Business Law Prof Blog

Money Where My Mouth Is?

During my brief academic career, I have focused the majority of my research on social enterprise law.  While I have expressed my disagreement with various parts of the current social enterprise statutes, I have tried to make constructive suggestions for improvement, and am largely in favor of businesses that have a society-focused mission.

Lately, I have been thinking about whether my oral and written support of socially responsible businesses significantly impacts my purchasing behavior. 

Frankly and regrettably, the social responsibility of a given company is usually merely a “tie-breaker” in my purchasing decisions.  In my Social Enterprise Law seminar last spring, the class concluded, after doing case studies on a number of social enterprises, that for-profit social enterprises likely need a business plan that is just as good as a traditional for-profit company to be sustainable and successful.  Social enterprises that used their social responsibility as a crutch often failed or performed poorly. 

Patagonia is a socially responsible company that I have supported religiously -- long before I started writing in the area.  You can see my worn out Patagonia shoes below.  While Patagonia’s products may be expensive, their value proposition is strong.  Those shoes cost me less per day worn than any other shoes I have ever purchased. (My wife has been trying to get rid of these shoes for years and is probably going to be mortified that I posted a picture of them, if she ever finds this post). 

More recently, I have made purchases from Method, Better World Books, Plum Organics, Ben & Jerry's, and other socially responsible businesses (or at least companies that market themselves as socially responsible) with varying levels of satisfaction.  In Nashville, we frequent a number of restaurants that attempt to buy fair trade and from local sources. 

When we moved into our new home a little over a week ago, we used The Green Truck Moving Company.  (They gave us a small discount for tweeting about the service, but had no involvment in or knowledge of this post).  The Green Truck Moving Company plants two trees for each move, has trucks that run on biodiesel, recycles your boxes, and had the friendliest movers I have ever encountered.  I have moved over a dozen times in my life, and they did a great job, but, frankly, I probably would not have used them if they were not competitive on price with their more profit-focused peers. 

One of the reasons that more consumers are not willing to pay significantly more for socially responsible products may be that they do not trust the claims put forward by the companies.  For example, Professor Alicia Plerhoples (Georgetown) recently profiled a for-profit college with a seemingly poor track record that took advantage of one of the new social enterprise legal forms.

My students (and many other people around their age), however, seem to have a strong and growing interest in socially responsible products and businesses.  The law is evolving quickly in that area and will hopefully address the accountability issues. 

For those who are interested in further reading regarding consumer willingness to purchase from socially responsible companies, here is information on a recent Nielsen survey and a link to an article entitled Are People Willing to Pay More for Socially Responsible Products: A Meta - Analysis.  (Thanks to Professors Cass Brewer (Georgia State) and Peter Roberts (Emory) for the links).

Two Recent Business Law Professor Postings

As I have mentioned before, there appears to be no official "meat market" for legal studies positions in business schools.  I found my current job through Higher Ed Jobs, and thought Higher Ed Jobs was the best source during my search.  Also, the Chronicle of Higher Education's Vitae recently launched (though they have had a jobs board for quite some time) and is likely worth frequenting.

For those still on the market, I wanted to highlight two recent business law postings: Southeast Missouri State University and University of Alaska (Fairbanks).  Both positions appear to be tenure-track legal studies positions in business schools.  Also, both schools are AACSB-accredited.  (There are multiple accrediting bodies for business schools, and AACSB is the gold standard). 

I maintain that being a professor is the best job in the world (especially given that my childhood dream of becoming an NFL quarterback is looking less glamorous in light of all the talk about concussions and chronic traumatic encephalopathy (CTE)). 

Wishing success for our readers who are on the professor market. 

What does a for-profit corporation believe and should it receive a religious exemption?

Professor Caroline Mala Corbin from University of Miami has written an interesting article on the Hobby Lobby and Conestoga Wood Specialites Corp. cases before the Supreme Court. Her abstract is below:

Do for-profit corporations have a right to religious liberty? This question is front and center in two cases before the Supreme Court challenging the Affordable Care Act’s “contraception mandate.” Whether for-profit corporations are entitled to religious exemptions is a question of first impression. Most scholars writing on this issue argue that for-profit corporations do have the right to religious liberty, especially after the Supreme Court recognized that for-profit corporations have the right to free speech in Citizens United. 

This essay argues that for-profit corporations should not – and do not – have religious liberty rights. First, there is no principled basis for granting religious liberty exemptions to for-profit corporations. For-profit corporations do not possess the inherently human characteristics that justify religious exemptions for individuals. For-profit corporations also lack the unique qualities that justify exemptions for churches. Citizens United fails to provide a justification as its protection for corporate speech is based on the rights of audiences and not the rights of corporate speakers. Second, as a matter of current law, neither the Free Exercise Clause nor the Religious Freedom Restoration Act recognizes the religious rights of for-profit corporations. Finally, corporate religious liberty risks trampling on the employment rights and religious liberty of individual employees.

 

 

Contracts Content

I recently discovered that YouTube hosts a collection of content related to contracts. If you teach this first year course, it is at least worth browsing through the options to see if you can include something in class, a follow-up email to students, or linking through your course website.  These videos are silly and hard to believe that one could devote so much time to a task like "contracts" songs, but bless those who do.  

Collection of Contracts Songs #1: 

Collection of Contracts Songs #2: 

If you use other content in your first year contracts course, please leave a comment or send me an email. I will update the post with your suggestions.

-AT

Veil Piercing Not the Only, or Best, Response to Man-Made Disasters

Last week, after a post here, I received a call from a Charleston (WV) reporter seeking some background on veil piercing as it relates to the company (Freedom Industries) linked to a chemical spill that left 300,000 people without clean drinking water.  That conversation led to a rather long article, as newspapers go, on the concepts of veil piercing in West Virginia.  The article did a rather good job of relaying the basics (with a few nits), and I hope it at least informs people a little bit about the process to follow on that front. 

The article does reflect a little confusion over what I was trying to communicate about personal liability for the president of Freedom Industries. West Virginia law provides: (b)“Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.” W. Va. Code, § 31D-6-622 (emphasis added). I was trying (and I take responsibility for any lack of clarity) to reflect my view that it was conceptually possible that the company president could be found personally liable for the harm if there were activities undertaken in his personal (and not corporate) capacity, but that based on the facts currently available, that seemed unlikely to me. 

West Virginia courts have long reinforced the separate nature of the corporation and the shareholder. Consistent with prevailing views, the state recognizes each corporation as a distinct, individual entity that is separate and distinct from other corporations and from their respective shareholders. “The law presumes that two separately incorporated businesses are separate entities and that corporations are separate from their shareholders.” S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 788, 320 S.E.2d 515, 523 (1984). In a proper case, courts will disregard the entity form—pierce the limited liability veil—where necessary to prevent injustice; however, courts take seriously this separate nature of corporations and shareholders, and “the corporate form will never be disregarded lightly.” Laya v. Erin Homes, Inc., 177 W. Va. 343, 347, 352 S.E.2d 93, 97 (1986) (quoting S. States Coop., Inc. v. Dailey, 167 W.Va. 920, 930, 280 S.E.2d 821, 827 (1981)); see also S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 787, 320 S.E.2d 515, 522 (1984) (“The [veil piercing] doctrine is complicated, and it is applied gingerly.”).  Thus, while veil piercing is not impossible, it is a significant hurdle. 

I mentioned in a prior post that I thought enterprise liability (essentially collapsing various limited liability entities into one) was a more likely possible remedy for unpaid losses, though again it is by no means a given.  Much more information about how the various entities involved in the whole situation operated and interacted with one another will need to be discovered before the real likelihood of such an outcome can be reasonably predicted.  

Regardless of how that turns out, though, there is another issue worth noting, and that is the lack of government oversight.  The classic case on veil piercing and enterprise liability, Walkovszky v. Carlton, explained that complaints about the inadequacy of corporate insurance and others assets are not a problem for the courts to solve.  That court explained: 

if the insurance coverage required by statute “is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature.” It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, §1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of . . . [such] corporations that they carry . . . liability insurance over and above that mandated by [law].”  Walkovszky v. Carlton, 18 N.Y.2d 414, 419-420(N.Y. 1966) (citations omitted).

I don’t know if a court will pierce the veil or apply an enterprise liability theory to expand the available assets for victims of the chemical spill. There is a lot to be determined before we’ll see an outcome. Still, it needs to be clear that where a company acts within the parameters of its grant of limited liability, seeking additional compensation from others after the fact is improper. (Again, whether the companies involved acted appropriately is an open question.) 

If we’re uncomfortable with the cap on recovery for harms such as this, then randomly, haphazardly, and retroactively eliminating a state grant of limited liability protection is not the proper response.  There are other ways to help protect the public, such as proper permitting, oversight and enforcement at chemical storage sites, and increased insurance and/or bonding requirements.  State and federal legislatures should be discussing such options right now, and at least some discussions are occuring.  It is, though, disheartening to read that even while discussing stronger standards for chemical storage tank operators, the West Virginia Senate Natural Resources Committee also voted to reduce water quality standards for aluminum in state water.

Legal and Ethical Issues in Predictive Data Analytics (Call for Papers)

The following call for papers comes to us from Janine Hiller (Virginia Tech):

I am pleased to announce a Call for Papers for a research colloquium focused on "Legal and Ethical Issues in Predictive Data Analytics." The colloquium is co-organized and the resulting publication will be co-edited by Tonia Hap Murphy of  the University of Notre Dame. The colloquium of 8-10 scholars will be held at Virginia Tech, Blacksburg, Va. on June 19-20, 2014. Virginia Tech and the Center for Business Intelligence and Analytics are sponsoring the research meeting, and will pay for meals and lodging during the colloquium dates.

 

Predictive data analytics are used in a variety of settings and applications,  including personalized marketing, crime prevention, insurance, health care, and increasingly in the legal profession itself. Within the next few years, the sale of predictive analytics business software alone is forecast to reach billions of dollars and to be utilized in a wide variety of industries. In contrast to the growth of data analytics and predictive modeling, legal and ethical considerations have not been widely identified or discussed in academic literature. The goal of the colloquium is to provide leadership for research about these issues and to provide a vehicle for researchers to discuss their ideas, or to launch new ideas, about the intersection of law, ethics, and predictive data analytics.

 

To be considered, please submit an abstract of up to 750 words to Janine Hiller at [email protected], and copied to [email protected] by March 3, 2014.  Abstracts will be evaluated based upon the quality of the abstract and the topic’s fit with other presentations.  Questions and a request for a copy of the full Call for Papers may be directed to Janine Hiller at [email protected] or Tonia Hap Murphy at [email protected].   

Why Lawyers and Non-Lawyers React Differently to Citizens United

As Anne Tucker noted, last week was the fourth anniversary of the Supreme Court’s Citizens United decision, striking down as unconstitutional a ban on electioneering expenditures by corporations.

I don’t want to discuss the merits of that decision. I’m not a constitutional expert and many people much more qualified than I have chimed in. Instead, I want to talk about the public reaction to the decision. In my (admittedly limited) experience, non-lawyers react to Citizens United very differently from lawyers.

The Reaction of the Lay Public

The reaction of many non-lawyers is, “Are you nuts? Only people have constitutional rights and corporations aren’t people.” The mere idea that corporations should be treated like natural persons with similar constitutional rights is both hilarious and outrageous. Corporations aren’t people, and only an idiot would think otherwise.

The Reaction of Lawyers

The reaction of many lawyers is quite different. (I’m excluding those lawyers who appear as pundits on talk shows and are expected to overreact.) Many lawyers disagree with the Citizens United decision, but most lawyers don’t consider the idea of giving corporations the same rights as natural persons as completely beyond the pale of reason. The focus of the debate among lawyers is more on whether corporations should have the particular legal right at issue in Citizens United.

Corporations are Often Persons in the Law

The reason for the difference, I think, is that lawyers and law students are bombarded with instances of corporations as persons. It’s second nature to us. Look in the definitions section of almost any statute. It’s hard to find a statute that does not define the term “person” to include corporations. In the law, corporations are often treated as persons, with the same legal rights and obligations as natural persons.

Citizens United, in a broad sense, is just another example of that common legal concept of personhood. Because of that, although lawyers may think the Citizens United decision is bad policy or bad constitutional law, the reaction of most lawyers isn’t quite as derisive as some of the lay reaction.

Bullard on the SEC's Crowdfunding Proposal: Will it Work for Small Businesses?

Go here for the January 16, 2014 testimony of Mercer E. Bullard before the Committee on Small Business, United States House of Representatives, on the SEC's Crowdfunding Proposal.  Here is a brief excerpt (comment deadline is February 3):

The overriding issue for crowdfunding is likely to be how the narrative of investors frequently losing their entire investment plays out. If investors are perceived as losing only a small part of their portfolios because of business failures rather than fraud, or if their crowdfunding losses are set off by gains in other investments through diversification, the crowdfunding market could weather large losses and thrive. However, if fraudsters are easily able to scam investors under the cover of a crowdfunding offering, or stale financial statements routinely turn out to have hidden more recent, undisclosed financial declines, or there are investors who can’t afford the losses they incur, resulting in stories of personal financial distress – then crowdfunding markets will never become a credible tool for raising capital.

Pearce & Hopkins on “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization”

John A. Pearce II & Jamie Patrick Hopkins have posted “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization” on SSRN.  Here is the abstract:

One new business model is the low-profit, limited liability company (L3C). The L3C was first introduced in Vermont in 2008 and has since been adopted by several other states. The L3C is designed to serve the for-profit and nonprofit needs of social enterprise within one organization. As such, it has been referred to as a "[f]or-profit with [a] nonprofit soul."

In an effort to efficiently introduce the L3C business model, states have designed L3C laws under existing LLC regulations. The flexibility provided by LLC laws allows an L3C to claim a primary social mission and avail itself of unique financing tools such as tranche investing. Specifically, the L3C statutes are devised to attract the program related investments (PRIs) of charitable foundations. Despite these successes, adoption of the L3C form has been slower than proponents expected.

A similar business initiative has found great success in the United Kingdom (U.K.), where numerous proponents supported legislation designed to create hybrid business models that would promote social entrepreneurship. As a result, the U.K. created the Community Interest Company (CIC) in 2006, allowing more than 4,500 companies to register as CICs that offer a double bottom line (or dual benefit) to investors.

While CICs and L3Cs were created with the same double bottom line in mind, CICs face strict government regulations that provide investors with additional protections. These regulations have indirectly contributed to the success of many CICs by increasing investor confidence in the success of these businesses. In the United States, the flexibility of LLC statutes may provide L3Cs with unique funding options, but the lack of government regulation leaves investor outcomes uncertain and inhibits L3Cs from being a better-utilized business model for social entrepreneurship.

Academy of Legal Studies in Business - Seattle, WA (Aug. 4-7, 2014)

Information about the annual Academy of Legal Studies in Business ("ALSB") conference is available here. 

Supposedly, the conference hotel, the Hyatt Olive 8, is already booked.  (Who knew that you had to book earlier than January 24 for an early August academic conference).  I hear that the conference organizers are negotiating for reduced rates at the nearby hotels, or perhaps more rooms will come available (at the conference rate of $159/night) at the Hyatt Olive 8.

This will be my first ALSB conference and my first trip to Seattle.  I am looking forward to it.  The ALSB conference is the annual, national conference for legal studies professors in business schools.  Last fall I attended, presented, and enjoyed the SEALSB regional conference in Tampa.  I am told that ALSB will be similar, but on a much larger scale.

If you are interested in this conference and/or are interested in teaching law in business schools, it might be worth joining ALSB.  The new member rate is only $30. 

Hope to see some of our readers in Seattle in August.   

National Business Law Scholars' Conference (Call for Papers)

An announcement from the Faculty Lounge that may be of interest to some of our readers is reproduced below:

"The National Business Law Scholars Conference (NBLSC) will be held on Thursday, June 19th and Friday, June 20th at Loyola Law School, Los Angeles.

This is the fifth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Presentations should focus on research appropriate for publication in academic journals, especially law reviews, and should make a contribution to the existing scholarly literature. We will attempt to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at [email protected] with an abstract or paper by April 4, 2014. Please title the email “NBLSC Submission – {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 commentator or moderator. A conference schedule will be circulated in late May.  More information is available here:  http://lls.edu/resources/events/listofevents/eventtitle,81539,en.html

 Conference Organizers

Barbara Black (The University of Cincinnati College of Law)
Eric C. Chaffee (The University of Toledo College of Law)
Steven M. Davidoff (The Ohio State University Moritz 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 Law)"

Can lawyers ever be happy?

Even before I read the book The Happy Lawyer by my former colleagues Nancy Levit and Doug Linder, I loved every legal job I ever had from judicial law clerk to BigLaw associate (twice), to deputy general counsel. I am still a happy lawyer after twenty-two years in the profession. I am clearly an anomaly among my attorney friends, most of whom looked at me with envy when I said that I was leaving practice to pursue academia. One friend, a partner in a South Florida firm quipped, “litigation has to be one of the only professions where your client hates you, your opposing counsel hates you, and the judge probably thinks you’re an idiot. When the outcome is positive, the client loves you until they see the bill.” No wonder lawyers aren’t happy.

But the situation for lawyers is more serious than a few clients grumbling about high bills. Earlier this week CNN reported that lawyers are the 4^th most unhappy professionals behind dentists, pharmacists, and physicians, and are 3.6 times more likely to suffer from depression than non-lawyers. According to the article, 40% of law students report that they have suffered from depression before graduation. That acknowledgement of a diagnosis of depression or indeed seeking any help for mental illness or substance abuse can adversely affect the graduate’s chances for admission to the bar.

Eight states, including my home state of Florida, have added a mental health component to the continuing legal education requirement, in part to address a rise in attorney suicides.  No one can pinpoint the cause for the increase in unhappiness. Perhaps it’s the recession, which led to layoffs at every level and which will forever alter the legal landscape. Perhaps, like doctors, pharmacists and dentists, lawyers tend to be type A personalities who thrive on perfection and success and drive themselves harder than others. 

I  read the CNN article while was on a tour in Switzerland two days ago. I thought I wanted to live the life of the Swiss with their low taxes, 3.1% unemployment rate, high income and great medical and social insurance programs, when the tour guide stunned us by acknowledging that Switzerland has the third highest suicide rate in the world.  “It’s the relentless pressure to succeed and the tremendous competition here,” he explained.  It seems as though the Swiss have something in common with American lawyers.   

I was actually in Switzerland for the 4^th annual kickoff of the innovative LawWithoutWalls program founded by University of Miami Professor Michele DeStefano. The program requires law and business students from around the world to work on teams to develop a project of worth addressing a problem facing the legal profession or legal education. I serve as an academic mentor with entrepreneurs, venture capitalists, in house counsel, practitioner mentors and lawyers from sponsor Eversheds. The students learn about the commoditization of legal services from the very firms that are disrupting the profession, Axiom and LegalZoom, who have representatives serving as mentors or thought leaders. They watch actual pitches on legal innovations to venture capitalists. They learn about doing a business plan for their projects of worth from entrepreneurs, and they use that knowledge when they present their project in a Shark Tank-like presentation in April. The next few months of their lives as part of this program will help the students learn skills and make contacts for an ever-evolving global legal market. Hopefully, they will be better equipped to handle what’s out there than the students who take their career cues from the television show Suits.

But what about the practicing lawyers? Not everyone wants to or can make the leap to academia. There are few LawWithoutWalls programs for veteran, burned-out lawyers. Many attorneys will continue to suffer from soul-crushing anxiety, depression or boredom. I don’t have the answer but look out for the follow-up to Levit and Linder’s book entitled The Good Lawyer: Seeking Quality in the Practice of Law due out this summer.  

 

Top 5 Legal Mistakes Made by Startups

Aaron George at Under30CEO has a nice post on the top five legal mistakes made by startups. Not much new to those of us who are lawyers, but it's a nice summary of some of the mistakes startups can make.

I could quibble with his list. I think selling securities without complying with securities law ought to be there somewhere, and I think his No. 5--not hiring a lawyer--ought to be No. 1. But his list does include some of the common legal mistakes made by budding entrepreneurs.

Anniversary

Today marks the 4 year anniversary of the Citizens United decision and tomorrow marks the 41st anniversary of Roe v. Wade.  Corporations, the First Amendment, and Reproductive choice/freedom may have seemed like odd bed-fellows, but all three issues come together in the upcoming Hobby Lobby case challenging the application of access to birth control required under the health care law to a corporation whose owners oppose the extension on the grounds of religious freedom. 

Consider this a teaser on the issues offered up in the Hobby Lobby case.    Law professors are filing amicus briefs on this case coming down on either side of the issue.  One group arguing that religious views of the owners should not protect the corporation from complying and another arguing that the religious views of the owners can be imputed to the corporation and thus exempt it from compliance.  This is set to be a fantastically interesting issue, and hopefully one that will generate some healthy debate on this blog.  There will be more to come from me on this issue, but for now...consider this a teaser (or a place holder).

And if you crave more substance and internet sleuthing this afternoon, let me refer you to a list of 7 charts that is making its rounds in the blogosphere today. These charts detail the consequences of Citizens United in the last four years.  The results are not surprising and include:increased outside spending, conservative spending outpacing liberal spending 2:1, more political ads and occurring earlier, and decreased disclosures.  You can see the version posted by the Washington Post here.

-Anne Tucker

WV Chemical Spill: Can you over do entity formation? (Hint: Yes.)

Freedom Industries -- the company apparently responsible for contaminating the Elk River (and, along with it, 300,000 West Virginia residents’ drinking water) – has filed for Chapter 11 bankruptcy.  The company wasted little time filing for reorganization, and the process already has some people on edge. 

From a public relations perspective, this kind of cases does not serve the concepts of Business Organizations especially well.  The use of limited liability vehicles is sanctioned by law, and such use has been credited with creating all kinds of opportunities for growth through pooled resources that would not otherwise occur without the grant of limited liability.  I happen to think that’s true.  (See, e.g., Corporate Moral Agency and the Role of the Corporation in Society, p. 176, By David Ronnegard) 

Still, one of the issues is that figuring out who owned Freedom Industries took some sleuthing (reporter's findings here).  It appears the structure is as follows: 

Freedom Industries’ Chapter 11 documents list its sole owner as Chemstream Holdings, which is owned by J. Clifford Forrest.  Forrest also owned the Pennsylvania company, Rosebud Mining, which is located at the same address Chemstream Holdings lists for its headquarters.  The Reports note that the chapter 11 filing also states that two entities have offered to lend up to $5 million to fund Freedom Industries’ reorganization.  The two entities are VF Funding and Mountaineer Funding, the latter of which is a West Virginia LLC formed by its sole owner: J. Clifford Forrest.

The idea that the owner of the company that owns the company that owned the chemicals that harmed the water in West Virginia is now seeking to create a new company to loan money to the company that owned the chemicals is not sitting very well with many of those harmed by the chemical leak. 

Some of those harmed by the chemical spill are objecting to the proposed reorganization structure. As reported here, West Virginia American Water (WVAW), the utility providing the tainted water (and the subject of it own lawsuits because of it), claims the water company will be “the largest creditor by far in this bankruptcy case.” As such, WVAW has asked (PDF here) the bankruptcy judge to slow down the reorganization so that the utility and other creditors an opportunity get a better sense of the ownership structure and how the creditors (and possible creditors) will be treated. 

This case probably looks even worse because it keeps coming back to a single person, and not a group of investors. Again, one company – Chemstream Holdings, Inc. is owned by one person -- J. Clifford Forrest, who then is the sole owner of a company seeking to loan money to the embattled company. 

Keeping with that theme, after a little sleuthing of my own, I found that although the initial reports were of VF Funding and Mounatineer Funding LLC offering to loan $5 million to Freedom Industries, it seems to have gotten even more convoluted.  There is yet another company in the mix – WV Funding LLC (pdf), which was formed on January 17, 2014, and on the same date the entity filed to be the Debtor in Possession of Freedom Industries (pdf). WV Funding LLC was organized by same Wheeling attorney who formed Mountaineer Funding LLC for Forrest.  The sole listed member of WV Funding LLC? Mountaineer Funding LLC (pdf). Related documents here.

All of this, at least at this point, seems permissible. Still, at some point, it really does start to look like someone is trying to pull a fast one.  And even a staunch defender of the corporation and uncorporation has a hard time arguing otherwise.  At a minimum, and even though there are good counterarguments (like Steve Bainbridge makes here in a different context), such behavior starts to make an expansive view of enterprise liability a lot more attractive. 

SEC Report on Disclosure Requirements: Has the SEC Done as Congress Instructed?

Late last month, the SEC released its Report on Review of Disclosure Requirements in Regulation S-K. This report is in response to section 108(a) of the JOBS Act, which provides that

The Securities and Exchange Commission shall conduct a review of its Regulation S-K . . . to

(1) comprehensively analyze the current registration requirements of such regulation; and

(2) determine how such requirements can be updated to modernize and simplify the registration process and reduce the costs and other burdens associated with these requirements for issuers who are emerging growth companies.

The SEC is required by section 108(b) to transmit the report to Congress, including "the specific recommendations of the Commission on how to streamline the registration process in order to make it more efficient and less burdensome for the Commission and for prospective issuers who are emerging growth companies."

This report was supposed to be submitted by October 2, 2012, 180 days after the passage of the JOBS Act. It was actually released on December 20, 2013, more than a year after that deadline.

The SEC apparently believes this report satisfies the requirements of section 108. The first page of the report includes a label "As Required by Section 108 of the Jumpstart Our Business Startups Act." But does this report really satisfy the Congressional mandate?

First, the statute requires the Commission to conduct a review and issue a report. The report is issued by the SEC staff, not the Commission itself, and expressly disclaims any Commission responsibility for its contents: "This is a report by the staff of the U.S. Securities and Exchange Commission. The Commission has expressed no view regarding the analysis, findings or conclusions contained herein."

Obviously, no one in Congress expected the commissioners to do their own research and write a report without staff involvement. But that doesn't mean a majority of the Commission shouldn't have to approve the report before sending it to Congress. There's a huge difference between having the staff's views on an issue and having the Commission's views on the same issue.

Setting that aside, there's another problem with this report. Section 108 requires "the specific recommendations of the Commission on how to streamline the registration process." The report has no specific recommendations. It indicates (at p. 108) that "the staff believes that further information gathering and review is warranted in order to formulate specific recommendations regarding specific disclosure requirements." And the press release accompanying the report says that SEC Chair Mary Jo White has "directed the staff to develop specific recommendations for updating the rules that dictate what a company must disclose in its filings." In other words, at some point in the future, the staff is going to do what Congress actually asked the Commission to do: develop specific recommendations for change.

I understand why the SEC couldn't submit the report by the 180-day deadline, but it's now been 655 days since the passage of the JOBS Act and we still don't have what Congress asked for: a report by the Commission making specific recommendations about how to improve the registration process.

Nagy on Owning Stock While Making Law

Donna M. Nagy recently posted “Owning Stock While Making Law: An Agency Problem and A Fiduciary Solution” on SSRN.  Here is the abstract:

This Article focuses on Members of Congress and their widespread practice of holding personal investments in companies that are directly and substantially affected by legislative action. Whether entirely accurate or not, congressional officials with investment portfolios chock full of corporate stocks and bonds contribute to a corrosive belief that lawmakers can – and sometimes do – place their personal financial interests ahead of the public they serve.

Fiduciary principles provide a practical solution to this classic agency problem. The Article first explores the loyalty-based rules that guard against self-interested decision-making by directors of corporations and by government officials in the executive and judicial branches of the federal government. It then contrasts the strict anti-conflict restraints in state corporate law and federal conflicts-of-interest statutes with the very different set of ethical rules and norms that Congress traditionally has applied to the financial investments held by its own members and employees. It also confronts the parochial view that lawmakers’ conflicts are best deterred through public disclosure of personal investments and the discipline of the electoral process. The Article concludes with a proposal for new limitations on the securities that lawmakers may hold during their congressional service. Specifically, and as a starting place, Congress should prohibit its members (and their staffs) from holding securities in companies substantially affected by the work of any congressional committee on which they hold membership. But Congress should also explore the adoption of even stricter anti-conflict restraints, such as a statute or rule that would, subject to some narrow exceptions, prohibit members and senior staff officials from owning any securities other than government securities or shares in diversified mutual funds.

Huhn on the Implications of Daimler AG for Hobby Lobby

My Akron colleague Will Huhn just posted “2013-2014 Supreme Court Term: Court's Decision in Daimler AG v. Bauman, No. 11-965: Implications for the Birth Control Mandate Cases?” over at his blog wilsonhuhn.com.  Here is a brief excerpt, but you should go read the entire post:

On January 14, 2014, the Supreme Court issued its decision in favor of Daimler AG (the maker of Mercedes-Benz), ruling that the federal courts in California lacked personal jurisdiction over Daimler to adjudicate claims for human rights violations arising in Argentina. The ruling of the Court may have implications for the birth control mandate cases pending before the Court in Hobby Lobby Stores and Conestoga Wood Specialties…. In those cases the owners of two private, for-profit business corporations contend that their individual rights to freedom of religion "pass through" to the corporation -- that the corporations are in effect the "agents" of the principal shareholders, and that this is why the corporations have the right to deny their employees health insurance coverage for birth control. In Daimler the Ninth Circuit Court of Appeals had held that MBUSA was the "agent" of Daimler AG, and that the substantial business presence of MBUSA in California could be imputed to Daimler AG. The Supreme Court was not persuaded by this agency analysis…. It would be anomalous for the Court to adhere to corporate identity for purposes of personal jurisdiction and liability for tort, and yet to ignore corporate identity to give effect to the personal religious choices of stockholders.

Work, Rest, and Wall Street

Last week, the New York Times Dealbook ran a story entitled, Wall Street Shock: Take a Day Off, Even a Sunday.  The story details how Bank of America Merrill Lynch is supposedly encouraging its investment banking analysts and associates to take four days a month off…on the weekends. 

As the authors note, "[s]uch an offer from an employer would sound like punishment for the average worker. But for junior employees of Bank of America Merrill Lynch, that recommendation was intended as a bit of relief."  The memorandum was probably a relief …if the Merrill Lynch really meant it, and if it will be respected by the various managing directors.

At many large investment banks (and law firms), true rest is largely absent.  Analysts and associates are pushed, and push themselves, to the brink.  Call me cynical, but I doubt Merrill Lynch is doing this primarily for the good of its employees.  Perhaps Merrill Lynch thinks the diminishing returns of working 80+-hour weeks and the high employee turnover are impacting their bottom line. 

While the lack of true rest is glaring on Wall Street, I think any modern employee can suffer from insufficient rest.  With smart phones, it is possible to be on-call 24/7.  Taking a full 24-hour break from work can, and often does, lead to more productive work in the remaining hours of the week.  As Dr. Stephen Covey famously noted, it pays to take time to sharpen the saw.  Relatedly, I recently listened to a 2003 recording of Dr. Timothy Keller speaking eloquently on the topic of work and rest, from a Christian perspective, to his New York City audience.  The recording is available here.

The benefits of intentional, regularly-scheduled rest can be seen not only in our job, but also in our exercise.  One of the best marathon training plans on the market right now is the FIRST training plan, developed at Furman University.  Most marathon training plans recommend running five to ten times a week and recording a high volume of miles, but do not have much focus on pace or rest. 

In contrast, FIRST recommends only three runs a week, but focuses on quality and encourages a variety of speeds and distances.  Some of the recommended speeds are much faster than the average marathoner would typically run, but FIRST also encourages more rest than most plans and more diversity in types of exercise.  While the FIRST plan seems to recommend an insufficient number of miles to many marathon runners, it has led to countless personal records over the past few years.   

Wish you all a restful weekend. 

Update:  See Professor Brian Quinn on Emma Jacobs' article on "why the recent fashion of limiting junior bankers hours is doomed to fail.  In short it boils down to [two] things:  the nature of the clients and the nature of the people who work for banks."  For what it is worth, I think they are probably correct (note my two big "ifs" above).  That said, I do think there might be a way to give a client 24/7 service and also give junior bankers (and lawyers) a 24-hour break each week.  On the point that most of the people working in these jobs are "alpha types," I think even the "alpha types" could appreciate 24-hours of rest each week, and may realize they perform better as a result. 

Living in a Material World- From Naming and Shaming to Knowing and Showing: Will New Disclosure Regimes Finally Drive Corporate Accountability for Human Rights?

In my posts last Thursday (see here and here) and in others, I have explained why I don’t think that the Dodd-Frank conflicts minerals law is the right way to force business to think more carefully about their human rights impacts.  I have also blogged about the non-binding UN Guiding Principles on Business and Human Rights, which have influenced both the Dodd-Frank rule, the EU's similar proposal, and the State Department's required disclosures for businesses investing in Burma (see here). 

For the past few months, I have been working on an article outlining one potential solution.  But I was dismayed, but not surprised to read last week that the US government’s procurement processes may be contributing to the very problems that it seeks to prevent in Bangladesh and other countries with poor human rights records. This adds a wrinkle to my proposal, but my contribution to the debate is below:

Faced with less than optimal voluntary initiatives and in the absence of binding legislation, what mechanisms can interested stakeholders use as leverage to force corporations to take a more proactive role in safeguarding human rights, particularly due diligence issues in the supply chain?  Can new disclosure and procurement requirements provide enough incentives to have a measurable impact on the behavior of transnational corporations based in the United States? This Article argues that federal and state governments should take advantage of the fact firms are adapting to more rigorous transparency and due diligence demands from socially responsible investors, international stock exchange listing requirements, and enterprise risk management processes.

Corporations respond to incentives and penalties. Governments can and should  require stronger procurement contractual terms for contractors and subcontractors. The contract could require: (1) executive level, Sarbanes-Oxley like attestations regarding human rights policies and due diligence on impacts within the supply chain; (2) an audit by certified third parties and (3) suspension or debarment from contracts as well as clawbacks of executive bonuses and a portion of board compensation as penalties for false or misleading attestations.

Companies that do not choose to participate in government contracting programs will not have to complete the attestation or due diligence process but the benefits of participating will outweigh the costs.  The large number of participating firms will likely lead to the practice becoming an industry standard across sectors, thereby forestalling additional legislation, shareholder resolutions, and name and shame campaigns, and thus eventually leading to benefits for all stakeholders including those most directly affected.