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Sunday, December 31, 2017

ICYMI: #corpgov Weekend Roundup (Dec. 31, 2017)

By Stefan J. Padfield

December 31, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, December 30, 2017

If a false analyst opinion falls in the computer system, does it make a sound?

By Ann Lipton

There is so much to unpack in FINRA’s recent settlement with Citigroup Global Markets over its analyst ratings. (Press release here.)

The short version is that due to a glitch in one of Citigroup’s clearing firms, there was a nearly five year period when its displayed ratings for 1800 different equity securities (buy, sell, hold) were incorrect.  Buys were listed as sells; securities that weren’t covered received a rating, etc.  As I understand it, the research reports themselves were accurate – so you could probably click through to see the true rating – but in various summaries made electronically available to customers and brokers, the bottom line recommendation was wrong.  My guess – and this is just a guess – is that some brokers and customers probably figured out that the summary ratings were unreliable and made a habit of clicking through to check the research reports, but nonetheless FINRA alleges the mistakes impacted trading in various ways, including by allowing trades in violation of certain account parameters (i.e., accounts that were supposed to be restricted to securities rated “buy,” and so forth).

The problem did not go entirely unnoticed within the firm, but there wasn’t a firm level understanding of how systematic the issue was.  So, brokers would report problems with individual ratings, and maybe they were corrected and maybe not, but no one seems to have had their eye on the system as a whole. 

So, first - wow.

Second, I can’t help but point out that European regulations will soon require that investment banks charge for their research rather than provide it “free” to brokerage clients.  This has created some rather complex questions regarding the value of analyst research as research (rather than as an entrée for schmoozing with corporate insiders, as Matt Levine has extensively discussed).  Which means we now have a new datapoint: if Citi can go nearly five years with no one caring much about systematic mistakes in its analyst recommendations, that, umm, is rather suggestive of the research’s value.  I also look forward to someone doing the empirical work to determine if these mistakes had any impact on market prices.  I mean, Citi leaves a big footprint; it’s not impossible to imagine the errors had some detectable effect on stock prices, if only briefly. 

Third, the extent to which securities laws prohibit false statements of opinion is a perennially hot topic.  Technically, Rule 10b-5, Section 11, and Section 18 prohibit false statements of fact.  Assuming the distinction between fact and opinion is a clear one (which is a whole ‘nother issue) – does that mean people are free to falsely talk up stocks as great buys (in their opinion) even when they are not?

Courts have settled on the rule that when a speaker misrepresents his own opinion – claims that he thinks a stock is a great buy when he thinks it is in fact no such thing – that is a false statement of fact, namely, about the fact of the speaker’s own opinion.  The Supreme Court has also made clear that statements of opinion may be false in the sense that they mislead about the factual basis that underlies the opinion.  Throughout this debate, it has been generally assumed that falsity in the first sense is, functionally, indistinguishable from scienter: after all, how could anyone accidentally misrepresent their own opinion about something? 

Well, it seems Citigroup has now found a way.

Interestingly, this is not a case where a company seems to have accidentally bumbled into a series of mistakes that happily worked out in the company’s favor.  In this case, the false reports were all over the map, and did not appear to result in any particular benefit to Citi.  So, it appears that once computer algorithms get involved, it is in fact possible to falsely state one’s opinion without harboring fraudulent intent.

But only up to a point - some brokers noticed problems with particular stocks and reported them, though Citi took its own sweet time about making a fix.  Does that mean the company acted with scienter with respect to particular false recommendations?  And if so, can we expect to see lawsuits?  (Loss causation will be an issue, naturally, but - well.  We can stay tuned to see if someone comes up with an argument).

December 30, 2017 in Ann Lipton | Permalink | Comments (2)

Friday, December 29, 2017

Exploring Taking a Legal Studies Professor Position in a Business School?

By Haskell Murray

We are at a time of year where schools are starting to make offers for professor position.

In business schools, the hiring process is more of a year-round affair than it is in law schools, but business schools have started to learn that they need to hire on the same schedule as law schools if they want to compete for the best legal academic talent. Also, a few business schools, such as the University of Georgia this year, have started to attend the AALS hiring conference.

As I explained a few years ago, working as a law professor in a business school can be a good bit different than working in a law school.

Business school legal studies positions have become more popular in recent years as law school hiring has diminished and as many law schools face financial difficulties. Personally, I have fielded dozens of calls from prospective academics and current law school professors, asking advice about getting a job teaching law in a business school.

The business school legal studies positions are quite diverse – vastly different pay scales, vastly different teaching loads, vastly different research expectations, and some are tenure-track and some are not. As such, I think it is smart to explore some of the following before accepting a legal studies professor position in a business school.

  • What are the research expectations, especially how does the school view law reviews? (Some business schools disregard or heavily discount law reviews because they are not “peer-reviewed” in the traditional sense. There are peer-reviewed legal journals, like the American Business Law Journal, the Journal of Legal Studies Education, and the regional ALSB related journals, but there are relatively limited publication slots. Also, business schools may use metrics for scholarship not common among law schools, and you should attempt to uncover the formal and informal tenure requirements before accepting a job.)
  • Does the business school provide WestLaw/Lexis access? (Most schools at least have Lexis, but they may or may not have access to all the law resources you need for your research.)
  • Does the business school have an ExpressO and Scholistica accounts? If not, will they reimburse for your submissions?
  • What is the teaching load/schedule? Ask not only about the number of hours, but also the number of courses, as business schools seem to have more 2-credit courses, especially at the MBA level than law schools. Also, business schools have night, weekend, and online classes, especially at the MBA level, more frequently than law schools.
  • Are there other tenure-track legal studies faculty members? If so, those faculty members likely will have fought most of the research battles mentioned above, though standards do change over time and resources are cut, so it is still worth asking those questions. I am the only tenure-track legal studies faculty member at the Massey College of Business at Belmont University, and I do miss discussing my research with knowledgeable colleagues on my hall. That said, having a law school at Belmont and nearby Vanderbilt has helped some, though I don’t make it over to either school nearly enough.
  • What is the policy on research stipends? (This varies significantly at business schools).
  • What is the policy on travel? (If you do not have legal studies colleagues in the school or nearby, you will definitely want to travel to the various ALSB conferences for work-shopping your articles and for exchanging ideas with fellow legal academics).
  • What administrative responsibilities will you have? At some schools, full-time legal studies professors are responsible for managing the legal studies adjuncts, which can take a considerable amount of time. (I do not). At some schools, legal studies professors serve as pre-law advisers to undergraduate business students. (I do, and I enjoy it, though it does mean quite a number of extra meetings and reference letters, especially in the late fall and early spring.)
  • Does the school have a pre-law major or minor or certificate program? (If so, this may give you some additional job security and may allow you to teach a variety of courses, instead of section after section of Business Law/Legal Environment).
  • Is the school AACSB accredited? There are multiple accrediting bodies in the business school space, but AACSB is clearly the best and most of the non-AACSB schools do have a bit of a second-class reputation. Also, I believe Business Law/Legal Environment is generally a required course at most (if not all) AACSB schools.   

Always happy to discuss teaching law in a business school with those who have additional questions. Good luck to everyone on the market.  

December 29, 2017 in Business Associations, Business School, Haskell Murray, Research/Scholarhip, Teaching | Permalink | Comments (0)

Thursday, December 28, 2017

Securities Arbitration Clinics

By Benjamin P. Edwards

Most Americans now struggle to save for retirement.  The ones fortunate enough to have some savings set aside often don't have much.  For help allocating those savings, many turn to commission-compensated stockbrokers.  In many instances, these stockbrokers give their clients "suitable" advice.  The advice might not be the best, but decent, suitable advice often helps substantially.

Of course, not all stockbrokers give suitable advice.  Sometimes, a financial adviser decides to chase a bigger commission and pushes a client into a direction that isn't in his or her best interest.  One financial adviser coined Brown's Law of Broker Compensation to explain the dynamic.  In short, the worse a product is for clients, the more a broker will be paid to sell it to clients.

Access to representation shifts with the amount of damages in play.  Clients with big problems can often find a eager lawyer.  Clients that suffer $15,000 in damages may struggle to find representation.  These cases are complex.  They require substantial skill and diligence to resolve.  The potential compensation for these relatively smaller cases may not motivate the private bar to provide representation.

Securities arbitration clinics provide an option.  These relatively rare clinics take on a few of these smaller matters.  They provide representation and train law students using live, complex disputes at the same time.  One clinic even works with its state regulator to provide enforcement assistance.  But there are only about fifteen of them to serve the entire nation.  Still, they are a decent resource.  If you know someone that has had a problem, consider sending them to a securities clinic for assistance.  

 

December 28, 2017 | Permalink | Comments (0)

Tuesday, December 26, 2017

Feeling Like Charlie Brown at Christmas: More LLCs as a Corporations

By Joshua Fershee

No one will  be shocked that my last post of the year is about a court referring to a limited liability company (LLC) as a "limited liability corporation."  It's wrong to do so, and it's my thing to point out when it happens.  This case is especially striking (and perhaps upsetting) because of the context of the reference.  In this 2015 case that just showed up on Westlaw (or at least, in my alerts), "Plaintiff argues that because Defendants are all limited liability corporations they must identify and prove the citizenship of their various members and that they have failed to do so." Skywark v. Healthbridge Mgmt., LLC, No. 15-00058-BJR, 2015 WL 13621058, at *1 (W.D. Pa. July 22, 2015).  They mean LLCs, not corporations.  Okay, so far this is a pretty typical mistake.  But wait! 

In this case, the defendants did not allege the citizenship of the members of the defendants' LLCs in their initial Notice of Removal, so the plaintiffs claimed that a filed  amendment was more than “technically defective.” In claiming the amendment was "minor, the defendants rely cited  O'Boyle v. Braverman, No. 08-553, 2008 U.S. Dist. LEXIS 62180 (D.N.J. Aug. 12, 2008), which found that when a party mistakenly alleged the citizenship of an LLC as a corporation, the party could still amend the allegations to properly allege the citizenship of its LLC members. 2008 U.S. Dist. LEXIS 62180, at *7. O'Boyle, like the present court on Skywark found the proposed amendment to be technical in nature. 
 
On the one hand, this is probably correct in terms of justice seeking. On the other hand, if a court were to find that such a mistake was more than minor, perhaps lawyers would get this right in the first place, which they should do.
 
In assessing the situation, the court states: 
Plaintiff is correct that the citizenship of a limited liability corporation is determined by the citizenship of its members. Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 420 (3d Cir. 2010). Defendants have sought to fix any errors that may affect diversity jurisdiction by filing a declaration that identifies the members of their limited liability corporations and allegations of their citizenship. Plaintiff raises several arguments in response to Defendants' declaration and alleges that it is insufficient to prove diversity of citizenship.
Skywark v. Healthbridge Mgmt., LLC, No. 15-00058-BJR, 2015 WL 13621058, at *3 (W.D. Pa. July 22, 2015) (emphasis added). 
 
To quote Charlie Brown, AAUGH! 
 
Didn't the court just establish that the entire issue was the distinction between corporations and LLCs?  Sigh. The mistakes are frustrating, but to add to that such a clear lack of internal consistency when the issue has been identified is darn right irritating.  
 
As I often do, I feel I must acknowledge that we're all human and we make mistakes.  Goodness knows I have made (and continue to make) more than my fair share.  I don't mean to say anyone is a bad person for making such mistakes.  But I sure would appreciate it if they were a lot less common, too.  

If you celebrated, I hope you had a great Christmas. We sure did. Wishing you and yours peace, warmth, and love in this holiday season.  

December 26, 2017 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Monday, December 25, 2017

Christmas Cheer for All!?

By joanheminway

Christmas2017(MorningBeverage)

Merry Christmas to all celebrating today.  I am enjoying a white Christmas in Pittsburgh, Pennsylvania with my dad and my brother and his husband, joined later today by my son and his fiancée (who had to work the night shift last night--she's a hospital nurse).  For the first time in many, many years--I think since before I was married in 1985--I am separated from my husband this Christmas.  He is back in Tennessee with my daughter, who celebrated her 26th birthday yesterday.  Their work schedules didn't accommodate holiday travel this year.  My daughter, in particular, worked yesterday and will work again tomorrow.  The working world is a different place now during the holidays than it was when I was a child.

As I sit here with a blood orange mimosa on Christmas morning, that observation set me to thinking about blue laws and Christmas.  (Ann and I are thinking along similar lines this week, it seems . . . .)  A lot of folks save their shopping--including shopping for alcohol--until somewhat the last minute.  This year, Christmas is on a Monday, meaning that Christmas Eve--a prime shopping day--was on a Sunday.  I wondered whether any blue laws prevented stores from being open or alcohol from being sold yesterday (or today, for that matter) . . . .

Back in 2006, when Christmas also was on a Monday, National Public Radio's All Things Considered covered this story from a South Carolina perspective.  Tennessee law, TCA § 57-3-406(e) (2016), provides as follows:

No retailer shall sell or give away any alcoholic beverage between eleven o'clock p.m. (11:00 p.m.) on Saturday and eight o'clock a.m. (8:00 a.m.) on Monday of each week. No retail store shall sell, give away or otherwise dispense alcoholic beverages except between the hours of eight o'clock a.m. (8:00 a.m.) and eleven o'clock p.m. (11:00 p.m.) on Monday through Saturday. The store may not be open to the general public except during regular business hours. Likewise, all retail liquor stores shall be closed for business on Thanksgiving Day and Christmas Day.

So, folks in Tennessee could not buy drinking alcohol yesterday from any store but can buy spirits today (absent applicable local ordinances to the contrary) from a retail store that is not a liquor store (if I am reading that correctly).

Massachusetts, my immediate former home state, has many exceptions to its blue laws, including allowing certain retail establishments to be open on Sundays, provided that rank-and-file (non-executive, non-administrative over a certain pay grade) retail employees are paid time-and-a-half if the business employs more than seven people.  See MGL c. 136, § 6(50).  This exception does not apply to any state-defined legal holiday (and to Christmas, when it is on a Sunday), but the exception does apply to the day following Christmas when Christmas occurs on a Sunday.  The exception for alcohol sales is more detailed and includes:

The retail sale of alcoholic beverages not to be drunk on the premises on Sundays by retail establishments licensed under section 15 of chapter 138; provided, however, that notwithstanding this chapter, a municipality may prohibit the retail sale of alcoholic beverages on Sundays by licensees under section 15 by vote of the city council or board of selectmen; provided further, that there shall be no such sales prior to the hour of 10:00 a.m. or on Christmas Day if Christmas occurs on a Sunday; and provided further, that establishments operating under this clause which employ more than 7 persons shall compensate all employees for work performed on a Sunday at a rate of not less than one and one-half of the employee's regular rate. No employee shall be required to work on a Sunday and refusal to work on a Sunday shall not be grounds for discrimination, dismissal, discharge, deduction of hours or any other penalty.

MGL c. 136, § 6(52).  Massachusetts apparently delegates significant control to municipalities on the alcohol issue.  The general Massachusetts blue law proscriptions are contained in MGL c. 136, § 5:

Whoever on Sunday keeps open his shop, warehouse, factory or other place of business, or sells foodstuffs, goods, wares, merchandise or real estate, or does any manner of labor, business or work, except works of necessity and charity, shall be punished by a fine of not less than twenty dollars nor more than one hundred dollars for a first offense, and a fine of not less than fifty dollars nor more than two hundred dollars for each subsequent offense, and each unlawful act or sale shall constitute a separate offense.

Even where retail establishments may be open, states may regulate work on Christmas--and on other holidays, too--designated as legal holidays by the state.  I grew up with a system of federal and state holidays that serve this purpose.  But The Legal Genealogist tells us that Christmas has not been a government-designated holiday from work for very long.  The Tennessee list for 2017 can be found here.  The Massachusetts legal holiday list is here.

Anyway, lest I bore you with my holiday blue law musings, I will close now by wishing you a happy continuing holiday season from here in Pittsburgh. Enjoy time with and memories of family and friends.  From my house to yours, this brings wishes for a lovely holiday week.  Enjoy.

December 25, 2017 in Employment Law, Family, Food and Drink, Joan Heminway, Religion | Permalink | Comments (4)

Sunday, December 24, 2017

ICYMI: #corpgov Weekend Roundup (Dec. 24, 2017)

By Stefan J. Padfield

December 24, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, December 23, 2017

It’s beginning to (not) look a lot like Christmas

By Ann Lipton

Christmas is just a couple of days away, and we all know what that means – the end of Winter break is in sight and preparation for the Spring semester must begin in earnest!

In these last few vacation days, however, I leave you with a few articles on the changing face of the Christmas business:

The down-and-out Mall Santa reinvents himself for a modern age

Sorry. Wrap It Yourself, Say Overwhelmed Online Shops

Holiday Windows Brighten a Bleak Retail Scene, but How Long Will They Last?

Merry Christmas to all who celebrate, and for the rest of us – well, I know a great Chinese place :-)!

 

 

December 23, 2017 in Ann Lipton | Permalink | Comments (0)

Friday, December 22, 2017

Imitation: Children and Students

By Haskell Murray

One of the things I have noticed in raising two young children is how both my son and my daughter are much more likely to do what I do than they are to do what I say.

For example, I’ve always encouraged my children to be active, but it wasn’t until I started running that they really started being interested in running themselves. Now, they stage mock races, love their “running shoes,” and ask which foods will make them fast. On the less positive side, when they see me looking at my phone or eating sweets, they want to do the same thing, regardless of what I say is best for them.

Similarly, I had a professor in law school who insisted that we be on-time to class. He explained all the reasons why a habit of punctuality would benefit us in our careers, but then proceeded to be late a number of times himself. He attempted to explain this away, telling us “the partners in the law firm may be late, but that doesn’t excuse lateness from you.” Nevertheless, the students did not seem to respect the professor’s cautionary tale about being late because of the own actions, and it became difficult for him to hold the line he had drawn.

While all of us are human and flawed, the above is a good reminder to me. Our children and our students are watching us, and we are likely to have a bigger impact through our example than through our words.  

December 22, 2017 in Business School, Haskell Murray, Law School, Lawyering, Teaching | Permalink | Comments (1)

Thursday, December 21, 2017

Non-Lawyer Representation in Arbitration

By Benjamin P. Edwards

As a follow-up to my last post, the comment period on whether Non-Attorney Representatives (NARS), should be allowed to represent investors in FINRA arbitration has now closed.  By my count, fifty-seven different commentators weighed in on the issue.  Although securities industry groups and the plaintiffs' bar often disagree over the right course, they share concerns about the impact of NARS on the forum.

For example, the Securities Industry Financial Markets Association, an organization that styles itself as "the voice of the U.S. securities industry," cautioned against allowing NARS to represent investors in the forum, pointing out that "FINRA has no current means to measure or ensure competency, nor respectfully, should it put itself in the business of doing so" for NARS.  The Public Investors Arbitration Bar Association (PIABA), filed an entire report, arguing that FINRA should significantly restrict NARS from representing clients in FINRA's forum.  The PIABA report also points out that a NAR's appearance in an arbitration has resulted in an investor receiving no recovery because Kansas law prohibited the representation.  That arbitration award explained that:

The Kansas Supreme Court and the Rules of Professional Conduct have consistently and firmly held non-attorney representatives are not authorized to practice law in its jurisdiction and individuals can only be represented by a lawyer, if they are not representing themselves…

Under FINRA Code of Arbitration Procedure, and as limited by Kansas law, the pleadings are stricken, as neither Cold Spring Advisory Group nor non-attorney Jennifer Tarr can represent Claimant in this arbitration, and even if we were to address the merits, Claimant has not met his burden of proof on any count, so all awards are in favor of Respondents

But Kansas is not the only state that frowns on non-attorney representation in securities arbitration.  The Illinois State Bar Association filed a letter, reiterating its position that "non-lawyers representing parties in FINRA proceedings constitutes the unauthorized practice of law."  PIABA's report explains that Alabama, Florida, Louisiana, and Washington have taken the same view.

Still, a real representation problem remains for small cases.  Law school clinics fill some of this gap.  Clinics submitting comments included St. John's, Georgia State, Cornell, and Pace.  These letters reflect different views, but showcase the value of having law clinics comment in the public's interest.

And then there is a letter from a New York attorney that has me scratching my head and attempting to figure out my own obligations after reading it.  Jonathan E. Neuman filed a comment letter arguing that FINRA should not restrict NARS from practicing in the forum.  He starts by claiming that his letter should "be accorded some additional weight as [his] comment will be against [his] own interest."  In the letter he claims that it's against his interest because "less competition in the forum [leaves] more clients potentially available for [him] to represent."  He goes on to explain that he has a relationship of some kind with "an NAR firm by the name of Stock Market Recovery Consultants" (SMRC) and that he has "recovered millions of dollars for investors in cases that originally began as SMRC cases."  If he has recovered millions because of cases sent to him by NARS, it seems unclear that the letter is truly against his interest.  Presumably, he received significant compensation for recovering millions of dollars for investors.  He might also anticipate future cases coming his way.

Yet his letter may be against his interest for other reasons.  The language in it indicates that "SMRC began employing attorneys to handle the arbitration hearings in the event a case could not be resolved." (emphasis added)  He continues and explains that "SMRC has retained me on a number of occasions to handle hearings in certain of their cases."(emphasis added). Later in the letter he describes "another case in which SMRC retained me to handle the hearing . . . "  (emphasis added).  In another instance, he uses less troubling language, referring to "cases that I have taken over from SMRC." (emphasis added).

I'm scratching my head over whether the relationship seemingly described in the letter is permitted by New York's ethical rules.  Mr. Neuman is a New York attorney.  New York's rules govern his practice.  Even if arbitration does not constitute the practice of law in New York, a lawyer providing those services in a setting that is not "distinct from legal services" must follow New York's ethics rules.  (Rule 5.7) 

There are a few provisions that seem relevant.  The first concerns fees.  Rule 5.4 states that a lawyer "shall not share legal fees with a nonlawyer" subject to certain exceptions.  None of those exceptions seem to apply here.  Although Mr. Neuman claims to have recovered millions because of cases sent to him by SMRC, he nowhere states that he shares any of the fees from those cases with NARS.  The SMRC website provides some information, seemingly indicating that they generally represent clients on a contingency basis:

STOCK MARKET RECOVERY CONSULTANTS generally works on a contingent fee.

We offer a NO  RECOVER NO FEE  alternative to other firms that will typically require a substantial up front retainer with no guarantee of a successful recovery.

The fee situation seems even more puzzling because Mr. Neuman goes on to say that "SMRC does not take any up-front fees from clients."  If SMRC takes no up-front fees and the ethics rules prohibit Mr. Neuman from sharing fees with SMRC, one wonders how SMRC receives compensation in the instances where SMRC "retains" or "employs" Mr. Neuman to take over.  

The language he uses raises questions about who he views as the client--the NARS firm or the underlying investor.  It's difficult to tell from his letter and raises questions about professional independence.  There are specific limitations on the ability of lawyers to practice with non-lawyers. Rules 5.4(c) seems particularly relevant.  That provision states:

(c) Unless authorized by law, a lawyer shall not permit a person who recommends, employs or pays the lawyer to render legal service for another to direct or regulate the lawyer’s professional judgment in rendering such legal services or to cause the lawyer to compromise the lawyer’s duty to maintain the confidential information of the client under Rule 1.6.

The issue that has me scratching my head is whether it's appropriate for Mr. Neuman to be "retained by SMRC" on "their cases."  By saying that he is "retained" by the NARS, it may be that the NARS retain some role in the representation or otherwise direct or regulate the representation.  The rules do not allow "a person who employs or pays the lawyer to render legal service for another to direct or regulate the lawyer’s professional judgment in rendering such legal services." (5.4(c)) To be fair, Mr. Neuman does not say that he keeps the NARS informed after he takes over a case or that they have any influence on his representation.  Rule 1.8(f) governs the conflict of interest when someone other than the client pays for representation.  That rule provides that:

A lawyer shall not accept compensation for representing a client, or anything of value related to the lawyer’s representation of the client, from one other than the client unless:
(1) the client gives informed consent;
(2) there is no interference with the lawyer’s independent professional judgment or with the client lawyer relationship; and
(3) the client’s confidential information is protected as required by Rule 1.6.

In theory the dynamics described by Mr. Neuman's letter would be permissible if he did not share fees with SMRC, clients all consented, Mr. Neuman retained his independent professional judgment, and he protected client confidentiality.

The letter baffles me.  Am I missing something?

December 21, 2017 | Permalink | Comments (0)

Trump, Trade, and Human Rights

By Marcia Narine Weldon

Earlier this week, President Trump gave his annual speech on national security. As in the past, he failed to stress human rights (unlike his predecessors) but did allude to cooperation, even with China and Russia, when warranted by geopolitical interests. Over the last several months, he has touted bilateral trade agreements. Coincidentally, my latest law review article on a potential bilateral investment treaty with Cuba came out the same day. As you may recall, Trump recently reversed some Obama-era policies on Cuba over human rights. My article may help his administration reconcile some of the apparent contradictions in his policies. The abstract is below. 

You Say Embargo, I Say Bloqueo—A Policy Recommendation for Promoting Foreign Direct Investment and Safeguarding Human Rights In Cuba

The United States is the only major industrialized nation that restricts
trade with Cuba. Although President Obama issued several executive orders
that have facilitated limited trade (and President Trump has scaled some
back), an embargo remains in place, and by law, Congress cannot lift it until,
among other things, the Cuban government commits to democratization and
human rights reform. Unfortunately, the Cuban and U.S. governments
fundamentally disagree on the definition of “human rights,” and neither side
has shown a willingness to compromise. Meanwhile, although some U.S.
investors clamor to join their European and Canadian counterparts in
expanding operations in Cuba, many have an understandable concern
regarding the rule of law and expropriation in a communist country. Bilateral
investment treaties aim to address those concerns.

After discussing the legal and political barriers to lifting the embargo, I
propose a partial solution to the stalemate on human rights, which will: (1)
facilitate foreign direct investment in Cuba; (2) protect investor interests
through a bilateral investment treaty; and (3) require an examination of
human rights impacts on the lives of Cuban citizens before investors can 
receive the protection of the treaty. 

Specifically, I recommend the inclusion of human rights clauses in bilateral 
investment treaties (BITs) and investor-state dispute mechanisms as a condition precedent 
to lifting the embargo. My solution also requires “clean hands” so that investors seeking relief must
provide proof that their business interests have not exacerbated or been
complicit in human rights abuses, rebut claims from stakeholders that their
business interests have not exacerbated or been complicit in human rights
abuses, or both. Finally, I propose revisions to the 2016 U.S. National Action
Plan on Responsible Business Conduct to incorporate human rights
requirements in future BITs and other investment vehicles going forward.

Anyone with connections to Rex Tillerson is free to pass it on. Happy Holidays to all.

 

December 21, 2017 in Current Affairs, Human Rights, International Business, International Law, Law Reviews, Marcia Narine Weldon | Permalink | Comments (0)

Wednesday, December 20, 2017

European Academy of Management - Sharing Economy - Call for Participation

By joanheminway

Our colleagues and friends at the Burgundy School of Business have informed me about an opportunity to participate in the European Academy of Management (EURAM) conference to be held in Reykjavik, Iceland from June 20-23.  (Note: these dates overlap with the 2018 National Business Law Scholars Conference.)  The Strategic Interest Group on Entrepreneurship (GIS 03) for the EURAM conference has established a sub-track on the "Sharing Economy" at the EURAM 2018 meeting. Djamchid Assadi of the Burgundy School of Business is coordinating this part of the program.

Djamchid is looking for both paper submissions and reviewers for the Sharing Economy sub-track.  Paper submissions are due by January 10 (2:00 pm Belgium time) and applications to serve as a reviewer are due December 31.  (Paper presenters are required to review at least two papers at the conference.)  Information about the conference can be found here.  The reviewer application form is available here.

Please contact Djamchid at [email protected] if you are interested in submitting a paper.  He can tell you how to designate the paper for GIS 03.  Apparently, in GIS 03, you can declare your interest in the "The Sharing Economy" subtract.  Please feel free to use my name in any communications with Djamchid.

December 20, 2017 in Call for Papers, Conferences, Entrepreneurship, Joan Heminway | Permalink | Comments (0)

Tuesday, December 19, 2017

Washington Marijuana Law Has Entity Type Quirks (And LLCs Are Still Not Corporations)

By Joshua Fershee

A recent case in Washington state introduced me to some interesting facets of Washington's recreational marijuana law.  The case came to my attention because it is part of my daily search for cases (incorrectly) referring to limited liability companies (LLCs) as "limited liability corporations."  The case opens: 

In 2012, Washington voters approved Initiative Measure 502. LAWS OF 2013, ch. 3, codified as part of chapter 69.50 RCW. Initiative 502 legalizes the possession and sale of marijuana and creates a system for the distribution and sale of recreational marijuana. Under RCW 69.50.325(3)(a), a retail marijuana license shall be issued only in the name of the applicant. No retail marijuana license shall be issued to a limited liability corporation unless all members are qualified to obtain a license. RCW 69.50.331(1)(b)(iii). The true party of interest of a limited liability company is “[a]ll members and their spouses.”1 Under RCW 69.50.331(1)(a), the Washington State Liquor and Cannabis Board (WSLCB) considers prior criminal conduct of the applicant.2

LIBBY HAINES-MARCHEL & ROCK ISLAND CHRONICS, LLC, Dba CHRONICS, Appellants, v. WASHINGTON STATE LIQUOR & CANNABIS BOARD, an Agency of the State of Washington, Respondent., No. 75669-9-I, 2017 WL 6427358, at *1 (Wash. Ct. App. Dec. 18, 2017) (emphasis added).  
 
The reference to a limited liability corporation appears simply to be a misstatement, as the statute properly references limited liability companies as distinct from corporations. The legal regime does, though, have some interesting requirements from an entity law perspective. First, the law provides:
 
(b) No license of any kind may be issued to:
 
. . . .
 
(iii) A partnership, employee cooperative, association, nonprofit corporation, or corporation unless formed under the laws of this state, and unless all of the members thereof are qualified to obtain a license as provided in this section;
Wash. Rev. Code § 69.50.331 (b)(iii) (West). It makes some sense to restrict the business to in-state entities given the licensing restrictions that state has, although it is not clear to me that the state could not engage in the same level of oversight if an entity were, say, a California corporation or a West Virginia LLC. 
 
The state's licensing requirements, as stated in Washington Administrative Code 314-55-035 ("What persons or entities have to qualify for a marijuana license?") provide: "A marijuana license must be issued in the name(s) of the true party(ies) of interest." The code then lists what it means to be a  “true party of interest” for a variety of entities. 
True party of interest: Persons to be qualified
 
Sole proprietorship: Sole proprietor and spouse.
 
General partnership: All partners and spouses.
 
Limited partnership, limited liability partnership, or limited liability limited partnership: All general partners and their spouses and all limited partners and spouses.
 
Limited liability company: All members and their spouses and all managers and their spouses.
 
Privately held corporation: All corporate officers (or persons with equivalent title) and their spouses and all stockholders and their spouses.
 
Publicly held corporation: All corporate officers (or persons with equivalent title) and their spouses and all stockholders and their spouses.
Multilevel ownership structures: All persons and entities that make up the ownership structure (and their spouses).
Wash. Admin. Code 314-55-035. 

This is a pretty comprehensive list, but I note that the corporation requirements are missing some noticeable parties: directors. The code states, for both privately and publicly held corporations, that all "corporate officers (or persons with equivalent title)" and their spouses and all stockholders and their spouses must be qualified. Directors are not "equivalent" in title to officers. Officers, under Washington law, are described as follows:
 
(1) A corporation has the officers described in its bylaws or appointed by the board of directors in accordance with the bylaws.
(2) A duly appointed officer may appoint one or more officers or assistant officers if authorized by the bylaws or the board of directors.
(3) The bylaws or the board of directors shall delegate to one of the officers responsibility for preparing minutes of the directors' and shareholders' meetings and for authenticating records of the corporation.
(4) The same individual may simultaneously hold more than one office in a corporation.
Wash. Rev. Code § 23B.08.400. Directors have a different role. The statute provides:

Requirement for and duties of board of directors.

(1) Each corporation must have a board of directors, except that a corporation may dispense with or limit the authority of its board of directors by describing in its articles of incorporation, or in a shareholders' agreement authorized by RCW 23B.07.320, who will perform some or all of the duties of the board of directors.
(2) Subject to any limitation set forth in this title, the articles of incorporation, or a shareholders' agreement authorized by RCW 23B.07.320:
(a) All corporate powers shall be exercised by or under the authority of the corporation's board of directors; and
(b) The business and affairs of the corporation shall be managed under the direction of its board of directors, which shall have exclusive authority as to substantive decisions concerning management of the corporation's business.
Wash. Rev. Code § RCW 23B.08.010.
 
The Code, then, seems to provide that directors are, as a group, exempt from the spousal connection. The code separately provides:
 
(4) Persons who exercise control of business - The WSLCB will conduct an investigation of any person or entity who exercises any control over the applicant's business operations. This may include both a financial investigation and/or a criminal history background. 
Wash. Admin. Code 314-55-035.  This provision would clearly include directors, but also clearly excludes spouses. That distinction is fine, I suppose, but it is not at all clear to me why one would want to treat directors differently than LLC managers (and their spouses).  To the extent there is concern about spousal influence--to the level that the state would want to require qualification of spouses of shareholders in a publicly held entity--leaving this gap open for all corporate directors seems to be a rather big miss (or a deliberate exception).  Either way, it's an interesting quirk of an interesting new statute.   
 
 
 
 
 
 

December 19, 2017 in Corporations, Current Affairs, Entrepreneurship, Family Business, Joshua P. Fershee, Legislation, Licensing, LLCs, Management, Nonprofits, Partnership, Shareholders, Unincorporated Entities | Permalink | Comments (0)

Monday, December 18, 2017

Food, Glorious Food: Meal Delivery Kits

By joanheminway

HelloFreshBoxClosed

As I earlier noted, I have planned to write on meal delivery kits.  What is a meal delivery kit, you ask?  It is a delivered-to-your-door box of ingredients and recipes for meals.  All of the ingredients (except pantry essentials) needed to produce the meals shown and described in the recipe cards are included in the box.  All the recipient has to do is follow the recipe instructions and produce the meals.  Reviews of meal kits that describe additional features can be found here (July 2017), here (October 2016), here (May 2016), and here (May 2015).

My husband ordered us our first meal kit (from Blue Apron) last year as an anniversary present to me.  The idea (which has worked exceedingly well) was that we would be able to more easily prepare meals together, since I often design meals on the fly and cook based on what I sense is needed.  It's pretty hard to assign tasks consistently and continuously using my natural method of meal preparation.  The meal kits solved this problem neatly.  So, having found success with Blue Apron, we decided to try a few other brands.  Specifically, we also have ordered meal kits from Plated and Hello Fresh.  In a later post, I plan to offer a review of the kits themselves.  For today, I simply want to describe the services and the market.

It's been a healthy market from a financing and financial point of view. Accordingly to a TechCrunch article published back in April, "U.S. meal kit delivery startups have raised more than $650 million in venture capital . . . ."  The same article reported that "[m]eal kit companies sold between $1 billion and $1.5 billion in 2016, according to industry estimates from MarketResearch and others."  Yet, Blue Apron's initial public offering ("IPO") was not as successful as all had hoped.  An August 2017 CNBC report noted that the Blue Apron IPO priced on June 29, 2017 after decreasing the expected offering price range significantly (from $15-$17 per share to $10-$11 per share).

Legal claims brought against and by meal kit delivery firms so far seem to be typical of those in any business, based on published reports.  For example, a BuzzFeed News October 2016 article reported on workplace safety and other worker-related issues at Blue Apron.  A brief search on Westlaw relating to the three services we have used revealed a run-of-the-mill wrongful termination action (Hello Fresh), a case involving defamation and interference with business relations (Blue Apron), and a racial discrimination, harassment, and related retaliatory wrongful termination claim (Plated).  In addition, Blue Apron participated in a successful arbitration in the World Intellectual Property Association over the right to the domain name <blue apron.reviews>.

Notably absent?  Customer actions relating to advertising or the food or recipes included in the meal delivery kits.  It may be that these are just not publicly reported or available.  Or it may be that these types of problems are resolved amiably without the need of judicial or alternative dispute resolution processes.

There are, however, a fair number of Better Business Bureau complaints.  This would seem to come with the territory.  For the record (and what it may be worth), Plated fares best in Better Business Bureau ratings.  Hello Fresh comes in close behind, with Blue Apron coming in a distant third.

Have you tried these meal services?  What are your impressions of the business model and the service?  Are they just a passing fad, or will they survive the test of time?  I am interested in your thoughts. 

December 18, 2017 in Food and Drink, Joan Heminway | Permalink | Comments (0)

Sunday, December 17, 2017

ICYMI: #corpgov Weekend Roundup (Dec. 17, 2017)

By Stefan J. Padfield

December 17, 2017 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, December 16, 2017

Appraisal is the New Fiduciary Duty

By Ann Lipton

This week, the Delaware Supreme Court reversed and remanded Chancery’s appraisal determination in Dell et al. v. Magentar Global Event Driven Master Fund et al..  The decision amplified the Supreme Court’s earlier opinion in DFC Global Corp. v. Muirfield Value Partners, LP, et al..

In DFC, the Delaware Supreme Court held that courts entertaining appraisal claims should place heavy emphasis on the deal price, at least for arm's length negotiations with no apparent flaws.

Dell, however, was a slightly different animal.  Unlike DFC, it involved a management buy-out, which is a scenario rife with potential conflicts of interest.  It was precisely because of these conflicts that the Chancery court refused to accept the deal price, and instead used its own discounted cash flow analysis to determine that the stock was worth more.

On appeal, the Delaware Supreme Court reversed.  Though the Court acknowledged that there may be cause for concern in the MBO context, the Court concluded – based on Chancery’s own findings – that those concerns had been allayed in this particular case due to, among other things, an efficient market for the company’s stock, a robust sales process with full disclosure, and a CEO who was apparently willing to join with any potential buyer.

What was implicit in DFC – and what Dell makes explicit – is that in some ways, the Delaware Supreme Court is using appraisal to recapture ground it gave up in the context of fiduciary duty litigation.

As we all know, after Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), a shareholder vote can cleanse a variety of management sins in the context of negotiating a sale of the company.  Though Corwin may have much to recommend it, the chief criticism is that management may be left with little incentive to conduct a robust sales process.  As management is presumably well aware, so long as there’s some kind of premium over market, stockholders may be feel pressured to accept a deal on the table rather than hold out hope that management, if rebuked by an unfavorable vote, will apply their full efforts towards obtaining a better price (especially given customary break up fees).  Corwin provides management with no incentives to do better than the minimum of what the stockholder vote will accept.

In DFC, the Delaware Supreme Court took the first steps toward filling that gap.  By holding that deal price should carry great weight in the appraisal context absent evidence of a dysfunctional sales process, the court provided new incentives for management to obtain the best possible price for stockholders.

What was implicit in DFC is explicit in Dell.  After explaining all the reasons why Dell’s sales process raised no red flags, and even counterbalanced the ordinary concerns that are raised in the MBO context, the court explained: “If the reward for adopting many mechanisms designed to minimize conflict and ensure stockholders obtain the highest possible value is to risk the court adding a premium to the deal price based on a DCF analysis, then the incentives to adopt best practices will be greatly reduced.”

Thus, the substitution of appraisal litigation for fiduciary litigation is near complete:  improving upon deal price in the context of appraisal may be impossible unless something went wrong in the sales process (at least for the sale of a public company without a controlling stockholder).  In this way, the Delaware Supreme Court ensures that there remain incentives for directors to use best practices when negotiating deals, while avoiding some of the pathologies that have infected fiduciary duty litigation.  See Charles Korsmo & Minor Myers, The Structure of Stockholder Litigation: When do the Merits Matter?, 75 Ohio St. L.J. 829 (2014).

The question remains, however, whether Delaware made the right call.  Commenters have argued that the threat of appraisal results in higher deal prices; those salutary effects may be mitigated under the new standards.  It is not clear how proficient courts are at detecting the kinds of subtle distortions in a sales process that might result from even mild degrees of director self-interest, lack of expertise, or distraction – indeed, commenters have argued that it is precisely because appraisal can avoid these inquiries that makes it such an effective remedy. 

December 16, 2017 in Ann Lipton | Permalink | Comments (0)

Friday, December 15, 2017

Doping, Russia, and Morality Clauses

By Haskell Murray

Recently, the International Olympic Committee (IOC) announced that Russia will be banned from the 2018 Winter Games for systemic doping. 

If you have not watched Icarus (on Netflix) on this topic, I recommend it. The documentary starts slowly, and the story-line is a bit disjointed, but the information uncovered about state-sponsored doping in Russia is fascinating and depressing.  Even if you are not a sports fan, you may be interested in the parts in the documentary related to the alleged involvement of the Russian government. 

It has been a busy semester, but I am working (slowly) on a journal article on morality clauses in sports contracts. Doping is often specifically mentioned in these contracts, and doping is a sad reality in many sports. Doping also betrays, I think, improper prioritization. While we are starting to see more attention paid to courage and compassion in sports, "winning" has often been promoted as the top priority. Hopefully we will see more people (and  countries) who compete with passion, but also with integrity.  

December 15, 2017 in Contracts, Current Affairs, Haskell Murray, Sports | Permalink | Comments (0)

Thursday, December 14, 2017

Should Non-Lawyers Represent People in Arbitration?

By Benjamin P. Edwards

Thank you to the BLPB for the chance to write some for the platform. Reading the BLPB has informed my work, and it has kept me up to speed on breaking developments.  For readers that don't know me, I'm at the University of Nevada, Las Vegas.  My teaching and scholarship focus on business, securities, and professional responsibility issues.

On that note, the Financial Industry Regulatory Authority (FINRA) now considers a live securities and professional responsibility issue.  It has a request for comment out about whether non-attorney representatives (NARS) should continue to represent persons in FINRA's arbitration forum.  States approach unauthorized practice in different ways.  Florida has vigorously policed the unauthorized practice of law.  New York, on the other hand, has allowed NARS to represent persons in arbitration. 

There may be good reason to be concerned about representation quality from non-attorney advocates.  The New York Times covered the issue in 2010, profiling Stock Market Recovery Consultants, an outfit that represents investors in securities arbitration.  The Times pointed out that one of the firm's principals "pleaded guilty in 2004 to insurance fraud in a million-dollar scam involving jewelry."  Another one of the firm's principals suggested that the Times speak with an attorney that had represented a defendant against them:

Mr. Lapin offered a lawyer who has opposed him on several cases — Michael Schwartzberg of Winget, Spadafora & Schwartzberg — to vouch for his performance. He vouched thusly: “Dealing with Mr. Lapin and his operation is one of the most frustrating experiences I’ve ever dealt with.” Mr. Schwartzberg said the claims that Stock Market Recovery Consultants files — before it has fully investigated the case, and using passages cut and pasted from previous claims — sometimes don’t even get the client’s name right. When it comes to settling, he added, “It’s like hondling at a flea market with these guys: ‘I got these shirts 3 for 10, but for you, 3 for 5.’ ”

FINRA has begun to post comments that it has received.  One arbitrator reports that "experiences with NARS have, without exception, been negative: NARs have been discourteous to everyone and made numerous baseless objections and irrelevant arguments, resulting in unnecessarily long and unpleasant hearings."  Perhaps shedding light on NARS's practice quality and attention to detail, an oddly-formatted letter takes the opposite position and contends that "[w]hen we restrict, FINRA or State or other, the rights to an effective ADR process in which would impede the intended purpose; we spit in the face of SCOTUS and the American people."   Another arbitrator and commentator memorably relates his experience encountering a claim that was "heavy on legal jargon" and "significantly short of the factual allegations needed to state a claim."  The arbitrator assumed the pleading had "been prepared by a singularly incompetent lawyer."  When he discovered it was a NAR, he reached out to the state bar. 

For those interested, the FINRA comment period closes on December 18th.  

Sometimes, it can be difficult to distinguish between consumer protection and protectionism for attorneys. To be sure, booting NARS out of the forum will mean that attorneys get more cases.  It should only be done if NARS have not delivered competent representation.  

 

 

 

December 14, 2017 | Permalink | Comments (0)

Wednesday, December 13, 2017

Something to Help You Relax While Grading

By Marcia Narine Weldon

IMG_1296
Malaga, Spain


I'm in the midst of grading, revising an article, researching for another article, starting a travel blog, and preparing for next semester. Normally, this would cause some level of stress. But this year, for the first time, I chose to take a vacation before grading. I took a cruise around the Canary Islands and the Spanish coast. I didn't think about work at all, and I have come back refreshed and ready to grade. Now, when I'm reading exams, I'm more relaxed and less frustrated. I'm convinced that the pre-grading vacation led to my state of mind, and will likely lead to a better grading process for me. If you're grading and frustrated, here are some pictures to help you relax too.

Sunset tenerife
Sunset off the coast of Tenerife with Mt. Teide in the background

 

IMG_0660
Las Palmas

 

Photo Nov 28 11 50 27
Mt. Teide, the 3rd largest volcano in the world



IMG_0412
The exterior of Hassan II Mosque in Casablanca, Morrocco

 

IMG_1191
Mijas, Spain



December 13, 2017 in Marcia Narine Weldon, Travel | Permalink | Comments (1)

Tuesday, December 12, 2017

Getting LLC Definitions Wrong: It's Not Always the Judge's Fault

By Joshua Fershee

As I have noted in the past, it is not just judges that make the mistake of calling limited liability companies (LLCs), "limited liability corporations."  Today, I got a notice of a Texas case using the later definition.  Here's the excerpt:

The statute defines a “licensed or registered professional” to mean “a licensed architect, licensed professional engineer, registered professional land surveyor, registered landscape architect, or any firm in which such licensed or registered professional practices, including but not limited to a corporation, professional corporation, limited liability corporation, partnership, limited liability partnership, sole proprietorship, joint venture, or any other business entity.” Tex. Civ. Prac. & Rem. Code Ann. § 150.001(1-a) (emphasis added).

CH2M Hill Engineers, Inc., v. Springer, No. 09-16-00479-CV, 2017 WL 6210837, at *2 (Tex. App. Dec. 7, 2017). 
 
My first thought was, "Doesn't everyone cut and paste statutory language these days?  How could they get that wrong?"  I went to look up the code, and even before the code section had loaded, it dawned on me:  Of course, they cut and pasted it.  It's the code that's wrong.  Sure enough, it is.
 
Another recent example comes from a Westlaw source: Business Transactions Solutions § 60:358. I am going to tread lightly here because my mission is not to be a snarky jerk (I can be one sometimes, but that is not my goal).  The source provides what appears to be a model letter to an LLC client that has some very useful information, but I am going to be critical of a couple parts.  The letter opens: "[T]he following is a summary of our discussion concerning business responsibilities that must be met to maintain your LLC status."  Good start.  And then: "Failure to comply with LLC formalities can result in individual liability to the members if the 'corporate veil is pierced.'" I know this is colloquial talk, but couldn't it just say "if the limited liability veil is pierced?"
 
The draft letter continues:
You can also be liable for the company's debts by implied actions or negligent conduct. If you disregard LLC formalities or commingle your personal interests with the company's assets or interests, you can open the door for an adverse party to “pierce the corporate veil” and render you personally liable for the LLC's debts. To avoid such consequences, you should never refer to your company as “my” business or “our” business. Such a statement could later be used against you as being a material representation that the business was a proprietorship or a partnership rather than a corporation.
There's a lot here with which I disagree. For example, LLCs don't, in my view, have formalities. And an LLC is not a corporation.  The letter also explains that "[m]anagers control the policy of the LLC, (this is similar to a director in a corporation)" and refers to the LLC's "corporate name " and "corporate records." Some of this is accurate colloquially, but don't you hire a lawyer for precision?  I appreciate the idea that lawyers should share a lot of this kind of information with clients, and a lot of this is useful, but this really can be better. The LLC letter should be different than the corporation letter.  

Anyway, this is another example where a lot of my complaints are simply nits, and they probably impact nothing.  But it's not all nits.  Some of this is substance that matters.  So, I keep picking nits. 

 

December 12, 2017 in Joshua P. Fershee, LLCs | Permalink | Comments (0)

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