Business Law Prof Blog

Strava as Social Media's Social Enterprise

The Social Enterprise Alliance (SEA) previously defined "social enterprise" as businesses that (1) Directly address social need; (2) Commercial activity [not donations] drives revenue; and (3) Common good is the primary purpose. SEA's definition has evolved to be more inclusive, now recognizing three different models based on -- (1) opportunity employment, (2) transformative products/services, or (3) donations. While the first definition could be criticized for being too narrow (Ben & Jerry's would not qualify because their product does not directly address a "social need"), SEA's new definition is likely too broad because it seems to cover all donating businesses. 

Personally, I am most fond of social enterprises that produce products/services that lead directly to human flourishing. 

For Lent, I gave up Facebook/Twitter/Instagram. While these products have their uses, on the whole they tend distract me from what is truly important. Perhaps social media has improved since the advent of Covid-19, and I admit to feeling somewhat out of the loop. But I also feel much more at peace, and may not return to those forms of social media after Easter, or, if I do, I hope it will be on a much more limited basis. 

In contrast, Strava is one form of social media that has been a constant positive in my life. Strava, for those who don't know, is a free app to log all kinds of physical exercise. I credit Strava (and my friends on Strava) with keeping me accountable to exercise 4+ times a week for the past 4+ years. The community on Strava is unlike any social media I have seen or heard of elsewhere. People are relentlessly encouraging, and the focus is on fitness not controversy. Also, as a Strava friend recently posted -- "love Strava because it’s the only social media platform with almost 100% factually accurate information and statistics. (Besides minor GPS errors and the occasional ‘wrong activity type’)." Strava has truly created a product that likely improves the lives of nearly all of its users.

Anyway, no sponsorship for me for this post, but I do hope to see more readers on Strava!

When Your Former Students Make You Proud . . . And Make You Laugh

COVID-19's effects on financings and M&A, as well as contracts more generally (as covered here, here, and here among many other places), the rapid adoption of the Coronavirus Act, Relief, and Economic Security Act, a/k/a the “CARES Act” (key terms summarized briefly here and elsewhere), and the President's invocation of the Defense Production Act have me feeling like I am drinking business law water out of a fire hose this past week.  Anyone else feeling that way?  Whew!

I am still sorting through it all.  I am sure that I will have more to say on some of this as time passes.  However, earlier today, in the process of reading online resources and watching and listening to others talk about the many legal aspects of the current pandemic, I came across this YouTube video, done by one of my former students, a local attorney who works with entrepreneurs, start-ups, and small businesses.

I have not fact-checked this video.  And he jumps in to correct himself.  But what I like about it is that it represents unvarnished, even humorous, boots-on-the-ground legal public service.  He does not want businesses in the local community to miss out or waste time/money shooting in the dark--or in the wrong direction.  

Sometimes, our students do great things after they leave the hallowed halls of law school.  Many times, those good deeds go unrecognized.  Haseeb has always been passionate.  It makes me so happy to see him using his passion to help the local business community.  I want to offer a "shout out" to him here.  (And his dog, Simon, is the cutest! ♥)

2020 SEALS Conference - Update

Here is the latest on this summer's annual conference for the Southeastern Association of Law Schools (SEALS), scheduled for July 30 - August 5 at the Marriott Fort Lauderdale, from SEALS Executive Director Russ Weaver:

Dear Deans, Program Committee members and SEALS friends,

First, and foremost, I hope that everyone is staying well and adjusting to the new normal in legal education (with all classes being taught online).

Second, I want to let you know that SEALS’ Board of Trustees is meeting regularly to assess how to move forward on this summer’s meeting. At this point, the situation is uncertain and no decision has been made. However, the Board is meeting regularly and constantly assessing/reassessing the situation. As the situation becomes clearer, we will be making further announcements.

Third, I also want to let you know that, in order to ensure that no attendee is placed in a difficult situation, SEALS has moved the registration cancellation date back to July 1st. In other words, you can cancel your registration and receive a full refund through July 1st. Hopefully, by that time, we will be able to more accurately assess whether our meeting will go forward and in what form.

In the meantime, please stay safe!

Russell L. Weaver
Professor of Law & Distinguished University Scholar
University of Louisville
Louis D. Brandeis School of Law
Louisville, KY 40292
Email: [email protected]
PH: (502) 852-6559
FAX: (502) 852-0862

I currently serve as an officer of SEALS.  Fee free to contact Russ, me, or any SEALS officer or board member if you have any questions.

Master Accounts at the Fed: An Arcane But Highly Important Issue

In a December 2018 post (here), I noted that “although esoteric, such issues as who has access to an account at the Fed are critical social policy choices with real world implications that merit broad-based public debate.” 

This past week, a federal district court judge granted the Federal Reserve Bank of New York’s (FRBNY) motion to dismiss The Narrow Bank’s (TNB) complaint in TNB USA Inc. v. Federal Reserve Bank of New York (USDC SDNY) (here).  In light of this recent opinion, I wanted to reiterate my invitation to BLPB readers to think about seemingly technical, arcane issues such as who gets an account at the Fed – a master account is essentially a bank account at a regional Federal Reserve Bank enabling access to the Federal Reserve Payments System –  and how such decisions should be made. The importance of this critical policy issue is only set to increase.  A few months ago, the Federal Reserve announced plans to develop FedNow Service (here).

TNB is a financial institution with an innovative business model.  Professor Peter-Conti Brown has written about it (here).  It’s model is essentially this: open an account at the Federal Reserve, deposit customer funds (financial institution customers), receive interest on the funds deposited at the Fed’s Interest on Excess Reserves Rate (“IOER rate”), keep a slice of the gains, and pay out the remainder to customers.  The Federal Reserve is a risk-free counterparty, but it is not limited to paying the risk-free interest rate.  So, TNB has a really clever business model.  TNB’s Chairman & CEO, James McAndrews spent 28 years working in the Federal Reserve System (19 at the FRBNY).  Its Board members also includes two highly respected finance professors: Gary Gorton at Yale University and Darrell Duffie at Stanford University.         

TNB received a “temporary Certificate of Authority” from the Connecticut Department of Banking, contingent on several things, including “that the FRBNY would open a master account for TNB.”  As the opinion explains, the FRBNY has not actually denied TNB’s application for a master account…though at least 18 months have passed since TNB applied for it!  However, as the opinion notes, “the FRBNY’s delay is not TNB’s cause of action.”  Hence, United States District Judge Andrew L. Carter, Jr. granted the FRBNY’s motion to dismiss, writing that “TNB lacks standing to pursue its claim, which is also constitutionally and prudentially unripe.”    

The decision strikes me as technically correct, and it will be interesting to see TNB’s strategy from here.  I’m not taking a position on whether TNB should/should not have a master account without additional research and thought.  However, what I am taking a position on is the importance of greater public debate about the underlying policy questions surrounding who does/doesn’t get an account at the Fed. 

In Regulating the Invisible: The Case of Over-the-Counter Derivatives (here), I noted that ICE US Trust LLC, an uninsured NY trust company clearing credit default swaps – controversial financial instruments that had just played a huge role in the financial crisis of 2007-08 – had been granted membership in the Federal Reserve System in 2009 (here).  ICE Trust was essentially the predecessor of ICE Clear Credit, which essentially has the monopoly on CDS clearing today.  Dodd-Frank’s Title VIII explicitly provides the Federal Reserve with the ability to provide accounts and services to clearinghouses designated as systemically important under that title.  But prior to Dodd-Frank, I think that granting ICE Trust membership in the Federal Reserve System was a questionable decision.   

The Fed obviously has its hands full at the moment with much more urgent issues.  In the future, however, it should provide additional clarity about the granting of master accounts and the general timing of such decisions.   

Williams v. ETE: My favorite underrated merger case

We just reached the part of my M&A class where I teach The Williams Companies v. Energy Transfer Equity LP, 159 A.3d 264 (Del. 2017).  It’s a difficult case – I try to explain the tax aspects which makes part of it a slog – but I do it anyway because I find both the facts and the opinions endlessly fascinating.

The basic set up is that Energy Transfer Equity (“ETE”) and The Williams Companies (“Williams”) had agreed that Williams would be acquired by ETE for a combination of cash and ETE partnership units.  One condition of closing, however, was that ETE’s tax counsel at Latham would issue an opinion to the effect that the second leg of the deal should be non-taxable under IRS regulations.  The Latham Tax Lawyer did not issue the opinion, ETE refused to close, and Williams sued, alleging that ETE breached the merger agreement by failing to use its best efforts to obtain the opinion.  After a trial in Chancery, VC Glasscock ruled for ETE, and the Delaware Supreme Court affirmed, Strine dissenting.

So, the deal itself is complicated but it’s worth explaining.  The actual transaction was to proceed in two steps.  First, Williams merged into a shell company, ETC, and former Williams shareholders received 81% of ETC’s stock.  ETE purchased the remaining 19% of ETC’s stock for $6.05 billion cash, which was immediately distributed to the former Williams shareholders, so now they would have cash plus an 81% interest in a company that was essentially just a reorganized version of Williams itself.

In the next step, ETC planned to sell all of the Williams assets to ETE, in exchange for ETE partnership units, leaving ETC a shell company whose only assets were ETE partnership units, 81% owned by the former Williams shareholders.

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Originally, ETE’s tax counsel at Latham had opined that the transaction was not taxable, but that changed after the energy industry took a downturn.  The deal suddenly became very unfavorable to ETE, and ETE was looking for an exit ramp.

At that point, ETE’s in-house tax lawyer, Whitehurst, purportedly noticed that the first leg of the transaction required ETE to pay $6.05 billion for a fixed amount of ETC stock – 19% - rather than a floating percent.  This meant, thought Whitehurst, that ETE would now be massively overpaying for ETC stock given the industry downturn, and the overpayment would trigger IRS scrutiny.  He conveyed his concerns to Latham, and a Latham Tax Lawyer (discreetly never identified by name in the Delaware Supreme Court opinion although he is named in Chancery) decided he could not issue the opinion, and the deal collapsed.

There’s a lot to talk about here, and first is the doubtfulness ETE’s claim that Whitehurst, experienced tax guy, suddenly just “noticed” that the deal called for a fixed rather than floating exchange rate, or that the Latham counsel just “noticed” the same. 

It all starts with asking why a simple acquisition – ETE buys Williams shares in exchange for cash and equity interest in its partnership – was accomplished through such a convoluted set of maneuvers.  And the reason for that is, Williams was a publicly traded corporation with a lot of mutual fund shareholders who could not hold ETE partnership units.  Why?  Because partnership units have a complex tax structure that mutual funds can’t handle.  If ETE simply issued cash and partnership units in exchange for Williams shares, the mutual funds would have been forced to sell those units immediately, and they would have paid tax on that sale for a merger that would have otherwise had a tax-free equity component.  And if Williams simply sold assets to ETE, then that sale itself would have been taxable.

So the whole point of the deal was to transfer ETE partnership units to a shell entity that was taxable as a corporation, and distribute stock in that entity to the former Williams shareholders, so that mutual funds could hold a financial interest in ETE without holding ETE directly and dealing with its tax structure, without making anything seem like an asset sale.

In other words, every single thing about this deal, down to its bones, was designed to avoid taxes. 

I’m not saying that as a criticism, I’m saying that to highlight how carefully the tax aspects were integrated into the structure from the get-go, making it extremely unlikely that anyone would be “surprised” by any tax aspects of the deal without an intervening change in the law.

But there’s more.

Notice that in that first leg, Williams shareholders end up with 81% of ETC while ETE ends up with 19%.  Those are very odd numbers; they suggest that someone is trying to avoid a regulatory cut-off at 80/20.  And that seems to be the case; because as I understand it – and I am not a tax person so I genuinely welcome comments from anyone who understands the tax aspects better than I do – 80/20 is a common cut off needed to make deals nontaxable, according to this document drafted by – oh look, Latham. 

Thus, to my uninformed eye, if it was previously doubtful, it now becomes actually incredible that Whitehurst suddenly noticed, several months in, that the deal called for a fixed rather than floating exchange rate.  The fixed rate – 19% - seems to have been necessary to avoid taxes.  If it was floating – if ETE acquired more of ETC as ETC’s value dropped – the deal would have been taxable in the first leg.  So the fixed rate was a fundamental aspect of the deal’s design.

But that’s not actually the most interesting part of the opinion.  No one believed Whitehurst was truly surprised by the fixed rather than floating structure; indeed, Glasscock was openly skeptical of Whitehurst’s testimony.  But Glasscock’s view – and also the view of the Delaware Supreme Court – was that Whitehurst’s good faith or lack thereof was irrelevant.  Yes, said the Delaware Supreme Court, ETE breached its covenant to use its best efforts to obtain the tax opinion, but Williams could only succeed if ETE’s breach was proximately related to the failure of the condition itself.  And, whatever machinations it took to get there, the Latham Tax Lawyer acted in good faith when he said he could not issue the opinion.  Therefore, ETE’s breach was not the cause of the failure.  The Latham Tax Lawyer’s good faith functioned as an intervening event that broke the chain of causation from ETE’s lack of enthusiasm to the failure of the closing condition. 

What’s critical, then, to both Delaware courts’ analyses, is their implicit belief that the Latham Tax Lawyer’s good faith was independent of his client’s behavior or obvious desire to escape a newly-disfavored deal.

Strine, dissenting, saw the matter differently.  In his view, lawyers strive to please their clients, and their good faith on complex legal issues is therefore somewhat malleable.  If ETE had used its best efforts to obtain the opinion – if it had not suggested to Latham that it wanted out of the deal, and pressured it in that direction – the Latham Tax Lawyer’s “good faith” may have led him to a different conclusion.

So what intrigues me about all of this are the fundamentally different views of law that are reflected in the majority and the dissenting opinions.  The majority endorses classical legal theory: in its view, the law is a fixed point, perhaps reflected – like the shadows in the cave – in an attorney’s good faith, but still existing as a universal truth to which the lawyer aspires.  As a result, despite any client bullying or cajoling, in the end, if the lawyer acts in good faith with all available facts, his or her position is immutable – it is a function of The Law itself.

Strine, however, appears to view the law itself as something either manipulable or at the very least unknowable, and thus any particular opinion is as subject to motivated reasoning as any other opinion might be.  In true Legal Realist fashion, Strine’s view is that “law” is inherently indeterminate, constructed out of the policy preferences and incentives of the decisionmaker, which is why something as banal as a client’s preferred outcome will affect even the good faith judgments of the advocate.

So yeah, what I am saying is: Williams v. ETE is ultimately a battle about the nature of law itself, miniaturized in a dispute about commercially reasonable efforts to obtain a tax opinion.

Pandemic Puppy & Reg BI Changes to Suitability Standards

Although this is a little off-brand for the BLPB, I thought readers might appreciate a puppy break.  This is Lucky, the newest addition to the family.

She's excellent at giving me so much to worry about that I stop thinking about the pandemic!  But that does not mean that stuff stops happening!

Notably, FINRA has a rule proposal out to alter its exiting suitability standard in light of the SEC's new Regulation Best Interest. FINRA summarized the proposal as doing two things:

1. amend the FINRA and CAB suitability rules to state that the rules do not apply to recommendations subject to Regulation Best Interest (“Reg BI”), and to remove the element of control from the quantitative suitability obligation; and
2. conform the rules governing non-cash compensation to Reg BI’s limitations on sales contests, sales quotas, bonuses and non-cash compensation.

Because Reg BI so closely resembles the FINRA Suitability Rule, firms may not have to do too much to comply with the text of the rule.  This leaves me wondering about guidance.  FINRA has many notices to members and other explanations available to give context to the suitability rule.  With regulation moving from the self-regulator to the regulator, will the guidance move as well and will it have the same force?  This may be unknowable because so many customer issues get resolved in arbitrations without explained decisions.

What will happen in the future when FINRA has to manage compliance or enforcement for activity covered by Reg BI?  In the past, FINRA could simply determine what its own rules meant.  Now, new issues may need to be addressed by the SEC instead.  FINRA may still simply opt to apply Rule 2110 for conduct it would have deemed over the line under the suitability standard.  Essentially, it's a catch-all for requiring all members to "observe high standards of commercial honor and just and equitable principles of trade."  

Regulation Best Interest is now set to go into effect this July.  Whether the date will get bumped back remains uncertain.  Financial Planning has reported that the SEC is now mulling whether to extend the deadline.  My bet is that the SEC will probably extend the deadline event though there probably isn't much of a need to because it didn't seem as though Reg BI actually required any major changes to most firms' business practices.

ICYMI: #corpgov Midweek Roundup (Mar. 25, 2020)

If you have trouble viewing the embedded Tweets, please try a different browser (I recommend Internet Explorer).

It's been two weeks since the WHO declared the coronavirus outbreak a pandemic, and the NBA cancelled games. As of this writing, the NY Post reports: Total cases globally: 417,966; Deaths: 18,615.

"As of this week, we estimate that there are just under 150 significant M&A transactions ... waiting to close .... corporate lawyers everywhere are spending their shelter-in-place hours scouring the terms of these deals in a frenzied search for an escape hatch" #corpgov https://t.co/EA3Zzg6F0O

— Stefan Padfield (@ProfPadfield) March 19, 2020

BlackRock: "Key steps towards increased transparency include 1) moving from annual to quarterly voting disclosure, 2) prompt disclosure around key votes including an explanation of our voting decisions, and 3) enhanced disclosure of our company engagements." https://t.co/HnULcurK6z

— Stefan Padfield (@ProfPadfield) March 20, 2020

"The more modern corporate social responsibility scholarship ... is dominated by Panglossians who believe that moral choices have essentially no economic cost ...." 41 Cardozo L. Rev. 1081 #corpgov

— Stefan Padfield (@ProfPadfield) March 22, 2020

There are many places (including faculty meetings) where decision-making goes: (1) it's a good idea; (2) let's do it -- w/o ever asking what we will do less of in order to shift resources (assuming no new tech/synergy). Then we act surprised when some valued thing deteriorates.

— Stefan Padfield (@ProfPadfield) March 22, 2020

"Awesemo will stream an NBA 2K game each night at 8pm/et between two computer controlled teams and FanDuel is giving users a free Single Game DFS contest to play alongside it. Boom: The ability to watch a game and follow your DFS lineup during it." https://t.co/oIeskPjZcS #degen

— Stefan Padfield (@ProfPadfield) March 22, 2020

Science of Well-Being (Yale University - Professor Laurie Santos)

I am taking a free online course from Coursera and Yale University on the Science of Well-Being. The course is taught by Professor Laurie Santos.

Join me.

I may blog about the course at a later date. I am taking the course both for the content and for online teaching strategies.

Update (1/2/21): While I found some suggestions in this course helpful, I think philosopher Jennifer Frey makes a thoughtful critique of this course and the happiness hacking it promotes. In relevant part, Professor Frey writes:

"Happiness, pagan and Christian philosophers agreed, requires something more than technique or self-help; it requires the transformation of the person that comes with the acquisition of virtue: wisdom, prudence, justice, courage, and temperance. Wisdom gives us a clear vision of what is truly good, prudence allows us to deliberate well so as to attain and maintain that vision, justice to realize it in our actions, and courage and temperance to preserve it in the face of fears and temptations. Acquiring virtue is not about hacking oneself or engaging in other forms of self-manipulation; it is about the proper habituation of one’s thoughts, feelings, and desires so that one becomes existentially ready to seek what is truly good and beautiful. In this view, there is a truth about the human desire for happiness, which is that it can either be properly directed toward the possession of what is actually beautiful and good, or it can be improperly directed, remaining within the prison of the self and closed off from transcendence."

Managing Grief and Sharing Our Way Forward (Music Edition)

Like so many law schools, we're navigating our way to online and other remote teaching and learning in a rapid and unexpected way.  We started classes yesterday, and it's gone fairly well.  Our faculty has worked hard, and our students have been incredibly resilient in the face this adversity we all, unfortunately, share. It does, though, impact people in many different ways.  

Some people face additional health risks, financial challenges, childcare problems, technology limitations, learning disabilities, and more, and I have been so impressed with the strength and composure I have seen in our community. I suspect it's that way a lot of places, and I hope so, but it has been remarkable to see.  

The Harvard Business Review posted a piece yesterday that framed this whole COVID-19 experience in a way I had not considered. The piece is titled, That Discomfort You’re Feeling Is Grief. I would not have framed it the way, but I think it's an important perspective.  The whole piece is worth a read, but here are some important points worth considering: 

Anticipatory grief is the mind going to the future and imagining the worst. To calm yourself, you want to come into the present. This will be familiar advice to anyone who has meditated or practiced mindfulness but people are always surprised at how prosaic this can be. You can name five things in the room. There’s a computer, a chair, a picture of the dog, an old rug and a coffee mug. It’s that simple. Breathe. Realize that in the present moment, nothing you’ve anticipated has happened. In this moment, you’re okay. . . . .

You can also think about how to let go of what you can’t control. What your neighbor is doing is out of your control. What is in your control is staying six feet away from them and washing your hands. Focus on that.

Finally, it’s a good time to stock up on compassion. Everyone will have different levels of fear and grief and it manifests in different ways. A coworker got very snippy with me the other day and I thought, That’s not like this person; that’s how they’re dealing with this. I’m seeing their fear and anxiety. So be patient. Think about who someone usually is and not who they seem to be in this moment.

This all makes sense to me, and it is a helpful way to think about things when everything feels a little off.  And right now, that seems to be often.  Another thing I have tried to do is find some routine and ways to share with one another.  We have been having family dinners and family movie night most nights. And we have been reconnecting with friends around the country via phone calls, but more often on Zoom. Sharing some time with friends works remarkably well, at least now that we lack other options interaction.  

In the interest of sharing, here are a few recommendations.  As to movies and music, if periodic coarse language, drug references, etc., are not for you, my recommendations may not be for you.  So in closing, I will share some (mostly new) songs you may not have heard (and I think you should).  Be safe, be well, and be good to each other.   

1. I think I'm OKAY, Machine Gun Kelly, et al., -- seems about right. 

2. how will i rest in peace if i'm buried by a highway?, KennyHoopla (for old guys like me, there's a modern edge with an old techno, maybe New Order, feel)

3. Hit the back, King Princess (sultry, smooth, with a 70s dance vibe, not too sappy). 

4. Celoso, Lele Pons (chill Latin dance that's upbeat yet goes well with a cocktail) 

5. Don't You (Forget About Me), beabadoobee (Okay, you've probably heard this one, but not this version.  Like I said, I'm Gen X).  

Call for Papers - Virginia Sports and Entertainment Law Journal

I am publishing this call for papers below with permission from the editor.

In 2018, I published with the Virginia Sports & Entertainment Law Journal (out of UVA), and I think it is fair to say that they are a leader in this specialty area. 

-----

My name is Blake Steinberg and I am the current Editor-in-Chief of the Virginia Sports & Entertainment Law Journal at UVA Law. I am reaching out to you because you have published with our Journal in the past. We are currently looking for submissions, and would be glad to review any piece that you hope to publish.

Although we received a large number of student notes this year, our Journal has received fewer pieces from professors and practitioners than we would like. If you are a professor or practitioner who focuses on legal issues arising in the sports or entertainment industries, we would be especially interested in reviewing a submission from you.

In the past, published pieces have addressed topics such as video game licensing, basketball arena and team owners’ tort liability for spectator injuries, negotiations over cell phone ringtone revenue, and copyright law's treatment of entertainers as compared to its treatment of other types of authors.

To submit a piece, please send an email to me at [email protected], with a Word document version of your submission along with your resume. If you know of anyone else who might be interested in publishing with our Journal, feel free to forward this email to them as well.

Teaching Through the Pandemic - Part II

I write today to share some Zoom connectivity tips that I have accumulated since my first post on this topic.  I spent class time before (and personal time during) Spring Break, which concluded for us yesterday, testing Zoom connections with students--working with them to overcome barriers to clear Internet communications using Zoom.  My collected tips, which I shared with my students yesterday, are pasted in below.  

Some items on my tip list may not be applicable to you and your students.  Most are mentioned elsewhere; and if you already have been teaching using Zoom for a week or more, you may well have already figured all this out in any case.  Nevertheless, I thought it might be useful to share my "top five" here.

1. Close out of open files and applications before you join in on our class meeting.  Allow your computer to focus its activity on our class exclusively.¹

2.  If you are sharing bandwidth in your household, ask your household members if they can schedule their usage around your class meetings.  Internet speed issues can have a real effect on the performance of video conferencing software.²

3.  Log in through the campus's Zoom page, [the url for that page was included here in the original].  It seems to work better than logging in through the Zoom app directly.  But each of us may want to try each way on our own to see if it makes a difference.³

4.  Download the Zoom app for your phone.  If your Internet connection fails, you may be able to join or re-join class from your phone, assuming your data plan can support that use.⁴

5.  Remember that you can test your audio or video on Zoom by clicking on zoom-us in the tool bar and clicking on Audio or Video.  You will see the test options there.  Please run those tests before class!⁵

I also reminded my students to log into class about ten minutes early to best ensure that their links to the class meeting are as strong as possible once class begins.

Nothing in my tip list is Earth-shattering.  But if you are troubleshooting Zoom connection issues with a student, perhaps one or more of these tips will help.  Regardless, I hope that everyone settles into a productive, happy online teaching experience.  If you are like me, you'll figure out a way to ensure that your students are getting what they need, one way or another. 

Leave your own tips in the comments.  They are appreciated.  Footnotes are included below.

____

¹ From the Zoom blog:

During a meeting, other applications have a way of intruding and asking for attention from your CPU or broadband connection. While downloading information through a broadband connection, the application doing the downloading is competing with Zoom. The same occurs when you use CPU-intensive applications: they steal precious ticks from your processor.

When streaming 30 frames per second, your camera is taking 30 pictures of you each and every second, then sending them to the processor with instructions to forward the images through Zoom. Zoom uses your processor to send the images to your network card, which transmits the data to its destination. This process requires the energy of your CPU. To engage in the smoothest possible meetings, close any applications you don’t need to use for the meeting itself. It’s that simple.

² Zoom's recommended system requirements can be found here.

³ Our campus has a super webpage dedicated to Zoom with a list of linked support documents.  Yours probably does, too.

⁴ Zoom has a webpage dedicated to information for mobile users.

⁵ Zoom offers a streamlined process for testing audio and video from the view screen at this webpage (which includes, among other things, a brief video).

2020 National Business Law Scholars Conference - CFP Deadline Extended

This follows on my post from last week regarding the 2020 National Business Law Scholars Conference, scheduled for June 18-19, 2020 at The University of Tennessee College of Law.  The planning committee conferred a few days ago and, in recognition of the current state of affairs, determined to extend the deadline for paper submissions to Friday, April 24.  We hope that this takes some pressure off faculty who would like to submit a paper for inclusion in the conference but are wrestling with new challenges and stressors in transitioning to teaching online.

Again, please contact me at [email protected] or any other member of the planing committee listed below with questions.  Eric Chaffee handles paper submissions and scheduling.  Accordingly, he is the best person to contact if you need to address specific submission issues or scheduling constraints.  His email address is [email protected].

Afra Afsharipour (University of California, Davis, School of Law)
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 MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Tulane University Law School)
Elizabeth Pollman (University of Pennsylvania Carey Law School)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)
Megan Wischmeier Shaner (University of Oklahoma College of Law)

A Sunday Blog Highlighting Some Helpful Blog Posts

In today’s post, I wanted to call BLPB readers’ attention to two blog posts related to current events that I've found helpful.

First, a few weeks ago, I was really excited to learn that Psychology Today had asked my OU management colleague Dr. Mark Bolino, the Michael F. Price Chair in International Business, to start blogging for them.  He recently posted, Managing Employee Stress and Anxiety During the Coronavirus: Some practical, evidence-based advice for managers (here).  Although the post’s target audience is likely business managers, I think its wisdom is applicable to a wide variety of work environments.

Second, University of Chicago Booth’s Initiative on Global Markets (IGM) has a Forum (here) on COVID-19 that’s definitely worth checking out.  IGM Directors have also posted “Economic Policy Principles for Combating the Covid-19 Crisis” (here).  A summary paragraph from this insightful document is below.  Thanks to Professor Kathryn Judge for bringing the site to my attention! 

We organize our discussion around three pillars. First, following the advice of medical experts, we must do all we can to spread out the number of infections over time, or “flatten the curve.” Second, policies should facilitate production and decision-making in a temporarily socially distanced world. Third, we should prepare to make the post-virus recovery as rapid as possible. Even though these three aspects of the policy response will play out in sequence, policymakers should start acting on all three now.       

So the Salzberg v. Sciabacucchi Decision is In!

It’s the moment we’ve all been waiting for, and I am sorry to say - I was wrong.

(All right, in my heart, I still believe I was right in my account of existing law, and Salzberg v. Sciabacucchi actually changed the law.  But, if law is just a prediction of what judges will do, then okay, fine, yes, I was wrong.)

As you all know by now, I’ve been blogging about this case, and the issue of litigation-limiting bylaw and charter provisions, for a while, and I’ve written an article, and a book chapter, on the subject.  In this post, I’ll assume the reader’s familiarity with the issue and my prior argument.

 Anyway, the basic logic of the decision is illustrated by this figure from the opinion:

 

In other words, in the Delaware Supreme Court’s view, there are matters of internal affairs that are governed by the state of incorporation, and then there is a slightly larger category of matters that are still “intra-corporate” but not “internal affairs,” and can be governed by a corporation’s charter, and then there are truly external claims that cannot be the subject of a charter provision.   Federal forum provisions for Section 11 claims, at least facially, count as intra-corporate claims because “FFPs involve a type of securities claim related to the management of litigation arising out of the Board’s disclosures to current and prospective stockholders in connection with an IPO or secondary offering. The drafting, reviewing, and filing of registration statements by a corporation and its directors is an important aspect of a corporation’s management of its business and affairs and of its relationship with its stockholders.” Op. at 11.

I’d love to do a full analysis of the decision but to be terribly honest, I’m just a wee bit distracted right now and also I found the opinion itself kind of … elliptical in its reasoning.  Point being, I’ll give it a more thorough read at a later date but for now I’ve only got a series of quick points:

As I understand it, those matters that are sufficiently intracorporate to be the subject of a charter provisions, but not within the category of internal affairs, are to be determined case by case.  But, per the Court’s earlier decision in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014), even provisions related to antitrust lawsuits are at least facially permissible, so it’s going to be really interesting to find out what the court does, and does not, believe can be governed by corporate charters – and even more interesting to see if any other states (hello, California) push back.  I’ll note that simply as a matter of terminology, I find the logic puzzling because the court quotes its own decision in McDermott v. Lewis, 531 A.2d 206 (Del. 1987), where the phrase “intracorporate” is treated as coextensive with “internal affairs.”  Op. at 37.  Moreover, apparently because the court couldn’t find better precedent, in explaining how external matters would be distinguished from intracorporate-but-not-internal-affairs matters, the court cited – well, Mohsen Manesh on the definition of the internal affairs doctrine. Op. at 47-48.  Suffice to say, for those of us trying to figure out what falls into this middle category of “intracorporate” matters, a definition that distinguishes only between internal affairs and external affairs is not helpful.

As Larry Hamermesh says of the decision, “I thought we were in a predictable room, but the door has opened up into very uncertain challenges and positions.”

The case largely focuses on charter provisions, even going so far as to mention charter provisions specifically in its discussion of why forum selection clauses do not violate federal policy.  Op. at 45.  But occasionally, the decision cites to DGCL 109, regarding the bylaw power. I … do not know how to interpret this.  And this is not a minor issue: Part of the reason I have been arguing that corporate constitutive documents cannot govern “external” claims is precisely because there’s no vocabulary outside the corporate law context to discuss whether a waiver, say, of a jury right, or an agreement to pay litigation expenses, should be in bylaws, charters, or both, or subject to supermajority voting provisions, or what happens if someone has dual-class stock or is a controller, etc.  We know how to answer those questions when they concern matters of corporate law; we don’t when we step outside that realm.

The opinion very much hangs the NJAG out to dry.  As I previously blogged here, here, and here, Professor Hal Scott has been pushing for bylaw at J&J which would mandate arbitration of all federal securities claims, including ones brought under Section 10(b)/10b-5.  J&J is chartered in New Jersey.  As part of the dispute over whether the proposal could be included on J&J’s proxy under Rule 14a-8, NJ’s Attorney General argued that such provisions violate NJ law, relying on Chancery’s Sciabacucchi decision.  Now, that decision has been reversed.  Professor Scott’s lawsuit will go forward and New Jersey will … I don’t know.

I think? there’s a basis for distinguishing Section 11 and 10b-5 in the opinion.  The court emphasizes that Section 11 necessarily involves directors (“Section 11 claims are ‘internal’ in the sense that they arise from internal corporate conduct on the part of the Board and, therefore, fall within Section 102(b)(1)”), but 10b-5 does not.  The court also says that tort claims are “external,” and 10b-5 is akin to common law fraud.  But, umm … then there’s the antitrust thing so I really don’t know.

Further to this, the decision opens with a description of how both Section 11 and Section 12 claims operate.  Section 12, like 10(b), also does not necessarily involve directors.  But the opinion doesn’t discuss whether such claims count as intracorporate, even though the forum provisions at issue in the case cover both types of claims.

So, yeah. I got nothing.

I note that since the decision permits charters to govern securities claims, there is now apparently no barrier to inserting a loser-pays provision in corporate constitutive documents for federal securities claims.  After all, the DGCL only bars loser-pays for internal claims.  So, Professor Bainbridge’s preferred policy may yet (mostly) prevail.  Which again highlights why I think this is a problem.  If a corporation adopts such a provision, Delaware will have to decide if it’s permissible, if it violates public policy, whether the provision must be in the charter or the bylaws, what to do if there are nonvoting shares, etc, and that’s just way outside of its area of expertise.  What happens when a director invokes a loser-pays provision and a shareholder argues that, under the circumstances, doing so was a breach of the director’s fiduciary duty?  How will Delaware make the call?  The Supreme Court has not, umm, demonstrated much savvy with respect to the difference between Section 11 and Section 12 claims (or, if you read some decisions, even the difference between a Schedule 14D-9 filing and a Schedule 14A), so I’m not confident of its ability make these judgments.

The Delaware Supreme Court should maybe start boning up on PSLRA pleading standards now, is what I’m saying.

Which brings us to arbitration.  At the very end of the opinion, in Footnote 169, the court mentions that even though this case only involved forum selection provisions, many commenters – and I’d fall into this category, naturally – are concerned about using charters and bylaws to force individualized arbitration of shareholder claims.  The court dismisses this concern on the grounds that DGCL 115 would prohibit mandatory arbitration for internal affairs claims.  The problem here is twofold: First, the court opens the door to corporations adopting arbitration provisions for federal securities claims – precisely as Prof. Scott is currently arguing – but secondly, there looms the possibility that DGCL 115 is invalid under the Federal Arbitration Act. 

Now, I wrote a whole long paper explaining why I believe the Federal Arbitration Act does not apply to corporate constitutive documents, but the basis for that article is that corporations are not ordinary contracts within the meaning of the FAA.  Every decision – like this one – that expands the boundaries of the corporate “contract” and applies ordinary contract law principles to define its scope not only, ahem, renders my article less relevant, but also undermines the basis for excluding corporations from FAA’s purview.  This is not an abstract issue; Professor Scott’s lawsuit, for example, argues that the FAA renders arbitration bylaws valid, regardless of any New Jersey law to the contrary.  Again, his lawsuit only deals with a bylaw mandating arbitration of federal claims, but there is no reason the logic would not extend to bylaws purporting to mandate arbitration of internal affairs claims.

In other words, this decision hands corporations the keys to challenging the viability of DGCL 115, and in that respect, I have a sinking fear that it signs Delaware’s death warrant.

But people have made that prediction before, so who knows.

My final observation is this: I think the contrast between the Supreme Court and Chancery decisions as a matter of corporate theory are quite striking.  The Chancery decision is a fairly stark example of the concession theory of the corporation: Laster makes very clear that Delaware, as sovereign, is intimately involved in establishing corporations, designing their operations, and articulating their limits.  The Supreme Court, by contrast, is a model of contracts theory; it treats the corporation as simply a private arrangement among its constituents, with few prohibitions on what that arrangement may entail.  I have been thinking about designing a corporate theory seminar; if it comes to fruition, I’ll likely include excerpts of both opinions.

Businesses Respond to COVID-19

CNN recently ran a story entitled - the pandemic risks bringing out the worst in humanity.

Rather than focus on the negative, I decided to collect some of the positive business responses to COVID-19. This is probably just a small sampling of the positive responses. I may update this list from time to time; please feel free to add more in the comments or email me. [Updated with some suggestions from my business ethics students and to include some of the highlights from this excellent, more extensive list that a reader e-mailed.]

• Alibaba co-founder is donating masks and test kits to the US. 
• AT&T provides free wireless to school districts and 60 days free service to new customers
• Bank of America allows borrowers to pause mortgage payments
• Comcast is offering free internet to low-income customers for two months and opening up WiFi hotspots and waiving disconnect/late fees. 
• Dallas Mavericks are paying their hourly workers despite the NBA season being suspended.
• Delta waives change fees. 
• Disney paying workers and donating food
• General Motors to support production of ventilators
• Goldman Sachs, Capital One, and American Express waived interest payments
• Google is offering free virtual tours of 1200+ museums & building a triage website (currently just for Bay area)NextDoor adds help maps and groups.
• Kellogg offering $4M in food relief
• Major League Baseball Pledges $30M to Ballpark Workers
• Publix offering special shopping hours for senior citizens. (Kroger, Giant, Target, Whole Foods and Dollar General are also doing this)
• Starbucks is offering free therapy sessions for its employees
• Taco Bell will continue to pay workers during the pandemic 
• Tesla's CEO (Elon Musk) donating ventilators
• U-Haul is offering 30 days of free storage for college students
• Many distilleries and breweries make hand sanitizer (here, here, and here). (As is Louis Vuitton)
• Many online learning platforms are providing free materials. 
• Many fitness studios are streaming free classes online (here, here, and here)
• Many musicians live streaming music for free. 
• Many companies are offering more flexible working conditions and paid sick leave (beyond what is being required)
• And here is another list. 50 Ways Companies are Giving Back.

Also related to COVID-19, I just came across this article about David Lat (founder of "Above the Law"). David is an acquaintance of mine and many of our readers. According to the article, David has COVID-19 and has been dealt a particularly harsh case. David is an incredibly kind person, with a beautiful family, and his case has made me take the virus even more seriously.  

 

Nevada Director and Officer Liability

Nevada's Supreme Court recently released an advance opinion providing guidance on when the directors and officers of Nevada corporations may face liability.  This marks the first instance where the Nevada Supreme Court has directly considered Nevada's unique statute.

Nevada differs from other states because our statute exculpates directors and officers as a default and includes a requirement that the misconduct must involve: "intentional misconduct, fraud or a knowing violation of law."  This is the relevant portion of the statute:

7.  Except as otherwise provided in NRS 35.230, 90.660, 91.250, 452.200, 452.270, 668.045 and 694A.030, or unless the articles of incorporation or an amendment thereto, in each case filed on or after October 1, 2003, provide for greater individual liability, a director or officer is not individually liable to the corporation or its stockholders or creditors for any damages as a result of any act or failure to act in his or her capacity as a director or officer unless:

      (a) The presumption established by subsection 3 has been rebutted; and

      (b) It is proven that:

             (1) The director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and

             (2) Such breach involved intentional misconduct, fraud or a knowing violation of law.

The Nevada Supreme Court used the opportunity to walk back language from Shoen, a much earlier decision.  That decision had said that "[w]ith regard to the duty of care, the business judgment rule does not protect the gross negligence of uninformed directors and officers."  In Chur, the Nevada Supreme Court explained that it was concerned that "language in Shoen has misled lower courts about the law surrounding individual liability for directors and officers."  It went on to disavow Shoen's language about different processes for duty of loyalty and duty of care claims.  

Instead, Nevada has one standard for liability, a director or officer must know that "alleged conduct was wrongful in order to show a 'knowing violation of law' or 'intentional misconduct'" under the Nevada statute.  Interestingly, although "knowing violation of law" and "intentional misconduct" are two different terms, the Nevada Supreme Court now uses the same definition for them.  (Thanks to Stefan Padfield for that point!)

How much does it take for a court to find that the director of a Nevada corporation knew he acted wrongfully or engaged in intentional misconduct?  This isn't entirely clear.  At the least, the decision seems to require more than gross negligence, which, drawing on Black's Law Dictionary, the Nevada Supreme Court defined as "reckless disregard of a legal duty." 

If you're like me, you may be wondering where does this leave oversight liability claims under Nevada law?  Would the Nevada Supreme Court view a board of directors consciously disregarding their duties as more significant than merely recklessly disregarding them?  The issue appears open for now.

 

ICYMI: #corpgov Midweek Roundup (Mar. 18, 2020)

If you have trouble viewing the embedded Tweets, please try a different browser (I recommend Internet Explorer).

It's been a week since the WHO declared the coronavirus outbreak a pandemic, and the NBA cancelled games. As of today, the NY Post reports: Total cases globally: 198,179; Deaths: 7,954.

Do these two men have too much power to advance their agendas? "board members have become accustomed to receiving ... letter[s] every January.... from the CEOs of two of their largest investors, BlackRock and State Street Global Advisors .... Larry Fink and Cyrus Taraporevala" https://t.co/1JUbfvHSnR

— Stefan Padfield (@ProfPadfield) March 12, 2020

"This article examines the rise of SRI [socially responsible investing] in major financial markets and compare the approaches adopted by regulators in these financial markets to regulate on ESG disclosure and reporting." https://t.co/Pd7uC5aa3V #corpgov

— Stefan Padfield (@ProfPadfield) March 12, 2020

1/2: "Kaeser dismisses the [green] protesters’ attempt to force Siemens to change its mind: 'The impact is zero — there has not been any movement on the share price.'" https://t.co/ui34FklaDO #corpgov

— Stefan Padfield (@ProfPadfield) March 16, 2020

Did "corporations, stock markets and the corporate economy enjoy[] a long and prosperous history well before limited liability in its modern sense became established and dominant"? https://t.co/k3NmXDdZod #corpgov

— Stefan Padfield (@ProfPadfield) March 17, 2020

"There are no companies, no jobs, and there is no progress without investment, and Milken would vastly improve the world around him through skillful development of ... bespoke finance." https://t.co/cCYwJVPXT3 #corpgov

— Stefan Padfield (@ProfPadfield) March 12, 2020

Some Things I Think

Like all of us, the past few weeks have been hard. The past few days, harder. Still, I am fortunate that my challenges are nothing compared to so many. My family and I are healthy so far; my job is challenging, but not currently threatened; and the people I love are, generally, safe.  I am truly fortunate.

Complaining about courts messing up LLCs is not at the top of my mind right now, even though it remains both satisfying and important to me. Today, all I have are some thoughts.  That all I’ve got, and it will have to be good enough.

So, here are some things I think:

• It was right to cancel March Madness, and it still makes me sad.
• Other than being a father and a spouse, I have the most important job I have ever had.
• I love our students. Every day. 
• My family is the best and far more than I deserve.
• Women are widely over scrutinized, over worked, and underappreciated.
• I am proud to be a lawyer.
• Lawyers lawyering everything is exhausting, and too often, wrong (i.e., bad lawyering)
• I hate racism, and I need to work harder to be anti-racist.
• Babies are the best.
• Sometimes, it is better to be happy than to be right.
• I’m proud to be Irish.
• Law school rankings suck.
• Online teaching and learning is more work than a lot of people think.
• We all need to give each other a break. 
• We can have high expectations and still be compassionate and forgiving.

I think a lot more things, but it’s time to pay attention to my family. There is no question I am the weak link in this group, and they deserve more. I guess that’s one more thing I think. Be well, friends.

2020 National Business Law Scholars Conference - CFP Deadline in Two Weeks!

Thanks to all who have been registering and submitting papers for this year's National Business Law Scholars Conference, scheduled for June 18-19 at The University of Tennessee College of Law.  I posted on the conference last month.  The conference planning committee, like so many others, is monitoring the COVID-19 situation.  At present, the conference is still a "go," and we remain excited about it!

The deadline for paper submissions is March 31.  We hope that you are inspired to submit.  The conference website can be found here.  The planning committee understands that many (most?) of us are currently subject to institutionally imposed travel restrictions.  Please know that if you submit a paper and are unable to attend due to travel restrictions, you may withdraw your paper.

Comments can be left here, or feel free to email me or any other planning committee member for more information.  Paper submission questions are best directed to Eric Chaffee.  The planning committee members are listed again below, for your convenience.

Afra Afsharipour (University of California, Davis, School of Law)
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 MacLeod Heminway (The University of Tennessee College of Law)
Kristin N. Johnson (Tulane University Law School)
Elizabeth Pollman (University of Pennsylvania Carey Law School)
Jeff Schwartz (University of Utah S.J. Quinney College of Law)
Megan Wischmeier Shaner (University of Oklahoma College of Law)

New Paper on “Coronavirus Fears and Macroeconomic Expectations”

To help support the economy as the nation grapples with the coronavirus, the Federal Reserve announced today its decision to take a number of actions (here), including lowering the fed funds target rate to 0 to 1/4%, increasing its holdings of Treasury securities and agency mortgage-backed securities, and taking coordinated measures with foreign central banks (I've written about the Fed's use of central bank swap lines, here).  Today’s announcement is the Fed's second interest rate cut in two weeks.  On March 3, 2020, it lowered the fed funds target rate to 1 to 1.25%.  Economist Carola Binder recently posted (here) an interesting paper, Coronavirus Fears and Macroeconomic Expectations, related to this first March 2020 interest rate cut.  Here’s the abstract:

The Federal Reserve cut interest rates by 50 basis points on March 3, 2020, in response to concerns about the coronavirus (COVID-19). On March 5 and 6, I conducted an online survey of over 500 U.S. consumers that asked about their attention to, concerns about, and responses to the coronavirus, their awareness of the Fed's policy move, and their inflation and unemployment expectations. I then provided respondents with information about the Fed's policy announcement, and re-elicited inflation and unemployment expectations. Most consumers were somewhat or very concerned about effects of coronavirus on the U.S. economy, their health, and their personal finances; 28% had cancelled or postponed travel and 40% purchased food or supplies in response to these concerns. About 38% were aware that the Fed had cut interest rates. I show how concerns and awareness of the rate cut depend on consumer characteristics and news sources. Greater concern about coronavirus is associated with higher inflation expectations and more pessimistic unemployment expectations. Provision of information about the Fed announcement leads some consumers to become more optimistic about unemployment and revise inflation expectations downward, consistent with recent research showing that many consumers associate bad times with high inflation.