Business Law Prof Blog

Three Things Make a Post

Happy (Almost) New Year!  As 2016 draws to a close, I offer three quick hits of interesting recent business law developments:

First:  The endlessly-running case of Erica P. John Fund v. Halliburton has finally settled!  Halliburton has been a particular obsession of mine lo these past 6 years or so, and I even attended the Fifth Circuit oral argument held in September.  (My report of that argument is here, where I link to my prior blog posts on the subject).  I'm sort of sad to see it go, even though I found many of the opinions frustrating.  In any event, Alison Frankel has a nice retrospective of the case, including how David Boies ended up as lead attorney for the plaintiffs after the death of his daughter, the previous lead.  

Second: I previously posted about Facebook's move to create a nonvoting class of stock, essentially as a mechanism to allow Mark Zuckerberg to have his cake and eat it too (i.e., divest his stock while still maintaining voting control).  The move was duly approved by an independent special committee, but - as was recently revealed in a shareholder lawsuit - one of the committee members appears to have been a double agent.  According to the plaintiffs, Marc Andreessen kept Zuckerberg informed of the committee's deliberations, even going so far as to text Zuckerberg realtime advice on his negotiations during a conference call with the committee.  He apparently contacted Zuckerberg to tell him what the committee's main concerns were, and to warn him what the committee planned to do.  He also apparently kept Zuckerberg informed of his progress in persuading the recalcitrant committee member - Erskine Bowles - to accept the proposal.  You can read articles about it here and here, or just pull the recently unsealed August 30 brief from In re Facebook Inc Class C Reclassification Litigation, 12286-VCL, but either way, I smell business law exam scenarios. (Maybe I shouldn't have said that.)  Notably, Andreessen's loyalty to Zuckerberg, despite his nominal independence, is exactly the kind of thing that apparently has Strine's - and the Delaware Supreme Court's - attention.

Third: Surprise!  The Tenth Circuit just held that the SEC's ALJ's are "inferior officers" and therefore their current method of appointment is unconstitutional.  The decision creates a circuit split with the DC Circuit in Raymond J. Lucia Companies v. SEC, 832 F.3d 277 (D.C. Cir. 2016), and pretty much assures Supreme Court review - possibly with a newly-appointed justice of Trump's choosing.   And that makes me wonder whether we're about to witness some radical changes to the structure of the administrative state.

Here's to 2017 - there will be no shortage of change to keep us busy!

New Year's Resolutions for Universities

As avid readers of this blog already know, I am a fan of New Year's Resolutions. I usually set over twenty goals for each year, and they prove helpful in directing effort during the year. 

Over the past few years, my employer (Belmont University) has been engaged in Vision 2020, which should amount to something like New Year's Resolutions for the University (to be accomplished by 2020). I recently served on the committee for the Athletics Department's contribution to Vision 2020, which was an enjoyable and interesting experience. 

My time on the Vision 2020 committee and my years of doing my own resolutions have taught me a few things. Most importantly, I have learned that SMART goals tend to be the most useful and effective. (For those who don't know, SMART usually stands for Specific, Measurable, Attainable, Relevant, Time-Based, though there are variations).

The most difficult part, in my view, is finding appropriate measurements. Some items are easy to measure - movements in endowment, enrollment, incoming student GPA and standardize test scores, rankings, etc. There are plenty of items that are important, but much more difficult to measure. And measurements can be overdone, especially if the focus on the measurement overshadows the ultimate goal. 

Why Lawyers Should Resolve to Blog in 2017

At the end of every semester I resolve to give less work to my students so that I don't have so much to grade. This upcoming semester I may actually keep that resolution, but I do plan to keep my blogging assignment. In each class, I provide an extra credit or required post or series of posts of between 200-500 words so that students can learn a fundamental legal skill—communicating clearly, correctly, and concisely.

If you are reading this post, then you are already a fan of legal blogs. Academics blog to get their ideas out quickly rather than waiting for the lengthy law review cycle to publicize their thoughts. Academics can also refine ideas they are incubating by blogging and receiving real time feedback from readers. Practicing lawyers blog (or should) for a slightly different reason. Blogging can enhance a lawyer’s reputation and visibility and ultimately lead to more business.

Yesterday, I met with an attorney who will speak to the students in my new course on Legal Issues for Startups, Entrepreneurs, and Small Businesses. I mentioned to him that I found his blog posts enlightening and that they filled a gap in my knowledge base. Although I practiced for almost twenty years before entering academia and had a wide range of responsibility as a deputy general counsel, I delegated a number of areas to my colleagues or outside counsel. That attorney is now part of a growing trend. In 2011, when I left practice, lawyers rarely blogged and few utilized social media. Now, many recognize that lawyers must read legal blogs to keep up on breaking developments relevant to their practice. However, most lawyers understandably complain that they do not have the time to get new clients, retain their existing clients, do the actual legal work, and also blog.

Leaving blogging to the wayside is a mistake, particularly for small or newer firms. A 2016 Pew Research Center Study revealed that only 20% of people get their news from newspapers yet almost 40% rely on social media, which often provides summaries of the news curated to the consumer’s interests. The potential client base’s changing appetite for instant information in a shorter format makes blogging almost a necessity for some lawyers. Indeed, consumers believe that hiring a new lawyer is so overwhelming that some clients are now crowdsourcing. But when they receive multiple “offers” to represent them, how do/should consumers choose? Perhaps they will pick the firm with a social media presence, including a blog that highlights the firm’s expertise.

I read several blogs a day. Admittedly, I have a much longer attention span than many of our students and the lay public. I also get paid to read. Nonetheless, I consider reading blogs an essential part of my work as an academic. In prepping for my new course, I have found posts on startups and entrepreneurship particularly helpful in providing legal information as well as insight into the mindset of entrepreneurs. If I were a busy founder running a new startup, I would likely try to learn as much as possible as quickly as possible online about certain topics prior to retaining a lawyer. Some lawyers, however, don’t really know how to speak to clients without talking down to them, much less write anything “short” and free of jargon. A lawyer/blogger who wrote in a way that I could understand, without all of the legalese, would be more likely to get my business.

Thus, even though I want to grade fewer papers, I also want my students to leave my class with the critical skill of communicating complex topics to the public in digestible chunks (and in line with state bar rules on social media). Over the years, I have advised students to volunteer to update or start a blog for their internship employers.  Many have told me that they enjoyed these projects and that their employers have found value in this work. This blogging practice also puts students in the position to start to blog after graduation.

I’ll end this post with a plug for my blogging colleagues who will attend AALS next week in San Francisco. I encourage you to attend some of the socioeconomic panels highlighted here. Please introduce yourself if you attend the panel next Wednesday morning at 9:50 on whistleblowers with me, Professor Bill Black of UMKC; Professor June Carbone of Minnesota; and Professor Ben Edwards of Barry. If you have an interest in the intersection between ethics and business, please swing by next Friday at 1:30 and see me and co-panelists Christopher Dillon from Gibson Dunn; Mina Kim, GC of Sunrun; Professor Eric Orts of Wharton; Professor Joseph Yockey of Iowa; Professor Brian Quinn of Boston College; Dean Gordon Smith of BYU; Professor Lori Johnson of UNLV; and Professor Anne Choike of Michigan.

If you have legal blogs you want to recommend and/or will be speaking at AALS and want to call attention to your session, feel free to comment below. Happy New Year and happy blogging.

Conflicts of a Different Kind . . . .

Ten days ago, I posted on conflicts of interest and the POTUS.  Today, friend-of-the-BLPB Ben Edwards has an Op Ed in The Washington Post on conflicts of a different kind--those created by brokerage compensation based on commissions for individual orders.  The nub:

In the current conflict-rich environment, Wall Street gorges itself on the public’s retirement assets. While transaction fees are costs to the public, they’re often juicy paydays for financial advisers. A study by the White House Council of Economic Advisers found that Americans pay approximately $17 billion annually in excess fees because of such conflicts of interest. The high fees mean that the typical saver will run out of retirement money five years earlier than he or she would have with better, more disinterested advice.

The solution posed (and fleshed out in a forthcoming article in the Ohio State Law Journal, currently available in draft form on SSRN here):

[S]imply banning commission compensation in connection with personalized investment advice would put market forces to work for consumers. This structure would kill the incentive for financial advisers to pitch lousy products with embedded fees to their clients. While the proposal might sound radical, Australia and Britain have already banned commission compensation linked to investment advice without any significant ill effect. While some might pay a small amount more under such a system, the amount of bias in advice would go down, likely more than offsetting the additional cost with investment gains.

I have been following the evolution of Ben's thinking on this and recently heard him present the work at a faculty forum.  I encourage folks interested in the many areas touched on (broker duties, broker compensation, conflicts of interest generally, etc.) to give it a read.  This is provocative work, even of one disagrees with the extent of the problem or the way to solve any problem that does exist.

New Book from Martin & Kunz: When the Levees Break: Re-visioning Regulation of the Securities Markets

My friend and colleague, Jena Martin's coauthored book (which she wrote with another West Virginia University professor Karen Kunz) has just been released: When the Levees Break: Re-visioning Regulation of the Securities Markets. I have just started the book, and I look forward to working my way through it. I cannot say Prof. Martin and I always see eye to eye on things (though we often do), she always has a thoughtful and interesting take. It's been an interesting read so far, and I recommend taking a look. Following is a synopsis of the book: 

The stock markets. Whether you invest or not, the workings of the stock market almost certainly touch your life. Either through your retirement fund, your mutual fund or just because you work for a place that invests (or is invested in)—the reach of the securities markets is expanding, like an ever growing tidal wave. 

This book discusses what happens when that wave hits the shore. Specifically, this book argues that, given the mounting deluge from misplaced regulation, fast-paced technology, and dominant financial players, the current US regulatory structure is woefully inadequate to hold back the tide. 

Using vivid imagery and plain language, Karen Kunz and Jena Martin take the problems involved in regulating the complex world of securities head on. Examining everything from the rise of technology and the role of hedge funds to our bloated agency system, Kunz and Martin argue that the current structure is doomed to fail and, when it does, the consequences will be disastrous. 

Sending out a call to action, the authors also offer a bold vision for how to fix the mess we’ve made—not by tinkering around the edges—but instead by building a whole new structure, one that can withstand the next storm that is sure to come.

Pressing Forward to the New Year in Business Litigation

The end of the calendar year brings many things--among others: the holidays (and I hope you have enjoyed and are enjoying them), the release of the last Oscar-contender movies, and the publication of oh-so-many "top ten" lists.

Apropos of the last of those three, I admit to being a bit proud, in a perverse sort of way, about spotting a "top ten" and commenting on it here on the BLPB.  Back in May and June, I blogged about consumer litigation against Starbucks (my daughter's employer) involving coffee--too much ice, too hot, etc.  Apparently, those types of legal actions are among the "Top Ten Most Ridiculous Lawsuits of 2016."  Specifically, two of those lawsuits against Starbucks (the one for too much ice and another alleging too much steamed milk) are #1 on the list.  Another consumer suit takes the #2 spot--a legal action asserting that a lip balm manufacturer's packaging is misleading (specifically, making customers beehive there is more product in the tube than there actually is).  I continue to maintain (while acknowledging that consumer class action litigation can be useful when employed in cases that present a true danger to the consuming public), as I noted in my May post, that there are better ways to handle customer complaints.  

Back in the spring, Weil, Gotshal shared some observations on litigation trends.  Many of the underlying matters on which the co-authors of the report comment remain unresolved, and many involve actual or potential business litigation (including consumer litigation involving supply-chain-related or False Claims Act allegations).   Certainly, a new U.S. Supreme Court appointee may make a difference in business law cases accepted by the Court this year . . . .

What will 2017 bring in business litigation?  Any predictions?  Now is the time to stake your claim!

ICYMI: Tweets From the Week

"HOW TO JUDGE A LAWYER’S LLC COMPETENCE" https://t.co/WJWvI9Gg9m #corpgov

— Stefan Padfield (@ProfPadfield) December 19, 2016

"Starting a Business with Family or Friends? Agree on the Five “Ds” to Avoid Disaster" https://t.co/aabLX7me0B #corpgov

— Stefan Padfield (@ProfPadfield) December 22, 2016

"enterprise liability should be a..alternative to negligence..in the emerging world of autonomous vehicles" https://t.co/nSB7hTn2kr #corpgov

— Stefan Padfield (@ProfPadfield) December 23, 2016

1/3: "Wherever he sees growth, he attributes it to the 'capitalist' portion of the mixed economy." https://t.co/9BkTCUtkXC #corpgov

— Stefan Padfield (@ProfPadfield) December 20, 2016

“capitalism has taken a succession of particular institutional forms over time” https://t.co/oIk9JnLpvS #corpgov

— Stefan Padfield (@ProfPadfield) December 21, 2016

Sandys v. Pincus reversed, because I am that kind of jinx.

I previously posted in praise of Sandys v. Pincus for its excellence as a teaching tool – which meant that its reversal was inevitable, as occurred days after classes concluded. (Same with the Salman v. United States decision, though that changed little; naturally; we won’t even what get into what changes midstream when I’m teaching Securities Regulation).  The reversal itself is quite interesting, though, as the latest entry in the Delaware Supreme Court’s developing jurisprudence on friendship/social ties as a basis for director disqualification.  And, strikingly for Delaware, it generated a dissent.

In Sandys, the basic dispute involves a secondary offering by the social-media game company Zynga.  The plaintiffs filed a derivative lawsuit alleging that the secondary offering was designed to allow major insiders – including the controlling shareholder, himself a member of the Zynga board – to cash out before a disappointing earnings announcement.  As a result, the secondary offering materials were alleged to have omitted critical facts about the company, ultimately exposing Zynga to a securities fraud lawsuit.

The Chancery decision held that demand was not excused, resting in large part on the court’s conclusion that the directors who were not directly implicated in the scheme were sufficiently independent of those who were to be able to consider the plaintiffs’ demand.  The court found that numerous business and social ties among the directors were not sufficient to call these directors’ impartiality into question. 

When I taught the case, I told my students that Delaware is largely persuaded by two things: blood and money. 

Well, I’m going to have to revise that lesson. 

On appeal, the Delaware Supreme Court – per Chief Justice Strine – held that the fuzzy half-business/half-social ties alleged by the plaintiffs were, in fact, sufficient to suggest that the directors were conflicted.  (After first excoriating the plaintiffs for failing to pursue a Section 220 request – I don’t know what kind of competitive pressures the plaintiffs may have been under in this particular case, but let’s just say Delaware’s gonna have to do some retooling if it wants that advice to stick.  See also Lawrence Hamermesh & Jacob Fedechko, Forum Shopping in the Bargain Aisle: Wal-Mart and the Role of Adequacy of Representation in Shareholder Litigation.)

First, one director co-owned an airplane with her husband, and with the controlling shareholder.  The court held that an airplane is such an unusual asset, requiring such “close cooperation in use,” that joint ownership suggests an “intimate personal friendship” sufficient to call the director’s impartiality into question.

Second, two other directors were partners at Kleiner Perkins, a firm with a 9.2% stake in Zynga.  Kleiner Perkins had also invested in a company started by the controlling shareholder’s wife, and had invested in a third company that also counted one of the other Zynga secondary-offering sellers (himself also a Zynga director) as one of its investors.    

These interrelationships did not make the directors beholden to the controlling stockholder and other sellers in the financial sense, but, the court concluded, were evidence of a “network” of “repeat players” who had created a “mutually beneficial ongoing business relationship.”  This created “human motivations” that called the directors’ impartiality into question.  Additionally, the court noted that Zynga had not classified these directors as independent for NASDAQ purposes, a determination that itself deserved deference, and had particular relevance in a case, like this one, involving potential wrongdoing by the controlling stockholder.

Justice Valihura dissented.  She believed that without more details of the size and scope of the Kleiner Perkins investments, or the financial or personal significance of the co-owned airplane, these relationships could not be used to challenge the directors’ impartiality.

Sandys is thus the latest in a line of Strine decisions pushing Delaware law toward greater legal recognition of the fact that structural coziness may make directors reluctant to accuse each other of wrongdoing.  This has always been a delicate area; it’s fair to say that any human being who has lived some time among other humans understands the kind of bias that these relationships may generate, but courts have always feared that formal recognition of them would open the floodgates to frivolous/damaging litigation, and force judges to engage in impossible determinations as to the exact point at which friendship becomes compromising.  Strine, plainly, believes that the law has overcorrected – i.e., the complete failure to recognize these informal relationships creates an intolerable artificiality in how questions of conflict are examined, and he’s pushing the law in a new direction. 

(If I had to guess, I'd also say that Strine recognizes that as Delaware becomes a mini-SEC for transactions on which shareholders vote - i.e., disclosure becomes the only requirement - Delaware's relevance may hinge on its ability to stake out territory for vigorous court oversight that can't be cured by disclosure.)

What’s particularly striking here is that – as Justice Valihura’s dissent makes clear – Sandys goes much further than its predecessor, Del. County Emples. Ret. Fund v. Sanchez.   In Sanchez, the allegedly conflicted director had a 50-year friendship with the interested party as well as a strong financial dependency; the Sandys relationships are nowhere near that scale.  So Delaware – presumably at Strine’s urging – seems to be in the process of some rather aggressive redrawing of the lines.  Where those lines will end up remains to be seen.

I may still teach the Chancery decision in my business class, though – it’s just so useful, with charts, and you can make alternative hypothetical charts and ask how the case might have come out differently.  But then I’ll have to either talk the students through the reversal, or assign them the relevant excerpts.

That's all!  Wishing everyone a happy erev Chanukah and erev Christmas!

Law Teaching Positions and Questions to Ask Yourself

I recently updated my list of business law teaching positions. At this point, a number of the positions have probably been filled, but I put posted dates by the more recently posted positions. I still get asked, on a fairly regularly basis, about how one breaks into law teaching, and while I do have thoughts on that topic (basically, write, write, write), I think folks wanting to enter the legal academy should ask themselves a few questions first. 

1. Are you truly drawn to both teaching and research (or are you just tired of practicing)?
2. Are you geographically flexible? (You have to be both really good and really lucky to pick your geographic location in legal academia)
3. Do you have a few years to devote to pursuing a career in legal academia? (these days, it often takes a VAP or two, and/or a few years on the market to secure an academic job).
4. If you are in BigLaw, are you truly comfortable with a sizable pay cut?
5. Can you be patient with students, administrators, staff, etc.? (things typically move much more slowly in academia than in practice)

Once you have received one of more offers, I would ask the following questions.

1. What is my BATNA (best alternative to a negotiated agreement? (If you only have one academic offer, and don't like your alternatives in practice, you should be very careful in negotiating and should try to avoid offending the offering school).
2. Can I see myself living in this part of the country? (Accessibility to a major airport can be an important consideration as well, if you plan to travel for work or personal reasons)
3. What is the teaching package? Does it include night, weekend, or online courses?
4. What are the research expectations? When are reviews done? Roughly what percentage of faculty members achieve tenure?
5. How is the financial stability of the school? What is the reputation of the school? Does the school have strong distinctive? How is the local competition? What is the discount rate trend? What is the LSAT/UGPA trend?
6. How do you get along with the faculty members you met?
7. Is the surrounding town/city an area where it is easy or difficult to find an appropriate job for your significant other?
8. If you have young children or plan to have children, how are the schools in the area? Does the university have a tuition exchange and/or tuition payment program?

There are many more questions to ask, but again, it is important to start with your alternatives. If you have strong alternatives, you can be more picky, but you also don't want to start your academic career with an overly aggressive negotiation.

I still think teaching is the most rewarding job available, but there are definitely important questions to ask before pursing an academic career path and before committing to school.

IRC § 162 and the Pay-For-Play Model

A year and a half ago I was attending a panel discussion on sports law issues at the Academy of Legal Studies in Business (ALSB) Conference in Philadelphia.  A meaningful discussion arose about the logistics of moving toward the pay-for-play model in college sports.  At one point somebody asked whether anyone has thought about the tax consequences of moving towards that model, to which my co-author Adam Epstein (who was one of the panelists) responded yes, and noted that our paper analyzing the state tax implications of paying student-athletes was our most downloaded article on SSRN.

Thus far the NCAA hasn’t evolved from the paradigm of amateurism, but every time the debate seems to quiet down about whether it should something new pops up that brings the idea of paying student-athletes back into the spotlight.  This week it was the headline, Could Fournette, McCaffrey Skipping Bowls Lead to NCAA Paying Players?  As long as there is a remote possibility of moving in that direction in the future, tax issues should be included in the overall discussion of the effects of pay-for-play on college sports.

This past November I presented a working paper at the Southeastern Academy of Legal Studies in Business (SEALSB) Conference on the topic, Analyzing the Applicability of IRC § 162 on the Pay-For-Play Model.  § 162 of the Internal Revenue Code provides rules for deducting business expenses for federal income tax purposes.  One of the three conditions that must be satisfied to properly deduct business expenses requires that such expenses be incurred while away from home.

Currently there is a split among circuits as to what the term tax home means under § 162, with the majority holding that home is the principal place of business while the minority allows that home means home in the ordinary sense.  With respect to professional sports, numerous cases have been published that analyze where various pro athletes’ tax homes are located.  However, because college athletics still maintains the principal of amateurism, neither the judicial system nor scholarly works have heartily examined all the various tax issues that could arise under pay-for-play, including the application of § 162 on paid student-athletes.

In this paper I explore a very intricate area of federal tax law that will undoubtedly require judicial guidance in the future should college athletics move towards a pay-for-play model, specifically focusing on what the potential effects of the application of the term tax home will be on paid student-athletes and college athletic programs. 

Analyzing the historical application of § 162 from both the majority and minority of circuits, I ultimately propose that depending on which circuit they live in certain paid student-athletes would likely be able to deduct the costs of travel and moving expenses between their family residences and the schools they play for, as well as other specified out-of-pocket expenses not covered by their institutions.  For those student-athletes who won’t be able to take advantage of the benefits of § 162 because of the circuit they reside in, there may be a reasonable opportunity to make the case that they are temporarily employed by their universities – a characterization which various courts, including the US Supreme Court, have narrowly analyzed in order to open the door for possible business expense deductions to be taken even if they reside in circuits that define home as the principal place of business.

Ultimately, the questions of (1) where would a paid student-athlete’s tax home be located, and (2) would paid student-athletes be considered living temporarily away from home when residing at their employer-institutions’ campuses will be important tax issues that the judicial system will need to consider should the pay-for-play model be effectuated in the future.  I attempt to analyze both of these issues quite thoroughly in this paper.

With visions of tax now dancing in your heads, I graciously wrap up this month’s Guest Blogger posts just in time for the College Football Bowl Game series to really ramp up (minus, of course, Fournette and McCaffrey).  As we all embark on new and yet unknown adventures in the coming year I once again wish to extend my sincere thanks to Haskell Murray and the Business Law Prof Blog editorial board for inviting me to share my research in the area of sports and tax as we close out 2016.  Happy holidays to all!

Delaware Supreme Court to Rehear Appraisal Action

In July, Delaware Chancellor Andre Bouchard found that payday lender DFC Global Corp was sold too cheaply to private equity firm Lone Star Funds in 2014.  Chancellor Bouchard held that four DFC shareholders were entitled to $10.21 a share at the time of the deal, or about 7 percent above the $9.50 per share deal price that was approved by a majority of DFC shareholders.

A Gibson Dunn filing related to the DFC case on appeal before the Delaware Supreme Court sheds light on the appraisal process in Delaware.  The claim is the Chancellor Bouchard manipulated the calculations to reach the $10.21 prices.  The full brief is available here, but this summary might provide easier reading.  Reuters reports:

Bouchard made a single clerical error that led him to peg DFC’s fair value at $10.21 per share.

DFC’s lawyers at Gibson Dunn & Crutcher spotted the mistake and asked Chancellor Bouchard to fix the erroneous input. If he did, the firm said, he’d come up with a fair value for the company that was actually lower than the price Lone Star paid. The chancellor agreed to recalculate – but in addition to fixing the mistaken input, Bouchard adjusted DFC’s projected long-term growth rate way up, to a number even higher than the top of the range proposed by the plaintiffs’ expert. The offsetting changes brought the recalculated valuation back in line with Chancellor Bouchard’s original, mistaken analysis.

Gibson Dunn is now arguing at the Delaware Supreme Court that the chancellor’s tinkering shows just why appraisal litigation – in which shareholders dissatisfied with buyout prices ask Chancery Court to come up with a fair price for their stock – has become a big problem for companies trying to sell themselves.

Last week The Chancery Daily reported on a December 16th appraisal case, Merion Capital, where Chancellor Laster held that a fair price was paid. The questions remains what is the significance of deal price and what is the significance of expert opinion shifting these technical cases in or outside of fair value?

-Anne Tucker

 

Legal Origins of Political Correctness

During the recent presidential campaign, there was a lot of talk the evil of “political correctness” or (PC).  A lot has been said about this concept on social media, and I got to thinking about the legal applications of what PC means. This post is my first look the concept from a legal perspective and looks briefly at the legal origins and applications of the idea. 

Speechwriter (and author and columnist) Barton Swaim has said that “Political correctness is an insidious presence in American life.” PC is generally seen (and criticized) as a product of the political left. 

And the political right has a companion, “patriotically correct,” and that idea was recently explained in a popular article by Alex Nowrasteh, an immigration policy analyst at the Cato Institute’s Center for Global Liberty and Prosperity. Nowrasteh notes that political correctness has been a “major bugaboo of the right” in recent years and explains:

[C]onservatives have their own, nationalist version of PC, their own set of rules regulating speech, behavior and acceptable opinions. I call it “patriotic correctness.” It’s a full-throated, un-nuanced, uncompromising defense of American nationalism, history and cherry-picked ideals. Central to its thesis is the belief that nothing in America can’t be fixed by more patriotism enforced by public shaming, boycotts and policies to cut out foreign and non-American influences.

As for a definition of political correctness, I will borrow from Swaim again:

Political correctness, if I could venture my own admittedly rather clinical definition, involves the prohibition of common expressions and habits on the grounds that someone in our pluralistic society may be offended by them. It reduces political life to an array of signs and symbols deemed good or bad according to their tendency either to include or exclude aggrieved or marginalized people from common life.

But where did the concept come from? The first cited U.S. legal use of it appears to be one of the foundational Supreme Court cases, which ultimately led to passage of the Eleventh Amendment, states:

Sentiments and expressions of this inaccurate kind prevail in our common, even in our convivial, language. Is a toast asked? ‘The United States,‘ instead of the ‘People of the United States,‘ is the toast given. This is not politically correct. The toast is meant to present to view the first great object in the Union: It presents only the second: It presents only the artificial person, instead of the natural persons, who spoke it into existence.

Chisholm v. Georgia, 2 U.S. 419, 462, 1 L. Ed. 440 (1793) (emphasis added). This doesn’t seem to apply to the modern concept of what it means to be politically correct.  The fact that the case draws a distinction between the artificial person (in this case, the United States of America) and the natural persons who make up the nation. That's concept that has application in the business law world, to be sure.  

The phrase “politically correct” appears in 259 cases per a search on Westlaw, and the phrase took 191 years off after Chisholm v. Georgia. The phrase resurfaced in 1984, with a use that seems to combine the more modern usage with the 1793 use. Am. Postal Workers Union v. U.S. Postal Serv., 595 F. Supp. 1352, 1362 (D.D.C. 1984), aff'd in part, vacated in part sub nom. Am. Postal Workers Union, AFL-CIO v. U.S. Postal Serv., 764 F.2d 858 (D.C. Cir. 1985) (stating that a union “could find out what party a worker is affiliated with and, if not ‘politically correct,’ exert pressure on the worker to change).

In 1991, the phrase comes into more common usage, and we see a particularly modern spin in a Minnesota appeals court dissent in a case upholding a trespassing conviction against abortion protestors:

Both the issues of war and abortion produce a deep split in America's fabric. Oftentime an ugly split. Although it is not pretty, at least it proves that Americans feel strongly on both sides of the issue. Courts do not determine whether anti-war protests are more “politically correct” than abortion protests. It is not up to courts to pass judgment on the “worthiness” of appellants' cause. Trespass is a crime. This is a criminal case. I do not bother my head with whether appellants should protest against “X” (because I disagree with “X”) but not protest against “Y” (because I agree with “Y”). As criminal defendants, appellants are entitled to certain constitutional rights. We do not differentiate between “good” defendants and “bad” defendants. We treat all the same.

State v. Rein, 477 N.W.2d 716, 723 (Minn. Ct. App. 1991) (Randall, J., dissenting).

From a legal perspective, this 1991 case is a jumping off point for modern legal usages of the PC concept. The idea almost always connotes something negative. Take, for example, the most recent case in which a judge used the phrase as part of the opinion (there are more recent cases in which the court quotes others using the phrase).  Here, again is a dissent, this time a Fourth Circuit case upholding a District Court order allowing a transgender student to use their restroom of choice: 

Somehow, all of this is lost in the current Administration's service of the politically correct acceptance of gender identification as the meaning of “sex”—indeed, even when the statutory text of Title IX provides no basis for the position.

G.G. v. Gloucester Cty. Sch. Bd., 824 F.3d 450, 452 (4th Cir. 2016) (Niemeyer, J., dissenting), cert. granted in part Gloucester Cty. Sch. Bd. v. G.G. ex rel. Grimm, 137 S. Ct. 369 (2016). 

I find it interesting that my quick search (admittedly not exhaustive), only revealed the term being used by courts in dissents.  As such, when in the majority, the label is deemed unnecessary, even in discussing a counterargument.  Is is just a matter of time, or is it more that the majority is deciding not to take a victory lap when on the winning side? 

That's the quick look at the legal landscape of political correctness. Does it lead us anywhere? I don't know. At a minimum, I think we should try not to offend others when we can avoid it. And if we do offend others, apologize and try to move forward.

Beyond that, I have to get back grading. So far, not one person has called an "LLC" a "limited liability corporation." Doing so would be decidedly un-PC.  

The Conflicting Interests of the POTUS through a Corporate Lawyer's Eyes

In her post on Saturday, co-blogger Ann Lipton offered observations about possible legal issues resulting from the President-Elect's tweets regarding public companies.  She ends her post with the following:

So, it's all a bit unsettled. Let's just say these and other novel legal questions regarding the Trump administration are sure to provide endless fodder for academic analysis in the coming years.

Probably right.

Today, I take on a somewhat related topic.  I briefly explore the President-Elect's conflicting interests through the lens of a corporate law advisor.  For the past few weeks, the media (see, e.g., here and here and here) and many folks I know have been concerned about the potential for conflict between the President-Elect's role as the POTUS, public investor and leader of the United States, and his role as "The Donald," private investor and leader of the Trump corporate empire.

The existence of a conflicting interest in an action or transaction is not, in and of itself, fatal or even necessarily problematic.  In a number of common situations, fiduciaries have interests in both sides of a transaction.  For example, a business founder who serves as a corporate director and officer may lease property she owns to the corporation.  What matters under corporate law is whether the fiduciary's participation in the transaction on both sides results in a deal made in a fully informed manner, in good faith, and in the bests interests of the corporation.  Conflicting interests raise a concern that the fiduciary is or may be acting for the benefit of himself, rather than for and in the best interest of the corporation. 

Corporate law generally provides several possible ways to overcome concerns that a fiduciary has breached her duty because of a conflicting interest in a particular action or transaction:

• through good faith, fully informed approval of the action or transaction (e.g., after disclosure of information about the nature and extent of the conflicts) by either the corporation's shareholders or members of the board of directors who are not interested in the transaction; and
• through approval of a transaction that is entirely fair--fair as to process and price. 

See, e.g., Delaware General Corporation Law Section 144.  Yet, if I believe what I read, no similar processes exist to combat concerns about actions or transactions in which the POTUS has or may have conflicting interests.  In particular, to the extent one does not already exist, should a disinterested body of monitors be identified or constituted to receive information about actual and potential conflicting interests of the POTUS and approve the action or transaction involving the conflicting interests?  Perhaps the Office of Government Ethics ("OGE") already has something like this in place . . . .  If it does, then both the public media and I are underinformed about it.  While there seems to be OGE guidance on the President-Elect's nominees for executive branch posts (see, e.g., here and here) and on overall executive branch standards of conduct (see here), I have not found or read about anything applicable to the President-Elect or POTUS.

In making these observations, I recognize that our federal government is different in important ways from the corporation.  I also understand that the leadership of a country/nation is different from the leadership of a corporation.  Having said that, however, conflicting interests can have similar deleterious effects in both settings.  The analogy I raise here and this overall line of inquiry may be worth some more thought . . . .

ICYMI: Tweets From the Week (Dec. 18, 2016)

Do we know "what dollar values to put on the relevant benefits and costs of climate change policy"? https://t.co/iX8CkS4p6r #corpgov

— Stefan Padfield (@ProfPadfield) December 12, 2016

"US and ... UK ... fiduciary duties ... often operate in strikingly different ways" https://t.co/NdNTGomeYm #corpgov

— Stefan Padfield (@ProfPadfield) December 13, 2016

"U.S. Government to Release Its National Action Plan on Responsible Business Conduct" https://t.co/GBlQAraT8u #corpgov

— Stefan Padfield (@ProfPadfield) December 15, 2016

"research suggests...laws which protect minority shareholders are associated w/ stronger financial markets" https://t.co/9QTUUV07cF #corpgov

— Stefan Padfield (@ProfPadfield) December 15, 2016

"Every business lawyer needs a basic understanding of bankruptcy law." https://t.co/DbvHpdf8zG #corpgov

— Stefan Padfield (@ProfPadfield) December 15, 2016

"the first complete revision to the Model Business Corporation Act (2016 Revision) since 1984" https://t.co/E74pFB1laS #corpgov

— Stefan Padfield (@ProfPadfield) December 15, 2016

IHRB "released its annual list of 'Top 10' business and human rights issues for the coming year" https://t.co/NT1PbqriKu #corpgov

— Stefan Padfield (@ProfPadfield) December 17, 2016

The University of Akron invites applications and nominations for the position of Dean of the School of Law

The University of Akron invites applications and nominations for the position of Dean of the School of Law, with an anticipated start date of July 1, 2017.  Review of applicants will begin immediately and continue until the position is filled. 

The University of Akron School of Law is a public law school of approximately 450 students, with both full-time and part-time programs, and opportunities to begin study in either the Fall or the Spring.  The school offers the J.D., five joint-degree programs, an LL.M. in Intellectual Property, and various certificate programs for both J.D. and non-J.D. students.  Since its founding in 1921, the school has graduated over 6,300 men and women.  The school has historically embraced a strong commitment to teaching and public service in the community. 

Akron Law has recently experienced tremendous upward trajectories in admissions in terms of applications, selectivity, yield, and the size and quality of the incoming class.  The employment rate for graduates is above the national average. The school boasts several Centers with opportunities for students to distinguish themselves in their education and practice-ready preparation: a Center for Intellectual Property Law and Technology; a Constitutional Law Center, one of only four such centers established by Congress; and the Joseph G. Miller and William C. Becker Institute for Professional Responsibility.  The Akron trial advocacy program also consistently ranks among the top in the nation.  Clinical programs in a wide variety of areas have won awards recently for their excellence and innovation, and new clinical programs continue to be added under growing faculty numbers and associations with outside practitioners.

Akron Law and its programs have been showered over the past year with national recognition, including a #7 ranking for training prosecutors and public defenders, an “A” grade for our Intellectual Property program, a Top 50 ranking in 2015-16 from Above The Law, a Top 25 recognition for bar exam preparation, and a Top 8 rating for affordable living and quality of education.  Akron Law also continues to be recognized as a Best Value school.

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Trading on Trump’s Twitter Tirades

One of the more … striking ... habits of President-Elect Trump is his tendency to use Twitter to attack specific companies that have displeased him in some way.  For example, after the CEO of Boeing criticized him, he tweeted:

Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!

— Donald J. Trump (@realDonaldTrump) December 6, 2016

After Vanity Fair published a scathing review of Trump Grill, he tweeted:

Has anyone looked at the really poor numbers of @VanityFair Magazine. Way down, big trouble, dead! Graydon Carter, no talent, will be out!

— Donald J. Trump (@realDonaldTrump) December 15, 2016

And other times, Trump seems to simply be reacting to whatever he sees on the news.

These tweets might explicitly threaten to harm their targets through the exercise of government power – such as the threat to cancel Boeing’s Air Force One contract – but even if they don’t, the implicit possibility is there.  As a result, Trump’s tweets move the market.  Boeing’s stock reacted negatively to Trump’s tweet (though it rebounded).  Shares of Lockheed Martin dropped dramatically after Trump criticized one of its fighter jets as too expensive.

Wall Street traders have begun building a Trump tweet effect into their models.  One anecdotal report says that compliance departments have lifted bans on trader Twitter usage, aware that presidential-tweet monitoring is now a necessary part of the job.

The Wall Street Journal even published a blog post recommending four proactive steps all businesses take in anticipation of a Trump twitter attack.

All of this has prompted some accusations of market manipulation and insider trading.  For example, it’s been reported that some lucky trader started dumping shares of Lockheed Martin six minutes before Trump tweeted, though that could simply be the result of hedge funders correctly predicting where Trump would tweet next.

For the sake of argument, let’s say that Trump’s tweet attacks – at least some of them – are calculated to drive down stock prices in order to allow someone (maybe Trump himself, maybe someone in his circle) to make a profit.  Is there anything illegal here?

[More under the jump]

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New Favorite Podcast Series - How I Built This

My favorite new (to me) podcast is NPR's How I Built This. They describe the podcast as "about innovators, entrepreneurs, and idealists, and the stories behind the movements they built. Each episode is a narrative journey marked by triumphs, failures, serendipity and insight — told by the founders of some of the world's best known companies and brands."

So far, I have listened to two of the episodes: one about the Sam Adams founder Jim Koch and one about the Clif Bar co-founder Gary Erickson.

On the Sam Adams episode, I liked Jim Koch's distinction between scary and dangerous -- repelling off a mountain with an expert guide is scary but not not necessarily dangerous; walking on a snow-covered, frozen lake on a sunny day is dangerous but not necessarily scary. Jim said that his comfortable job at Boston Consulting Group was not scary, but it was dangerous in luring him away from his true calling. However, founding his own company (Sam Adams) was scary, but not really as dangerous as working for BCG. Also, it was interesting to find out that Jim Koch is a Harvard JD/MBA.

On the Clif Bar episode, though I have eaten more than my share of Clif Bars, I was surprised to learn that the bars were named for Gary's father, Clif. The Clif Bar episode also gave great insight into the emotions that can come out when deciding whether to sell your business; Gary decided not to sell to Quaker Oats at the last minute and then needed to buy-out his partner. Separately, Gary talked about the need for corporate counsel (and how a "handshake deal" with a distributor almost cost him his business), but he also noted how many attorneys are simply too expensive for small businesses.

Both entrepreneurs drew on lessons they learned during their outdoor adventure experiences. And both entrepreneurs discussed some combination of lawsuits, contracts, and regulatory challenges.

Looking forward to listening to more episodes. 

What happens when a company is as powerful as a country?

This post is not about politics, although it does concern President-elect Trump's cabinet pick, ExxonMobil head, Rex Tillerson. I first learned about Tillerson during some research on business and human rights in the extractive industries in 2012. I read the excellent book, "Private Empire" by Pultizer-prize winner Steve Coll to get insight into what I believe is the most powerful company in the world.

Although Coll spent most of his time talking about Tillerson's predecessor, Lee Raymond, the book did a great job of describing the company's world view on climate change, litigation tactics, and diplomatic relations. Coll writes, “Exxon’s far flung interests were at times distinct from Washington’s.” The CEO “did not manage the corporation as a subordinate instrument of American foreign policy; his was a private empire.” Raymond even boasted, “I am not a U.S. company and I don’t make decisions based on what’s good for the U.S.” Indeed, the book describes how ExxonMobil navigated through Indonesian guerilla warfare, dealt with kleptocrats in Africa, and deftly negotiated with Vladmir Putin and Hugo Chavez. 

Before I read the book, I knew that big business was powerful--after all I used to work for a Fortune 500 company. But Coll's work described a company that was in some instances more influential to world leaders than the UN, the US State Department, or the World Bank. I don't know if Trump has read the book, but no doubt he knows about the reach of Tillerson's power. I won't comment about whether this pick is good for the country. I will say that this choice is not outrageous or even surprising given Trump's stated view of what he wants for America. The key will be for Tillerson, if he's confirmed, to use the skills he has honed working for ExxonMobil for the country. 

If you have time after grading for a really good read (it's a fast 700 pages), pick up the book. Coll's view on the Tillerson nomination is available here.

Taxing Athletic Scholarships - The Evolving World of College Sports

As I mentioned in my “Show Me the Money!” blog last week, back in March of 2014 the Chicago District (Region 13) of the National Labor Relations Board (NLRB) held that Northwestern University football players qualified as employees and could unionize and bargain collectively.  Although this decision was later overturned, the national level NLRB’s final holding specifically targeted unionization efforts at private schools – leaving the door wide open to revisit this issue at some point with respect to public universities.

Although the Regional decision was reversed, I was interested in Peter Sung Ohr’s (Director of Region 13) analysis, especially with respect to athletic scholarships.  He noted that although student-athletes don’t officially receive paychecks from universities, they do receive “a substantial economic benefit for playing football” in the form of scholarships.  He also focused on the extent of control exerted by coaches on players (something that has been touched on quite a bit in academic literature) and the amount of time players spend on football related activities, ultimately concluding that receiving scholarships in exchange for playing football amounts to a contract-for-hire between employer and employee.

I was inspired to write my 3^rd sports/ tax paper, Northwestern, O’Bannon And the Future: Cultivating a New Era For Taxing Qualified Scholarships based on Ohr’s analysis in conjunction with the similarly-timed O’Bannon v. NCAA case where D-I athletes settled a $40 million lawsuit for the improper use of their likenesses.  In this paper my colleague Adam Epstein and I analyzed whether these cases, combined with other recent efforts by student-athletes to unionize and mobilize, could redefine the principal that select student-athletes aren’t really unpaid amateurs, but instead employees who earn scholarships in exchange for services rendered.  We also considered whether the IRS can realistically treat scholarships received by student-athletes as excludable from gross income if they are one day characterized as employees of their universities, specifically focusing on relevant historical cases and the direct language of the Internal Revenue Code.

Ultimately, we concluded that if select student-athletes are characterized as employees of their institutions at some point in the future, the IRS may  be hard pressed to reevaluate whether their scholarship amounts are part of a greater overall compensation package that is subject to taxation.  I should note that this particular paper doesn’t focus on the tax effects of the hypothetical prototype of the pay-for-play model (where student-athletes would receive cash in exchange for playing sports) but instead concentrates on the evolving relationship between institution and student-athlete, and the effect that characterizing student-athletes as employees could have on the taxability of their athletic scholarships in the future.

Scholarship Highlight: David Min on Corporate Political Activity

UC Irvine law professor, David Min, has a new article titled, Corporate Political Activity and Non-Shareholder Agency Costs, in theYale Journal on Regulation.  Professor Min examines corporate constitutional law  in recent examples such as Citizens United, through the lens of nonshareholder dissenters.  

The courts have never considered the problem of dissenting nonshareholders in assessing regulatory restrictions on corporate political activity. This Article argues that they should. It is the first to explore the potential agency costs that corporate political activity creates for nonshareholders, and in so doing, it lays out two main arguments. First, these agency costs may be significant, as I illustrate through several case studies. Second, neither corporate law nor private ordering provides solutions to this agency problem. Indeed, because the theoretical arguments for shareholder primacy in corporate law are largely inapplicable for corporate political activity, corporate law may actually serve to exacerbate the agency problems that such activity creates for non-shareholders. Private ordering, which could take the form of contractual covenants restricting corporate political activity, also seems unlikely to solve this problem, due to the large economic frictions facing such covenants. These findings have potentially significant ramifications for the Court’s corporate political speech jurisprudence, particularly as laid out in Bellotti and Citizens United. One logical conclusion is that these decisions, regardless of their constitutional merit, make for very bad public policy, insofar as they preempt much-needed regulatory solutions for reducing non-shareholder agency costs, and thus may have the effect of inhibiting efficient corporate ordering and capital formation. Another outgrowth of this analysis is that nonshareholder agency costs may provide an important rationale for government regulation of corporate political activity.

In examining corporate political activity, Professor Min, expertly blends and connects agency theory to corporate theories of the firm.  He rebuts traditional arguments against nonshareholder constituents such as residual interest holders (shareholders), the role of private ordering and provides 3 detailed case studies illustrating the costs of CPA on nonshareholder constituents. Among the proposals and options explored to mitigate these agency costs, Professor Min suggests that the existence of agency costs to nonshareholders--an area heretofore unexamined in corporate law--could justify a regulatory intervention.

 

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