Business Law Prof Blog

Note to the White House: More Energy Supply Drives Down Prices

Energy and business are closely related, and the former often has a direct impact on latter.  At Whitehouse.gov, the President has posted his energy plan, making the following assertions: 

Sound energy policy begins with the recognition that we have vast untapped domestic energy reserves right here in America. The Trump Administration will embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans. We must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own. We will use the revenues from energy production to rebuild our roads, schools, bridges and public infrastructure. Less expensive energy will be a big boost to American agriculture, as well.

It is certainly true that we "have vast untapped domestic energy reserves right here in America." It has brought some wealth and prosperity to the nation, and low oil prices because the country "embrace[d] the shale oil and gas revolution to bring jobs and prosperity to millions of Americans." However, low oil and gas prices (which largely remain) have slowed that growth and expansion because shale oil and gas exploration and production was wildly successful. 

The President says, "We must take advantage of the estimated $50 trillion in untapped shale, oil, and natural gas reserves, especially those on federal lands that the American people own."  But it's not clear how that's helpful. That is, selling our (the American people's) assets when the market is at or near record lows doesn't seem like very good asset management.  

The plan is to "use the revenues from energy production to rebuild our roads, schools, bridges and public infrastructure."  I am very fond of all of these things, though I am skeptical that the federal government should take a leading role in all of them. I am open to the discussion.  But, if we're selling our assets at pennies on the dollar of historic value, I am particularly skeptical of the benefits. 

"Less expensive energy will be a big boost to American agriculture, as well." Low energy costs do help agriculture. That is certainly true.  But notice that making energy even less expensive means we get less for our assets, and we're dumping more cheap energy into a market where private businesses in the oil and gas sector are already having a hard time.  

Facilitating a boom from cheap energy means investing in new jobs to use the energy, not just getting more of the energy.  Plants that use our cheaper fuels to make and build new products could help, but it's never easy.  High energy prices can stifle an economy, but low ones rarely spur growth.  About a year ago, an Economist article from January 2016 remains accurate, as it explained that sudden and major price increases can slow an economy rapidly, as we saw in Arab oil embargo of 1973. However, "when the price slumps because of a glut, as in 1986, it has done the world a power of good. The rule of thumb is that a 10% fall in oil prices boosts growth by 0.1-0.5 percentage points."  

The article further explains: 

Cheap oil also hurts demand in more important ways. When crude was over $100 a barrel it made sense to spend on exploration in out-of-the-way provinces, such as the Arctic, west Africa and deep below the saline rock off the coast of Brazil. As prices have tumbled, so has investment. Projects worth $380 billion have been put on hold. In America spending on fixed assets in the oil industry has fallen by half from its peak. The poison has spread: the purchasing managers’ index for December, of 48.2, registered an accelerating contraction across the whole of American manufacturing. In Brazil the harm to Petrobras, the national oil company, from the oil price has been exacerbated by a corruption scandal that has paralysed the highest echelons of government.

I am all for a new energy plan to help the economy grow, and I support continued energy exploration and production as long as it is done wisely, which I firmly believe can be done.  But adding new competitors (by allowing more exploration on federal lands) simply won't help (and it really won't help increase coal jobs). More supply is not the answer in an already oversupplied market.  And the current proposal is just giving away assets we will want down the road. 

Susilo Institute for Ethics Symposium - June 15-17 - Boston, MA

Conference information from an e-mail I recently received. 

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The second annual Susilo Symposium of the Susilo Institute for Ethics in the Global Economy will be held on June 15-17, 2017 at Boston University Questrom School of Business.

The event will feature distinguished and varied speakers, including Professor Francesca Gino of Harvard Business School, and site visits at Aeronaut Brewing, Bright Horizons, and Fenway Park, among other exciting area companies.

The Susilo Symposium will be part of a new Global Business Ethics week, which begins at Bentley University from June 12-15 for the Global Business Ethics Symposium and teaching workshop, and then will move to BU for June 15-17.

The event promises an audience of both scholars and practitioners from around the world. All seek to explore and exchange ideas in a unique and interactive forum about the role of ethics in the global economy.

This year’s Susilo Symposium follows the inaugural symposium, which was held in May 2016 in Surabaya, Indonesia. Featuring foremost business, academic, and political leaders, it reflected on “Global Business Ethics – East Meets West.”

What to Expect

The program is directed specifically toward both academics and practitioners. Our hope is that attendees will learn from each other and take away ideas and practices that they can implement immediately.

It will feature onsite visits to global corporations and the latest start-ups, from which you will learn about today’s cutting-edge responses to challenging dilemmas.

Symposium sessions will range from traditional academic paper presentations on the most recent research on global ethics, to interactive panels of faculty and practitioners discussing their shared perspectives, to active problem-solving and learning, to programs showcasing effective practices by leading corporate decision-makers.

The conference design intentionally builds in plenty of opportunities for networking among your colleagues and between academics and practitioners, including a Thursday evening social event, a Friday luncheon and Friday evening reception.

Registration & Questions

Registration is open now. If you have additional questions, please contact us by e-mail at [email protected]

Public Officials And Securities Investments - A Parade of Horribles?

Although it may have gotten a bit lost in the shuffle of the POTUS's first ten days in office, the nomination of Representative Tom Price for the post of Secretary of Health and Human Services has received some negative attention in the press.  In short, as reported by a variety of news outlets (e.g., here and here and here), some personal stock trading transactions have raised questions about whether Representative Price may have inappropriately used information or his position to profit personally from securities trading activities, in violation of applicable ethical or legal rules.  This post offers some preliminary insights about the nature of the concerns, which are set forth in major part in this New York Times editorial from January 18, and joins others in calling for reform.

Concerns about legislators' securities trading activities are not new.  As you may recall, a 2011 study (using data from 1985-2001) found that members of the U.S. House of Representatives do make abnormal returns on stock trades.  A 60 Minutes exposé, "Insiders," then followed, which helped catalyze the adoption in 2012 of the Stop Trading on Congressional Knowledge ("STOCK") Act.  A recently released paper catalogues this history and effects on those abnormal returns.  The findings in this paper, which focuses on Senate trading transactions, are summarized below.

Before “Insiders” aired, the market-value weighted hedged portfolio earns an annualized abnormal return of 8.8%. This abnormal return comes entirely from the sell-side of the portfolio, which earns an annualized 16.77% abnormal return. Post-60 Minutes, we find no evidence of continued outperformance in our market-value weighted portfolios. On average, abnormal returns to the market-value weighted sell portfolio are 24% lower post-60 Minutes, relative to the pre-60 Minutes sample. Taken together, our evidence suggests that, Senators, on the whole, outperformed the market pre-60 Minutes, and this systematic outperformance did not survive the attention paid to Senators’ investments surrounding the broadcast of “Insiders” and subsequent passage of the Stop Trading On Congressional Knowledge (STOCK) Act.

Continue reading

ICYMI: Tweets From the Week (Jan. 29, 2017)

"startup’s valuation fell..avg of 17-22% when..founder stayed on as CEO or chairman after..first 2 years" https://t.co/PBbQzN9iij #corpgov

— Stefan Padfield (@ProfPadfield) January 25, 2017

Are courts split on how to "apply SLUSA to state law claims for breaches of contract and fiduciary duty"? https://t.co/9eQtyOLf9e #corpgov

— Stefan Padfield (@ProfPadfield) January 27, 2017

"public policy exception to the employment-at-will doctrine ... recognized in Ohio for over 25 years" https://t.co/OGbQiv4wow #corpgov

— Stefan Padfield (@ProfPadfield) January 27, 2017

ICYMI: "First Amendment allows the government to bar employees from speaking in their official capacity" https://t.co/reVqq7CwR2 #corpgov

— Stefan Padfield (@ProfPadfield) January 28, 2017

"median..incomes are basically the same..as they were [25 yrs] ago even though GDP has grown by almost 80%" https://t.co/Zq42FlwdxG #corpgov

— Stefan Padfield (@ProfPadfield) January 28, 2017

That was unexpected – Delaware reconsiders preclusion in light of due process

I’ve previously posted about Delaware’s vulnerability – namely, to the extent it tries to police shareholder litigation through procedural rather than substantive legal standards, it is vulnerable to losing disputes to other jurisdictions that have rules deemed more favorable by litigants.  Plaintiffs and defendants can reach sweetheart merger settlements in jurisdictions that examine the terms less searchingly; defendants can win a dismissal of all claims filed by weak plaintiffs in one jurisdiction and estop stronger plaintiffs who bring suit in Delaware.

So, for example, Delaware encourages derivative plaintiffs to seek books and records under Section 220 before bringing a lawsuit, but that takes time.  A plaintiff in another jurisdiction might simply file a lawsuit right away, and if that suit is dismissed, the dismissal can preclude the Delaware plaintiff– which only gives the Delaware plaintiff less incentive to seek books and records in the first place.

Well, until now.  In Cal. State Teachers Ret. Sys. v. Alvarez, 2017 WL 239364 (Del. 2017), that exact scenario occurred in the long-running action against Wal-Mart for violations of the foreign corrupt practices act in Mexico.  While the Delaware plaintiffs sought books and records to bolster a derivative claim, federal plaintiffs in Arkansas ploughed ahead using public information, only to see their suit dismissed for failure to plead demand futility.  And Delaware Chancery concluded that the Arkansas ruling was res judicata against the Delaware plaintiffs.

Not so fast, said the Delaware Supreme Court last week.  Following VC Laster's analysis in In re EZCORP Inc. Consulting Agreement Deriv. Litig., 130 A.3d 934 (Del. Ch. 2016), the Supreme Court expressed concern that, as a matter of constitutional due process, until demand futility is established, any single group of plaintiffs represents only its own interests, and not the interests of the corporation.  Therefore, they bind only themselves – not the corporation – in any litigation, and a dismissal of one claim cannot preclude a subsequent claim.

The Court did not so hold definitively, though; it simply remanded to Chancery for further consideration of the issue.

This is certainly a dramatic solution to the problem of multiforum shareholder litigation.  Prior proposals have suggested a more searching inquiry into the adequacy of the first plaintiff; this approach, however, would mean that in derivative actions, no plaintiff is ever precluded by another plaintiff’s failure to plead demand futility.  Talk about firing off a canon to kill a bug.

It still leaves Delaware in a precarious position, because it rests wholly on federal constitutional law – and there’s no telling how federal judges will rule once they get hold of the problem.  They certainly don’t have the same interests in protecting Delaware law that Delaware has.

The Star Trek Fan Film Case, part 2 - Thoughts on the Fair Use Opinion

The Star Trek copyright lawsuit I previously wrote about settled last Friday.  This was not a surprise. Defendant Axanar’s best bet was arguing that its fan film made fair use of the Star Trek works. The court, however, foreclosed that defense a few weeks ago.  This post addresses a few points (out of many) from the opinion ruling against Axanar’s assertion of fair use.  I’m not certain that the judge got the multi-factor analysis incorrect, but I do worry about how some aspects of the opinion will be applied in the future. 

When assessing fair use, courts must review whether the work is commercial or not.  For-profit use weighs against the defense.  Axanar argued that its film was non-commercial because it would be freely downloadable.  The court rebuffed, positing that “indirect commercial benefit” is sufficient to render a use commercial. While there is precedent supporting this proposition, the opinion expanded the idea of indirect commercial benefit a step too far. 

The court held that defendants’ intent to create “other job opportunities” through the Axanar project rendered it commercial and thus, disfavored fair use.  The problem is that almost any author, film producer, etc. hopes that their projects will be successful and create future job prospects.  Accordingly, this consideration will disfavor fair use in almost all situations under the Axanar opinion. 

To be fair, there was evidence that defendants attempted to leverage their project into new business opportunities, and that probably supports the “commercial” determination. This fact, however, was not elaborated on in the opinion, and that nuance is unlikely to be referenced in future citations to the case.   

My second concern with the fair use analysis pertains to the court’s assessment of the “Amount and Substantiality of the Portion Used.” Under this factor, the more of the copyrighted work that is used (in both volume and importance), the less likely the defense is applicable. The court found that Axanar’s use of many details from the Star Trek universe (e.g., Vulcans, phasers, etc.) disfavored fair use.  There was no discussion of whether Axanar used primary plots or characters from Star Trek.

This precedent again casts broad shadows. Under the opinion, stories that take place in a preexisting fictional world (e.g., fan works) will almost always be disfavored as a fair use (regardless of how much of the actual plot is used).  Works of that type commonly use small details to stay consistent with the original universe, and thus, under the Axanar opinion, will usually be disfavored as a fair use.  I doubt the court intended the “amount used” consideration to disfavor fair use for almost all works of this nature (including most fan productions).  Again, while the court’s final conclusion may be correct, the precedent it established seems to be unnecessarily broad.

Reviving the IRAC Conclusion

Many, if not most, law professors teach their students the IRAC framework --- Issue - Rule - Analysis - Conclusion --- to use in addressing legal issues and answering exam essays.

I even teach my undergraduate students the IRAC framework, and find it useful in teaching critical thinking skills.

However, like many of my former law professors, I usually underemphasize the importance of the conclusion. Of course you have to get the issue and rule correct to start, but the meat of the answer is in the fact and rule-based analysis. The conclusion, I often say, can often go either way, especially on the thorny exam issues.

Since I started hearing the term "post truth," I have been rethinking the way I teach IRAC and the underemphasized conclusion. While it is still clearly important to teach and test analysis, I am starting to realize the value of identifying the strongest and best conclusion. This may prove difficult to test, as law exams often focus on unsettled areas of law, but perhaps I will include a few more settled portions to see if students can identify legal issues with a clearer correct answer.  

Belmont Health Law Journal - What’s Next? The Movement from Volume to Value-based Healthcare Delivery

The Belmont Health Law Journal is hosting its first symposium tomorrow, January 27th.

The theme of the symposium will be What's Next? The Movement from Volume to Value-based Healthcare Delivery, and will feature Congressman Jim Cooper as keynote speaker. 

Information is available here.

Registration is from 8:30am to 9:00am. Speakers will present from 9:00 am until noon. CLE credit and lunch provided.

Delaware Pre-suit Demand Refusal & Bad Faith Standards

Spoiler alert:  wrongful refusal of demand and bad faith standards are the same in recent Delaware Court of Chancery case: Andersen v. Mattel, Inc., C.A. No. 11816-VCMR (Del. Ch. Jan. 19, 2017, Op by VC Montgomery-Reeves).  

But sometimes a reminder that the law is the same and can be clearly stated is worth a blog post in its own right.  Professors can use this as a hypo or case note and those in the trenches can update case citations to a 2017 (and 2016) case.

In Andersen v. Mattel, Inc., VC Montgomery-Reeves dismissed a derivative suit, holding that plaintiff did not prove wrongful refusal of pre-suit demand.  The derivative action claimed that the Mattel board of directors refused to bring suit to recover up to $11.5 million paid in severance/consulting fees to the former chairman and chief executive officer who left in the wake of a falling stock price. Plaintiff challenged disclosure discrepancies over whether Stockton resigned or was terminated and the resulting entitlement to severance payments.  Mattel's board of directors unanimously rejected the demand after consultation with outside counsel, 24 witness interviews and a review of approximately 12,400 documents.

The relied upon case law is unchanged, but the clear recitation of the law is worth noting:

Where, as here, a plaintiff makes demand on the board of directors, the plaintiff concedes that the board is disinterested and independent for purposes of responding to the demand. The effect of such concession is that the decision to refuse demand is treated as any other disinterested and independent decision of the board—it is subject to the business judgment rule. Accordingly, the only issues the Court must examine in analyzing whether the board’s demand refusal was proper are “the good faith and reasonableness of its investigation. (internal citations omitted)

To successfully challenge the good faith and reasonableness of the board's investigation, Plaintiff's complaint was required to state particularized facts raising a reasonable doubt that: 

(1) the board’s decision to deny the demand was consistent with its duty of care to act on an informed basis, that is, was not grossly negligent; or (2) the board acted in good faith, consistent with its duty of loyalty. Otherwise, the decision of the board is entitled to deference as a valid exercise of its business judgment.

First, Plaintiff challenged the board's demand refusal on the grounds that they did not disclose the investigation report or the supporting documents in conjunction with the demand refusal.  The Court was unpersuaded given that Plaintiff had the right to seek the report and records through a Section 220 demand, but chose not to do so.

Second, Plaintiff challenged the board's demand refusal on the grounds that it failed to form a special committee. Absent any facts that the Mattel board considering the demand was not independent, there was no requirement for the board to form a special committee.

Third, and final, Plaintiff challenged the board's good faith in rejecting the demand on the grounds that Stockton's employment was not voluntarily terminated. The court cautioned that:

[T]he question is not whether the [b]oard’s conclusion was wrong; the question is whether the [b]oard intentionally acted in disregard of [Mattel’s] best interests in deciding not to pursue the litigation the Plaintiff demanded. [T]he fact that the [b]oard’s justifications for  refusing [the] demand fall within ‘the bounds of reasonable judgment’ is fatal to [the] claim that the refusal was made in bad faith. (citing to Friedman v. Maffei, (Del. Ch. Apr. 13, 2016))

Francis Pileggi at the excellent Delaware Corporate and Commercial Litigation Blog first brought this case to my attention.  Practitioners and Professors alike should be certain to include his blog on your weekly round up.  He is a sure source of concise and insightful summaries of the latest Delaware court developments.  

-Anne Tucker

Alaska LLC Veil Piercing at Crossroads: A Chance to Get it Right

Friend and co-blogger Marcia Narine Weldon sent me a news article from Alaska discussing a "piercing of the corporate veil" claim for an LLC.  

The City and Borough of Juneau demolished the Gastineau Apartments and is trying to get hold members of Gastineau Apartments LLC, apparent owners of the building liable for the $1.4 million demolition costs. Demolition cost more than the land is worth, so the suit is seeking to have the owners of the LLC, Camilla and James Barrett, pay the bill because they missed deadlines to repair or demolish the property.

 

The article reports:

At issue before Juneau Superior Court Judge Philip Pallenberg is the legal concept of “piercing the corporate veil.” It would allow legal action against the Barretts, who controlled Gastineau Apartments LLC.

Defense Attorney Robert Spitzfaden had argued that the Barretts should remain shielded from liability. But the judge noted that the defendants had allowed their limited liability corporation to be dissolved after missing filing deadlines with the state.

“It’s clear that the Barretts were not always clear to observe the formal legal requirements of their LLC,” Judge Pallenberg said from the bench.

A quick review of Alaska LLC law did not make clear to me that LLCs in the state have formal requirements that would be implicated in this case.  If the main reason that the LLC did not pay the bills was a mere lack of money, there is no reason to pierce the veil. It's just a failed venture.  Sure, the Barretts should have gone followed the appropriate processes, but it cannot be that the fact that the Barretts "allowed their limited liability corporation [author's note: it's an LLC] to be dissolved after missing filing deadlines with the state" is sufficient to support veil piercing."  

Imagine the same scenario, but the building had value. Would missing deadlines and allowing the land owned by LLC to be automatically transferred to the Barretts?  Even if there were other creditors?  I think not.  

Perhaps there is more to this case than the article reveals, but this looks a lot like a lack of entity funds is the only issue, and a lack of funds (on its own) should not be sufficient for veil piercing, especially in a property case where the property can be forfeited.  If the city or state wants to make a law making individuals liable, then fine, but this looks like a bad case for veil piercing and a possible summary judgment case. I look forward to seeing if Alaska analyzes this one right at trial.  

A New Resource for Teaching Transactional Business Law

Just a quick post today to alert you to a new teaching text that you may want to consider if you teach business planning or another similar offering focusing on transactional business law.  My UT Law colleagues George Kuney, Brian Krumm, and Donna Looper are coauthors of the recently released teaching text, A Transactional Matter.  The description on amazon.com follows.

A Transactional Matter gives users a summary of a basic transaction from initial choice of entity for a new venture through the harvest of that venture through a sale of substantially all its assets to an acquirer. This book allows students to get a feel for how transactional lawyering actually works―examining client objectives, legal options, client counseling, due dilligence, documentation and implementation.

This book is available in both a print version and electronic version. The e-version has live hyperlinks to the underlying transactional documents and statutes, regs, and cases. The print version will be supported by a website giving access to the same materials. Both the e-book and website of print version will feature extensive hyperlinks to source documents and legal authorities.

The three coauthors bring to this book a wealth of business law experience in a variety of contexts (from bankruptcy to general practice).   Overall, the book represents a very accessible set of teaching materials.  In fact, a student in my transaction simulation course module (which focuses on bylaw drafting) has already posted an excerpt to our class website, showing the immediate value of the text to my students (and maybe yours . . .).  If you use the book, please let me know how and how it worked for you.

[FYI, my colleagues also are coauthors of A Civil Matter, a civil procedure/litigation introduction for 1L students, in case that's more up your alley.]

[Added 1/24/2017: Here is the link to the West Academic page that Jeff Lipshaw mentions in his comment, for those who are interested.]

ICYMI: Tweets From the Week (Jan. 22, 2017)

"10 biggest corporations together have revenue greater than the 180 poorest countries combined" https://t.co/4Pwd5RWWl2 #corpgov

— Stefan Padfield (@ProfPadfield) January 16, 2017

"Trump has discovered he can move the world’s largest global corporations w/ simple, 140-character tweets." https://t.co/9daw9ASzXB #corpgov

— Stefan Padfield (@ProfPadfield) January 17, 2017

"corporate titans ... more skeptical about the benefits of integrating people, companies and governments" https://t.co/r2Uh507fKd #corpgov

— Stefan Padfield (@ProfPadfield) January 17, 2017

"Allergan Paying $15 Million Penalty for Disclosure Failures During Merger Talks" https://t.co/L4CWhlzdpB #corpgov

— Stefan Padfield (@ProfPadfield) January 17, 2017

"The average small-business owner is spending at least $12,000 every year dealing with regulations" https://t.co/vuCFP5ypQR #corpgov

— Stefan Padfield (@ProfPadfield) January 18, 2017

Saturday Movie Blogging - The Founder

I’ve been waiting for The Founder to open for months.  Starring Michael Keaton as Ray Kroc, it tells the story of the founding of McDonald’s restaurants.  As business junkies and professors know, McDonald’s was an innovation: it created the modern franchise, identical restaurants run by individual entrepreneurs in locations across the country and, eventually, the world.  It also represented a critical development in the history of fast food, transferring the assembly line from the factory floor to the kitchen.  Most basic business classes talk a lot about McDonald’s, because the franchise system – and the degree of control that McDonald’s corporate exercises – raise interesting questions about agency law and the definition of employment.

[Spoilers under the cut, not very if you already know the story]

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Thoughts on the Star Trek Fan Film Copyright Lawsuit

A copyright lawsuit against Star Trek fan film creator Axanar Productions is going to trial this month. CBS and Paramount alleged infringement after Axanar raised over $1 million to produce a freely downloadable Star Trek movie and a previously released teaser. The case raises a host of interesting issues, which I’ll look at over a couple of posts.

I found this case notable for how it fits into the expansion of copyright protections and the influence of repeat litigants. Copyright has evolved to protect increasingly granular elements of a story (i.e., protecting discrete things in a story, not the entire work). It was once questionable if an isolated character could be protected, but now copyright extends to means of transportation (Batmobile), monsters (Godzilla), and implements of mass murder (Freddy Krueger’s glove). 

This is good for copyright holders. It is easier to prove infringement a copyrighted light saber than it is to show that someone copied the story of a farm boy who learned a mystical religion, got a light saber, found out his dad was Darth Vader, and so on. The Star Trek suit falls into the trend of increasingly granularity; CBS and Paramount assert protection of individual phrases (“beaming up”), made-up languages (Klingon), and fictional styles of architecture.

These allegations are not surprising, but they are interesting as part of a continuing trend of large-scale copyright holders attempting to protect small elements of a story. These parties will be repeat litigants, and they aim to craft beneficial precedent. It behooves them to allege granular protection, see if any assertions catch the court’s favor, and proceed with likely winners. Losing allegations are dropped or the case settled. Content owners thus secure caselaw supporting granular (easily infringed) copyright, without creating adverse precedent. This is smart business, but limits authors and filmmakers who must avoid these copyrights.

I’m also curious about the message sent by this case. Most fan fiction/films are either tacitly accepted by copyright holders or endorsed as advertising. This lawsuit will certainly chill the production of fan fiction and films—especially high-end works. Was Paramount so concerned about competition from fans that it was willing to lose the goodwill that Axanar could have generated? A million dollar fan film might have "competed" with Star Trek movies to some extent, but it almost certainly would have created significant buzz among fans. I wonder if other franchise-owners would have made the same decision. At this point, I doubt they’ll have to; I wouldn’t expect any fan to be willing to venture into “high-end” fan works anytime soon for fear of a lawsuit. 

Signing Kate Grace

If you were at the SEALS Conference panel on crowdfunding last summer, you heard me talk a bit about women’s athletic apparel company Oiselle and the interesting running team part of their business.

In addition to building a team of amateur runners, Oiselle sponsors a number of professional athletes. Kate Grace was the first of the sponsored athletes, signing with Oiselle in 2012. Last year Kate won the U.S. Olympic Trials in the 800m, and she made the Olympic finals in the same distance.

Kate Grace’s sponsorship contract with Oiselle expired at the end of 2016, and Oiselle recently posted a classy goodbye.

A 2011 Yale University graduate, and now an Olympian, Kate Grace is talented, promising, and instantly likeable. She has already accomplished a great deal in the running world, but she is likely to accomplish even more. Kate Grace is on record as praising Oiselle as incredibly supportive of her and full of people with whom she has strong relationships.

So why didn’t Kate Grace and Oiselle sign a sponsorship contract for 2017 and beyond? This is a question I may pose to my negotiation classes.

To be clear, everything below is pure speculation. I have no inside knowledge. I do not know anyone at Oiselle or Kate Grace personally.

Assuming no personal fallouts, the most obvious reason for Kate Grace to move on is financial. Oiselle is still a niche brand and now that Kate is an Olympian, she is likely receiving much more lucrative offers. 

But if I were on the Oiselle management team, and I wanted to keep Kate Grace as a sponsored athlete, I would be creative with the contract offer terms. Oiselle may not be able to match the cash offers of the larger companies, but Oiselle could do something like offer significant equity in the company, which larger companies are highly unlikely to do. Oiselle could also offer Kate Grace a longer-term contract than some of the big companies that will probably only want to sponsor her at her peak. Finally, Oiselle could offer her a spot on their board of directors and/or employment in another role, which may last past her running days. All of those options would be creative ways to negotiate a contract to keep top talent.

If not Oiselle, then who will sponsor Kate Grace? It is risky to predict, but I think New Balance is the best fit, based on brand and values. That said, New Balance already sponsors quite a number of strong female distance and mid-distance runners. ASICS or Adidas probably need to sponsor someone like Kate Grace the most, so they will probably throw a lot of money at her. Nike seems to have the deepest pockets, but I would be surprised if Kate Grace signed with them after how they, allegedly, treated Boris Berian, and what her fellow Oiselle athlete Kara Goucher had to say about the Nike Oregon Project. 

Update, 1/28/17: Well, this is somewhat surprising. Kate Grace recently signed with Nike. While Nike has gotten some bad press over the past year and is seen by some as the anti-Oiselle, Nike does have a rich track & field history, is an official sponsor of the U.S. Olympic team, has amazing facilities (including a tree-lined track), and was founded by a middle distance runner and his track coach. I am willing to wager that Kate Grace entertained multiple offers. I wish I could see the terms and analyze what influenced her. As mentioned in the original post, Nike probably has the deepest pockets and they could have blown the other offers out of the water from a financial perspective. Also, Nike has focused on track & field more intensely, for a longer period of time than most, if not all, of its competitors. Regardless of the terms and the sponsor, I do wish Kate Grace the very best running going forward.   

The Importance of the Business Judgment Rule

Bernard Sharfman, a prolific author on corporate governance, has written his fourth article on the business judgment rule. The piece provides a thought-provoking look at a subject that all business law professors teach. He also received feedback from Myron Steele, former Chief Justice of the Delaware Supreme Court, and William Chandler III, former Chancellor of the Delaware Court of Chancery during the drafting process. I don’t think I will assign the article to my students, but I may take some of the insight when I get to this critical topic this semester. Sharfman has stated that he aims to change the way professors teach the BJR.

The abstract is below:

Anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the business judgment rule (Rule) is so important. To provide a better explanation of why this is so, this Article takes the approach that the Aronson formulation of the Rule is not the proper starting place. Instead, this Article begins by starting with a close read of two cases that initiated the application of the Rule under Delaware law, the Chancery and Supreme Court opinions in Bodell v. General Gas & Elec. By taking this approach, the following insights into the Rule were discovered that may not have been so readily apparent if the starting point was Aronson.

First, without the Rule, the raw power of equity could conceivably require all challenged Board decisions to undergo an entire fairness review. The Rule is the tool used by a court to restrain itself from implementing such a review. This is the most important function of the Rule. Second, as a result of equity needing to be restrained, there is no room in the Rule formulation for fairness; fairness and fiduciary duties must be mutually exclusive. Third, there are three policy drivers that underlie the use of the Rule. Protecting the Board’s statutory authority to run the company without the fear of its members being held liable for honest mistakes of judgment; respect for the private ordering of corporate governance arrangements which almost always grants extensive authority to the Board to make decisions on behalf of the corporation; and the recognition by the courts that they are not business experts, making deference to Board authority a necessity. Fourth, the Rule is an abstention doctrine not just in terms of precluding duty of care claims, but also by requiring the courts to abstain from an entire fairness review if there is no evidence of a breach in fiduciary duties or taint surrounding a Board decision. Fifth, stockholder wealth maximization (SWM) is the legal obligation of the Board and the Rule serves to support that purpose. The requirement of SWM enters into corporate law through a Board’s fiduciary duties as applied under the Rule, not statutory law. In essence, SWM is an equitable concept.

 

 

Girls' Club: Corporate Governance at Mutual Funds & Pensions

The New York Times DealB%k reports today on the role women are playing in shaping corporate governance at the largest mutual funds.

 "The corporate governance heads at seven of the 10 largest institutional investors in stocks are now women, according to data compiled by The New York Times. Those investors oversee $14 trillion in assets."  

Mutual and pension funds are some of the largest stock block holders casting crucial votes in director elections and on shareholder resolutions that will span the gamut from environmental policy to political spending to supply chain transparency.  While ISS and other proxy advisory firms have a firm hand shaping proxy votes^FN1 (and have released new guidelines for the 2017 proxy season), that $14 trillion in assets are voted at the behest of women is new and noteworthy.  As the spring proxy season approaches-- it's like New York fashion week, for corporate law nerds, but strewn out over months and with less interesting pictures--these asset managers are likely to vote with management. ^FN2 Still, there is growing consensus that institutional investors' corporate governance leaders are "working quietly behind the scenes to advocate for greater shareholder rights" fighting against dual class stock and fighting for gender equality on corporate boards, to name a few.

I now how a new ambition in life: get invited to the Women in Governance lunch.  

FN1:  See Choi et al, Voting Through Agents: How Mutual Funds Vote on  Director Elections (2011)  

FN2: Gregor Matvos & Michael Ostrovsky, Heterogeneity and Peer Effects in Mutual Fund Voting, 98 J. of Fin. Econ. 90 (2010).

-Anne Tucker

Oops: Oregon District Court Rule For LLCs that are Defined as Corporations

Here we go again. The Oregon Federal District Court has a rule with an incorrect reference to LLCs on the books: 

In diversity actions, any party that is a limited liability corporation (L.L.C.), a limited liability partnership (L.L.P.), or a partnership must, in the disclosure statement required by Fed. R. Civ. P. 7.1, list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens. If any owner/member/partner of the L.L.C., L.L.P., or partnership is another L.L.C., L.L.P., or partnership, then the disclosure statement must also list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens.

U.S. Dist. Ct. Rules D. Or., Civ LR 7.1-1 (emphasis added). This rules is designed to assist with earlier disclosure to assist in determining diversity jurisdiction and other related issues. As the Practice Tip explains, 

The certification requirements of LR 7.1-1 are broader than those established in Fed. R. Civ. P. 7.1. The Ninth Circuit has held that, “[L]ike a partnership, an LLC is a citizen of every state of which its owners/members/partners are citizens.” Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). Early state citizenship disclosure will help address jurisdictional issues. Therefore, the disclosure must identify each and every state for which any owner/member/partner is a citizen. The disclosure does not need to include names of any owner/member/partner, nor does it need to indicate the number of owners/members/partners from any particular state.

The problem is that the rule defines an LLC as a limited liability corporation, while the Ninth Circuit case cited in the Practice Tip was referring to limited liability companies, which are different entities than corporations. The language from Johnson v. Columbia Properties is correct, but the Oregon District Court rule does not include traditional LLCs. It includes corporations, as per the rule's definition of LLC.  Corporations, of course, have shareholders, not members or partners, and for diversity jurisdiction purposes, "a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business." 28 U.S.C. § 1332 (2016).  Shareholders are not part of the equation. Cf. Hertz Corp. v. Friend, 559 U.S. 77, 88 (2010). 

For federal law purposes, it appears that the rule has excluded LLCs, despite the intent (and likely specific purpose) of the rule. Interestingly, Oregon law, has extended "unless context requires otherwise" the concept of LLCs to apply to partnership and corporate law. Oregon law provides: 

Unless the context otherwise requires, throughout Oregon Revised Statutes:

(1) Wherever the term “person” is defined to include both a corporation and a partnership, the term “person” shall also include a limited liability company. 

(2) Wherever a section of Oregon Revised Statutes applies to both “partners” and “directors,” the section shall also apply:

(a) In a limited liability company with one or more managers, to the managers of the limited liability company.

(b) In a limited liability company without managers, to the members of the limited liability company.

 (3) Wherever a section of Oregon Revised Statutes applies to both “partners” and “shareholders,” the section shall also apply to members of a limited liability company.

Or. Rev. Stat. § 63.002 (2015). 

 

Beyond potentially leaving limited liability companies out of the disclosure requirement, the rule could have another effect. The way the rule reads, although it does not change the underlying jurisdictional law, it could be read to change disclosure requirements. Though not the only possible reading, one could certainly read "owner" to include shareholders, which would require a corporation to disclose the states of citizenship of all shareholders.  

 

This is pretty obviously an error in drafting, as the court almost certainly intended to define LLCs as "limited liability companies." See Or. Rev. Stat. § 63.002 (2015).  And the court almost certainly did not intend to compel disclosure of all shareholders' states of citizenship.  Nonetheless, courts generally read statutes for what they say, not for what they meant to say.  This might just get a little interesting, if anyone (besides me) is paying attention.   

Welcome Professor Mike Schuster to BLPB!

Professor Mike Schuster of Oklahoma State University, Spears School of Business, will be guest blogging at BLPB for the next 4 weeks. Prior to joining Oklahoma State's faculty, Professor Schuster was at attorney at Vinson & Elkins LLP in Houston, Texas. His research is primarily in the intellectual property space, which, as we all know, is quite important to businesses.

Professor Schuster's most recent academic article, "Invalidity Assertion Entities and Inter Partes Review: Rent Seeking as a Tool to Discourage Patent Trolls" is forthcoming in the Wake Forest Law Review and his SSRN page is available here.

Please join me in welcoming Professor Mike Schuster to BLPB. 

In Honor of Martin Luther King, Jr.

Today, we again celebrate the life of a great American, Martin Luther King, Jr.  His legacy is felt in so many ways in this country every day in the year.  But today, we call him and his work out for special attention.

Many have noted that Martin Luther King, Jr. had messages for those engaged in and with business.  I have gathered some of those observations, as interpreted by a variety of folks, for today's post.  Perhaps you have favorite quotes or stories of your own from Dr. King's life that have touched your business law teaching or practice.  If so, please share them in the comments.  But here are some of the nifty ones I found.

• 9 Business Lessons from the Words of Martin Luther King Jr. (They're all good, but perhaps my favorite is: "The ultimate measure of a man is not where he stands in moments of comfort and convenience, but where he stands at times of challenge and controversy.")
• Martin Luther King: His 'dream' is great business strategy ("The reasons for King’s success were simple. First, he defined his dream, and then, he created a plan for how his dream could be realized. This same strategy can be applied with great success to businesses.")
• Martin Luther King and Leadership (This one includes a reference to a related Harvard Business School case.)
• 5 Leadership Lessons From Martin Luther King Jr. (This article features a nice story about a former president of The Harvard Crimson.)

It also seems significant to note that business awards (including these out in Colorado) have been named after Dr. King in that same spirit.

As I prepare to lead a faculty-staff-student discussion group on Wednesday at The University of Tennessee College of Law (an annual MLK week tradition at UT Law that I mentioned in a prior Martin Luther King Day post), I am reminded of the many aspects of life--including professional life--that Dr. King's actions and words touch.  They represent a rich gift to us all.  Although I aspire to incorporate much of his wisdom into my daily life, I remain grateful to have a day each year made for thoughtful reflection on how his work affects my own (and the rest of my life, too).