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Guest post by Daniel Kleinberger:

Part I – Introduction

My postings this week will seek to delineate Delaware’s implied contractual covenant of good faith and fair dealing and the covenant’s role in Delaware entity law

An obligation of good faith and fair dealing is implied in every common law contract and is codified in the Uniform Commercial Code (“U.C.C”). The terminology differs:  Some jurisdictions refer to an “implied covenant;” others to an “implied contractual obligation;” still others to an “implied duty.”  But whatever the label, the concept is understood by the vast majority of U.S. lawyers as a matter of commercial rather than entity law.  And, to the vast majority of corporate lawyers, “good faith” does not mean contract law but rather conjures up an important aspect of a corporate director’s duty of loyalty.

Nonetheless, Delaware’s “implied contractual covenant of good faith and fair dealing” has an increasingly clear and important role in Delaware “entity law” – i.e., the law of unincorporated business organizations (primarily limited liability companies and limited partnerships) as well as the law of corporations.

Because to the uninitiated “good faith” can be frustratingly polysemous, this first blog “clears away the underbrush” by explaining what Delaware’s…

Guest post by Jeffrey Lipshaw:

I’m honored to be asked to participate in this micro-symposium, and will (sort of) address the first two questions as I have restated them here.

  1. Does contract play a greater role in “uncorporate” structures than in otherwise comparable corporations and, more importantly, do I care?

                  Yes, as I’ll get to in #2, but indeed I probably don’t care. My friend and casebook co-author, the late great Larry Ribstein, was more than a scholar-analyst of the non- or “un-” corporate form; he was an enthusiastic advocate. It’s pretty clear that had to do with his faith in the long-term rationality of markets and their constituent actors and a concomitant distrust of regulatory intervention. Indeed, he argued the uncorporate form, based in contract, was more amenable than the regulatory-based corporate form to the creation of that most decidedly immeasurable quality, trust, and therefore the reduction of transaction costs. I confess I never quite understood the argument and tried to explain why, but only after Larry passed away, so I never got an answer. 

                  Unlike Larry (and a number of my fellow AALS Agency, Partnership, & LLC section members), I was never able to…

Last week I shared my thoughts on REI’s #OptOutside campaign and concluded that the campaign appeared, in my opinion, to be more of a marketing ploy than anything truly socially responsible. 

I promised to discuss what I think it takes to build a respected socially responsible brand.

In my opinion, respected socially responsible brands are: (1) Authentic; (2) Humble; and (3) Consistent. 

These three work together. Authenticity comes, at least in part, from not over-claiming (also seen in humility) and from showing social responsibility in many areas over time (consistency). Authenticity with regard to social responsibility requires some serious sacrifice, at least in the short term. Humble companies admit their imperfections, work to right wrongs, and seek to improve. Building a socially responsible brand takes time, often decades.  As Warren Buffett supposedly said, “It takes 20 years to build a reputation and 5 minutes to ruin it.”

Patagonia’s “Don’t Buy This Jacket” campaign was probably one of the best socially responsible advertising campaigns I have seen. This campaign seemed authentic because of Patagonia’s consistent history of social responsibility and because it seemed clear that Patagonia was going to take a serious financial hit from this campaign. Patagonia’s add was also…

Just a quick report from the 2015 ABA LLC Institute, an annual event held in the fall in Washington, DC that attracts anally compulsive (and I do mean that in the most positive way possible) business lawyers (academics and practitioners) interested in limited liability companies (LLCs) and other alternative business entities.  The agenda for this year’s program is full of nifty stuff and great presenters (present company excepted).  Co-blogger Josh Fershee would love the LLC Institute.  No one here confuses the LLC with the corporation!  (I will just link to one of Josh’s fabulous posts on that topic as a reference point.)

For this year’s institute, I chaired a panel on dissolution in the LLC and also participated in a panel that explored just what an LLC operating agreement really is.  I was wowed in each case by my co-paneleists.  Because the norm at this conference is to interrupt the panelists and comment on their presentations as they speak, the discourse was engaged and lively.

I will save my comments on the operating agreement panel for next week’s micro-symposium.  Today, I want to briefly cover highlights from  the dissolution panel.  Specifically, we focused a lot of attention on the evolution of dissolution events under the uniform and prototype LLC acts and various state LLC statutes since the adoption of the federal income tax “check the box” rules.  There’s more in and related to that topic than you might think . . . .

Next week, the BLPB is hosting a micro-symposium organized by the AALS section on Agency, Partnership, LLCs, and Unincorporated Associations.  Confirmed participants include Joan MacLeod Heminway (BLPB editor), Dan Kleinberger, Jeff Lipshaw, Mohsen Manesh, and Sandra Miller.

The micro-symposium will explore the role of private ordering in LLCs and other alternative business entities, a broad topic that encompasses many interesting questions:

(1) To what extent, and in what ways, does contract play a greater role in LLCs and LPs than in otherwise comparable corporations? Is it helpful to conceptualize private ordering in this context as contractual?

(2) Does unfettered private ordering reliably advance the interests of even the most sophisticated parties? Does it waste judicial resources? In their book chapter, The Siren Song of Unlimited Contractual Freedom, two distinguished Delaware jurists, Chief Justice Leo Strine and Vice Chancellor J. Travis Laster, raise these concerns and argue in favor of more standardized fiduciary default rules. 

(3) Should the law impose fiduciary duties of loyalty and care as safeguards against abuse of the unobservable discretion managers enjoy because those duties reflect widely held social norms that most investors would expect to govern the conduct of managers?

(4) If…

REI recently announced that they will close their stores on the busiest day in retail, Black Friday. They are encouraging their customers and employees to spend time outside. REI is also paying their employees on Black Friday even though their stores will be closed.

At first, I was proud of REI for this move; Black Friday can be materialism at its worst. 

But I think REI made a poor strategic move by over-promoting this announcement and buying numerous social media advertisements for their #OptOutside campaign. REI’s self-congratulatory ads have been following me around the internet for the past few days. 

Advertising about your social responsibility is really difficult to do well.

Convincing customers that you are socially responsible through advertising is like trying to convince your friends you are generous through social media posts. Both are likely to backfire. As Wharton professor Adam Grant recently wrote, you shouldn’t say “I’m a giver;” that determination is for others to make.

In my opinion, praise of a company’s socially responsible behavior should come primarily from its stakeholders. REI received plenty of third-party press regarding their announcement (see, e.g., here, here, and here), but their self-promotion…

The Georgia Attorney General’s (AG) office is trying to make the case that the Georgia Pipeline Act does not allow any entity other than a corporation to use the statute’s eminent domain power.  Palmetto Pipeline is seeking a certificate for authorization to use that power, provided in GA Code § 22-3-82 (2014): 

(a) Subject to the provisions and restrictions of this article, pipeline companies are granted the right to acquire property or interests in property by eminent domain for the construction, reconstruction, operation, and maintenance of pipelines in this state . . . .

The state AG has argued that a pipeline company must be a corporation, and thus a limited liability company (LLC)  cannot use the statutory power.  The AG is right.  In the Pipeline Act’s definitions section, it provides, at GA Code § 22-3-81 (2014), 

As used in this article:

. . . .

(2) “Pipeline company” means a corporation organized under the laws of this state or which is organized under the laws of another state and is authorized to do business in this state and which is specifically authorized by its charter or articles of incorporation to construct and operate pipelines for the

…

Pat Haden is the athletic director at the University of Southern California. Until Friday, he was also a member of the College Football Playoff selection committee. And, according to this story in the L.A. Times, he is also a director of at least nine non-profits or foundations and three businesses.

According to the Times, Haden spends an average of 70 hours a week on his U.S.C. job. As a playoff selection committee member, he was expected to spend countless hours watching football games and evaluating teams.

So where does he find the time to serve as a board member? Not a problem, according to Haden. He has “never been to one meeting” of some of the nonprofits he serves. And he spends “very little” time on his board positions.

Haden’s attitude is representative of an earlier era when outside directors merely showed up at meetings and nodded their head to whatever the chairman said. Those days are long gone. Today, board members are expected to spend much more time on their board duties, at the risk of liability if they don’t.

Mr. Haden, a former Rhodes Scholar, is a very bright guy, but even bright guys can say…

I teach both Civil Procedure and Business Associations. As a former defense-side commercial and employment litigator, I teach civ pro as a strategy class. I tell my students that unfortunately (and cynically), the facts don’t really matter. As my civil procedure professor Arthur Miller drilled into my head 25 ago, if you have procedure on your side, you will win every time regardless of the facts. Last week I taught the seminal but somewhat inscrutable Iqbal and Twombly cases, which make it harder for plaintiffs to survive a motion to dismiss and to get their day in court. In some ways, it can deny access to justice if the plaintiff does not have the funds or the will to re-file properly. Next semester I will teach Transnational Business and Human Rights, which touches on access to justice for aggrieved stakeholders who seek redress from multinationals. The facts in those cases are literally a matter of life and death but after the Kiobel case, which started off as a business and human rights case but turned into a jurisdictional case at the Supreme Court, civil procedure once again “triumphed” and the doors to U.S. courthouses closed a bit tighter for litigants. …

Jill Fisch (Penn) recently posted an essay entitled The Mess at Morgan: Risk, Incentives and Shareholder Empowerment.

The entire essay is worth reading, but I think her argument can be summed up with this quote: 

This essay argues that the effort to employ shareholders as agents of public values and, thereby, to inculcate corporate decisions with an increased public responsibility is misguided. The incorporation of publicness into corporate governance mistakenly assumes that shareholders’ interests are aligned with those of non-shareholder stakeholders. Because this alignment is imperfect, corporate governance is a poor tool for addressing the role of the corporation as a public actor. (pg. 651)

Jill Fisch argues that economic regulation may be a better solution to the problem of protecting the public than shareholder empowerment. (pg. 684).

While I acknowledge the essay’s mentioned limitations on shareholder empowerment, I don’t think economic regulation is the only alternative solution to the problem of protecting public values. As Jill Fisch notes “shareholder empowerment might be defended on the basis that it is less intrusive than direct regulation.” Corporate governance mechanisms other than shareholder empowerment may be both less intrusive and more effective than direct regulation. For example, (non-shareholder) stakeholder empowerment may…