October 2020

Earlier this week, VC Laster issued his decision in United Food & Commercial Workers Union v. Zuckerberg.  Professor Stephen Bainbridge blogged about the decision here, with a lot more detailed discussion of the law than I’m going to provide, but I’m covering the same territory anyway because this case is an interesting example of the pathologies associated with the common law.

So, before stockholder plaintiffs are permitted to bring a derivative action on behalf of a corporation, they must first make a showing that the corporate board is too conflicted to be able to make the litigation decision themselves.  This may occur because board members are themselves at risk of liability regarding the underlying transaction being challenged, or because they are too close to someone who is.  The test was first articulated by the Delaware Supreme Court in Aronson v. Lewis, 473 A.2d 805 (Del. 1984), but because this was a common law creation and the court was mostly focused on the dispute in front of it, the test it articulated conflated the general inquiry – is the board able to be objective about the litigation – with the specific application of that inquiry to the Aronson…

The courts have interpreted Section 10b of the Securities and Exchange Act as prohibiting insiders from trading in their own company’s shares only if they do so “on the basis of” material nonpublic information. This element of scienter for insider trading liability is sometimes tricky for regulators and prosecutors to satisfy because insiders who possess material nonpublic information at the time of their trade will often claim they did not use that information. The insider may claim that her true motives for trading were entirely innocent (e.g., to diversify her portfolio, to pay a large tax bill, or to buy a new house or boat). Such lawful bases for trading can be easy for insiders to manufacture and are often difficult for regulators and prosecutors to disprove.

Historically, the SEC and prosecutors sought to overcome this challenge by taking the position that knowing possession of material nonpublic information while trading is sufficient to satisfy the “on the basis of” test. This strategy met mixed results before the courts, with some circuits holding that proof of scienter under Section 10b requires proof that the trader actually used the inside information in making the trade.

Facing a circuit split, the SEC attempted…

The North American Securities Administrators Association (NASAA) recently released a new report aimed at “identify a baseline of broker-dealer (“BD”) and investment adviser (“IA”) firm policies, procedures, and practices involving sales to retail investors, as those policies, procedures, and practices existed in 2018 prior to adoption and release of the final rule by the SEC (the “pre-BI period”).”  NASAA will do a second look later to see how Regulation Best Interest changes sales patterns.  My early prediction:  not much.

As it stands, some of the differences between the BD channel and the IA channel are shocking.  You’re nine times as likely to get sold a non-traded REIT by a BD than by an IA.  Across the board, BDs load investors up with riskier, complex products:

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This doesn’t surprise me.  Many of these complex products pay massive commissions to the brokers who sell them.  Unsurprisingly, they tend to get sold more often through that channel.  The IA channel compensates advisers differently and they lack the same incentive to get their clients into variable annuities and other complex, illiquid products.

Looking forward, if Regulation Best Interest has some meaningful effect, we would expect these numbers to change in some significant way.  I…

The University of Wisconsin Law School is looking to hire in the areas of Business/Corporate Law, among other closely related areas. We invite applications for faculty position at the rank of Assistant, Associate or Full Professor of Law beginning academic year 2021-2022. We seek entry-level and lateral candidates who show scholarly promise, as evidenced by publications, works in progress, or a research agenda. Applicants should have relevant experience such as teaching, legal practice, or a judicial clerkship. Hiring rank will be commensurate with years of relevant experience. All candidates must have proven success in conducting research or publishing papers in high-impact journals, and teaching appropriate to their stage of career. The University of Wisconsin is an Equal Opportunity and Affirmative Action Employer. We promote excellence through diversity and encourage all qualified individuals to apply. 

 

The complete PVL is available here: https://jobs.hr.wisc.edu/en-us/job/505740/assistant-associate-or-full-professor-of-law

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I have written about the American Bar Association Limited Liability Institute in this space before.  See, e.g., here, here, here, here, and here.  The 2020 LLC Institute is being hosted virtually and begins next Friday–something to look forward to at the end of election week!  This ABA program is always a premier event, and it is the only national annual program that focuses in exclusively on LLCs and unincorporated business associations.

Importantly, this year’s institute is free to law students.  I have recommended registration and attendance to mine.  Click here for more information, including the agenda, list of speakers (including yours truly!), and registration.

If one is going to ignore entity distinctions, I supposed one may as well go all in.  Following is from an opinion issued last week that involves Christeyns Laundry Technology, LLC (“Christeyns”), which is a limited liability company.  The opinion, though, asserts: 

Selective is a New Jersey corporation with its principal place of business in New Jersey. [Docket No. 1-1, ¶ 2.] Christeyns is a Limited Liability Corporation with two partners: Christeyns Holding, Inc., and Rudi Moors. [Docket No. 25, at 14, ¶ 7.] Christeyns Holding, Inc., is a Delaware corporation with its principal place of business in East Bridgewater, Massachusetts. [Id. at 14, ¶ 8.] Rudi Moors is a resident of South-Easton, Massachusetts. [Id. at 14, ¶ 9.] The remaining parties’ claims arise out of a common nucleus of operative fact.

SELECTIVE INSURANCE COMPANY OF AMERICA, Plaintiff, v. CHRISTEYNS LAUNDRY TECHNOLOGY, LLC, et al., Defendants. Additional Party Names: Clean Green Textile Servs., LLC, Lavatec Laundry Tech., Inc., Single Source Laundry Sol., No. CV1911723RMBAMD, 2020 WL 6194015, at *3 n.2 (D.N.J. Oct. 22, 2020) (emphasis added).

We have already established that an LLC is a limited liability company, and not a corporation. And while the opinion seems to track…

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The NYU Pollack Center for Law & Business, Indiana University Maurer School of Law, and Securities and Exchange Commission Historical Society invite you to a virtual program entitled “Insider Trading: Honoring the Past｜A Program Commemorating the 40th Anniversary of Chiarella v. United States,” which will take place on Thursday, November 5th from 10am-noon Eastern Time.

The program will explore the fascinating backstories of the Chiarella prosecution and the Supreme Court argument as well as the SEC’s and DOJ’s insider trading enforcement strategies in the wake of the Court’s ruling. The Chiarella case is also the subject of Donna Nagy’s recent essay, Chiarella v. United States and its Indelible Impact on Insider Trading Law.

A webinar link will be circulated to all those who RSVP, which you can do here. Conference details and schedule are below.

Conference Organizers:

Stephen Choi, Murray and Kathleen Bring Professor of Law, NYU School of Law, Co-Director Pollack Center for Law and Business
Donna M. Nagy, C. Ben Dutton Professor of Law, Indiana University Maurer School of Law
Jane Cobb, Executive Director, SEC Historical Society

Schedule:

10:00am Welcome by Stephen Choi, Murray and Kathleen Bring Professor of Law, NYU School of…

Although my UT Law colleague Greg Stein is perhaps most well known for his work in the area of real estate law (development, finance, land use, etc.–see his SSRN page here), of late, he has been focusing increased attention on issues at the intersection of technological innovation and economic enterprise.  I have been interested in and engaged by this new twist to his research, thinking, and writing.  This post promotes two works he has completed that occupy this scholarly space, the first of which was recently published in the Brooklyn Law Review and the second of which is forthcoming in the Florida State University Law Review.

The Brooklyn Law Review piece is entitled “Inequality in the Sharing Economy.”  The SSRN abstract follows.

The rise of the sharing economy benefits consumers and providers alike. Consumers can access a wider range of goods and services on an as-needed basis and no longer need to own a smaller number of costly assets that sit unused most of the time. Providers can engage in profitable short-term ventures, working on their own schedule and enjoying many new opportunities to supplement their income.

Sharing economy platforms often employ dynamic pricing, which means…

This week, I’m plugging a new piece I posted to SSRN, forthcoming as a chapter in Research Handbook on Corporate Purpose and Personhood (Elizabeth Pollman & Robert Thompson eds., Elgar). It actually includes a lot of the arguments/observations I’ve previously made in this space, but if you want them compiled in a handy chapter, here’s the abstract:

ESG Investing, or, If You Can’t Beat ‘Em, Join ‘Em

If corporate purpose debates concern whether corporations should operate solely to benefit their shareholders, or if instead they should operate to benefit the community as a whole, “ESG” – or, investing based on “environmental, social, and governance” factors – occupies a middle ground. Its adherents welcome shareholder power within the corporate form and accept that shareholders are the central objects of corporate concern, but argue that shareholders themselves should encourage corporations to operate with due regard for the protection of nonshareholder constituencies. This Chapter, prepared for the Research Handbook on Corporate Purpose and Personhood, will explore the theory behind ESG, as well as the barriers to its implementation.

Professor Dan Kleinberger and I have recently published a short article in the Business Law Today entitled “The Limited Effect of ‘Maximum Effect.'” The executive summary of the piece is that more than 20 jurisdictions have followed Delaware rather than the Uniform Law Commission in giving “maximum effect” to the principle of freedom of contract in LLC arrangements.  You may wonder, “Exactly how effective has the construct of ‘maximum effect’ been?”  Our answer is “not very.”

If you’re interested in reading beyond the executive summary, you can find the article here:  https://businesslawtoday.org/2020/08/limited-effect-maximum-effect/