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Monday, April 30, 2018

Social Enterprise and the Traditional For-Profit Corporation

By joanheminway

My essay on the use of traditional for-profit corporations as a choice of entity for sustainable social enterprise firms was recently published in volume 86 of the UMKC Law Review.  I spoke on this topic at The Bryan Cave/Edward A. Smith Symposium: The Green Economy held at the UMKC School of Law back in October.  The essay is entitled "Let's Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise," and the SSRN abstract is included below:

The past ten years have witnessed the birth of (among other legal business forms) the low-profit limited liability company (commonly known as the L3C), the social purpose corporation, and the benefit corporation. The benefit corporation has become a legal form of entity in over 30 states. The significant number of state legislative adoptions of new social enterprise forms of entity indicates that policy makers believe these alternative forms of entity serve a purpose (whether legal or extra legal).

The rise of specialty forms of entity for social enterprise, however, calls into question, for many, the continuing role of the traditional for-profit corporation (for the sake of brevity and convenience, denominated “TFPC” in this essay) in social enterprises, including green economy ventures. This essay argues that TFPCs continue to be a viable—and in many cases desirable or advisable choice of entity for sustainable social enterprise firms. The arguments presented are founded in legal doctrine, theory, and policy and include both legal and practical elements.

Somehow, I managed to cite to four BLPB co-bloggers in this single essay: Josh, Haskell, Stefan, and Anne.  Evidence of a business law Vulcan mind meld?  You decide . . . .  

Regardless, comments, as always, are welcomed as I continue to think and write about this area of law and practice.

April 30, 2018 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Haskell Murray, Joan Heminway, Joshua P. Fershee, Social Enterprise, Stefan J. Padfield | Permalink | Comments (2)

CFP: AALS Bus. Assoc. "New Voices in Business Law" works-in-progress

By Anne Tucker

Call for Papers

AALS Section on Business Association

New Voices in Business Law

January 2-6, 2019, AALS Annual Meeting

The AALS Section on Business Associations is pleased to announce a “New Voices in Business Law” program during the 2019 AALS Annual Meeting in New Orleans, Louisiana. This works-in-progress program will bring together junior and senior scholars in the field of business law for the purpose of providing junior scholars with feedback and guidance on their draft articles.

FORMAT:  Scholars whose papers are selected will provide a brief overview of their paper, and participants will then break into simultaneous round tables dedicated to the individual papers.  Two senior scholars will provide commentary and lead the discussion about each paper.

SUBMISSION PROCEDURE:  Junior scholars who are interested in participating in the program should send a draft or summary of at least five pages to Professor Jessica M. Erickson at [email protected] on or before August 10, 2018.  The cover email should state the junior scholar’s institution, tenure status, number of years in his or her current position, whether the paper has been accepted for publication, and, if not, when the scholar anticipates submitting the article to law reviews.  The subject line of the email should read: “Submission—Business Associations WIP Program.”

Junior scholars whose papers are selected for the program will need to submit a draft to the senior scholar commentators by December 14, 2018.

ELIGIBILITY:  Junior scholars at AALS member law schools are eligible to submit papers.  “Junior scholars” includes untenured faculty who have been teaching full-time at a law school for ten or fewer years.  The Committee will give priority to papers that have not yet been accepted for publication or submitted to law reviews. 

Pursuant to AALS rules, faculty at fee-paid non-member law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit.  Please note that all presenters at the program are responsible for paying their own annual meeting registration fees and travel expenses.  

April 30, 2018 in Anne Tucker, Call for Papers | Permalink | Comments (0)

Sunday, April 29, 2018

ICYMI: #corpgov Weekend Roundup (Apr. 29, 2018)

By Stefan J. Padfield

April 29, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, April 28, 2018

Arbitration, shaming, and #metoo

By Ann Lipton

The #MeToo movement has shone a spotlight not only on sexual harassment, but also on the NDAs and arbitration agreements that allow it to flourish undetected for many years – until, in some cases, it finally explodes into a full-grown corporate crisis.

Part of the explanation is that victims choose to enter into settlements rather than conduct lengthy, expensive, and potentially humiliating court battles – which is understandable and a problem for which there is no obvious immediate solution.

But the other part of the explanation is that women (and men, who are harassed at lower rates but still may be targeted) are frequently forced to sign agreements to arbitrate claims confidentially as a condition of employment or the use of various services, and the Supreme Court – with its muscular interpretation of the Federal Arbitration Act – has held that states are virtually powerless to regulate these agreements.  These agreements, it is well understood, are less about providing a venue for resolution of claims than about preventing claims at all, if for no other reason than most prohibit class actions.  So until Congress is willing to modify the FAA (which, well, I’m not going to hold my breath), the situation continues.

Or does it?

Public pressure has now caused some companies to abandon their arbitration agreements.  Microsoft ostentatiously announced it would no longer require them for sexual harassment claims.   There was a bit of a tempest when it was discovered that Munger Tolles had them in their employment agreements; after some angry Tweeting – including requests for school-wide boycotts by elite law students and faculty – many firms agreed to withdraw them.  

And now it seems the fight has moved to Uber.

Uber’s user agreement with its riders has long contained an arbitration clause, and of course, we all know of the horror stories where Uber drivers are accused of assaulting passengers, sexually or otherwise.  (Law Prof Nancy Leong reported a terrifying close call recently).   It’s been my habit in my basic business organizations class to show students Uber’s user agreement, including the part on safety – where, to paraphrase, Uber instructs riders they should tell a friend where they’re going and sit near the car door in case they have to run.  

Now, a group of women who allege they were sexually assaulted by Uber drivers have publicly released a letter to Uber’s board demanding that the board waive the arbitration clause.  Their attorney argues that the board cannot claim it genuinely cares about women’s rights while forcing these claims into confidential arbitration.

Uber's been plagued by a tsunami of poor press recently, all casting a shadow on its hopes for an IPO next year.  Given that, the women’s demand strikes me as a well-timed, savvy move. I don’t know if it can succeed – Uber may depend too heavily on keeping the misconduct of its drivers out of the spotlight – but on the other hand, as Twitter has demonstrated, there’s only so much silencing it can manage.  I look forward to seeing whether these straws are what finally break the back of widespread arbitration clauses in consumer contracts.

April 28, 2018 in Ann Lipton | Permalink | Comments (0)

Friday, April 27, 2018

Kanye West’s Business and the Trump Effect

By Marcia Narine Weldon

Music star/clothing designer Kanye West stirred up controversy on Wednesday when he began tweeting about his support of Donald Trump, calling him his “brother,” discussing their shared “dragon energy,” and showing off his  MAGA hat, autographed by President Trump himself. The President thanked West for the support, and some level of outrage ensued among liberal pundits and many in the black community about West’s actions. A number of marketing experts opined that West’s vocal support had the potential to adversely affect sales of his Yeezy line of clothing and sneakers, which had already suffered a decline of late, even though earlier releases of his product sold out in minutes online. In the past, Yeezy sneakers’ assoication with Adidas helped that company double its stock price.

As fans threatened to get rid of their Yeezy gear, news outlets wondered if West had killed his brand. But a funny thing happened. GQ Magazine reported today that Yeezy sales are actually up and West has even more Twitter followers than ever. The article described the backlash and boycott threats that other sneaker companies faced after their executives supported President Trump. Even Kim Kardashian, West’s wife and marketing, urged him to cease his public support. 

What’s the explanation? Is West a marketing genius? Are a number of Yeezy consumers secret Trump supporters? It’s actually likely more simple than that. As a founder of a sneaker retailer stated in October 2017 during earlier threats of boycotts of high end sneakers, “Our consumer is pretty superficial. They’re driven by hype, so I think a very small margin of our consumer base is insightful enough to come up with their own opinions on these types of things. Most would rather just see a trend happening on social media and go by that.”

Yeezy shoppers tend to be millennial with a lot of disposable income. A recent study indicated that 60% of millennials buy on the basis of their beliefs. The West/Trump saga provides an example to challenge some of those statistics. As I have written in the past, people often claim that ethical consumerism drives them (not that supporting Trump is unethical), but in practice, most consumers actually purchase what they  want. Perhaps West’s consumer base is just more transparent. Will other CEOs follow West’s example and voice  their support of President Trump? It’s doubtful, especially if they run public companies, but I will be watching. 

 

April 27, 2018 in Corporate Personality, Current Affairs, Marcia Narine Weldon | Permalink | Comments (0)

Thursday, April 26, 2018

The DOL Fiduciary Fight Continues

By Benjamin P. Edwards

The current Department of Labor has shown little interest in continuing to defend its fiduciary rule after the Fifth Circuit struck it down.  The AARP and three different state attorney generals recently sought to intervene to request review by the entire Fifth Circuit.  The AARP has a substantial interest in the rule.  It argues that "the panel’s decision also presents an exceptionally important issue because it robs workers, retirees, and their families of crucial protections for their retirement investments." 

Even though the SEC recently launched its investment-advice initiative by proposing  regulation Best Interest, Labor's rule remains critical.  Insurance pitchmen now characterize themselves as "financial advisers" and sell a variety of insurance products.  In many instances, these "financial advisers" sell annuities or whole life insurance to people with little need for the products, causing them to miss out on substantial gains over time.   Without the Labor rule, there may be few restraints on improper insurance sales.

 

April 26, 2018 | Permalink | Comments (0)

Wednesday, April 25, 2018

ICYMI: #corpgov Midweek Roundup (Apr. 25, 2018)

By Stefan J. Padfield

April 25, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, April 24, 2018

The (WV) Code Police: The Scourge of the Misdefined LLC

By Joshua Fershee

As I am inclined to do with cases and statutes, I spent some time this week chasing down incorrect definitions of the LLC (correctly defined as a "limited liability company").  I did some perusing of the Code of my home state of West Virginia for incorrect uses of "limited liability corporation," where limited liability company was intended.  As I expected, there are multiple errors. Take, for example: 

§ 31D-11-1109. Conversion of a domestic corporation to a domestic limited liability company.

. . . .

(i) When a corporation has been converted to a limited liability corporation pursuant to this section, the limited liability company shall, . . . .

This part of the Code uses "limited liability company" correctly throughout this provision, except in this one spot.  This should be cleaned up, but it appears to be an error related to repeated use of corporation and company in the same statute (as opposed to a misunderstanding of the concept).

 The West Virginia Code has adopted the use of "limited liability corporation" in place of "limited liability company" in a couple definitions provisions, too, which could be a little more problematic. 

In the Motor Fuel Excise Tax portion of the Code, we have this, § 11-14C-2. Definitions:

     (66) "Person" means an individual, firm, cooperative, association, corporation, limited liability corporation, estate, guardian, executor, administrator, trust, business trust, syndicate, partnership, limited partnership, copartnership, organization, limited liability partnership, joint venture, receiver and trustee in bankruptcy. "Person" also means a club, society or other group or combination acting as a unit, a public body including, but not limited to, this state and any other state and an agency, commissioner, institution, political subdivision or instrumentality of this state or any other state and, also, an officer, employee or member of any of the foregoing who, as an officer, employee or member, is under a duty to perform or is responsible for the performance of an act prescribed by the provisions of this article.

Literally, anyway, LLCs are not defined as persons in this Code section.  I am confident that the intent here is quite clear, even if the execution is flawed, but still, this exhaustive list leaves out the West Virginia limited liability company created in WV Code § 31B, the Uniform Limited Liability Company Act.

 A similar error occurs in Code Chapter 16, Public Health. Code § 16-2D-2 provides:

(29) “Person” means an individual, trust, estate, partnership, limited liability corporation, committee, corporation, governing body, association and other organizations such as joint-stock companies and insurance companies, a state or a political subdivision or instrumentality thereof or any legal entity recognized by the state.

Here, at least, the catch-all "any legal entity" does include LLCs, but LLCs are still not listed specifically. 

This definition language is being repeated in draft legislation, as well, so the error is spreading.  See, e.g., House Bill 2873, Budget and Spending Transparency Act ("(c) "Entity" or "recipients" means any corporation, association, union, limited liability corporation, limited liability partnership, legal business entity including nonprofit organizations, grantee, contractor or any county, municipal or other local government entity . . ..") 

I am planning to spend some time this summer sending proposed fixes to some key legislators to see if we can get this corrected. Though I concede this is a small fix, it is also an easy fix, and I see no reason not to get it right.  Maybe if I do the legwork, it can get done. 

April 24, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Monday, April 23, 2018

AALS 2019 - Section on Business Associations Call for Papers

By joanheminway

Call for Papers for the

Section on Business Associations Program on

Contractual Governance: the Role of Private Ordering

at the 2019 Association of American Law Schools Annual Meeting

The AALS Section on Business Associations is pleased to announce a Call for Papers from which up to two additional presenters will be selected for the section’s program to be held during the AALS 2019 Annual Meeting in New Orleans on Contractual Governance: the Role of Private Ordering.  The program will explore the use of contracts to define and modify the governance structure of business entities, whether through corporate charters and bylaws, LLC operating agreements, or other private equity agreements.  From venture capital preferred stock provisions, to shareholder involvement in approval procedures, to forum selection and arbitration, is the contract king in establishing the corporate governance contours of firms?  In addition to paper presenters, the program will feature prominent panelists, including SEC Commissioner Hester Peirce and Professor Jill E. Fisch of the University of Pennsylvania Law School.

Our Section is proud to partner with the following co-sponsoring sections: Agency, Partnership, LLC's and Unincorporated Associations; Contracts; Securities Regulation; and Transactional Law & Skills.

Submission Information:

Please submit an abstract or draft of an unpublished paper to Anne Tucker, [email protected] on or before August 1, 2018.  Please remove the author’s name and identifying information from the submission. Please include the author’s name and contact information in the submission email.

Papers will be selected after review by members of the Executive Committee of the Section. Authors of selected papers will be notified by August 25, 2018. The Call for Papers presenters will be responsible for paying their registration fee, hotel, and travel expenses.

Any inquiries about the Call for Papers should be submitted to: Anne Tucker, Georgia State University College of Law, [email protected] or (404) 413.9179.

+++++

[Editorial note: As some may recall, the BLPB hosted a micro-symposium on aspects of this issue in the limited liability company context in anticipation of a program held at the 2016 AALS annual meeting.  The initial post for that micro-symposium is here, and the wrap-up post is here.  This area--especially as writ broadly in this proposal--remains a fascinating topic for study and commentary.]

April 23, 2018 in Anne Tucker, Business Associations, Call for Papers, Conferences, Contracts, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, LLCs, Nonprofits, Partnership | Permalink | Comments (0)

Sunday, April 22, 2018

ICYMI: #corpgov Weekend Roundup (Apr. 22, 2018)

By Stefan J. Padfield

April 22, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, April 21, 2018

Can Contract Clauses Stop Human Trafficking?

By Marcia Narine Weldon

Last week, I blogged blogged about lawsuits against chocolate makers alleging unfair and deceptive trade practices for failure to disclose that the companies may have used child slaves to harvest their products. Today, I want to discuss steps that the Business Law Section of the American Bar Association is taking to provide more transparency in supply chain practices.

In 2014, the ABA House of Delegates adopted Model Principles on Labor Trafficking and Child Labor developed by over 50 judges, in-house counsel, outside counsel, academics, and NGOs. The Model Principles address the UN Guiding Principles on Business and Human Rights and other hard and soft law regimes. At last week’s ABA Business Law Spring Meeting, academics David Snyder and Jennifer Martin presented on human rights issues in supply chains alongside practicing lawyers and in-house executives. Many of them (and several others) had formed a Working Group to Draft Human Rights Protections in Supply Contracts. The Group aims to provide contract clauses that are “legally effective” and “operationally likely.”

As a former Deputy GC for a supply chain management company, I can attest that the ABA’s focus is timely as companies answer questions from customers, regulators, shareholders, and other stakeholders. Human rights issues play out in dozens of regulations, including, but not limited to: the Foreign Corrupt Practices Act, Trafficking Victims Protection Act, Dodd-Frank Conflict Minerals Act, California Transparency in Supply Chains Act, the UK Modern Slavery Act, the Trade Facilitation and Trade Enforcement Act, and the updated Federal Acquisition Regulations. Australia and at least seven EU countries are currently working on their own regulations. Savvy lawyers have use the Alien Tort Statute, RICO, negligence, and false advertising allegations to state claims, with varying success.

The following statistics may provide some context. Thanks to e. Christopher Johnson, Jr., CEO of the Center for Justice, Rights, and Dignity.
- there are 21 million victims of human trafficking
- Human trafficking provides $150 billion in profit
- Women and girls are 55% of the victims, and children 17 and under are 26%

To help companies mitigate their supply chain risks, the Business Law and UC Article 1 and Article 2 Committees have drafted more specific model clauses to incorporate human rights provisions in certain contracts. The Committees are also establishing an information exchange with NGOs and developing a Toolkit for Canadian lawyers.

One of the most practical features of the Group’s work is Schedule P, the warranties and remedies to protect human rights in the supply chain. The Working Group’s Report provides guidance on how to use the clauses as well as potential limitations. It’s a long read but I recommend that you look at the report and consider whether the model clauses and Schedule P, an appendix to supplier agreements, will help in the fight to combat human trafficking and forced labor. 

April 21, 2018 in Compliance, Contracts, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, Marcia Narine Weldon | Permalink | Comments (0)

Corporate Waste Makes a Comeback

By Ann Lipton

I tell my students that corporate waste technically may be a mechanism for defeating the business judgment rule in the absence of any other evidence of lack of compliance with fiduciary duty, but - as one Delaware decision put it - it's really more theoretical than real.  See Steiner v. Meyerson, 1995 Del. Ch. LEXIS 95.  When my students ask for some kind of real world example of waste, I tell them the facts of Fidanque v. American Maracaibo Co., 92 A.2d 311 (Del. Ch. 1952), where a corporation paid "consulting fees" to a 70-year-old former executive who had recently suffered a stroke that left him sufficiently incapacitated to be noticeable during his deposition.

I assumed that case was sui generis, but it turns out history has a way of repeating, this time in the form of Sumner Redstone's contract with CBS.  As described in a recent opinion by Chancellor Bouchard, plaintiff stockholders of CBS adequately alleged that the Board made wasteful payments by refusing to terminate Redstone's $1.75 million contract as Executive Chair once his declining health left him unable to eat or speak, and by designating him Chairman Emeritus - at a $1 million salary - after he resigned from the Executive Chair position.

The decision strikes me as significant not merely because it presents a modern example of waste that I can now offer to my students - at a large, public company no less - but also because CBS is contemplating a merger with Viacom.  Both companies are controlled by the Redstone family via supervoting shares, though they are - purportedly - negotiating the deal via independent committees.  This kind of self-interested transaction was already vulnerable to legal challenge; how much stronger will that challenge be now that there's already evidence of a supine board willing to cater to Redstone?

April 21, 2018 in Ann Lipton | Permalink | Comments (6)

Thursday, April 19, 2018

The SEC's Fiduciary Rulemaking

By Benjamin P. Edwards

Yesterday, the SEC announced three different proposals related to financial advice for retail customers.  The SEC's press release summarized the proposals:

Under proposed Regulation Best Interest, a broker-dealer would be required to act in the best interest of a retail customer when making a recommendation of any securities transaction or investment strategy involving securities to a retail customer.  Regulation Best Interest is designed to make it clear that a broker-dealer may not put its financial interests ahead of the interests of a retail customer in making recommendations.

In addition to the proposed enhancements to the standard of conduct for broker-dealers in Regulation Best Interest, the Commission proposed an interpretation to reaffirm and, in some cases, clarify the Commission’s views of the fiduciary duty that investment advisers owe to their clients.  By highlighting principles relevant to the fiduciary duty, investment advisers and their clients would have greater clarity about advisers’ legal obligations.

Next, the Commission proposed to help address investor confusion about the nature of their relationships with investment professionals through a new short-form disclosure document — a customer or client relationship summary.  Form CRS would provide retail investors with simple, easy-to-understand information about the nature of their relationship with their investment professional, and would supplement other more detailed disclosures.  For advisers, additional information can be found in Form ADV.  For broker-dealers, disclosures of the material facts relating to the scope and terms of the relationship would be required under Regulation Best Interest.

Finally, the Commission proposed to restrict certain broker-dealers and their financial professionals from using the terms “adviser” or “advisor” as part of their name or title with retail investors.  Investment advisers and broker-dealers would also need to disclose their registration status with the Commission in certain retail investor communications.

With the comment window now open, interested stakeholders have 90 days to provide the SEC with comments on the proposals.

In the open session announcing the proposals, the sitting SEC commissioners expressed significant reservations about many of the proposals.  Commissioner Stein voted against releasing the proposals for a variety of reasons, including a concern that proposed Regulation Best Interest wouldn't actually require brokerages to act in the best interests of retail customers:

In addition, as I mentioned previously, because there is no definition of the best interest standard in the proposal, the name of the rule, in and of itself, is confusing. Calling the proposal Regulation Best Interest could cause retail investors to reasonably believe that broker-dealers are required to act in their clients’ best interests. Perhaps it would be more accurate to call this proposal “Regulation Status Quo.” Calling it Regulation Best Interest is not just confusing, it is in effect a form of mislabeling, which may be misleading and which could have deleterious consequences.  Indeed, one of the recommendations we are considering today is a proposal to restrict the use of the terms “advisor” and “adviser” by a broker-dealer unless it is also registered as an investment adviser. We should be logically consistent ourselves.

Collectively, the proposals span over a thousand pages.  It'll take some time to dig through and digest this.  If any stakeholders see more elegant ways of addressing the problem, there may some support on the commission for changes designed to make the proposals shorter.  Commissioner Piwowar noted his concern with the sheer volume of the package: 

Nevertheless, I cannot hide my misgivings about certain aspects of the nearly 1,000 page tome before us today. The size of this package alone gives me pause. If it takes us that many pages to explain what we are trying to do, dare I say that our solution might necessarily lack the clarity that is needed to address retail investors’ confusion? With that overarching concern off my chest, I will now discuss my views on each of the three proposals in turn.

My sense, after watching the announcement yesterday, is that these proposals remain malleable.  Most of the commissioners seemed to have reservations about different aspects of the proposals.  Hopefully the process results in a series of rules that significantly improve outcomes for retail investors.

April 19, 2018 | Permalink | Comments (2)

Wednesday, April 18, 2018

ICYMI: #corpgov Midweek Roundup (Apr. 18, 2018)

By Stefan J. Padfield

April 18, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, April 17, 2018

LLCs Are Not Corporations & You Can't Have A Parent-Subsidiary Relationship When There is Only One Entity

By Joshua Fershee

Oh boy. A 2010 case just came through on my "limited liability corporation" WESTLAW alert (that I get every day).  This one is a mess. Recall that LLCs are limited liability companies, which are a separate entity from partnership and corporations, despite often having some similar characteristics to each of those. 

CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation. Id. (describing the restructuring of OPRA following its incorporation). At the time this lawsuit was filed, however, there remains a question as to whether there were any formalities in place to separate OPRA from CBOE operations. In short, the parties dispute whether, at the time the suit was filed, OPRA operated independently or was operated jointly with CBOE.
*2 To this end, Realtime asserts that the lack of any corporate governance at OPRA [an LLC], such as Articles of Association or a partnership agreement, renders OPRA “simply a label with no formal business structure.” RESPONSE at 2, 4 (citing SEC RELEASE at 2) (“OPRA was not organized as an association pursuant to Articles of Association or as any other form of organization. Instead, OPRA simply served as the name used to describe a committee of registered national securities exchanges.”).
REALTIME DATA, LLC d/b/a/ IXO, Plaintiff, v. CME GROUP INC., ET AL., Defendants. Additional Party Names: Chicago Bd. Options Exch., Inc., No. 6:09-CV-327-LED-JDL, 2010 WL 11601868, at *1–2 (E.D. Tex. Aug. 27, 2010) (emphasis added).
 
Okay, so first, we should get the LLC name right. That's old news. Important, but old news. An LLC is still not a corporation.  Second, LLCs, as non-corporate entities, do not engage in corporate governance and have significantly fewer formal entity obligations. Third, LLCs do not have "partnership agreements," they generally have operating agreements. 
 
In addition, partnerships don't need formal "partnership agreements," either, though to be a partnership there is always the agreement of two or more people to operate a business as co-owners seeking profit.  The court explains that "CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation," and states that OPRA had been in operation since 1975, when it was established by "directive from the Securities and Exchange Commission (“SEC”) designating OPRA to facilitate the distribution of options pricing information." Id. This suggests that perhaps OPRA is a partnership formed by the CBOE and the other six exchanges.  That would make CBOE (and the other six exchanges) potentially liable for the actions of OPRA and any resulting damages.  No one seemed to make that claim. 
 
Instead, CBOE was pursued under some version of an alter ego or business enterprise claim, seeking to merge OPRA into CBOE.  The court explains further: 
CBOE fails to identify grounds for institutional independence from OPRA at the time this suit was filed, and Realtime presents sufficient evidence to impute OPRA's contacts [for obtaining personal jurisdiction] to CBOE.
*5 In applying the Texas long arm statute, courts in this Circuit have followed the rule established by the Supreme Court in 1925 that “so long as a parent and subsidiary maintain separate and distinct corporate entities, the presence of one in a forum state may not be attributed to the other.” Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1159 (5th Cir. 1983) (citing Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333 (1925)). In this case, however, at the time the lawsuit was filed there were no clear legal boundaries to affirmatively identify a parent-subsidiary or sister-sister corporate relationship. . . .  It is undisputed that prior to January 1, 2010, OPRA did not seek the protections of incorporation, RESPONSE, EXH. 13, OPRA LLC AGREEMENT (Doc. No. 238-14), and based on the current record, Realtime has put on more than a minimal showing that OPRA was under the managerial and day-to-day control of CBOE. See, e.g., Oncology Therapeutics Network v. Virginia Hematology Oncology PLLC, No. C 05-3033-WDB, 2006 WL 334532 (Feb. 10, 2006 N.D. Cal.) (noting, in the context assessing whether two related entities formed a single enterprise, that “At this juncture, plaintiff merely has to allege a colorable claim. Plaintiff does not have to prove the claim.”). Therefore, the strict separateness required under Cannon need not be applied here because OPRA did not seek protections to formally divide its dealings from that of its counterpart CBOE.
Id. at *4–5  (emphasis added). Rather than working to find entity status here, I would think the better claim would the existence of a partnership, as noted above, or even a principal-agent relationship, where CBOE is the agent of OPRA or vice versa.  The court goes on: 
Instead, these facts make it appropriate to apply the single business enterprise doctrine. The single business enterprise doctrine applies when two or more business entities act as one. Nichols, 151 F. Supp.2d at 781–82 (citing Beneficial Personnel Serv. of Texas v. Rey, 927 S.W.2d 157, 165 (Tex. App.- El Paso 1996, pet. granted, judgm't vacated w.r.m., 938 S.W.2d 717 (Tex. 1997)). Under the doctrine, when corporations are not operated as separate entities, but integrate their resources to achieve a common business purpose, “each corporation may be held liable for debts incurred during the pursuit of the common business purpose.”Western Oil & Gas J.V., Inc., v. Griffiths, No. 300-cv-2770N, 2002 WL 32319043, at *5 (N.D. Tex. Oct. 28, 2002) (internal citations omitted). Being a part of a single business enterprise imposes partnership-style liability. Id. The facts presented here demonstrate that OPRA and CBOE operate as a single business entity, at least for the threshold inquiry of establishing jurisdiction.
Id. (footnotes omitted) (emphasis added). How does this doctrine apply when, at the time of filing, the court has already acknowledged that there were not even tow entities? If there is one entity, then CBOE is directly connected.  If OPRA is clearly some form of entity, the court should figure out which one it is (hint: it's likely a partnership).  If, as the court says, they are a single entity, then CBOE (as a clearly defined entity) is the only entity. The court acknowledges this reality but does not concern itself with it.   
Traditionally, courts have applied this doctrine when two corporations are acting as one. However, despite OPRA not having a defined corporate status at the time this suit was filed, there is demonstrable proof that CBOE was controlling OPRA's “business operations and affairs,” permitting the two entities to be fused for jurisdictional purposes.
Id. (emphasis added). This description suggests that CBOE might be the principal and OPRA might be the agent or that OPRA is simply part of CBOE. The facts seem to suggest a separateness that makes the latter a more difficult claim (at least the court is acting that way). An agency relationship, in at least some circumstances, can support indirect personal jurisdiction. See EBG Holdings LLC v. Vredezicht's Gravenhage 109 B.V., No. CIV.A. 3184-VCP, 2008 WL 4057745, at *10 (Del. Ch. Sept. 2, 2008) (stating that there are two "indirect bases under which a parent entity may be subject to jurisdiction through a subsidiary . . . the agency theory and the alter ego theory); but see Daimler AG v. Bauman, 571 U.S. 117, 139, 134 S. Ct. 746, 762, 187 L. Ed. 2d 624 (2014) (stating that due process did not permit the exercise of general jurisdiction over an international parent corporation in California).  
 
It seems to me that using an agency relationship to establish personal jurisdiction in the CBOE case should be somewhat easier than a parent-subsidiary case given the lack of a parent-subsidiary relationship and OPRA's lack of entity status. Instead, establishing the agency relationship should be sufficient. As a reminder, an agency relationship must

include: (1) the agent having the power to act on behalf of the principal with respect to third parties; (2) the agent doing something at the behest of the principal and for his benefit; and (3) the principal having the right to control the conduct of the agent). 

Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 169 n.130 (Del. Ch. 2003) (citing J.E. Rhoads & Sons, Inc. v. Ammeraal, Inc., 1988 WL 32012, at *4 (Del. Super. Mar. 30, 1988)). 

Anyway, it appears the court may have been right to assert personal jurisdiction over CBOE, but I don't think the analysis was proper.  And that should matter, too. One day, the same analysis will lead to an incorrect outcome.  
 

April 17, 2018 in Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Partnership | Permalink | Comments (0)

Monday, April 16, 2018

Lynn A. Stout (1957-2018): Mourning the Loss of an Amazing Colleague . . . .

By joanheminway

I learned earlier this afternoon that Lynn Stout, author of The Shareholder Value Myth: How Putting Shareholders First Harms Investors, Corporations and the Public (2012), lost her battle with cancer today.  Appropriate words are hard to come by.  She was among the nation's scholarly leaders in the legal aspects of corporate governance.  Regardless of whether you agree with her on the substance, you would likely find her work enlightening and her presence powerful.  She was persistent in argument, yet generous with mentoring and other professional support.

I know we each will miss her in our own way.  She and I had a bit of an unfinished conversation last June at the National Business Law Scholars Conference about my Washington & Lee Law Review article, "Shareholder Wealth Maximization as a Function of Statutes, Decisional Law, and Organic Documents."  I am sorry we never completed that chat.

Her vast body of work is among her great legacies.  I have my Advanced Business Associations students read "A Team Production Theory of Corporate Law" (coauthored with Margaret Blair) every year.  Other articles that I have enjoyed and used in teaching or research include: "Why We Should Stop Teaching Dodge v. Ford" (although I enjoy teaching the case and interrogating it nevertheless), "The Investor Confidence Game," "The Mythical Benefits of Shareholder Control," and "On the Proper Motives of Corporate Directors (or, Why You Don't Want to Invite Homo Economicus to Join Your Board)."  Feel free to add your memories and favorite works in the comments.  

Thank you, Lynn, for all you have done for all of us.  May you rest in total peace, free of your earthly burdens.  Amen.

April 16, 2018 in Joan Heminway, Law School | Permalink | Comments (3)

Sunday, April 15, 2018

ICYMI: #corpgov Weekend Roundup (Apr. 15, 2018)

By Stefan J. Padfield

April 15, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, April 14, 2018

Do Corporate Chiefs Get to Lead Private Lives?

By Ann Lipton

As most readers are likely aware, Donald Trump has no love for the Washington Post, which frequently publishes articles that cast him in a negative light.  The Washington Post is owned by Jeff Bezos, who also is the founder, Chair, CEO, and largest shareholder of Amazon.  Trump’s rage at the Washington Post in general and Bezos as its owner has led him to threaten Amazon, both publicly and privately, with suggestions that – for example – it should pay the Post Office more for shipping, that its taxes should be increased, and perhaps even that it should not have access to certain critical government contracts.  Most recently, he even ordered a review of USPS finances, apparently as a mechanism for targeting Amazon.  As a result, Amazon’s stock price has suffered.

Egan-Jones Proxy Services recently posted a comment on this state of affairs, ultimately arguing that Bezos’s responsibilities to Amazon’s investors include limiting the Washington Post’s coverage.  As Egan-Jones put it, “Unless Mr. Bezos decides and is able to tone down, or better yet eliminate the content which is upsetting the President and his supporters he will continue to find he has created the most dangerous type of enemy for any type of company and its CEO, the politician…  The job of a CEO is to act as a good steward for the funds investors have entrusted to him. The job of a CEO is not to promote a particular political path he or she may favor. Mr. Bezos needs to decide, does he wish to remain CEO of Amazon, or does he want to be a political player, Amazon’s investors deserve nothing less.”

Now, at this point I will say, from a pure policy perspective, I am horrified at the thought that any news organization could be bullied by a public figure into moderating truthful, newsworthy coverage.  Additionally, by all accounts, Bezos has no input into the Washington Post’s editorial decisions.  But putting these points to the side, I actually wish to explore the suggestion that a corporate fiduciary’s duty to shareholders extends to his private conduct, such that even entirely personal actions must be moderated if they might have an adverse effect on the corporation he oversees.

There can be no dispute that a corporate fiduciary’s personal information and behavior might be relevant to investors and to the quality of his/her stewardship.  The health of corporate executives has frequently come under scrutiny (e.g., Steve Jobs, Sumner Redstone, Hunter Harrison); Martha Stewart’s private trading in an unrelated corporation ultimately impacted her own company; the private affairs of a partner could have company-wide repercussions; an executive’s drug habit may impact the company in unexpected ways; heck, even a CFO’s golfing habits may be relevant to the quality of corporate financial statements.

As a result, scholars – including Joan Heminway (hi, Joan!) – have tried to unpack the extent of a corporation’s duty to disclose directors’ and officers’ private facts, both under the federal securities laws, and under state fiduciary requirements, recognizing that due respect must be paid both to the informational needs of investors, and to the moral (and perhaps constitutional) rights of privacy possessed by corporate actors.

See, e.g., Joan Heminway, Martha’s (and Steve’s) Good Faith: An Officer’s Duty of Loyalty at the Intersection of Good Faith and Candor; Joan Heminway, Personal Facts about Executive Officers: A Proposal for Tailored Disclosures to Encourage Reasonable Investor Behavior; Ann M. Olazábal & Patricia Sánchez Abril, Celebrity CEOs: Disclosure at the Intersection of Privacy and Securities Law; Allan Horwich, When the Corporate Luminary Becomes Seriously Ill: When is a Corporation Obligated to Disclose That Illness and Should the Securities and Exchange Commission Adopt a Rule Requiring Disclosure?.

It’s an even knottier question when we extend that analysis not merely to disclosure, but to the original behavior.  Do corporate fiduciaries have a duty to police their private conduct so as not to harm the company?  And in this context, I use the phrase “private” not only to mean unknown to the public, but also to mean personal, unrelated to their jobs as fiduciaries.

When it comes to Bezos, for example, his ownership of the Washington Post is entirely separate from his control of Amazon.  Amazon’s 10-K does not even mention the Washington Post, and its proxy statement only discusses the Post in order to disclose potential related-party transactions regarding advertising and digital services; they are entirely distinct companies.

It might therefore seem bizarre to declare that Bezos has a fiduciary duty to Amazon even when acting entirely in his unrelated capacity as owner of a newspaper.  Yet the law already recognizes that for some executives, the personal and the professional are nearly impossible to disentangle; for example, I am reminded of corporate opportunity cases where an executive’s close relationship with his company made it impossible to distinguish opportunities presented to him in an individual capacity from those presented in a professional capacity – or, as the Delaware Supreme Court famously put it, “In the instant case Guth was Loft, and Guth was Pepsi.”   We might therefore decide that certain controllers – like a Bezos, or a Musk, or a Zuckerberg, or a Gates, or a (formerly) Kalanick, or a Jobs, or a Stewart, or a Winfrey – are so intertwined with their companies, are such auteurs, that they cannot have private pursuits that are distinct from the companies they operate.  All of their behavior may impact their companies, and thus all of their behavior must be scrutinized for compliance with the duties of care and loyalty.

Might the constitutional rights of privacy and free expression play a role here?  Perhaps; fiduciary duties are obligations ultimately imposed and defined by the state.  At the same time, though, there is no constitutional right to be a corporate CEO; unless fiduciary duties are viewed as the equivalent of an unconstitutional condition, there may be few limits to the state’s power to define standards of behavior.

Yet we might nonetheless decide that, as a matter of policy, executives must be granted space for private pursuits, if for no other reason than – as Joan points out – too many talented candidates may simply refuse the top jobs otherwise.  

April 14, 2018 in Ann Lipton | Permalink | Comments (2)

Friday, April 13, 2018

Can a CSR Report Be Used Against A Company in Court?

By Marcia Narine Weldon

Greetings from the ABA Business Law Meeting in sunny Orlando, Florida. Today, I attended an excellent program on Protecting Human Rights in Supply Chains; Moving from Policy to Action. I plan to blog more about the meeting next week, highlighting the work surrounding draft human rights clauses for supplier contracts. The project was spearheaded by David Snyder of American University and corporate lawyer Susan Maslow. In this post, I want to address one of the topics Susan Maslow discussed-- the recent spate of lawsuits brought by consumers who allege unfair trade practices based on what companies say (or don’t say) about their human rights records.

I’ve blogged (incessantly for the past five years) and written longer articles about the various ESG disclosure regimes. I’ve argued that in theory, disclosure is a good thing. But without meaningful financial penalties from regulators for violations, many corporations won’t do anything more than the bare minimum for human rights, even with the threat of (often short-lived) consumer boycotts. Further, most consumers suffer from disclosure overload or don’t understand or remember what they read.

The disclosure issue has now reached the courts. In 2015, a law firm filed cases in California under unfair competition and false advertising laws against the Hershey Company, Mars, and Nestle. The firm likely chose those causes of action because there’s no private right of action under the California Transparency in Supply Chain Act.  The suits claimed, among other things that:

  • in violation of California law, Hershey’s, Mars and Nestle failed to disclose that their suppliers in the Ivory Coast relied on child laborers and profitted from the child labor that supplies the chocolate sold to American consumers,
  • the children subjected to the forced labor are victims of hazardous work involving dangerous tools, transport of heavy loads and exposure to toxic substances, and,
  • “sometimes extremely poor people sell their own children into slavery for as little as $30. Children that are sometimes not even 10 years old carry huge sacks that are so big that they cause them serious physical harm. Much of the world’s chocolate is quite literally brought to us by the back-breaking labor of child slaves.”

Plaintiffs lost those cases because the court found that these companies had no legal duty to disclose on their labels that African child slaves might have been involved in manufacturing their cocoa. Had the plaintiffs won, I imagine that the First Amendment argument that prevailed in the Dodd-Frank conflicts minerals litigation would have played a prominent role in the appeal.

Fast forward a few years and the same law firm has now filed a similar class action lawsuit against Hershey in Massachusetts. This claim alleges unjust enrichment in violation of the state’s consumer protection law. According to plaintiffs, “much of the world’s chocolate is quite literally brought to us by the back-breaking labor of children, in many cases under conditions of slavery.” Moreover, they claim, “Hershey’s material omissions and failure to disclose at the point of sale [are] all the more appalling considering that Hershey’s Corporate Social Responsibility Report state[s] that ‘Hershey has zero tolerance for the worst forms of child labor in its supply chain.’ But Hershey does not live up to its own ideals.”

Hershey, like many companies, produces a CSR report showcasing its efforts and progress in accordance with the Global Reporting initiative, the gold standard for CSR. Companies like Hershey also report on their CSR initiatives in good faith with the knowledge that their statements are generally not legally binding, at least not in the United States. I’ll be following this case closely. If the court grants class certification, this could have a chilling effect on what companies say in their CSR reports, and that would be a shame.

April 13, 2018 in Compliance, Conferences, Corporate Finance, Corporations, CSR, Current Affairs, Human Rights, Marcia Narine Weldon | Permalink | Comments (0)

Thursday, April 12, 2018

David Webber's New Book - An Interesting Read

By Benjamin P. Edwards

One new book worth picking up is David Webber's The Rise of the Working-Class Shareholder: Labor's Last Best Weapon.  When I heard this book was coming out, I jumped to order it immediately. David Webber is a uniquely talented writer. In the book, he takes the stories of ordinary workers and labor activists and uses them to help explain sophisticated corporate governance concepts. Along the way, he keeps his objectivity intact and resists the urge to mythologize the gritty labor activists that help him present key concepts. For example, he writes that one: "was no saint. He was highly confrontational and abrasive, with a tendency to overplay his hand. I don't write about him to hold him up as a paragon. I write about him because he . . . punched [his] way to a new set of tactics that must be refined and widely adopted if labor is going to reassert itself in the twenty-first century."

The balance he brings in his portrayal of labor leaders continues with his discussion of key legal concepts. You'll find yourself appreciating how much a nuanced understanding of ERISA can improve options. Although it's nearly impossible to make ERISA engaging, Webber's writing holds your interest. He presents his view plainly and explains why he thinks it offers the best approach. Still, the book is not another one-sided polemic. It also explains and addresses the other side of the debate to leave readers with informed opinions about the issues. It's a thoughtful book that conveys important ideas and concepts with clarity. It should open many readers' eyes to the true power available to labor's capital and the need to make better use of it.

April 12, 2018 | Permalink | Comments (0)

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