Tuesday, November 13, 2018
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.
- 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.").
Tuesday, November 6, 2018
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.
Tuesday, October 30, 2018
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.
Tuesday, October 16, 2018
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*
- 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 email@example.com
Tuesday, October 9, 2018
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.
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.”)
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.
Tuesday, October 2, 2018
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/
Tuesday, September 25, 2018
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.
Things are judgmenty. People are judgmental. At least, that’s my story, and I’m sticking to it. Plus, if I have learned anything in my 47 years, it’s that, in American English, if people say something enough, it becomes a word. That and the #OxfordComma is essential.— Joshua Fershee (@jfershee) September 25, 2018
Well, it seems like you've gotten a very small ball rolling. pic.twitter.com/yMCFkTNZ8D— Professor Bainbridge (@ProfBainbridge) September 25, 2018
So it appears.
Tuesday, September 18, 2018
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:
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.
Thursday, September 13, 2018
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.
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? "Nike Loses $3.75 Billion in Market Cap After Colin Kaepernick Named Face of 'Just Do It'" https://t.co/UIuZanOUon #corpgov— Stefan Padfield (@ProfPadfield) September 6, 2018
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.
Tuesday, September 4, 2018
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."
Monday, September 3, 2018
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.
Saturday, September 1, 2018
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
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.
Tuesday, August 21, 2018
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 blog. Countless 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.”
(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:
(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)
Tuesday, August 14, 2018
According to its website,
The U. S. Securities and Exchange Commission (SEC) has a three-part mission:
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.
Tuesday, August 7, 2018
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).
(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 . . . .
Wednesday, August 1, 2018
I am probably late to the game on this, but I just realized that Uber promotes their drivers as "driver-partners." It's even in their ads. This seems unwise.
Uber has a history linked to the question about whether their drivers are employees or independent contractors. But what about the question of whether Uber drivers are partners or independent contractors? That is big, potential liability conundrum.
Now, just because one says they are partners, that does not make it so, at least as to each other. The converse is also true -- saying expressly "this agreement does not form a partnership" does not necessarily mean a court won't find one. See, e.g., Martin v. Peyton, 158 N.E. 77 (NY 1927) ("Statements that no partnership is intended are not conclusive."). But, as to third parties, at a minimum, affirmative statements that one is a partner, can create liability for those involved. The Uniform Partnership Act (1914) § 16. Partner by Estoppel, provides:
(1) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made.
(a) When a partnership liability results, he is liable as though he were an actual member of the partnership.
(b) When no partnership liability results, he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately.
Similarly, the Revised Uniform Partnership Act provides:
SECTION 308. LIABILITY OF PURPORTED PARTNER.
(a) If a person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership. If the representation, either by the purported partner or by a person with the purported partner’s consent, is made in a public manner, the purported partner is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant. If partnership liability results, the purported partner is liable with respect to that liability as if the purported partner were a partner. If no partnership liability results, the purported partner is liable with respect to that liability jointly and severally with any other person consenting to the representation.
Now, can I come up with plenty of counterarguments and ways to make this liability less likely, and those are compelling arguments, too, in many settings. However, I cannot come up with such a good argument that would make it worth using "Driver-Partner" as my term. How about "Driver-Teammate" or "Driver-Affiliate" or "Driver-Collaborator" or even "Driver-Member?" For me, the specificity of the term "partner," and the liability that can follow without formal action, would warrant avoiding its use. But maybe that's just me.
Tuesday, July 24, 2018
An Illinois appellate court decision that was just made available on Westlaw provides some revealing insight into Hydra, the longtime source of evil that many recognize from Captain America: The First Avenger.
Hydra stated that Hydra's manager is Ahuva Horowitz, defendant's wife, and that she owns 100% of the membership interests of Hydra a limited liability corporation.
Xcel Supply LLC v. Horowitz, 2018 IL App (1st) 162986, ¶ 14, 100 N.E.3d 557, 561, reh'g denied (Mar. 9, 2018) (emphasis added).
First, let's correct the record: Hydra is listed as an LLC, a limited liability company. It is not a corporation.
Second, I should also note, after further review, it's not really THAT Hydra. It is apparently not this one:
So, instead, the instant Hydra is Hydra Properties, LLC, which came into existence in 2009. That makes more sense, but it's a lot less interesting.
Still, either way, and for either Hydra, if it's Hydra LLC, it's not a corporation.
Tuesday, July 10, 2018
I am both a business law professor and an energy law professor, which is sometimes surprising to people. That is, some folks are surprised that have a research focus in two areas that are seemingly very distinct. In one sense, that's true, at least in the academic realm. Most energy law scholars tend to have a focus on more close related disciplines, such as environmental law, administrative law, and property law. And business law scholars tend to trend toward things like commercial law, bankruptcy, tax, and contracts.
There is substantial overlap, though, in the energy and business law spaces, as I have noted on this blog before. I am even working on some research that looks specifically at the role laws and regulations have on business and economic development. My work with the WVU Center for Innovation in Gas Research and Utilization builds on this energy and business nexus.
I am pleased to share a newly published article I wrote with Amy Stein from the University of Florida's Levin College of Law. The piece is called Decarbonizing Light-Duty Vehicles, and it appears in the July issue of Environmental Law Reporter. It is available here. This article is based on our forthcoming book chapter that will appear in Legal Pathways to Deep Decarbonization in the United States (Michael B. Gerrard & John C. Dernbach eds.) and published by the Environmental Law Institute. The book expands on the U.S. work of the Deep Decarbonization Pathways Project, and was prepared in collaboration with that organization. Following is an excerpt that gives a sense of how energy and business law and policy sometimes intersect.
A last challenge surrounds the existing business models that revolve around the [internal combustion vehicle (ICV)]. First, a number of states have a strong incentive to maintain a core of ICVs due to their heavy reliance on the gasoline tax to fund highway infrastructure in their respective states. The gasoline tax has been in place since 1956 to help pay for construction of the interstate highway system. Since that time, Congress has directed the majority of the revenues from this tax to the Highway Trust Fund (HTF). At the federal level, Congress has not increased the tax in more than 20 years, leaving it at 18.4 cents a gallon. As of July 2015, state taxes on gasoline averaged 26.49 cents a gallon, bringing the total tax on gasoline to about 45 cents per gallon. All efforts to reduce reliance on gas-dependent vehicles therefore stand in sharp contrast to efforts to maintain a healthy highway fund. The interplay between fuel economy and the dependence on gasoline tax revenues should not be overlooked, as well as the conflicting demands placed on legislators.
Second, dealers, mechanics, and gas stations have a strong incentive to maintain the dominance of ICVs. Dealers may not be as familiar with [alternative fuel vehicles (AFVs)] and so are less likely to be able to demonstrate specifics about available incentives, nor be able to exude confidence about charging, range, and battery life-span. More importantly, dealers may also be hesitant to sell AFVs for some of the same reasons that customers may be inclined to purchase them—specifically, the expectation of reduced maintenance costs. These misaligned incentives exist because an essential part of a dealer’s business model relies on post-sale revenues related to the sale of used cars, oil changes, and engine maintenance repairs, avoided costs for AFV owners. More car dealers may need to explore options that evolve with the technology, including maintaining and repairing fleets of autonomous vehicles.
In short, although the United States has begun the transition to AFVs, there are a number of obstacles, financial, psychological, and cultural, that stand in the way of a greater shift to AFVs.
Amy L. Stein & Joshua Fershée, Decarbonizing Light-Duty Vehicles, 48 Environmental Law Reporter 10596 (2018) (footnotes omitted).
Tuesday, July 3, 2018
Bernard Sharfman has posted Dual Class Share Voting versus the “Empty Voting” of Mutual Fund Advisors’ and it is an interesting read. He argues:
Dual class shares (shares with unequal voting rights) arise when the board of directors of a company decides to raise capital through the sale of newly issued shares, but wants one or more insiders, who may be giving up economic control through the issuance of the shares, to retain voting control in the company. Typically, this occurs in an initial public offering (IPO), but it can also occur before. In an IPO, a company will usually issue a class of common stock to the public that carries one vote per share (ordinary shares), while reserving a separate class, a super-voting class, that provide insiders with at least 10 votes per share. However, both types of shares will have equal rights to the cash flow of the company. The issuance of dual class shares may create a wide gap between voting and cash flow rights over time, especially if the insiders periodically sell a significant amount of their ordinary shares.
But this is the critical point. A dual class share structure cannot exist without the permission of those shareholders who are purchasing the ordinary shares at the price offered. The bargaining process that leads to the issuance of dual class shares is referred to as “private ordering.” . . . .
. . .
By contrast, the empty voting of mutual fund advisors is not a firm specific corporate governance arrangement that results from private ordering. It is the consequence of the industry practice of centralizing the voting of mutual funds into the hands of their advisor’s corporate governance department. As a result of this delegation of voting authority, mutual fund advisors have the voting power, but not the economic interest in the shares that they vote.
I am not evangelical about dual-class shares, but I do appreciate his point on private-ordering, which is similar (as I have noted before) to my take in many circumstances. His distinction between dual-class shares and empty voting for mutual fund advisors is a compelling one, and I recommend checking out the whole post.