Photo of Benjamin P. Edwards

Benjamin P. Edwards

Subscribe to Benjamin P. Edwards's Posts

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

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…

The Wall Street Journal yesterday reported that oil and stocks are working together closer than they have in twenty-six years.

Oil and stock markets have moved in lockstep this year, a rare coupling that highlights fears about global economic growth.

As oil prices tumbled early in 2016, global equities recorded one of their worst-ever starts for a new year. On Monday, oil and stocks were lower again. The S&P 500 index was down 0.7% in midday New York trading, and Brent crude futures, the global benchmark, were down $1.37 a barrel, or 4.3%, to $30.81. That followed a joint rebound on Friday.

The correlation between the price of Brent and the S&P 500 stock index is at levels not seen in the past 26 years. January isn’t over yet, but over the past 20 trading days—an average month—the correlation is 0.97, higher than any calendar month since 1990 . . . .

And today, stocks rebounded with the 3.4% increased in the price of oil to $31.38 a barrel. And yeah, that’s still low.   

The correlation may not be a strong as reports indicate, though.  Some reports suggest that the correlation is not nearly as close as it seems. As…

Section 2 of the Sherman Act provides: 

Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.

The Washington Examiner, among other outlets, reports that President Obama and former Republican presidential candidate Mitt Romney are fighting a section 2 lawsuit together.  The lawsuit, filed by a group of  third-party political groups including the 2012 nominees for the Libertarian Party and the liberal Green Party, claims the Commission on Presidential Debates committed antitrust violations:

This action challenges a per se continuing illegal conspiracy or agreement between the RNC, the DNC, and the Commission, with the direction, assistance, and collusion, over the course of many years, of several co-conspirators and affiliated persons, including Fahrenkopf, McCurry, Obama, Romney, and other presidential candidates of the Republican and Democratic Parties. The conspiracy commenced prior to the

…

On Sunday, the world lost a musical giant in David Bowie, who died of cancer at 69.  He was the first artist who that made me a true music fan. Like buy all the records, read the biographies, hang-posters-on-the-wall type fan.  I grew up with a love for Motown music, especially Smokey Robinson, the Supremes, and the Four Tops, that I still have, but my appreciation for that music came from listening to my parent’s records.

When it came time to choose my own artists, other kids were into Led Zeppelin and Pink Floyd, but Bowie emerged as my guy.  He was later followed by bands like R.E.M., the English Beat, and The Cure, among others, as I moved into more of the college radio scene, and I really liked Joan Jett, but Bowie was always The Guy.  My fandom started with an album I poached from my aunt, Heroes.  I also got ahold of David Live (1974), and then worked my way back before going forward.  The Rise and Fall of Ziggy Stardust and the Spiders from Mars, Space Oddity, The Man Who Sold the World, Aladdin Sane, Diamond Dogs, and…