Tuesday, July 16, 2019
I have been a dean for two days. So, obviously, I have it all figured out. (That's very much a joke).
My sample size is small, but it seemed like a good time for me to take a shot at comparing what it's like to be a new dean versus what it's like to be a new professor. Admittedly, I am working hard to remember what it was like to be a professor in his first two days. I have the benefit of hindsight with that, while my life as dean is very much real time. But hey, it's a blog, so I will give it a try.
- As a new professor, I was worried (very worried) that I did not know everything about the subject matter and that it would be obvious. As a new dean, I expect that others don't expect me to know everything, and if they do, I know they're wrong.
- As a new professor, I wanted everyone to like me. As a new dean, I'd still appreciate that. But I don't need it, and I don't expect it, and I know it is impossible. (It's impossible as a professor, too, by the way, if you do your job, but you can get closer to 100%.).
- As a new professor, my goals were largely personal. They were aligned with my institution, but they were about my goals. Promotion. Tenure. Publication. Citation. As a new dean, my goals are far more institutional. Bar passage. Jobs for students. Faculty opportunity. A high-quality and inclusive workplace.
- As a new professor, I was hopeful. I wanted to have an impact on students, policy, and our future. As new dean, I am hopeful. And I want the same things, too. My role is very different, by my goal is the same.
Short list, I suppose, but those are the comparisons the stick out to me.
I don't have any expectation that being a new dean is any easier than being a new professor. But one thing I learned as a new professor was that I need to be myself. As a new dean, I will make mistakes, just as I did as a new professor. I hope not to, but that's not how the world works. And it's not how learning works. Learning involves testing, trying, failing, and seeking solutions.
What's next? I will work to be myself. That's one advantage I have. When I started as a professor, I thought maybe I should be like other professors, and I worked to be "a professor." Dumb. I want to make sure any mistakes I make are mine and not me trying to be something I am not. I am not trying to be a dean. I just am one. If nothing else, I hope that will make it easier for people to forgive mistakes.
To my new professor and new dean colleagues, good luck. Let's try to be ourselves and show our students and faculty and staff colleagues that genuineness has value. Because it does. It combines well with hard work, too.
Monday, July 15, 2019
In Tennessee Wine and Spirits Retailers Assn. v. Thomas, the SCOTUS affirmed decisions of the Sixth Circuit and Federal District Court of Middle Tennessee finding Tennessee’s 2-year residency requirement applicable for retail liquor store license applicants unconstitutional as a violation of the Commerce Clause that is not saved by the 21st Amendment. Specifically, in an opinion dated June 26, 2019, Justice Alito concluded that "Tennessee’s 2-year durational-residency requirement plainly favors Tennesseans over nonresidents" and, addressing the claim that Tennessee's regulation nevertheless is valid under Section 2 of the 21st Amendment, found that "the record is devoid of any 'concrete evidence' showing that the 2-year residency requirement actually promotes public health or safety; nor is there evidence that nondiscriminatory alternatives would be insufficient to further those interests." This is a huge win for the alcoholic beverage retail industry nationwide, even of it is a deemed loss for smaller local liquor retailers in Tennessee who were protected by the stringent residency requirements (although the Tennessee Alcoholic Beverage Commission had stopped enforcing the requirements against new applicants).
[Note: BLPB reader Tom N. predicted this result in his comment to this Josh Fershee post earlier in the year.]
A number of things about the Court's opinion interest me and also may interest you. First, the Petitioner, a trade association, chose to only challenge the Sixth Circuit's opinion on only one of the two residency requirements struck down at the Sixth Circuit level. Second, the Petitioner chose not to argue that the initial application residency requirement could be sustained under the dormant Commerce Clause as a narrowly tailored measure designed to “advance a legitimate local purpose.” Rather, the Petitioner chose to argue that the law could be sustained under Section 2 of the 21st Amendment because the residency requirement promoted public health and safety. And finally, the Court's opinion includes some interesting history on alcohol regulation (including Prohibition) and the dormant Commerce Clause.
The dissent, written by Justice Gorsuch (joined by Justice Thomas), takes a states' rights viewpoint under Section 2 of the 21st Amendment. The concluding text (citations have been omitted for readability) is somewhat passionate.
Like it or not, those who adopted the Twenty-first Amendment took the view that reasonable people can disagree about the costs and benefits of free trade in alcohol. They left us with clear instructions that the free-trade rules this Court has devised for “cabbages and candlesticks” should not be applied to alcohol. Under the terms of the compromise they hammered out, the regulation of alcohol wasn’t left to the imagination of a committee of nine sitting in Washington, D. C., but to the judgment of the people themselves and their local elected representatives. State governments were supposed to serve as “laborator[ies]” of democracy, with “broad power to regulate liquor under §2,” If the people wish to alter this arrangement, that is their sovereign right. But until then, I would enforce the Twenty-first Amendment as they wrote and originally understood it.
Nevertheless, I am more persuaded by the majority opinion.
Regardless, the opinions both offer some fun reading for those interested in the dormant commerce clause or in alcohol regulation.
[Editorial Note: I found a few typos in this after posting--enough that it bears mention here that I corrected them. Thanks to coblogger Ann Lipton for spotting a particularly egregious spellcheck-generated error.]
Sunday, July 14, 2019
On Thursday, the Commodity Futures Trading Commission (CFTC) held an open meeting to consider:
…the five members of the U.S. Commodity Futures Trading Commission voted unanimously to release a proposed rulemaking designed to create a less burdensome regulatory regime for foreign clearinghouses that clear swaps for U.S. customers…
A related proposal fared less well, however. The agency's two Democratic commissioners strongly objected to a supplemental proposal to exempt foreign clearinghouses from U.S. regulation if they are subject to regulation in their home countries that is comparable to the U.S….Despite the objections, the supplemental proposal passed by a vote of three to two and will be published for public comment.
As I’ve noted, the regulation of derivatives clearing has been a source of conflict between international policymakers, particularly since the financial crises of 2007-08 and the subsequent global clearing mandates. An article in the FT, CFTC agrees to rein in rules for overseas clearing houses, suggests that one aim of the CFTC’s decisions on Thursday is to decrease tensions in this area between the U.S. and the E.U. For now, I’m cautiously optimistic.
Saturday, July 13, 2019
I just recently came across the Ninth Circuit’s decision in In re Atossa Genetics Inc Securities Litigation, 868 F.3d 78 (9th Cir. 2017), and it struck me because it highlights an ongoing tension between the reliance/materiality distinction in fraud-on-the-market cases in general, and in the Supreme Court’s jurisprudence in particular.
And I’ll say up front that a lot of what I’m about to discuss in this post is stuff I’ve laid out in more detail in my essay, Halliburton and the Dog that Didn’t Bark. The Atossa case is just a nice demonstration of the issue.
And hey, this got long, so – more after the jump.
Friday, July 12, 2019
This picture brings me joy. It captures the mood among all of us (me, my UT Law emeritus colleague John Sobieski, and a group of UT Law students) after my last UT Law yoga session this past spring. I need to begin to wrestle with how I will be able to teach yoga at the College of Law this coming semester, since I will be full-time back in the classroom teaching two demanding business law courses (Business Associations and Corporate Finance). All ideas are welcomed . . . .
My law school yoga teaching came to mind this week not because I am already deep into planning the fall semester (although that comes soon) but because of two independent health/wellness items that hit my radar screen this week. First, I was reminded that the Knoxville Bar Association (of which I am a member) is offering a full-day continuing legal education program in September entitled "Balancing the Scales of Work and Wellness - Finding Joy through Self-Care Practical Advice & Wellness Strategies". Second, I learned today that my UT Law colleague Paula Schaefer penned a nifty post yesterday on the Best Practices for Legal Education blog: Examples of How Law Schools are Addressing Law Student Well-Being. She mentions yoga, although not our UT Law classes. It seemed that I was being focused on self-care, and that made me think about our UT Law yoga sessions (and the above picture) . . . .
All of this reminded me that I should recommit myself to my goal of learning more about mental health issues and promoting mental health awareness this year. Health and wellness are far more than physical. They are emotional and psychological. I may just try to attend the Knoxville Bar Association program (or part of it). And I plan to be attentive to the ideas mentioned by Paula in her blog post.
Enjoy the weekend!
Thursday, July 11, 2019
William & Mary's Kevin Haeberle has a new paper entitled Information Asymmetry and the Protection of Ordinary Investors. It takes a close look at the degree to which the core securities laws designed to reduce information asymmetry actually protect ordinary investors in the stock market. Haeberle explains how market makers adjust prices to manage the costs information asymmetry imposes on them. He focuses on how this response creates illiquidity in the market. But then he explains that while this illiquidity hurts many investors, it also helps others—namely, longer-term investors. Thus, reducing information asymmetry will affect different investors in different ways, turning on the time horizon of their investment.
His key takeaway is then that securities laws reducing information asymmetry impose a long-overlooked cost on at least buy-and-hold ordinary investors (including both those who trade directly and those who invest through mutual funds), while conferring only limited benefits to those investors. Accordingly, whatever it does for society, an excessive focus on stopping some investors from making "unfair" gains based on superior information may actually be a bad thing for ordinary investors.
Haeberle closes out the paper by pointing out that the SEC would likely be more effective in protecting ordinary investors from stock-market information asymmetry if it focused more on other areas of law—for example, by regulating the kinds of advice retail investors actually receive.
Wednesday, July 10, 2019
"the Staff said that, 'by imposing this requirement, the Proposal would micromanage the Company ....' but .... These are requests to the boards on a major public policy issue, not directives." https://t.co/LBilc4tazX— Stefan Padfield (@ProfPadfield) July 7, 2019
"To gather data...about potential cognitive biases in the franchising context, this article incorporates a survey of franchisees; it provides empirical evidence of the limited perspective & flawed decision-making of most persons who buy a franchise." 13 OhioSt.Bus.L.J. 1 #corpgov— Stefan Padfield (@ProfPadfield) July 6, 2019
"The increase in failed majority-supported proposals in recent years can be directly attributed to the change in the rules pertaining to the treatment of broker non-votes." https://t.co/fHoY2GN9Fq— Stefan Padfield (@ProfPadfield) July 6, 2019
"The universal ballot adopted by both EQT & the Rice Team named both EQT’s & the Rice Team’s nominees on their respective proxy cards. The only difference related to the presentation of the two cards, in which each side highlighted how it desired shareholders to vote." #corpgov https://t.co/mxwQ9mZBrm— Stefan Padfield (@ProfPadfield) July 10, 2019
Tuesday, July 9, 2019
A recent Tennessee court decision subtly notes that limited liability companies (LLCs) are not, in fact corporations. In a recent Tennessee federal court opinion, Judge Richardson twice notes the incorrect listing of an LLC as a "limited liability corporation."
First, the opinion states:
The [Second Amended Complaint] alleges that Defendant Evans is a resident of Tennessee, Defendant #AE20, LLC is a California limited liability company, and Defendant Gore Capital, LLC is a Delaware limited liability “corporation.”3
3 Gore Capital is in fact a limited liability company.
Judge Richardson later notes, in footnote 11:
Plaintiff states that he was sent documents that listed Gore’s (not #AE20’s) principal place of business as being in Chattanooga, Tennessee, although the SAC lists Gore as a “Delaware limited liability corporation (sic)[.]”
Monday, July 8, 2019
Avid BLPB readers may have noticed that I failed to post on Monday of last week. I was traveling from Portugal to Spain that day. I did plan to make this post then, but travel scrambles (thanks to the Porto metro) and delays (thanks to Ryanair) prevented me from getting to a computer with Internet access until late in the day. By then, I was too exhausted to post. So, you get last Monday's post this Monday! No harm done; this post is not time-sensitive.
Ever heard of Graham's port? The Graham's port lodge was founded by brothers William and John Graham back at the beginning of the 18th century. Fast-forward 150 years, and the Graham family sells the then-very-successful Graham's port business to another family. That second family still runs the Graham's business today.
But a Graham descendant still wanted to be in the port business. He thought he had a "better way." So, 11 years after the Graham family sold Graham's, John Graham (not the same one, obviously!) established the Churchill port lodge. Here's what the Churchill's website says about its formation as a business:
Churchill’s was founded in 1981 by John Graham, making it the first Port Wine Company to be established in 50 years. The Founder wanted to continue his family’s long Port tradition but at the same time create his own individual style of Port. He named the Company after his wife, Caroline Churchill.
I went to a port wine tasting at the Churchill's lodge in Vila Nova de Gaia, Portugal last Monday with my husband and daughter. We tasted the uniqueness of the Churchill's product. (My daughter, who is not a port wine fan, actually enjoyed what she tasted at Churchill's.) The wine is less sweet than one would expect from a port wine. John Graham himself explains why:
My Ports are made with as much natural fermentation, and with as little fortification brandy, as possible. I like to make wines in the most natural way. Above all I look for balance. I believe I brought this balance to Churchill’s Ports. There is a consensus around the characteristics that define our house style which are easily identified.
While we were at the tasting, we took a tour and learned the basic facts I relate here.
I was enchanted by the business story! Headline: A Graham founds Churchill's after the Graham family sells Graham's. A bit confusing, but a great narrative involving family business, M&A (and corporate finance more generally), intellectual property, business formation, and more. We learned, for example, that the grapes are foot-treaded (stomped on by human feet). Imagine the interesting employment questions. (The shifts are twelve hours and there are stems and seeds in with the grapes . . . .) And the tasting is still done by John Graham himself, raising questions about key man insurance and business succession planning. (We were told that John Graham has chosen a successor taster--not a member of the family. But we did not ask about management.) Finally, a major real estate acquisition--buying a vineyard (Quinta da Gricha) with a special terroir--is part of the tale.
I am scheming to find ways to integrate what I learned into my teaching this year. I know I will find places to work aspects of the story in--particularly in Advanced Business Associations and Corporate Finance. Because I teach on a dry campus, no wine tasting will take place during the lessons. But maybe an optional out-of-class session could be planned. Hmmm . . . .
Sunday, July 7, 2019
In reading Izabella Kaminska’s Why dealing with fintechs is a bit like dealing with pirates [FT Alphaville is free, but registration is required], I thought of two points from past blogs. First, the critical, controversial issue of who should have access to an account at a central bank. The article notes China’s decision to require “domestic fintechs like Alipay and WeChat…[to] hold their customer deposits on a full reserve basis at the central bank directly,” and also points to Governor Mark Carney’s recent discussion of permitting fintech companies to deposit funds at the Bank of England. Second, the strategic point of recognizing when change is inevitable, and proactively helping to shape it. Kaminska seems to suggest that a potential reason for this expansion in central bank account access is recent power shifts in the area, and central bankers’ desire to proactively shape the inevitable changes on the horizon in financial markets. As is generally the case, Kaminska's piece is a worthwhile read.
Saturday, July 6, 2019
When I was in practice, I worked on a number of cases alleging violations of Section 11 of the Securities Act, but none that had been filed in state court. (For which I was profoundly grateful; I was always bemused by the fact that I needed to get pro hac’d into federal courts around the country but I was vastly more familiar with their rules and practices than with those of the New York State courts, notwithstanding my admission to the New York State bar).
So, to be honest, I never had any strong feelings about whether plaintiffs should have the right to pursue Section 11 class actions in state court, or whether the Securities Litigation Uniform Standards Act should be interpreted to permit defendants to remove such cases. And I didn’t spare much attention when the Supreme Court recently held in Cyan, Inc. v. Beaver County Employees Retirement Fund that defendants cannot remove them.
But Michael Klausner, Jason Hegland, Carin LeVine, and Sarah Leonard just posted a short empirical analysis of state Section 11 class actions, and the results have captured my interest. First, they find – unsurprisingly – there has been an increase in state Section 11 filings since Cyan was decided, and very often, state litigation is accompanied by a parallel federal case filed by a competing set of plaintiffs. Second, they conclude that the state cases are dismissed on the pleadings at far lower rates than federal cases (though the data is a bit muddy; they exclude from analysis any federal cases with a simultaneous Section 10(b) component, which means they may be excluding cases that appear more fraudulent and thus are - perhaps - stronger). They also analyze settlement sizes and find little difference between federal and state cases, with the caveat that Cyan may have effects further down the road (they also exclude cases filed prior to 2014 to avoid the effects of the financial crisis, which may also distort results).
So this is definitely a fruitful area to keep an eye on – especially with the looming battle over whether the PSLRA discovery stay applies in state court proceedings. See Wendy Gerwick Couture, Cyan, Reverse-Erie, and the PSLRA Discovery Stay in State Court, 47 Sec. Reg. L.J. 21 (2019); see also Post-Cyan Ruling on Discovery Stay.
Friday, July 5, 2019
The dark side of entrepreneurial finance
Editors: Arvind Ashta, Olivier Toutain
Theme of the special issue
Whether we are talking about start-ups, more recently "grow up" or more broadly about company creation-takeover, entrepreneurial finance attracts a lot of attention, from the entrepreneurs' side and from the side of private and public financing organisations and the media. Entrepreneurial finance includes Founder's equity, Love Money, Business Angel, Venture Capital, LBO Funds, banks, IPOs and various alternative financing treated as shadow banking: micro-credit, loan sharking, leasing, crowdfunding, Initial Coin Offerings, among others (Block, Colombo, Cumming, & Vismara, 2018; Wright, Lumpkin, Zott, & Agarwal, 2016).
Financing is considered as an inherent dimension of the entrepreneurial development process (Panda, 2016; Yunus, 2003). Without financing, there is no investment and, therefore, little chance of starting a business with adequate production tools and an organization capable of absorbing the trials and tribulations of starting and developing entrepreneurial activities. Without funding, the risk of lack of legitimacy is also high: what does it mean in the entrepreneurial ecosystem not to have the support of one or more funding agencies? More so in the start-up world! Is that conceivable? Finally, can the entrepreneur now free himself from financial support, even if he does not really need it to start his business? If the reasoning is pursued further, does the entrepreneur have a choice? In other words, is it possible to create and develop your company without mobilizing the financial resources of the territory? Without entering into a financial system and ecosystem that regulates the creation and takeover of companies in a territory? Or a system that pushes the entrepreneur to finance so much that the system itself collapses by bringing forth a financial crisis (Boddy, 2011; Diamond & Rajan, 2009; Donaldson, 2012; Guérin, Labie, & Servet, 2015; Mishkin, 2011).
Applying for funding today is often considered as a difficult adventure: is it really a fighter's path given the particularly numerous mechanisms in France? But are they also numerous in Europe? In the world? Is the cost of financing transparent or hidden (Attuel-Mendes & Ashta, 2013)? In any case, to adventure is to walk and remove obstacles while following a guide... often at the funder's request... which is often called coaching or mentoring. Or following the guide, sometimes - or often, depending on the reader's appreciation – results in respecting rules, imposed steps, in short, to adopt a good conduct... to such an extent that the entrepreneur can lose track of his North Star, or at least part of his project, modified by "pitching" and integrating the comments, suggestions, strong suggestions of potential funders... In other words, if we push the reflection further, the accompanying logic proposed in the form of good intentions by the funders of an ecosystem, are they not likely, by force, to respond to external constraints, to generate effects opposite to expectations: inhibited entrepreneurs, whose project has lost its originality, vitality and excellence through the coaching or mentoring of initially imagined value creation (Collewaert, 2009)? Isn't the finance injected into the support systems finally a Dr Jekyll and Mr Hyde of entrepreneurship? In other words, if it constitutes an unprecedented measure of support for entrepreneurial growth in the world, does it not at the same time generate "antipreneurial" effects? Normative and highly biased, do financial actors deserve such a place in the creative process? What is it that basically legitimizes their central place? (Bateman, 2010; Sinclair, 2012) What is the hidden face of entrepreneurial finance (Henderson & Pearson, 2011; Krohmer, Lauterbach, & Calanog, 2009; Toe, Hollandts, & Valiorgue, 2017)?
The purpose of this issue is to extract itself from the normative fields and discourses that highlight, in the vast majority of cases, the important role of finance in the development of entrepreneurship, whether purely economic, social or environmental. In other words, we are asking ourselves here about the secondary, even hidden, effects of finance on the emergence and development of new companies in France and around the world.
The proposals will address, among other things, the following topics:
- What place does finance occupy today in the feeling of success and accomplishment of an entrepreneurial activity?
- How do entrepreneurs interact with potential funders?
- How do funders dialogue with each other?
- How do funders make their investment decisions? Rationality, Short termism, information asymmetry....
- How do entrepreneurs and funders negotiate? On which elements of the project or company? Are there any losers? What is lost in the process?
- How does the relationship between entrepreneurs and funders change over time?
- Can finance harm the value creation produced by entrepreneurial activity? Can it affect entrepreneurial freedom?
- Is it possible to free oneself from financing circuits? How?
Finally, what is the dark side of entrepreneurial finance?
Submission of texts: By April 30, 2020 at the latest
Publication: March 2021
[I have omitted here the list of references supporting the text citations. Please contact me by email if you would like a .pdf copy of the call for papers that includes the list. There is more information after the jump.]
Wednesday, July 3, 2019
"a review of empirical studies of the last forty years reveals that every aspect of corporate governance that was studied yielded conflicting empirical findings as to its effect on firm value and performance" https://t.co/cSSIzPS9Tw— Stefan Padfield (@ProfPadfield) June 30, 2019
"The purpose of this paper is to analyze 1,530 benefit corporations ... for proof of social purpose performance, as demonstrated in reports on their websites.... most benefit corporations in the study had no published reports" https://t.co/FmuDmvji6G #corpgov #socent— Stefan Padfield (@ProfPadfield) June 28, 2019
Pitney Bowes "is unique because, unlike the other state court decisions, it interprets Cyan to apply the PSLRA’s discovery stay to Securities Act suits in state courts." https://t.co/GeW27oI5ks— Stefan Padfield (@ProfPadfield) June 29, 2019
"Dual-class share structures do not necessarily offer an edge on performance, as the results appear inconclusive. Dual-class companies appear more profitable than their peers, but they fail to show significant improvement in performance compared to their counterparts." https://t.co/5i2y2VCMbi— Stefan Padfield (@ProfPadfield) June 28, 2019
"Wall Street’s role as matchmaker between big money managers and corporate executives is under threat. Five large investors overseeing more than $7 trillion are banding together to directly organize a series of meetings with company executives" #corpgov ht @AnnMLipton https://t.co/KfzdePQORt— Stefan Padfield (@ProfPadfield) June 28, 2019
Tuesday, July 2, 2019
Veil piercing continues its randomness. Back in April, in Hawai'i Supreme Court decision, Calipjo v. Purdy, 144 Hawai'i 266, 439 P.3d 218 (2019), the court determined that there was evidence to support a trial court jury's decision to pierce the veil of an multiple entities and hold the sole member/shareholder of the entities liable. (An appellate court had determined that there was insufficient evidence to support veil piercing.)
The decision may be sound, but the evidence for the decision makes the outcome seemingly inevitable. In determining there was evidence to support the jury's decision, the court notes the plaintiff's allegations were that "sole ownership and control is one of many factors that can establish alter ego and, therefore, evidence of Purdy’s ownership and control was pertinent to this claim." The court then explains,
In this case, the jury was presented with evidence that Purdy exercised exclusive ownership and control over Regal Corp. and Regal LLC. Purdy testified that he was the sole shareholder, director, and officer of Regal Corp. and the sole member and manager of Regal LLC. This court has held that “sole ownership of all of the stock in a corporation by one individual” is one relevant factor to determine alter ego. Id. (quoting Associated Vendors, 26 Cal. Rptr. at 814). Purdy’s testimony supports the jury’s determination that Purdy exercised exclusive ownership and control over Regal Corp. and Regal LLC; it constitutes evidence that Purdy was the sole owner and manager of either company.
Note, though, that the plaintiff claimed that "sole ownership and control ... can establish alter ego." The court more accurately states that ownership and control are a factor. They are not dispositive or else limited liability for a single-member LLC, corporation, or other limited liability entity would be a fiction. The jury instructions, though, seem to eliminate the possibility that an entity and a single shareholder or member could be separate. The jury was told:
You should consider the following facts in determining whether or not to disregard the legal entity of Regal Capital Corporation and return a verdict in favor of plaintiff against Defendant Jack Purdy, as an individual.
One, whether or not defendant Jack Purdy owned all or substantially all the stock in Regal Capital Corporation; two, whether or not Jack Purdy exercised discretion and control over the management of Defendant Regal Capital Corporation; three, whether or not Defendant Jack Purdy directly or indirectly furnished all or substantially all of the financial investment in Defendant Regal Capital Corporation; four, whether or not Regal Capital Corporation was adequately financed either originally or subsequently for the business in which it was to engage.
Five, whether or not there was actual participation in the affairs of Regal Capital Corporation by its stockholders and whether stock was issued to them. Six, whether or not Regal Capital Corporation observed the [formalities] of doing business as a corporation such as the holding of regular meetings, the issuance of stock, the filing of necessary reports and similar matters. Seven, whether or not Defendant Regal Capital Corporation [dealt] exclusively with Defendant Jack Purdy, directly or indirectly in the real estate sales development activities in this case. Eight, whether or not Defendant Regal Capital Corporation existed merely to do a part of business of Defendant Jack Purdy.
So, here was have an undercapitalization factor, and that could be separate from the shareholder/member, and we have the traditional "corporate formalities" test, but even there, these instructions imply that the entity must have additional shareholders to be "real." For numbers one, two, three, five, seven, and eight, a jury would almost always have to find that those factors would support veil piercing for any sole shareholder corporation or single-member LLC. I don't think that's either the intent or the substance of current law in most jurisdictions, though the Hawai'i Supreme Court clearly disagrees with me.
In this case, there seems to be at least some evidence of fraud, and I'm more than willing to defer to a jury if they determined that the defendant had sole control of his entities and he used those entities to commit fraud. I just object to court's apparent comfort level with the idea having sole control of an entity or entities, and exercising that control, on its own suggests something nefarious.
I know people use LLCs and corporations to engage in all sorts of bad behavior, and I'd like to see that punished more often than it seems to be. But relaxing the application of legal standards to get there is not a good way to do it. If the law should be changed, then legislatures should get to work on that. If we think single-owner entities are a bad idea (I don't think they are inherently so), let's deal with that through legislation so that at least everyone knows the rules.
Ultimately, it's not as though current veil piercing jurisprudence has been clear or sound or predictable. There has always been a random nature to it. However, for single-member entities, if the current trends continue, the randomness of veil piercing will not attach not to the outcome of a lawsuit -- it will attach to whether or not someone brings suit at all.
Sunday, June 30, 2019
I don’t have enough material for another focused post on advice for new business law professors (see posts I, II, III, and IV). However, I do have a smattering of additional thoughts that I wanted to share in hopes that new professors, and potentially others, might find them helpful. So, in no particular order:
- As in much of life, less is generally more. Specifically, in prepping a new class, in your excitement, you might initially want to try to cover almost all of the casebook. Just say no! For example, given my research interests, I always wanted to cover derivatives etc. in my Banking and Financial Institutions Law course. However, I finally learned that in a three-hour course without prerequisites, I only had time to cover how banks (and some bank-like financial institutions) were structured, regulated, and handled when in trouble.
- I think it’s helpful to add syllabus language (and note it to students) along the lines of the following: “In practice, the learning experience of each course is unique. I reserve the right to modify the scheduled readings or material to be covered to promote the best educational experience for students.” I certainly don’t recommend wholesale changes mid-course to the syllabus. However, I do think, as fellow co-bloggers have aptly pointed out, that clearly setting expectations early on is critical. Hence, it is helpful to set the expectation that there might be some variation in the assignments over the course of the semester to match the pace of the class.
- The professor sets the energy level of each class. This is particularly important to remember if one is teaching at 8am, right after lunch, or in the evening!
- When possible, be encouraging! We all love to receive encouragement! Let’s do our best to distribute it too! For example, if a student’s answer to a question is wrong, is there something positive you can say about their response, and then steer the class to the right answer?
- Our words, even if only casual remarks, often carry great weight with our students.
- Where possible, I find it helpful to use in-class examples students can relate to, and occasionally to share recent news stories relevant to the material we’re studying.
- In some courses, I’ve found it helpful to begin each class by summarizing at a very high level what we’ve already covered, what we’ll be covering that day, and what we are going to cover in the near future. Many students appreciate a reminder of the big picture.
Ok experienced professor-readers, is there something we’ve yet to mention that you think important to share with new business law professors? If so, please help us out with a comment!
Saturday, June 29, 2019
Greetings from sunny Portugal. I am enjoying some vacation time here after attending and presenting at the European Academy of Management conference in Lisbon this past week. I will have more to say about that conference in a later post. But for today, I offer some light thoughts and an Internet "treasure hunt" relating to mergers and acquisitions.
I arrived at my hotel in Sintra earlier today to find a notice in the room stating that "[o]n the 30th June 2019, the Hotel Tivoli Sintra will be changing the legal business entity which will be reflected in future invoices." The notice went on to ask that, "to avoid possible delays relating to the billing" each guest pay up his or her bill to date on June 30th "in a partial invoice," noting that "[t]he remaining services will be invoiced at the departure time with the new entity." Apologies were made for "the inconvenience" and thanks were offered for "the understanding."
Of course, as an M&A practitioner and instructor, I wanted to know what led to this change in "legal business entity." I suspected a merger or acquisition transaction. Was it an asset transaction in which the hotel brand was being changed? That's what I suspected. Since I ask my advanced business law students to try to identify the nature of business combination transactions from news reports and public filings, I thought I would see what I could find out by doing a bot of Internet research. Here's what I learned.
Minor Hotels "completed the acquisition of the entire Tivoli portfolio in early 2016." I read this in the Minor International Public Company Limited 2016 Annual Report. See also here. The Tivoli Hotel Sintra was part of this final stage in acquiring the Tivoli hotels. See here. Minor International (known as MINT) is registered under the laws of the Kingdom of Thailand.
In the fall of 2018, MINT launched a compulsory tender offer for shares of NH Hotel Group SA. The tender offer was commenced as a result of MINT's acquisition of a >30% equity stake in NH Hotel Group in a series of transactions earlier in the year. A news report reveals that MINT's significant stock acquisitions were part of an initial unsolicited bid for NH Hotel Group, which Hyatt Hotels & Resorts also desired to acquire. (Spain has a compulsory tender offer law that kicks in when control of a public company--which includes the direct or indirect acquisition of 30% or more of the public company's voting rights--changes. See here.) By the end of October, MINT had acquired sufficient additional shares of NH Hotel Group's common stock to bring its equity stake in NH Hotel Group to over 94%. See here and here and here. A subsequent news report indicates that "NH Hotels and Minor Hotels are seeking to further integrate their brands." The same posting noted that "[p]lans are already underway in Brazil and Portugal to rebrand some Minor Hotels as NH Hotels, with 15 hotels in the two countries undergoing the transformation."
Accordingly, it seems that I may be among the last hotel guests to stay at the Tivoli Hotel Sintra as a Tivoli branded hotel. At least that's my guess based on what I have read. Although I was not correct in my original guess as to the nature of the transaction that led to the change in "legal business entity" of my Sintra hotel, if my assessment is correct, I wasn't far off. An asset acquisition was involved at the outset, but the posited rebranding happened later and was more the result of a series of stock acquisitions in a hostile, competitive takeover environment. Not a bad day's work in M&A sleuthing. Just call me Nancy Drew, right, Ann?
Friday, June 28, 2019
Last week, the Delaware Supreme Court issued an opinion, Marchand v. Barnhill, which is notable for two reasons. First, it furthers the Court’s project of reinvigorating director independence standards, and second, it is one of the very few decisions to find that the plaintiffs properly pled a claim for Caremark violations.
The facts are these. Blue Bell Creameries suffered a listeria outbreak in 2015 that killed three people and nearly bankrupted the company, and shareholders brought a derivative lawsuit alleging that the directors failed to oversee corporate compliance with FDA and other requirements. First, they alleged that the CEO Paul Kruse, and the VP of Operations Greg Bridges, actually received notification from various agencies of the company’s lack of compliance and took no remedial action. In so doing, Kruse and Bridges violated their fiduciary duties to the company, and a litigation demand on the board would be futile because of their close ties to the board members.
Second, plaintiffs alleged that the Board violated its Caremark duties by failing to institute a system for monitoring the company’s compliance.
Chancery dismissed both claims, and the Delaware Supreme Court reversed.
Starting with the issue of director independence, as Delaware-watchers are well-aware, in the past few years, the law has undergone something of a revolution. Once upon a time, only clear financial ties or the equivalent of blood relations would be sufficient to show that one director lacked independence from another, but more recently, Delaware has begun to recognize how less concrete social and business ties, traveling in similar circles, ongoing professional and personal contacts, and so forth, can collectively create feelings of obligation that prevent one director from making an objective decision about whether to sue another.
Thus, in Marchand, the Court held that a particular director was likely biased in favor of Kruse because the Kruse family – not Paul Kruse personally – had mentored him throughout his business career, going so far as to make a sizeable donation to a local college that somehow ended up with the director in question getting a facility named after him. Significantly, the Court emphasized that “independence” may vary depending on the type of decision at issue – directors may be willing to vote against close friends on some matters, but that’s a far cry from being willing to sue the friend for breach of duty, and judges need to be sensitive to the difference.
This entire line of caselaw might be described as Strine’s revenge: it’s a direction he recommended with In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003) when he was on the Chancery court, and that the Delaware Supreme Court rejected in Beam v. Stewart, 845 A.2d 1040 (Del. 2004). Now in the Chief Justice spot, Strine has apparently persuaded his colleagues as to the correctness of his views and is moving full steam ahead, going so far in Marchand as to cite his Oracle decision, thus retroactively making it authoritative.
As to the Caremark issue, what’s striking here is not only the rarity with which Caremark claims make it past a motion to dismiss, but the fact that the Court accepted the plaintiffs’ claim that no monitoring system at all had been put into place. The Court highlighted that despite various compliance problems that arose over the years, the Board had no committee in place to address these matters and Board minutes did not indicate any discussion of them.
By contrast, in the few cases where Caremark claims have had some success – think something like In re Massey Energy Co., 2011 WL 2176479 (Del. Ch. May 31, 2011), where the claim was properly pled but lost in a merger – plaintiffs demonstrated that the Board didn’t simply fail to monitor, but was actually complicit in the legal violations. They knew of the red flags and either ignored them or directly encouraged the misbehavior. They were, in Elizabeth Pollman’s framework, actually disobedient regarding their legal obligations. (And to give credit where credit is due, I’ll say that Elizabeth Pollman is the one who has observed that successful Caremark complaints tend to plead willful violations of the law, and the paper she eventually releases on the subject is something to stay tuned for). But notwithstanding that general tendency, in Marchand, the Delaware Supreme Court did not hold that the Board was complicit, or that it had actual knowledge of potential legal violations; instead, it held that the Board simply had no monitoring system in place at all – a much harder claim since just about any monitoring system will do, and its design is within the directors’ business judgment. The Marchand Court went so far as to point out that monitoring systems in place at the management level were insufficient to absolve the Board, because there was no indication that the Board was monitoring at all – even to make sure that management did its job.
The thing to note about this aspect of Marchand is that the Court did not have to go that way, because Paul Kruse and Greg Bridges – who actually knew about the various problems – were both directors themselves, and Kruse later became Chair of the Board. That is, the Court could have said that the Board, via Kruse and Bridges, did have a monitoring system, and that, via Kruse and Bridges, the Board was aware of problems but refused to take action to remedy them. Yet the Court chose not to go this route – it didn’t even mention that Kruse was a director throughout the period and Bridges was a director for most of it (you have to look at the Chancery decision for those tidbits), and only grudgingly indicated that Kruse eventually became Chair of the Board – a fact to which the Court attaches no significance (and indeed, he only became Chair just before the problem reached crisis point). Instead, ignoring the fact that at least two members of the Board were part of management and directly received notice of compliance issues, the Court simply declared that no monitoring system was in place.
So the opinion seems, in a way, motivated.
That impression is reinforced by the types of compliance problems that the Court identifies to establish that that Blue Bell had longstanding sanitation issues. The Court lists regulatory citations that Blue Bell factories received dating back to 2009, but – to my untutored eye – they all read like, well, flyspecking. You know, periodically an agency inspects, and they always find a problem to write up, and it’s quickly resolved. Now, just to be clear, I am not an expert in the regulation of food safety and I may very well be misreading this, but a handful of problems like “equipment left on the floor and a ceiling in disrepair in the container forming room” just don’t strike me as the kind of thing to suggest systemic noncompliance. Matters only get serious when listeria is first detected in 2013, and after that, though listeria is identified several other times, nothing in the opinion indicates that the company was ignoring regulatory complaints or failing to attempt to remediate the problem before it issued a general recall in early 2015.
The point being, it almost seems as though the Court is going out of its way to justify a “failure to monitor” theory and seizes upon (again, to my untrained eye) fairly minor problems as evidence that the Board was not paying sufficient attention.
That said, I do have to highlight this aspect of the Court’s reasoning:
In answering the plaintiff’s argument, the Blue Bell directors also stress that management regularly reported to them on “operational issues.” This response is telling. In decisions dismissing Caremark claims, the plaintiffs usually lose because they must concede the existence of board-level systems of monitoring and oversight such as a relevant committee, a regular protocol requiring board-level reports about the relevant risks, or the board’s use of third-party monitors, auditors, or consultants…Here, the Blue Bell directors just argue that because Blue Bell management, in its discretion, discussed general operations with the board, a Caremark claim is not stated.
But if that were the case, then Caremark would be a chimera. At every board meeting of any company, it is likely that management will touch on some operational issue….
I admit, if defendants just argued that the Board discussed “operational issues,” that’s pretty damning.
Okay, so what do we make of all of this?
Well, I have to go back to an argument I’ve previously made in this space, namely, that with decisions like Corwin, Delaware has transformed itself into something like a mini-SEC. Suddenly, instead of emphasizing a Board’s substantive obligations, courts are scouring disclosures to determine if a shareholder vote was fully informed. Except, of course, we already have an SEC – we don’t need Delaware to do that job. (But see Reza Dibadj, Disclosure as Delaware’s New Frontier, 70 Hastings L.J. 689 (2019)). A contextual, nuanced take on independence carves out a space for Delaware that the SEC can’t replicate – and perhaps the same might be said of a more muscular approach to Caremark.
Thursday, June 27, 2019
Arizona State's Laura N. Coordes has a new paper up making a powerful case for overhauling bankruptcy laws for health care. Despite the soaring, and seemingly irrational medical costs paid by patients, health care bankruptcies have been on the rise. Since 2010, health care bankruptcies have increased by 123% while bankruptcies across all sectors have declined by 58%. The problems are not evenly distributed. Financial distress may be most concentrated in rural hospitals. If these hospitals continue to fail and close because they cannot address financial problems through bankruptcy, many people will be left without access to basic medical care. As the boomer population continues to age and require ever more medical care, these problems are likely to get worse and worse.
Coordes convinced me that health care organizations differ from other entities in need of bankruptcy relief. These bankruptcy misfits have state and federal regulators and patient communities as key stakeholders, making it a challenge for bankruptcy courts charged with maximizing a bankruptcy estate's financial value to balance competing interests.
Looking down the road, additional health care bankruptcies appear likely. And as they mount, the need to put a solid, health-care-specific framework in place to address them will increase. Hopefully, this is an area where we'll be able to get some reforms done before too many providers close.
Wednesday, June 26, 2019
"'It’s less harmful to piss off the government than piss off Google,' Mr. Abuhazim said. 'The government will hit me with a fine. But if Google suspends my listings, I’m out of a job. Google could make me homeless.'" #corpgov https://t.co/LisAipJZR5— Stefan Padfield (@ProfPadfield) June 21, 2019
"we see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people" #corpgov https://t.co/0FyB5LzRJN— Stefan Padfield (@ProfPadfield) June 22, 2019
Is doctrinal change a response to "extra-legal factors, including interest group politics"? "Kershaw rejects this claim, offering other..accounts for the production of US corporate fiduciary law & for Delaware’s lead in attracting incorporations." https://t.co/HpFVmTDDkD #corpgov— Stefan Padfield (@ProfPadfield) June 21, 2019
"Many legal scholars do not readily associate executive search firms (ESFs) with corporate governance, yet they are intimately connected with a key mechanism of corporate governance — elite labor markets." https://t.co/yR7QEJqCIq #corpgov— Stefan Padfield (@ProfPadfield) June 21, 2019
Tuesday, June 25, 2019
I’m not great at unplugging. That’s a trait I suspect rings true with a lot of people, especially lawyers. I am working on it. Writing this post while on vacation is not a great example of that, though I’m writing this while I’m on a plane, and the kids are occupied with their own electronic flashy things.
I have tried very hard to put most anything that can wait to the side during our travels. I’ve not always succeeded, but I’m doing better than I usually do, so that’s good.
Setting work aside (especially cellphones/email) is something a lot of try to do on vacation, but I also know I need to do a better job of it on a daily basis. If I’m accessible to people all the time electronically, I am necessarily less available to those right in front of me. There are times when that’s a necessary balancing act, but not always.
In some ways, that’s a lesson I learned a long time ago (though I continue to need reminders), and I have done better in certain settings, such as individual meetings with students and colleagues. But even for myself, when I am writing or reading, I often let the possible get in the way of the immediate task before me. I’m trying to set up some better habits so I can be more focused — more in — in whatever it is I am doing.
I am also contemplating additional efforts to protect other people’s time. The main one I’m thinking about relates to communication timing. I’m someone who tends to be connected, so I’m also one who tends to both reply and initiate emails at all hours. That can imply to others an expectation of similar accessibility, even if that’s not the intent.
At a minimum, I plan to make sure people know when I send an email during off hours if it’s actually urgent or if it’s just me catching up. It’s almost always the latter. But I’m also thinking strongly about using delayed timing for non-urgent emails, so they send during regular business hours, even if they were written on the weekend or in the evening.
The challenge with that is that some people would prefer to have emails during non-business hours. I’m one of them, as I often like to work through email early in the morning, so delayed emails might actually set me back a bit. And while I’d like people to unplug more, I’m not one to tell others how they should work or when.
At a minimum, I’ll be thinking a lot more about ways to make sure what I ask of people is reasonable and ensure that people know what I actually expect. It is not just students who appreciate transparency.
My first order of business is trying to let myself know what I expect of me. Fortunately, I’ve got just a little more time to sort that out.