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Benjamin P. Edwards

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Benjamin Edwards joined the faculty of the William S. Boyd School of Law in 2017. He researches and writes about business and securities law, corporate governance, arbitration, and consumer protection.

Prior to teaching, Professor Edwards practiced as a securities litigator in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP. At Skadden, he represented clients in complex civil litigation, including securities class actions arising out of the Madoff Ponzi scheme and litigation arising out of the 2008 financial crisis. Read More

The end of the calendar year brings many things–among others: the holidays (and I hope you have enjoyed and are enjoying them), the release of the last Oscar-contender movies, and the publication of oh-so-many “top ten” lists.

Apropos of the last of those three, I admit to being a bit proud, in a perverse sort of way, about spotting a “top ten” and commenting on it here on the BLPB.  Back in May and June, I blogged about consumer litigation against Starbucks (my daughter’s employer) involving coffee–too much ice, too hot, etc.  Apparently, those types of legal actions are among the “Top Ten Most Ridiculous Lawsuits of 2016.”  Specifically, two of those lawsuits against Starbucks (the one for too much ice and another alleging too much steamed milk) are #1 on the list.  Another consumer suit takes the #2 spot–a legal action asserting that a lip balm manufacturer’s packaging is misleading (specifically, making customers beehive there is more product in the tube than there actually is).  I continue to maintain (while acknowledging that consumer class action litigation can be useful when employed in cases that present a true danger to the consuming public), as I noted…

In her post on Saturday, co-blogger Ann Lipton offered observations about possible legal issues resulting from the President-Elect’s tweets regarding public companies.  She ends her post with the following:

So, it’s all a bit unsettled. Let’s just say these and other novel legal questions regarding the Trump administration are sure to provide endless fodder for academic analysis in the coming years.

Probably right.

Today, I take on a somewhat related topic.  I briefly explore the President-Elect’s conflicting interests through the lens of a corporate law advisor.  For the past few weeks, the media (see, e.g., here and here and here) and many folks I know have been concerned about the potential for conflict between the President-Elect’s role as the POTUS, public investor and leader of the United States, and his role as “The Donald,” private investor and leader of the Trump corporate empire.

The existence of a conflicting interest in an action or transaction is not, in and of itself, fatal or even necessarily problematic.  In a number of common situations, fiduciaries have interests in both sides of a transaction.  For example, a business founder who serves as a corporate director and officer may lease property she owns to the corporation.  What matters under…

As part of my “scared straight” strategy for teaching insider trading, I like to tell my students horror stories of attorneys who have been caught up in scandals (as well as the collective *facepalm* reaction of the bar, which is as much due to the stupidity of the schemes as to their immorality).

Last year, I recounted the curious case of Robert Schulman and King Pharmaceuticals.

Schulman was an attorney representing King Pharmaceuticals, and he learned that the company would soon be acquired by Pfizer.  He told his friend and investment adviser, Tibor Klein, who promptly purchased King shares for himself and his clients (some of which were allocated to Schulman’s account).  All told, Klein generated about $328K in profits.

The SEC charged Klein with insider trading in 2013.  Interestingly, the SEC did not accuse Schulman of tipping; instead, the SEC’s theory was that Schulman had gotten tipsy at dinner and shot off at the mouth, ultimately blurting out, “It would be nice to be King for a day.”  (When I tell my students this part, I imagine how that might have been said – presumably, with an exaggerated  wink and heavy emphasis on the word “King”).  Klein, having been…

Many thanks to the Business Law Prof Blog for giving me the opportunity to post here.

I’d like to start off with a brief observation: corporations are more international than they have ever been.  Just in the last week, we have witnessed the European Commission ordering Apple to pay $14 billion in back taxes to Ireland, Samsung recalling its Galaxy Note phones from 10 countries due to battery fires in the devices, and Caterpillar announcing a global restructuring that could lead to the closing of its factory in Belgium in favor of a location in Grenoble, France.

While the globalization of international business today benefits society in a number of ways, it also has costs.  One of these costs is the increasing difficulty of regulating globalized companies.  When companies can easily restructure and relocate in order to avoid burdensome regulation, government regulators face a stark choice: they can pursue their policy priorities and risk causing companies to flee their jurisdiction (see the inversion craze of the last few years), or they can abandon those priorities in the hopes of attracting and retaining corporate business.  Neither of these is a particularly attractive option.

International cooperation provides one resolution to this…

    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…

    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…

    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).

 

My co-blogger Joan Heminway a short while back wrote a great article, The Ties That Bind: LLC Operating Agreements as Binding Commitments, 68 SMU L. Rev. 811 (2015). (symposium issue)

I often (and perhaps even usually) agree with Joan on issues of law and life, but there’s a spot in Joan’s article with which I disagree.  Joan says:

Although partnership law varies from state to state, as a general matter, partners are not expressly required to contract to form a partnership,88 and a partnership agreement is not defined in a manner that mandates adherence to the common law elements of a contract.89

  1. Under the Revised Uniform Partnership Act, a partnership exists when two or more persons associate as co-owners to carry on a business for profit. REVISED UNIFORM PARTNERSHIP ACT § 101(6), 202(a) (1997).
  2. See, e.g., Sewing v. Bowman, 371 S.W.3d 321, 332 (Tex. App.– Houston [1st Dist.] 2012, no pet.). The Revised Uniform Partnership Act provides the following definition for a partnership agreement: “the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.” REVISED UNIFORM PARTNERSHIP ACT § 101(7).

Joan has case law support, so at least in…

My home state in West Virginia is struggling.  The economy is struggling because two of the state’s main industries — coal and natural gas — are facing falling production (coal) and low prices (gas). Severance taxes for the state account for approximately 13% of the budget, and both are down dramatically. Tax revenues for the state were down $9.8 million in January from the prior year and came up $11.5 million short of estimates.  For the year-to-date, the state collected $2.29 billion, which is $169.5 million below estimates. Oddly enough, state sales and income taxes for January both exceeded estimates, but not enough to offset other stagnation in the state.  

The state has long been known as a coal state, and that industry has dominated the legal and political landscape.  West Virginia has been criticized for having a legal system that is “anti-business,” with the United States Chamber of Commerce finding stating that West Virginia is the 50th ranked state in terms of the fairness of its litigation. (See PDF here.) CNBC (with input from the National Association of Manufacturers) also ranked West Virginia last in terms of business competitiveness, so the starting point is not good.  

Now, the West Virginia legislature is considering the…

I have been giving a lot of thought to the idea of waiving the duty of loyalty in LLCs in Delaware.  The more I think about it, the more I am okay with the concept of allowing members of an LLC to decide to do away with the duty of loyalty when they form the entity.  Delaware, of course, retains the implied covenant of good faith and fair dealing in any contract, and I think parties to a contract should be able to decide the terms of their deal.  

Still, I am sympathetic to those who are concerned about eliminating the duty of loyalty because it does seem rather awful, and yet, I am also a proponent of freedom of contract.  How to reconcile these things?  Well, I am now of the mind that perhaps we need to bring a partnership principle to LLCs to help.  In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j).  I think changes to the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not…