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In a recent decision of the Tennessee Supreme Court, Keller v. Estate of Edward Stephen McRedmond, Tennessee adopted Delaware’s direct-versus-derivative litigation analysis from Tooley v. Donaldson, Lufkin, & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), displacing a previously applicable test (that from Hadden v. City of Gatlinburg, 746 S.W.2d 687 (Tenn. 1988)).  Although this is certainly significant, I also find the case interesting as an example of the way that a court treats different types of claims that can arise in typical corporate governance controversies (especially in small family and other closely held businesses).  This post covers both matters briefly.

The Keller case involves a family business eventually organized as a for-profit corporation under Tennessee law (“MBI”).  As is so often the case, after the children take over the business, a schism develops in the family that results in a deadlock under a pre-existing shareholders’ agreement.  A court-ordered dissolution follows, and after a bidding process in which each warring side of the family bids, the trustee contracts to sell the assets of MBI to members of one of the two family factions as the higher bidder.  These acquiring family members organize their own corporation to hold the transferred MBI assets (“New MBI”) and assign their rights under the MBI asset purchase agreement to New MBI

Prior to the closing, the losing bidder family member, Louie, then an officer and director of MBI who ran part of its business (its grease business), solicited customers and employees, starved the MBI grease business, diverted business opportunities from MBI’s grease business to a corporation he already had established (on the MBI property) to compete with MBI in that business sector, and engaged in other behavior disloyal to MBI.  Louie’s actions were alleged to have contravened a court order enforcing covenants in the MBI asset purchase agreement. They also were allegedly disloyal and constituted a breach of his fiduciary duty of loyalty to MBI.  Finally, they constituted an alleged interference with New MBI’s business relations.  

There are a number of short articles on benefit corporations in today’s issue of the ABA’s Business Law Today, including one on benefit corporation reporting by me.

My contribution is based on my 2015 West Virginia Law Review article, An Early Report on Benefit Reports, which showed under 10% compliance with benefit corporation reporting, noted problems with the statutory framework, and suggested statutory amendments.

Last week on the blog I featured the smart book Empire of the Fund by sharing excerpts from a conversation with author, Professor William Birdthistle.  In discussing the book, he shared with me some insights on writing a book:  its process, genesis and use in the classroom.  I am fascinated by other’s people writing process in the continual effort to improve my own.

writing a book…

[W]riting a book was more of a challenge than I expected, even though I told myself it was simply a collection of law review articles.  It turns out that the blinking cursor on an empty screen is more taunting when you’re obliged to fill hundreds of pages.  Brief stints of productivity need to be repeated again and again and, until it all exists, nothing really exists.  I developed a convoluted system of drafting notes, then sitting down with a research assistant to record a chat about those notes, then working that recording into an outline.  That process still left me with plenty of writing to do, but I found it much easier to expand, polish, and revise those outlines than to fight the demon blank page.

Talking through your ideas forces you to synthesize the materials. It also…

Robert Esposito (Drinker Biddle) passed along his firm’s interesting report on early crowdfunding offerings. The report is available here. Be sure to download the firm level detail spreadsheet available via the data download on the top right of the page.  

The report shows that social enterprise and breweries/distilleries account for outsized portions of the early offerings. A group of us (including co-blogger Joan Heminway) predicted, at the University of Colorado’s business school in July 2013, that social entrepreneurs would gravitate to equity crowdfunding. Separately, in my social enterprise law seminar, I was surprised by how many students presented on breweries that were social enterprises, and looking at this list it appears that there is at least one company (Hawaiian Ola Brewing Corporation – a Certified B Corporation) that falls into both the social enterprise and brewery categories highlighted below. It may be that both areas appeal to younger entrepreneurs who may also be eager to try this new form of capital raising. 

Go read the entire report, but I provide a teaser quote below the dotted line with some emphasis added.

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In general. As of June 30, 2016, 50 companies have filed a Form C with the SEC to offer securities…

Like Anne and Joan, I enjoyed the Berle Symposium and found it incredibly valuable. As they have mentioned, former Chancellor Chandler’s presentation was definitely a highlight, and it was affirming to hear Delaware law described as I understand it, if much more eloquently expressed than I have managed. Former Chancellor Chandler appeared to make clear that directors of Delaware firms could be at risk if they admit to taking an action that is not aimed at (eventually) meeting the short or long-term financial interests of shareholders.  

Former Chancellor Chandler’s description of Delaware law, both in the symposium and in his eBay case, coupled with the law review writings of Delaware Supreme Court Chief Justice Leo Strine, confirm, in my mind, that benefit corporations could be useful, at least in Delaware, for entrepreneurs who want to admit pursing strategies that are not aimed at benefiting shareholders in the short or long run. For example, I think some companies, like Patagonia, make decisions that benefit the environment, even though the directors may honestly believe that financial costs will far exceed financial benefits, even in the long-term. 

Interestingly, however, much of what I heard from the B Lab representatives at the symposium was…

Today, the following business law professor position at Pepperdine University’s Seaver College was brought to my attention. Further information is available here and below.

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Assistant Professor of Business Law

The business administration division of Pepperdine University seeks a candidate with a terminal degree in law for a tenure-track position in business law. Candidates are expected to complete all requirements for the JD before the date of appointment, which is August 1, 2017. A documented research interest in law is required and teaching experience is preferred. The expected courses taught would be undergraduate classes in business law and international business. The flexibility to teach occasionally in another field is preferred.

The business program at Seaver College, is accredited by The Association to Advance Collegiate Schools of Business (AACSB). USA Today ranked Seaver’s business program as the 7th best undergraduate business program in the country. We have approximately 775 undergraduate students in the Business Administration Division. Despite the large number of majors, our classes are small (rarely more than 25 students) and our faculty is collegial and collaborative. The division offers Bachelor of Science degree programs in accounting, business administration, and international business, and a contract major in finance. Degree programs…

Anne Tucker (who, together with Haskell Murray, me, and many others, attended the 8th Annual Berle Symposium in Seattle a week ago) penned an excellent post last week on the importance of shareholder value under Delaware law.  Her post covers important outtakes from the symposium presentation given by former Delaware Chancellor William (Bill) Chandler and Elizabeth Hecker, both lawyers in the Wilmington, Delaware office of Wilson Sonsini Goodrich & Rosati. In the post, Anne accurately and succinctly summarizes a key take-away from the former Chancellor’s remarks:

[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.

Specifically, as Anne’s summary indicates, Chancellor Chandler stated his view that a Delaware corporate board must place shareholder financial wealth (whether in the short term or the long term) ahead of any other value in its decision making.  This is hardly a surprise to anyone who follows Delaware corporate law judicial opinions (although the former Chancellor’s statement of the law was among the clearest and most definite I have heard).  After all, Chancellor Chandler’s opinion in the eBay case is widely cited for this proposition.

The Berle symposium focused on benefit corporations this year, and my draft paper for the symposium highlights the central importance of a corporation’s charter-based corporate purpose in that type of firm.  So, I asked the former Chancellor for his personal view on how a Delaware court might handle a specific type of corporate purpose clause in a non-benefit-corporation Delaware corporate law context.  The specific corporate purpose clause I had in mind is one that expresses a clear “second bottom line” (other than the promotion of shareholder value) and clearly indicates that neither bottom line is to be given constant or presumed precedence over the other in decisions made by the board of directors or the corporate officers.

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.

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…

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…