Business Law Prof Blog

Virtual ESG and Compliance Conference- November 7

 The Society of Corporate Compliance and Ethics is hosting a virtual ESG and Compliance Conference on November 7.  I love to hear academics talk about these issues at conferences but because I still engage in the practice of law and I teach about compliance, governance, and sustainability, I find the conversations are very different when listening to practitioners.

My panel is titled ESG Due Diligence Across the Corporate Lifecycle From Start-Up to Maturity: The Roles of Compliance, Ethics, Legal, and the Board. My co-panelists, Ahpaly Coradin, Partner, Pierson Ferdinand, and Eugenia di Marco, a startup founder and international legal advisor, and I will focus on:

•  how to measure and prioritize ESG factors at different stages of a company's life cycle, according to a company's industry, and technology use.
•  how ESG creates value in M&A  beyond risk mitigation and learn the impact of ESG on target selection, valuation, and integration.
• board and management responsibilities in overseeing and managing ESG-related risks, particularly in light of Caremark duties and Marchand.

Date & Time: Thursday, November 7 from 12:45 PM – 1:45 PM central time

Other topics that speakers will discuss include:

• Supply chains and European due diligence 
• Global regulatory and legislative developments
• Sustainable governance in a global landscape
• Materiality assessments
• The intersection of governance and ESG
• OECD Guidelines

Who should attend?  (from the brochure)

• Compliance officers
• ESG, sustainability, and CSR professionals
• Audit professionals
• CFOs
• General counsel
• Corporate secretaries
• Risk managers
• Investment managers
• Supply chain and due diligence professionals
• Outside advisors

Although the official brochure clearly doesn't target academics, I strongly recommend that my peers attend. It may help inform your research and teaching, and I know that my students are very interested in these issues. 

Are you teaching on any of these areas? And what do you think practitioners should be focusing on that they aren't?

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Lebovitch on DGCL § 122(18)

As you may recall, Ann and I got a bit wound up last summer about the Delaware General Assembly's consideration of Delaware S.B. 313 (and, within it, the proposed addition of § 122(18) of the General Corporation Law of the State of Delaware ("DGCL")). We each offered brief oral testimony and even wrote letters to the Delaware House Judiciary Committee, which you can find here and here.

A comrade in that effort, Mark Lebovitch, has taken time to reflect a bit on the crazy summer that brought a new and troubling corporate purpose to Delaware's venerable corporate law and to prognosticate about the future impact of DGCL § 122(18).  The result?  Soap Opera Summer: Five Predictions About DGCL 122(18)’s Effect on Delaware Law and Practice.  The abstract follows.

Predictability and stability are often cited as leading reasons for why Delaware’s corporate law system is world renowned and widely emulated, giving the First State dominance in the competition for domiciling business entities. The first half of 2024 was anything but predictable and stable in Delaware’s legal community. Rarely has an amendment to the Delaware General Corporation Law (“DGCL”) triggered as much public debate as SB 313, which became effective as of August 1, 2024. The crux of the dispute turned on identifying the greater risk to Delaware’s standing as the global leader in corporate law – a few recent judicial opinions that would have forced certain market practices to change, or the legislative fix seeking to nullify those opinions.

This article focuses on the most controversial aspect of SB 313. New DGCL Section 122(18) overrides the Court of Chancery’s February 23, 2024, Opinion in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company ("Moelis"), by broadly allowing corporate boards to contractually delegate to any stockholder or prospective stockholder the power to cause the company to act or refrain from acting in almost any manner, including many decisions normally reserved for the board itself. Now that the debate about recent cases and new legislation is over, this article takes the opportunity to assess how the new law will actually affect Delaware’s corporate law doctrine and litigation practice. Looking beyond the atypical drama of the past six months, this article offers five subtle (but hopefully not boring) predictions and observations about how new Section 122(18) is likely to affect the corporate world going forward.

Time will tell whether Mark gets the predictions "right" or not.  In the meantime, I am prepared for the eventual advent of legal challenges.  Like Mark, I see them coming . . . .

Fiduciary Duties Trump Contracts?!

Many in the business law world have been following the saga involving the adoption of  S.B. 313 by Delaware's General Assembly last week.  S.B. 313 adds a new § 122(18) to the General Corporation Law of the State of Delaware (DGCL) that broadly authorizes corporations to enter into free-standing stockholder agreements (not embodied in the corporation's charter) that restrict or eliminate the management authority of the corporation's board of directors.  See my blog posts here and here and others cited in them, as well as Ann's post here.

In the floor debate on S.B. 313 last Thursday in the Delaware State House of Representatives, a proponent of the legislation stated that fiduciary duties always trump contracts.  That statement deserves some inspection in a number of respects.  I offer a few simple reflections here from one, limited perspective.

The historical centrality of corporate director fiduciary duties (which were the fiduciary duties referenced on the House floor) is undeniable.  Those who have taken business associations or an advanced business course with me over the years know well that I emphasize in board decision making that the directors’ actions must be both lawful and consistent with their fiduciary duties in order to be legally valid and enforceable.  I doubt my teaching is exceptional in that regard.

But the floor debate involved a different kind of tangle between legal obligations and fiduciary duties than exists in the board decision-making context in which corporate action is written on a tabula rasa.  The comment made in last Thursday’s legislative session responded to the suggestion that a board of directors may later decide to breach a contract that is lawful and was approved by the board in a manner that is consistent with director fiduciary duty compliance.  That scenario involves board action to disregard the terms of an agreement—by authorizing and directing the corporation to breach a legal obligation of the corporation because the directors have, in good faith and with due care, determined that the breach of contract is in the best interest of the corporation.

This type of board action is certainly not unprecedented.  An example from my practice immediately springs to mind: no-shop, non-solicitation, and related clauses in business combination (M&A) agreements.  These provisions may be (or at least appear to be) lawful and compliant with director fiduciary duties when made but may interfere with a target board’s fiduciary duties if the board later determines it has a fiduciary obligation to engage in interactions with a potential transactional partner in violation of that type of deal protection provision. 

The resolution of this issue in the M&A context has largely been contractual.  Fiduciary outs of various kinds have been common in M&A agreements for decades.  (I gave my first CLE talk on them back in the 1980s.)  Through these provisions, directors consider and prepare in advance for the potentiality of a later conflict between the deal protection obligations of the corporation and their fiduciary duties to the corporation.  Properly drafted, fiduciary outs help  protect the legal validity and enforceability of the original contract from future challenge and preserve the board’s legal right to respond to new circumstances without breaching the contract.

As those who work in this space well know, a watershed case involving deal protection provisions is Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003). In its Omnicare opinion, the Delaware Supreme Court assesses the validity of a merger agreement that effectively locked up a majority of the votes needed to approve the merger.  The merger agreement did not include a fiduciary out provision. The directors had no ability to terminate the merger agreement or nullify its terms to comply with their fiduciary duties without breaching the contract.  The court found the deal protections invalid and unenforceable.

Proponents of S.B. 313 clearly state that a corporation's exercise of its authority to enter into stockholder agreements under § 122(18) will be subject to challenge if the directors breach their fiduciary duties to the corporation in approving a stockholder agreement or in later authorizing the corporation's performance under that agreement.  If the corporation's directors are found to be in breach, the stockholder agreement then may be found invalid or unenforceable.  The prospect of that occurring in the stockholder agreement context is as real as it is in the M&A deal protection context.

Perhaps, then, fiduciary outs are a best practice that should grow out of the new DGCL § 122(18).  If the parties truly intend for fiduciary duties to trump the contract (as the bill proponents have claimed) and we can anticipate challenges in that regard based on the nature of the agreement, stockholder agreements should provide in advance for the eventuality of a conflict.  Otherwise, a stockholder agreement authorized under DGCL § 122(18) may be found either invalid ex post because the board’s original approval of the agreement may later be determined to have been a breach of the directors’ fiduciary duties (for failure to include a fiduciary out, as in Omnicare) or unenforceable in litigation over a board decision to breach or refrain from breaching the agreement in the face of a perceived fiduciary duty conundrum related to the corporation’s performance under the terms of the agreement.  A well-crafted fiduciary out (which would undoubtedly be somewhat bespoke, as it should be in the M&A context, based on the nature of the corporation’s obligations in the contract) should help avoid litigation, or at least enable its early dismissal, in the event of either type of legal claim.

Your reactions to these musings are, as always, welcomed.  We will be operating in new territory here assuming the Governor of Delaware signs S.B. 313 into law (as he has signaled).  If I am missing an element of statutory or decisional law or strategic litigation practice that impacts my arguments, I would appreciate hearing about it.  Regardless, it is now time that we all think about how to address anticipated issues arising from the Pandora’s box that the Delaware General Assembly has opened.  That may include practice-oriented solutions to perceived legal questions or tensions as well as potential further adjustments to the DGCL.  As to the latter, I note that I raised in one of my earlier posts the desirability of looking at DGCL subchapter XIV in light of the provisions of DGCL § 122(18).  Perhaps that issue merits a subsequent post . . . .

Thoughtful CTA Guidance

The Corporate Transparency Act is among the most talked about business law topics in the bar communities I frequent. Basic information and guidance can be found in many places, but nuanced treatments are more rare. I offer one of those rare ones up for your review and consideration today.

Entitled The Corporate Transparency Act Is Happening To You and Your Clients: Dealing with the Tsunami, the analysis and guidance comes from Stoll Keenon Ogden PLLC.  More specifically, one of the two co-authors is friend-of-the-BLPB Tom Rutledge.  His work never disappoints.  I urge you to check it out--all 58 pages of it!  There is even a short resource list at the end with links to some of the key public guidance.  I am grateful for Tom and his colleague, Allison, for putting this together.

I Also Write Letters!

Further to Ann's post on Sunday sharing the text of her comment letter on Delaware's S.B. 313 (and more particularly the proposal to add a new § 122(18) to the General Corporation Law) and my post on § 122(18) last week, I share below the text of my comment letter to the Delaware State House of Representatives Judiciary Committee.  Although Ann and I each got one minute to deliver oral remarks at the hearing held by the Judiciary Committee on Tuesday, 60 seconds was insufficient to convey my overarching concerns--which represent a synthesis and characterization of selected points from my post last week.  The comment letter shared below includes the prepared remarks I would have conveyed had I been afforded additional time.

Madame Chair and Committee Members:

I appreciated the opportunity to speak briefly at today’s hearing. As I explained earlier today, although I am a professor in the business law program at The University of Tennessee College of Law, my appearance before the committee relates more to my nearly 39 years as a corporate finance practitioner, which has included bar work (most recently and extensively in the State of Tennessee) proposing and evaluating corporate and other business entity legislation. This letter expands on the virtual oral comments I offered at the hearing on the proposed addition of § 122(18) to the General Corporation Law of the State of Delaware (DGCL). My goal is simply to best ensure that the committee and the General Assembly are well informed about the significance of this proposed new section of the DGCL.

Both proponents and critics of proposed § 122(18) concur that the stockholder agreements that would be authorized by that provision can currently be accomplished in a corporation’s certificate of incorporation—the corporate charter. Indeed, as was alluded to in the testimony earlier today, current Delaware law expressly authorizes transferring governance authority from a corporation’s board of directors to its stockholders through charter amendments and through certificates of designation (instruments providing for new classes or series of stock) as well as for statutory close corporations, a status designated in the certificate of incorporation. As a result, questions raised at today’s hearing about why the new authority embodied in proposed DGCL § 122(18) is needed—or why it would be objectionable—are well taken. As I indicated in my oral testimony earlier today, the answer to those questions lies in public policy.

Current Delaware law on stockholder agreements promotes notice, transparency, and assent. Provisions in a Delaware corporation’s certificate of incorporation are matters of public record in the State of Delaware on which stockholders and prospective stockholders rely. They must be filed with the Delaware Secretary of State. Thus, Delaware’s corporate law currently requires that stockholders and potential future stockholders have public notice of any fundamental alteration in the statutory power of the board of directors to manage the corporation. Stockholder agreements like those authorized under proposed DGCL § 122(18) are not required to be filed with the state (although they would have to be filed with the U.S. Securities and Exchange Commission under the federal securities laws at some point after they are signed, for public companies). Moreover, under current Delaware law, if an amendment to the certificate of incorporation is required to achieve a shift in governance authority from the board of directors, then a stockholder vote is required. These requirements, which evidence Delaware’s public policies of notice, transparency, and assent, are what ultimately divide the supporters and detractors of proposed DGCL § 122(18). Your ultimate views on these policies—your determination as to whether they are important to the integrity of Delaware corporate law—should be strong factors in your determination of how to vote on proposed DGCL § 122(18). I submit that these policies should not be abandoned or reduced without careful consideration.

Last week, I wrote about my policy concerns relating to proposed DGCL § 122(18) in a blog post published on the Business Law Prof Blog. That post can be found here. Although my blog post was written for a different and broader legal audience (and therefore includes some technical legal references), it may be useful to you as additional statutory and judicial support for the positions I have taken in this letter and in my oral testimony. The post also includes several drafting observations relevant to the productive introduction of statutory authority for stockholder agreements that you may appreciate having.

I am grateful to have had the opportunity to share these insights with you today in writing and orally during the hearing this afternoon. I wish you well in your deliberations.

Very truly yours,

Joan M Heminway
Rick Rose Distinguished Professor of Law, The University of Tennessee College of Law
Member and Former Chair, Tennessee Bar Association Business Law Section
Former Chair and Member, Boston Bar Association Corporate Law Committee

The Delaware State House of Representatives may vote on the bill tomorrow (Thursday) afternoon.  It is the last item listed in the Main House Agenda for tomorrow's session.  I can only hope that the members of the House feel better informed after the House Judiciary Committee hearing on Tuesday.  I know many of us tried to ensure that they are well informed.

Moelis, § 122(18), and DGCL Subchapter XIV - Knowing Legislative Policy Shift?!

Like so many others, I have wanted to say a word about West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, 311 A.3d 809 (Del. Ch. 2024).  My angle is a bit different from that of many others.  It derives from my 15-year practice background, my 24-year law teaching background, and my 39-year bar service background.  It focuses on a doctrinal analysis undertaken through a policy lens.  But I want to note here the value of Ann Lipton’s existing posts on Moelis and the related proposed addition of a new § 122(18) to the General Corporation Law of the State of Delaware (DGCL).  Her posts can be found here, here, here, and here.  (Sorry if I missed one, Ann!)  Ben Edwards also published a related post here.  They (and others offering commentary that I have read) raise and touch on some of the matters I address here, but not with the same legislative policy focus.

I apologize at the outset for the length of this post.  As habitual readers know, long posts are “not my style” as a blogger.  This matter is one of relatively urgent legislative importance, however, and I am eager to get my thoughts out to folks here.

I begin by referencing the DGCL provision in the eye of the storm.  DGCL § 141(a) provides for management of the business and affairs of a Delaware corporation by or under the direction of the corporation’s board of directors, except as otherwise provided in the corporation’s certificate of incorporation or the DGCL.  In Moelis, Vice Chancellor Travis Laster found various provisions in a stockholder agreement unlawful under DGCL § 141(a).  Specifically, a series of governance-oriented contractual arrangements at issue in Moelis were not authorized under the corporation’s certificate of incorporation or another provision of the DGCL.

The tension in this space involving DGCL § 141(a) is not new.  For many years, the legal validity of so-called stockholder agreements—technically, agreements (as opposed to charter provisions) that shift governance power from the directors of a corporation to one or more of its stockholders—has been questionable for most Delaware corporations, including public companies.  (I say “many years” because the legal validity of these agreements was an issue I routinely wrestled with before I left the full-time private practice of law in 2000.) 

The DGCL is different from the Model Business Corporation Act (MBCA) in this regard.  The MBCA has long had a broad-based statutory provision, MBCA § 7.32, authorizing shareholder agreements under specified conditions.  States adopting the MBCA have made a (presumably) conscious choice to embrace shareholder governance under the circumstances provided in the MBCA, including through § 7.32.  The MBCA’s provision expressing the management authority of the corporation’s board of directors, MBCA § 8.01(b), expressly references MBCA § 7.32, providing that:

[e]xcept as may be provided in an agreement authorized under section 7.32, and subject to any limitation in the articles of incorporation permitted by section 2.02(b), all corporate powers shall be exercised by or under the authority of the board of directors, and the business and affairs of the corporation shall be managed by or under the direction, and subject to the oversight, of the board of directors.

There is no analogous provision in the DGCL.  The only way to be sure that one could accomplish a shift in governance power from directors to stockholders under the DGCL has been for a corporation either to include the governance provisions in its certificate of incorporation or to organize as a close corporation under Subchapter XIV.  Close corporation status requires charter-based notification and conformity to a number of statutory requirements set forth in DGCL §§ 341 & 342, including that the certificate of incorporation provide that the stock be represented by certificated shares “held of record by not more than a specified number of persons, not exceeding 30,” that the stock be subject to transfer restrictions, and that there not be a “public offering” of the stock. DGCL § 342(a)(1)-(3).  Thus, by legislative design, statutory close corporation status is not available to publicly held corporations organized under Delaware law (which makes total sense for those who understand what a closely held corporation is, in a general sense).

Members of the Delaware State Bar Association (DSBA) Corporation Law Section know all of this well.  As leaders in reviewing and proposing changes to the DGCL over the years, this group of folks has thoughtfully weighed policy considerations relating to the DGCL’s application to the myriad situations that Delaware corporations may face.  Without having researched or inquired about the matter, I find it hard to believe that the section has not previously discussed the desirability of an express statutory provision allowing for the approval and execution of stockholder agreements outside a corporation’s certificate of incorporation.  The matter has been addressed by the Executive Council of the Tennessee Bar Association’s Business Law Section, which engages in similar legislative initiatives in Tennessee, more than once during the time I have been serving on it.  I therefore assume that the choice to refrain from proposing a specific statute authorizing stockholder agreements outside a corporation’s certificate of incorporation over the years has been both informed and intentional.

Yet, earlier today, Senate Bill 313 passed in the Senate Chamber of the Delaware General Assembly.  In that bill, vetted and approved by the DSBA Corporation Law Section and blessed by the DSBA Executive Committee, the longstanding policy decision to refrain from allowing stockholder agreements outside of the certificate of incorporation or Subchapter XIV is being summarily reversed through the proposal to adopt a new DGCL § 122(18)—an alteration of the corporate powers provision of the DGCL.  That new proposed DGCL section provides a corporation with the power to enter into stockholder agreements within certain bounds, but those bounds are relatively broad.

As others have noted (at least in part), the drafting of the proposed DGCL § 122(18) (and the related additional changes to DGCL § 122) reflects a belt-and-suspenders approach and is otherwise awkward.  Multiple sentences are crammed into this one new subpart of DGCL §122 to effectuate the drafters’ aims.  The DGCL has been criticized for its complex drafting in the past (resulting in, among other things, a project creating a simplified DGCL), and the approach taken by the drafters of the proposed DGCL § 122 changes adds to the complexity of the statute in unnecessary ways.  A provision this significant should be addressed in a separate statutory section, the approach taken in MBCA §7.32.  That new section then can be cross-referenced in DGCL § 141(b)—and, if deemed necessary, DGCL § 122.  Breaking out the provision in its own section also should allow legislators to more easily and coherently identify strengths and weaknesses in the drafting and build in or remove any constraints on stockholder governance that they may deem necessary as the proposed provision gets continued attention in the Delaware State House of Representatives.  I offer that as a drafting suggestion.

Apart from the inelegance of the drafting, however, I have one large and important question as Senate Bill 313 continues to move through the Delaware legislative process: do members of the Delaware General Assembly voting on this bill fully understand the large shift in public policy represented by the introduction of DGCL § 122(18)?  If so, then they act on an informed basis and live with the consequences, as they do with any legislation they pass that is signed into law.  If not, we all must work harder to enable that understanding. 

It is all fine and good for us to point out how hasty the drafting process has been, how traditional debate and procedures may have been short-changed or subverted, how waiting for the Delaware Supreme Court to act on the appeal of the Chancery Court decision before proceeding is prudent, etc.  But the fact of the matter has been that potential and actual stockholders of Delaware corporations have been able to rely exclusively on charter-based exceptions to the management authority of the board of directors—whether those exception are authorized in Subchapter XIV of the DGCL or otherwise.  This has meant that prospective equity investors in a Delaware corporation knew to carefully consider a corporation’s certificate of incorporation to identify any pre-existing constraints on the management authority of the board of directors before investing.  This also has meant that any new constraints on the board of directors’ authority to manage the corporation’s business and affairs required a charter amendment of some kind—either a board-approved and stockholder-approved amendment of the certificate of incorporation or the board’s approval of a certificate of designations under charter-based authority of which existing stockholders should be aware.

Ann noted this issue in a previous post.  The enactment of proposed DGCL § 122(18) will make it more challenging for potential equity investors to identify the locus/loci of management power in the corporation.  Although both the certificate of incorporation and any stockholder agreement would be required to be filed with the U.S. Securities and Exchange Commission for reporting companies (the latter as an instrument defining the right of security holders under paragraph (b)(4) or as a material contract (b)(10) of Regulation S-K Item 601), the current draft of proposed DGCL § 122(18) does not provide that a copy of any contract authorized under its provisions be filed with the Delaware Secretary of State or that its existence be noted on stock certificates (a requirement included in MBCA §7.32(c)).  In addition, stockholders will lose their franchise if the stockholder agreement would otherwise have required a stockholder vote.

Finally, it seems important to note that the judicial doctrine or independent legal significance—or equal dignity—has been strong in Delaware over the years as a factor in the interpretation of Delaware corporate law.  This has helped practitioners and the judiciary to navigate difficult issues in advising clients about the outcomes of Delaware corporate law debates.  The rule typically has been that, if one takes a path afforded by the statute, they get what the statute provides.  And if one does not take a provided statutory path, they cannot later be heard to argue for what the statute provides for users of that untaken statutory path. 

Classically, in dicta in Nixon v. Blackwell, 626 A.2d 1366 (1993), Chief Justice Veasey wrote (on pp. 1380-81) about the importance of DGCL Subchapter XIV in construing corporate governance arrangements in light of the doctrine of independent legal significance:

 . . . the provisions of Subchapter XIV relating to close corporations and other statutory schemes preempt the field in their respective areas. It would run counter to the spirit of the doctrine of independent legal significance and would be inappropriate judicial legislation for this Court to fashion a special judicially-created rule for minority investors when the entity does not fall within those statutes, or when there are no negotiated special provisions in the certificate of incorporation, by-laws, or stockholder agreements.

With the passage of proposed DGCL § 122(18), parts of Subchapter XIV of the DGCL will seemingly be rendered vestigial (i.e., they will no longer have independent legal significance).  Consideration of this and any other potential collateral damage to the interpretation of Delaware corporate law that may be created by the enactment of proposed DGCL § 122(18) should be carefully undertaken and, as desired, additional changes to the DGCL should be debated before voting on Senate Bill 313 is undertaken in the Delaware State House of Representatives.

I do not argue for a specific result in this post.  Rather, I mean to illuminate further the significance of the decision facing the Delaware General Assembly (and, potentially, the decision of the Governor of the State of Delaware) in the review of proposed DGCL § 122(18).  In doing so, I admit to some sympathy for those who may have clients with stockholder agreements they now know or suspect to be unlawful under the Moelis opinion.  In all candor, any legislation on this topic should more directly address those existing agreements given that the provisions of proposed DGCL § 122(18) are not a mere clarification of existing law.  Agreements not re-adopted under any new legislative authority may be found unlawful in the absence of clarity on this point.  As a reference point, I note that, in amending MBCA § 7.32 to remove a previous 10-year duration limit, the drafters specified the effect on pre-existing agreements in MBCA § 7.32(h).  Take that as another drafting suggestion . . . .

I welcome comments on any or all of what I offer here.  If I have anything incorrect, please correct me.  Regardless, I hope this post provides some additional information to those in the Delaware General Assembly and elsewhere who have an interest in proposed DGCL § 122(18).

Counseling Creators: Influencers, Artists and Trendsetters Negotiation Competition and Conference

If you happen to be in Miami or think it's worth it to fly there next week, this is for you. I'll be moderating the panel on regulatory considerations for promoters and influencers and we have student teams competing from all over the country. 

February 29 - March 1
University of Miami

Content is king. We live in the golden age where content creators, artists, and influencers wield power and can shift culture. Brands want to collaborate. Creators need to be sophisticated, understand deal points and protect their brand and intellectual property. Miami Law will be the first law school in the country to pull together law students with leading lawyers, influencers, artists, creatives and trendsetters for a negotiation competition and conference.  

Negotiation Competition - Thursday, February 29 

Where

Shalala Student Center, 1330 Miller Drive, Coral Gables, FL 33146

Who Should Participate

This competition is ideal for law and business students. THE. TEAMS ARE FINALIZED ALREADY.

What to Expect

Participants will have the chance to represent influencers, brands, artists, fashion companies and other creators in the first ever Counseling Creators: Influencers, Artists and Trendsetters Negotiation Competition

• Register a team of law students (can include business school students)
  1. Team of up to 4
  2. Individual registrants will be placed on a team
• In advance of the competition, you will be assigned two negotiations where you may be representing your favorite influencer, brand, artist, or fashion company negotiating the compensation, deliverables, and key deal points
• Industry judges will grade your negotiation and provide feedback
• Top teams will advance to the final negotiation to be held live during the conference 

Conference - Friday, March 1 

Where

Lakeside Village Auditorium, 1280 Stanford Dr, Coral Gables, FL 33146

Who Should Attend

This conference appeals to all lawyers, law students, brands, influencers, artists and creators for the first ever law school conference on Counseling Creators: Influencers, Artists and Trendsetters.  

What to Expect

• Panel conversations + Keynotes
• Topics such as: The Business of Content Creation, Fair Use for Content Creators, Clearances for Creators, The Brand Deal, Compliance and Regulatory Considerations for Creators, Promoter Liability
• Opportunity to network and learn from industry leading creators, brands, and lawyers and more

PROGRAM (Subject to change)

9:00am - 9:15am         Opening Remarks

9:15am - 10:15am       The Brand Deal

Moderator: TBA

Speakers:

Jennifer Karlik, Director of Business Development, CAA Brand Management
Michael Calvin Jones, SVP, Creators, Wasserman
Mark Middlebrook, VP, Legal Affairs, Fanatics Collectibles
Michael Isselin, Partner, Entertainment & Media Group, Reed Smith
Jonathan Seiden, Senior Vice President, Associate General Counsel, Endeavor

10:20am - 11:20am    Fair Use and Clearances for Creators

Moderator: Vivek Jayaram, Founder, Jayaram Law and Co-Director, Arts Track, Entertainment, Arts and Sports Law Program at Miami Law

Speakers:
John Belcaster, General Counsel, MSCHF and Miami Law Entertainment, Arts and Sports Law Program Advisory Board Member
Katie Fittinghoff, Creative, MSCHF
Matt Rayfield, Creative, MSCHF

11:30am - 12:30pm    Athletes as Content Creators 

Moderator: Greg Levy, JD ’10, Associate Dean & Director Entertainment, Arts & Sports Law Graduate Program, Miami Law

Speakers:
Kirby Porter, Founder, New Game Labs
Michael Raymond, Founder, Raymond Representation
Bob Philp, Sr. Executive, Sports Partnerships & Talent Management, Roc Nation Sports
Darren Heitner, Founder, Heitner Legal

12:30pm -1:30pm      LUNCH
 

1:30pm – 2:20pm      Creator Fireside Chat

2:25pm - 3:25pm       Regulatory Considerations and Promoter Liability for Creators

Moderator: Marcia Narine Weldon, Director of Transactional Skills Program, Miami Law

Speakers:
Toam Rubinstein, JD ’13, Senior Associate, Entertainment & Media Group, Reed Smith
Mr Eats 305, (@MrEats305), Food, Travel, & Lifestyle Creator & Law School Graduate
Tyler Chou, Founder and CEO, Tyler Chou Law for Creators

3:30pm - 4:30pm       The Fashion Collaboration

Moderator – Carolina Jayaram, CEO, The Elevate Prize and Co-Director, Arts Track, Entertainment, Arts and Sports Law Program at Miami Law

Speakers:
Demeka Fields, Counsel for Global Sports Marketing, New Balance
Danielle Garno, Partner and Co-Chair of Entertainment Practice, Holland & Knight and Miami Law Entertainment, Arts and Sports Law Program Advisory Board Member
Matthew Growney, Founder, Thermal Brands; Sr. Advisor (Fashion/Creative), PUMA & Stella Artois

 
4:40pm - 5:30pm       Competition Final

 

For More Information

Contact [email protected] or 305-284-1689.

 

 

 

 

Are Lawyers, Lawmakers, and Law Professors Really Ready for AI in 2024?

We just finished our second week of the semester and I’m already exhausted, partly because I just submitted the first draft of a law review article that’s 123 pages with over 600 footnotes on a future-proof framework for AI regulation to the University of Tennessee Journal of Business Law. I should have stuck with my original topic of legal ethics and AI.

But alas, who knew so much would happen in 2023? I certainly didn’t even though I spent the entire year speaking on AI to lawyers, businesspeople, and government officials. So, I decided to change my topic in late November as it became clearer that the EU would finally take action on the EU AI Act and that the Brussels effect would likely take hold requiring other governments and all the big players in the tech space to take notice and sharpen their own agendas.

But I’m one of the lucky ones because although I’m not a techie, I’m a former chief privacy officer, and spend a lot of time thinking about things like data protection and cybersecurity, especially as it relates to AI. And I recently assumed the role of GC of an AI startup. So, because I’m tech-adjacent, I’ve spent hours every day immersed in the legal and tech issues related to large and small language models, generative AI (GAI), artificial general intelligence (AGI), APIs, singularity, the Turing test, and the minutiae of potential regulation around the world. I’ve become so immersed that I actually toggled between listening to the outstanding Institute for Well-Being In Law virtual conference and the FTC’s 4-hour tech summit yesterday with founders, journalists, economists, and academics. Adding more fuel to the fire, just before the summit kicked off, the FTC announced an inquiry into the partnerships and investments of  Alphabet, Inc., Amazon.com, Inc., Anthropic PBC, Microsoft Corp., and OpenAI, Inc. Between that and the NY Times lawsuit against OpenAI and Microsoft alleging billions in damages for purported IP violations, we are living in interesting times.

If you’ve paid attention to the speeches at Davos, you know that it was all AI all the time. I follow statements from the tech leaders like other people follow their fantasy football stats or NCAA brackets. Many professors, CEOs, and general consumers, on the other hand, have been caught by surprise by the very rapid acceleration of the developments, particularly related to generative AI.

However, now more members of the general public are paying attention to the concept of deepfakes and demanding legislation in part because the supernova that is Taylor Swift has been victimized by someone creating fake pornographic images of her. We should be even more worried about the real and significant threat to the integrity of the fifty global elections and occurring in 2024 where members of the public may be duped into believing that political candidates have said things that they did not, such as President Biden telling people not to vote in the New Hampshire primary and to save their votes for November.

For those of us who teach in law schools in the US and who were either grading or recovering from grading in December, we learned a few days before Christmas that Lexis was rolling out its AI solution for 2Ls and 3Ls. Although I had planned to allow and even teach my students the basics of prompt engineering and using AI as a tool (and not a substitute for lawyering) in my business associations, contract drafting, and business and human rights class, now I have to also learn Lexis’ solution too. I feel for those professors who still ban the use of generative AI or aren’t equipped to teach students how to use it ethically and effectively.

Even so, I’m excited and my students are too. The legal profession is going to change dramatically over the next two years, and it’s our job as professors to prepare our students. Thompson Reuters, the ABA, and state courts have made it clear that we can’t sit by on the sidelines hoping that this fad will pass.

Professionally, I have used AI to redraft an employee handbook in my client’s voice (using my employment law knowledge, of course), prepare FAQs for another client’s code of conduct in a very specialized industry, prepare interview questions for my podcast, and draft fact patterns for simulations for conferences and in class. I’ve also tested its ability to draft NDAs and other simple agreements using only ChatGPT. It didn’t do so well there, but that’s because I know what I was looking for. And when I gave additional instructions, for example, about drafting a mutual indemnification clause and then a separate supercap, it did surprisingly well. But I know what should be in these agreements. The average layperson does not, something that concerns Chief Justice Roberts and should concern us all.

How have you changed your teaching with the advent of generative AI? If you’re already writing or teaching about AI or just want more resources, join the 159 law professors in a group founded by Professors April Dawson and Dan Linna. As for my law review article, I’m sure a lot of it will be obsolete by the time it’s published, but it should still be an interesting, if not terrifying, read for some.

Ethical and Practical Issues for Lawyers Using AI

I’m a law professor, the general counsel of a medtech company, a podcaster, and I design and deliver courses on a variety of topics as a consultant. I think about and use generative AI daily and it’s really helped boost my productivity. Apparently, I’m unusual among lawyers. According to a Wolter’s Kluwers Future Ready Lawyer report that surveyed 700 legal professionals in the  US and EU, only 15% of lawyers are using generative AI right now but 73% expect to use it next year. 43% of those surveyed see it as an opportunity, 25% see it as a threat, and 26% see it as both.

If you’re planning to be part of the 73% and you practice in the US, here are some ethical implications with citations to select model rules. A few weeks ago, I posted here about business implications that you and your clients should consider.

• How can you stay up-to-date with the latest advancements in AI technology and best practices, ensuring that you continue to adapt and evolve as a legal professional in an increasingly technology-driven world? Rule 1.1 (Competence)
• How can AI tools be used effectively and ethically to enhance your practice, whether in legal research, document review, contract drafting, or litigation support, while maintaining high professional standards? Will it be malpractice NOT to use GAI in the future? Rule 1.1 (Competence), Comment 8, duty to understand the benefits and risks associated with relevant technology; Rule 1.3 (Diligence)
• How can you obtain and document informed consent from clients when using AI tools in your practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies? Rule 1.4 (Communication); Rule 1.6 (Confidentiality of Information)
• How can you obtain and document informed consent from clients when using AI tools in your practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies? Rule 1.4 (Communication); Rule 1.6 (Confidentiality of Information). Tip- Make sure your engagement letter discusses the use of technology and specifically addresses the responsible use of GAI.  If needed, amend your engagement letter. Adequately anonymize client information in your prompts. Make sure to opt out of data sets. Check the terms of service and privacy policies of your AI tools.
• How do you rethink billing clients and what’s ethical if you have reliable AI models that can do some work in a fraction of the time? Is it still ethical to bill by the hour or do you use a flat rate? Rule 1.5 (Fees)
• How can you effectively explain and defend the use of AI-generated evidence, analysis, or insights in court, demonstrating the validity and reliability of the methods and results to judges and opposing counsel? Rule 3.3 Candor Toward the Tribunal; Rule 4.1 Truthfulness in Statements to Others
• What measures should you implement to supervise and train your staff, including paralegals and support personnel, in the responsible use of AI tools, ensuring that ethical and professional standards are maintained throughout the practice? Rule 5.1 (Responsibilities of Partners, Managers, and Supervisory Lawyers); Rule 5.3 (Responsibilities Regarding Nonlawyer Assistance)

Then there are the harder questions:

• How many lawyers and legal professionals will you replace?
• How many should you replace?
• Who and how will you retrain and upskill?
• Should your firm be developing your own large language models as some are already doing?  What are the risks? The 2022 ABA Legal Technology Survey Report found that accuracy is the top barrier preventing many lawyers from adopting AI. Some insurance brokers have indicated the existing GAI tools are not fit for law practice because of reliability, accuracy, confidentiality, and copyright concerns,

If you're ready to take the deep dive or maybe just dip your toe in the AI waters, here are some resources to help you get started on the journey. Of course, with the way things are changing so rapidly on the legislative and tech development front, this list could be relatively useless in the next few weeks.

•ABA House of Delegates Resolution 604

•Task Force on Responsible Use of Generative AI for Law- MIT

• NIST AI Framework

•FTC AI Guidance

•EEOC Artificial Intelligence and Algorithmic Fairness Initiative

•National Conference of State Legislatures-2023-legislation

•SEC Investor Advisory Committee Establishment of an Ethical Artificial Intelligence Framework for Investment Advisors

•ABA Task Force on the Law and Artificial Intelligence

•Health AI Partnership

•National Association of Insurance Commissioners

•ISO 27701- International Standard for Protecting Personally Identifiable Information

Partnership on AI

Are you using generative AI in the classroom? How are you preparing the next generation of lawyers? If you’re a practicing lawyer, are you ready to be part of the 15% this year or the 73% next year? 

Materiality and the SEC's Rulemaking Authority

Over the summer, friend-of-the-BLPB Bernie Sharfman posted a draft paper to SSRN that was the subject of a short colloquy between us.  The paper, The Ascertainable Standards that Define the Boundaries of the SEC's Rulemaking Authority, asserts, among other things, that materiality is one of three "ascertainable policy standards that Congress has placed in the Acts to guide the SEC’s rulemaking discretion."  The reasoning? 

• "[T]here are multiple references to materiality in the Acts."
• The SEC's 1972 annual report avers that "[a] basic purpose of the Federal securities laws is to provide disclosure of material financial and other information on companies seeking to raise capital through the public offering of their securities, as well as companies whose securities are already publicly held."
• "As observed by Professor Ruth Jebe, it is fair to say that materiality 'constitutes the primary framing mechanism for financial reporting.'"

Bernie acknowledges that "there is no explicit statutory language in the Acts that forbids the SEC from promulgating rules requiring non-material disclosures."  I might add that nothing in either the Securities Act of 1933, as amended ("1933 Act"), or the Securities Exchange Act of 1934, as amended ("1934 Act"), explicitly limits the SEC's rulemaking authority to rules qualified by materiality.

Since the U.S. Congress knew to use materiality to qualify some disclosure, enforcement, and other responsibilities under the 1933 Act and the 1934 Act and not others, it easily could have provided an express constraint on the SEC's overall rulemaking authority in that regard.  Arguably, since Congress did not qualify all of the disclosure mandates in the 1933 Act or 1934 Act by materiality, SEC rulemaking that introduces a materiality qualification may be subject to unfavorable scrutiny.  (Congress could then take the view that, if it had meant to restrict the statutory disclosure or other mandates to only those items that are material, it would have said so.)  Yet, overall, Congress has delegated relatively broad authority to the SEC to engage in rule making that serves the investor protection, market integrity maintenance, and capital formation policies underlying the various provisions of the 1933 Act and the 1934 Act.

For example, Schedule A to the 1933 Act sets forth the initial disclosure mandates provided for by Congress for registration statements. See §7(a)(1) of the 1933 Act.  Congress then notes that the SEC "may by rules or regulations provide that any such information or document need not be included in respect of any class of issuers or securities if it finds that the requirement of such information or document is inapplicable to such class and that disclosure fully adequate for the protection of investors is otherwise required to be included within the registration statement."  Id. The disclosure requirements for registration statements are now executed primarily through registration forms adopted by the SEC under the 1933 Act.  In both Schedule A and in the forms of registration statement adopted by the SEC under the 1933 Act, disclosures were or are required that are not expressly qualified by materiality.  In fact, few of the mandatory disclosures in Schedule A are limited only to supplying material information.  The same is true for the initial disclosure mandates applicable to 1934 Act registration statements.  See § 12(b) of the 1934 Act.

There's more I could say, but I will leave it there for now.  As you might guess from the above, I am skeptical, at best, about the argument that materiality is a required constraint on SEC rule making.  I consider Congress's words and actions to be most important in this matter (absent any issues identified under the U.S Constitution).  Your thoughts on the asserted materiality constraint are welcomed.

What Business Lawyers Needs to Ask their Clients About Generative AI Usage

Last week I had the pleasure of joining my fellow bloggers at the UT Connecting the Threads Conference on the legal issues related to generative AI (GAI) that lawyers need to understand for their clients and their own law practice. Here are some of the questions I posed to the audience and some recommendations for clients. I'll write about ethical issues for lawyers in a separate post. In the meantime, if you're using OpenAI or any other GAI, I strongly recommend that you read the terms of use. You may be surprised by certain clauses, including the indemnification provisions. 

I started by asking the audience members to consider what legal areas are most affected by GAI? Although there are many, I'll focus on data privacy and employment law in this post.

Data Privacy and Cybersecurity

Are the AI tools and technologies you use compliant with relevant data protection and privacy regulations, such as GDPR and CCPA? Are they leaving you open to a cyberattack?

This topic also came up today at a conference at NCCU when I served as a panelist on cybersecurity preparedness for lawyers.

Why is this important?

ChatGPT was banned in Italy for a time over concerns about violations of the GDPR. The Polish government is investigating OpenAI over privacy issues. And there are at least two class action lawsuits in California naming Microsoft and OpenAI. Just yesterday, a US government agency halted the use of GAI due to data security risks. 

It’s also much easier for bad actors to commit cybercrime because of the amount of personal data they can  scrape and analyze and because deepfake technology allows impersonation of images and voices in a matter of seconds. The NSA and FBI have warned people to be worried about misinformation and cyberthreats due to the technology. On a positive note, some are using GAI to fight cybercrime.

Surveillance and facial recognition technology can violate privacy and human rights. Governments have used surveillance technology to tamp down on and round up dissidents, protestors, and human rights defenders for years. Now better AI tools makes that easier. And if you haven't heard some of the cautions about Clearview AI and the misidentification of citizens, you should read this article. A new book claims that this company could "end privacy as we know it."

What should (you and) your clients do?

• Ensure algorithms minimize collection and processing of personal data and build in confidentiality safeguards to comply with privacy laws
• Revise privacy and terms of use policies on websites to account for GAI
• Build in transparency for individuals to control how data is collected and used
• Turn on privacy settings in all AI tools and don’t allow your data to be used for training the large language models
• Turn off chat history in settings on all devices
• Prevent browser add-ons
• Check outside counsel guidelines for AI restrictions (or draft them for your clients)
• Work with your IT provider or web authority to make sure your and your clients’ data is not being scraped for training
• Use synthetic data sets instead of actual personally identifiable information
• Ensure that you have a Generative AI Security Policy
• Check vendor contracts for AI usage
• Enhance cybersecurity training
• Conduct a table top exercise and make sure that you have an incident response plan in place
• Check cyberinsurance policies for AI clauses/exclusions

What about the employment law implications?

According to a Society for Human Resources Management Member Survey about AI usage:

• 79% use AI for recruiting and hiring

• 41% use AI for learning and development

• 38% use AI for performance management

• 18% use AI for productivity monitoring

• 8% use Ai for succession planning

• 4% use AI or promotional decisions

GAI algorithms can also have significant bias for skin color. The National Institute of Standards and Technology (NIST) released research showing that "not just dark African-American faces, but also Asian faces were up to 100 times more likely to be failed by these systems than the faces of white individuals.”

Then there’s the question of whether recruiters and hiring managers should use AI to read emotions during an an interview. The EU says absolutely not. 

The Equal Employment Opportunity Commission has taken notice. In a panel discussion, Commissioner Keith Sonderling explained, “carefully designed and properly used, AI has potential to enhance diversity and inclusion, accessibility in the workplace by mitigating the risk of unlawful discrimination. Poorly designed and carelessly implemented, AI can discriminate on a scale and magnitude greater than any individual HR professional.” The EEOC also recently settled the first of its kind AI bias case for $365,000.

What to do 

• Use AI screening tools to disregard name, sec, age, national origin, etc.
• Use bots for interviews to eliminate bias because of accents
• Check local laws such as New York City's automated decision tools guidance for employers
• Be careful about training large language models on current workforce data because that can perpetuate existing bias
• Review the EEOC Resource on AI

Questions to Ask Your Clients:

• How are you integrating human rights considerations into your company's strategy and decision-making processes, particularly concerning the deployment and use of new technologies?

• Can you describe how your company's corporate governance structure accounts for human rights and ethical considerations, particularly with regards to the use and impact of emerging technologies?

• How does your company approach balancing the need for innovation and competitive advantage with the potential societal and human rights impact of technologies like facial recognition and surveillance?

• As data becomes more valuable, how is your company ensuring ethical data collection and usage practices?

• Are these practices in line with both domestic and international human rights and privacy standards?

• How is your organization addressing the potential for algorithmic bias in your technology, which can perpetuate and exacerbate systemic inequalities?

• What steps are you taking to ensure digital accessibility and inclusivity, thereby avoiding the risk of creating or enhancing digital divides?

• How is your company taking into account the potential environmental impacts of your technology, including e-waste and energy consumption, and what steps are being taken to mitigate these risks while promoting sustainable development?

• Are you at risk of a false advertising or unfair/deceptive trade practices act claim from the FTC or other regulatory body due to your use of AI?

Whether or not you're an AI expert or use GAI in your practice now, it's time to raise these issues with your clients. Future posts will address other legal issues and the ethical implications of using AI in legal practice. 

Generative AI Is the Greatest Thing Since the Discovery of Fire And/Or Will Kill Us All

Depending on who you talk to, you get some pretty extreme perspectives on generative AI. In a former life, I used to have oversight of the lobbying and PAC money for a multinational company. As we all know, companies never ask to be regulated. So when an industry begs for regulation, you know something is up. 

Two weeks ago, I presented the keynote speech to the alumni of AESE, Portugal’s oldest business school, on the topic of my research on business, human rights, and technology with a special focus on AI. If you're attending Connecting the Threads in October, you'll hear some of what I discussed.

I may have overprepared, but given the C-Suite audience, that’s better than the alternative. For me that meant spending almost 100 hours  reading books, articles, white papers, and watching videos by data scientists, lawyers, ethicists, government officials, CEOs, and software engineers. 

Because I wanted the audience to really think about their role in our future, I spent quite a bit of time on the doom and gloom scenarios, which the Portuguese press highlighted. I cited the talk by the creators of the Social Dilemma, who warned about the dangers of social media algorithms and who are now raising the alarms about AI's potential existential threat to humanity in a talk called the AI Dilemma.

I used statistics from the Future of Jobs Report from the World Economic Forum on potential job displacement and from Yale's Jeffrey Sonnenfeld on what CEOs think and are planning for. Of the 119 CEOs from companies like Walmart, Coca-Cola, Xerox and Zoom, 34% of CEOs said AI could potentially destroy humanity in ten years, 8% said that it could happen in five years,  and 58% said that could never happen and they are “not worried.” 42% said the doom and gloom  is overstated, while 58% said it was not. I told the audience about deepfakes where AI can now mimic someone's voice in three seconds.

But in reality, there's also a lot of hope. For the past two days I've been up at zero dark thirty to watch the live stream of the AI For Good Global Summit in Geneva. The recordings are available on YouTube. While there was a more decidedly upbeat tone from these presenters, there was still some tamping down of the enthusiasm.

Fun random facts? People have been using algorithms to make music since the 60s. While many are worried about the intellectual property implications for AI and the arts, AI use was celebrated at the summit. Half of humanity's working satellites belong to Elon Musk. And  a task force of 120 organizations is bringing the hammer down on illegal deforestation in Brazil using geospatial AI. They've already netted 2 billion in penalties. 

For additional perspective, for two of the first guests on my new podcast, I've interviewed lawyer and mediator, Mitch Jackson, an AI enthusiast, and tech veteran, Stephanie Sylvestre, who's been working with OpenAI for years and developed her own AI product somehow managing to garner one million dollars worth of free services for her startup, Avatar Buddy. Links to their episodes are here (and don't forget to subscribe to the podcast).

If you’re in business or advising business, could you answer the following questions I asked the audience of executives and government officials in Portugal?

• How are you integrating human rights considerations into your company's strategy and decision-making processes, particularly concerning the deployment and use of new technologies?

 

• Can you describe how your company's corporate governance structure accounts for human rights and ethical considerations, particularly with regards to the use and impact of emerging technologies?

 

• How are you planning to navigate the tension between increasing automation in your business operations and the potential for job displacement among your workforce?

 

• How does your company approach balancing the need for innovation and competitive advantage with the potential societal and human rights impact of technologies like facial recognition and surveillance?

 

• In what ways is your company actively taking steps to ensure that your supply chain, especially for tech components, is free from forced labor or other human rights abuses?

 

• As data becomes more valuable, how is your company ensuring ethical data collection and usage practices? Are these practices in line with both domestic and international human rights and privacy standards?

 

• What steps are you taking to ensure digital accessibility and inclusivity, thereby avoiding the risk of creating or enhancing digital divides?

 

• How is your company taking into account the potential environmental impacts of your technology, including e-waste and energy consumption, and what steps are being taken to mitigate these risks while promoting sustainable development?

 

• What financial incentives do you have in place to do the ”right thing” even if it’s much less profitable? What penalties do you have in place for the “wrong” behavior?

 

• Will governments come together to regulate or will the fate of humanity lie in the hands of A few large companies?

Luckily, we had cocktails right after I asked those questions.

Are you using generative AI like ChatGPT4 or another source in your business 0r practice? If you teach, are you integrating it into the classroom? I'd love to hear your thoughts. 

Fourth of July Learning Moment - Foundations of U.S. Business Law

The history of the present King of Great Britain is a history of repeated injuries and usurpations, all having in direct object the establishment of an absolute Tyranny over these States. To prove this, let Facts be submitted to a candid world.

 . . .

He has combined with others to subject us to a jurisdiction foreign to our constitution, and unacknowledged by our laws; giving his Assent to their Acts of pretended Legislation:

 . . . 

For cutting off our Trade with all parts of the world:

For imposing Taxes on us without our Consent:

 . . .

We, therefore, the Representatives of the United States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good people of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to . . . establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the Protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

Words from the Declaration of Independence that protected and catalyzed the development of the laws that I teach.  Of course, there is a lot more there than support for self-determined business laws.  Perhaps as a result, I rarely have paused to consider the importance of our Declaration of Independence to U.S. business law. 

Is the connection obvious?  Yes.  We all learn about the Boston Tea Party in school, and I worked downtown in the Government Center part of Boston for the better part of fifteen years at the beginning of my career--a constant reminder of that part of our history.  But, for me, the connection of the Declaration of Independence to business law has been all but ignored--or at least forgotten. 

Today, I am grateful for this part of the Declaration of Independence as well as the rest.  We do not always execute our lawmaking freedom perfectly, but our laws are ours.  And that's important.

Happy Fourth to all!

Trust in Business Associations: Fiduciary Duties

The University of Tennessee College of Law's business law journal, Transactions: The Tennessee Journal of Business Law, recently published my essay, "The Fiduciary-ness of Business Associations."  You can find the essay here.  This essay--or parts of it, anyway--has been rattling around in my brain for a bit.   It is nice on a project like this to be able to get the words out on a page and release all that tension building up inside as you fashion your approach.

The abstract for the essay is included below. 

This essay offers a window and perspective on recent fiduciary-related legislative developments in business entity law and identifies and reflects in limited part on related professional responsibility questions impacting lawyers advising business entities and their equity owners. In addition—and perhaps more pointedly—the essay offers commentary on legal change and the legislative process for state law business associations amendments in and outside the realm of fiduciary duties. To accomplish these purposes, the essay first provides a short description of the position of fiduciary duties in U.S. statutory business entity law and offers a brief account of 21st century business entity legislation that weakens the historically central role of fiduciary duties in unincorporated business associations. It then reflects on these changes as a matter of theory, policy, and practice before briefly summarizing and offering related reflections in concluding.

Although I always welcome thoughts on my work, I am especially interested in your thoughts on this essay. It relates to all three of my activities as a law professor--my scholarship, teaching, and service.  And I know that fiduciary duty waivers and opt-ins have different impacts in different business sectors . . . .  So, let me know what you think.

Ten Questions Lawyers Should Ask Themselves about AI

A few months ago, I asked whether people in the tech industry were the most powerful people in the world. This is part II of that post.

I posed that question after speaking at a tech conference in Lisbon sponsored by Microsoft. They asked me to touch on business and human rights and I presented the day after the company announced a ten billion dollar investment in OpenAI, the creator of ChatGPT. Back then, we were amazed at what ChatGPT 3.5 could do. Members of the audience were excited and terrified- and these were tech people. 

And that was before the explosion of ChatGPT4. 

I've since made a similar presentation about AI, surveillance, social media companies to law students, engineering students, and business people. In the last few weeks, over 10,000 people including Elon Musk, have called for a 6-month pause in AI training systems. If you don't trust Musk's judgment (and the other scientists and futurists), trust the "Godfather of AI," who recently quit Google so he could speak out on the dangers, even though Google has put out its own whitepaper on AI development. Watch the 60 Minutes interview with the CEO of Google.

Just yesterday, the White House held a summit with key AI stakeholders to talk about AI governance. 

Between AI-generated photos winning competitions, musicians creating songs simulating real artists' voices, students using generative AI to turn in essays that fool professors, and generative AI's ability to hallucinate (come up with completely wrong answers that look correct), what can we as lawyers do? Are our jobs at risk? Barrons has put out a list.  IBM has paused hiring because it believes it can gain efficiencies though AI.  Goldman Sachs has said that 300 million jobs might be affected by this technology. I'm at a conference for entrepreneurs and the CEO of a 100-million dollar company said that he has reassigned and is re-skilling 90% of his marketing team because he can use AI for most of what they do. 

Should we be excited or terrified? I've been stressing to lawyers and my students that we need to understand this technology to help develop the regulations around it as well to wrestle with the thorny legal and ethical issues that arise. Here are ten questions, courtesy of ChatGPT4, that lawyers should ask themselves:

1. Do I understand the basic principles and mechanics of AI, including machine learning, deep learning, and natural language processing, to make informed decisions about its use in my legal practice?
2. How can AI tools be used effectively and ethically to enhance my practice, whether in legal research, document review, contract drafting, or litigation support, while maintaining high professional standards?
3. Are the AI tools and technologies I use compliant with relevant data protection and privacy regulations, such as GDPR and CCPA, and do they adequately protect client confidentiality and sensitive information?
4. How can I ensure that the AI-driven tools I utilize are unbiased, transparent, and fair, and what steps can I take to mitigate potential algorithmic biases that may compromise the objectivity and fairness of my legal work?
5. How can I obtain and document informed consent from clients when using AI tools in my practice, ensuring that they understand the risks, benefits, and alternatives associated with these technologies?
6. What are the intellectual property implications of using AI, particularly concerning AI-generated content, inventions, and potential copyright or trademark issues that may arise?
7. How can I assess and manage potential liability and accountability issues stemming from the use of AI tools, including understanding the legal and ethical ramifications of AI-generated outputs in my practice?
8. How can I effectively explain and defend the use of AI-generated evidence, analysis, or insights in court, demonstrating the validity and reliability of the methods and results to judges and opposing counsel?
9. What measures should I implement to supervise and train my staff, including paralegals and support personnel, in the responsible use of AI tools, ensuring that ethical and professional standards are maintained throughout the practice?
10. How can I stay up-to-date with the latest advancements in AI technology and best practices, ensuring that I continue to adapt and evolve as a legal professional in an increasingly technology-driven world?

Do you use ChatGPT or any other other generative AI in your work? Can you answer these questions? I'll be talking about many of these issues at the Connecting the Threads symposium and would love to get your insights as I develop my paper. 

Why the Judge Was Right to Rule Against DeSantis' Stop WOKE Act

As much as I love being a professor, it can be hard. I’m not talking about the grading, keeping the attention of the TikTok generation, or helping students with the rising mental health challenges.

I mean that it’s hard to know what to say in a classroom. On the one hand, you want to make sure that students learn and understand the importance of critical thinking and disagreeing without being disagreeable.

On the other hand, you worry about whether a factual statement taken out of context or your interpretation of an issue could land you in the cross hairs of cancel culture without the benefit of any debate or discussion.

I’m not an obvious person who should be worried about this. Although I learned from some of the original proponents of critical race theory in law school, that’s not my area of expertise. I teach about ESG, corporate law, and compliance issues.

But I think about this dilemma when I talk about corporate responsibility and corporate speech on hot button issues. I especially think about it when I teach business and human rights, where there are topics that may be too controversial to teach because some issues are too close to home and for many students and faculty members, it’s difficult to see the other side. So I sometimes self censor.

My colleagues who teach in public universities in Florida had even more reason to self censor because of the Stop WOKE act, which had eight topics related to race, gender, critical race theory and other matters that the State deemed “noxious” or problematic.

Yesterday, a federal court issued a 139-page opinion calling the law “dystopian.” The court noted that Justice Sotomayor could violate the law by guest lecturing in a law school and reading from her biography where she talks about how she benefitted from affirmative action. That’s absurd.

I had the chance to give my views to the Washington Post yesterday. This law never personally affected me but as the court noted, the university is the original marketplace of ideas. I told the reporter that one of my areas of expertise, ESG, is full of the kinds of issues that the government of the State of Florida has issues with. I told him that I was glad that I worked at a private university because academic freedom makes me more comfortable to raise issues.  I noted that students need the ability to play devil's advocate and speak freely because there's no way to mold the next generation of thinkers and lawmakers without free speech. I explained that you can't write the laws if you're not willing to hear more than one point of view. 

I hope that we get back to the days when professors don’t self censor, whether there’s a law in place or not. Of course there are some statements that are unacceptable and should never be taught in a classroom.

But I worry that some in this generation don’t know the difference between controversial and contemptible. That goes for my friends of all ideologies.

I worry that some students are missing out on so much because our society doesn’t know how to engage in civil discourse about weighty topics. So people either rant or stay silent.

In any event, my rant is over.

Today is a day for celebration.

Congratulations to my colleagues in public universities.

Reason has won out.

Business Lawyers as "Financial Institutions"?

Earlier today, I received a communication from the American Bar Association's Governmental Affairs Office.  It was a request for action (as would often come from a government affairs office) relating to the ENABLERS Act amendment to the National Defense Authorization Act (NDAA).  The contents admittedly somewhat stunned me.  I include them in pertinent part below.

This . . . Senate amendment, like the similar amendment contained in the House-passed version of the NDAA, would regulate many business lawyers and law firms under the Bank Secrecy Act (BSA) and could require them to report a substantial amount of attorney-client privileged and other protected client information to the government.

The ENABLERS Act amendment, sponsored by Sen. Sheldon Whitehouse (D-RI), would change the BSA’s definition of “financial institution” to include lawyers and law firms that provide legal services to clients involving company formation, trust services, acquiring or disposing of interests in those entities, and many other specified financial activities. It would also require the Treasury Department to issue new regulations that could subject these lawyers and law firms to some or all of the BSA’s requirements for financial institutions. This could force you to submit Suspicious Activity Reports (SARs) on your clients’ financial transactions (without notifying the clients); identify and verify your clients’ accounts to the government; establish due diligence policies that could conflict with state supreme court rules; create costly and burdensome new anti-money laundering programs within your law firm; and undergo periodic or random audits to assess compliance. 

I have not been following this at all.  I wonder if any of you have been . . . .  Of course, the ostensible purpose is to combat money laundering--certainly a worthy goal.  But the incursion on the lawyer-client relationship, assuming the description above is accurate (and I am still wading into this, in all candor), does seem rather vast.  Please leave comments if you have thoughts to offer.  I am intrigued.

Why Transactional Lawyers Need to Educate Themselves on Compliance

Prior to joining academia, I served as a compliance officer for a Fortune 500 company and I continue to consult on compliance matters today. It's an ever changing field, which is why I'm glad so many students take my Compliance, Corporate Governance, and Sustainability course in the Fall. I tell them that if they do transactional or commercial litigation work, compliance issues will inevitably arise. Here are some examples: 

• In M&A deals, someone must look at the target's  bribery, money laundering, privacy, employment law, environmental, and other risks
• Companies have to complete several disclosures. How do you navigate the rules that conflict or overlap?
• What do institutional investors really care about? What's material when it relates to ESG issues?
• What training does the board need to ensure that they meet their fiduciary duties?
• How do you deal with cyberattacks and what are the legal and ethical issues related to paying ransomware?
• How do geopolitical factors affect the compliance program?
• Who can be liable for a compliance failure?
• What happens when people cut corners in a supply chain and how can that affect the company's legal risk?
• What does a Biden DOJ/SEC mean compared to the same offices under Trump?
• Who is your client when representing an organization with compliance failures?
• and so much more

I'm thrilled to be closing out the PLI Compliance and Ethics Essentials conference in New York with my co-panelist Ben Gruenstein of Cravath, Swaine, & Moore. It's no fun being the last set of presenters, but we do have the ethics credits, so please join us either in person or online on June 28th. Our areas of focus include:

• Risk assessment, program assessment, and attorney-client privilege
• Ethical obligations for lawyers and compliance officers
• Which compliance program communications can (and should) be privileged?

In addition to discussing the assigned issues, I also plan to arm the compliance officers with more information about the recent trend(?) of Caremark cases getting past the motion to dismiss stage and compliance lessons learned from the Elon Musk/Twitter/Tesla saga. 

Here's the description of the conference, but again, even if you're not in compliance, you'll be a better transactional lawyer from learning this area of the law. 

Compliance and ethics programs are critically important to the success of any organization. Effective programs allow organizations to identify and mitigate legal risks. With an increasingly tough enforcement environment, and greater demands for transparency and accountability, an effective compliance program is no longer just “nice-to-have.” It’s essential. 

Whether you are new to the area or a seasoned compliance professional, PLI’s program will give you the tools you need to improve your organization’s compliance program.  We will review the principal elements of compliance programs and discuss best practices and recent developments for each.  Our distinguished faculty, drawn from major corporations, academia, law firms and the government, can help you improve your program, increase employee awareness and decrease legal risk.  Compliance and Ethics Essentials 2022 is highly interactive and includes case studies, practical tools and real-time benchmarking.

What You Will Learn 

• Designing and conducting effective compliance risk assessments that enhance your program
• Structuring your program for appropriate independence and authority
• The evolving role of the board
• ESG and your compliance program
• Using data analytics to improve your program
• Encouraging reporting and investigating allegations of wrongdoing
• Best practices in compliance codes, communications, training and tools
• Ethics for compliance professionals

Who Should Attend

If you are involved in any aspect of corporate compliance and ethics as in-house counsel, a compliance and ethics officer, human resources executive, outside counsel, or risk management consultant, this event should be on your annual calendar.

Special Feature: Special luncheon presentation with guest speaker

If you do come to the conference, I would love to grab a cup of coffee with you, so reach out.

The Federalization of Corporate Governance - Heminway on Karmel

Last May, I posted on a wonderful two-day event--a symposium hosted over Zoom by Brooklyn Law School celebrating the career of Professor Roberta Karmel.  As I noted then, I was honored to be invited to speak at the event. It was so inspiring.

I have just posted the essay that I presented at the symposium, "Federalized Corporate Governance: The Dream of William O. Douglas as Sarbanes-Oxley Turns 20" (recently published by the Brooklyn Journal of Corporate, Financial & Commercial Law), on SSRN.  It can be found here. 

The roadmap paragraph from the essay's introduction offers a brief description of the essay's contents.

This essay focuses on the federalization of U.S. corporate governance since Sarbanes-Oxley—and, more specifically, since Roberta’s article was published in 2005 [Realizing the Dream of William O. Douglas — The Securities and Exchange Commission Takes Charge of Corporate Governance, 30 DEL. J. CORP. L. 79 (2005)]—pulling forward key aspects of Roberta’s work in Realizing the Dream. To accomplish this purpose, the essay first briefly reviews the contours of Roberta’s article. It then offers observations on corporate governance in the wake of (among other things) the public offering reforms adopted by the U.S. Securities and Exchange Commission (SEC) in 2005, the SEC’s 2010 adoption of Rule 14a-11, the 2010 enactment of the Dodd–Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), the 2012 enactment of the Jumpstart Our Business Startups Act (JOBS Act), and recent adoptions of corporate charter and bylaw provisions that constrain aspects of shareholder-initiated federal securities and derivative litigation. Finally, before briefly concluding, the essay provides brief insights on the overall implications for future corporate governance regulation of these and other occurrences since the publication of Realizing the Dream.

I found it great fun to build on the architecture of Roberta's earlier work in writing this piece.  Work on the essay allowed me to appreciate in new ways the many linkages between corporate governance and corporate finance--an appreciation that will no doubt continue to infuse my teaching with new ideas over time.  I hope some of you will take time out to read the essay and that you gain some insight from it.   Comments are, of course, always welcomed.

2022 Online Symposium – Mainstreet vs. Wallstreet: The Democratization of Investing Friday, March 4 12:30-3:30

2022 Online Symposium – Mainstreet vs. Wallstreet: The Democratization of Investing

I'm thrilled to moderate two panels this Friday and one features our rock star BLPB editor, Ben Edwards. 

                                                                     REGISTER HERE

The University of Miami Business Law Review is hosting its 2022 online symposium on Friday, March 4, 2022. The symposium will run from 12:30 PM to 3:30 PM. The symposium will be conducted via Zoom. Attendees can apply to receive CLE credits for attending this event—3.5 CLE credits have been approved by the Florida Bar. 

The symposium will host two sessions with expert panelists discussing the gamification of trading platforms and the growing popularity of aligning investments with personal values.

The panels will be moderated by Professor Marcia Narine Weldon, who is the director of the Transactional Skills Program, Faculty Coordinator of the Business Compliance & Sustainability Concentration, and a Lecturer in Law at the University of Miami School of Law.

Panel 1: Gamification of Trading 

This panel will focus on the role of social media and “gamification” of trading apps/platforms in democratizing investing, and the risks that such technology may influence investor behavior (i.e., increase in trading, higher risk trading strategies like options and margin use, etc.).

Gerri Walsh:

Gerri Walsh is Senior Vice President of Investor Education at the Financial Industry Regulatory Authority (FINRA). In this capacity, she is responsible for the development and operations of FINRA’s investor education program. She is also President of the FINRA Investor Education Foundation, where she manages the Foundation’s strategic initiatives to educate and protect investors and to benchmark and foster financial capability for all Americans, especially underserved audiences. Ms. Walsh was the founding executive sponsor of FINRA’s Military Community Employee Resource Group. She serves on the Advisory Council to the Stanford Center on Longevity and represents FINRA on IOSCO’s standing policy committee on retail investor education, the Jump$tart Coalition for Personal Financial Literacy, NASAA’s Senior Investor Advisory Council and the Wharton Pension Research Council.

Prior to joining FINRA in May 2006, Ms. Walsh was Deputy Director of the Securities and Exchange Commission’s Office of Investor Education and Assistance (OIEA) and, before that, Special Counsel to the Director of OIEA. She also served as a senior attorney in the SEC’s Division of Enforcement, investigating and prosecuting violators of the federal securities laws. Before that, she practiced law as an associate with Hogan Lovells in Washington, D.C.

Ari Bargil:

Ari Bargil is an attorney with the Institute for Justice. He joined IJ’s Miami Office in September of 2012, and litigates constitutional cases protecting economic liberty, property rights, school choice, and free speech in both federal and state courts.

In 2019, Ari successfully defended two of Florida’s most popular school choice programs, the McKay Program for Students with Disabilities and the Florida Tax Credit Program, before the Florida Supreme Court. As a direct result of the victory, over 120,000 students in Florida have access to scholarships that empower them to attend the schools of their choice.

Ari also regularly defends property owners battling aggressive zoning regulations and excessive fines in state and federal court nationwide and litigates on behalf of entrepreneurs in cutting-edge First Amendment cases. He was co-counsel in a federal appellate court victory vindicating the right of a Florida dairy creamery to tell the truth on its labels, and he is currently litigating in federal appellate court to secure a holistic health coach’s right to share advice about nutrition with her clients. In 2017, Ari was honored by the Daily Business Review as one of South Florida’s “Most Effective Lawyers.”

In addition to litigation, Ari regularly testifies before state and local legislative bodies and committees on issues ranging from occupational licensing to property rights regulation. Ari has also spearheaded several successful legislative campaigns in Florida, including the effort to legalize the sale of 64-ounce “growlers” by craft breweries and the Florida Legislature’s passage of the Right to Garden Act—a reform which made it unlawful for local governments to ban residential vegetable gardens throughout the state.

Ari’s work has been featured by USA Today, NPR, Fox News, Washington Post, Miami Herald, Dallas Morning News and other national and local publications.

Christine Lazaro:

Christine Lazaro is Director of the Securities Arbitration Clinic at St. John’s University School of Law. She joined the faculty at St. John’s in 2007 as the Clinic’s Supervising Attorney. She is also a faculty advisor for the Corporate and Securities Law Society.

Prior to joining the Securities Arbitration Clinic, Professor Lazaro was an associate at the boutique law firm of Davidson & Grannum, LLP.  At the firm, she represented broker-dealers and individual brokers in disputes with clients in both arbitration and mediation.  She also handled employment law cases and debt collection cases.  Professor Lazaro was the primary attorney in the firm’s area of practice that dealt with advising broker-dealers regarding investment contracts they had with various municipalities and government entities.  Professor Lazaro is also of Counsel to the Law Offices of Brent A. Burns, LLC, where she consults on securities arbitration and regulatory matters.

Professor Lazaro is a member of the New York State and the American Bar Associations, and the Public Investors Arbitration Bar Association (PIABA). Professor Lazaro is a past President of PIABA and is a member of the Board of Directors.  She is also a co-chair of PIABA’S Fiduciary Standards Committee, and is a member of the Executive, Legislation, Securities Law Seminar, and SRO Committees. Additionally, Professor Lazaro is the co-chair of the Securities Disputes Committee in the Dispute Resolution Section of the New York State Bar Association and serves on the FINRA Investor Issues Advisory Committee. 

Panel 2: ESG Investing

The second panel will address the growing popularity of ESG funds among investors that want to align their investments with their personal values, and the questions/concerns that arise with ESG funds, including: 1) explaining what they are; 2) discussing the varying definitions and disclosure issues; 3) exploring if investors really give up better market performance if they invest in funds that align with their values; and 4) asking if the increased interest in ESG funds affect corporate change? 

Thomas Riesenberg:

Mr. Riesenberg is Senior Regulatory Advisor to Ceres, working on climate change issues. He previously worked as an advisor to EY Global’s Office of Public Policy on ESG regulatory issues. Before that he worked as the Director of Legal and Regulatory Policy at The Sustainability Accounting Standards Board pursuant to a secondment from EY. At SASB he worked on a range of US and non-US policy matters for nearly seven years. He served for more than 20 years as counsel to EY, including as the Deputy General Counsel responsible for regulatory matters, primarily involving the SEC and the PCAOB. Previously he served for seven years as an Assistant General Counsel at the U.S. Securities and Exchange Commission where he handled court of appeals and Supreme Court cases involving issues such as insider trading, broker-dealer regulation, and financial fraud. While at the SEC he received the Manuel Cohen Outstanding Younger Lawyer Award for his work on significant enforcement cases. He also worked as a law clerk for a federal district court judge in Washington, D.C., as a litigator on environmental matters at the U.S. Department of Justice, and as an associate at a major Washington, D.C. law firm.

Mr. Riesenberg graduated from the New York University School of Law, where he was a member of the Law Review and a Root-Tilden Scholar (full-tuition scholarship). He received a bachelor’s degree from Oberlin College, where he graduated with honors and was elected to Phi Beta Kappa. He is a former chair of the Law and Accounting Committee of the American Bar Association, former president of the Association of SEC Alumni, former treasurer of the SEC Historical Society, and a current member of the Advisory Board of the BNA Securities Regulation and Law Report. For seven years he was an adjunct professor of securities law at the Georgetown University Law Center. He is an elected member of the American Law Institute. He serves on the boards of several nonprofit organizations, including the D.C. Jewish Community Relations Council and the Washington Tennis & Education Foundation. He is the author of numerous articles on securities law and ESG disclosure issues.

Benjamin Edwards:

Benjamin Edwards joined the faculty of the William S. Boyd School of Law at the University of Nevada, Las Vegas in 2017. In addition to being the Director of the Public Policy Clinic, he researches and writes about business and securities law, corporate governance, arbitration, and consumer protection. Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis.

Max Schatzow:

Max Schatzow is a co-founder and partner of RIA Lawyers LLC—a boutique law firm that focuses almost exclusively on representing investment advisers with legal and regulatory issues. Prior to RIA Lawyers, Max worked at Morgan Lewis representing some of the largest financial institutions in the United States and at another law firm where he represented investment advisers and broker-dealers. Max is a business-minded regulatory lawyer that always tries to put himself in the client’s position. He assists clients in all aspects of forming, registering, owning, and operating an investment adviser. He prides himself in preparing clients and their compliance programs to avert regulatory issues, but also assists clients through examinations and enforcement issues. In addition, Max assists advisers that manage private investment funds. In his little spare time, Max enjoys the Peloton (both stationary and road), golf, craft beer, and spending time with his wife and two children.