December 2013

Happy New Year!  2014 holds much promise and many challenges.  One such item: a recent World Bank report (key findings pdf) finds some things we all probably suspected: 

The report finds that economies with greater numbers of restrictions on women’s work have, on average, lower female participation in the formal labor force and have fewer firms with female participation in ownership. Conversely, economies which provide a greater measure of incentives for women to work, have greater income equality.

Here’s hoping 2014 brings you all you seek.  More equality in the workplace, starting by removing legal barriers to gender equity, is high on my list.

Lyman Johnson, Robert O. Bently Professor of Law at Washington & Lee, has a new article out in the Delaware Journal of Corporate Law titled, Unsettledness in Delaware Corporate Law: Business Judgment Rule, Corporate Purpose.

Abstract:  This Article revisits two fundamental issues in corporate law. One — the central role of the business judgment rule in fiduciary litigation — involves a great deal of seemingly settled law, while the other — is there a mandated corporate purpose — has very little law. Using the emergent question of whether the business judgment rule should be used in analyzing officer and controlling shareholder fiduciary duties, the latter issue having recently been addressed by Chancellor Strine in the widely-heralded MFW decision, this Article proposes a fundamental rethinking of the rule’s analytical preeminence. For a variety of reasons, it is suggested that fiduciary duties should be made more prominent and the business judgment rule should be dramatically deemphasized. The policy rationales for the rule are sound, but they have no relevance for shareholders and introduce needless complexity. For directors, those rationales do not apply in the loyalty setting, and in the care setting, can be achieved by recalling simply that there is no substance to

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For those of you interested in crowdfunding and the new federal exemption for crowdfunded securities offerings, the University of Cincinnati College of Law is planning a symposium on crowdfunding, to be held on March 28. I and several leading crowdfunding scholars will be presenting papers, and those papers will eventually be published in the University of Cincinnati Law Review.

I will post more details when the official conference announcement is released.

Lucian A. Bebchuk & Allen Ferrell recently posted “Rethinking Basic” on SSRN.  Here is the abstract:

In the Halliburton case, the United States Supreme Court is expected to reconsider next spring the Basic ruling that, twenty-five years ago, adopted the fraud-on-the-market theory and has facilitated securities class action litigation. In this paper we seek to contribute to the expected reconsideration.

We show that, in contrast to claims made by the parties, the Justices need not assess, or reach conclusions regarding, the validity or scientific standing of the efficient market hypothesis; they need not, as it were, decide whether they find the view of Eugene Fama or Robert Shiller more persuasive. We explain that class-wide reliance should not depend on the “efficiency” of the market for the company’s security but on the existence of fraudulent distortion of the market price. Indeed, based on our review of the large body of research on market efficiency in financial economics, we show that, even fully accepting the views and evidence of efficiency critics such as Professor Shiller, it is possible for market prices to be distorted by fraudulent disclosures. Conversely, even fully accepting the views and evidence of market efficiency by…

Robert H. Sitkoff recently posted “An Economic Theory of Fiduciary Law” on SSRN.  Here is the abstract:

This chapter restates the economic theory of fiduciary law, making several fresh contributions. First, it elaborates on earlier work by clarifying the agency problem that is at the core of all fiduciary relationships. In consequence of this common economic structure, there is a common doctrinal structure that cuts across the application of fiduciary principles in different contexts. However, within this common structure, the particulars of fiduciary obligation vary in accordance with the particulars of the agency problem in the fiduciary relationship at issue. This point explains the purported elusiveness of fiduciary doctrine. It also explains why courts apply fiduciary law both categorically, such as to trustees and (legal) agents, as well as ad hoc to relationships involving a position of trust and confidence that gives rise to an agency problem.

Second, this chapter identifies a functional distinction between primary and subsidiary fiduciary rules. In all fiduciary relationships we find general duties of loyalty and care, typically phrased as standards, which proscribe conflicts of interest and prescribe an objective standard of care. But we also find specific subsidiary fiduciary duties, often…

Over at The Race to the Bottom Blog, Jay Brown has posted a 3-part series reviewing Klaassen v. Allegro Development, a case currently pending before the Delaware Supreme Court, which deals with the issue of how much notice a board is required to provide a CEO before firing him or her.  What follows are brief excepts from each of the three parts, but you should definitely follow the links for the full discussion if this material is of interest to you.

Part 1

Increasingly … governance cases involve disputes among directors.  What does a management friendly approach mean in that context?  Most likely, it means an approach that favors management directors (i.e., the CEO) over non-management directors, particularly independent directors…. This hypothesis provides an interesting template for a review of Klaassen v. Allegro Development.  The case essentially involved a dispute between a CEO and the non-management directors…. At a meeting held on Nov. 1, 2012, the board voted to remove the CEO [Klaassen].  Klaassen eventually filed suit challenging the dismissal…. The board in turn asserted that the actions were at most voidable and subject to equitable defenses.  They argued for, and the Chancery Court found applicable…

Once my son realized that the life of a lawyer bore no resemblance to the fun and games of Take Our Kids to Work Day, he quickly changed career paths. Now he’s applying to art and design schools to study visual arts, photography, and writing. Almost every school he wants to attend requires students to take a basic accounting course as a prerequisite for the Bachelors of Fine Arts degree. This led me to ask why law schools don’t require the same.

Two weeks ago I attended a local bar association luncheon during which several deans of Florida law schools informed the group of practicing lawyers and judges about the state of legal education. The deans also received an earful from the audience members about the kind of training they expect from the schools. More than one attorney bemoaned the lack of practical skills and business training from today’s law schools, which prompted one dean (not mine) to challenge the audience member’s hypothesis about the need for required courses beyond business associations. The dean asked why schools should force students to take additional courses if they want to litigate or do appeals. Some audience members disagreed with this response and…

This paper is a look back, but it seems appropriate for today. Happy holidays, all!  Who Owns the Christmas Trees? – The Disposition of Property Used by a Partnership, by Daniel S. Kleinberger.  Abstract: 

Abstract:      

Two partners form an enterprise. One (the K partner) supplies the assets used by the enterprise. The other partner (the L partner) supplies only labor. When the enterprise ends, the partners disagree about how to divide the property used in the partnership business. The K partner wants his or her property returned. The L partner wants his or her share of the business assets. If some of the property has appreciated while in partnership use, the dispute will be especially complicated. How do the partners divide the value of the property as originally brought into the business? Who benefits from the previously unrealized appreciation? 

This Article explores the property allocation issues that arise when the members of a K and L partnership lack a dispositive agreement. In such circumstances the default rules should provide clear guidance, and the Uniform Partnership Act (U.P.A.) seeks to do so. Unfortunately, many of the decided cases misapply or distort the U.P.A. As a body, the decided cases

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Here, Professor Bainbridge kindly asks for my thoughts on Keith Paul Bishop’s article Would Hobby Lobby Stores, Inc. Have A Stronger Case As A Flexible Purpose Corporation?   

I agree with Bishop’s conclusion that the question is still open.  Both the Flexible Purpose Corporation (“FPC“) and the Benefit Corporation version of social enterprise legal forms are quite new and each became available in California as of January 1, 2012.  The FPC is only available in California (though Washington state’s social purpose corporation is similar in many respects) and the Benefit Corporation legislation has passed in 20 U.S. jurisdictions (19 states and Washington D.C.), starting with Maryland in 2010.  As the name suggests, the FPC allows managers more flexibility in choosing their particular corporate purpose(s), whereas most of the Benefit Corporation statutes require a “general public benefit purpose” to benefit “society and the environment” when “taken as a whole” but also allow additional “specific public benefit purpose(s).”  Delaware’s version of the benefit corporation law (called a “public benefit  corporation”) requires the choosing of one or more specific public benefit purposes.  

Converting to an FPC or a Benefit Corporation, without more, likely would not be much help to…

My favorite Christmas movie is It’s a Wonderful Life. I have watched it at least 50 times, but the final scene never fails to bring a tear to the eye of this hopelessly sentimental romantic.

The basic premise, for those of you who have never seen the movie, is how much the good deeds we do affect those around us. George Bailey, on the brink of suicide, is shown by his guardian angel Clarence how Bedford Falls, George’s community, would have changed if George had never been born.

As much as I like the movie, I have always been a little bothered by its portrayal of Bailey’s nemesis, Henry F. Potter, played brilliantly by Lionel Barrymore. Potter is the personification of “heartless capitalism.” He mistreats people, eschews charity of any kind, and has only one goal in life: the accumulation of wealth. The idea of sacrificing profit to help others is foreign to him.

I wouldn’t want to be Potter and I wouldn’t want to work for Potter. But is the picture the movie paints totally fair to Potter or, more generally, to profit-seeking capitalism? The best way to answer the question is to ask same question the movie…