Tuesday, November 13, 2018

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

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)

Sunday, October 21, 2018

5th Conference of the French Academy of Legal Studies in Business - June 20-21 - Paris

5th Conference of the French Academy of Legal Studies in Business (Association Française Droit et Management)

June 20 and 21, 2019 – emlyon - Paris Campus

CALL FOR PAPERS 2019 Social Issues in Firms

Social issues and fundamental rights occupy an increasingly important space in the governance of today’s companies. Private enterprises assume an increasingly active role not only in a given economy but also in society as a whole. Firms become themselves citizens. They recognize and support civic engagement by the men and women who work for them. Historically, the role of the modern firm that resulted from the Industrial Revolution has been torn between two opposing viewpoints.

[More information under the break.]

Continue reading

October 21, 2018 in Business Associations, Business School, Call for Papers, Conferences, Corporate Governance, Corporations, Ethics, Haskell Murray, International Business, International Law, Management, Research/Scholarhip | Permalink | Comments (0)

Saturday, October 13, 2018

Has the Dodd-Frank Conflict Minerals Rule Really Made a Difference and is Blockchain The Answer?

Last week Dr. Denis Mukwege won the Nobel Peace Prize for his work on gender-based violence in the Democratic Republic of Congo (DRC). This short video interview describes what I saw when I went to DRC in 2011 to research the newly-enacted Dodd-Frank disclosure rule and to do the legwork for a non-profit that teaches midwives ways to deliver babies safely. For those unfamiliar with the legislation, U.S. issuers must disclose the efforts they have made to track and trace tin, tungsten, tantalum, and gold from the DRC and nine surrounding countries. Rebels and warlords control many of the mines by controlling the villages. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. 

The stated purpose of the Dodd-Frank rule was to help end the violence in DRC and to name and shame companies that do not disclose or that cannot certify that their goods are DRC-conflict free (although that labeling portion of the law was struck down on First Amendment grounds). I  wrote a law review article in 2013 and co-filed an amicus brief during the litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rulehere about the EU's version of the rulehere about the differences between the EU and US rule, and half a dozen times since 2013.

I had the honor of meeting Dr. Mukwege in 2011, who at the time did not support the conflict minerals legislation. He has since endorsed such legislation for the EU. During our trip, we met dozens of women who had been raped, often by gangs. On our way to meet midwives and survivors of a massacre, I saw five corpses of villagers lying in the street. They were slain by rebels the night before. I saw children mining gold from a river with armed soldiers only a few feet away.  That trip is the reason that I study, write, and teach about business and human rights. I had only been in academia for three weeks when I went to DRC, and I decided that my understanding of supply chains and corporate governance from my past in-house life could help others develop more practical solutions to intractable problems. I believed then and I believe now that using a corporate governance disclosure to solve a human rights crisis is a flawed and incomplete solution. It depends on the belief that large numbers of consumers will boycott companies that do not do enough for human rights. 

What does the data say about compliance with the rule? The General Accounting Office puts out a mandatory report annually on the legislation and the state of disclosures. According to the 2018 report:

Similar to the prior 2 years, almost all companies required to conduct due diligence, as a result of their country-of-origin inquiries, reported doing so. After conducting due diligence to determine the source and chain of custody of any conflict minerals used, an estimated 37 percent of these companies reported in 2017 that they were able to determine that their conflict minerals came from covered countries or from scrap or recycled sources, compared with 39 and 23 percent in 2016 and 2015, respectively. Four companies in GAO’s sample declared their products “DRC conflict-free,” and of those, three included the required Independent Private Sector Audit report (IPSA), and one did not. In 2017, 16 companies filed an IPSA; 19 did so in 2016. (emphasis added).

But what about the effect on forced labor and rape? The 2017 GAO Report indicated that in 2016, a study in DRC estimated that 32 percent of women and 33 percent of men in these areas had been exposed to some form of sexual and gender-based violence in their lifetime. Notably, just last month, a coalition of Congolese civil society organizations wrote the following to the United Nations seeking a country-wide monitoring system:

... Armed groups and security forces have attacked civilians in many parts of the country...Today, some 4.5 million Congolese are displaced from their homes. More than 100,000 Congolese have fled abroad since January 2018, raising the risk of increased regional instability... Since early this year, violence intensified in various parts of northeastern Congo’s Ituri province, with terrifying incidents of massacres, rapes, and decapitation. Armed groups launched deadly attacks on villages, killing scores of civilians, torching hundreds of homes, and displacing an estimated 350,000 people. Armed groups and security forces in the Kivu provinces also continue to attack civilians. According to the Kivu Security Tracker, assailants, including state security forces, killed more than 580 civilians and abducted at least 940 others in North and South Kivu since January 2018. (emphasis added)

The U.S. government provides $500 million in aid to the DRC and runs an app called Sweat and Toil for people who are interested in avoiding goods produced by exploited labor. As of today, DRC has seven goods produced with exploitative labor: cobalt (used in electric cars and cell phones), copper, diamonds, and, not surprisingly, tin, tungsten, tantalum, and gold- the four minerals regulated by Dodd-Frank. The app notes that "for the second year in a row, labor inspectors have failed to conduct any worksite inspections... and [the] government also separated as many as 2,360 children from armed groups...[t]here were numerous reports of ongoing collaboration between members of the [DRC] Armed Forces and non-state armed groups known for recruiting children... The Armed Forces carried out extrajudicial killings of civilians including children, due to their perceived support or affiliation with non-state armed groups. .."

For these reasons, I continue to ask whether the conflict minerals legislation has made a difference in the lives of the people on the ground. The EU, learning from Dodd-Frank's flaws, has passed its own legislation, which goes into effect in 2021.  The EU law applies beyond the Democratic Republic of Congo and defines conflict areas as those in a state of armed conflict, or fragile post-conflict area, areas with weak or nonexistent governance and security such as failed states, and any state with a widespread or systematic violation of international law including human rights abuses. Certain European Union importers will have to identify and address the actual potential risks linked to conflict-affected areas or high-risk areas during the due diligence of their supply chains. 

Notwithstanding the statistics above, many investors, NGOs, and other advocates believe the Dodd-Frank rule makes sense. A coalition of investors with 50 trillion worth of assets under management has pushed to keep the law in place. It's no surprise then that many issuers have said that they would continue the due diligence even if the law were repealed. I doubt that will help people in these countries, but the due diligence does help drive out inefficiencies and optimize supply chains.

Stay tuned for my upcoming article in UT's business law journal, Transactions, where I will discuss how companies and state actors are using blockchain technology for due diligence related to human rights. Blockchain will minimize expenses and time for these disclosure requirements, but it probably won't stop the forced labor, exploitation, rapes, and massacres that continue in the Democratic Republic of Congo. (See here for a Fortune magazine article with a great video discussing how and why companies are exploring blockchain's uses in DRC). The blockchain technology won't be the problem-- it's already being used for tracing conflict diamonds. The problem is using the technology in a state with such lawlessness. This means that blockchain will probably help companies, but not the people the laws are meant to protect. 

 

 

 

 

 

 

 

 

 

October 13, 2018 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Human Rights, International Business, International Law, Legislation, Marcia Narine Weldon, Securities Regulation | Permalink | Comments (0)

Tuesday, October 9, 2018

Bang Head Here: California and the LLC as a "Corporation"

California drives me nuts with lazy references to LLCs -- "limited liability companies" -- as" limited liability corporations." See, e.g., Dear California: LLCs are Not Corporations. Or Are They?

A 2010 case recently posted to Westlaw provides another example, this time from the local rules for the United States District Court for the Central District of California.  The case deals with an attorney withdrawing as counsel for an LLC, which requires the withdrawing attorney to provide notice to soon-to-be former client YPA, that as

a limited liability company that cannot proceed pro se, its failure to have new counsel file a timely notice of appearance will result in the dismissal of its complaint for failure to prosecute and of the entry of its default on the cross-complaint.

YOUR PERSONAL ASSISTANT, LLC, a Nevada limited liability company, Plaintiff, v. T-MOBILE USA, INC., a Delaware Corp., & DOES 1-100, inclusive. Defendants., No. CV1000783MMMRCX, 2010 WL 11598037, at *3 (C.D. Cal. Apr. 23, 2010)

This is fairly typical, as entities are generally not allowed to appear pro se -- that is reserved as an option for natural persons. However, because of poor drafting, the local rules keep open the possibility that an LLC could appear pro se.  As the court notes in footnote 9, the rules provide:

9. See CA CD L.R. 83-2.10.1 (“[a] corporation including a limited liability corporation, a partnership including a limited liability partnership, an unincorporated association, or a trust may not appear in any action or proceeding pro se.”)

Id. at *3 n.9 (C.D. Cal. Apr. 23, 2010).  The language here refers to an LLC a type of corporation, which, as a general matter, it is not.  A limited liability partnership is a type of partnership (with gaps often filled by partnership law), but corporations and LLCs are, most of the time, separate and distinct entities.
 
image from www.thefrugalhumanist.com
None of this is new, coming from me.  But I'm not giving up, even if I that tree I keep banging my head on is a Redwood. 

October 9, 2018 in Corporations, Joshua P. Fershee, Lawyering, LLCs | Permalink | Comments (0)

Tuesday, October 2, 2018

Symposium Announcement: The Urgency of Poverty

Following is an announcement for an upcoming symposium that will tackle some challenging topics, including those related to the role corporate law plays in addressing poverty.  I, of course, would probably talk about the role of "entity law," rather than "corporate law," but that's just me.  Regardless, this should be an interesting and enlightening discussion, and I look forward to seeing the papers that come from it.  

On Thursday, October 25, 2018, The University of Tennessee Law School and the Tennessee Journal of Race, Gender, & Social Justice will be hosting a Symposium titled The Urgency of Poverty. The Symposium reflects on the Poor People's Campaign of 1968 and the continued injustices which have led to the current revival. The Symposium further explores the important role transactional lawyers and scholars must play in advocating for economic justice in modern America.

The Symposium will include panels on (1) Environmental Justice, (2) Intersection of Civil Rights and Economic Justice, (3) Solidarity Economies, and (4) Reforming Corporate Law. Professor Philip Alston, the U.N. Special Rapporteur on Extreme Poverty, and Human Rights, will deliver the keynote. The Symposium is accompanied by a dedicated publication featuring essays and articles from Transactional Professors of Color.

More information is available here: https://law.utk.edu/alumni/get-involved/cle/the-urgency-of-poverty/

 

Image

October 2, 2018 in Corporations, Crowdfunding, Joshua P. Fershee, Research/Scholarhip, Social Enterprise | Permalink | Comments (0)

Tuesday, September 25, 2018

No Need to Be Judgmental: Last Thoughts on the Business Judgmenty Nike Ad

I was going to move on to other topics after two recent posts about Nike's Kaepernick Ad, but I decided I had a little more to say on the topic.  My prior posts, Nike's Kaepernick Ad Is the Most Business Judgmenty Thing Ever and Delegation of Board Authority: Nike's Kaepernick Ad Remains the Most Business Judgmenty Thing Ever explain my view that Nike's decision to run a controversial ad is the essence of the exercise of business judgment.  Some people seem to believe that by merely making a controversial decision, the board should subject to review and required to justify its actions.  I don't agree. I need more.   

First, I came across a case (an unreported Delaware case) that had language that was simply too good for me to pass up in this context:

The plaintiffs have pleaded no facts to undermine the presumption that the outside directors of the board . . . failed to fully inform itself in deciding how best to proceed . . . . Instead, the complaint essentially states that the plaintiffs would have run things differently. The business judgment rule, however, is not rebutted by Monday morning quarterbacking. In the absence of well pleaded allegations of director interest or self-dealing, failure to inform themselves, or lack of good faith, the business decisions of the board are not subject to challenge because in hindsight other choices might have been made instead.

In re Affliated Computer Servs., Inc. Shareholders Litig., No. CIV.A. 2821-VCL, 2009 WL 296078, at *10 (Del. Ch. Feb. 6, 2009) (unreported). 
 
Absolutely, positively, spot on.  (I'll note, again, that Nike's stock is up, not down since the ad. That shouldn't matter as to the inquiry, but it further supports why we have the business judgment rule in the first place.) 
 
Next, the good Professor Bainbridge posted yesterday, I hate to break it to Josh Fershee but "Judgmenty" is not a word. He is, of course, correct. But, I couldn't leave it there. I decided to double down on my use of the admittedly ridiculous "judgmenty."  My claim:
Ever the good sport, the good professor replied: 

So it appears. 

September 25, 2018 in Corporate Governance, Corporate Personality, Corporations, Delaware, Joshua P. Fershee, Management, Sports | Permalink | Comments (2)

Tuesday, September 18, 2018

Delegation of Board Authority: Nike's Kaepernick Ad Remains the Most Business Judgmenty Thing Ever

Last week, I made the argument that Nike's Kaepernick Ad Is the Most Business Judgmenty Thing Ever.  I still think so.  

To build on that post (in part based on good comments I received on that post), I think it is worth exploring that ability and appropriateness of boards delegating certain duties, as this impacts any assessment of the business judgment rule. 

As co-blogger Stefan Padfield correctly noted, directors "become informed of all material information reasonably available." However, does that apply to a particular ad campaign? Hiring of all spokespeople? Only certain ones? How about a particular ad?  Or is it the hiring of a marketing and ad team (internally or externally)? 

Nike has a long list of sponsorship (here) for teams and individuals. I sincerely doubt that all of those were run by the board of directors, though it is possible.  The board may also weigh in from time to time, based on the behavior of the people they sponsor.  Nike famously terminated contracts with Oscar Pistorius and Ray Rice in September 2014. Are these all board decisions? Maybe. Or maybe they have a protocol for dealing with such issues. Regardless, how they deal with this seems plainly within the BJR.  

Now, I also would agree that there comes a time when the board would need to do more with regard to their advertising and sponsorships, if they were on notice of a problem with their sponsored athletes, not unlike a Caremark duty or its predecessor. In discussing the applicability of the business judgment rule, an older, but classic, Delaware case stated, “it appears that directors are entitled to rely on the honesty and integrity of their subordinates until something occurs to put them on suspicion that something is wrong. If such occurs and goes unheeded, [only] then liability of the directors might well follow . . . “ Graham v. Allis-Chalmers Mfg. Co., 41 Del. Ch. 78, 85, 188 A.2d 125, 130 (1963). 

When I started to write this, I did not know if Nike's board of directors saw this ad before it went out (more on that below). I expect they did (or at least knew about it), but I'm not sure.  Even it if the ad were raised with the board for informational purposes, trusting the judgment and recommendation of your marketing executives seems imminently reasonable to me. It seems to me that how the board chooses to work with their marketing people fall plainly under the business judgment rule (BJR) unless shareholders can rebut the presumption that the BJR applies.  It's not like marketing mistakes are not common. Most years there are recap articles about the works gaffes in marketing for the year. This one from 2017 is a particularly good example, and I don't think any of them would be likely to lead to director liability.  

The scope and power of board delegation of such duties would be a good topic for further research. I certainly concede that there are times when such decisions look more like board decisions that require an appropriate process and perhaps some demonstration of due care.  Maybe that goes to a need to review ads with certain risk factors, but you'd still have to delegate the decision about what needs to come to the board to someone.  And do you need such a process absent notice that your ad folks are taking enormous risks?  Is this a Caremark/Allis-Chalmers issue? Or could negligent hiring be the failure, if the ad folks are insane? 

Support for my assumptions, and for the idea that Nike, at least, views this as a delegation question, arrived in this breaking news from CNBC, which appeared as I was writing this blog post:  

Nike director Beth Comstock said Tuesday that the sports apparel giant's management and CEO Mark Parker informed the board about the controversial Colin Kaepernick ad before it was released.

But Comstock, also a former vice chair of General Electric, said Parker didn't need the board's permission before running a "Just Do It" campaign featuring the former San Francisco 49ers quarterback.

"Parker runs the company really well," Comstock said on CNBC's "Squawk on the Street," while also commenting about the new China tariffs. Parker "certainly doesn't need board approval to figure out where to run an ad," she added.

In the end, we know marketing decisions can harm stock prices, but we also know risky marketing decisions can improve stock prices.  That very fact, I maintain, puts this decision squarely in the BJR zone.  

September 18, 2018 in Corporations, Current Affairs, Joshua P. Fershee, Management, Marketing | Permalink | Comments (3)

Sunday, September 16, 2018

How I Became (Semi) Literate About Distributed Ledger and Blockchain Technology

I knew it would be impossible. There was no way to relay my excitement about the potential of blockchain technology in a concise way to lawyers and law students last Friday at the Connecting the Threads symposium at the University of Tennessee School of Law. I didn't discuss cryptocurrency or Bitcoin other than to say that I wasn't planning to discuss it. Still, there wasn't nearly enough time for me to discuss all of the potential use cases. I did try to make it clear that it's not a fad if IBM has 1500 people working on it, BITA has hundreds of logistics and freight companies signed up to explore possibilities, and the World Bank, OECD, and United Nations have studies and pilot programs devoted to it. As a former supply chain person, compliance officer, and chief privacy officer, I'm giddy with excitement about everything related to distributed ledger technology other than cryptocurrency. You can see why when you read my law review article in a few months in Transactions.

I've watched over 100 YouTube videos (many of them crappy) and read dozens of articles. I go to Meetups and actually understand what the coders and developers are saying (most of the time). A few students and practitioners asked me how I learned about DLT/blockchain. First, see herehere, here, and here for my prior posts listing resources and making the case for learning the basics of the technology. What I list below adds to what I've posted in the past.

Here are some of the podcasts I listen to (there are others, of course):

1) The Decrypting Crypto Podcast 

2) Block that Chain

3) Block and Roll

4) Blockchain Innovation

Here are some of the videos that I watched (that I haven't already linked to in past posts):

1) Using Blockchains for Supply Chains

2) IBM and Maersk demo: Cross-border supply chain solution on blockchain

3) How to Activate a Blockchain with IBM (Demo)

4) Examples of Blockchain Changing Every Day Life

5) 19 Industries The Blockchain Will Disrupt

6) Vitalek Buterin Explains Ethereum

7) In Conversation with Vitalik Buterin, Justin Drake and Karl Floersch (Ethereum Foundation)

8) Fireside Chat With Vitalek Buterin

9) Blockchain and Food Safety With IBM and Walmart

10) Applying Blockchain Technology to Customs Declarations

11) Your 31st Human Right Guaranteed by Blockchain

12) How Blockchain Can Transform India

13) Blockchain, A Tool for Social Good

14) Blockchain for Social Impact

15) Bitcoin, Blockchain, and the Law

16) Blockchain and the Law: What Lawyers (And their Clients) Need to Know

17) Blockchain and the Law: The Rule of Code

18) The Blockchain: A Revolution You Need to Understand

19) Vitalik Buterin on Ethereum, Bitcoin, and Scaling

20) Exploring Blockchain Use Cases: Microsoft Azure

21) How the Blockchain is Changing Money and Business

22) Blockchain and Corporate Law

23) Blockchain Innovation in Law and Corporate Governance

24) Changing the Legal Game With Blockchain

25) Blockchain and Smart Contracts

26) Code is Not the Law: Blockchain and Artificial Intelligence

27) Linklaters Blockchain Legal & Regulation Panel

28) How Do You Square Blockchain with Privacy Laws

29) Jeff Jonas on GDPR and Integrating IBM Blockchain with Senzing at IBM Think 2018

30) CPDP 2018: BLOCKCHAIN AND DATA PROTECTION: CHALLENGES AND OPPORTUNITIES

31) John McAfee: about blockchain, bitcoins and cyber security

There are dozens more, but this should be enough to get you started. Remember, none of these videos or podcasts will get you rich from cryptocurrency. But they will help you become competent to know whether you can advise clients on these issues. 

 

September 16, 2018 in Compliance, Corporate Governance, Corporations, CSR, Current Affairs, Financial Markets, Human Rights, Law Firms, Law Reviews, Law School, Lawyering, Marcia Narine Weldon | Permalink | Comments (1)

Thursday, September 13, 2018

Nike's Kaepernick Ad Is the Most Business Judgmenty Thing Ever

On Sept. 4, it was reported 

Nike just lost about $3.75 billion in market cap after announcing free agent NFL quarterback Colin Kaepernick as the new face of its “Just Do It” ad campaign. It’s the 30th anniversary of the iconic TV and print spots.

At the time of this writing, the sneaker company’s intra-day market capitalization was $127.82 billion. On Friday, that number had been $131.57 billion.

Market capitalization is the market value of a publicly traded company’s outstanding shares.

Shares of NKE stock dropped about 4 percent on Tuesday morning, as #NikeBoycott has been trending on Twitter. The company’s valuation has since recovered a bit.

In light of the market cap loss, friend and co-blogger Stefan Padfield asked, via Twitter, "How much & what kind of information regarding projected backlash losses did Nike need to review in order to satisfy its duty of care to shareholders here?" My answer: very, very little and very, very limited.  

Now, it is worth noting that here it is Sept. 13, and as I write this, Nike is at or near its 52-week high. As such, the question is less pressing than it may have seemed a week ago.  But even then, I maintain, this is not really even in the realm of a duty of care concern. Or, at least, it shouldn't be. (Also of potential interest, friend and co-blogger Ann Lipton provides a good overview of the varying takes on the ad here

A while back I wrote, This I Believe: On Corporate Purpose and the Business Judgment Rule, which provided my thoughts on how director )ecision making should be viewed (short answer: "I believe in the theory of Director Primacy").  The business judgment rule provides that absent fraud, self-dealing or illegality, directors decisions cannot be reviewed. "Courts do not measure, weigh or quantify directors’ judgments. We do not even decide if they are reasonable in this context. Due care in the decisionmaking context is process due care only. Irrationality is the outer limit of the business judgment rule." Brehm v Eisner, 746 A.2d 244 (Del. 2000)(emphasis added)(footnote omitted).     

Under this lens, regardless of the market cap impact, Nike's advertising falls within the scope of the business judgment rule. Did the board even know this ad was coming out? I don't know.  Probably. But I also think it is clearly proper for the board to delegate duties to CEO to handle day-to-day operations. And it is customary and proper for that CEO to delegate to a marketing VP and/or marketing agency the role of designing and placing advertising. Could the CEO and/or marketing VP get fired for their choices? Sure. Or they could get bonuses. Either way, that would be the call of the directors.  

I can come up with lots of reasons why Nike should not have done that ad, and I can come up with a lot of good reasons why it makes sense.  The biggest reason it makes sense? Nike knows marketing.  They won't get everything right, but they have been taking calculated risks for a long time. In 1992, the Harvard Business Review noted that

in the mid-1980s, Nike lost its footing, and the company was forced to make a subtle but important shift. Instead of putting the product on center stage, it put the consumer in the spotlight and the brand under a microscope—in short, it learned to be marketing oriented. Since then, Nike has resumed its domination of the athletic shoe industry. It commands 29% of the market, and sales for fiscal 1991 topped $3 billion.

Phil Knight, Nike founder, futher explained how Nike looked at using famous athletes:

The trick is to get athletes who not only can win but can stir up emotion. We want someone the public is going to love or hate, not just the leading scorer. Jack Nicklaus was a better golfer than Arnold Palmer, but Palmer was the better endorsement because of his personality.

To create a lasting emotional tie with consumers, we use the athletes repeatedly throughout their careers and present them as whole people. So consumers feel that they know them. It’s not just Charles Barkley saying buy Nike shoes, it’s seeing who Charles Barkley is—and knowing that he’s going to punch you in the nose. We take the time to understand our athletes, and we have to build long-term relationships with them. Those relationships go beyond any financial transactions. John McEnroe and Joan Benoit wear our shoes everyday, but it’s not the contract. We like them and they like us. We win their hearts as well as their feet.

Read in this light, it all makes sense. This is part of Nike's plan, and it always has been. Presumably, they expect that any business they lose because consumers are upset by the ads will be made up and then some by creating a "lasting emotional tie with consumers."  That is, creating what we might call brand loyalty.

Not that is should matter to a court. While these explanations may be correct, they aren't necessary.  The business judgment rule exists to allow companies, via their directors, to take these kinds of risks. It's how you create companies like Nike (and Apple, for that matter). And that's why there should be no question that this ad is beyond the scope of review, not matter how the public responds. If consumers don't like it, they can buy other products. If shareholders don't like it, they can vote the board out.  And that's it.  That's the recourse. It just doesn't get much more "business judgmenty" than who you pick for your ads.  And that's exactly how it should be.  

September 13, 2018 in Corporations, Joshua P. Fershee, Management, Marketing | Permalink | Comments (3)

Tuesday, September 4, 2018

Sports Agents, LLCs, and LLPs: You Can't Believe Everything You Read on the Internet

I am teaching Sports Law this semester, which is always fun.  I like to highlight other areas of the law for my students so that they can see that Sports Law is really an amalgamation of other areas: contract law, labor law, antitrust law, and yes, business organizations.  I sometimes cruise the internet for examples to make my point that they really need to have a firm grounding the basics of many areas of law to be a good sports lawyer.  Today, I found a solid example, and not in a good way.  

I found a site providing advice about "How to Start a Sports Agency" at the site https://www.managerskills.org.  This is site is new to me.  Anyway, it starts off okay: 

Ask any successful sports agent: education is the foundation upon which you will build your business. The first step is to earn your bachelor’s degree from an appropriately accredited institution.

. . . .

Once you have obtained your bachelor’s degree, the next step will be to pursue your master’s degree. Alternately, you may choose to pursue a law degree.

While a law degree is not required, the skills you acquire during your studies will be particularly beneficial when it comes to negotiating contracts for your clients. Most major leagues, including the NFL and the NBA, requires their sports agents to possess a master’s degree.

All true. A law degree should also help when it comes to figuring out your entity choice.  The site's advice continues: 

The next step is to choose a professional name for your business and to create a limited liability corporation (LLC). If you have one or more business partners, then you will need to create a limited liability partnership (LLP).

Yikes.  I mean, yikes.  First, an LLC is a limited liability company!

Second,  I believe that after Massachusetts allowed single-member LLCs in 2003, all states allowed the creation of single-member LLCs, so an LLC is an option. An LLP might be an option, and some professional entities for certain lawyers might be an option (or requirement), such as the PLLC or PC.  But the idea that one needs to choose an LLP if there is more than one person participating in the business is flawed. It is correct that to be an LLP, there would need to be more than one person, but this is not transitive.  

Anyway, while not great advice, this gives me some good material for class tomorrow.  I will probably start with, "Don't believe everything you read on the Internet." 

September 4, 2018 in Contracts, Corporations, Joshua P. Fershee, LLCs, Sports | Permalink | Comments (0)

Saturday, September 1, 2018

Should Corporate Lawyers and Business Law Professors Be Talking About DAOs?

Did I lose you with the title to this post? Do you have no idea what a DAO is? In its simplest terms, a DAO is a decentralized autonomous organization, whose decisions are made electronically by a written computer code or through the vote of its members. In theory, it eliminates the need for traditional documentation and people for governance. This post won't explain any more about DAOs or the infamous hack of the Slock.it DAO in 2016. I chose this provocative title to inspire you to read an article entitled Legal Education in the Blockchain Revolution.

The authors Mark Fenwick, Wulf A. Kaal, and Erik P. M. Vermeulen discuss how technological innovations, including artificial intelligence and blockchain will change how we teach and practice law related to real property, IP, privacy, contracts, and employment law. If you're a practicing lawyer, you have a duty of competence. You need to know what you don't know so that you avoid advising on areas outside of your level of expertise. It may be exciting to advise a company on tax, IP, securities law or other legal issues related to cryptocurrency or blockchain, but you could subject yourself to discipline for doing so without the requisite background. If you teach law, you will have students clamoring for information on innovative technology and how the law applies. Cornell University now offers 28 courses on blockchain, and a professor at NYU's Stern School of Business has 235 people in his class. Other schools are scrambling to find professors qualified to teach on the subject. 

To understand the hype, read the article on the future of legal education. The abstract is below:

The legal profession is one of the most disrupted sectors of the consulting industry today. The rise of Legal Tech, artificial intelligence, big data, machine learning, and, most importantly, blockchain technology is changing the practice of law. The sharing economy and platform companies challenge many of the traditional assumptions, doctrines, and concepts of law and governance, requiring litigators, judges, and regulators to adapt. Lawyers need to be equipped with the necessary skillsets to operate effectively in the new world of disruptive innovation in law. A more creative and innovative approach to educating lawyers for the 21st century is needed.

For more on how blockchain is changing business and corporate governance, come by my talk at the University of Tennessee on September 14th where you will also hear from my co-bloggers. In case you have no interest in my topic, it's worth the drive/flight to hear from the others. The descriptions of the sessions are below:

Session 1: Breach of Fiduciary Duty and the Defense of Reliance on Experts

Many corporate statutes expressly provide that directors in discharging their duties may rely in good faith upon information, opinions, reports, or statements from officers, board committees, employees, or other experts (such as accountants or lawyers). Such statutes often come into play when directors have been charged with breaching their procedural duty of care by making an inadequately informed decision, but they can be applicable in other contexts as well. In effect, the statutes provide a defense to directors charged with breach of fiduciary duty when their allegedly uninformed or wrongful decisions were based on credible information provided by others with appropriate expertise. Professor Douglas Moll will examine these “reliance on experts” statutes and explore a number of questions associated with them.

Session 2: Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation

Private fraud actions brought under Section 10(b) of the Securities Exchange Act require courts to make a variety of determinations regarding market functioning and the economic effects of the alleged misconduct. Over the years, courts have developed a variety of doctrines to guide how these inquiries are to be conducted. For example, courts look to a series of specific, pre-defined factors to determine whether a market is “efficient” and thus responsive to new information. Courts also rely on a variety of doctrines to determine whether and for how long publicly-available information has exerted an influence on security prices. Courts’ judgments on these matters dictate whether cases will proceed to summary judgment and trial, whether classes will be certified and the scope of such classes, and the damages that investors are entitled to collect. Professor Ann M. Lipton will discuss how these doctrines operate in such an artificial manner that they no longer shed light on the underlying factual inquiry, namely, the actual effect of the alleged fraud on investors.

Session 3: Lawyering for Social Enterprise

Professor Joan Heminway will focus on salient components of professional responsibility operative in delivering advisory legal services to social enterprises. Social enterprises—businesses that exist to generate financial and social or environmental benefits—have received significant positive public attention in recent years. However, social enterprise and the related concepts of social entrepreneurship and impact investing are neither well defined nor well understood. As a result, entrepreneurs, investors, intermediaries, and agents, as well as their respective advisors, may be operating under different impressions or assumptions about what social enterprise is and have different ideas about how to best build and manage a sustainable social enterprise business. Professor Heminway will discuss how these legal uncertainties have the capacity to generate transaction costs around entity formation and management decision making and the pertinent professional responsibilities implicated in an attorney’s representation of such social enterprises.

Session 4: Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management

Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, Professor Marcia Narine Weldon will discuss how the technology also has the potential to transform the way companies look at governance and enterprise risk management. Companies and stock exchanges are using blockchain for shareholder communications, managing supply chains, internal audit, and cybersecurity. Professor Weldon will focus on eliminating barriers to transparency in the human rights arena. Professor Weldon’s discussion will provide an overview of blockchain technology and how state and nonstate actors use the technology outside of the realm of cryptocurrency.

Session 5: Crafting State Corporate Law for Research and Review

Professor Benjamin Edwards will discuss how states can implement changes in state corporate law with an eye toward putting in place provisions and measures to make it easier for policymakers to retrospectively review changes to state law to discern whether legislation accomplished its stated goals. State legislatures often enact and amend their business corporation laws without considering how to review and evaluate their effectiveness and impact. This inattention means that state legislatures quickly lose sight of whether the changes actually generate the benefits desired at the time off passage. It also means that state legislatures may not observe stock price reactions or other market reactions to legislation. Our federal system allows states to serve as the laboratories of democracy. The controversy over fee-shifting bylaws and corporate charter provisions offers an opportunity for state legislatures to intelligently design changes in corporate law to achieve multiple state and regulatory objectives. Professor Edwards will discuss how well-crafted legislation would: (i) allow states to compete effectively in the market for corporate charters; and (ii) generate useful information for evaluating whether particular bylaws or charter provisions enhance shareholder wealth.

Session 6: An Overt Disclosure Requirement for Eliminating the Duty of Loyalty

When Delaware law allowed parties to eliminate the duty of loyalty for LLCs, more than a few people were appalled. Concerns about eliminating the duty of loyalty are not surprising given traditional business law fiduciary duty doctrine. However, as business agreements evolved, and became more sophisticated, freedom of contract has become more common, and attractive. How to reconcile this tradition with the emerging trend? Professor Joshua Fershée will discuss why we need to bring a partnership principle to LLCs to help. In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j). As such, the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default. The duty of loyalty norm is sufficiently ingrained that more active notice (and more explicit consent) is necessary, and eliminating the duty of loyalty is sufficiently unique that it warrants unique treatment if it is to be eliminated.

Session 7: Does Corporate Personhood Matter? A Review of We the Corporations

Professor Stefan Padfield will discuss a book written by UCLA Law Professor Adam Winkler, “We the Corporations: How American Businesses Won Their Civil Rights.” The highly-praised book “reveals the secret history of one of America’s most successful yet least-known ‘civil rights movements’ – the centuries-long struggle for equal rights for corporations.” However, the book is not without its controversial assertions, particularly when it comes to its characterizations of some of the key components of corporate personhood and corporate personality theory. This discussion will unpack some of these assertions, hopefully ensuring that advocates who rely on the book will be informed as to alternative approaches to key issues.

 

September 1, 2018 in Ann Lipton, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Human Rights, Intellectual Property, International Business, Joan Heminway, Joshua P. Fershee, Law School, Lawyering, LLCs, Marcia Narine Weldon, Real Property, Shareholders, Social Enterprise, Stefan J. Padfield, Teaching, Technology, Web/Tech | Permalink | Comments (0)

Wednesday, August 29, 2018

California Court Misplays Smackdown: LLCs Are Still Not Corporations

In a recent California appellate opinion disposing of the second appeal of an earlier judgment seems to have the court irritated.  It does appear the appellant was trying to relitigate a decided issue, so perhaps that's right.  But the court makes its own goof.  After referring repeatedly to the "limited liability company" at issue, the court then goes down a familiar, and disappointing, path.  The court explains: 

In any event, the Supreme Court opinion which Foster contends we disregarded, Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252, 1259, has no relevance here. Essex decided whether an assignee of a bad faith claim could also recover attorney fees. (Ibid.) This holding has nothing to do with whether a limited liability corporation may assign its appellate rights in an improper attempt to circumvent the rules requiring corporations to be represented by attorneys.

JENNITA FOSTER, Plaintiff & Appellant, v. OLD REPUBLIC DEFAULT MANAGEMENT SERVICES, Defendant & Respondent., No. B280006, 2018 WL 4075910, at *2 (Cal. Ct. App. Aug. 27, 2018) (emphasis added).  
 
It's not clear whether Essex Insurance Company is an LLC or a corporation, though it's a strong bet it is a corporation. (A search of California entities and a quick look at the docket were inconclusive.) Regardless, I know that case does not discuss LLCs and that the instant case definitely deals with a "limited liability company."  It is "unpublished/noncitable," according to Westlaw, so I guess that's good, but it is still out there. 
 
Ultimately, the court's apparent frustration seems warranted, but it is a little ironic (and a bit amusing) that the court misstates the entity type in the smackdown.  

August 29, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (2)

Tuesday, August 28, 2018

Kuo & Means - The Political Economy of Corporate Exit

Are corporations (and other business associations) political actors?  Of course.  Some of Marcia's posts here on the BLPB have raised, for example, questions about the use of boycotts as firm political activity.  See, e.g., here.  Marcia also pointed out here that National Football League teams (typically owned by and operated through some form of business association) have been caught up in political activity surrounding the players-kneeling-during-the-national-anthem controversy.

The Vanderbilt Law Review has recently published an essay on the political corporation written by a Dream Team of sorts--two friends who are married to each other--at the University of South Carolina School of Law, Susan Kuo and Ben Means.  Susan teaches advocacy and dispute resolution courses (currently focusing on criminal law and procedure, conflicts, and social justice issues) and is the Associate Dean for Diversity and Inclusion.  Ben is likely known to many BLPB readers as a business law guy (with a special focus on small and family owned busnesses). He's been a member of the executive committee for the Association of American Law Schools (AALS) Section on Business Associations and is past chair of the AALS Section on Agency, Partnership, LLCs, and Unincorporated Business Associations.  They bring their individual and collective talents to this essay, entitled The Political Economy of Corporate Exit.  Here is the SSRN abstract.  

Corporate political activity is understood to include financial contributions, lobbying efforts, participation in trade groups, and political advertising, all of which give corporations a “voice” in public decisionmaking. This Essay contends that the accepted definition of corporate political activity overlooks the importance of “exit.” Corporations do not need to spend money to exert political influence; when faced with objectionable laws, they can threaten to take their business elsewhere. From the “grab your wallet” campaign to the fight for LGBT rights in states such as Georgia, Indiana, and North Carolina, corporate exit has played a significant role in recent political controversies.

This Essay offers the first account of corporate exit as a form of political activity and identifies two basic rationales: (1) attaching economic consequences to public choices, and (2) avoiding complicity with laws that violate a corporation’s values. This Essay also shows how citizens can harness corporate economic power when conventional political channels are inaccessible. In an era of hashtag activism and boycotts sustained via social media, corporations cannot afford to ignore consumers, employees, investors, and other stakeholders.

I communicated with Ben about this piece a while back and was excited about it then.  I am looking forward to getting into it in short order.  Looks like a relevant, insightful read.

August 28, 2018 in Business Associations, Corporations, Joan Heminway, Marcia Narine Weldon | Permalink | Comments (0)

Friday, August 24, 2018

If Rockefeller Were A Coder- Business Entity Selection and Blockchain

Two weeks ago, I blogged about why lawyers, law professors, and judges should care about blockchain. I'll be speaking about blockchain, corporate governance, and enterprise risk management on September 14th at our second annual BLPB symposium at UT. To prepare, I'm reading as many articles as I can on blockchain, but it can be a bit mind numbing with all of the complexity. After hearing Carla Reyes speak at SEALS, I knew I had to read hers, if only because of the title If Rockefeller Were A Coder.

I recommend this article in general, but especially for those who teach business organizations and want to find a way to enliven your entity selection discussions. The abstract is below. 

The Ethereum Decentralized Autonomous Organization (“The DAO”), a decentralized, smart contract-based, investment fund with assets of $168 million, spectacularly crashed when one of its members exploited a flaw in the computer code and stole $55 million. In the wake of the exploit, many argued that participants in the DAO could be jointly and severally liable for the loss as partners in a general partnership. Others claimed that the DAO evidenced an entirely new form of business entity, one that current laws do not contemplate. Ultimately, the technologists cleaned up the exploit via technological means, and without engaging in any further legal analysis, many simply concluded that the DAO, other decentralized autonomous organizations, and the Ethereum protocol itself signify opportunities to do away with legal business organizational forms as they presently exist. In this Article, I argue that precisely the opposite is true. Instead of creating a new type of corporate entity through computer code, The DAO and other smart contract-based organizations may resurrect a very old, frequently forgotten, business entity—the business trust, which Rockefeller first used to solve the technology-business organization law divide of his time. 

This Article offers the first analysis of blockchain-based business ventures under business organization law at three separate levels of the technology: protocols, smart contracts and decentralized autonomous organizations. The Article first reveals the practical and theoretical deficits of using partnership as the only default entity option for blockchain-based business ventures. The Article then demonstrates that incorporation and LLC formation will also pose both practical and doctrinal difficulties for some such businesses. When faced with a similar conundrum in the nineteenth century, Rockefeller turned to the common law business trust as a substitute business entity. This Article argues that if Rockefeller were a coder building a blockchain-based business, he would again turn to the business trust as an additional choice of entity. The Article concludes by considering, in light of Rockefeller’s history, whether the law should anticipate any challenges with the rise of blockchain-based business trusts.

 

August 24, 2018 in Corporate Governance, Corporate Personality, Corporations, Current Affairs, Marcia Narine Weldon, Research/Scholarhip, Teaching | Permalink | Comments (0)

Tuesday, August 21, 2018

Everyone Wants to Make Non-Corporate Things Corporate: It's Sen. Warren's Turn

Senator Elizabeth Warren last week released her Accountable Capitalism Act. My co-blogger Haskell Murray wrote about that here, as have a number of others, including Professor Bainbridge, who has written at least seven posts on his blogCountless others have weighed in, as well.

There are fans of the idea, others who are agnostic, and still other who thinks it’s a terrible idea. I am not taking a position on any of that, because I am too busy working through all the flaws with regard to entity law itself to even think about the overall Act.

As a critic of how most people view entities, my expectations were low. On the plus side, the bill does not say “limited liability corporation” one time.  So that’s a win. Still, there are a number of entity law flaws that make the bill problematic before you even get to what it’s supposed to do.  The problem: the bill uses “corporation” too often where it means “entity” or “business.”

Let’s start with the Section 2. DEFINITIONS.  This section provides:

 (2) LARGE ENTITY.—

(A) IN GENERAL.—The term ‘‘large entity’’ means an entity that—

(i) is organized under the laws of a State as a corporation, body corporate, body politic, joint stock company, or limited liability company;

(ii) engages in interstate commerce; and

(iii) in a taxable year, according to in- formation provided by the entity to the Internal Revenue Service, has more than $1,000,000,000 in gross receipts.

Okay, so it does list LLCs, correctly, but it does not list partnerships.  This would seem to exclude Master Limited Partnerships (MLPs). The Alerian MLP Indexlist about 40 MLPs with at least a $1 billion market cap.  It also leaves our publicly traded partnerships(PTPs). So, that’s a miss, to say the least. 

Section 2 goes on to define a  

(6) UNITED STATES CORPORATION.—The term “United States corporation’’ means a large entity with respect to which the Office has granted a charter under section 3.

The bill also creates an “Office of United States Corporations,” in Section 3, even though the definitions section clear says a “large entity” includes more than just corporations. 

Next is Section 4, which provides the “Requirement for Large Entities to Obtain Charters.”

LARGE ENTITIES.—

(1) IN GENERAL.— An entity that is organized as a corporation, body corporate, body politic, joint stock company, or limited liability company in a State shall obtain a charter from the Office . . . .”

So, again, the definition does not include MLPs (or any other partnership forms, or coops for that matter) as large entities.  I am not at all clear why the Act would refer to and define “Large Entities,” then go back to using “corporations.”  Odd. 

Later in section 4, we get the repercussions for the failure to obtain a charter: 

An entity to which paragraph (1) applies and that fails to obtain a charter from the Office as required under that paragraph shall not be treated as a corporation, body corporate, body politic, joint-stock company, or limited liability company, as applicable, for the purposes of Federal law during the period beginning on the date on which the entity is required to obtain a charter under that paragraph and ending on the date on which the entity obtains the charter.

Here, the section chooses not to use the large entity definition or the corporation definition and instead repeats the entity list from the definitions section. As a side note, does this section mean that, for “purposes of Federal law,” any statutory “large entity” without a charter is a general partnership or sole proprietorship? I would hope not for the LLC, which isn’t a corporation, anyway.

Finally, in Section 5, the Act provides:

(e) APPLICATION.—

(1) RULE OF CONSTRUCTION REGARDING GENERAL CORPORATE LAW.—Nothing in this section may be construed to affect any provision of law that is applicable to a corporation, body corporate, body politic, joint stock company, or limited liability company, as applicable, that is not a United States corporation.

Again, I will note that “general corporate law” should not apply to anything but corporations, anyway. LLCs, in particular. 

The Act further contemplates a standard of conduct for directors and officers.  LLCs do not have to have either, at least not in the way corporations do, nor do MLPs/PTPs, which admittedly do not appear covered, anyway. The Act also contemplates shareholders and shareholder suits, which are not a thing for LLCs/MLPs/PTPs because they don’t have shareholders.

This is not an exhaustive list, but I think it’s a pretty good start. I will concede that some of my critiques could be argued another way.  Obviously, I'd disagree, but maybe some of this is not as egregious as I see it. Still, there are flaws, and if this thing is going to move beyond even the release, I sure hope they take the time to get the entity issues figured out. I’d be happy to help.

August 21, 2018 in Corporate Governance, Corporate Personality, Corporations, CSR, Joshua P. Fershee, Legislation, LLCs, Management, Partnership, Shareholders, Unincorporated Entities | Permalink | Comments (0)

Sunday, August 19, 2018

Sergio Alberto Gramitto Ricci on The Technology and Archeology of Corporate Law

The following comes to us from Sergio Alberto Gramitto Ricci, Visiting Assistant Professor of Law and Assistant Director, Clarke Program on Corporations & Society, Cornell Law School.  I had the pleasure of listening to Sergio discuss this project at our recent SEALS discussion group on Masterpiece Cakeshop, and I found particularly interesting his conclusion that "Roman slaves could not own property, but ius naturale provided them with the right to exercise religion. To the contrary, Roman corporations could contract, own assets and bear liabilities, but they had no exercise rights as religion liberties were typical of personae—physically sound humans."  The concept of robo-directors is also fascinating, and adds another layer to my ongoing dystopian (utopian?) novel plot wherein corporations are allowed to run for seats in Congress directly (as opposed to what some would argue is the current system wherein we get: "The Senator from [X], sponsored by Big Pharma Corp."). You can download the full draft via SSRN here: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3232816.

In an era where legal persons hold wealth and power comparable to those of nation states, shedding light on the nature of the corporate form and on the rights of business corporations is crucial for defining the relations between the latter and humans. Recent decisions of the U.S. Supreme Court, including Masterpiece Cakeshop, Ltd. v. Colorado Civil Rights Commission and Burwell v. Hobby Lobby Stores, Inc., have called for a closer investigation of the role that corporate separateness plays in the business corporation formula. Moreover, legal personhood is a sophisticated legal technology, which employment can revolutionize the strategies to protect cultural heritage or natural features and can address emerging phenomena, including artificial intelligence and learning machines. This paper adopts archeology of corporate law to analyze three intertwining legal and organizational technologies based on legal personhood. Archeology of corporate law excavates ancient laws and language in order to solve salient issues in contemporary and future corporate debates. First, this paper sheds light on the origins and nature of legal personhood and on the rights of business corporations by analyzing laws and language that the Romans adopted when they invented the corporation. For example, excavating roman law shows how Roman slaves could not own property, but ius naturale provided them with the right to exercise religion. To the contrary, Roman corporations could contract, own assets and bear liabilities, but they had no exercise rights as religion liberties were typical of personae—physically sound humans. In sum, the Romans drew a line between the legal capacities of their corporations and the rights and liberties that persons possessed by virtue of being human. Second, this paper discusses the separation of ownership and control. It explains how the separation of ownership and control, together with legal personhood, constitutes the essential formula of the business corporation model. Last, this paper explores artificial intelligence in boardrooms to assist, integrate or replace human directors drawing a parallelism between robo-directors and Roman slaves appointed to run joint-enterprises. Barring the statutory restrictions that require for board directors to be natural persons and overcoming the moral concerns related to appointing robo-directors, the remaining issue that AI in boardrooms raises is that of accountability.

August 19, 2018 in Business Associations, Comparative Law, Corporate Personality, Corporations, Religion, Research/Scholarhip, Stefan J. Padfield | Permalink | Comments (0)

Thursday, August 16, 2018

Elizabeth Warren's Accountable Capitalism Act and Benefit Corporations

On Tuesday, Elizabeth Warren penned an article in The Wall Street Journal entitled Companies Shouldn’t Be Accountable Only to Shareholders: My new bill would require corporations to answer to employees and other stakeholders as well.

The article announced and promoted her Accountable Capitalism Act. With Republicans in control of Congress and the White House, Warren’s bill almost certainly doesn’t stand a chance of passing in the short-term.

Yet, because the bill draws on benefit corporation governance, a main scholarly interest of mine, and because it may foreshadow moves by a Democrat-controlled Congress in the future, I decided to read the 28-page bill and report here briefly.

Portions of the bill summarized:

  • As has been widely reported, the bill only applies to companies with more than $1 billion in revenue.
  • The bill seeks to establish an “Office of United States Corporations” within the Department of Commerce, which will review, grant, and rescind charters for the large companies covered by the bill.
  • The bill takes language from benefit corporation law and requires that U.S. Corporations must have a purpose to serve a “general public benefit” – “a material positive impact on society resulting from the business and operations of a United States corporation, when taken as a whole.” This purpose is in addition to any purpose in the company’s state filing.
  • The governance requirements are a mix of the Model Benefit Corporation Legislation and Delaware version of benefit corporation law – requiring both that directors balance the “pecuniary interests of shareholders” with the "best interests of persons that are materially affected by the conduct of the United States corporation” (drawn from Delaware) and that directors consider a litany of stakeholders in their decisions (including shareholders, employees, customers, community, local and global environment - drawn from the Model). Only shareholders with 2%+ of the shares can sue derivatively.
  • Employees must elect 40%+ of the board of directors.
  • 75%+ of shareholders and 75%+ of directors must approve political spending of over $10,000 on a single candidate.

My brief thoughts:

  • This is a lot of press for benefit corporations.
  • The press may not be good for benefit corporation proponents who have been largely able to pitch to both sides of the political aisle in their state bills. B Lab co-founder Jay Coen Gilbert has already written an article trying to promote what he sees as the bipartisan nature of benefit corporations: Elizabeth Warren, Republicans, CEOs & BlackRock's Fink Unite Around 'Accountable Capitalism'
  • I have noted in my scholarly work how the state benefit corporation laws fail to align the purported “general public benefit” corporate purpose with effective accountability mechanisms. This bill, however, takes one step toward aligning company purpose and accountability by requiring that employees elect 40%+ of the board. Of course, that still leaves out many other stakeholders that directors are supposed to consider, and shareholders are still the only stakeholders with the ability to sue derivatively. A better solution is to have stakeholder representatives who elect the entire board and also possess, collectively, the right to sue derivatively. This stakeholder representative framework, articulated in my 2017 American Business Law Journal article, has the benefit of keeping the board united on a common goal – instead of fighting on behalf of the single stakeholder group who elected them – while also being held to account by representatives of all major stakeholder groups, collectively.
  • Suggesting that benefit corporation law become mandatory will likely not be popular among many conservatives. See, e.g., this early response in the National Review: Elizabeth Warren’s Batty Plan to Nationalize . . . Everything. Currently, a fair response to conservative critics of state benefit corporation laws is "if businesses do not like the benefit corporation framework, they can just choose to be a traditional corporation." This bill attempts to remove that choice for large companies. 

(My co-blogger Joshua Fershee may be horrified to learn that the bill purports to apply not only to corporations, but also to LLCs, even though they use the term "U.S. Corporations" throughout).   

August 16, 2018 in Business Associations, Corporations, CSR, Financial Markets, Haskell Murray, Social Enterprise | Permalink | Comments (7)

Tuesday, August 14, 2018

The SEC Needs to Crack Down on Incorrect Entity Types

According to its website,

The U. S. Securities and Exchange Commission (SEC) has a three-part mission:

  • Protect investors
  • Maintain fair, orderly, and efficient markets
  • Facilitate capital formation

I think it needs to add: "Ensure proper entity identification." 

Examples abound. Take this recent 10-Q:

On June 27, 2018, the Company formed a joint venture with Downtown Television, Inc., for the purpose of developing, producing and marketing entertainment content relating to deep-sea exploration, historical shipwreck search, artifact recovery, and expounding upon the history of these shipwrecks.  The joint venture is being formed as a new limited liability corporation that will be 50% owned each by EXPL and Downtown, and has been named Megalodon Entertainment, LLC. (“Megalodon”), as is further described in Note B. 

Endurance Exploration Group, Inc., SEC 10-Q, for the quarterly period ended: June 30, 2018 (emphasis added). 

Side note: That 10-Q, I will note, raised some other questionable decisionmaking, as it goes on to report: 

NOTE B – JOINT VENTURE

EXPL Swordfish, LLC

Effective January 9, 2017, the Company, through a newly formed, wholly owned subsidiary, EXPL Swordfish, LLC (“EXPL Swordfish”), entered into a joint-venture agreement (“Agreement”) with Deep Blue Exploration, LLC, d/b/a Marex (“Marex”).  The joint venture between EXPL Swordfish and Marex is referred to as Swordfish Partners.

As near as I can tell, Swordfish Partners is what it says it is, a partnership formed as a joint venture for a unique purpose.  This is fascinating to me.  Why would a company filing quarterly reports with the SEC not choose to take the time to create an LLC for the joint venture? I'm not a maritime expert, though I did participate in Tulane Law School's program with the Aegean Institute of the Law of the Sea and Maritime Law many years ago. I simply cannot come up with a good reason not to create a limited liability entity for the joint venture.  I know there are times when it makes sense (or is not a concern), but this doesn't seem like one of those times. 

I did a quick look for some other entity issues in SEC filings. There are many more, but this is what the Google machine provided in a quick search:

  • From Core Moldings Technologies, Inc. Schedule 13D (Aug. 8, S018): "GGCP Holdings is a Delaware limited liability corporation having its principal business office at 140 Greenwich Avenue, Greenwich, CT 06830."   
  • From Financial Engines, Inc. Form 8-K, Jan. 28, 2016: "On February 1, 2016, Financial Engines, Inc. (“Financial Engines”) completed the previously announced acquisition of Kansas City 727 Acquisition LLC, a Delaware limited liability corporation ...."
  • Limited Liability Company Agreement of Artist Arena International, LLC, Exhibit 3.206"This Limited Liability Company Agreement (this “Agreement”) of Artist Arena International, LLC, a New York limited liability company (the “Company”), dated as of January 4, 2011, is adopted and entered into by Artist Arena LLC., a New York limited liability corporation (the “Member” or “AA”), pursuant to and in accordance with the Limited Liability Company Law of the State of New York, Article 2, §§ 201-214, et seq., as amended from time to time (the “Act”)."
  • CloudCommerce, Inc., Form 8-K, October 1, 2015: "Certificate of Merger of Domestic Corporation and Foreign Limited Liability Corporation between Warp 9, Inc., a Delaware corporation, and Indaba Group, LLC, a Colorado limited liability company."

I swear we can do better.  Really.  

August 14, 2018 in Corporations, Joshua P. Fershee, LLCs, Securities Regulation | Permalink | Comments (0)

Sunday, August 12, 2018

Why Lawyers, Law Professors, and Judges Should Care About Blockchain

We’re a month away from our second annual Business Law Professor Blog CLE, hosted at the University of Tennessee on Friday, September 14, 2018. We’ll discuss our latest research and receive comments from UT faculty and students. I’ve entitled my talk Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management, and will blog more about that after I finish the article. This is a really long post, but it’s chock full of helpful links for novices and experts alike and highlights some really interesting work from our colleagues at other law schools.

Two weeks ago, I posted some resources to help familiarize you with blockchain. Here’s a relatively simple definition from John Giordani at Forbes:

Blockchain is a public register in which transactions between two users belonging to the same network are stored in a secure, verifiable and permanent way. The data relating to the exchanges are saved inside cryptographic blocks, connected in a hierarchical manner to each other. This creates an endless chain of data blocks -- hence the name blockchain -- that allows you to trace and verify all the transactions you have ever made. The primary function of a blockchain is, therefore, to certify transactions between people. In the case of Bitcoin, the blockchain serves to verify the exchange of cryptocurrency between two users, but it is only one of the many possible uses of this technological structure. In other sectors, the blockchain can certify the exchange of shares and stocks, operate as if it were a notary and "validate" a contract or make the votes cast in online voting secure and impossible to alter. One of the greatest advantages of the blockchain is the high degree of security it guarantees. In fact, once a transaction is certified and saved within one of the chain blocks, it can no longer be modified or tampered with. Each block consists of a pointer that connects it to the previous block, a timestamp that certifies the time at which the event actually took place and the transaction data.

These three elements ensure that each element of the blockchain is unique and immutable -- any request to modify the timestamp or the content of the block would change all subsequent blocks. This is because the pointer is created based on the data in the previous block, triggering a real chain reaction. In order for any alterations to happen, it would be necessary for the 50%-plus-one of the network to approve the change: a possible but hardly feasible operation since the blockchain is distributed worldwide between millions of users.

In case that wasn’t clear enough, here are links to a few of my favorite videos for novices. These will help you understand the rest of this blog post.

To help prepare for my own talk in Tennessee, I attended a fascinating discussion at SEALS on Thursday moderated by Dean Jon Garon of Nova Southeastern University Shepard Broad College of Law called Blockchain Technology and the Law.

For those of you who don’t know how blockchain technology can relate to your practice or teaching, I thought I would provide a few questions raised by some of the speakers. I’ve inserted some (oversimplified)links for definitions. The speakers did not include these links, so if I have used one that you believe is incomplete or inaccurate, do not attribute it to them.

Professor Del Wright, University of Missouri-Kansas City School of Law;

Del started the session by talking about the legal issues in blockchain consensus models. He described consensus models as the backbones for users because they: 1) allow users to interact with each other in a trustless manner; 2) ensure the integrity of the ledger in both normal and adversarial situations; and 3) create a “novel variety of networks with extraordinary potential” if implemented correctly. He discussed both permissioned (e.g. Ripple) and permissionless (Bitcoin) systems and how they differ. He then explained Proof of Work blockchains supported by miners (who solve problems to add blocks to the blockchain) and masternodes (who provide the backbone support to the blockchain). He pointed out how blockchains can reduce agency costs and problems of asymmetrical information and then focused on their utility in financial markets, securities regulation, and corporate governance. Del compared the issues related to off-chain governance, where decisionmaking first takes place on a social level and is then actively encoded into the protocol by the developers (used by Bitcoin and Ethereum) to on-chain governance, where developers broadcast their improvement protocols on-chain and then, once approved, those improvements are implemented into the code. He closed by listing a number of “big unanswered issues” related to regulatory guidance, liability for the performance of the technology and choice of consensus, global issues, and GDPR and other data privacy issues.

Professor Catherine Christopher, Texas Tech University School of Law;

Catherine wants to help judges think about smart contracts. She asked, among other things, how judges should address remedies, what counts as substantial performance, and how smart contract audits would work. She questioned whether judges should use a consumer protection approach or instead follow a draconian approach by embracing automation and enforcing smart contracts as drafted to discourage their adoption by those who are not sophisticated enough to understand how they work.

Professor Tonya Evans, University of New Hampshire School of Law (follow her on Twitter; see her blog on blockchain here);

Tonya focuses on blockchain and intellectual property. Her talked raised the issues of non-fungible tokens generated through smart contracts and the internet of value. She used the example of cryptokitties, where players have the chance to collect and breed digital cats. She also raised the question of what kind of technology can avoid infringement. For more on how blockchain can disrupt copyright law, read her post here.

Professor Rebecca Bratspies, CUNY School of Law;

In case you didn’t have enough trust issues with blockchain and cryptocurrency, Rebecca’s presentation focused on the “halo of immutability” and asked a few central questions: 1) why should we trust the miners not to collude for a 51% attack 2) why should we trust wallets, which aren’t as secure as people think; and 3) why should we trust the consensus mechanism? In response, some members of the audience noted that blockchain appeals to a libertarian element because of the removal of the government from the conversation.

Professor Carla Reyes, Michigan State University College of Law- follow her on Twitter at Carla Reyes (@Prof_CarlaReyes);

Carla talked about crypto corporate governance and the potential fiduciary duties that come out of thinking of blockchains as public trusts or corporations. She explained that governance happens on and off of the blockchain mechanisms through social media outlets such as Redditt. She further noted that many of those who call themselves “passive economic participants” are actually involved in governance because they comment on improvement processes. She also noted the paradox that off chain governance doesn’t always work very well because participants don’t always agree, but when they do agree, it often leads to controversial results like hard forks. Her upcoming article will outline potential fiduciaries (miner and masternode operators for example), their duties, and when they apply. She also asked the provocative question of whether a hard fork is like a Revlon event.

Professor Charlotte Tschider, William Mitchell College of Law (follow her on Twitter);

As a former chief privacy officer, I have to confess a bias toward Charlotte’s presentation. She talked about blockchain in healthcare focusing on these questions: will gains in cybersecurity protection outweigh specific issues for privacy or other legal issues (data ownership); what are the practical implications of implementing a private blockchain (consortium, patient-initiated, regulatory-approved); can this apply to other needed uses, including medical device applications; how might this technology work over geographically diverse regulatory structures; and are there better applications for this technology (e.g. connected health devices)? She posited that blockchain could work in healthcare because it is decentralized, has increased security, improves access controls, is more impervious to unauthorized change, could support availability goals for ransomware attacks and other issues, is potentially interoperable, could be less expensive, and could be controlled by regulatory branch, consortium, and the patient. She closed by raising potential legal issues related to broad data sharing, unanswered questions about private implementations, privacy requirements relating to the obligation of data deletion and correction (GDPR in the EU, China’s cybersecurity law, etc); and questions of data ownership in a contract.

Professor Eric Chason, William & Mary Marshall-Wythe School of Law;

Eric closed by discussing the potential tax issue for hard forks. He explained that after a hard fork, a new coin is created, and asked whether that creates income because the owner had one entitlement and now has two pieces of ownership. He then asked whether hard forks are more like corporate reorganizations or spinoffs (which already have statutory taxation provisions) or rather analogous to a change of wealth. Finally, he asked whether we should think about these transactions like a contingent right to do something in the future and how that should be valued.

Stay tuned for more on these and other projects related to blockchain. I will be sure to post them when they are done. But, ignore blockchain at your peril. There’s a reason that IBM, Microsoft, and the State Department are spending money on this technology. If you come to UT on September 15th, I’ll explain how other companies, the UN, NASDAQ, and nation states are using blockchain beyond the cryptocurrency arena.

 

August 12, 2018 in Commercial Law, Compliance, Conferences, Contracts, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, Human Rights, Law School, Lawyering, Legislation, Marcia Narine Weldon, Research/Scholarhip, Securities Regulation, Shareholders, Teaching, Technology, Writing | Permalink | Comments (0)

Tuesday, August 7, 2018

A Missed "sic", A Big Bank, and LLCs Are Still Not Corporations

It's not just judges and lawyers. Big banks, too, are apparently not committed to clear and accurate language when it comes to LLCs (limited liability companies).  A recent antitrust case provides an excerpt from a Barclays Settlement Agreement that states:

Paragraph 2(cc) of the Barclays Settlement Agreement defines “Person” as: “An individual, corporation, limited liability corporation, professional corporation, limited liability partnership, partnership, limited partnership, association, joint stock company, estate, legal representative, trust, unincorporated association, municipality, state, state agency, any entity that is a creature of any state, any government or any political subdivision, authority, office, bureau or agency of any government, and any business or legal entity, and any spouses, heirs, predecessors, successors, representatives, or assignees of the foregoing.” Barclays Settlement Agreement ¶ 2(cc).

In re LIBOR-Based Fin. Instruments Antitrust Litig., No. 11 CIV. 5450, 2018 WL 3677875, at *20 (S.D.N.Y. Aug. 1, 2018) (emphasis added). 
 
I checked to see if this was the court's error, but I found a link to what appears to be the settlement agreement, and it, too, includes "limited liability corporation" in paragraph (cc)'s definition.  Given that it is an error in the original, the judge, or at least the judge's clerks, missed an opportunity for an appropriately placed "[sic]," which more than a few lawyers in my experience have relished the opportunity to insert. 
 
I did a little poking around and found that some Barclays' divisions know and honor the distinction.  For example, a 2014 settlement agreement between  Federal Housing Finance Agency and "Barclays Bank PLC, Barclays Capital Inc. ('Barclays Capital'), and Securitized Asset Backed Receivables LLC (collectively, the Barclays Corporate Defendants')" (as well as some other defendants) provides (emphasis added): 

(h) “Person” means an individual, corporate entity, partnership, association, joint stock company, limited liability company, estate, trust, government entity (or any political subdivision or agency thereof) and any other type of business or legal entity . . . .

I guess beyond judges and lawyers, I should extend my An LLC Checklist Proposal to bankers, as well.  We can get this right, I swear.  It's just going to take some work. 
 

August 7, 2018 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)