Business Associations

Subscribe to Business Associations via RSS

Too bad I
didn’t have this information from today’s
Wall Street Journal to add to my arsenal of reasons of why I think the Dodd-Frank conflict minerals
SEC disclosure is a well-intentioned but bad law to address rape, forced labor,
plundering of villages, murder, and exploitation of children in the Democratic
Republic of Congo. I won’t reiterate the reasons I outlined in my two-part blog
post a couple of weeks ago.  According
to press reports, while acknowledging her responsibility to uphold the law, SEC Chair Mary Jo White mirrored some of the arguments about
discretion that business groups and our amicus brief raised on appeal to the DC
Circuit, and further explained, “seeking
to improve safety in mines for workers or to end horrible human rights
atrocities in the Democratic Republic of the Congo are compelling objectives,
which, as a citizen, I wholeheartedly share … [b]ut, as the Chair of the SEC, I
must question, as a policy matter, using the federal securities laws and the
SEC’s powers of mandatory disclosure to accomplish these goals.”  I couldn’t agree more. While I have no problems with appropriate and relevant disclosure, corporate responsibility, and due diligence related to human rights, Congress should…

Professor Bainbridge takes issue with my analogy between shareholder activists and Congress.   I am pretty sure he’s missing my point, in part because I have not disagreed with the points he makes.  My point (or at least intended one) is not that shareholder rights should equal a strict democracy.  My point is that shareholder activists, sometimes with less than a majoity, say 20%, try to improperly impose their will on the currently elected (and properly empowered) board.  Further, they are seeking additional powers to further their influence.    

I figure we all agree that if a majority of shareholders agree, they can, at the proper time, make the changes they want.  In contrast, shareholder activists often try to make those changes before they have the votes — votes they may never have to support their views.  I happen to see at least some of the current Republican House in that same vein.  That’s my intended point.  I am sure lots of people disagree with that, too, but I just want to make clear that I am criticizing what I see as the abuse of a powerful minority messing with a regime that was properly elected and exercising that…

Professor Haskell Murray is presenting on
Delaware’s new Public Benefit Corporation Act on October 5th at the
Southeastern Law Scholars Conference.  Delaware is the 19th state to
pass such legislation and given the influence that the state has on others in the area of
corporate law, it may prompt the many states that are considering it to pass their
own pending legislation.  Many question
the need for benefit corporations in general given the constituency statutes that are already in
place in many states and the debate about the shareholder wealth maximization norm. Others worry about unintended consequences (see
here for example).  

Haskell has
probably written more extensively on these entities than almost anyone else (see here).
Although his latest article is not yet on SSRN, the abstract is below.  I look forward to reading his article and to
seeing how many Delaware corporations jump on the benefit corporation
bandwagon.

“Systems should exist to serve
society.  Right now our capitalist system is not serving society; it’s
serving shareholders.  And we can’t run around expecting different
outcomes until we change the rules of the game.”   -Jay Coen Gilbert
(Co-founder, B-Lab)

“Delaware, the leading incorporation state…

Before I
went to law school, I had a career in public relations and brand
management. I had the pleasure of having a client that was among the best when
it comes to brand reputation, Nintendo, where I was responsible (with our
client and a solid team) for product launches like this, this, and this (PDF, p. 3).  A few years ago,
I even wrote an article combining my interest in branding and my interest in
entity law: The North Dakota Publicly
Trade Corporations Act: A Branding Initiative Without a (North Dakota) Brand. 

Anyway, when I
recently received my version of ERN Economics of Networks eJournal, (Vol. 5 No.
68), I took note of the paper, Corporate
Reputation and Social Media: A Game Theory Approach, which is available
here.  The paper states in the abstract,
“Corporate reputation is more and more the most valuable asset for a firm. In
this day and age, corporate reputation, although an intangible asset, is and
will grow as the most essential asset to publicize and also protect.”  My first thought:  as a general matter, can that possibly be
true? 

It appears not,
though it is obvious that reputation…

I have spent the
past two days at West Virginia University attending a conference entitled “Business
and Human Rights: Moving Forward and Looking Back.” This was not a bunch of academic
do-gooders fantasizing about imposing new corporate social responsibilities on
multinationals. The conference was supported by the UN Working Group on
Business and Human Rights, and attendees and speakers included the State
Department (which has a dedicated office for business and human rights), the Department
of Labor, nongovernmental organizations, economists, ethicists, academics,
members of the extractive industry (defined as oil, gas and mining),
representatives from small and medium sized enterprises (“SMEs”), Proctor and
Gamble, and Monsanto.

Professor Jena
Martin organized the conference after the UN Working Group visited West
Virginia earlier this year to learn more about SMEs and human rights issues.
She invited participants to help determine how to ground the 2011
UN Guiding Principles on Business and Human Rights into business practices
and move away from theory to the operational level. The nonbinding Guiding
Principles outline the state duty to protect human rights, the corporate duty
to respect human rights, and both the state and corporations’ duty to provide
judicial and non-judicial remedies to aggrieved parties.  Transnational corporations…

Okay, so maybe I am overstating that a bit, but it’s only a
bit.  This is not exactly timely, as the
following case was decided in the December 2012, but I was recently reviewing
it as I taught these cases and helped update Unincorporated Business Entities (Ribstein, Lipshaw, Miller, and Fershee, 5th ed., LexisNexis). (semi-shameless plug).  Despite the passage of time, this case has, apparently, gotten me riled up
again.  So here we go . . .    

Synectic Ventures I, LLC v. EVI Corp., 294 P.3d 478 (Or.
2012):  several investment funds organized as LLCs (the Synectic LLCs or
LLCs).  The LLCs made a loan to the
defendant corporation, EVI Corp. The loan agreement was secured by EVI’s
assets, and provided that EVI would pay back $3 million in loans, plus 8%
interest by December 31, 2004.  The loan
agreement provided that if EVI obtained $1 million in additional financing by
December 31, 2004, the loan amount would be converted into equity (i.e., EVI
shares) and the security interest would be eliminated. If the money were not
raised by the deadline, the LLCs could foreclose on EVI’s assets (mostly IP in
medical devices). 

To make things interesting, the LLCs appointed Berkman the
manager of the LLCs (thus, they were manager-managed LLCs). “At all relevant
times, Berkman—the managing member of plaintiffs—was also the chairman of the
board and treasurer of defendant [EVI].” 
In mid-2003, the Synectic LLCs’ members sought to have Berkman removed, and Berkman signed
an agreement not to enter into new obligations for the LLCs without getting
member approval. 

Lewis Lazarus recently posted Directors Designated By Investors Owe Fiduciary Duties to the Company as a Whole and Not to the Designating Investor at the Delaware Business Litigation Report.  In his article, he explained

[The Delaware] cases teach that directors designated by particular stockholders or investors owe duties generally to the company and all of its stockholders.  Where the interests of the investor and the company and its common stockholders potentially diverge, the directors cannot favor the interests of the investor over those of the company and its common stockholders.

Professor Bainbridge weighs in (here), agreeing that the above is the general rule, but that in some cases that may not be best.  He gives a few examples, such as a struggling company granting a union nominee a board position or a time when preferred shareholders can elect a board majority because no dividends were paid for a sufficient period of time. He then notes that a director’s “sponsor might reasonably expect the directors not just to ‘advocate’ for the shareholder’s position, but to vote for it and take other action.”  Professor Bainbridge concludes that he still doesn’t “think the sponsor should be able to punish…

I continue thinking about Chancellor Chandler’s opinion in eBay v. Newmark, and I still find myself troubled by the determination that, by embracing it’s “community service mission,” craigslist was being run improperly as corporate entity (see my prior post here).  To recap, Chancellor Chandler explained that by choosing “a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.”

As I mentioned before, in apparent contrast to Chancellor Chandler, I don’t think it necessarily follows that embracing a “community service mission” is inconsistent with “promot[ing] the value of a corporation for the benefit of its stockholders.”  In fact, it may be that the community service mission is the precise reason that stockholders are gaining the benefit.  Take, for example, Ben and Jerry’s Ice Cream. Ben and Jerry’s began as a small start-up looking to expand its business.  Over time, the company began to grow, and along with this growth, embraced environmental causes and created a foundation giving 7.5% of pretax profits for distribution to worthy causes.  (See Ben & Jerry’s History here.)  Of course, the company would…

At The Conglomerate, Gordon Smith notes some comparisons between Dodge v. Ford (pdf here) and eBay v. Newmark (pdf here). I certainly see the comparison (and I think his post here on the case and Christine Hurt’s earlier post here are great).  Still, I think I am a little more critical of the Dodge v. Ford analogy than Professor Smith. Here’s why:

In Dodge v. Ford, Henry Ford stated clearly that he was operating the business as he saw fit and that he was changing toward supporting philanthropic purposes. As the Dodge v. Ford opinion notes:

‘My ambition,’ declared Mr. Ford, ‘is to employ still more men; to spread the benefits of this industrial system to the greatest possible number, to help them build up their lives and their homes. To do this, we are putting the greatest share of our profits back into the business.”

. . . .

The record, and especially the testimony of Mr. Ford, convinces that he has to some extent the attitude towards shareholders of one who has dispensed and distributed to them large gains and that they should be content to take what he chooses to give. His testimony creates the

…

Back in 2007, North Dakota passed the North Dakota Publicly Traded Corporations Act (ND Act), which became Chapter 10-35 (Publicly Traded Corporations) of the North Dakota Century Code.  The ND Act provided a shareholder friendly alternative to the state’s Business Corporations Act, Chapter 10-19.1 for companies that were so inclined.  (Find the referenced North Dakota laws here.)

Before the state could pass the law, the state constitution needed be amended, and voters approved the necessary changes in 2006 (for more on the history of the ND Act, see pdf here). A North Dakota-based publicly traded corporation is not subject to the ND Act unless it opts-in, essentially by reincorporating in the state. None of the state’s public corporations existing before the ND Act was passed have done so.  

One of the main provisions of the ND Act gave proxy access for purposes of nominating candidates for election to the board of directors for a “qualified shareholder” of the publicly held corporation subject to the law. N.D. Cent. Code 10-35-08.  A qualified shareholder is a person or group of persons holding 5% of the company’s shares authorized to vote for directors, and each person or member of the group must…