June 2016

Today is the rare day where I feel like a professor.  Dressed in jeans and drinking coffee in my office, I have been reading Colin Mayer‘s book Firm Commitment in advance of the Berle VIII Symposium in Seattle next week (you can also see Haskell’s post & Joan’s post about Berle).  That’s not a typo, my agenda for the day is reading.  And not for a paper or to prep for class, I am just reading a book–cover to cover. I can hardly contain my joy at this.

I have been struck by the elegantly simple idea that corporations’ true benefit is to advance (and therefore) balance commitment and control.  I have long viewed the corporate binary as between accountability and control.  Under my framework the two are necessary to balance and contribute to the checks and balances within the corporate power puzzle of making the managers, who control the corporation, accountable to the shareholders.  Colin Mayer posits that the one directional accountability of the corporation to shareholders without reciprocity of commitment from the shareholders to the corporation is a corrosive element in corporate design.  

“The most significant source of failure is the therefore that we have created a system of

…

Last week, a federal court determined that an insurance disclosure that asked about an “applicant’s” criminal history did not apply to an LLC member’s individual criminal past.  In Jeb Stuart Auction Servs., LLC v. W. Am. Ins. Co., No. 4:14-CV-00047, 2016 WL 3365495, at *1 (W.D. Va. June 16, 2016), the court explained: 

“Question Eight” on the [insurance] application asked, “DURING THE LAST FIVE YEARS (TEN IN RI), HAS ANY APPLICANT BEEN INDICTED FOR OR CONVICTED OF ANY DEGREE OF THE CRIME OF FRAUD, BRIBERY, ARSON OR ANY OTHER ARSON-RELATED CRIME IN CONNECTION WITH THIS OR ANY OTHER PROPERTY?” Hiatt, on behalf of Jeb Stuart (who [sic] was the sole [LLC] applicant for the insurance policy), answered, “No.” Hiatt signed the application and left.

As you might imagine, Hiatt had been convicted of “hiring individuals to wreck cars so that he could receive the proceeds from the applicable insurance policies,” and, yep, about a month later, the building burned down.  Id. at *2.

The insurance company cancelled the policy because it claimed Hiatt had lied on the application, and Hiatt sued for the improper cancellation of the policy because he did not lie (he prevailed) and for attorneys fees claiming…

Having helped a few Tennessee bar applicants get straight on their knowledge of agency, unincorporated business associations, and personal property law last Friday at my BARBRI lecture (such a nice group present at the taping to keep me company!), it’s now time for me to wrap up my June Scholarship and Teaching Tour with a twofer–a week of travel to two of my favorite U.S. cities: Chicago, for the National Business Law Scholars Conference and Seattle for Berle VIII.  At both events, I will present my draft paper (still in process today, unfortunately) on publicly held benefit corporations, Corporate Purpose and Litigation Risk in Publicly Held U.S. Benefit Corporations.  Here’s the bird’s-eye view from the introduction:

Benefit corporations—corporations organized for the express purpose of realizing both financial wealth for shareholders and articulated social or environmental benefits—have taken the United States by storm. With Maryland passing the first benefit corporation statute in 2010, legislative growth of the form has been rapid. Currently, 31 states have passed benefit corporation statutes.

The proliferation of benefit corporation statutes and B Corp certifications can largely be attributed to the active promotional work of B Lab Company, a nonprofit corporation organized in 2006 under Pennsylvania law that…

As Rodney Tonkovic discusses in more detail, the plaintiff in Fried v. Stiefel Labs, 814 F.3d 1288 (11th Cir. 2016), has petitioned the Supreme Court to delineate disclosure duties in the context of trading by private companies.

Richard Fried was the former CFO of Stiefel Labs, which was privately held.  As an employee, he received stock as part of a pension plan.  When he retired, he sold the stock back to Stiefel (I don’t know much about the market for Stiefel stock, but I’m guessing that, since it was privately held, Fried didn’t think he had many alternative options).  Sadly for Fried, shortly after his sale, it was announced that Stiefel was being acquired by GlaxoSmithKline, and that negotiations had been in the works at the time of his sale.  By selling to Steifel instead of waiting for GSK’s acquisition, he missed out on, roughly, an additional $1.62 million.  He sued Stiefel, alleging that Stiefel had been obligated to disclose the negotiations to him at the time of his sale.

This is not something that comes up very often, but the case law that does exist tends to hold that insider trading principles apply both to private…

By now, I am sure all readers are aware of the horrific, hateful mass shooting that occurred in Orlando earlier this week.

If your social media feeds are anything like mine, it did not take long for politicians, pundits, and friends to politicize this tragedy. The tragedy was quickly used, by people all along the political spectrum, as evidence supporting their views on guns, religion, sexuality, and immigration. There is certainly a time and need for solutions, but there needs to be space to mourn. Orin Kerr (George Washington Law) summarized my thoughts well when he tweeted:

What could and should be done immediately after a tragedy? I am not entirely sure, but those who took steps to donate blood and financial resources should be commended.

Some local businesses also attempted to help. For example, it was reported that Chick-fil-A, which is famously closed on Sundays, cooked and gave away food to those waiting in line to donate blood. This is an admittedly small gesture, but at a time when our nation often seems hopelessly divided, I am thankful for…

On Wednesday, the EU finally outlined its position on conflict minerals. The proposed rule will affect approximately 900,000 businesses. As I have discussed here, these “name and shame” disclosure rules are premised on the theories that: 1) companies have duty to respect human rights by conducting due diligence in their supply chains; 2) companies that source minerals from conflict zones contribute financially to rebels or others that perpetuate human rights abuses; and 3) if consumers and other stakeholders know that companies source certain minerals from conflict zones they will change their buying habits or pressure companies to source elsewhere.

As stated in earlier blog posts, the US Dodd- Frank rule has been entangled in court battles for years and the legal wranglings are not over yet. Dodd-Frank Form SD filings were due on May 31st and it is too soon to tell whether there has been improvement over last year’s disclosures in which many companies indicated that the due diligence process posed significant difficulties.

I am skeptical about most human rights disclosure rules in general because they are a misguided effort to solve the root problem of business’ complicity with human rights abuses and assume that consumers care…

Three Business Law Prof Blog editors (myself included) are presenting at the upcoming Berle Symposium on June 27-28 in Seattle.

Colin Mayer (Oxford) is the keynote speaker, and I look forward to hearing him present again. I blogged on his book Firm Commitment after I heard him speak at Vanderbilt a few of years ago. The presenters also include former Chancellor Bill Chandler of the Delaware Court of Chancery. Given that Chancellor Chandler’s eBay v. Newmark decision is heavily cited in the benefit corporation debates, it will be quite valuable to have him among the contributors. The author of the Model Benefit Corporation Legislation, Bill Clark, will also be presenting; I have been at a number of conferences with Bill Clark and always appreciate his thoughts from the front lines. Finally, the list is packed with professors I know and admire, or have read their work and am looking forward to meeting. 

More information about the conference is available here.

Starting 2 weeks ago at Law & Society, I began participating in a series of conversations that can be boiled down to this:  Artificial Intelligence and the Law. Even the ABA is on to this story, which means it has reached a peak saturation point.  Exciting, scary, confusing, skeptical and a variety of other reactions have been thrown into the conversations across the legal studies gamut from algorithms in parole & criminal sentencing  to its use to generate social credit scores (thank you Nizan Packin for opening my eyes to this application).  In another LSA shout out, I want to highlight to forthcoming scholarship of Ben Edwards at Barry College where he criticizes the conflicts of interest in investment advise channels. One possible work around he explores is relying on robo-advisors:    In the few years since I have looked at digital investment advise, the field has changed, matured, grown!   So much so that FINRA has issued a report on digital investment advise, and is unsurprisingly skeptical of the technology application that poses a significant threat to its members (new release synopsis available here).   For the uninitiated, check out this run down of popular…

    Thanks to the BLPB for inviting me to guest blog!  I’m excited to be here.  I’ll probably write a few substantive posts to start out and finish up with some musings on teaching.

    Here’s a head scratcher:  interested director provisions have long been a part of corporation statutes, and they are making appearances in LLC statutes as well.  The statutes generally address transactions between a corporation and one or more of its directors (or between the corporation and another entity to which the director is affiliated) and provide a mechanism for cleansing the “stink” of the conflict of interest. 

    The fundamental problem with interested director transactions is that we do not trust the interested director to put the entity’s interests before his own.  Correspondingly, in such transactions there is a need to find a “trustworthy decisionmaker” to review the transaction with the entity’s interests in mind.  See, e.g., Franklin Gevurtz, Corporation Law § 4.2.1, at 325 (2000); Douglas K. Moll & Robert A. Ragazzo, Closely Held Corporations § 6.03[B][2][b], at 6-59 (LexisNexis 2015).  Interested director statutes in corporate law can be viewed as providing three trustworthy decisionmaker options:  disinterested directors, disinterested shareholders, or a court.  Section 144 of the Delaware General Corporation Law is fairly typical of such statutes:

§ 144 Interested directors; quorum.

(a) No contract or transaction between a corporation and 1 or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which 1 or more of its directors or officers, are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because any such director’s or officer’s votes are counted for such purpose, if:

(1) The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or

(2) The material facts as to the director’s or officer’s relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or

(3) The contract or transaction is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders.

(b) Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee which authorizes the contract or transaction.

    Although § 144(a)(2) does not explicitly indicate that a vote of disinterested shareholders is required, case law in Delaware has imposed a disinterested requirement.  See, e.g., Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987); In re Wheelabrator Technologies, Inc. S’holders Litig., 663 A.2d 1194, 1203 (Del. Ch. 1995).  If the purpose of the statute is to find a trustworthy decisionmaker—i.e., a decisionmaker lacking a conflict of interest in the transaction at issue—this disinterested requirement is eminently sensible.  Moreover, why require disinterested directors for director authorization, but permit interested shareholders for shareholder authorization?  After all, particularly in a closely held corporation, the interested directors are almost always significant shareholders.  If they are not to be trusted to bless the conflicted transaction at the director level, why trust them to bless the transaction at the shareholder level?  See also MBCA §§ 8.61(b)(2), 8.63(a) (requiring disinterested shares for shareholder authorization purposes).