Monday, December 31, 2018

Out with the Old; In with the New! Promoting Mental Health Awareness

I am finishing up the last of my grading (grades are due on Wednesday).  Nevertheless (or maybe for the purpose of grading avoidance), I have been determined all day to take a pause to reflect on 2018 and look forward to 2019.  For me (and perhaps for us all), 2018 was a year with both joys and sorrows; achievements and failures; ups and downs.  I admit that 2018's sorrows were more abundant than usual--or than I would have liked.  And so, I am primed to kick 2018 to the curb.  Ready or not, 2019 will be here in a few short hours.  I have much to look forward to in the coming year--a research leave, my son's wedding, and lots more that I know I am forgetting or do not even know about yet!

Among my more serious reflections and (dare I say it) resolutions heading into 2019 is self-care.  I am particularly mindful of the need for lawyers and lawyers-in-waiting (our students) to be aware of an attendant to their mental health.  A few days ago, The American Lawyer published an article entitled After a Year Marked by Tragedy, Attorney Mental Health Takes the Spotlight.  The article highlights industry-wide and organizational efforts to boost mental health awareness and support.  It also notes that "[l]aw school curricula and continuing legal education classes have already begun to take mental health into account . . . .  [P]eople throughout the industry are searching for concrete ways to address structural issues."  This article followed on many others this past year, including those here and here and here.

I applaud these institutional initiatives and publications.  We need more press about lawyer mental health.  And we must invest in and acquire the comprehensive tools that continuing education and workplace programs can provide.  I, for one, desire to know a lot more than I do about both lawyer mental health and lawyer substance abuse.  If you are knowledgeable in either area, please send links to resources along by email or post suggestions in the comments.

In my heart, however, I know that broad-based awareness and guidance on lawyer mental health, while necessary, is insufficient to the task.  I have come to the view that it would be meaningful if each of us could step back from the madness of life more than once in a while to assess not only our own well-being, but also the well-being of those around us.  An increased knowledge base is important to the task, but a heightened level of personal commitment also is required.  I will be working toward that commitment in 2019 and hope that some of you will join me.

Happy new year to all!  May you have a joyous and healthy 2019.

December 31, 2018 in Joan Heminway | Permalink | Comments (2)

Sunday, December 30, 2018

ICYMI: #corpgov Weekend Roundup (Dec. 30, 2018)

December 30, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, December 29, 2018

Strine and Wealth Maximization: Cracks in the Wall?

Chief Justice Leo Strine of the Delaware Supreme Court just posted a fascinating article/speech to SSRN, which was apparently delivered to the Institute for Corporate Governance & Finance in November.

The subject of the speech is the fiduciary obligation that mutual funds owe fund beneficiaries when voting their shares, and in particular, the funds’ failure – in Strine’s view – to adequately police portfolio companies’ political spending.

The general thesis is that investors in mutual funds benefit most when the economy does well by generating long-term, sustainable jobs, and he lauds the current trend of mutual funds’ willingness to second-guess corporate managers and vote for measures that promote long-term sustainability, including their increasing willingness to back shareholder-sponsored proposals on ESG measures.  As he puts it:

[I]nstitutional investors are not just getting involved in boardroom battles.  … [S]ome prominent mutual funds have now expressed the view that their portfolio companies should act with sufficient regard for the law and general social responsibility. That is, in the area of corporate social responsibility, the largest institutional investors seem to be evolving in a positive direction.

He laments, however, that funds’ willingness to buck management appears to stop when it comes to political spending:

In the key area of corporate political spending, the Big 4 have opted for a policy of total deference to management….  [T]he Big 4 generally will not even vote to require corporations to disclose what they spend on politics, leaving the Big 4 and others largely blind to what is going on… [T]o be fair, State Street has done far better, supporting a majority of these proposals over the years….

In his view, political spending indicates that the corporation is seeking to profit by short-term regulatory arbitrage rather than by long-term investment in better products and services that will pay off more over time:

If a business has to try to make money by influencing the political process, that suggests that its prospects for growth by developing improved products and services are not strong. Instead, the business apparently has to seek special favors to gain access to subsidies or government  contracts, not on the basis of the merits alone, but by currying favor…

He calls upon mutual funds to vote in favor of transparency regarding political spending, and even in favor of supermajority shareholder approval of political spending. 

So, this intrigues me for several reasons.

First, there is currently a fierce political battle being waged over the value of ESG proposals and whether mutual funds should vote in favor of them.  As I previously mentioned, this was a topic of discussion during the SEC’s recent proxy roundtable, and Phil Gramm in particular spoke emphatically against such proposals.  (He has also written, with Mike Solon, an op-ed against them).  Main Street Investors is, despite the name, a corporate group that has also been lobbying against such proposals and against mutual funds’ increasing tendency to support them.  Thus, it is surprising to see the Chief Justice stake out such a firm position in favor of ESG proposals.

But that’s not all.

The usual argument in favor of these proposals is that they are in fact long-term wealth maximizing, as String acknowledges.  But he also goes further and suggests that mutual funds should favor these proposals – and restrictions on political spending – even if they are not wealth maximizing in the corporate sense, out of respect for fund beneficiaries’ presumed shared interest in the safety of their jobs and the health of the environment.  As he puts it:

Worker Investors derive most of their income and most of their ability to accumulate wealth, from their status as laborers, not as capitalists. ….Unless American public companies generate well-paying jobs for Worker Investors to hold, Worker Investors will not prosper and be economically secure….

[F]or diversified investors any increased profitability by particular corporations that results from externalities is suffered by them both as Worker Investors and as human citizens who pay taxes, breathe air, and have values not synonymous with lucre.

The colder economic term externalities can be put in the more human terms of dirtier water and air, workers who suffer death or harm at an unsafe workplace, employees whose health care needs to be covered by the government or a spouse’s more responsible employer, or defrauded or injured consumers. All of them are costs that Worker Investors bear as taxpayers, human victims, and as diversified investors.  In other words, Worker Investors are not in on the swindle that results when an industry, think big tobacco, is able to make profits by shifting its costs of harm to others….

This is an extraordinary claim.  He is placing workers’ shared desire for certain basic living standards on par with the hypothetical shared desire of all investors to maximize returns, and claiming that mutual funds have a duty to advance those interests.

Now, he’s not the first to make this argument (Other examples here and here).  But I didn’t expect to hear it from Strine, and I have so many questions.

First, there is the issue of the factual basis for the argument.  Some of those workers presumably are employed with big tobacco, or big oil, or coal, or any of the other industries where the desire for good jobs (or even the desire for affordable transportation) and environmental sustainability conflict.  Shall we gloss over these distinctions (in the same way we do regarding the somewhat fictionalized concept of wealth maximization)?

Second, assuming he is correct, why is this a duty imposed on mutual funds and not the corporations directly?  Strine has been a vocal champion of directors’ duties of wealth maximization; is he saying that mutual funds should be voting for policies that directors’ own duties prohibit them from advancing?  I mean, obviously, the business judgment rule would prevent any kind of judicial second-guessing one way or another, but if we can talk theoretically about what mutual funds’ fiduciary duties require we can do the same for corporate directors.

Now, Strine (with co-author Nicholas Walter) has written before that if corporate political spending cannot constitutionally be constrained by regulation after Citizens United, then that suggests the shareholder wealth maximization norm must give way to a stakeholder theory of corporate obligation. (An argument that has also been made by others, including David Yosifon).  Previously, though, I took him to mean that Citizens United should be overruled; should we now take him to be inching toward a reformed view of corporate law? 

I obviously do not know whether anything more will come of this, but I look forward to future developments.

December 29, 2018 in Ann Lipton | Permalink | Comments (0)

Thursday, December 27, 2018

FINRA Seeking To Ban Non-Attorney Representatives (a/k/a NARs)

We now have some new developments on the non-attorney representative front.  After taking time to consider responses to its prior request for comments, FINRA's board has approved a new rule proposal to prohibit "compensated non-attorney representatives from practicing in the FINRA arbitration and mediation forum."  Once filed with the SEC, the proposed rule should be available here.


December 27, 2018 | Permalink | Comments (0)

Wednesday, December 26, 2018

ICYMI: #corpgov Midweek Roundup (Dec. 26, 2018)

December 26, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Tuesday, December 25, 2018

Merry Christmas. And some reminders

Merry Christmas to you and yours, if you’re celebrating. And if you’re not, love to you, anyway. 

A few reminders on Christmas:  LLCs are corporations. And the business judgment rule gives directors a lot of latitude. Or at least it should. Even if Delaware courts say dumb stuff from time to time. 

Love to all. 

December 25, 2018 | Permalink | Comments (0)

Monday, December 24, 2018

Voting Recommendations, Fiduciary Duties, and the Proxy Process

A few weeks ago, I posted on the SEC Roundtable on the Proxy Process (here).  I noted in a postscript to that post that friend-of-the-BLPB Bernie Sharfman had an additional comment letter (his fourth) relating to this regulatory project up his sleeve (so to speak).  That comment letter, dated December 17, 2018, was recently filed (see here) and focuses on voting recommendations.  The nub?

Investment advisers should not be in fear of breaching their fiduciary duties if they use board voting recommendations. . . . The SEC needs to go further than just approving the use of board voting recommendations as long as the investment adviser has an agreement with the client to use them. . . . [T]he SEC needs to explicitly state in some way that an investment adviser will not be in breach of its fiduciary duties under the Advisers Act if it uses board voting recommendations when voting its proxies.

To implement such a policy, this comment letter requests the SEC to provide investment advisers with a liability safe harbor under the Advisers Act when using board voting recommendations in voting their proxies as long as their clients do not prohibit their use and no significant business relationship exists between the investment adviser and the company whose shares are being voted. This will help ensure that the value inherent in board voting recommendations is reflected in the voting of proxies by investment advisers.

The entire letter is well worth a good read--and only 11 pages, at that.

But that's not all.

Bernie has taken thoughts from two of his four comment letters and combined and enhanced them in a recently posted article, Enhancing the Value of Shareholder Voting Recommendations.  The abstract of the article is set forth below.

This writing addresses a fundamental issue in corporate governance. If institutional investors such as investment advisers to mutual funds have a fiduciary duty to vote the shares of stock that they owned on behalf of their investors, then how do we practically achieve informing them on how to vote their proxies without requiring each institutional investor to read massive amounts of information on the hundreds or thousands of companies they have invested in for the thousands, tens of thousands, or even hundreds of thousands of votes they are confronted with each year?

A critical step in resolving this issue is maximizing the ability of institutional investors to avail themselves of voting recommendations that are made on an informed basis and with the expectation that they will lead to shareholder wealth maximization. One way to achieve this maximization is to make sure that the voting recommendations provided by proxy advisors are truly informed ones. This leads to the recommendation that the proxy advisor should be held to the standard of an information trader. Another way is for the SEC to recognize the value of board recommendations and explicitly state that their use will allow investment advisers to meet their fiduciary duties when voting their proxies.

As Bernie noted on LinkedIn when he posted a link to the article a few days ago, it is a present "[f]or those of you who are looking forward to reading articles on corporate governance during the Christmas break."  I, for one, am still focused on grading (we ended late this semester, and my exam was given on the last possible day--with one student taking it late because of illness) and on my daughter's birthday (today) and Christmas (tomorrow).  But I did take a peek at the article anyway.  It makes many nice points on relevant embedded legal issues and does draw together well Bernie's ideas on the interaction of the duties of proxy advisors and investment advisers.

Bernie is inviting comments.  I am sure he would appreciate yours.

December 24, 2018 in Corporate Governance, Joan Heminway, Securities Regulation | Permalink | Comments (0)

Sunday, December 23, 2018

ICYMI: #corpgov Weekend Roundup (Dec. 23, 2018)

December 23, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Saturday, December 22, 2018

Some Comments on the Recent BIS Quarterly Review

Earlier this week, the Bank for International Settlements – an international financial institution in Basel, Switzerland, created in 1930 and owned by 60 global central banks – released its Quarterly Review of international banking and financial market developments.  Several “special features” (articles) follow a sobering discussion of conditions in today’s global financial markets aptly titled: “Yet more bumps on the path to normal.”  In this post, I focus on the article, The growing footprint of EME banks in the international banking system (Growing Footprint), and comment upon its links to another, The geography of dollar funding of non-US banks (Dollar Funding) (note my admirable restraint in choosing not to discuss Clearing risks in OTC derivatives markets: the CCP-bank nexus).

Emerging market economy (EME) banks are much more on the move these days than advanced economy (AE) banks when it comes to growth in cross-border lending activity.  Indeed, the expanding footprint in the global banking system of banks headquartered in EMEs mirrors the increased contribution of EMEs to global GDP (now at 40%) and its growth (responsible for 2/3 in 2017).  Key takeaways from Growing Footprint are: 1) a greater amount of EME banks' cross-border lending to EMEs transpires through their foreign affiliate banks rather than their headquarters; 2) interconnections and interdependencies among firms in EMEs and these EME foreign affiliate banks are on the rise and, in many cases, these banks provide more than half of total cross-border loan amounts to such firms and, in some cases, provide total loan amounts surpassing 25% of the EME firm country’s GDP; and 3) significant cross-border interbank liabilities exist among EME banks, with institutions in larger EMEs being net borrowers on average from banks in smaller EMEs.      

Takeaway #1 presents a bit of a puzzle.  The pattern is actually the reverse in the case of advanced economy (AE) banks, whose cross-border lending to EMEs tends to be booked from their home office.  However, this difference disappears with cross-border borrowers in AEs, whose loans tend to be booked from a bank’s home office whether in an EME or AE.  Thoughts, Readers?    

Also notable is that EME banks extend the majority of cross-border dollar lending to non-banks in about 60% of the EMEs in Africa and Asia, and in about 50% of emerging European countries.  It is unclear to me whether this is long-term or short-term dollar borrowing.  However, either could be potentially problematic.  If long-term, adverse currency movements could impact a poorly-hedged borrower’s repayment ability.  If short-term, any future overseas dollar funding shortages such as happened in the financial crisis could impact global financial market stability.  Indeed, Dollar Funding reports that: “US dollar liabilities of non-US banks grew after the Great Financial Crisis (GFC). At end-June 2018, they stood at $12.8 trillion ($14.0 trillion including net off-balance sheet positions) – as large as at the peak of the GFC.”  And guess what?? The authors talk about their findings in a YouTube video (as a side note, I’d love more clips like this)! 

Most readers are likely aware of TARP, a $700 billion dollar U.S. government response to the 2008 financial crisis.  However, fewer are likely aware of the Federal Reserve’s central bank swap lines, which were used to lend $583 billion dollars to 14 foreign central banks during this period because of risks to global financial market stability due to overseas dollar funding shortages.  Legal academics have focused scant attention on this general area.  But with numbers like those reported in Dollar Funding, perhaps it’s time to reverse this trend.          

December 22, 2018 | Permalink | Comments (0)

Friday, December 21, 2018

Ipse Dixit - Legal Scholarship Podcast

If you are looking for podcasts over the break, I recommend Professor Brian Frye's Ipse Dixit. I have only listened to a handful of the 75 episodes, but I learned something new in each one.

A big thanks to Brian for putting all of these podcasts on legal scholarship together. The podcasts cover a wide range of legal topics, mostly in an interview format with other professors. 

December 21, 2018 in Current Affairs, Haskell Murray, Law School, Research/Scholarhip, Technology, Web/Tech | Permalink | Comments (1)

Call for Papers - Law and Entrepreneurship Association Retreat

Law and Entrepreneurship Association - Call for Papers


The 13th annual meeting of the Law and Entrepreneurship Association (LEA) will be held on April 5, 2019 at Boston College Law School.


The LEA is a group of legal scholars interested in the topic of entrepreneurship—broadly construed. Scholars include those who write about corporate law and finance, securities, intellectual property, labor and employment law, tax, and other fields related to entrepreneurship and innovation policy. Our annual meeting is an intimate gathering where each participant is expected to read and actively engage with all papers under discussion.

The theme for the meeting will be Unicorns and the Law. We seek papers addressing issues raised by the growing number of highly-valued private companies that are delaying IPOs.  One or more panels will be organized around this theme. Possible topics include disclosure requirements, unicorn valuation, regulation of private trading markets, the role of sovereign wealth funds and mutual funds as unicorn investors and governance issues including dual class capitalization, fraud, employee protection, employment discrimination, and compliance with law. We also welcome papers on other topics relevant to entrepreneurship. 

Proposals should be comprehensive enough to allow the LEA board to evaluate the aims and likely content of the papers they propose. Papers may be accepted for publication but must not be published prior to the meeting. Works in progress, even those at a relatively early stage, are welcome. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a proposal or paper, please email Professor Renee Jones at by January 4, 2019. Please include the subject line: “LEA Submission – {Name}.”

Boston College Law School is located in Newton, Massachusetts, with easy access to Boston Logan Airport and Downtown Boston. For additional information, please email Professor Renee Jones at


December 21, 2018 in Call for Papers | Permalink | Comments (0)

Thursday, December 20, 2018

Unpaid FINRA Arbitration Awards

The SEC Investor Advisory Committee met last week and considered how to respond to the unpaid arbitration awards problem.  This is an issue I've written about before.   As more outside attention has focused on the issue, FINRA has begun releasing statistics on how many arbitration awards go unpaid.  In 2017, about $25 million in awards went unpaid--amounting to roughly a third of the awards and a quarter of the total damages won.

The Investor Advisory Committee heard from an informed panel, taking statements from Christine Lazaro, President of the Public Investors Arbitration Bar Association (PIABA) and professor at St. John's School of Law, Jill Gross, a professor at Pace Law School, Richard Berry, the head of FINRA's dispute resolution group, and Robin Traxler, from the Financial Services Institute (also known as FSI).  There is also pending legislation on this issue from Senator Warren with Senator Kennedy on board as a bipartisan co-sponsor.

The issue matters for retirement savers swindled by bad brokers.  Professor Lazaro provided the committee with the stories of wronged investors, including the problem facing one retired couple:

Take for example the Sheas. The couple has been together for over 40 years. Mr. Shea started out with a dairy route in southern Illinois. After saving for about a decade, the couple purchased a dairy farm, which they operated for the next twenty years. Although they have given up the dairy part of the farm, they continue to grow crops. As you can imagine, the life of a farmer is not an easy one. The Sheas saved their money over time, and eventually accumulated about $1.5 million. As they approached retirement, they considered what to do with their life savings. Their broker, with the firm Windsor Street Capital, aggressively pursued the Sheas, eventually convincing them to invest with him. Within one year, the Sheas lost a significant portion of their savings. The broker traded their account for his own benefit, something commonly called churning. His trading resulted in annualized turnovers of between 10 and 38, far in excess of what would be considered reasonable (which is typically something between 0 on the low side and 6 on the extreme high side). Earlier this year, the Sheas were awarded over $1.3 million in compensatory damages, and $3 million in punitive damages after the arbitration hearing. Although the Sheas lost so much of their life savings, and the arbitration panel agreed that the firm engaged in misconduct, the Sheas have not recovered from the firm. And it is unlikely they will as the firm has shut down.

Stories like the Sheas are all too common.  Although the unpaid award statistics do not look good, the true scope of the problem is likely worse because most investors will not file an arbitration if the brokerage firm has already shut down.  Imagine that there were five different dairy farmer families all in the same situation.  The first one to file may generate the unpaid award.  The remaining four may decide not to spend what little they have left pursing an arbitration against an uncollectable brokerage.

My view is that FINRA should bear some financial responsibility for unpaid arbitration awards because it is a self-regulatory entity.  The theory behind self-regulation holds that the industry has an incentive to police itself and can do so more efficiently than traditional government.  Having the industry internalize the costs of wrongful behavior creates an incentive to more effectively self-police.  When arbitration awards go unpaid, the industry does not bear the costs of misconduct and lacks the right incentive to devote optimal resources to policing misconduct from its members. 

This doesn't mean that the industry should be required to pony up every penny for all awards. I'd feel comfortable putting some appropriate cap or limit on the amount and type of damages the industry could be liable for in the interest of financial stability.  It wouldn't make sense to hold the industry liable for a trillion dollars if one rogue arbitration panel awarded that amount.

Consider it from a different angle.  To some degree, FINRA has to sell its members on the need for enforcement and oversight resources.  After all, these members have a significant voice on FINRA's board and directly elect many of its members.  Even some of the appointed "public" representatives also serve on the boards of directors for other financial institutions that are FINRA members or have FINRA members as subsidiaries.  If these members end up, collectively, on the hook for misbehavior from the industry's bad apples, it creates an incentive to devote more resources to identifying and addressing problems at an earlier stage before they go on and cause problems for investors.  Without that incentive, larger players with better compliance programs may not care overmuch about misconduct happening elsewhere.  

It's wonderful to see the SEC's Investor Advisory Committee focused on this issue.  Hopefully we'll see a recommendation from them soon.


*Disclosure:  I'm on PIABA's board of directors.  I do not speak for the organization and write this in my personal capacity.

December 20, 2018 | Permalink | Comments (0)

Wednesday, December 19, 2018

ICYMI: #corpgov Midweek Roundup (Dec. 19, 2018)

December 19, 2018 in Stefan J. Padfield | Permalink | Comments (0)

Litigation limits, corporate governance, and securities law - a new hope


If you read this blog regularly, you know that one of my pet issues has been litigation limits in corporate charters and bylaws (examples here, here, and here).

The holy grail, for those who are in favor of these things, has been to insert clauses in corporate governance documents that would require all securities claims to be arbitrated on an individualized basis.  The expectation has been that, given the Supreme Court’s recent jurisprudence, such provisions would pass muster under federal law.

In 2015, Delaware amended the DGCL to prohibit the insertion of arbitration clauses in corporate governance documents.  But that statute explicitly applies only to “internal corporate claims,” Del. Code tit. 8, § 115, leaving open the possibility that it would not prohibit arbitration clauses that only govern federal securities claims.

One of the main stumbling blocks to that maneuver has been the SEC’s resistance – a resistance that recently has been crumbling.

The other stumbling block has been the possibility – which I’ve discussed repeatedly in blog posts, a law review article, and a book chapter (abstract only on SSRN; you have to buy the book for the rest!) – is that charters and bylaws can only govern internal affairs claims, and not external claims, including claims created by federal law.

The latter argument was finally tested in Delaware Chancery, but not in the context of arbitration.  Rather, several companies went public with charter or bylaw provisions requiring that all Section 11 claims be litigated in a federal forum.  That’s not arbitration, naturally, but it raises the same question whether charters and bylaws can govern federal securities claims.

The answer, according to Vice Chancellor Laster, is no.

I won’t quote the whole decision here, but I’ll just say, he has a lot of the same reasoning that I’ve previously laid out (and yes, he cited me, so, you know, yay! And it’s possible when the decision came down the first thing I did was a word search for my name LIKE YOU WOULDN’T DON’T JUDGE).

He also inferred – citing a blog post by Lawrence A. Hamermesh and Norman M. Monhait – that when Delaware enacted Section 115, the reason it limited the statute to “internal corporate claims” was because no one thought charters and bylaws could possibly extend any further.

I am assuming there will be an appeal (Laster also seemed to assume so at oral argument), but if his decision is affirmed, what next?

I’ve been thinking a lot about what a determined corporate advocate would do, and it seems to me there are two possibilities.

First, I could see an effort to persuade other states – Nevada being the most obvious candidate – that corporations organized in that state may limit federal securities claims in their governance documents.  My perspective, however, is that states can’t; any effort to do so would extend beyond the boundaries of internal affairs and the authority of chartering states.  Now, as many readers may be aware, California is already testing the boundaries of the internal affairs doctrine with its new statute requiring public companies with their principal place of business in that state to include women on their boards; it would be the height of irony if the constitutional limits of the internal affairs doctrine were tested not in that context, but in the context of litigation limits on federal securities claims.

Second, I can imagine an effort to bypass charters and bylaws entirely, and simply to insert into a registration statement some kind of declaration to the effect that “all purchasers agree that federal securities claims/Section 11 claims are subject to such-and-such limits.”  But that, of course, might be a bridge too far for the SEC, and even if it isn’t, I personally am unaware of any precedent for treating the registration statement as a “contract,” and thus there would be serious questions about whether purchasers could be bound in this manner.

Anything else I’m not thinking of?  Feel free to speculate in the comments.

In any event, this is clearly my beat, so stay tuned for further developments.

December 19, 2018 in Ann Lipton | Permalink | Comments (4)

The Relationship Between Fiduciary Duty and Trade Secret Law: I've Got Some Questions . . .

    As part of the duty of loyalty, a fiduciary of a company should not use confidential information belonging to the company for the fiduciary’s personal benefit.  See, e.g., Hollinger Intern., Inc. v. Black, 844 A.2d 1022, 1061 (Del. Ch. 2004).  In a recent Texas case, Super Starr Int’l, LLC v. Fresh Tex Produce, LLC, 531 S.W.3d 829 (Tex. App. 2017), a wrinkle on bringing such a breach of fiduciary duty claim was introduced -- at least to me. 

    In December 2010, Kenneth Alford, Lance Peterson, and David Peterson created Tex Starr Distributing, LLC (the “LLC”).  Under the Tex Starr operating agreement, Fresh Tex Produce, LLC (the “Distributor”) and Super Starr International, LLC (the “Importer”) were the LLC’s only members.  Lance Peterson was associated with the Importer.

    In October 2016, the Distributor filed an original petition and application for injunctive relief individually and derivatively on behalf of the LLC. The defendants were the Importer, Lance Peterson, and others.  Among other claims, the Distributor brought an action for breach of fiduciary duty and for violation of the Texas Uniform Trade Secrets Act (“TUTSA”).  The Distributor’s breach of fiduciary duty claim alleged:  “By diverting [the LLC's] accounts and business for [the Importer's] own benefit, by using confidential and proprietary information owned by [the LLC] against the interests of [the LLC], and by soliciting [the LLC's] accounts and employees, [the Importer] and [Lance Peterson] are engaging in serious breaches of their fiduciary duty to [the LLC]” (emphasis added).

    According to the court, the Distributor's breach of fiduciary duty claim duplicated its alleged violation of TUTSA.  Why does this matter?  Because, according to the court, TUTSA generally “displaces conflicting tort, restitutionary, and other law of this state providing civil remedies for misappropriation of a trade secret.” TEX. CIV. PRAC. & REM. CODE ANN. § 134A.007(a).  The court observed that “[w]here a claim is based on a misappropriation of a trade secret, then it is preempted by the Texas Uniform Trade Secrets Act.”  As a result, the court held that TUTSA’s preemption provision precluded the Distributor's breach of fiduciary duty claim from serving as a basis for temporary injunctive relief.

    I may be missing something, but this blows my mind.  First, not all confidential information rises to the level of a trade secret.  Does TUTSA preempt a breach of fiduciary duty claim for misappropriation of confidential information that does NOT constitute a trade secret?  I would assume no.  Second, what if the confidential information does rise to the level of a trade secret, but the plaintiff does not assert a TUTSA claim?  Does a breach of fiduciary duty claim survive?

    Finally, and most importantly, the preemption provision in the Texas statute (Civil Practice and Remedies Code § 134A.007) is nearly identical to § 7 of the Uniform Trade Secrets Act.  The comment to § 7 of the Uniform Act states, in part, the following:  “The Act also does not apply to a duty imposed by law that is not dependent upon the existence of competitively significant secret information, like an agent’s duty of loyalty to his or her principal.” 

    So . . . doesn’t that mean that even if the confidential information does rise to the level of a trade secret, a breach of fiduciary duty claim based on misappropriation of that information – i.e., a duty of loyalty claim that is imposed by law and that does not depend on the information qualifying as a trade secret – is NOT preempted by the Act?  I need to look into this further as I’m no trade secrets expert, but at the moment my head is spinning . . . .

December 19, 2018 | Permalink | Comments (1)

Tuesday, December 18, 2018

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

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

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

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

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

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

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

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


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

Monday, December 17, 2018

Women Are Undervalued

Women and underrepresented founders face a tremendous funding gap when compared to their male, and particularly white male, peers.   Consider just the 2016 statistics.   All-male firms raised $58.2 billion in venture capital funding while all-female firms raised only 1.46 billion.  The funding gap grows starker when we look at black-female-founded firms.  Startups founded by black women raised an average of $36,000.  In contrasts, white men pulled in an average of $1.3 million for business ventures that failed.  

Many people see how identity affects capital allocation.  Academic research has shown that otherwise identical pitches are more favorably received when voiced by a man.  Founders can see it and try to present themselves in ways that cater to investor preferences. Ann McGinley and I have written about the gap and the extraordinary measures founders take to contort themselves and their businesses to increase their access to capital. We even categorized relatively common techniques that founders use to raise capital.  We identified substitution as when a woman sends a man in her stead as a founder or co-founder because she believes that it's the right business decision to bypass investor bias.  We also identified something we called "manclusion" where a woman has to bring a bro to get that dough--essentially dragging men into meetings just because it makes the investors more manageable.

It seems as though everyone can see the problem.  Yet a new report from Morgan Stanley reveals that most investors still don't see the problem.  Their survey found that about "eight in ten investors say that multicultural and female entrepreneurs receive the right amount, or more, of capital than their business models deserve."  Morgan Stanley makes a business case for investing in women and underrepresented founders and highlights research showing that women-owned firms generate significantly more revenue than their all-male peers.  

Although market forces may cause smarter capital to flow toward women-owned businesses over time, slower shifts on this front may lead to lower overall economic efficiency and growth. As Ann and I highlighted, institutional investors may play a role in accelerating returns and broader economic equality by negotiating for commitments from venture capital firms to direct more capital to women-owned businesses.  The research on returns certainly supports targeting an increased allocation as consistent with an institutional allocator's fiduciary duties.  Setting targets for venture capital firms creates an incentive for investors to learn how to see past their blind spots and recognize value.

December 17, 2018 | Permalink | Comments (1)

New M&A Hornbook - Gevurtz & Sautter

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West Academic Publishing has just released a new mergers and acquisitions hornbook co-authored by dear friends and business law prof colleagues Frank Gevurtz and Christina Sautter.  I had known that the book was in the offing, but I just got a note from Frank on Saturday confirming its publication and availability.  Here is the synopsis from West:

Gevurtz & Sautter’s Hornbook on Mergers and Acquisitions provides a comprehensive exploration of this important topic. Written in a casual style designed to engage the reader, the book clarifies and critiques critical doctrine. In addition to covering corporate laws governing mergers and acquisitions, the book explores securities, tax, and antitrust laws, as well as addressing the business, financial, and practical lawyering aspects of mergers and acquisitions.

I know these two to be folks with solid backgrounds and interesting insights in this area.  I have requested my online review copy.  Perhaps some of you will want to do that, too.  And for those without that privilege who want this in their libraries, you can get it by clicking on the West Academic Publishing link at the beginning of this post or purchase it on Amazon here.

December 17, 2018 in Joan Heminway, M&A, Teaching | Permalink | Comments (0)

Sunday, December 16, 2018

End of the Semester Thoughts on Teaching Undergraduate Business Law

Having just finished another semester of teaching a course required of all University of Oklahoma undergraduate business majors, the Legal Environment of Business (an introduction to business law), I wanted to share a few thoughts about why I have really enjoyed teaching business law in a business school.

When I taught Banking and Financial Institutions Law and Regulation in a law school, I loved when a student commented that my excitement for the topic had sparked their interest in the subject matter too.  Of course, such students were already generally attracted to the study of law!  I now occasionally have the joy of hearing that my enthusiasm for business law has sparked an undergraduate student’s interest in going to law school (they’d better take Banking!), and the excitement of knowing that I’ve potentially helped the student decide upon a professional direction. 

Like my students, I’ve found the Legal Environment of Business course to be challenging.  Teaching this course has definitely furthered my growth as a teacher.  In thinking of how best to engage students in the subject matter, I’m always searching for creative pedagogical approaches.  I’ve constructed in-class games such as “Procedural Trivia,” in which student teams compete against each other to display their mastery of the civil procedure material, be named the “Most Triumphant” team, and awarded a bag of chocolates.  The winning team is then under pressure to retain its grandiose title when we play a second trivia game with contract material later in the semester. 

Into our study of Alternative Dispute Resolution (ADR), Administrative Law, Torts, and Contracts, I’ve managed to weave negotiation role play exercises from the Harvard Program on Negotiation.  Ever since I serendipitously became a teaching assistant for Professor Ken Shropshire’s Negotiation course during my doctoral studies in the Ethics and Legal Studies Program at Wharton, Negotiation has been a favorite course to teach.  Imagine students delighting in bargaining over the language for an administrative agency’s upcoming rule proposal with Negotiated Rulemaking for Electric Utilities or experiencing first-hand the differential emotional impact of using mediation versus arbitration to resolve typical tort claims such as those at issue in Broken Benches.   

Now, those familiar with my research might be thinking that the utility negotiation exercise is just a sneaky ploy to introduce financial market utilities to a captive audience. Not true!  Nevertheless, teaching Legal Environment of Business has definitely improved how I present my research.  It challenges me to explain complex topics to an audience with whom I can’t make any assumptions about a basic level of background legal knowledge (similar to some audiences in my research presentations).  For many undergraduates, taking this course is somewhat like taking a foreign language course. The daunting, initial task for many students is to learn a whole new vocabulary.  For the teacher, this means constantly defining and explaining terms and concepts with crystal clarity that from a self-referential perspective might appear to be commonplace. 

In closing, I’d love to hear from other business school professors about teaching the introductory business law course in your university.  I’d also like to encourage readers interested in teaching business law to consider the possibility of teaching in a business school, and to feel free to reach out to me with any questions. 

December 16, 2018 | Permalink | Comments (3)

ICYMI: #corpgov Weekend Roundup (Dec. 16, 2018)

December 16, 2018 in Stefan J. Padfield | Permalink | Comments (0)