June 2016

Back in May, I posted about a legal action against Starbucks for too much ice in its drinks.  I referenced in that post the earlier legal action taken against Starbucks for under-filling its latte drinks and against McDonald’s for damage done by hot coffee.  I can’t resist adding another hot coffee case to the mix . . . .

Another suit has been brought against Starbucks–my daughter’s employer (as I disclosed at the outset in my previous post).  This time, the case involves damage caused by hot coffee resulting from a bad drive-through pass-off.  The plaintiff requests up to $1 million “for medical expenses, loss of work, and for the mental and physical pain she claims the burning coffee caused her,” according to the news report.  The case involves second-degree burns–a serious matter in anyone’s eyes.  Depending on the facts elucidated at trial, this case may (like the McDonald’s case from 20+ years ago) have some traction in court.  (Apparently, there have been other Starbucks cases involving hot drinks.)

I do feel sorry for plaintiffs who are damaged by hot coffee or beverages.  These cases undoubtedly have more gravitas than cases alleging damages based on the amount of ice or beverage…

Former Delaware Chancellor William (Bill) Chandler and Elizabeth Hecker, a fellow lawyer at Wilson Sonsini Goodrich & Rosati presented on benefit corporations and Delaware law at the Berle VIII conference. I cannot fully communicate how exciting it was to hear a distillation of Delaware law generally and several opinions specifically from a judge involved in the cases.  In short: it was thrilling.

Former Chancellor Chandler discussed the Delaware case law interpretation of shareholder value and its place in analyzing corporate transactions.  While these aren’t words that he used, I have been thinking a lot about this tension as a question of complimenting or competing.  The simple message was that the “inc.” behind corporate names means something.  But the question, is what does that mean?  It signals, among other things, that a Delaware court will invalidate a board of directors’ other serving actions only if they are in conflict with shareholder value, but never when it is complimentary.   And there is a expanding appreciation of when “other interests” are seen as complimentary to, and not in competition with, shareholder value maximization.

Former Chancellor Chandler reminded us that shareholder value can include long term interests as the Delaware Chancery Court concluded in February…

    The doctrine of shareholder oppression protects minority stockholders in closely held corporations from the improper exercise of majority control. When a minority shareholder claims abuse at the hands of a majority investor, courts applying the oppression doctrine will subject the majority’s conduct to a considerable amount of scrutiny.  Approximately thirty-nine states have statutes providing for dissolution or other relief on the grounds of “oppressive actions” by “directors or those in control.”  See Douglas K. Moll & Robert A. Ragazzo, Closely Held Corporations § 7.01[D][1][b], at 7-69 n.192 (LexisNexis 2015).

    The factors that give rise to the oppression problem in the closely held corporation context are also present in the LLC setting.  See, e.g., Douglas K. Moll, Minority Oppression & the Limited Liability Company:  Learning (or Not) from Close Corporation History, 40 Wake Forest L. Rev. 883, 925-57 (2005).  Indeed, the same combination of “no exit” and majority rule—a combination that has left minority shareholders vulnerable in the closely held corporation for decades—exists in the LLC.  Despite these similarities, only nineteen states have LLC statutes providing for dissolution or other relief on the grounds of oppressive conduct or similar language.

    Why the difference?  Why do twice as many states…

SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, “Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability.” The full speech is available here.    

In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I’d turn those thoughts into an annotated version of the speech.  In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves.  Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals.  Here’s my initial take:   

I am still at Berle VIII with Haskell Murray and Anne Tucker.  One more day of my June Scholarship and Teaching Tour to go–and I have a final presentation to do.  Then, back to Knoxville to stay until late in July.  Whew!

As you may recall or know, my Berle appearance this week follows closely on the heels of a talk on the same work (on corporate purpose and litigation risk in publicly held U.S. benefit corporations) that I made at last week’s 2016 National Business Law Scholars conference.  While I am thinking about this conference, please join me in saving the date for the next one:  the 2017 National Business Law Scholars conference.  Next year’s conference will be held June 8-9 at The University of Utah S. J. Quinney College of Law, with Jeff Schwartz hosting.  I will post more information and the call for papers, etc. once I have it.

Section 11 imposes liability for false statements in registration statements.  See 15 U.S.C. §77k.  Section 11 is distinctive in that the plaintiffs do not have to show fault on the part of any defendants – a sharp contrast with Section 10(b), which requires plaintiffs to prove that the defendants acted with scienter.

When it comes to imposing liability on corporate auditors who approve false financial statements, very often, Section 11 is the only viable option for plaintiffs.  This is because it is very, very hard to show that auditors acted with scienter – especially at the pleading stage.  When a company blows up, typically a lot of information becomes available that would help the plaintiffs demonstrate that there was fault within the corporate ranks.  But it is far less typical for information to become available against the auditor.  So Section 11 is really the only way for plaintiffs to go.

In Querub v. Moore Stephens Hong Kong, 2016 U.S. App. LEXIS 9213 (2d Cir. N.Y. May 20, 2016) (unpublished), the Second Circuit held that for Section 11 purposes, audit opinions are “opinions” in the manner described in Omnicare, Inc. v. Laborers Dist. Council Constr. Indus. Pension Fund, 135…

Last fall, I posted some thoughts on the film Poverty Inc., which looked at the impact of foreign aid and business giving through programs like TOMS Shoes’ One for One initiative. 

Recently, I came across this discussion on Poverty Inc. by Bill Easterly (NYU Economics) and the film’s creators (Michael Matheson Miller and Mark Weber). I posted on one of Bill Easterly’s books here. 

In the discussion at NYU, I especially liked this quote from Michael Matheson Miller: “We tend to treat poor people as objects–as objects of our charity, objects of our pity, objects of our compassion.–instead of subjects…Poor people are not objects; they are subjects and they should be the protagonists in their own stories of development.” The personal story Mark Weber tells of his trip while he was studying at Notre Dame was moving, but you will have to watch the discussion to hear it, as it would be tough to summarize. Some of the audience questions are a bit long-winded, but I think the panel does a nice job deciphering and answering. 

The film’s trailer, the discussion, and the Q&A with the audience are all worth watching.

Film Trailer

Discussion

Q&A

My latest article on Cuba and the US is out. Here I explore corporate governance and compliance issues for US companies. In May, I made my third trip to Cuba in a year to do further research on rule of law and investor concerns for my current work in progress.

In the meantime, please feel free to email me your comments or thoughts at mnarine@stu.edu on my latest piece
Download Here

The abstract is below:

The list of companies exploring business opportunities in Cuba reads like a who’s who of household names- Starwood Hotels, Netflix, Jet Blue, Carnival, Google, and AirBnB are either conducting business or have publicly announced plans to do so now that the Obama administration has normalized relations with Cuba. The 1962 embargo and the 1996 Helm-Burton Act remain in place, but companies are preparing for or have already been taking advantage of the new legal exemptions that ban business with Cuba. Many firms, however, may not be focusing on the corporate governance and compliance challenges of doing business in Cuba. This Essay will briefly discuss the pitfalls related to doing business with state-owned enterprises like those in Cuba; the particular complexity of doing business in Cuba…

    Do partners in a general partnership owe a fiduciary duty of loyalty to one another?  “Of course!” you say.  “Everyone knows that.”  In one of the most famous passages in business organizations law, Justice Cardozo observed:

Joint adventurers, like copartners, owe to one another, while the enterprise continues, the duty of the finest loyalty.  Many forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties.  A trustee is held to something stricter than the morals of the market place.  Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behavior.  As to this there has developed a tradition that is unbending and inveterate.  Uncompromising rigidity has been the attitude of courts of equity when petitioned to undermine the rule of undivided loyalty by the ‘disintegrating erosion’ of particular exceptions.  Only thus has the level of conduct for fiduciaries been kept at a level higher than that trodden by the crowd.  It will not consciously be lowered by any judgment of this court.

Meinhard v. Salmon, 164 N.E. 545, 546 (N.Y. 1928).

    On its face, RUPA § 404 (1997) seems consistent with Meinhard…