Business Associations

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Whether you are teaching insider trading as part of a corporations or a securities regulation course, you practice in the area, or you like these cases because they contain some of the most interesting fact patterns….. I have a couple of gems for you.

First, the on line edition of the New Yorker features two great stories on insider trading.  The first story, The Empire of Edge written by Patrick Radden Keefe, focuses on the conviction of a trader at S.A.C. capital for trades made 10 days before the release of results from clinical trials on an alzheimer’s medication. The hedge fund reversed its $.785B position in two companies testing the drug and took a short position against the companies earning the fund $275M. In classic long-form journalism at its best, the story is riveting as it unfolds.  The second story, A Dirty Business by George Packer, tells the story of Raj Rajaratnam, head of the Galleon hedge fund at the heart of the 2009 informant ring scandal, the prosecution and the SEC’s stance on enforcement.  

For those of you who are interested, the SEC posted a running list of insider trading enforcement actions here.

-Anne Tucker

To be clear, I’m not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics.  I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law.   This week’s announcement of  Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.  

I admit I did not much about Tirole before the announcement, and after just a little reading, it’s clear to me that I need to know more.  A nice summary of Tirole’s work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:

A theory prize!  A rigor prize!  I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics.  He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too.  He is a broader economist than many of his fans realize.

Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s.  In industrial organization, you can think of him

…

OK.  I cannot compete with the brevity or humor of the student comment Steve Bradford posted earlier today.  [sigh]  But my post today does relate to a student comment/question–one from my Business Associations course earlier this semester.  Specifically, a student posted the following on our class discussion board under the title “Swiss Vereins and piercing the veil”:

I was curious about Swiss Vereins and how that works when trying to pierce the veil since a Swiss Verein consists of independent offices that have limited liability amongst them. Would it have been beneficial for Westin [referring to the Gardemal v. Westin Hotel Co. case] to have used such a structure instead of having Westin Mexico be a subsidiary? It seems that most Swiss Vereins are large law firms, such as DLA Piper and Baker & McKenzie or accounting firms, such as Deloitte. 

This is the first time a student has asked me about the Swiss verein structure in my almost fifteen years of teaching.  My familiarity with Swiss vereins comes solely from what I have read and heard over the years.  I never advised a firm in setting one up (or deciding not to).  Here is the core substance of my…

Alibaba dominated the September business press coverage with its record-breaking IPO last month, and news of its stock price, trading at a 30% premium, continues to dominate coverage.  I have been using the headline-hogging IPO in my corporations class to discuss raising capital, which I am sure many of you are doing as well.  Here are a few creative uses for the class-friendly headlines:

  • I used coverage of the IPO and its short-lived halo effect on other tech IPO’s as a companion to the E-bay stock spinning case (taught under director fiduciary duties).  

As we move into securities next week,

Please add to the list of uses in the comments section if you have any new ideas or suggestions.

-Anne Tucker

Maryland State Senator and American University Washington College of Law professor Jamie B. Raskin recently wrote an opinion piece for the Washington Post, A shareholder solution to ‘Citizens United’. In the piece, he explains that 

Supreme Court Justice Anthony M. Kennedy’s majority opinion in Citizens United essentially invites a shareholder solution. The premise of the decision was that government cannot block corporate political spending because a corporation is simply an association of citizens with free-speech rights, “an association that has taken on the corporate form,” as Kennedy put it. But if that is true, it follows that corporate managers should not spend citizen-shareholders’ money on political campaigns without their consent.

Senator Raskin further notes that the Congress doesn’t appear interested in moving forward with the Disclose Act, and the Securities and Exchange Commission has not pursued requiring campaign spending disclosures.  In response, the senator has a proposal:

Our best hope for change is with the state governments that regulate corporate entities throughout the year and receive regular filings from them. I am introducing legislation in January that will require managers of Maryland-registered corporations who wish to engage in political spending for their shareholders to post all political expenditures on company Web sites within 48 hours and confirm that any political spending fairly reflects the explicit preference of shareholders owning a majority interest in the company.

Further, if no “majority will” of the shareholders can form to spend money for political candidates — because most shares are owned by institutions forbidden to participate in partisan campaigns — then the corporation will be prohibited from using its resources on political campaigns.

Back in early 2010, as a guest blogger here, I wrote a post, Citizens United: States, where I noted my reaction to the case, which was that I wondered how states would react and that the case made the issue “an internal governance issue, which is a state-level issue.” (Please click below to read more.)

For the second time, I have assigned my BA students to write their own shareholder proposals so that they can better understand the mechanics and the substance behind Rule 14-a8. As samples, I provided a link to over 500 proposals for the 2014 proxy season. We also went through the Apple Proxy Statement as a way to review corporate governance, the roles of the committees, and some other concepts we had discussed. As I reviewed the proposals this morning, I noticed that the student proposals varied widely with most relating to human rights, genetically modified food, environmental protection, online privacy, and other social factors. A few related to cumulative voting, split of the chair and CEO, poison pills, political spending, pay ratio, equity plans, and other executive compensation factors.

After they take their midterm next week, I will show them how well these proposals tend to do in the real world. Environmental, social, and governance factors (political spending and lobbying are included) constituted almost 42% of proposals, up from 36% in 2013, according to Equilar. Of note, 45% of proposals calling for a declassified board passed, with an average of 89% support, while only two proposals for the separation…

Yesterday, I shared with my faculty during our teaching conversations* my research and thinking on gender equality in the classroom.  How do we handle gender in the classroom?  My guess is that most of us teaching honestly strive to achieve and believe that we create a gender-neutral, or more accurately an equally-facilitative classroom environment.  You can image the horror I felt when I received voluntary, anonymous student feedback last spring that said “you may not mean to or know you are doing this, but you treat men and women differently in class.”  From whose perspective was this coming?  How differently? And who gets the better treatment?  I was baffled. As a female law professor, I was hoping that I got a pass on thinking critically about gender because I am female, right?  Wrong. 

This feedback launched my research into the area and a self-audit of the ways in which I may be explicitly treating students differently, implicitly reinforcing gender norms, and unintentionally creating a classroom environment that is different from my ideal.

Below are some observations and discoveries about my own behavior and a summary of some relevant research. 

In recent blog posts, two of my favorite bloggers, Keith Paul Bishop and Steve Bainbridge, have highlighted for our attention Delaware and California statutes providing (differently in each case) that an LLC and, at least in Delaware, its managers and members, are bound by the LLC’s operating agreement even if they do not sign that agreement.  Bishop notes in his post that the California “RULLCA creates an odd situation in which LLCs are bound by contracts that they did not execute and to which they seemingly are not parties.”  In his post Bainbridge cites to the Bishop post and another post by Francis Pileggi.  Certainly, they all have a point.  For students of contract law, the conclusion that a non-party is bound by a contract does not seem to be an obvious result . . . .

The flap in the blogosphere has its genesis in a recent Delaware Chancery Court decision, Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al. C.A. No. 8841-VCL.  The limited liability company defendant in that case raised as its only defense that it was not a party to the limited liability company agreement and therefore was not bound.  Unsurprisingly in light of applicable Delaware law, Chancellor Laster found the defense wanting as a matter of law.

This issue has more history than my brother bloggers point out, some of which is included in the brief Seaport Village opinion.  I probably don’t have all the details, but set forth below is some additional background information that may be useful in thinking about the binding nature of LLC operating agreements.  Others may care to fill in any missing information by leaving comments to this post.

The Delaware Supreme Court has held that fairness review in duty of loyalty cases has two elements: fair dealing and fair price. Weinberger v. UOP, Inc., 457 A.2d 701 (1983). Fair dealing focuses on process: questions such as “when the transaction was timed, how it was initiated, structured, negotiated, disclosed to the directors, and how the approvals of the directors and the stockholders were obtained.” 457 A.2d at 711. Fair price focuses on the consideration paid or received in the transaction.

Weinberger says that the two elements of fairness must be considered together, that “the test for fairness is not a bifurcated one between fair dealing and fair price.” Id. But, of course, damages will be measured against a fair price. If that’s the case, I ask my students, does fair dealing really make any difference as long as the price is fair?

A Delaware Court of Chancery opinion, In Re Nine Systems Corporation Shareholders Litigation,  (Del. Ch. Sept. 4, 2014), recently dealt with that issue.  Vice Chancellor Noble concluded that the procedure followed by the company was unfair, so the element of fair dealing was not met. He decided that the price was fair but, considering…

Joseph Yockey (Iowa) has posted a new paper on social enterprise.  I have not read this one yet, but enjoyed his first article on the subject and have added this second one to my long “want to read” list.  The abstract is below.

Social enterprises generate revenue to solve social, humanitarian, and ecological problems. Their products are not a means to the end of profits, but rather profits are a means to the end of their production. This dynamic presents many of the same corporate governance issues facing other for-profit firms, including legal compliance. I contend, however, that traditional strategies for corporate compliance are incongruent to the social enterprise’s unique normative framework. Specifically, traditional compliance theory, with its prioritization of shareholder interests, stands at odds with the social enterprise’s mission-driven purpose. Attention to this distinction is essential for developing effective compliance and enforcement policies in the future. Indeed, arguably the greatest feature of the social enterprise is its potential to harness organizational characteristics that inspire the values and culture most closely linked with ethical behavior — without resort to more costly or intrusive measures.