Tuesday, January 15, 2019

Sixth Circuit, Why Can't You Be More Like Your Sister, Eleventh Circuit? #LLCs

I am wading back into a jurisdiction case because when it to LLCs (limited liability companies), I need to. A new case from the United States Court of Appeals for the Sixth Circuit showed up on Westlaw.  Here's how the analysis section begins:

Jurisdiction in this case is found under the diversity statute 28 U.S.C. § 1332. John Kendle is a citizen of Ohio; defendant WHIG Enterprises, LLC is a Florida corporation with its principal place of business in Mississippi; defendant Rx Pro Mississippi is a Mississippi corporation with its principal place of business in Mississippi; defendant Mitchell Chad Barrett is a citizen of Mississippi; defendant Jason Rutland is a citizen of Mississippi. R. 114 (Second Am. Compl. at ¶¶ 3, 5) (Page ID #981–82). Kendle is seeking damages in excess of $75,000. Id. at ¶¶ 50, 54, 58, 64, 71 (Page ID #992–95). The district court issued an order under Rule 54(b) of the Federal Rules of Civil Procedure that granted final judgment in favor of Mitchell Chad Barrett, and so appellate jurisdiction is proper. R. 170 (Rule 54(b) Order) (Page ID #3021).

Kendle v. Whig Enterprises, LLC, No. 18-3574, 2019 WL 148420, at *3 (6th Cir. Jan. 9, 2019).

No. No. No. An LLC is not a corporation, for starters.  And for purposes of diversity jurisdiction, "a limited liability company is a citizen of any state of which a member of the company is a citizen." Rolling Greens MHP, L.P. v. Comcast SCH Holdings L.L.C., 374 F.3d 1020, 1022 (11th Cir. 2004).  As such the where the LLC is formed doesn't matter and the LLC's principal place of business doesn't matter. All that matters is the citizenship of each LLC member.  

In this case, I can tell from the opinion that Kendle and Rutland are "co-owners" of WHIG Enterprises. The opinion suggests there may be other owners (i.e., members).  The opinion refers to the plaintiff suing "WHIG Enterprises, LLC, two of its co-owners, and another affiliated entity." Kendle v. Whig Enterprises, LLC, No. 18-3574, 2019 WL 148420, at *1. The opinion later refers to Rutland as "another WHIG co-owner."  If we want to know whether diversity jurisdiction is proper, though, we'll need to know ALL of WHIG's members.  

Now, it may well be that there is diversity among the parties, but we don't know, and neither, apparently, does the court. That may not be an issue in this case, but if people start modeling their bases for jurisdiction on the Kendle excerpt above, things could get ugly. The Eleventh Circuit, as noted above. A more recent case further reminds us to check diversity for all members in an LLC.  Thermoset Corporation v. Building Materials Corp. of America et al, 2017 WL 816224 (11th Cir., March 2, 2017).

I figured that I should give a shout out to folks getting right, given all my criticism of those getting it wrong.  Come, Sixth Circuit, let's get it together. 

January 15, 2019 in Corporations, Current Affairs, Joshua P. Fershee, Lawyering, LLCs | Permalink | Comments (1)

Tuesday, January 8, 2019

I Don't Care What the IRS Says, There Are No Federal Entities

Not for my purposes, anyway. Back in 2016, I made the argument that the IRS should "stop using state-law designations": 

My proposal is not abolishing corporate tax – that’s a much longer post and one I am not sure I’d agree with.  Instead, the proposal is to have entities choose from options that are linked the Internal Revenue Code, and not to a particular entity. Thus, we would have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax

This post deals with the tax code, which means I am in over my head, and because this is tax related, it means the solution is a lot more complicated than this proposal.  But now that the code provisions are not really linked to the state law entity, I think we should try refer to state entities as state entities, and federal tax status with regard to federal tax status.  Under such a code, it would be a little easier for people to understand the concept behind state entity status, and it would make more sense to people that a “C Corp” does mean “publicly traded corporation” (a far-too common misunderstanding).  Thus, we could have C Tax corporations, S Tax LLCs, K Tax LLCs, for example.  We'd know tax status and state-entity status quite simply and we'd separate the concepts. 

We discussed this issue on Saturday at the 2019 AALS Section on Agency, Partnership, LLCs & Unincorporated Associations Program on LLCs. As I taught my first Business Organizations class of the semester, I talked about this and it occurred to me that maybe the better way to think about this is to simply acknowledge that there are no federal entities.  

State law is the origin of all entity types (barring, perhaps, a few minor exceptions), and references to "C Corps" and "S Corps" are not really on target. I concede that the IRS does so, which is a challenge, but it's really unnecessary under today's tax code. That is, with check-the-box options, most entity types can choose whatever tax treatment they wish.  An LLC can choose to be taxed under subchapter S, for example, though it has to meet certain requirements (e.g., can only have one class of "stock"), but the LLC can file Form 2553 an make an S election.  

As such, as I have argued before, I think we should work to keep entity type and tax treatment separate.  Thus, for example, we can have an S-taxed LLC (an LLC that made the S election)  and a K-taxed LLC (an LLC that made a K election for pass-through taxation).  The tax treatment does not "convert" the LLC to a corporation -- or S corp. It simply provides for certain tax treatment.  I really think we'd see some doctrinal improvements if we could get more people to use language that makes clear tax treatment and entity type are separate issues, at least in today's word.   

Entities are creatures of state law. How the federal or state government tax such entities does not change that reality.  It's time we start using more precise language to make that clear.  

January 8, 2019 in Corporate Personality, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (1)

Tuesday, January 1, 2019

5 Quotes for the New Year

To start the New Year, I found a few thoughtful quotes to help me get in a good state of mind. I thought I’d share. Wishing you health, love, and success for 2019. 

“A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large.” – Henry Ford

“It is difficult, but not impossible, to conduct strictly honest business.” – Mahatma Gandhi

“Don’t bargain yourself down before you get to the table.” – Carol Frohlinger

“Goals are dreams with deadlines.” – Diana Scharf Hunt

“Our goals can only be reached through a vehicle of a plan, in which we must vigorously act. There is no other route to success.” – Stephen A. Brennan

January 1, 2019 in Joshua P. Fershee, Law School, Lawyering, Philosophy | Permalink | Comments (0)

Tuesday, December 18, 2018

There Once was an LLC with a Partnership Agreement Governing the Minority Shareholder's Interest

Sometimes I think courts are just trolling me (and the rest of us who care about basic entity concepts). The following quotes (and my commentary) are related to the newly issued case, Estes v. Hayden, No. 2017-CA-001882-MR, 2018 WL 6600225, at *1 (Ky. Ct. App. Dec. 14, 2018): 

"Estes and Hayden were business partners in several limited liability corporations, one of which was Success Management Team, LLC (hereinafter “Success”)." Maybe they had some corporations and LLCs, but the case only references were to LLCs (limited liability companies).

But wait, it gets worse:  "Hayden was a minority shareholder in, and the parties had no operating agreement regarding, Success."  Recall that Success is an LLC. There should not be shareholders in an LLC. Members owning membership interests, yes. Shareholders, no. 

Apparently, Success was anything but, with Hayden and Estes being sued multiple times related to residential home construction where fraudulent conduct was alleged. Hayden sued Estes to dissolve and wind down all the parties’ business entities claiming a pattern of fraudulent conduct by Estes. Ultimately, the two entered a settlement agreement related to (among other things) back taxes, including an escrow account, which was (naturally) insufficient to cover the tax liability.  This case followed, with Estes seeking contribution from Hayden, while Hayden claimed he had been released. 

Estes paid the excess tax liability and filed a complaint against Hayden, "arguing Hayden’s breach of the Success partnership agreement and that Estes never agreed to assume one hundred percent of any remaining tax liabilities of Success." Now there is a partnership agreement?  Related to the minority shareholder's obligations to an LLC?  [Banging head on desk.] 

The entity structures to these business arrangements are a mess, and it makes the opinion kind of a mess, though I would suggest the court could have at least tried to straighten it out a bit.  It even appears that the court got a little turned around, as it states, "While Estes may have at one time been liable for a portion of Success’s tax liabilities incurred from 2006 to 2010, once the parties signed the Settlement Agreement, his liability ended pursuant to the release provisions contained therein."  I think they meant that Hayden may have been liable but no longer was following the release, especially given that the court affirmed the grant of summary judgment to Hayden.  

For what it's worth, it appears that the court analyzed the release correctly, so the resolution on the merits is likely proper. Still, blindly adopting the careless entity-related language of the litigants is frustrating, at a minimum.  But it does give me something else to write about. As long as these case keeping showing up, and they will keep showing up, Prof. Bainbridge need not wonder, "Is legal blogging dead?"  Not for me, and I don't think for those of us here at BLPB, anyway. 
 



 

December 18, 2018 in Contracts, Corporations, Joshua P. Fershee, Lawyering, Litigation, LLCs, Partnership | Permalink | Comments (0)

Tuesday, December 11, 2018

Not Every CEO Opinion is a Breach of Fiduciary Duty (Most Aren't)

Jack Welch, former GE CEO (1981 to 2001) was revered for his ability to maximize shareholder value.  Yet in 2009, he explained that shareholder value was

“the dumbest idea in the world. Shareholder value is a result, not a strategy... your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

This runs contrary to how many people think about the role of the CEO and the board of directors.  I think it's spot on, and it is a key reason the business judgment rule, and its role in preserving director primacy, is so critical.   

Last week, a Wall Street Journal article about Dick's Sporting Goods made the rounds. The article reported: 

Ed Stack, the chairman and chief executive of Dick’s Sporting Goods Inc., arrived at work the Monday after a gunman killed 17 people at a school in Parkland, Fla., nearly certain the outdoor retailer should limit sales of some guns.

. . . .

Dick’s Financial Chief Lee Belitsky asked, “So what’s the financial implication here?” according to Mr. Stack. “I basically said, I don’t really care what the financial implication is, but you’re right, we should look.”

Company executives convened the board via teleconference to explain the proposed plan, took some time to reflect, then gathered again a few days later to vote. “It was unanimous that we should do this and stand up and take a stand,” said Mr. Stack, whose family holds a controlling stake in the retailer.

This revelation led many folks to question whether Stack's statement that he did not "really care" about the financial implications was a breach of fiduciary duty.  The concern was buoyed by the reality that store sales had dropped about 3% to  4% for the year, and the drop was linked to the decision to limit certain gun sales. 

That said, a drop in sales does not mean there was a breach of any duty any more than an increase in sales means no breach occurred. Results may be evidence, but that's all they are. Part of the story. Incidentally, though it is not proof, either way, it is worth noting that Dick's sales dropped, but profits rose after the decision because the company cut costs by replacing some guns with higher-margin items. 

It seems like every time a CEO or board issues a decision that is controversial or chooses to say that he or she supports a certain course of action because they think it is the "right thing to do," the questions begin about whether either the duty of care or loyalty has been breached.  I maintain that a statement (or series of statements) like that is not sufficient to overcome the business judgment rule to allow a review of the decision.  

This is especially true where, like in the Dick's situation, there is evidence that the company deliberated appropriately. The WSJ article noted that company executives called together the board to explain the proposed plan, "took some time to reflect, then gathered again a few days later to vote." The vote was unanimous to end all assault-style weapons sales and to and stop selling guns or ammunition to those under 21 years of age. Interestingly, Walmart Inc. and other retailers followed Dick's lead later that day. If the deliberative process is a concern, it would seem those following Dick's should be more vulnerable to a fiduciary duty/business judgment rule challenge than Dick's. 

For what it's worth, I think Dick's or any store deciding NOT to change their sales practice would also be protected by the business judgment rule, just as I think Chick-Fil-A's decision not to open on Sundays should be protected by the business judgment rule (though if it were a Delaware corporation, I am not sure it would be). 

This is not to say I don't believe in fiduciary duties. I very much do. I just also believe in a strong business judgment rule, ideally enforced as an abstention doctrine. (I believe in lots of things.)  

I need more than a few public statements before I think anyone should be looking behind an entity's decision making. Recent examples raising entity fiduciary duty questions, like Dick's and Nike's Colin Kaepernick ads, have had positive financial outcomes of the entities, but it shouldn't matter.  The business judgment rule is there to protect all the decisions of the board that are not the product of fraud, illegality, or self-dealing, not just correct decisions. 

December 11, 2018 in Corporate Governance, Corporations, Current Affairs, Joshua P. Fershee | Permalink | Comments (6)

Wednesday, December 5, 2018

Service of Process for LLCs (Which Are Still Not Corporations)

I just don't get the fascination that courts have with calling LLCs (limited liability companies) limited liability corporations. Yes, at this point, I can no longer claim to be surprised, but I can remain appalled/disappointed/frustrated/etc. Today I happened upon a U.S. District Court case from Florida that made just such an error.  This one bugs me, in part, because the court's reference immediately precedes a quotation of the related LLC statute, which repeatedly refers to the "limited liability company."  It's right there! 
 
That said, the court assesses the situation appropriately, and (I think) gets the law and outcome right.  The court explains: 
In this case, Commerce and Industry served the summons on Southern Construction by serving the wife of the manager of Southern Construction. Doc. No. 10. Because Southern Construction is a limited liability corporation, service is proper under Fla. Stat. § 48.062 . . . .
*2 (1) Process against a limited liability company, domestic or foreign, may be served on the registered agent designated by the limited liability company under chapter 605. A person attempting to serve process pursuant to this subsection may serve the process on any employee of the registered agent during the first attempt at service even if the registered agent is a natural person and is temporarily absent from his or her office.
(2) If service cannot be made on a registered agent of the limited liability company because of failure to comply with chapter 605 or because the limited liability company does not have a registered agent, or if its registered agent cannot with reasonable diligence be served, process against the limited liability company, domestic or foreign, may be served:
 
(a) On a member of a member-managed limited liability company;
(b) On a manager of a manager-managed limited liability company; or
(c) If a member or manager is not available during regular business hours to accept service on behalf of the limited liability company, he, she, or it may designate an employee of the limited liability company to accept such service. After one attempt to serve a member, manager, or designated employee has been made, process may be served on the person in charge of the limited liability company during regular business hours.
 
(3) If, after reasonable diligence, service of process cannot be completed under subsection (1) or subsection (2), service of process may be effected by service upon the Secretary of State as agent of the limited liability company as provided for in s. 48.181.
In the proof of service, the process server attests that he served Kenneth W. Jordan, the manager of Southern Construction, by serving Kimberly Jordan, Kenneth Jordan’s wife, at an address in Midway, Georgia. Doc. No. 10. Neither the process server nor counsel for Commerce and Industry provided any evidence that Southern Construction did not have a registered agent or, if it did, that service could not be made on the registered agent. There is also no evidence that Kimberly Jordan is a member, a manager or an employee of Southern Construction designated to accept service. Finally, there is no evidence regarding the address at which service was made, i.e., at the office of the registered agent, at the office of Southern Construction or at a residence. Therefore, based on the present record, the Court cannot conclude that service of process has been properly perfected.
COMMERCE & INDUSTRY INSURANCE COMPANY, Plaintiff, v. SOUTHERN CONSTRUCTION LABOR SERVICES, LLC, Defendant., No. 617CV965ORL31KRS, 2017 WL 10058577, at *1–2 (M.D. Fla. July 26, 2017) (emphasis added). 
 
The court here gets this right by both following the procedures (e.g., the presumption is to serve the LLC's agent) and the also does not make any assumptions that a spouse is a member or employee, so that's a good one.  This case led me to take a look at my home state's process rules for LLCs. 
 
West Virginia's process is less clear.  For example, West Virginia's rules for service of process do not include a mention of LLCs specifically. The rules provide for service to a "domestic private corporations" and "unincorporated associations" (among others). For a domestic private corporation, service can be completed by serving "an officer, director, or trustee thereof; or, if no such officer, director, or trustee be found, by delivering a copy thereof to any agent of the corporation . . . ." or by serving an authorized agent or attorney.  

Service of unincorporated associations is much more complicated.  Service is made 

Upon an unincorporated association which is subject to suit under a common name, by delivering a copy of the summons and complaint to any officer, director, or governor thereof, or by delivering or mailing in accordance with paragraph (1) above a copy of the summons and complaint to any agent or attorney in fact authorized by appointment or by statute to receive or accept service in its behalf; or, if no such officer, director, governor, or appointed or statutory agent or attorney in fact be found, then by delivering or mailing in accordance with paragraph (1) above a copy of the summons and complaint to any member of such association and publishing notice of the pendency of such action once a week for two successive weeks in the newspaper of general circulation in the county wherein such action is pending. Proof of publication of such notice is made by filing the publisher’s certificate of publication with the court.

Does a manager count as an officer or director? A quick look at cases did not answer that question, but it would seem to me the answer should be "no." Obviously, the easiest way to do complete service would be to serve an LLC's agent or attorney, if either can be found.  But if you have to serve a "member," one must deliver the summons and complaint to the member AND "publish[] notice of the pendency of such action once a week for two successive weeks in the newspaper of general circulation in the county wherein such action is pending." Old school. Anyway, it seems to me that it is high time for West Virginia to specifically recognize LLCs and other entity forms in the Rules of Civil Procedure.   

December 5, 2018 in Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Tuesday, November 27, 2018

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

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

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

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

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

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

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

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

 

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

Tuesday, November 20, 2018

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

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

LLC Members Are Not the LLC’s Employees

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

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

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

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

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

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

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

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

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)

Tuesday, November 6, 2018

Vote. Please.

With just a few hours left to vote, I am taking this opportunity to ask you, if you have not already, to vote.  Please. It is our opportunity to be heard.

So often people complain about money in politics, and I agree that raises concerns. But we always have the power to choose. We, the voters, always have the final say. We can impose term limits any time we want, by voting people out.  If it is really a concern for us, we can overcome money in politics by choosing those who reject corporate interests. Either way, it is up to us. So, if you haven't already, please, please vote. 

And if you already voted, thank you.  Good work.  

November 6, 2018 in Current Affairs, Joshua P. Fershee | Permalink | Comments (0)

Tuesday, October 30, 2018

Should You Ever Pierce the LLC Veil to Let a Member Recover? Probably Not.

Tom Rutledge, at Kentucky Business Entity Law Blog, writes about a curious recent decision in which the Kentucky Court of Appeals overrule a trial court, holding that the law of piercing the veil required the LLC veil to be pierced. Tavadia v. Mitchell, No. 2017-CA-001358-MR, 2018 WL 5091048 (Ky. App. Oct. 19, 2018).

Here are the basics (Tom provides an even more detailed description):

Sheri Mitchell formed One Sustainable Method Recycling, LLC (OSM) in 2013. Mitchell initially a 99% owner and the acting CEO with one other member holding 1%. Mitchell soon asked Behram Tavadia to invest in the company, which he did.

He loaned OSM $40K at 6% interest from his business Tavadia Enterprises, Inc. (to be repaid $1,000 per month, plus 5% of annual OSM profits).  There was no personal guarantee from Mitchell.  OSM then received a $150,000 a business development from METCO, which Tavadia personally guaranteed and pledged certain bonds as security.

Two years (and no loan payments) later under the original $40,000 loan, Tavadia agreed to delay repayment. OSM and Tavadia the created a second loan for $250,000, refinancing the original $40,000 and a subsequent Tavadia $12,000 loan.  This loan provided Tavadia a 25% ownership interest in OSM, but there was still no personal guarantee on the loan. Mitchell claimed this loan was needed to purchase essential equipment (no equipment was purchased). OSM then received a $20,000 loan from Fundworks, LLC, which was secured by Mitchell, who signed Tavadia’s name for OSM and she signed a personal guarantee in Tavadia’s name (both without permission).

Not surprisingly, in October 2015, OSM stopped operations, the equipment was sold, and more than half of the sale proceeds were deposited in Mitchell’s personal bank account, with the rest going to OSM’s account. OSM (naturally) defaulted on the Fundworks’ loan, which Tavadia learned about when Fundworks demanded repayment. The METCO loan also defaulted, and Tavadia was asked to provide funds from the bonds he provided as collateral.

Okay, so it sounds like Mitchell took advantage of Tavadia and engaged in some elements of fraud. What I can’t figure out from this case is why we’re talking about veil piercing.

First, the court states: “The evidence presented at trial demonstrated that Mitchell diverted OSM assets into her own account.” Tavadia v. Mitchell, No. 2017-CA-001358-MR, 2018 WL 5091048, at *5 (Ky. Ct. App. Oct. 19, 2018). So that money Mitchell owes to OSM, which owes money to Tavadia.  The court noted that at least half the funds from the sale of OSM equipment went into Mitchell’s personal account. That needs to go back to OSM, and if veil piercing has value, then a simple order of repayment should be, too. 

Second, the Fundworks loan, which Mitchell signed for, is really her loan, not Tavadia’s. He did not know about it until they sought payment, so it wasn’t ratified, and there is no other indication she has authority to enter into the contract. 

At a minimum, these funds are owed Tavadia (or OSM) and should be itemized as such.  Presumably, that is not enough money to make Tavadia whole. And I don’t know he should be. To the extent there were legitimate (if poorly executed) business attempts, he is on the hook for those losses. As such, I don’t see this as a veil-piercing case.

Instead, Tavadia should be able to sue Mitchell for her fraudulent actions that harmed him directly. And Tavadia should be able to make OSM sue Mitchell for improper transfers and fraud. 

Maybe there are other theories for recovery, too, but veil piercing should not be one. Mitchell did not use the entity to commit fraud. She committed fraud directly. Just because there is an entity, plus an unpaid loan, it does not make this a veil-piercing case. In fact, because Tavadia is a member of the LLC, I think there is a reasonable argument that (absent truly unique circumstances) veil piercing cannot apply. 

I am sympathetic that Tavadia was taken advantage of, and I think that Mitchell should have a significant repayment obligation to him, but I just don’t think this claim should be rooted in veil piercing.  At a minimum, like in administrative law, one should have to exhaust his or her remedies before proceeding to a veil-piercing theory. 

October 30, 2018 in Contracts, Entrepreneurship, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (1)

Tuesday, October 16, 2018

Temple University Faculty Development in International Business Program

I posted about this program last year, too, and it looks like another good program this year. Hard to beat good wine and learning about international business, I would think,  but I can't make it again this year.  It overlaps with the AALS Annual Meeting, and I have plans for New Orleans.  But, if it's your thing, it looks like a neat opportunity.  

Temple University's Center for International Business Education (CIBE) presents

A Faculty Development in International Business (FDIB): Santiago, Chile

January 5-11, 2019

 

Chile: The Global Star of Latin America

Understanding the International Business Environment through Innovation in Chile

Chile is often considered to be the place where great Latin American wines come from. Some may even know that Chile is also the hub of the global copper industry. But what many people are unaware of is how Chile became the only South American country invited to join the OECD, or how it is a country that has signed 21 free trade agreements and is one of the most open economies in the world, or the fact that it is rapidly attracting foreign innovators and entrepreneurs through a unique start-up incubator program for investors worldwide. Chile serves as an example of what a Latin American country can do with the right economic and social policies in place. It is the star of the South.

On this FDIB, faculty will be immersed in the Chilean business environment and will meet with business and academic thought leaders across innovative sectors from copper to manufacturing to wine. Our emphasis will be on how a small Latin American economy far removed from major trade routes has excelled through its linkages to the global business environment. Two key sectors—wine and copper—have driven much of this growth and will be a large part of our focus. However, we will also explore the start-up, education, and manufacturing sectors, in order to grasp a full picture of the Chilean business environment. In addition to the robust academic content, participants will have a chance to explore Chile’s marvelous natural environment and history through cultural activities and events, from visiting a wine innovation center to exploring the effects of the dictatorship on Chilean business and social culture.  Some of the key learning outcomes will include:

  • A better understanding of how innovation is utilized to drive growth in emerging markets;
  • A comparative study of innovation in emerging and developed markets;
  • Increased awareness of the importance of global markets for commodity production, such as grapes and copper, and;
  • Fundamental insights into Latin American economic development and business strategy. 

This Chilean immersion experience is being led by Fox School of Business Assistant Professor Dr. Kevin Fandl, a professor of legal studies and international business. Dr. Fandl’s research emphasizes the relationship between law, policy, and business in global markets, especially in Latin America.  

PROGRAM FEE:  $2,750 per person*

FEE INCLUDES:

  • Accommodations (single occupancy)
  • Corporate visits
  • Cultural activities
  • Some meals
  • In-country transportation

DEPOSIT: *A $500 non-refundable deposit is due upon registration. The remaining balance, also non-refundable, must be paid in full by November 30, 2018. Space is limited. A guest package for spouse/significant other is also available.

QUESTIONS? Please contact Phyllis Tutora, Director of International Programs at ptutora@temple.edu

October 16, 2018 in International Business, Joshua P. Fershee | 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)

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)

Monday, September 3, 2018

Connecting the Threads II - Laboring on Labor Day

Like many in the law academy, I find three-day holiday weekends a great time to catch my breath and catch up on work items that need to be addressed.  This Labor Day weekend--including today, Labor Day itself--is no exception to the rule.  I am working today, honoring workers through my own work.  My husband and daughter are doing the same.

This blog post and the announcement it carries are among my more joyful tasks for the day.  I have been remiss in not earlier announcing and promoting our second annual Business Law Prof Blog symposium, which will be held at The University of Tennessee College of Law on September 14.  The symposium again focuses on the work of many of your favorite Business Law Prof Blog editors, with commentary from my UT Law faculty colleagues and students.  This year, topics range from the human rights and other compliance implications of blockchain technology to designing impactful corporate law, with a sprinkling of other entity and securities law related topics.  I am focusing my time in the spotlight (!) on professional challenges in the representation of social enterprise firms.  More information about the symposium is available here.  For those of you who have law licenses in Tennessee, CLE credits are available.

I am looking forward to again hosting some of my favorite law scholars at this symposium.  I am sure some will blog about their presentations here (Marcia already has previewed her talk and summarized all of our presentations, and I plan to later blog about mine), Transactions (our business law journal) will publish the symposium proceedings, and videos will be processed and posted on UT Law's CLE website later in the year.  But if you are in the neighborhood, stop by and hear us all in person!  We would love to see you.

Transactions(BLBP-ConnectingThreadsLogo)

September 3, 2018 in Ann Lipton, Conferences, Current Affairs, Joan Heminway, Joshua P. Fershee, Marcia Narine Weldon, Stefan J. Padfield | 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)