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Friday, November 30, 2018

Suppressed Signal

By Benjamin P. Edwards

A new paper from Colleen Honigsberg and Matthew Jacob sheds light on how to think about FINRA's controversial expungement process.  As I explained in a post a couple years back, FINRA's expungement process leaves its own paper trail behind, making it possible for firms and more sophisticated individuals to see whether a broker has scrubbed complaints from their record:

You should also know that these studies work off compromised databases.  BrokerCheck only shows a partial picture because many financial advisers have managed to have complaints expunged from their records.  In instances where an investor settles an arbitration claim against a financial adviser, FINRA arbitrators routinely agree to expunge the existence of the complaint from the public record.  One study found that FINRA arbitrators granted 90% of these requests for expungement.  In some instances, state regulators have even struggled to block the expungement of complaints from the public record.

Like Harry Potter's Mad-Eye Moody, you too can see the invisible.  You can uncover whether (and possibly how many times) a financial adviser has used this process to scrub records by checking a different database.  FINRA makes its arbitration awards available.  While complaints may not show up on BrokerCheck, you may find whether a financial adviser has had complaints expunged by running their name or registration number through this awards database.  The arbitration award granting expungement still shows up in that database.  Wizardry.  

 Of course, some financial advisers may have used the expungement process to remove truly frivolous complaints.  Still, you probably want to know if a particular financial adviser regularly attracts complaints from disgruntled customers. 

Honigsberg and Jacob examined the expungement process and looked to see what having received an expungment meant about a broker.  In theory, expungment is an extraordinary remedy to remove baseless complaints from a broker's record.  If the process works correctly, a broker that receives an expungement would probably be about as likely as a broker without any complaints to have a future complaint.  (Unless, of course, there is some other reason why a subset of brokers keep attracting baseless complaints.) On the other hand, if the process is scrubbing complaints truly generated by broker behavior--that is to say complaints that would warn other investors that they might have a problem with a broker in the future--brokers that have their slates wiped clean will be more likely to attract a new complaint than the average broker with a clean record.

The paper seems to indicate that the process now suppresses the signal sent by these complaints.  Removing them makes it harder for customers to use the BrokerCheck database to protect themselves.  The paper has some interesting findings--including "that removing this public information increases recidivism."  Fascinatingly, brokers that successfully expunge complaints from their record may be "more likely to reoffend than a broker denied expungement."  Honigsberg and Jacob point out that this might be explained by the behavioral economics literature indicating that success can breed overconfidence and excessive risk taking.  If a broker has been able to suppress a complaint in  the past, she might be a bit more aggressive in the future because she might believe she could suppress a future complaint as well.

Congratulations to Honigsberg and Jacob for this contribution.  The Wall Street Journal picked up on it already.  Hopefully it'll also end up on the desks of regulators at the SEC and FINRA thinking about how to reform the expungement process.

November 30, 2018 | Permalink | Comments (0)

Thursday, November 29, 2018

10th Annual National Business Law Scholars Conference - Call for Papers

By joanheminway

It seems like it's "Call for Papers Week" for me.  Here's one near and dear to my heart, as you all must know . . . .

*     *     *     *     *

National Business Law Scholars Conference (NBLSC)
June 20-21, 2019
Call for Papers

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 20-21, 2019, at the University of California, Berkeley School of Law.

This is the tenth meeting of the NBLSC, an annual conference that draws legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Junior scholars and those considering entering the academy are especially encouraged to participate. If you are thinking about entering the academy and would like to receive informal mentoring and learn more about job market dynamics, please let us know when you make your submission.

To submit a presentation, email Professor Eric C. Chaffee at [email protected] with an abstract or paper by February 15, 2019. Please title the email “NBLSC Submission – {Your Name}.” If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a moderator. We will respond to submissions with notifications of acceptance shortly after the deadline. We anticipate the conference schedule will be circulated in May.

Conference Organizers:
Tony Casey (The University of Chicago Law School)
Eric C. Chaffee (The University of Toledo College of Law)
Steven Davidoff Solomon (University of California, Berkeley School of Law)
Joan Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Tulane University Law School)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)

 

 

November 29, 2018 in Call for Papers, Conferences, Joan Heminway | Permalink | Comments (0)

Observations from a Financial Regulation Academic on Carreyrou's Bad Blood

By Colleen Baker

I’d like to thank the Business Law Prof Blog for the opportunity to be a guest blogger!  In this first post, I build on a subject of previous posts (here, here, and here): Theranos, a now defunct Silicon Valley health-care start-up.

I rely heavily on the Financial Times to follow developments in one of my main research areas: financial market clearing and settlement (I’ll plan to report next week on the upcoming December 4th meeting of the Market Risk Advisory Committee, sponsored by CFTC Commissioner Rostin Behnam).  The FT recently announced that Wall Street Journal investigative reporter John Carreyrou’s book, Bad Blood: Secrets and Lies in a Silicon Valley Startup, had been named the FT/McKinsey Business Book of the Year 2018.  Having immensely enjoyed reading past winners, I wasted no time in ensuring that Amazon Prime speedily delivered it to my doorstep. 

Bad Blood is a riveting tale of Theranos’ spectacular rise and fall, and well-worth the reader’s time.  A fun fact is that a pathologist blogger, Adam Clapper (founder of the former Pathology Blawg), tipped Carreyrou onto the Theranos story (Chapter 19).  Additionally, in the months after Bad Blood’s publication, its founder and CEO, Elizabeth A. Holmes, and former COO, Ramesh “Sunny” Balwani, were charged by the Justice Department with wire fraud.    

I know little about the health-care industry.  Yet in reading Bad Blood, I was struck by links to and concerns shared with the financial industry (an area about which I know more).  Below, I make a few observations and invite reader comments on their importance in these and other industries.

Post-financial crisis, rock-bottom interest rates acted as a “key ingredient” to a new Silicon Valley boom (p.82).  Similarly, these low rates have also been a key ingredient for the many years of increasing stock market prices post-financial crisis.  Indeed, recent equity market declines made at least a temporary rebound yesterday after comments by Federal Reserve Chairman Jerome Powell at the Economic Club of New York.     

The increasing expansion of private markets enables companies such as Theranos to “avoid the close scrutiny” (p.178) to which public companies are subject (nevertheless, Theranos and Holmes settled fraud charges with the SEC).  Given current regulatory structures, it also risks severely limiting retail investment opportunities.  And it adversely impacts financial journalists’ access to information!  

When I teach Banking and Financial Institutions Law, the term “regulation-induced innovation” tends to amuse students.  The Theranos tale demonstrates, however, that such practices aren’t a laughing matter.  For example, its business strategies appeared to include: maneuvering in regulatory “gray zones” between the FDA and Centers for Medicare and Medicaid Services (p.88), exploiting “gap[s] spawned by outdated statutes” (p.125), and “operat[in]g in a regulatory no-man’s-land” (p.260).  Such practices can be troublesome enough in financial markets.  However, in Theranos’ case, the stakes (patient health) were much higher.    

Finally, who doesn’t love a good story?  Carreyrou, a two-time Pulitzer Prize-winning journalist, is an expert storyteller.  His portrayal of Holmes suggests that she too profoundly understood the power of stories, and that she had a bewitching talent for telling them.  Clearly, untruthful, non-fictional narratives are generally unethical and, depending upon the context, might also be illegal.  However, taking a cue from Holmes on the importance of stories and honing one's ability to tell them could assist financial market policymakers.  Indeed, several years ago, the FT’s Gillian Tett wrote an opinion piece entitled, “Central bank chiefs need to master the art of storytelling.”  Enhanced storytelling capabilities could also assist academics researching financial market regulation.  For both, the ability to compellingly communicate with the public about issues in financial markets and their broad-based importance is critical.  Even so, constructing a fascinating narrative about clearing and settlement along the lines of Bad Blood would be no small feat!  

November 29, 2018 in Books, Current Affairs, Entrepreneurship, Financial Markets | Permalink | Comments (4)

Wednesday, November 28, 2018

ICYMI: #corpgov Midweek Roundup (Nov. 28, 2018)

By Stefan J. Padfield

November 28, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Welcome Guest Blogger Colleen Baker

By Haskell Murray

Colleen Baker

Colleen Baker is joining us as a guest blogger at Business Law Prof Blog for the next month. Colleen Baker is an Assistant Professor at the Price College of Business at the University of Oklahoma. She is also affiliate faculty at the University of Oklahoma College of Law. Her research interests primarily lie in the banking and financial institutions law and regulation space. Additional information about her education, practice, and publications can be found at her bio, linked to above. We are looking forward to Professor Colleen Baker's posts and hope our readers will engage with her work.

November 28, 2018 in Business School, Research/Scholarhip | Permalink | Comments (0)

Tuesday, November 27, 2018

Not the Default Rule, But LLC Members Definitely Can Be Employees

By Joshua Fershee

Last week I posted Can LLC Members Be Employees? It Depends (Because of Course It Does), where I concluded that "as far as I am concerned, LLC members can also be LLCs employees, even though the general answer is that they are not. " I thought I would follow up today with an example of an LLC member who is also an employee.  

I am not teaching Business Associations until next semester, but it galls me a little that I did not note this case last week, as it is a case that I teach as part of the section on fiduciary duties in Delaware.  

The case is Fisk Ventures, LLC v. Segal and the relevant facts excerpted from the case are as follows: 
Genitrix, LLC, is a Delaware limited liability company formed to develop and market biomedical technology. Dr. Segal founded the Company in 1996 following his postdoctoral fellowship at the Whitehead Institute for Biomedical Research. Originally formed as a Maryland limited liability company, Genitrix was moved in 1997 to Delaware at the behest of Dr. H. Fisk Johnson, who invested heavily. 
Equity in Genitrix is divided into three classes of membership. In exchange for the patent rights he obtained from the Whitehead Institute, Segal's capital account was credited with $500,000. This allowed him to retain approximately 55% of the Class A membership interest. . . . 
 
Under the [LLC] Agreement, the Board of Member Representatives (the “Board”) manages the business and affairs of the Company. As originally contemplated by the Agreement, the Board consisted of four members: two of whom were appointed by Johnson and two of whom were appointed by Segal. In early 2007, however, the balance of power seemingly shifted. . . . 
 
Dr. Andrew Segal, fresh out of residency training, worked for the Whitehead Institute for Biomedical Research . . . [and when he] left the Whitehead Institute and obtained a license to certain patent rights related to his research.
With these patent rights in hand, Dr. Segal formed Genitrix. Intellectual property rights alone, however, could not fund the research, testing, and trials necessary to bring Dr. Segal's ideas to some sort of profitable fruition. Consequently, Segal sought and obtained capital for the Company. Originally, Segal served as both President and Chief Executive Officer, and the terms of his employment were governed by contract (the “Segal Employment Agreement”). Under the Segal Employment Agreement, any intellectual property rights developed by Dr. Segal during his tenure with Genitrix would be assigned to the Company.

Fisk Ventures, LLC v. Segal, No. CIV.A. 3017-CC, 2008 WL 1961156, at *2 (Del. Ch. May 7, 2008) (emphasis added) (footnotes omitted).  

So, for my purposes, that's a solid example of an LLC member who is also an employee, and it is from a case featured in more than one casebook, I might add.  

Co-blogger Joan Heminway noted in a comment to last week's post that what it means to be an employee can vary, based on statutory and other conditions, which is certainly true. I stand by my prior conclusion that it depends on the case whether a particular member of an LLC is an employee, and even that can vary based on context.  Thus, LLC members are not inherently employees, and perhaps most of the time they are not, but it's also true that LLC members can be employees. 

Finally, as to the Fisk Ventures case, in case you're curious, the short of it is that Fisk decided not to provide additional financing to Genitirx, and Segal sued claimed that not doing so breached certain fiduciary duties under the LLC agreement and further various acts "tortiously interfered with the Segal Employment Agreement."  Ultimately, Chancellor Chandler determined that there was no duty breached, the obligation of good faith and fair dealing did not block certain members from exercising express contractual rights, and the agreement's clause disclaming any fiduciary duties was valid.  

 

November 27, 2018 in Contracts, Delaware, Joshua P. Fershee, LLCs | Permalink | Comments (3)

Monday, November 26, 2018

Entrepreneurship in the Sharing Economy: P2P Strategies, Models, and Innovation Paradigms - Call for Papers

By joanheminway

From our friend and colleague, Djamchid Assadi at the Burgundy School of Business in Dijon, France:

 

Lisbon2019_EURAM-banner_1100

SIG 03 - ENT - Entrepreneurship

With our theme Exploring the Future of Management: Facts, Fashion and Fado, we invite you to participate in the debate about how to explore the future of management.

We look forward to receiving your submissions.

T03_08 - Entrepreneurship in the sharing economy: P2P strategies, models, and innovation paradigms

Proponents:

Djamchid Assadi, Burgundy School of Business BSB; Asmae DIANI, Sidi Mohamed Ben Abdellah University, Fez, Morocco; Urvashi Makkar, G.L. Bajaj Institute of Management and Research (GLBIMR), Greater Noida; Julienne Brabet, Université Paris-Est Créteil (UPEC); Arvind ASHTA, Arvind, CEREN, EA 7477, Burgundy School of Business - Université Bourgogne Franche-Comté, France

Short description:

Sharing of funds, files, accommodations, and other utilities and properties has become a vital part of the emerging social life and economy.

The traditional dyadic firm-to-customer transactions has given place to the depositional triadic of P2P platforms game changers which facilitate exchange between peer providers and peer recipients. As these P2P platforms disrupt conventional transactions, for example, P2P home exchange platforms like Airbnb thoroughly disorder the hotel industry, it is crucial that researchers consider conceptual refinement and empirical grounding for providing insights.

This track aims to bring together researchers with an interest in the sharing economy and, specifically, in P2P platforms.

Long description:

While direct interactions among individuals have always existed, P2P sharing platforms have considerably facilitated and lowered transaction costs for P2P exchanges. The P2P platforms do not supply nor demand. They do not divide a fortune to distribute its portions among peers. The P2P platforms simplify, accelerate and facilitate interactions among peers on the two-sided markets without the intermediation of central hubs. They enable individuals to unlock their unused and underused assets and skills for non or for-profit exchanges among peers.

They have transformed the way individuals consume and generate income and make use of their disposable resources and time. Numerous P2P platforms have sprung up for enterprising (Kickstarter, Indiegogo), working (Carpooling, Airbnb), dating (eHarmony, Match), innovating (Mindmixer), funding (Kiva, Zopa, Prosper), searching (CrowdSearching), etc. Airbnb and Uber are currently valued at $30 and $72 billion respectively.

This track aims to bring together researchers to provide insights and actionable visions to the emerging social and economic paradigms of spontaneous interactions and transaction among peers. It welcomes contributions that examine how P2P platforms transform market, entrepreneurship, competition, strategy, government-industry relations, supply chains, innovation, and other processes.

The following is a non-comprehensive list of leading issues in the sharing economy area.

How does entrepreneurship change in the sphere of sharing resources and utilities?
How do paradigms change in the case of open innovation?
Are the strategies and business models of sharing and collaborative online platforms peculiar?
Why do peers collaborate, share and circulate?
How does the sharing economy impact customer behavior?
What are the relations between social ties and ecosystem on the two-sided markets of the sharing economy?
How do conventional businesses react and develop business models to compete and/or coexist with the increasing trend of sharing economy?
How is value created (income steams) and distributed (value appropriation) among stakeholders in the sharing economy? Who are winners and losers? 
What is the role of institutions in the sharing economy?
How do technologies such as artificial intelligence, machine learning, augmented and virtual reality, and blockchains affect the functioning of sharing economy?
What are the effects of collaborative consumption on sustainability?
Is the possibility of evading ante-P2P regulations the dark side of the sharing economy?

Keywords:

Sharing and collaborative economy
Peer-to-peer and Two-sided market
Spontaneous order of P2P interactions and exchanges
Crowdfunding
Carpooling and Home-exchange
Online dating

Publication Outlet:

Optimization: Journal of Research in Management (Urvashi Makkar, proponent 2, is founding Editor-in-Chief of this journal. Djamchid Assadi, proponent 1, is member of the Editorial Board).

Innovative Marketing (Djamchid Assadi, proponent 1, is member of the Academic Advisory Board. He has exchanged for specific issues with Tatyana Kozmenko, Editorial Assistant).

The corresponding proponent, Djamchid Assadi, has exchanged with the individuals in charge within the books publishing companies. They have shown interest in considering proposals for collective books on the topic of sharing economy.

For more information contact:

Djamchid Assadi - [email protected]

AUTHORS GUIDELINES

http://www.euramonline.org/submissions-guidelines-2019/author-s-guidelines.html

  • Conference: 26-28 June 2019
  • Authors registration deadline: 25 April 2019 // Early birds registration deadline: 18 April 2019
  • Notification of acceptance: 20 March 2019
  • Deadline for paper submission: 15 January 2019 (2 pm Belgian time)

November 26, 2018 in Call for Papers, Conferences, Corporate Finance, Corporate Governance, Securities Regulation | Permalink | Comments (0)

Teaching UPA v. Teaching RUPA

By Douglas Moll

    Life is filled with difficult choices.  Chocolate or Vanilla?  Brady or Rogers?  Is that dress white/gold or blue/black?  And for law professors who teach Business Organizations, perhaps the most difficult choice of all:  UPA or RUPA?

    In all seriousness, and in the same vein as Joan’s earlier post on teaching fiduciary duty, the UPA/RUPA question when teaching partnership law is something that challenges me every year.  In the past, I focused on UPA and UPA cases, and then I briefly discussed RUPA as a point of contrast after finishing those materials.  My rationale, as I have explained elsewhere, was as follows:

    Despite the prevalence of RUPA in this country, the materials in this Chapter will discuss both UPA and RUPA.  There are several reasons for this dual treatment.  First, UPA is still the law in some commercially important states, including New York.  Second, UPA and RUPA share many common principles.  Because there is far more UPA case law than RUPA case law, however, many of the primary materials that are useful for teaching the basic principles of partnership law are based on UPA.  Third, it is easier to understand many of the significant changes in RUPA, particularly the dissociation and dissolution provisions, if one has a working knowledge of how those issues are dealt with under UPA.

While I am still comfortable with this rationale, the problem is that I never had time to do anything more with RUPA other than to set it up as a point of contrast—and for a single class at the most.  I always had the nagging feeling that my emphasis was backwards—my students should leave with a solid knowledge of RUPA and a passing familiarity with UPA, rather than the other way around.

    Over the past ten years or so, I have changed things.  Casebooks have gotten better about including RUPA-based cases (and there are now more of them), but most cases (and certainly the most “famous” cases) are still UPA-based.  Nevertheless, I tell my students that we are going to read and discuss all of the cases as if RUPA governed them.  I still discuss UPA, but I find that a brief discussion of the aggregate theory, the concept that partners joining and leaving the partnership leads to dissolution under that theory, and a few examples of aggregate-related problems (partnerships owning property, partnerships buying insurance) suffices to help the students understand why RUPA and its entity approach came about.  I feel much more confident that my students have a better grasp of RUPA (which is more important for them in Texas) and a passing familiarity with UPA, which I think is where they ought to be.  And when we get to LLCs, their familiarity with RUPA concepts is very helpful given that the modern uniform LLC statutes follow, in large part, the organization and logic of RUPA.

    I’m curious if others agree or disagree.  Assuming that you still teach general partnership law (and haven’t jettisoned it completely in favor of LLC materials, which is a subject for its own post), do you still teach UPA and, if so, why?

November 26, 2018 | Permalink | Comments (10)

Sunday, November 25, 2018

ICYMI: #corpgov Weekend Roundup (Nov. 25, 2018)

By Stefan J. Padfield

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

Saturday, November 24, 2018

Proxy advisors: A regulatory lacuna

By Ann Lipton

Last week, I posted about the SEC’s Proxy Roundtable, and in particular, the panel regarding proxy advisors.

As I mentioned at the time, one of the big issuer complaints about proxy advisors is that their recommendations may be erroneous – though of course, the definition of “error” is somewhat expansive and may include differences of interpretation.  Issuer advocates have long sought some regulatory/statutory ability to review and, if possible, force revisions to proxy advisor reports before they are published, a proposal that – as I previously noted - apparently has found some sympathy with at least Commissioner Roisman.

From my perspective, though, the most interesting aspect to all of this is that if proxy advisors do, in fact, include false statements (however defined) in their recommendations, it is not entirely clear whether and to what extent they are subject to federal sanction.

The most obvious place to begin is Rule 14a-9, which prohibits false or misleading statements in proxy solicitations, and has generally been interpreted to apply to negligent, as well as intentional, false statements.

The problem here is that it is not entirely clear that the voting recommendations of proxy advisors are proxy solicitations.  Glass Lewis, in its letter to the Senate Banking Committee, functionally concedes that they are; but ISS’s letter disputes that interpretation, and argues that voting recommendations by proxy advisors are not proxy solicitations.

If ISS is right, is there any prohibition on false statements?

Well, ISS says yes, at least for its own recommendations, because ISS is a registered investment advisor.  As such, it is subject to the antifraud provisions of the Investment Advisers Act, and is subject under that Act to a duty of care, including a duty to ensure the accuracy of its recommendations.

That’s fine as far as it goes, but Glass Lewis is not a registered investment advisor, because it disputes that proxy advice counts as investment advice.

What if they’re both right: voting recommendations are neither proxy solicitations nor investment advice?  Then neither 14a-9, nor the Investment Advisers Act, would apply to false statements in recommendations.*

We might then look to general prohibitions on false statements, articulated in Section 10(b) of the Exchange Act and Section 17 of the Securities Act.  The problem is, both of these statutes only apply to statements made in connection with securities transactions.  Proxy advisors, by definition, only provide voting advice, not advice regarding purchases and sales.  Now, that may not matter: Section 10(b), for example, has been broadly extended to situations where the speaker might reasonably anticipate its statements would be used in connection with securities transactions, even if they weren’t specifically intended for that purpose.  But then any legal action would focus on buying and selling rather than voting behavior.  So it’s an unsettling gap: If proxy advisors are only providing voting advice, and their statements are not proxy solicitations, is there any clear legal prohibition on falsity? 

My point is this: There’s a real ambiguity about where, if it all, proxy advisors fit within the existing regulatory framework, and while I am not convinced there is a specific problem with how they operate or even necessarily a need for regulation, I think it can only be for the good if the SEC were to at least clarify the law, if for no other reason than that these entities play an important role in the securities ecosystem, and if we expect market pressure to discipline them, potential new entrants should have an idea of the regime to which they will be subject.

So this is where I do think some action by the SEC would be helpful.  Certainly, the SEC can decide whether proxy advisors’ voting recommendations qualify as proxy solicitations, and whether their conduct qualifies as investment advice (which might render unnecessary the proposed Senate Bill that would require proxy advisors to register as investment advisors).  And if neither of these categories applies, the SEC might weigh in on whether and to what extent proxy advisors may be liable privately or subject to regulatory sanction for distributing false information in advance of an upcoming vote.  And that alone, leaving aside other issuer complaints, would probably be useful going forward.

*Why the divergence in views as to whether proxy advice counts as investment advice?  I assume the default is no one wants to claim a regulated status if they don’t have to, but ISS is particularly vulnerable to charges of conflict due to its consulting business; it may therefore feel that RIA status lends it an air of legitimacy that its clients find reassuring and that staves off additional regulatory pressure.

November 24, 2018 in Ann Lipton | Permalink | Comments (0)

Friday, November 23, 2018

Is Fair Trade Really Fair?

By Marcia Narine Weldon

IMG_1382

Greetings from Panama. Are you one of the people who look for products labeled "organic," "non-GMO," or "fair trade"? According to the official Fairtrade site:

Fairtrade is a simple way to make a difference to the lives of the people who grow the things we love. We do this by making trade fair.
Fairtrade is unique. We work with businesses, consumers and campaigners. Farmers and workers have an equal say in everything we do. Empowerment is at the core of who we are. We have a vision: a world in which all producers can enjoy secure and sustainable livelihoods, fulfill their potential and decide on their future. Our mission is to connect disadvantaged farmers and workers with consumers, promote fairer trading conditions and empower farmers and workers to combat poverty, strengthen their position and take more control over their lives....

Over and above the Fairtrade price, the Fairtrade Premium is an additional sum of money which goes into a communal fund for workers and farmers to use – as they see fit – to improve their social, economic and environmental conditions...

Fairtrade is about better prices, decent working conditions, local sustainability, and fair terms of trade for farmers and workers in the developing world. By requiring companies to pay sustainable prices (which must never fall lower than the market price), Fairtrade addresses the injustices of conventional trade, which traditionally discriminates against the poorest, weakest producers. It enables them to improve their position and have more control over their lives..

With Fairtrade you have the power to change the world every day. With simple shopping choices you can get farmers a better deal. And that means they can make their own decisions, control their future and lead the dignified life everyone deserves. 

In 2016, farmers received 158 million euros in Fairtrade premiums. 

This sounds great in theory, but according to a cacao farmer I spent time with in Panama, fair trade is not fair to the farmers. He and others in his indigenous tribe earn so little from the cacao exported to Switzerland for fine Swiss chocolate that he must resort to giving tours of his plantation in order to maintain the village school and pay for medical expenses for his tribe. His farm earns only 85 cents per half kilo of cacao (or 12 pods). This .85 cents is only for the exceptional cacao. Sometimes they earn even less. The Swiss tout the organic, non-GMO product and inspect the farms annually, which means that the farmers cannot use any fertilizers to combat the fungus that kills 85% of the crop every year. This also means that the farmers do everything by hand, including cutting, fermenting, roasting, and shelling the beans. The farmer/tour guide explained that they treat the cacao plants like a woman-- they love, cherish, and protect them every day. They use the same harvesting process that they have used for over 1,000 years. IMG_1375

Just like coffee farmers I met in Guatemala, the cacao farmer I met in Panama calls "fair trade" a marketing scheme for the Americans and Europeans. I assume the farmers I met represent the view of some portion of the 1.65 million farmers involved in the Fairtrade program.  For more on the Fair Trade debate, see here.

I will have more on this and other sustainability issues next week. I'll be at UN Forum on Business and Human Rights with 2500 companies, NGOs, academics, and state representative in Geneva. In the meantime, if you're buying someone Fairtrade chocolate for the holidays, do it for the taste because you're not really doing much to help the farmer.

IMG_1351

November 23, 2018 in Corporate Personality, Corporations, CSR, Current Affairs, Human Rights, Marcia Narine Weldon | Permalink | Comments (1)

Wednesday, November 21, 2018

ICYMI: #corpgov Midweek Roundup (Nov. 21, 2018)

By Stefan J. Padfield

November 21, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, November 20, 2018

Can LLC Members Be Employees? It Depends (Because of Course It Does)

By Joshua Fershee

Tom Rutledge posts the following over at the Kentucky Business Entity Law Blog:

LLC Members Are Not the LLC’s Employees

There is now pending before the Eighth Circuit Court of Appeals of a suit that may turn on whether the relevant question, namely whether an LLC member is an employee of the LLC, has already been determined by a state court. In that underlying judgment, the Circuit Court of Cole County, Missouri, issued a judgment dated October 9 18, 2017 in the case Joseph S. Vaughn Kaenel v. Warren, Case No.: 15 AC-CC 00472. That judgment provided in part:

As an equity partner of Armstrong Teasdale, LLP, [Kaenel] is not a covered employee protected by the Missouri Human Rights Act.

I am curious as to which case this is that is pending.  Tom knows his stuff and knows (and respects) the differences between entities, so I assume there is more to than appears here.  

For example, the fact that a state court determined that an LLP equity partner is not an employee does not inherently answer the question of whether an LLC member is an employee. It could, but it does not have to do so.  

In addition, I'd want to know more about the relationship between the LLC member and the entity.  I am inclined to agree that an LLC member is not generally an employee merely by virtue of being a member.  But I am also of the mind that an LLC member could also be an employee.  In fact, there are times when counsel would be wise to advise a client who is an LLC member to also get an employment contract is she wishes to get paid.  I am assuming there is not an employment contract here for the Eighth Circuit case. 

However, suppose in the operating agreement all the members agree to pay one member for certain services. Or perhaps the compensated member gets priority payouts because of her agreement to do certain work for the entity.  That would, as far as I am concerned, at least muddy the waters.

I'll be interested to see where this one goes (and, perhaps, what I have missed). But as far as I am concerned, LLC members can also be LLCs employees, even though the general answer is that they are not.  

November 20, 2018 in Employment Law, Joshua P. Fershee, LLCs, Partnership | Permalink | Comments (2)

Monday, November 19, 2018

Teaching Corporate Fiduciary Duties, Again . . . .

By joanheminway

Even after 19 years or so of teaching Business Associations courses, I still marvel at how hard it is to teach corporate fiduciary duty doctrine to my students.  A lot of my frustration comes from the amount of (perhaps not-so-useful) judicially instigated labeling involved under Delaware law, as the leading state in the area.  In particular, there is the narrowing of the duty of care to exclude both substantive duty of care claims and Caremark claims.  And then there is the matter of how to best describe the nature of the business judgment rule and how to describe the interaction of disclosure (candor) with the fiduciary duties of care and loyalty. And finally there is a lingering doctrinal question as to whether, in other jurisdictions, good faith, classified as a subsidiary component of the duty of loyalty in Delaware, may be a free-standing fiduciary duty or, in the alternative, foundational, penumbral, etc. to the fiduciary duties of loyalty and care  . . . .  Tough stuff.

Is anyone else out there suffering in the same way I do in teaching fiduciary duties in a Business Associations or Corporations class?  How do you handle the legal complexity/labeling questions?  I continue to want to improve in teaching this material.  I am all ears.

[Postscript:  I failed to note in the original post the helpful comments that I received on a longer-form, less specific post on this issue two years ago.  Feel free to look there for more and for some ideas folks shared about their teaching then.]

November 19, 2018 in Corporate Governance, Corporations, Joan Heminway, Teaching | Permalink | Comments (7)

Sunday, November 18, 2018

ICYMI: #corpgov Weekend Roundup (Nov. 18, 2018)

By Stefan J. Padfield

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

Saturday, November 17, 2018

SEC Roundtable and Proxy Advisory Firms

By Ann Lipton

The SEC held its Roundtable on the Proxy Process on Thursday, and I was able to watch the live webcast of the last panel on proxy advisory firms.  (In a prior post, I discussed how, in advance of the Roundtable, the SEC withdrew two no-action letters that facilitated investment advisors’ reliance on proxy advisory services.) 

One thing I’ll note about the Roundtable is that it felt a lot like oral argument in an appellate court, in that everyone had fun expounding their positions but it’s not where the real policymaking gets done; that’s going to take place in back offices based on private meetings and written submissions, not in a public theater.

Still, I was interested in what everyone had to say.  The webcast just went online here, but I’ll offer a summary of what stood out to me. 

(More under the jump)

Continue reading

November 17, 2018 in Ann Lipton | Permalink | Comments (0)

Friday, November 16, 2018

Will blockchain make voting more or less secure?

By Marcia Narine Weldon

     Greetings from Florida, the land of the endless voting snafus. As I continue my research on blockchain use cases, I’m particularly fascinated with the potential to make voting more streamlined and secure. West Virgina just used blockchain-protected voting in a general election for 144 voters in 30 different countries who were able to cast their ballots anonymously using a blockchain-enabled  app. Military personnel and overseas voters from 24 of the state’s 55 counties used the app from Voatz.. Under  the Uniformed and Overseas Citizens Act, personnel verify their identities by providing a photo of their driver’s license, state ID or passport that is matched to a selfie. After confirmation of the identity, the voter receives a mobile ballot based on the one that s/hewould receive in the local precinct. 

     Although the technology is supposed to be tamper proof, some argue that blockchain voting can’t protect against server problems, internet outages, or hacks on the mobile devices. Nonetheless, many governments are exploring the technology for voting and other citizen services. The tiny nation of Estonia has led the way in using digital ledger technology for citizen services since 2008. Through its E-Estonia initiative, the government facilitates voting, education, the justice system, legislation and other services. Not to be outdone, Dubai plans to become the first blockchain-powered government by 2020. Visas, permits, licenses, and bill payments require 100 million documents annually, and  the government believes that it can save 1.5 billion dollars through a paperless system.

     Of course, blockchain isn’t a cure all for our voting woes, but as a Floridian who is still waiting to find out who actually won our gubernatorial and senatorial races, I’m willing to try anything. 

November 16, 2018 | Permalink | Comments (0)

Thursday, November 15, 2018

New Jersey Fiduciary Regulation

By Benjamin P. Edwards

Facing looming retirement crises, some states have begun to do more.  Notably, Nevada recently passed a state fiduciary statute.  I cheered the legislation's passage because it mostly puts in place the legal protections that most savers now mistakenly believe that they already have.  New Jersey also recently began to solicit comments on the issue as well.  For the New Jersey process, written comments are due on December 14th.

As it moves forward, New Jersey will likely have to contend with the financial services industry doggedly lobbying to protect a stockbroker's right to sell clients the wrong products.  Much of the campaign will likely be led by the Securities Industry and Financial Markets Association (SIFMA).  SIFMA touts itself as "the voice of the nation's securities industry."  It came up with some creative concerns about the Nevada fiduciary statute and will likely raise similar concerns with New Jersey. 

One SIFMA argument struck me as particularly interesting in its implications:

We remain concerned that any new fiduciary duties under the Nevada law would impose additional recordkeeping requirements that would violate the National Securities Markets Improvement Act of 1996 (“NSMIA). As you well know, NSMIA precludes states from enacting regulations relating to the making and keeping of records “that differ from, or are in addition to, the requirements in those areas established under [the Exchange Act].” We are hard pressed to envision a scenario in which new duties do not require the creation of a new record.

For example, under the new law, broker-dealers and their agents are subject to NRS 628A.020. This provision states:

“A financial planner has the duty of a fiduciary toward a client. A financial planner shall disclose to a client, at the time advice is given, any gain the financial planner may receive, such as profit or commission, if the advice is followed. A financial planner shall make diligent inquiry of each client to ascertain initially, and keep currently informed concerning the client’s financial circumstances and obligations and the client’s present and anticipated obligations to and goals for his or her family.” 

Both the disclosure and information collection requirements would need to be done in writing, or verbally followed by the creation of a written record to document compliance with and ensure adequate supervision of these obligations. In our view, even if the Division does not require that a new form be filled out, the broker-dealer would still have to create a new record to demonstrate compliance, which violates NSMIA. We encourage you to continue to explore options that do not create additional books and records issues.

In essence, SIFMA appears to be arguing that states cannot regulate conduct within state borders if it would require incidental paperwork.  Curiously, SIFMA's testimony omitted the statute's next sentence which says that the "[SEC] shall consult periodically the securities commissions (or any agency or office performing like functions) of the States concerning the adequacy of such requirements as established under this chapter."  If Congress intended to strip the states of the power to regulate conduct, it seems odd that the statute would direct the SEC to check with the states to make sure that its books and records rules were adequate.  If a court read the statute the way SIFMA seems to, it would mean that a state could not require a financial adviser to inform the client about how much money she would make off selling a particular product.  It would also mean that the states could not regulate conduct if it might ever require anyone to write something down.

The argument also seems to stretch too far because it would interfere with state authority to prohibit fraud.  When Congress passed the NSMIA, it took pains to explicitly preserve the states' power to enforce their anti-fraud laws.  If state law creates a disclosure duty to inform the customer about a conflict, it would likely be a fraudulent omission for a broker-dealer to make sales without disclosing the conflict.  

It'll be interesting to watch this issue to see what happens.

 

November 15, 2018 | Permalink | Comments (0)

Wednesday, November 14, 2018

ICYMI: #corpgov Midweek Roundup (Nov. 14, 2018)

By Stefan J. Padfield

November 14, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, November 13, 2018

LLCs are Not Corporations, But That Does Not Mean LLC Diversity Rules Make Sense

By Joshua Fershee

Back in May, I noted my dislike of the LLC diversity jurisdiction rule, which determines an LLC's citizenship “by the citizenship of each of its members” I noted, 

I still hate this rule for diversity jurisdiction of LLCs.  I know I am not the first to have issues with this rule. 

I get the idea that diversity jurisdiction was extended to LLCs in the same way that it was for partnerships, but in today's world, it's dumb. Under traditional general partnership law, partners were all fully liable for the partnership, so it makes sense to have all partners be used to determine diversity jurisdiction.  But where any partner has limited liabilty, like members do for LLCs, it seems to me the entity should be the only consideration in determing citizenship for jurisdiction purposes. It works for corporations, even where a shareholder is also a manger (or CEO), so why not have the same for LLCs.  If there are individuals whose control of the entity is an issue, treat and LLC just like a corporation. Name individuals, too, if you think there is direct liability, just as you would with a corporation. For a corporation, if there is a shareholder, director, or officer (or any other invididual) who is a guarantor or is otherwise personally liable, jurisdiction arises from that potential liability. 
I am reminded of this dislike, once again, by a recently available case in which an LLC is referred to as a "limited liability corporation" (not company).  
Dever v. Family Dollar Stores of Georgia, LLC, No. 18-10129, 2018 WL 5778189, at *1 (11th Cir. Nov. 2, 2018). This is so annoying. 
 
The LLC in question is Family Dollar Stores of Georgia, LLC, which involved a slip-and-fall injury in which the plaintiff was hurt in a Family Dollar Store. Apparently, that store was located in Georgia. The opinion notes, though, that the LLC in question was "organized under Virginia law with one member, a corporation that was organized under Delaware law with its principal place of business in North Carolina." Id. 
 
It seems entirely absurd to me that one could create an entity to operate stores in a state, even using the state in the name of the entity, yet have a jurisdictional rule that would provide that for diversity jurisdiction in the state where the entity did business (in a brick and mortar store, no less) where someone was injured.  (Side note: It does not upset me that Family Dollar Stores of Georgia, LLC, would be formed in another state -- that choice of law deals with inter se issue between members of the LLC. )  
 
I'll also note that I see cases dealing with LLC diversity jurisdiction incorrectly referring to LLCs as "limited liability corporations." For example, these other cases also appeared on Westlaw within the last week or so: 
  • Util Auditors, LLC v. Honeywell Int'l Inc., No. 17 CIV. 4673 (JFK), 2018 WL 5830977, at *1 (S.D.N.Y. Nov. 7, 2018) ("Plaintiff ... is a limited liability corporation with its principal place of business in Florida, where both of its members are domiciled.").

  • Thermoset Corp. v. Bldg. Materials Corp. of Am., No. 17-14887, 2018 WL 5733042, at *2 (11th Cir. Oct. 31, 2018) ("Well before Thermoset filed its amended complaint, this court ruled that the citizenship of a limited liability corporation depended in turn on the citizenship of its members.").
     
    ALLENBY & ASSOCIATES, INC. v. CROWN "ST. VINCENT" LTD., No. 07-61364-CIV, 2007 WL 9710726, at *2 (S.D. Fla. Dec. 3, 2007) ("[A] limited liability corporation is a citizen of every state in which a partner resides.").
Coincidence? Maybe, but it's still frustrating. 
 

November 13, 2018 in Corporations, Delaware, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

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