Business Associations

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There’s an interesting slide show available on Forbes, 10 Terms You Must Know Before Raising Venture Capital.

It’s interesting, but it overlooks the most important thing entrepreneurs should know before raising venture capital: the need to hire an experienced lawyer. Learning the terminology won’t substitute for representation by someone who knows what he or she is doing.

Here in West Virginia, it’s exam time for our law students.  For my Business Organizations students, tomorrow is the day.  For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.  

Here’s a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here):   In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer.  A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of  Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck.  Andrew filed suit against the employee and M & W Milling  claiming personal property damage to the truck and the loss of income derived from the use of damaged truck.  Notably, the LLC was not a named plaintiff in the lawsuit.

Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though…

The increase in institutional ownership of corporate stock has led to questions about the role of financial intermediaries in the corporate governance process. This post focuses on the issues associated with the so-called “separation of ownership from ownership,” arising from the growth of three types of institutional investors, pensions, mutual funds, and hedge funds.

Originally, the anti-takeover law passed its court challenges because the judges accepted faulty data that showed investors could acquire at least 85 percent of the target corporation and satisfy the Williams Act, Subramanian said. But none of the cases used to support the anti-takeover law actually allowed hostile suitors to acquire a controlling 85 percent of a target company, he said, and plaintiffs using research from new studies would be able to convince a judge that the statute is unconstitutionally restrictive.

For me, the financial crisis was an eye-opening moment. I’ve long believed in free market economics and believed that the Church would do a lot of good…

On Saturday evening I leave for Geneva to attend the United Nations Forum on Business and Human Rights with 1,000 of my closest friends including NGOs, Fortune 250 Companies, government entities, academics and other stakeholders.  I plan to blog from the conference next week.  I am excited about the substance but have been dreading the expense because the last time I was in Switzerland everything from the cab fare to the fondue was obscenely expensive, and I remember thinking that everyone in the country must make a very good living. Apparently, according to the New York Times, the Swiss, whom I thought were superrich, “scorn the Superrich,” and last March a two-thirds majority voted to ban bonuses, golden handshakes and to require firms to consult with their shareholders on executive compensation. Nonetheless, last week, 65% of voters rejected a measure to limit executive pay to 12 times the lowest paid employee at their company. According to press reports many Swiss supported the measure in principle but did not agree with the government imposing caps on pay.

Meanwhile stateside, next week the SEC closes its comment period on its own pay ratio proposal under Section 953(b) of the Dodd-Frank Act. Among…

I was recently asked to evaluate a corporation’s obligation to indemnify a director named in a derivative suit initiated by the corporation alleging that the director usurped corporate opportunities. The MBCA establishes a standard framework for optional and mandatory indemnification of directors and officers, sets the appropriate boundary of indemnification obligations (i.e,. no reimbursement of derivative suit settlements or intentional misconduct), establishes the procedures for indemnification and advancement of expenses, and provides mechanisms for directors to enforce their indemnification rights through court orders.  The standard procedures for indemnification require the corporation to authorize the indemnification and make a determination that the conduct at issue qualifies for indemnification.

MBCA § 8.55 Determination and Authorization of Indemnification

(a) A corporation may not indemnify a director ….[until after] a determination has been made that indemnification is permissible ..[and].. director has met the relevant standard of conduct ….

(b) The determination shall be made:

(1)…. a majority vote of all the qualified directors…., or by a majority of the members of a committee;

(2) by special legal counsel ….or

(3) by the shareholders, but shares owned by or voted under the control of a director who at the time is not a qualified director may not

…

I have posted an updated draft of my latest paper Rehabilitating Concession Theory, which is forthcoming in the Oklahoma Law Review, on SSRN.  I have made only minor changes to the the prior draft, but I thought I’d post the abstract and link to the paper here in case any blog readers haven’t seen the paper before and might be interested in the content.

In Citizens United v. FEC, a 5-4 majority of the Supreme Court ruled that, “the Government cannot restrict political speech based on the speaker’s corporate identity.” The decision remains controversial, with many arguing that the Court effectively overturned over 100 years of precedent. I have previously argued that this decision turned on competing conceptions of the corporation, with the majority adopting a contractarian view while the dissent advanced a state concession view. However, the majority was silent on the issue of corporate theory, and the dissent went so far as to expressly disavow any role for corporate theory at all. At least as far as the dissent is concerned, this avoidance of corporate theory may have been motivated at least in part by the fact that concession theory has been marginalized to the point

…

“Man grows used to everything, the scoundrel!” 
― Fyodor Dostoyevsky, Crime and Punishment

This week two articles caught my eye.  The New York Times’ Room for Debate feature presented conflicting views on the need to “prosecute executives for Wall Street crime.” My former colleague at UMKC Law School, Bill Black, has been a vocal critic of the Obama administration’s failure to prosecute executives for their actions during the most recent financial crisis, and recommended bolstering regulators to build cases that they can win. Professor Ellen Podgor argued that the laws have overcriminalized behavior in a business context, and that the “line between criminal activities and acceptable business judgments can be fuzzy.” She cited the thousands of criminal statutes and regulations and compared them to what she deems to be overbroad statutes such as RICO, mail and wire fraud, and penalties for making false statements. She worried about the potential for prosecutors to abuse their powers when individuals may not understand when they are breaking the law.

Charles Ferguson, director of the film “Inside Job,” likened the activity of some major financial executives to that of mobsters and argued that they have actually done more damage to the…

Today is November 12, 2013, or 11/12/13.   (It also happens to be my 43rd birthday.  Yay me.) 

In honor of the unique date, I decided to take a look at some business cases from the most recent prior 11/12/13.  I found a couple of  interesting passages.  One case, Cotten v. Tyson, 89 A. 113, 116 (Md. Nov. 12, 1913),  provides a good overview of some basic corporate principals: 

[1] The principle is elementary that a stockholder, as such,
is not an owner of any portion of the property of the corporation and, apart
from his stock, has no interest in its assets which is capable of being
assigned. [citing cases] 

[2] Where one person is the owner of all the capital stock
of a corporation, it has been held bound by his acts in reference to its
property. [citing cases]

[3] But it is entirely clear upon reason and authority that
a stockholder of a corporation, while retaining his stock ownership, cannot
assign the interest represented by his stock in any particular class of the
corporate assets. Such an attempted alienation would not only be incompatible
with the retention of title to the stock in the assignor but its enforcement
would be altogether

…

Martin Gelter & Geneviève Helleringer posted “Constituency
Directors and Corporate Fiduciary Duties” on SSRN a few weeks ago, and I’m
finally getting around to passing on the abstract:

In this chapter, we identify a fundamental contradiction in
the law of fiduciary duty of corporate directors across jurisdictions, namely
the tension between the uniformity of directors’ duties and the heterogeneity
of directors themselves. Directors are often formally or informally selected by
specific shareholders (such as a venture capitalist or an important
shareholder) or other stakeholders of the corporation (such as creditors or
employees), or they are elected to represent specific types of shareholders
(e.g. minority investors). In many jurisdictions, the law thus requires or
facilitates the nomination of what has been called “constituency” directors.
Legal rules tend nevertheless to treat directors as a homogeneous group that is
expected to pursue a uniform goal. We explore this tension and suggest that it
almost seems to rise to the level of hypocrisy: Why do some jurisdictions
require employee representatives that are then seemingly not allowed to
strongly advocate employee interests? Looking at US, UK, German and French law,
our chapter explores this tension from the perspective of economic and
behavioral theory.

As Marc O. DeGirolami notes here: “In an extensive
decision, a divided panel of the U.S. Court of Appeals for the Seventh Circuit
has enjoined the enforcement of the HHS contraception mandate against several
for-profit corporations as well as the individual owners of those corporations.”  I have not had a chance to read the entire
decision (which you can find here), but I did do a quick search for “corporation” and pass on the
following excerpts I found interesting.

The plaintiffs are two Catholic families and their closely
held corporations—one a construction company in Illinois and the other a
manufacturing firm in Indiana. The businesses are secular and for profit, but
they operate in conformity with the faith commitments of the families that own
and manage them…. These cases—two among many currently pending in courts around
the country—raise important questions about whether business owners and their
closely held corporations may assert a religious objection to the contraception
mandate and whether forcing them to provide this coverage substantially burdens
their religious-exercise rights. We hold that the plaintiffs—the business
owners and their companies—may challenge the mandate. We further hold that
compelling them to cover these services substantially burdens their

…