May 2014

Reuven S. Avi-Yonah recently posted Just Say No: Corporate Taxation and Corporate Social Responsibility.

He poses the question whether corporations are obligated to engage in strategic transactions solely for the purpose of avoiding taxes.  His conclusion is basically that under any theory of the firm – aggregate, real entity, or artificial entity – corporations have an affirmative obligation not to engage in overly-aggressive tax planning.

His thesis is attractive, though I’m not sure it’s entirely convincing.  He basically posits that taxes are the means by which we ensure a peaceful and civilized society, and no matter what theory of the firm one endorses, it is therefore proper for corporations to shoulder that burden.  The argument, however, would seem to encompass any form of strategic behavior – i.e., the argument would apply to all behaviors in which corporations can engage that evade the spirit of various regulations intended for the greater good of society.  If so, then it’s not clear that the argument gets us very far in terms of determining the legitimate boundaries of corporate behavior.

As of earlier this week, B Lab has now certified 1,000 entities as “certified B corporations.”

Given over 1 million entities in Delaware alone, coupled with the fact that B Lab seems willing to certify any type of entity, anywhere in the world, (if the company scores above an 80 on B Lab’s 200 point survey and pays a fee) 1,000 is a relatively small number. Every movement has to start somewhere, however.

As a side note, I have told a number of folks at B Lab that “certified B corporation” is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality.  I am guessing my fellow blogger Professor Josh Fershee would share my concern.   

The number of benefit corporations is more difficult to pin down, but is somewhere in the neighborhood of 400 (including public benefit corporations in Delaware and Colorado).

For the major differences between certified B corporations and benefit corporations, see here. Confusingly, both are sometimes called “B Corps.”

While the numbers are currently small, and I have critiques for some of the ways both the certified B corporation and…

1) I was not the only person who went to law school because I was terrified of math and accounting. Many of my students did too, which made teaching this required course much harder even after I explained to them how much accounting I actually had to understand as a litigator and in-house counsel.

2) I will always make class participation count toward the grade. Apparently paying tens of thousands of dollars a year for an education is not enough to make some students read their extremely expensive textbooks. A 20% class participation grade is a great incentive. Similarly, I will never allow laptops in the classroom. The subject matter is tough enough without the distraction of Instagram, Facebook and buying shoes on Zappos.

3) Students come to a required course with a wide range of backgrounds- some have never written a check and others have traded in stocks since they were teenagers and use Bitcoin. Teaching to the middle is essential.

4) As I suspected, when students are allowed to use an outline for an exam, they won’t study as hard or as thoroughly, and I will grade harder.

5) Never underestimate how little many students know about the…

Joe Leahy (South Texas) recently posted an early draft of an interesting article entitled Corporate Political Contributions as Bad Faith.  He would appreciate any comments readers care to share with him.  The abstract is included below:

A shareholder who files a derivative lawsuit to challenge a corporate political contribution faces long odds, particularly when the shareholder sues under traditional theories for breach of the duty of loyalty, such as waste or self-dealing. However, there is a better theory for a shareholder to employ when filing such a lawsuit: bad faith. Bad faith is a better basis for challenging a corporate political contribution than either waste or self-dealing because bad faith is a more flexible concept than self-dealing and a less difficult standard to satisfy than waste. Even if she intends no harm, a director acts in bad faith when she (1) takes official action that is motivated primarily by any reason other than advancing the corporation’s best interests or (2) consciously disregards her fiduciary duties.

This Article identifies several examples of political contributions – both real and hypothetical – that are ripe for challenge as bad faith because they are made for reasons other than advancing the corporation’s

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Before I went to law school, I worked in the video game industry, first for the industry trade association, the Interactive Digital Software Association (now known as the Entertainment Software Association). From there I moved to public relations for the public relations firm Golin/Harris in Los Angeles where my work was focused on product launches for Nintendo. (This was from 1998-2000.) In those jobs, I had the chance to work with some amazing people (and clients), and the experience has served me well, even as I went on to become a lawyer and professor. 

 One of those people was the managing director of the Los Angeles Golin/Harris office when I was hired, Fred Cook, who is now the CEO of Golin/Harris.  Fred recently wrote a book that has caught the attention of the business world and is a top-25 book for corporate customers according to 800-CEO-READ.   His book is Improvise: Unconventional Career Advice from an Unlikely CEO, and it’s worth a look.

Here’s an excerpt:

People entering the business world today are a commodity. They’ve gone to the same schools, taken the same courses, read the same books, and watched the same movies. Every summer they’ve

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In the comments to one of Anne Tucker’s earlier posts, I mentioned that Chris Bruner’s book Corporate Governance in the Common-Law World (2013 Cambridge University Press) was on my summer reading list.

Looks like I am a little late to the party.  Over at PrawfsBlawg, there is already a book club on Bruner’s book with a number of excellent posts, including a few by the author.  Maybe the book club inspired demand is one of the reasons I got a letter from Cambridge University Press yesterday letting me know that my copy of Bruner’s book was going to take longer to deliver than expected.

Looking forward to reading the actual book, but for now, the posts make interesting reading.   

The Supreme Court of Appeals of West Virginia recently had the opportunity to address the role (if any) of veil piercing in West Virginia LLCs.  The state statute is silent on the subject, but the court determined veil piercing was there, anyway.  It was close, though, as the West Virginia Circuit Court took on the following question with the corresponding answer: 

Does West Virginia’s version of the Uniform Limited Liability Company Act, codified at W. Va. Code § 31B el seq., afford complete protection to members of a limited liability company against a plaintiff seeking to pierce the corporate veil?

ANSWER: YES

 Kubican v. The Tavern, LLC, 2012 WL 8523515 (W.Va.Cir.Ct.)

Under West Virginia LLC law:

[T]he debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the company. A member or manager is not personally liable for a debt, obligation or liability of the company solely by reason of being or acting as a member or manager. . . . The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company

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Rule 10b-5(b) makes it unlawful to make false or misleading statements in connection with the purchase or sale of a security. In Janus Capital [Janus Capital Group, Inc. v. First Derivative Traders, — U.S. –, 131 S. Ct. 2296 (2011)], the Supreme Court limited the scope of 10b-5(b) by narrowly defining the term “make.” According to the court, a “maker” for purposes of 10b-5 liability “is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” One is not liable under Rule 10b-5(b) merely because one drafts or publishes a statement for someone else or even if, as in Janus, one posts that other person’s statement on one’s own web site.

Last week, in Prousalis v. Moore, a panel of the Fourth Circuit held that Janus applies only to private rights of action, not to criminal enforcement actions by the government. This interpretation of Janus is wrong. There’s no justifiable reason not to apply the Janus Capital interpretation in criminal cases.

The Fourth Circuit begins by pointing out that Janus involved a private right of action, not a criminal action and the court’s holding is therefore limited to…

In ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., the Supreme Court of Delaware upheld a fee-shifting provision in a non-stock corporation’s bylaws, providing that unsuccessful plaintiffs in intracorporate litigation would be required to pay the fees and costs of defendants.

The court was answering a certified question from the Third Circuit, and thus was careful to note that it was only answering the question in the abstract, and that any such bylaw would have to be tested in a particular instance to determine if it was equitable.  But the court agreed that the bylaw appropriately concerned the “business of the corporation, the conduct of its affairs,
and its rights or powers or the rights or powers of its stockholders, directors, officers or employees” as the DGCL requires, and therefore was within the power of the directors to adopt.  The court also held that the purpose to deter litigation was not, in the abstract, “improper,” such that the bylaw could be invalidated on that ground.

The court was careful to repeat that this was a “nonstock” corporation, but nothing in the opinion suggests that the outcome would be any different for a publicly-traded corporation.

I’ve…