Business Associations

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Earlier this week I went to a really useful workshop conducted by the Venture Law Project and David Salmon entitled “Key Legal Docs Every Entrepreneur Needs.” I decided to attend because I wanted to make sure that I’m on target with what I am teaching in Business Associations, and because I am on the pro bono list to assist small businesses. I am sure that the entrepreneurs learned quite a bit because I surely did, especially from the questions that the audience members asked. My best moment, though was when a speaker asked who knew the term “right of first refusal” and the only two people who raised their hands were yours truly and my former law student, who turned to me and gave me the thumbs up.

Their list of the “key” documents is below:

1)   Operating Agreement (for an LLC)– the checklist included identity, economics, capital structure, management, transfer restrictions, consent for approval of amendments, and miscellaneous.

2)   NDA– Salmon advised that asking for an NDA was often considered a “rookie mistake” and that venture capitalists will often refuse to sign them. I have heard this from a number of legal advisors over the past few…

Yesterday, Prof. Bainbridge annotated my “creed” on corporate governance, and I appreciated his take. In fact, many of his chosen sources would have been mine.

In a later footnote, he noted that he was not sure what I meant by my statement: “I believe that public companies should be able to plan like private companies . . . .” I thought I’d try to explain. 

My intent there was to address my perception that there is a prevailing view that private companies and public companies must be run differently.  Although there are different disclosure laws and other regulations for such entities that can impact operations, I’m speaking here about the relationship between shareholders and directors when I’m referencing how public and private companies plan. 

Public companies generally have far more shareholders than private companies, so the goals and expectations of those shareholders will likely be more diverse than in a private entity. Therefore, a public entity may need to keep multiple constituencies happy in a way many private companies do not.  However, that is still about shareholder wishes, and not the public or private nature of the entity itself.  A private company with twenty shareholders could crate similar…

Plenty of valuable information was shared today at Vanderbilt’s 17th annual law & business conference, including remarks from Elisse Walter (former-SEC Chairman), Jim Cox (Duke), Bob Thompson (Georgetown), Amanda Rose (Vanderbilt), and others.

The most immediately useful information, however, might be the fact that SEC Commissioner Dan Gallagher, our luncheon speaker, is on Twitter. In academic and other circles, Commissioner Gallagher garnered a great deal of attention due to his controversial article co-authored with Joseph Grundfest (Stanford) entitled “Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors.”

Below is a recent Tweet from Commissioner Gallagher for those who would like to follow him.

Vanderbilt

After teaching my early morning classes, I will spend the rest of the day at Vanderbilt Law School for their Developing Areas of Capital Market and Federal Securities Regulation Conference.

This is Vanderbilt’s 17th Annual Law and Business Conference and they have quite the impressive lineup, including Commissioner Daniel Gallagher, Jr. of the U.S. Securities and Exchange Commission. 

I am grateful to the Vanderbilt faculty members who invited me to this event and others like it. Vanderbilt is only about 1 mile from Belmont and I have truly enjoyed getting to know some of the Vanderbilt faculty members and their guest speakers.

Below is a call for papers and description of a weeklong project on business and human rights. If you are interested, please contact one of the organizers below. I plan to participate and may also be able to answer some questions.

Lat Crit Study Space Project in Guatemala

Corporations, the State, and the Rule of Law

We are excited to invite you to participate in an exciting Study Space Project in Guatemala. Study Space, a LatCrit, Inc. initiative, is a series of intensive workshops, held at diverse locations around the world. This 2015 Study Space project involves a 7 working day field visit to Guatemala between Saturday June 27 (arrival date) and Saturday July 4, 2015 (departure date).  We are reaching out to you because we believe that your interests, scholarship, and service record align well with the proposed focus of our trip.

This call for papers proposes a trip to Guatemala to study more closely the phenomena of failed nations viewed from the perspective of the relationship of the state of Guatemala with corporations. With the recent surge of Central American unaccompanied minors and children fleeing with their mothers, the United States has had to confront the human face…

Last week, I wrote sports and the problems that could arise from a myopic focus on winning.

I promised to attempt to tie that post to business this week, but because I am running to a lunch meeting and then to the Belmont v. Virginia NCAA tournament basketball game viewing party, I am going to keep this short.

(Also, please indulge a little more bragging about my school. Before the game even begins, I am already incredibly proud of our basketball team. Belmont won the academic bracket for the NCAA tournament teams this year, which is based on academic measures like Academic Progress Rate (APR) and Graduation Success Rate (GSR)).

Anyway, I think there are a number of parallels between sports and business. Sports, done the right way, can teach many valuable lessons, such as the importance of teamwork, diligence, unselfishness, strategy, preparation, etc. In fact, team sport participation was one of the things I looked for when interviewing for law students when I was in practice and it is something I look for now when interviewing research assistants. 

As mentioned in last week’s post, sports can lead participants off-track if there is a myopic focus on winning that…

Etsy

The biggest recent news in the social enterprise world is that certified B corporation Etsy is going public.

Despite confusing press releases, Etsy is not legally formed as a benefit corporation, they are only certified by B Lab. (In one of the coolest comments I have received blogging, an Etsy representative admitted that they confused the “benefit corporation” and “certified B corporation” terms and corrected their public statements). If you are new to social enterprise, the differences between a “certified B corporation” and a “benefit corporation” are explained here.  

Etsy, however, will face a dilemma as noted in this article sent to me by Alicia Plerhoples (Georgetown). The B Lab terms for certified B corporations require Etsy to convert to a public benefit corporation (Delaware’s version of the benefit corporation) within four years of the Delaware law becoming effective. Delaware’s public benefit corporation law went effective August 1, 2013.

So, unless B Lab changes its terms, Etsy will lose its certified B corporation status if it does not convert to a public benefit corporation on or before August 1, 2017.

Given that converting to a public benefit corporation while publicly-traded would be extremely difficult–obtaining the necessary…

Prof. Bainbridge yesterday posted about The Modern Corporation Statement on Company Law.  The statement has ten fundamental rules, of which number ten is:

Contrary to widespread belief, corporate directors generally are not under a legal obligation to maximise profits for their shareholders. This is reflected in the acceptance in nearly all jurisdictions of some version of the business judgment rule, under which disinterested and informed directors have the discretion to act in what they believe to be in the best long term interests of the company as a separate entity, even if this does not entail seeking to maximise short-term shareholder value. Where directors pursue the latter goal, it is usually a product not of legal obligation, but of the pressures imposed on them by financial markets, activist shareholders, the threat of a hostile takeover and/or stock-based compensation schemes.

Prof. Bainbridge is with Delaware Chief Justice Strine in that profit maximization is the only role (or at least only filter) for board members.  As he asserts, “The relationship between the shareholder wealth maximization norm and the business judgment rule, . . . explains why the business judgment rule is consistent with the director’s “legal obligation to maximise profits for…

One of my pet peeves when I was in practice was working with junior lawyers or student interns who refused to take a position on anything when I asked for research. Perhaps because of the way law schools teach students, they tended to answer almost every question with “on the one hand but on the other hand.” This particularly frustrated me during my in house counsel years when I was juggling demands from internal clients in over a dozen countries and just wanted to know an answer, or at least a recommendation. Over at Legal Skills Prof Blog and PrawfsBlawg, they lay part of the blame on issue spotting exams. I use issue spotting essay exams, so perhaps I am perpetuating the problem, but I find that students have a love-hate relationship with ambiguity. They like to be ambiguous in essays but hate ambiguity in multiple choice questions.

I just finished administering multiple choice exams to my civil procedure and business associations students. Typically, I use essays for midterms and a combination of testing techniques for the final exam. I’m not a fan of multiple choice because I believe that students can get lucky. On my final exams I…