missouri football team threatened to sit out their next game if the president did not resign. 

Some have worried that the threat sets bad precedent, in that they think now a president can be forced to resign based on the racist acts of someone beyond his or her control. I don’t buy that, but more on that later.  Others are upset that it took the football team to make the protests have legs.  I don’t buy this one, either, though I give this one more credence. 

As someone working in an academic environment, I will say that I would be sympathetic if the resignation really happened because of things that were out of the control of the university president. That is, if he were really being held accountable for what was said by an idiot racist student, I'd be supportive of him and think it was wrong he was being forced out. Based on what I have seen, though, the criticisms were valid about the institution's response to the racists acts, and specifically the president’s response, to issues of racism on campus.

I have seen administrations respond well and respond poorly to such events, and how they respond does a lot for how people feel about their institution. My read on this is that this president did not seem to care about an institutional response, when he did respond it was dismissive, and when he came under fire, he lashed back.

One of this things that struck me was that the football coach publicly supported his players. To me, it seems that when high-level folks step out front like that, it's likely the problems were recognized deeply and across boundaries.

Beyond that, personally, I had little patience with the president, based on reports of his responses.  The one that sealed the deal for me was his description of “systematic oppression,” which goes as follows:  "Systematic oppression is because you don’t believe that you have the equal opportunity for success.” Um, no, that's exactly wrong. 

As such, I don’t think this was an issue where the president of a university was being held accountable for the racist behavior of some students.  Unfortunately, that kind of behavior unavoidable, but worth trying to avoid.  How we respond the racist behavior of others, though, is within our control, and we’re accountable for how we respond. 

Furthermore, I don’t think it was just the potential $1 million loss a forfeit of a football game was the sole reason this resignation happened.  I do think it accelerated the process, but I also get the sense this was a problem across the campus.  I think the football players astutely noted that the time was right to join the movement, and knew they had support.  Notoriously conservative football coaches (and I don’t mean politically) don’t jump out in front of things like this very often, at least not if they have a question about which way the wind is blowing.  This seems more to me like a case where the lack of an adequate response -- meaning mostly that the administration was not showing they cared or noticed the problems -- was recognized by a critical mass as problematic.  And things moved forward quickly. 

I am responding only to my perception of reports, and maybe I am getting this wrong, but I get the sense the outcome here was right.  And I think it is more complex than the fact that the football players complained, so change happened. That undercuts the work of the initial protestor, who did motivate change, and it underestimates how deep the lack of support for the administration seemed to go. And, sorry, it was more than financial, even if that was part of the story

Frankly, I worry more about the gendered aspect of this, as colleges and universities are notoriously bad in how they handle Title IX violations, and I don’t know of many (read: any) protests like this leading to successful change on that front.  But maybe, just maybe, we’re on the cusp of something like that.  In a proper case, I sure wouldn’t mind if a football team took the lead on that, too. 

November 10, 2015 in Current Affairs, Joshua P. Fershee, Sports | Permalink | Comments (4)

National Business Law Scholars Conference - Call for Papers

National Business Law Scholars Conference (NBLSC)

Thursday & Friday, June 23-24, 2016

Call for Papers

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 23-24, 2016, at The University of Chicago Law School. 

This is the seventh annual meeting of the NBLSC, a conference that annually draws legal scholars from across the United States and around the world.  We welcome all scholarly submissions relating to business law.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. 

To submit a presentation, email Professor Eric C. Chaffee at with an abstract or paper by February 19, 2016.  Please title the email “NBLSC Submission – {Your Name}.”  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.”  Please specify in your email whether you are willing to serve as a moderator.  We will respond to submissions with notifications of acceptance shortly after the deadline.  We anticipate the conference schedule will be circulated in May. 

Keynote Speakers:

Professor Steven L. Schwarcz, Stanley A. Star Professor of Law & Business, Duke Law School

Chief Judge Diane P. Wood, The United States Court of Appeals for the Seventh Circuit

Conference Organizers:

Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia School of Law)
Jeff Schwartz (The University of Utah, S.J. Quinney College of Law)

November 10, 2015 in Call for Papers, Conferences, Joan Heminway | Permalink | Comments (0)

Monday, November 9, 2015

Rule 147: Can the SEC Ever Successfully Revoke a Safe Harbor?

Once the SEC has created a safe harbor for a statutory exemption, can it ever really get rid of it? That’s one of the issues raised by the SEC’s proposed changes to Rule 147, which I considered in detail last week.

Rule 147 is currently a safe harbor for the intrastate offering exemption in section 3(a)(11) of the Securities Act. Section 3(a)(11) exempts from the Securities Act registration requirement

“Any security which is a part of an issue offered and sold only to persons resident within a single State or Territory, where the issuer of such security is a person resident and doing business within or, if a corporation, incorporated by and doing business within, such State or Territory.”

Rule 147 currently provides that an offering

“made in accordance with all of the terms and conditions of this rule shall be deemed to be part of an issue offered and sold only to persons resident within a single state or territory where the issuer is a person resident and doing business within such state or territory, within the meaning of section 3(a)(11) of the Act.”

In other words, if you meet the requirements of Rule 147, you are within the section 3(a)(11) exemption.

However, as I wrote in my post last week,  the SEC is proposing to decouple Rule 147 from section 3(a)(11) and make Rule 147 an independent exemption. As a result, section 3(a)(11) would no longer have a safe harbor. Issuers could still use the section 3(a)(11) exemption, but they would be relegated to the uncertain case law that prevailed under section 3(a)(11) before Rule 147 was adopted.

Or would they?

Consider the nature of a safe harbor. The SEC is saying that, if you comply with the current requirements of Rule 147, you have met the requirements of section 3(a)(11). The SEC is not creating a new exemption or redefining the requirements of section 3(a)(11), merely saying that a particular class of offerings (those that meet all of Rule 147’s requirements) falls within the exemption defined by Congress in section 3(a)(11).

But, if that’s the case, the elimination of the safe harbor should have no effect on offerings that meet the old requirements. If those offerings fell within the exemption created by Congress the day before the safe harbor was eliminated, they should still fall within the congressional requirements the day after the safe harbor is eliminated.

After Rule 147’s amendment, an issuer who meets the old requirements should still fall within the section 3(a)(11) exemption. Why? Because the SEC said an offering like that falls within section 3(a)(11) and, unless the Commission was wrong in the first place, that conclusion should still hold even after the formal rule is eliminated.

November 9, 2015 in C. Steven Bradford, Securities Regulation | Permalink | Comments (1)

Sunday, November 8, 2015

ICYMI: Tweets From the Week (Nov. 8, 2015)

November 8, 2015 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, November 7, 2015

Out of the Mouths of Babes

One of the best news stories to come in the wake of the financial crisis was L’Affaire du Chaton, in which the accusation was lobbed that Goldman Sachs literally abandoned a group of stray kittens. Goldman, apparently recognizing that there are limits to the amount of profit-seeking the public is willing to tolerate, set not one, but two spokespeople to quell the looming media disaster.

Which is what I’m reminded of when I read this story about Goldman Sachs’s investment in social impact bonds sold by Utah to fund its preschool program.

As I understand it, Utah’s Granite School District needed money to finance its preschool program – which, it believed, prevented at-risk students from needing expensive special education later.

So Utah’s United Way of Salt Lake sold Goldman bonds.  The money was used to finance the preschool program, and Goldman was to be paid by the United Way and Salt Lake County to the extent that the program did result in cost-savings by reducing the need for special education.

The problem was that Utah itself set a rather specious standard for determining whether the pre-school program avoided the need for special education, by inflating the numbers of at-risk students.  Because the at-risk student metric was inflated, the program appeared to be wildly successful – providing Goldman with a hefty profit.

This is fascinating on a couple of different levels.  First – if I’m understanding the situation correctly – it highlights a problem with social impact bonds.  I’m guessing that it's typical in politics to exaggerate the benefits of expenditures.  Here, the founders of Utah’s preschool program wanted to “sell” the program to the state, and made inflated claims about how much money could be saved later.  Their goals may well have been benign – they wanted funding for a good program that would help people – but in a world of political calculation, limited resources, and lobbying, they felt that they needed to overstate the benefits of their program in order to get anyone’s attention.

I assume that this  is business-as-usual in politics - not a great thing, but not exactly shocking.  And it’s mostly fine until Utah decides that it will pay actual cash money to an actual outside investor based on these inflated savings projections.  Which, I assume, is a problem that plagues all social impact bonds.

But the other level on which this situation fascinates me is Goldman’s (apparently) kitten-abandoning level of venality.  It is difficult to believe that Goldman was unaware of the flaws in the metrics when it made the investment; yet, it had no compunction about draining Utah’s school districts of funds that were intended for preschool and special education.

In this case, however, there probably aren't many people agitating for Goldman to make reparations.  Utah, the United Way, and the Granite School District aren’t going to want to admit the flaws in their own metrics, so we don’t have a kitten-defending constituency.  Just lots and lots of payouts to Goldman.

Maybe Goldman would have done better to have purchased social impact bonds for the kittens.

November 7, 2015 in Ann Lipton | Permalink | Comments (0)

Friday, November 6, 2015

Advertising Social Responsibility and #OptOutside

REI recently announced that they will close their stores on the busiest day in retail, Black Friday. They are encouraging their customers and employees to spend time outside. REI is also paying their employees on Black Friday even though their stores will be closed.

At first, I was proud of REI for this move; Black Friday can be materialism at its worst. 

But I think REI made a poor strategic move by over-promoting this announcement and buying numerous social media advertisements for their #OptOutside campaign. REI's self-congratulatory ads have been following me around the internet for the past few days. 

Advertising about your social responsibility is really difficult to do well.

Convincing customers that you are socially responsible through advertising is like trying to convince your friends you are generous through social media posts. Both are likely to backfire. As Wharton professor Adam Grant recently wrote, you shouldn't say "I'm a giver;" that determination is for others to make.

In my opinion, praise of a company's socially responsible behavior should come primarily from its stakeholders. REI received plenty of third-party press regarding their announcement (see, e.g., here, here, and here), but their self-promotion has convinced me that this is primarily a financially-focused marketing ploy, not mainly a move to benefit society at large.

Next week, I will look at some companies that I think do a better job of building their socially responsible brand.

November 6, 2015 in Business Associations, CSR, Current Affairs, Haskell Murray | Permalink | Comments (0)

Thursday, November 5, 2015

Following up on Arbitration and Human Rights

I would like to build off of Marcia Narine’s post about binding arbitration clauses. In her post, she discusses two related subjects. The first concerns the importance of civil procedure, noting that jurisdictional problems prevented the human rights victims in Kiobel from finding justice. The second addressed the grim picture painted by the New York Times about how companies use arbitration clauses to undermine meritorious legal claims. I mention this because there seems to be a radical development brewing about how arbitration clauses might actually help human rights victims.

The problem with adjudicating human rights claims is that few courts have been able, or willing, to remedy violations. Most abuses occur in countries where legal systems are too weak to prosecute offenders. And, in light of Kiobel, the United States generally lacks jurisdiction over entirely foreign defendants and events. This has led commentators to conclude that courts of law are poorly equipped to hear human rights cases.

But could arbitration be the answer? Consider the Bangladesh Accord, which was recently signed by over 200 apparel companies—including H&M, Abercrombie & Fitch, and Adidas—after a series of sweatshop fires in Bangladesh. Signatories agree to take numerous proactive and remedial measures intended to prevent future factory tragedies. The novelty of the Accord is found in its dispute resolution provision, requiring signatories to settle disputes by binding international arbitration. Since the New York Convention makes international arbitral awards globally enforceable, the Bangladesh Accord seems to have found a solution to the aforementioned jurisdictional issues. Although the Bangladesh Accord pertains only to a small subset of potential human rights abuses, the agreement suggests that private dispute resolution could offer a superior forum to hear types of human rights abuses.

The question is whether other agreements might similarly seek to use arbitration clauses to resolve human rights disputes—or whether the Bangladesh Accord will remain an anomaly. Convincing other companies in other industries to arbitrate corporate responsibility standards will certainly prove difficult since, as it currently stands, transnational firms face little liability for their torts in developing countries. However, it does appear that the International Olympic Committee is using a similar mechanism now that host countries must abide by human rights standards, enforced by the Court of Arbitration for Sport. Indeed, the potential use of binding arbitration to enforce corporate responsibility is certainly an interesting development considering arbitration’s reputation as an obstacle that frustrates less sophisticated and resourceful parties. 

There are a couple of articles discussing the potential use of international arbitration to promote human rights. Consider this article by Professor Roger Alford (who also has a great article about the future of human rights litigation after Kiobel) or me

November 5, 2015 in ADR, Human Rights, International Law | Permalink | Comments (4)

Bar Passage and the Business Law Professor

With the recent release of bar results in many states, I have been obsessed of late about the sorry state of bar passage across the country--as well as specific bar passage issues relating to our graduates.  So, rather than (as I should and will do soon) responding to Steve Bradford's prompting post on the final JOBS Act Title III crowdfunding rules and the related proposals regarding Rules 147 and 504 under the Securities Act of 1933, as amended (as well as his follow-up post on the Rule 147 proposal), I have decided to focus on bar passage for my few minutes of air time this week.  Specifically, I want to begin to explore the question of what we can do, if anything, as business law professors to help more of our students succeed in passing the bar on the first attempt.

At a base level, this means we should endeavor to understand something about the reasons why our individual students fail the bar the first time around.  A lot has been written about the national trends (inconclusively, as a general rule).  And I am sure every law school is now analyzing the data on its own bar passage shortcomings.  But my experience teaching Barbri and my conversations with former students who have not passed the bar indicate a number of possible causes.  They include (and these are my descriptions based on that experience and those conversations, in no particular order):

  • Failing to state the applicable legal rule(s) and apply them to the facts;
  • Difficulty in processing legal reasoning in the time allotted;
  • Nerves, sleep deprivation, illness and the like; and
  • Engaging insufficiently with study materials and practice examinations.

Assuming that these anecdotal observations are, in fact, causes contributing to bar exam failures for at least some students, how might we be able to help?

Continue reading

November 5, 2015 in C. Steven Bradford, Joan Heminway, Law School, Teaching | Permalink | Comments (7)