Business Law Prof Blog

Call for Papers: Business and Human Rights Scholars Conference

Business and Human Rights Scholars Conference

University of Washington School of Law, Seattle, Washington

September 16-17, 2016 

The University of Washington School of Law, the NYU Stern Center for Business and Human Rights, the Rutgers Business School, the Rutgers Center for Corporate Law and Governance, and the Business and Human Rights Journal announce the second Business and Human Rights Scholars Conference, to be held September 16-17, 2016 at the University of Washington School of Law in Seattle.  Conference participants will present and discuss scholarship at the intersection of business and human rights issues. 

Upon request, participants’ papers may be considered for publication in the Business and Human Rights Journal (BHRJ), published by Cambridge University Press. The Conference is interdisciplinary; scholars from all global regions and all disciplines are invited to apply, including law, business, business ethics, human rights, and global affairs. 

To apply, please submit an abstract of no more than 250 words to [email protected] with the subject line Business & Human Rights Conference Proposal.  Papers must be unpublished at the time of presentation. Please include your name, affiliation, contact information, and curriculum vitae. 

The deadline for submission is May 15, 2016.  Scholars whose submissions are selected for the Conference will be notified no later than June 15, 2016. We encourage early submissions, as selections will be made on a rolling basis.

 About the BHRJ

The BHRJ provides an authoritative platform for scholarly debate on all issues concerning the intersection of business and human rights in an open, critical and interdisciplinary manner. It seeks to advance the academic discussion on business and human rights as well as promote concern for human rights in business practice.

BHRJ strives for the broadest possible scope, authorship and readership. Its scope encompasses interface of any type of business enterprise with human rights, environmental rights, labor rights and the collective rights of vulnerable groups. The Editors welcome theoretical, empirical and policy/reform-oriented perspectives and encourage submissions from academics and practitioners in all global regions and all relevant disciplines.

A dialogue beyond academia is fostered as peer-reviewed articles are published alongside shorter ‘Developments in the Field’ items that include policy, legal and regulatory developments, as well as case studies and insight pieces.

 

 

Fed Financial Stability Conference Call for Papers

2016 Financial Stability Conference - Innovation, Market Structure, and Financial Stability

CALL FOR PAPERS

2016 Financial Stability Conference

“Innovation, Market Structure, and Financial Stability”

The Federal Reserve Bank of Cleveland and the Office of Financial Research invite the submission of research and policy-oriented papers for the 2016 Financial Stability Conference to be held December 1-2, 2016, in Washington, D.C. The objectives of this conference are to highlight research and advance the dialogue on financial market dynamics that affect financial stability, and to disseminate recent advances in systemic risk measurement and forecasting tools that assist in macroprudential policy development and implementation.

PAPER SUBMISSION PROCEDURE

The deadline for submissions is July 31, 2016. Please send completed papers to:[email protected] Notification of acceptance will be provided by September 30, 2016. Travel and accommodation expenses will be covered for one presenter for each accepted paper.

A pdf version of this call for papers is available here

 

 

Managing Director, Ray C. Anderson Center for Sustainable Business at Georgia Tech

Some readers may be interested in the position listed below. Georgia Institute of Technology, Scheller College of Business has a strong faculty and is a recognized leader in the sustainability area.

---------------------

Managing Director, Ray C. Anderson Center for Sustainable Business

(Professor of the Practice or Academic Professional)

The Scheller College of Business at the Georgia Institute of Technology in Atlanta, Georgia seeks applications or nominations for an academic appointment as the Managing Director, Ray C. Anderson Center for Sustainable Business (ACSB). The Center is part of the Scheller College of Business, which was ranked #1 in the US and #8 globally in the 2015 Corporate Knights Better World MBA Rankings. The College is a dynamic environment with a commitment to sustainability embedded in its strategic plan and faculty members across many disciplines who have sustainable business interests. The Managing Director will have the opportunity to shape and steer the growth of the Center’s activities and impact, as the Center recently received a long-term gift doubling its operational budget from the Ray C. Anderson Foundation. The Managing Director will also have the opportunity to partner with the Georgia Tech Center for Serve-Learn-Sustain (CSLS), an institute-wide undergraduate education initiative that is developing learning and co-curricular opportunities designed to help our students combine their academic and career interests with their desire to create sustainable communities.

More information follows after the break.

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Stanford Corporate Governance Fellowship (Hat Tip to Current Fellow Cathy Hwang)

The Rock Center for Corporate Governance at Stanford University seeks to hire a resident academic fellow to begin in September or October 2016 for a 12-month or one-academic-year term, with the possibility of renewal for a second year. The fellow will pursue his or her own independent research, as well as work closely with Stanford Law School faculty on a range of projects related to corporate governance, securities regulation, vehicles for public and private investment, and financial market reform. The ideal candidate has excellent academic credentials and experience in relevant fields of practice. The position is particularly well suited to a practicing attorney, with either a litigation or transactional background, seeking a transition to academia, or a post-doctoral economics or finance student with interests in corporate governance. More information can be found at https://stanfordcareers.stanford.edu/job-search?jobId=70496. 

Wyoming Cleans Up Veil Piercing in LLC Act

Wyoming has added two new sections to its Code Section 17-29-304, which is related to veil piercing of a Wyoming LLC.  The additions are a response of a court decision from last year, Green Hunter Energy, Inc. v. Western Ecosystems Technology, Inc., No. S-14-0036, 2014 WL 5794332 (Wyoming Nov. 7, 2014), which is summarized nicely here. The first added section provides:

(c) for purposes of imposing liability on any member or manager of a limited liability company for the debts, obligations or other liabilities of the company, a court shall consider only the following factors no one (1) of which, except fraud, is sufficient to impose liability:

 

(i)         Fraud;

(ii)        Inadequate capitalization;

(iii)       Failure to observe company formalities as required by law; and

(iv)       Intermingling of assets, business operations and finances of the company and the members to such an extent that there is no distinction between them. 

Although some might view this as a significant change to the veil piercing of a Wyoming LLC, this largely confirms and clarifies the law prior to GreenHunter.  The rule from that case was set forth as follows: 

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

GreenHunter Energy, Inc. v. W. Ecosystems Tech., Inc., 2014 WY 144, ¶ 27, 337 P.3d 454, 462 (Wyo. 2014).

 

The GreenHunter court provided the above rule, then stated that several factors could be considered in assessing whether both prongs of the test were met.  These factors included fraud, inadequate capitalization, and intermingling of assets.  "No single category, except fraud, alone justifies a decision to disregard the veil of limited liability; rather, there must be some combination of them, and of course an injustice or unfairness must always be proven." GreenHunter Energy, 2014 WY 144, ¶ 34, 337 P.3d at 464.  

 

This amendment, in fact, adds another factor courts can consider in LLC veil piercing: "Failure to observe company formalities as required by law." As such, this law clarifies the state LLC law, which is an improvement over the prior iteration, in my view. I do have a concern that some courts might miss that the need for "company formalities" as a potential factor for veil piercing is limited only to the formalities that are "required by law," which also means very few such formalities. "Company formalities" are not "corporate formalities," and I hope courts remember this. 

 

In addition, the Wyoming legislature added:   

(d)  In any analysis conducted under subsection (c) of this section, a court shall not consider factors intrinsic to the character and operation of a limited liability company, whether a single or multiple member limited liability company.  Factors intrinsic to the character and operation of a limited liability company include but are not limited to:

 

(i)         The ability to elect treatment as a disregarded or pass-through entity for tax purposes; 

(ii)        Flexible operation or organization including the failure to observe any particular formality relating to the exercise of the company’s powers or management of its activities;

(iii)       The exercise of ownership, influence and governance by a member or manager;

(iv)       The protection of members’ and managers’ personal assets from the obligations and acts of the limited liability company.

This section is, to me, spot on.  GreenHunter did not disabuse the notion of using tax classification as a factor in veil piercing analysis, and that was wrong.  Tax status is irrelevant to limited liability (a general partnership is a pass-through entity) and using any factors of an LLC acting like an LLC is inherently flawed. 

 

Overall, if the state is going to allow veil piercing of LLCs, then I support a more clear statute. This is an improvement over the original statute, which did not include veil piercing, but Wyoming courts allowed it anyway. Still, the better read on GreenHunter, is not really veil piercing, it would have been some version of enterprise liability, though I know some people think it has to be veil piercing when the entities in questions are vertically related, and reserve enterprise liability for horizontal relationships.  I don't agree, but that's for another post. 

 

[H/T: Kentucky Business Entity Law] 

Not All Contract Attorneys Are Alike . . . Or Are They?

There's been a lot of bad press lately about contract lawyers.  Between legal actions for overtime pay and articles in bar publications and elsewhere, it's easy to conclude that all of these warriors in the legal workforce are overworked and underpaid in this post-financial-crisis world.

Yet, I just had a corporate general counsel in my Advanced Business Associations class last week who regularly uses contract counsel and, based on his description, those he works with seem to be a relatively contented lot.  He has gone ahead and hired a few of them (although he notes that some prefer independent contractor status for its flexibility).  So, I wonder whether many of us make the same mistake with the press on contract lawyers that we do with the press on law schools: generalizing a description and drawing conclusions from limited, nonscientific data (i.e., one-sided or narrowly drawn press reports). For one thing, most of what I read focuses on contract lawyers performing e-discovery reviews or rote due diligence.  I know that there are more varied assignments out there (even if those two areas represent most of the territory).

I do know former students who, for a variety of reasons, have worked as contract lawyers after graduation or during a career interruption.  In most cases, this has been intended as and has been in fact a temporary position.  But (although I do not stay in touch with everyone after graduation) I am sure that some have ended up staying in contract lawyering longer than they had planned . . . or wanted.  Still, I have not heard about any abusive behavior or unusually long hours.  I have heard complaints about the routine and unstimulating nature of much of the work.

What information do you have about contract lawyers?  Are they a uniformly mistreated lot because employers--especially maybe Big Law and other large firms--take advantage of them and view them only as low-cost, low-quality providers of legal services?  How often do those who use contract lawyer services hire the lawyers in as employees?  How many contract lawyers continue in that role for more than two years?  Let me know what you know.

ICYMI: Tweets From the Week (Mar. 27, 2016)

"courts have almost universally adopted the corporate veil-piercing doctrine to deal with [LLCs]" 50 WakeForest L. Rev. 1229 (2015) #corpgov

— Stefan Padfield (@ProfPadfield) March 21, 2016

Adam Smith "would likely be horrified by any republic ruled for rapacious free-market interests" https://t.co/dsuvqk6Tw0 #corpgov

— Stefan Padfield (@ProfPadfield) March 22, 2016

ICYMI: "Senators Introduce Bill to Rein In Activist Hedge Funds" https://t.co/hZnyKbRnQ4 #corpgov

— Stefan Padfield (@ProfPadfield) March 23, 2016

"disclosure would ... enable SHs to evaluate whether lobbying is consistent w/ a company’s expressed goals" https://t.co/RllGuXjdHV #corpgov

— Stefan Padfield (@ProfPadfield) March 24, 2016

2/2: "Piercing the corporate veil of a public corporation is rare and unlikely, but not impossible." 2016-Ohio-1182 #corpgov

— Stefan Padfield (@ProfPadfield) March 25, 2016

Continuing Legal Education

Lately I've been thinking about CLE programs.  I no longer am required to take them (thank goodness) but they were a regular feature in my life when I was practicing.  I'm only familiar with New York's requirement, but I assume other states' programs are not terribly dissimilar.  I'm sorry to say that I generally found CLE requirements to be a thundering waste of my time - not to mention the fees for classes that functioned as a waste of my firm's money.  I realize there's been a decades-long debate about this issue, but I'll throw my hat in and speculate whether there's anything that could be done to improve them. 

My first problem with CLE - and this I gather has always been the complaint - is that the classes were generally of no use to me in my practice.  I was a specialist; almost all of my time was spent on securities litigation, with the occasional sprinkling of corporate.  That meant I lived the latest case law and proposed legislation/rulemaking on a day to day basis.  The majority of CLE programs in the area were simply pitched at a level that was far too introductory for me - if I actually needed, say, an hourlong course on the latest Supreme Court decisions in the field, that would have been a flashing red light that I was committing malpractice on a day to day basis.

Aware of this, I sometimes selected CLE programs that were outside my field: electronic privacy, IP, employment, antitrust.  And these were interesting, and new to me - but they were also entirely irrelevant to my work.

My other problem with CLE - and this is perhaps a new complaint - was, frankly, the political bias.  I was a plaintiff-side litigator in a highly politicized area of law.  I found that, at least in my area,  CLE programs tended to consist mostly, if not entirely, of defense-side speakers (sometimes with a smattering of government).  As a result, I found most of the discussions to be heavily slanted in the defense's favor, both in terms of their interpretation of existing law, and their recommendations and commentary.  This wasn't always true, of course, but it was true enough on a regular basis to be frustrating.  The occasional panel with one plaintiff-side attorney was rarely enough to counter what was an overwhelmingly defense-side spin.  I used to fear that to the extent some lawyers found these programs novel, they were receiving a very distorted picture of the law - one that they would then carry through to their own practice.

I imagine there are a lot of entrenched interests in maintaining the current system, but I wonder if there might be some ways to make the CLE requirement more meaningful.

First, I'd propose a some option of self-certification, whereby attorneys with a certain number of years of experience, who attest that they specialize in a particular field, are able to fulfill the requirement by certifying that they have read/studied a specified amount recent legal developments in their area of practice - caselaw, new regulations, new publications and updates, etc. 

Second, I'd propose a balance requirement.  At least for fields where attorneys tend to specialize on one side of the "v," any program featuring more than one speaker would be required to devote 50/50 time, or 60/40 time, or even 70/30 time, to each side.

I imagine that there are a zillion reasons why these proposals are impractical and unlikely to be adopted, and I know these issues have been discussed in various fora before, but it seems to me they can't render the requirement any less useful than it is now. 

I'd be curious to know how others experience CLE.  Am I too harsh in my assessment?  Do others get more out of it than I did?

 

Will a Change in Executive Compensation Lead to Safer Food? A Chipotle Shareholder Thinks So

I feel badly for Chipotle. When I have taught Business Associations, I have used the chain’s Form 10-K to explain some basic governance and securities law principles. The students can relate to Chipotle and Shake Shack (another example I use) and they therefore remain engaged as we go through the filings. Chipotle has recently been embroiled in a public relations nightmare after a spate of food poisonings occurred last fall and winter, a risk it pointed out in its February 2015 10-K filings. The stock price has fluctuated from $750 a share in October to as low as $400 in January and then back to the mid $500 range. After some disappointing earnings news the stock is now trading at around $471.

Clean Yield Group, concerned that the company will focus only on bringing its stock back to “pre-crisis levels,” filed a shareholder proposal March 17^th asking the company to link executive compensation with sustainability efforts. The proposal claims that the CEO was overpaid by $40 million in 2014 and states in part:

A number of studies demonstrate a firm link between superior corporate sustainability performance and financial outperformance relative to peers. Firms with superior sustainability performance were more likely to tie top executive incentives to sustainability metrics.

Leading companies are increasingly taking up this practice. A 2013 study conducted by the Investor Responsibility Research Institute and the Sustainable Investments Institute found that 43.4% of the S&P 500 had linked executive pay to environmental, social and/or ethical issues. These companies traverse industry sectors and include Pepsi, Alcoa, Walmart, Unilever, National Grid, Intel and many others…

Investor groups focusing on sustainable governance such as Ceres, the UN Global Compact, and the UN Principles for Responsible Investment (which represents investors with a collective $59 trillion AUM) have endorsed the establishment of linkages between executive compensation and sustainability performance.

Even with the adjustments to executive pay incentives announced this week in reaction to Chipotle’s ongoing food-borne illness crisis, Chipotle shareholders have consistently approved excessively large pay packages to our company’s co-chief executives that dangerously elide accountability for sustainability-related risks. This proposal provides the opportunity to rectify this situation.

If shareholders approve the compensation package on our company’s 2016 proxy ballot, by year-end, Mr. Ells and Mr. Moran will have pocketed nearly $211 million for their services since 2011. Shareholders have not insisted upon direct oversight of sustainability matters as a condition of employment or compensation, and the present crisis illustrates the probable error in that thinking.

This week, the Compensation Committee of the Board announced that it would withhold 2015 bonuses for executive officers. It has also announced that executive officers’ 2016 performance bonuses will be solely tied to bringing CMG stock back, over a three-year period, to its pre-crisis level.

This is a shortsighted approach that skirts the underlying issues that may have contributed to the E. coli and norovirus outbreaks that have left hundreds of people sickened, injured sales, led to ongoing investigations by health authorities and the federal government, damaged our company’s reputation, and will likely lead to expensive litigation. For years, Chipotle has resisted calls by shareholders to implement robust and transparent management and reporting systems to handle a range of environmental, social and governance issues that present both risks to operations as well as opportunities. While no one can know for certain whether a more rigorous management approach to food safety might have averted the current crisis, moving forward, shareholders can insist upon a proactive approach to the management of sustainability issues by altering top executives’ compensation packages to incentivize it.

The last sentence of the paragraph above stuck out to me. The shareholder does not know whether more rigorous sustainability practices would have prevented the food poisonings but believes that compensation changes incentivizing more transparency is vital. I’m not sure that there is a connection between the two, although there is some evidence that requiring more disclosure on environmental, social, and governance factors can lead to companies uncovering operational issues that they may not have noticed before. Corporate people are fond of saying that “what gets measured gets treasured.” Let’s see what Chipotle’s shareholders treasure at the next annual meeting.

The Criminalization of Compliance

The BLPB editors have been nice enough to let me pen a quick post concerning an idea I floated way back in May. In my role as that month’s guest blogger, I offered my thoughts on how rationalizing—that very powerful, and very human, psychological process that allows us to view ourselves positively (say, as an upstanding citizen, family man, etc.), while taking actions inconsistent with that view according to society’s standards (say, by passing a stock tip to a friend, misrepresenting a company’s financials, etc.)—helps explain corporate wrongdoing. I also offered a thesis for how overcriminalization, particularly in the white collar area, might be fostering rationalizations, and thus undermining crime control efforts. In a bit of a cliffhanger (not quite Game of Thrones quality, but a cliffhanger nonetheless), I promised a final post discussing how these ideas impact corporate compliance. Well, almost a year later, I’ve finally finished an article on the topic. Let me know what you think (and also if John Snow is really dead.)

Todd Haugh, The Criminalization of Compliance, 92 Notre Dame L. Rev. (forthcoming 2016).

Corporate compliance is becoming increasingly “criminalized.” What began as a means of industry self-regulation has morphed into a multi-billion dollar effort to avoid government intervention in business, specifically criminal and quasi-criminal investigations and prosecutions. In order to avoid application of the criminal law, companies have adopted compliance programs that are motivated by and mimic that law, using the precepts of criminal legislation, enforcement, and adjudication to advance their compliance goals. This approach to compliance is inherently flawed, however—it can never be fully effective in abating corporate wrongdoing. Explaining why that is forms this Article’s main contribution. Criminalized compliance regimes are inherently ineffective because they impose unintended behavioral consequences on corporate employees. Employees subject to criminalized compliance have greater opportunities to rationalize their future unethical or illegal behavior. Rationalizations are a key component in the psychological process necessary for the commission of corporate crime—they allow offenders to square their self-perception as “good people” with the illegal behavior they are contemplating, thereby allowing the behavior to go forward. Criminalized compliance regimes fuel these rationalizations, and in turn bad corporate conduct. By importing into the corporation many of the criminal law’s delegitimatizing features, criminalized compliance creates space for rationalizations, facilitating the necessary precursors to the commission of white collar and corporate crime. The result is that many compliance programs, by mimicking the criminal law in hopes of reducing employee misconduct, are actually fostering it. This insight, which offers a new way of conceptualizing corporate compliance, explains the ineffectiveness of many compliance programs and also suggests how companies might go about fixing them.

Olympics, Rule 40, Law, and Social Media

I usually look forward to the Olympics for months, if not years, before they start.

This year, however, all of the doping news, and buzz around Rule 40 has left me less enthusiastic.

For now, I am going to leave the doping news to one side, and focus on Rule 40.

From July 27 to August 24, 2016, Rule 40, prohibits Non-Olympic Commercial Partners from using the word "Olympics" and (depending on context) "Olympic-related terms," including:

• 2016
• Rio/Rio de Janeiro
• Gold
• Silver
• Bronze
• Medal
• Effort
• Performance
• Challenge
• Summer
• Games
• Sponsors
• Victory
• Olympian

Now, I understand why the International Olympic Committee ("IOC") and the U.S. Olympic Committee ("USOC") might want these restrictions (given the large sums of money official sponsors pay), and from what I understand from experts in this specific area, the IOC & USOC may have a defensible legal stance.

This, however, seems one of the many areas where (1) the law has not kept up with advances in technology, namely social media, and (2) even if the IOC & USOC are right on the law, they may lose in the court of public opinion. Here, it seems, there is a good bit of difference between a company running a detailed TV-ad noting that it sponsors an Olympian and simply wishing an athlete "Good luck in Rio" on Twitter. Also, even if the law treats social media the same as other forms of advertising, I could see the public (including me) judging the IOC & USOC harshly if it punishes brands and/or their athletes for minor violations. Outside of the most popular Olympic athletes, significant sponsorships are difficult to secure and outlawing short displays of appreciation on social media seems like overreaching. Adding to the problem, I think, is that this rule makes the IOC & USOC look like single bottom line, money-hungry organizations, when most of us would like to associate the Olympics with a broader, higher purpose.      

Judge Merrick Garland Opinions on "Business" Law

Legal commentators and the media have been abuzz with news of President Obama's nomination of Judge Merrick Garland to the Supreme Court.  If there was ever reason to be abuzz, in the world of legal news, this is it.  Try to find a summary of Judge Garland's record in dealing with business law issues, however, and you are met with a silent, dark internet.  Aside from mentions of Judge Garland having taught anti-trust at Harvard there is little discussion of his business jurisprudence.  The D.C. Circuit court hears an administratively heavy caseload, but Judge Garland has been on the bench for nearly 20 years! I set out to uncover his business law barometer.   My initial searches produced  19 opinions that he authored on business law matters, which are mostly securities cases but also include a piercing the corporate veil and contracts claims among others.  While I am no online search wizard and am positive that I have missed some relevant cases, this is what I produced after such wide-net casting as "business law", "corporations", "partnership", "board of directors", "shareholders" etc.  You get the idea, I ran several undeniably broad searches.  The initial case list is provided below, and was generated (along with annotations) through WestLaw.  Please comment if you have relevant cases to add.  I may add commentary on the cases in a future post if there is interest... (and time).

Securities Law Cases 

1. Horning v. S.E.C., 570 F.3d 337 (D.C. Cir. 2009)

SECURITIES REGULATION - Brokers and Dealers. Mid-trial correction of sanction the SEC sought did not deprive broker-dealer firm’s former director of due process.

2. Graham v. S.E.C., 222 F.3d 994 (D.C. Cir. 2000)

SECURITIES REGULATION - Fraud. Registered representative aided and abetted customer’s fraud.

3. Katz v. S.E.C., 647 F.3d 1156 (D.C. Cir. 2011)

SECURITIES REGULATION - Brokers and Dealers. Former registered representation made unsuitable investment recommendations for her customers.

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Microfinance and Crowdfunding

Jet lag prevented me from posting this yesterday.  (Yes, I am scheduled to be the BLPB every-Monday blogger going forward.)  But at least I am awake enough now to post a bit more on the 7th International Conference on Innovative Trends Emerging in Microfinance (ITEM 7 Conference) I attended last week in Shanghai, China.  My initial post on Wednesday provided some information on Chinese microfinance and the initial day of the conference.  This week, my post focuses on definitional questions that I have been pondering relating to my participation in this series of conferences.  Specifically, I have been sorting through the relationship between microfinance and crowdfunding.  My understanding continues to evolve as I become more familiar with the literature on and practice of microfinance internationally.

At the conference, one of the participants noted that while microfinance and crowdfunding appear to be mutually reinforcing, they still do not enjoy comfortable relations in scholarship and practice.  After weighing that statement for a moment, I had to agree.  I actually have been personally struggling with the nature of the relationship between the two for a few years now.  (I often wonder whether folks like co-blogger Haskell Murray who commonly work in the social enterprise space have this issue in talking about the relationship between social enterprise and corporate social responsibility . . . .)

Two years ago at the ITEM 5 Conference, I posited that crowdfunding could be a vehicle for microfinance.  The establishment of this point required defining both microfinance and crowdfunding--in each case, no small task.  To enable the audience to understand my observation, I used a broad definition of microfinance that focuses on financial inclusion (like the one found here).  I believed after my presentation that I had made the point well enough.

Yet, something still niggled at me after the presentation and conference were long gone.  I kept feeling as if I had inserted a square peg into a round hole.  Something was just a bit off.  Part of the issue is, no doubt, the fact that my observation was incomplete.  Microfinance is bigger than crowdfunding, and not all crowdfunding is microfinance, even under a broad definition.  So, picture a venn diagram like the one below.

The red point of intersection illustrates crowdfunding's place as a means of conducting microfinance.  This leaves part of microfinance to be handled through other types of financing (e.g., microcredit).  It also leaves part of crowdfunding to other capital-raising uses.  This conception of the relatonship between microfinance and crowdfunding is undoubtedly more complete.

The importance to microfinance of the non-microfinance part of crowdfunding was confirmed at our microfinance site visit last week in Shanghai.  Our host for the visit explained, in response to my question about the relationship of microfinance to crowdfunding in China, that crowdfunding typically is seen as an alternative to, rather than a means of, microfinance in China.  He noted that equity crowdfunding is uncommon (although growing) in Chinese small business finance overall because the number of shareholders of Chinese limited liability companies is statutorily capped.    Specifically, Article 20 of the Companies Law of the People's Republic of China provides that "[a] limited liability company shall be jointly invested in and incorporated by not less than two and not more than fifty shareholders."  I made a mental "note to files" that crowdfunding might get crowded out of microfinance or other types of financing--intentionally or unintentionally--by positive regulation.

I invite any readers who are more familiar with world-wide microfinance than I to comment further on its relationship to crowdfunding.  Do I have the principal story right, in your view, based on your experience?  Can you provide examples from your work or life that help me to see new aspects of the relationship between the two?  I invite any related thoughts.

Top Five LLC Mistakes of March

March has provided a slate of mistakes as to entity form, focusing (as it almost always does) on limited liability companies (LLCs) and various outlets calling such entities "corporations."  These are not in any particular order, but lists are neat. Enjoy! 

(1 ) Politifact Checks Trump Facts, Forgets to Check Entity Law Facts

In an article on Politifact.com, Donald Trump incorrectly says Virginia winery is the largest on East Coast, which determines that Trump's claims about the size of a winery that his son runs to be false and notes some statements are incorrect. Ironically, the article also claims: 

A legal disclaimer on the winery website says the GOP presidential candidate doesn’t own the winery. The venture is a limited liability corporation, and its owners are not a matter of public record.

Wrong. The winery site says, "Trump Winery is a registered trade name of Eric Trump Wine Manufacturing LLC, which is not owned, managed or affiliated with Donald J. Trump, The Trump Organization or any of their affiliates."  An LLC is still not a corporation. 

(2) Big Bang Theory: Big Brains Don't Know Entity Law

I don't watch the Big Bang Theory, but my colleague at Valparaiso University, Professor Rebecca J. Huss, is a reader of this blog who also cares about precise language with regard to LLCs alerted me to this one.  The story line of the March 10 show (the show can be found here) related to a the creation of a partnership agreement for some of the characters. One thing that is realistic is that the folks think it's a good idea to form an entity and draft contract language without a lawyer.  One character says he has some concerns about the partnership, and another replies with this "joke": "Are you suggesting a limited liability corporation, because I did not LLC that coming." (The offending segment is roughly 14 minutes into the show.) (This was also covered at Kentucky Business Entity Law Blog, here, which noted, "Ughhhh.   LLC ≠ limited liability corporation.  Rather, LLC = limited liability company.") 

(3) Ghost LLCs Masquerading as Corporations

The Washington Post last week ran a story, How ‘ghost corporations’ are funding the 2016 election. The article discusses how entities can be used to shield those backing political candidates. The article states: 

Advocates for stronger campaign-finance enforcement fear there will be even more pop-up limited liability corporations (LLCs) funneling money into independent groups, making it difficult to discern the identities of wealthy players seeking to influence this year’s presidential and congressional contests.

. . . .

Many corporate givers this cycle are well-established hedge funds, energy companies and real estate firms. But a significant share of the money is coming from newly formed LLCs with cryptic names that offer few clues about their backers.

That LLC definition is wrong, and LLC giving is not "corporate" giving. Perhaps political funding via opaque entities is a problem, but we should try to get our entities right.  There may be problems (and solutions) unique to one entity form or another, so this could be more than semantic.  

 

(4) Pass-Through Tax Law Isn't Really About Corporations (mostly)

The Topeka Capital-Journal Editorial Board wrote on March 20: LLC loophole needs plugging: Even some small business owners think the tax exemption should be eliminated.  The editorial is related to a 2012 Kansas law, HB 2117, which eliminated taxes on pass-though entities like LLCs, S corps, partnerships, farms, and sole proprietorships. (So, I admit, S corps are corporation, but they are essentially partnerships for federal tax purposes.)  Even though I agree with some their concerns, the board makes a couple mistakes here when they assert that the bill "was simply an unconditional gift from the state for anyone who has created an entity called a limited liability corporation (LLC)."

First, it assumes that just LLCs get the benefit, which is not true. All pass-though entities benefit.  Second, of course, the "limited liability corporation" is a corporation, not an LLC, and the corporation (other than one chosen to be an S corp) does not get the benefit of the law.  

(5) Court Gets Entity Right, Regulations Not Quite

I'm not one to leave the courts out of this.  Judge Robert M. Dow, Jr., of the United States District Court, Northern Illinois has an incredible resume.  A member of Phi Beta Kappa and a Rhodes Scholar, his credentials are impressive.  In a recent decision, though, his opinion refers to a defendant LLC correctly, but then goes on to say that Treasury Regulations are silent on treatment of "limited liability corporations." Alas, that's not accurate.  Here's the passage: 

It is undisputed that, as of the date of Anderson Bros.' withdrawal from the fund, Anderson Bros. (an Illinois corporation) was 100% owned by Anderson. Anderson therefore had a “controlling interest” in Anderson Bros. 29 U.S.C. § 1.414(c)-2(b)(2)(A). At the same time, Defendant (an Illinois limited liability company) was also solely owned by Anderson. Section 1.414(c)-2 of the Treasury Regulations does not address specifically the treatment of limited liability corporations, and the Board does not address this issue in its brief. According to the Internal Revenue Service (“IRS”), “an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes * * *, unless it files Form 8832 and affirmatively elects to be treated as a corporation.” IRS, Single Member Limited Liability Companies, https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Companies (last visited Mar. 16, 2016).

Bd. of Trustees of the Auto. Mechanics' Local No. 701 Union & Inustry Pension Fund v. 6516 Ogden Ave., LLC, No. 14-CV-3531, 2016 WL 1043422, at *4 (N.D. Ill. Mar. 16, 2016) (emphasis added).

 

ICYMI: Tweets From the Week (Mar. 20, 2016)

"Antitrust laws may hinder socially-responsible business collaboration" https://t.co/My238owhqd #corpgov

— Stefan Padfield (@ProfPadfield) March 16, 2016

"attempts by start-ups to set up environmentally-friendly businesses are being stymied" https://t.co/ma2IgFXe5F #corpgov

— Stefan Padfield (@ProfPadfield) March 16, 2016

"What kind of person is the contemporary corporation & what does this mean for society, government, & law?" https://t.co/ViQWVM8tk7 #corpgov

— Stefan Padfield (@ProfPadfield) March 16, 2016

Study: "Managers...are seriously underestimating the role luck plays in the success...of a business...." https://t.co/jGZZG4fBZJ #corpgov

— Stefan Padfield (@ProfPadfield) March 17, 2016

Is "idea that corps should be managed to max shareholder value...based on...mistaken claims about the law? https://t.co/CxY5nZBpgQ #corpgov

— Stefan Padfield (@ProfPadfield) March 19, 2016

"blockchain preferred stock will trade exclusively through Overstock's https://t.co/93jkRVCVIm platform" https://t.co/4QDIafz4Bj #corpgov

— Stefan Padfield (@ProfPadfield) March 20, 2016

Tulane's 28th Annual Corporate Law Institute

On Thursday and Friday, I attended Tulane’s 28^th Annual Corporate Law Institute. I’d never had the chance to go before, but now that I’m a member of the faculty, it’s a fabulous perk of the job. It was marvelous to get expert, practical analysis of the most pressing issues in corporate governance and M&A practice. I was also delighted to see a couple of my students in attendance – during one of the breaks, they told me how the speakers helped bring together the reality behind the theories they learned in their business courses (and, having never heard Chief Justice Leo Strine speak before, they were predictably … ahem … amazed by his comments).

I’ve compiled a (very) incomplete list of the particular remarks that struck me as interesting or enlightening – with a heavy disclaimer that I wasn’t able to take notes on everything, so this should not be viewed as representative of the conference as a whole. It’s more like, Things From Some Panels Ann Lipton Was Able to Jot Down Quickly. (And also it’s possible I misheard some comments – if so, I apologize!).

I’ll note that the orientation of the speakers was almost all defense-side practice – defending from lawsuits, and defending from activist investors – which made it all the more valuable and interesting when someone spoke up from the other side of the table, or even from a more centrist point of view (the SEC, ISS, M&A journalists, Strine, and Chancellor Andre Bouchard).

[More under the jump]

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Health and Law School

Law school can and should be an enriching intellectual experience. For many, however, the three years of law school can also be extremely unhealthy.

What responsibility, if any, do we have as legal academics to encourage healthy behavior by our students? How do we do so?

Many law students have horrendous sleep, exercise, and eating habits. Many of these habits carry over into practice, and probably play at least some role in the numerous, documented health and addiction issues facing law students and lawyers. For undergraduate students, many schools mandate physical education and/or nutrition courses. Should these courses be offered to or mandatory for law students?

Are there things that we are doing as legal educators that encourage unhealthy habits? For example, is testing only once a semester part of the problem or is it simply preparing them for stressful, important events like the bar exam or a big trial?

Just opening this topic for discussion; I don't think I have good answers yet. Feel free to respond in the comments or send me thoughts via e-mail. I think I lean toward letting law students make their own decisions in this area, especially because some students are older, second-career types. But, given all the problems law students and lawyers face, I wonder if it would be valuable to require something like a one-credit, ungraded course of health and nutrition, which include some exercise time and general health instruction.

Happy St. Patrick's Day

Why are you reading a blog post? Go out and have a pint of Guinness or a shot of Jameson. See you next week. 

Greetings from Shanghai - Microfinance in China

Between jet lag and the comprehensive conference proceedings and activities here in Shanghai, it’s all I can do to stay awake to finish this post . . . . But I am not complaining. Shanghai is a wonderful city, and the 7th International Conference on Innovative Trends Emerging in Microfinance (ITEM 7 Conference) has been a super experience so far.

Given my sleep-deprived state, I will just share with you here today a few key outtakes from the presentations we had yesterday (at a pre-conference site visit to the largest microfinance lender in Shanghai) and earlier today (at the conference itself) on microfinance in China.  Here goes.

• Chinese microfinance is not really microfinance, in major part. It is SME (small and medium enterprise) lending. MSE loans are loans up to  30,000,000 Yuan RMB (about $4,600,000), and the average single loan amount for MSE lending is about  5,000,000 Yuan RMB (just under $770,000).

• Unlike those in archetypal microfinance and those involved in actual micro-credit lending transactions in many other countries, borrowers in Chinese microfinance lending (such as it is) are largely men rather than women.

• Despite these and other marked differences between Chinese microfinance and global microfinance, Chinese microfinance data does not affect global studies of microfinance in a statistically significant way. However, Chinese microfinance data does influence study results for the East Asia and Pacific region to a statistically significant degree.

Most of this was “new news” to me, given that Chinese microfinance is not at the center of my work.  I am sure that I will know even more about it by the end of the conference tomorrow. In the mean time, however, I also enjoyed presentations today about:

• the willingness of rural Ethiopian farmers to pay for insurance to cover the risks of their business (given by an Italian scholar, for which I was an assigned discussant);
• a rural microfinance program in Nigeria (given by a research fellow affiliated with the Central Bank of Nigeria);
• gender-based microfinance lending in Canada (given by a faculty member/Ph.D. student at the University of New Brunswick in Canada);
• the utility of employing joint use of credit scoring and profit scoring in microfinance (given by a Ph.D. student currently serving as the research associate of the Microfinance Chair at the Burgundy School of Business in Dijon, France);
• the relationship between financial and social objectives of microfinance (given by a Ph.D. student from the Centre for European Research in Microfinance at the Université de Mons in Belgium); and
• Participants’ perceptions of two separate microlending programs in Australia, one involving no-interest microloans and the other offering matched savings (given by a Ph.D. student from the University of Queensland in Australia).

I speak tomorrow on crowdfunding intermediation and litigation risk and comment on a paper on crowdfunding and corporate governance. Fingers crossed that I can stay awake long enough to give my presentation . . . . :>)

Lisa Fairfax SEC Commissioner Nominee

Being near to celebrity, even academic celebrity, can be exciting.  I feel unjustifiable pride and exhilaration in the nomination of George Washington Law School professor Lisa Fairfax to be a SEC commissioner. The White House announced her nomination last October, and the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings yesterday for Lisa Fairfax (democratic nominee) and Hester Peirce (republican nominee).  Professor Fairfax is being heralded as having "written extensively in favor of shareholder rights, shareholder activism, and gender and racial diversity on corporate boards."  Her scholarship is available on her SSRN page. Hester Peirce, another academic of sorts, is a senior fellow at the Mercatus Center at George Mason University researching financial markets and an adjunct professor.  The Mercatus Center is a "university-based research center... advanc[ing] knowledge about how markets work to improve people’s lives by training graduate students, conducting research, and applying economics to offer solutions to society’s most pressing problems." Her writing is available here.

The hearing process was reported by the WSJ as "tough" for both nominees. The confirmation process is by no means a given in the current political climate. A video of the hearing is available for viewing.  Additionally, each nominee submitted a statement and financial records as a part of the confirmation process.    Download FairfaxStatement   Download FairfaxFinancialDisclosure  Download PeirceStatement   Download PeirceFinancialDisclosure  

Lisa Fairfax summarized her credentials to be a Commissioner: 

As a law professor, over the last fifteen years I have had the privilege of teaching Corporations and Securities Law to the next generation of practitioners, judges, and regulators, so that they can understand the increasingly complex world in which companies must operate, markets must perform, and regulators must monitor. My teaching, along with my research and writing in these areas, have given me a deep understanding of the issues confronting the SEC, as well as a strong desire to help tackle those issues head on.

Fairfax's statement also stated her view of the SEC:

[I] believe deeply in the SEC’s three part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. ... I believe that the SEC’s three-part mission statement is more than a statement; it is a set of guiding principles that should shape every aspect of the agency’s activities. ...I believe the SEC’s work must be aimed at ensuring that investors are protected at all times, and that investors have confidence in the markets and the financial system.

The SEC also has a responsibility to facilitate access to needed capital for all participants in the market, from the corporation and small business owner in need of cash and credit, to the individual investing to support a family, finance a child’s education, or ensure a comfortable retirement.

Hester Peirce, who previously worked with the SEC’s Division of Investment Management, Commissioner Paul Atkins, and the SEC Investor Advisory Committee wrote:

My desire to serve at the SEC is motivated by the conviction that the capital markets help unlock people’s potential. Investors build their retirement nest eggs, their down payments, and their children’s college funds. Vibrant capital markets find and fund individuals and companies with brilliant ideas that can enhance people’s lives and the nation’s prosperity.

My belief in the capital markets’ ability to enrich our communities is built on lessons I have learned at the Peirce family dinner table, in classrooms at Case Western Reserve and Yale, and from mentors and colleagues throughout my career.

I am academically (and personally) interested in the role of retirement investors in capital markets so I noted with interest that both nominees spoke of the relevance of capital markets and the SEC to individual (retirement) investors.

The Committee is expected to vote on April 7, 2016.

-Anne Tucker