Monday, January 6, 2020
Advice to My Business Associations Students . . . And Maybe Yours, Too
Business Associations is a tough course to teach, whether it is taught in a three-credit-hour or four-credit-hour format. I have written before (here, here, and here) about the challenges of teaching fiduciary duties in this course. And I recently posted here and here about the characterization of a classic oversight conundrum as a matter of corporate fiduciary duty law in Delaware.
I just recently finished grading my Business Associations exams from last semester. They were a good lot overall, but they evidenced several somewhat common errors that seemed to beg for broad dissemination to the class. So, I sent them all a message inviting them to come in and review their exams and highlighting certain things for their attention of a more general nature.
Today, I offer you that general counsel that I gave to my Business Associations students based on that review of their written final exams. It is set forth below, absent my introductory and closing remarks. As you'll see, some of it relates to substantive law, and some of it relates to exam or other skills. Perhaps this is of use to those of you who just taught or are about to teach the course. Maybe some students will read it and learn from it. Regardless, here it is.
- Agency rules and management rules in business associations law are often confused. Agency rules express the authority of a person to act on behalf of the firm in transactions with third parties--those who enter into transactions with the firm. For example, by default under the RUPA, each partner in a RUPA partnership is an agent of the partnership that can bind the partnership to contracts with others. Management rules, by contrast address the governance and control authority of a particular firm constituent within the governance structure of the firm. Thus, agency rules relate to authority that is outward-facing (pertaining to transactional parties) and management rules relate to authority that is inward-facing (pertaining to internal constituents of the firm). For example, by default under the RUPA, each partner has an equal right to manage the partnership.
- Similarly, the concept of "limited liability" is commonly understood to refer to the limited liability of a firm owner for the firm's obligations. For example, under the RUPA, each partner is jointly and severally liable for the obligations of the partnership, whereas under corporate law, shareholders are not personally liable for the corporation's obligations to third parties. Exculpation, which eliminates the monetary liability of directors in the corporate context, relates to corporate governance claims--legal actions for breach of the fiduciary duty of care. This is internal governance litigation that does not relate to corporate obligations to third parties. So, while exculpation does limit (eliminate) a director's personal liability for a breach of the duty of care, it is not part of what people generally refer to as "limited liability" in a corporate context.
- Fiduciary duties are typically understood to instill or increase trust in relationships. Accordingly, they are commonly employed to provide a benefit in circumstances involving untrustworthy business associates. Yet a number of you seemed to think they were an undue burden to business venturers in circumstances where trust may be lacking (i.e., where fiduciary duties should be useful). You will need to make a solid argument to most folks to justify that the detriments outweigh the benefits.
- If an exam or assignment question asks for you to talk about why one set of rules is better than another in addressing a specific scenario, make sure you contrast examples from the two sets of rules, applying each to the relevant facts.
- Read questions carefully and closely. When a question asks for you to reference or rely on statutory default rules,ensure that your response references or relies on statutory default rules--not on ways on which those rules can be or have been agreed around through private ordering. When a question asks for information or an evaluation or rules relating to member-managed LLCs, ensure you directly address member-managed LLCs in lieu of (or at least before) commenting on manager-managed LLCs or the flexibility of moving back and forth between member-managed and manager-managed LLCs.
- Don't forget to cite to an appropriate source for rules on which you rely in your legal analysis.
- Keeping track of and managing time is important to the bar exam and other in-class timed exercises. If you ran out of time in responding to the prompts on this exam, evaluate why. I can help, if need be. But understanding how and why your time management skills may have failed you can be important.
Feel free to add your observations or advice of a similar (or different) nature in the comments. I am teaching Advanced Business Associations this semester, so I can work on some of these things during that course. In any event, I wish you all a happy and healthy semester and year, whatever you may be teaching or doing.
These are nice additions, Walter! In the partner example, I do try to parse out the two pieces of that "blend," but I find that students still struggle a bit with--or at least have trouble properly labeling--the differences between the internal authority to act in governing the firm and the authority to bind the firm in transactions with third parties. And I have certainly commented in class on the second matter you raise, referring to the problem of two many "Ls" in business entity law--are we referring to limiting a partner's liability or authority or both (as in the LLLP)? There is often confusion between LLPs and LPs. I try to root that out in my first writing assignment for the course . . . .
Thanks for contributing these thoughts and your ideas. Have a great semester!
Posted by: joanheminway | Jan 7, 2020 4:46:54 AM
These are great. Thanks, Joan.
Posted by: Abbey R Stemler | Jan 8, 2020 2:29:05 AM
I apologize for my belated comment. When I taught business associations there were many things that bothered me. But, to keep things short, I'll focus on the teaching of agency prior to teaching corporate law. While all students should have a course in agency, I really think it creates confusion when teaching business associations. Even though it sounds like it should, the law of agency really doesn't mesh well with the unique way corporate law handles fiduciary duties. So, if I ever teach business associations again, I would skip the law of agency.
Posted by: Bernard S. Sharfman | Jan 22, 2020 8:01:37 AM
Bernie, belated comments are always welcomed!
I find your suggestion quite radical, actually. I see agency law as a great foundation for business associations law generally--and as an important gap-filler for sole proprietorships. Even where the rules for agency are different in business entities, introducing the concepts involved in agency law is, imv, critical to the students' understanding of firm governance. Admittedly, I teach agency with the goal of teaching business entities, so I do not offer many details on agency law--I use those few class hours merely to introduce concepts and basic rules. But I find that essential.
Just my thoughts; you and others may see all this differently.
Posted by: joanheminway | Jan 22, 2020 8:33:03 AM
I guess it all boils down to the business judgment rule. It creates a large amount of distance and confusion between the fiduciary duties found under corporate law versus agency law. It is a blunt hammer created by the courts through the application of equitable principles to corporate law. So, fiduciary duties are one thing under agency law, but is something totally different under corporate law.
Posted by: Bernard S. Sharfman | Jan 22, 2020 9:20:32 AM
But the business judgment rule does not apply to every fiduciary duty action. And exculpation, like the BJR, is not available in every form of entity. Indemnification and insurance protections also can vary.
But none of that impacts whether there is a duty in the first place. Agency is important, imv, to understanding the duties themselves. The rest (BJR, exculpation, indemnification, and insurance) go to liability for breach.
At least, that's my view.
Posted by: joanheminway | Jan 22, 2020 11:26:20 AM
Good points, Joan!
I think that agency and management issues can blend, such as in situations involving a law firm partner's ability to commit the firm to represent a potential client, and to designate/order other (equity and/or non-equity) partners, associates, and paralegals to work on that client's matter. I'm planning to include a retention agreement in the supplementary materials the next time I teach the course.
On a separate note, I always clarify when we begin studying LLPs that the "limited" in "limited liability partnership" refers to "liability" and not to "partnership"-- that is, that a LLP can be seen as a special form or type of general partnership, and not as a form or type of limited partnership.
Posted by: Walter Effross | Jan 7, 2020 4:32:27 AM