Mitch Crusto, a long-term buddy from past Southeastern Association of Law Schools (SEALS) conferences, contacted me last year about participating in a discussion group at this year’s SEALS conference on issues surrounding and emanating from Jeffrey Epstein’s significant asset transfers to a trust (for the benefit of his brother) two days before his death, currently ruled to be a death by suicide.  The discussion group, held yesterday afternoon/evening, was designed to explore interdisciplinary approaches to legal problem-solving, with the thought that the conversation might spur us to bridge doctrinal silos not merely for ourselves, but also for the benefit of our students (in and outside the classroom).  Megan Chaney and Victoria Haneman spoke passionately on that issue to lead-off our discussion.  Doctrinal areas covered in the session included trusts & estates, business associations, federal income taxation, criminal law, civil rights, and professional responsibility (and I am sure that I am missing some . . . ).

In our initial set of communications, I asked Mitch what possible angle I could have on the Epstein trust matter based on my work and areas of expertise.  He noted in response that he would like the session to address, e.g., whether veil piercing doctrine from the business entity law sphere might have a role in helping Jeffrey Epstein’s judgment creditors–especially victims of his sexual exploitation, trafficking, molestation, and rape (including the sexual exploitation of teenaged victims)–satisfy any damages awarded to them with assets transferred to and held in the trust.  I took the bait, more out of allegiance and curiosity than out of a feeling that I had something valuable to contribute.  The session was extremely rewarding professionally and personally.  I am sharing some musings from it today, most of which I also shared in yesterday’s discussion.  They are in the nature of a fledgeling thought experiment and do not reflect deep research.

At its base, the Epstein asset recovery issue presents as a fraudulent conveyance question: can creditors claw back into Jeffrey Epstein’s estate the assets he put into trust (presumably to avoid keeping those assets in his name and, after death, in his estate) and, if so, under what circumstances?  In reporting on the trust and the ability of Jeffrey Epstein’s creditors to access assets from it, a Forbes article from last year concluded, on balance, that the trust assets may well be reachable by those creditors to satisfy their judgments.  Of course, certain factual and legal matters asserted or assumed in the article’s assessment would need to be established in fact (and participants in yesterday’s session both agreed and disagreed with the conclusion expressed in the article, based on their individual knowledge of and “take” on the facts).

Aways loving a challenge, I set out to think about the business entity law angle Mitch pitched–focusing in on veil piercing doctrine (as the same is legally recognized under the law of corporations and limited liability companies).  Interestingly, the Forbes article described a trust by contrasting it with these forms of business entity.

It is important to understand what a trust is and isn’t. First, what it isn’t: A trust has no physical existence: You can’t have it over to your house on Saturday afternoon for beer and bar-b-que. Nor does a trust have a separate legal existence either, since it is not considered a “person” under the law that can itself sue or be sued; contrast this with the legal fictions known as corporations and LLC, which are considered “persons” under the law that can sue and be sued in their own names.

Right.  So, there is no legal entity to disregard (although it was noted in the discussion group that a trust may be a taxable entity–a recognized legal person–for federal income tax purposes).  There is, instead, the need to disregard a unique, legally recognized fiduciary relationship built on a contract or contract-like arrangement that involves the transfer, holding, and administration of property.  The lack of legal entity status gives me pause.

Also, of course, veil piercing relates to who is liable for a loss (not whether assets owned of record by a transferee may be recovered, of sorts, and used to satisfy liabilities of the transferor).  Various theories (e.g., alter ego, insufficient separateness, unity of interest/ownership) underlie the equitable application of veil piercing doctrine.  Given the nature of a trust, however, I am hard-pressed to come up with a theory that would explain or justify holding a properly constructed trust or its trustee liable for the grantor’s wrongful conduct.  The possibility of disregarding the trust is not, then, logically rooted in notions of direct or vicarious liability operative in business entity law.

All that having been said, there is an interesting, albeit imperfect, analogy to explore between reverse veil piercing and fraudulent transfer law as the same may relate to the Jeffrey Epstein trust scenario.  In reverse veil piercing, as business lawyers know well, a business entity is held legally responsible for damages created by the wrongful conduct of a shareholder.  As a result, the corporation’s assets would be used to satisfy the judgment for that wrongful conduct.  The argument in the Epstein trust situation would be that transfers to a trust should be voidable to cover damages created by the wrongful conduct of the grantor.  Thus, assets of the trust would be used to satisfy the judgment for that wrongful conduct.  The analogy is arguably grounded in common policy underpinnings–the desirability that a plaintiff’s recovery of damages for bona fide cognizable claims not be avoided by the establishment of legal structures purposefully designed to defraud or promote fundamental injustice.  Kenya Smith put a point on the analogy in our session yesterday by asking us to consider whether reverse veil piercing would be appropriate if Jeffrey Epstein had transferred his assets to a corporation instead of a trust . . . .

Indeed, it appears that the reverse veil piercing argument has been used in at least a few cases.  A 2020 Sixth Circuit opinion–Church Joint Venture, L.P. v. Blasingame, 947 F.3d 925 (6th Cir. 2020)–addresses reverse veil piercing in relation to a trust governed by Tennessee law.  The opinion of the court notes that, under Tennessee law, reverse veil piercing has only been applied in the parent-subsidiary context.  Both the opinion of the court and the concurrence offer much to consider.  (I have more to say about the concurrence in the next paragraph.)  Moreover, a Utah law firm has published a helpful post that offers a brief treatment of three cases–a federal tex case in which the argument was successful and two non-tax cases in which the argument was unsuccessful.  (The post also includes information about two possible alternative arguments applicable to asset protection trusts: that the funding of all or part of the trust was a fraudulent transfer and, in the case of a self-settled trust, that the trust should not be recognized under applicable law.)

A problem with the reverse veil piercing analogy, to the extent it may be considered for use in a legal action, is the possible application of the doctrine of independent legal significance (a/k/a the doctrine of equal dignity).  Under that doctrine, as it might be applied in this context, if a person chooses to use a corporation to accomplish a goal, then the law applicable to corporations should govern; and if a person chooses to use a trust to accomplish a goal (even if it be the same goal that could be accomplished with a corporation), then the law applicable to trusts should govern.  A court may use that doctrine to reject the application of corporate law to the trust.  In fact, the concurring opinion in the Church Joint Venture case cited above is grounded in independent legal significance and notes some of the points regarding the legal entity status (or a lack thereof) of trusts raised above.  The concurrence begins: “I join the court’s opinion in full. I write to add a word (or two) about my discomfort with incorporating ‘veil piercing’ and ‘alter ego’ theories into trust law. Both concepts originate in corporate law, and both concepts should stay there.” Church Joint Venture, L.P. v. Blasingame, 947 F.3d 925, 935 (6th Cir. 2020).  I found the concurrence a great read overall.  Another quotable from that opinion: “How could one ‘pierce the veil’ of a trust? It doesn’t have a veil, much less any form to pierce into.”  Id.

Notwithstanding the foregoing, it may be possible to use veil piercing not as a primary argument but, rather, as support for another legal theory of recovery (likely, fraudulent conveyance).  It seems that legal actions may often raise both fraudulent transfer and veil piercing arguments, in the alternative, in any case.  Regardless, it has been both instructive and satisfying to identify, think through, and discuss these issues with colleagues from other disciplines and other law schools.  I look forward to future conversations of this kind with these and other colleagues in legal education, and I also look forward to engaging students with and in these discussions.

 

Greetings from SEALS (virtually). I’ve just finished sitting in on the last of several excellent panels on online teaching. Below are tips from the panelists, some of my own lessons learned, and key takeaways from the excellent book Small Teaching Online.  For more of the foundations of online teaching see Part I,   Part II,  Part III, and Part IV.

  • Have a class zero- you and students can record an introduction of themselves, pets, hobbies, skills, talents etc. Make sure you’re smiling and conveying your excitement in the video about the class.
  • You can also have a class zero where you spend 5 minutes on Zoom with each student before the first day of class talking to them about any questions they have about the class, their tech etc. 
  • Let students know that this online format is not just a pandemic issue. Virtual offices are increasingly common in practice.
  • Think about how to motivate students- what counts as a grade? Should you raise the class participation component and if so, how will you measure it? Will watching videos before class and participating in discussion boards count?
  • Stand when recording your video lectures or teaching synchronously. Students prefer it. You can get a standing desk or go old school like me and use a pile of textbooks to create a lectern.
  • Think about creating mnemonic devices through your intentional use of imagery. Use images appropriately so that the students can connect the image with what you want them to remember.
  • Allow the students to do more prep  before class. Let them find the rule and the law and use a problem method during synchronous sessions where the students work on hypotheticals.
  • Make sure that you explain the learning objectives each week or each module so the students know what they are doing, why, and where it fits in the course. You can even add how the module or unit will help them in practice.
  • You can get information to students with an announcement or email, but consider using a short video, especially if you want to explain an assignment and add more nuance. Make sure to add your personality in to the video. You can also use video to explain information that students find confusing. This way you can avoid answering the same questions over and over again.
  • Use the subtitle or caption feature for your powerpoints when you are recording your asynchronous lecture. 
  • Consider having a transcript of your lecture videos or a detailed outline, especially if you don’t have subtitles or captions in your videos. I don’t write out an outline for my classes, but if you do, you can post that outline.
  • Have some questions for the students to think about while they watch the asynchronous video lecture. I will use Feedback Fruits so students will answer questions while they watch the videos and won’t be able to continue watching until they answer the questions. You could be more low tech and provide them with the question in advance and require them to answer the questions before class in a no or low-stakes quiz.
  • Students seem to prefer short, informal videos to highly produced videos. Students respond better to conversational tones and unedited videos. Of course, don’t just read the slides.
  • Try to avoid talking about dates or current events in your videos, unless it’s really relevant. Make sure the videos can  stand alone as an independent product and don’t refer back to other videos.
  • Disclose your grading rubric early or have students develop a rubric based on what you have communicated. This will help you know whether they understand your materials and your grading standards.
  • Learn from neuroscience- do ungraded short quizzes and spaced repetition before and after class. For a business associations class, for example, you can use old bar questions each week, which will get them familiar with those type of questions.
  • Use some of what works in K-12 teaching about how to keep students engaged, where they empower the students to learn. We focus more on how we perform as teachers vs. how students learn. If you watch YouTube videos of K-12 teachers, you can learn a lot that will also apply to law students.
  • Use non-graded events throughout the semester such as short essays or multiple choice so that they can see how they are doing. Do this anonymously and provide the answers or model answers. 
  • If your class is small enough, greet students by name when they come in the Zoom room.
  • Start each synchronous class with a question in the chat- it can relate to the materials, something in the news, or pop culture etc. If you normally arrive early to the physical classroom, do the same on Zoom and recreate that casual conversation. 
  • Make sure to save the chat in Zoom so that you can refer to issues in the next class or you can send out an email or announcement to discuss what you may have missed in the class.
  • If you have a TA, that person can monitor the chat for you while you’re teaching.
  • In the first week, think of creating an exercise that relates to what the students may do  for the final exam. This may include multiples choice, a short essay etc.
  • Have panels of students on call for certain parts of the class, just as you would in residential classes.
  • Try peer-to-peer formative assessment through peer review and team-based learning. This will work better in an online than a residential setting. See my earlier posts for more information on TBL.
  • Take a break in class if it’s more than an hour. Tell the students that they can use that time to take notes, talk with each other etc.
  • Add humor to the course. Consider a contest for best virtual background but be mindful that some students may not have the bandwidth for this. If all of your students can do it, consider a “prize” for the best background.
  • When you use breakout rooms, have a class document that students can fill out or download and then share the screen during the breakout rooms. While they can use a whiteboard in breakout groups, they can’t share their breakout room whiteboard in the main room. You can share using Google docs in Zoom. This may work better if students need to report back to the class.
  • In class, reboot student attention with thumbs up, thumbs down, polls etc. Try to keep things moving every 10-15 minutes.
  • Have students do a short reflection at the end of a unit to discuss what they learned or struggled with. Give them the choice of using video or written format.
  • If  your LMS allows it, have a conditional release system so students cant’t see certain content until they have reached a certain score or milestone with the materials.
  • Use the discussion board feature for students to answer questions and then make sure that you answer within 24 hours.
  • If you choose to use discussion board for substantive student submissions, make sure that you have a clear rubric, with word count requirements etc. Consider having students have a choice of questions to answer. You may decide that if a response does not meet the rubric, the student gets 0 points, so it’s all or nothing. You can also require students to post before they see other posts. If you have a very large class, you can divide them into groups so the students are only looking at a smaller group of posts.
  • Think about providing feedback on assignments via audio or video, if your class is small enough. Many students find that this provides more of a connection to the professor.
  • Early or midway through the semester, use Google forms, survey monkey, or another mechanisms for students to let you know anonymously what’s working and what’s not. Ask them what you should start, stop, and continue doing.
  • Send personal emails when a student misses class. Just asking if the student is ok and making sure s/he knows where to find the class recording, can further the sense of community and connection.
  • At the end of the semester, have the students assess themselves. They can also discuss three takeaways from the course and how they plan to use it in practice.

Best of luck planning for the new semester. Stay safe!

 

 

IMG_9322 (1)

(A bit of the harvest picked from my parent’s garden in north Georgia yesterday)

Last Thursday my neighborhood book club discussed work by poet David Whyte. This book club has been especially life-giving during the pandemic. I have deep admiration for every member of the group and always learn from our meetings. In March and April, we briefly moved to Zoom, but were unable to capture the same energy. We then decided to meet in person, bringing chairs to a member’s spacious driveway that backs up to common green space.

The work we discussed last week was not actually a book, but rather a few hours of David Whyte’s musings, only available in audio form. Much of the talk involves Whyte reading poetry – primarily his own, Rainer Maria Rilke’s and Mary Oliver’s – and relating that poetry to questions many of us ponder in midlife.

While I can’t locate the exact quote in the long recording, Whyte used a harvesting metaphor effectively. Whyte suggests that if we don’t slow down to be present for the harvest times in our lives, the fruit will rot on the vine. He reminds us, for example, that our child will only be five years old for a relatively short season. By being present for the harvest, I think Whyte means celebrate (among other things).

The practice of law, at least as it appears to be carried out by most major firms, leaves precious little time for celebration. In fact, during my handful of years at two major law firms, I can only recall a single occasion of truly pausing to celebrate the harvest.

This occasion involved a closing dinner. A celebratory dinner after closing a deal to buy or sell a company is relatively common in M&A practice. In my somewhat limited experience, however, law firms often organized these dinners to impress clients and tee up future deals. Networking, not savoring, is the focus. Often only the partners and clients attend closing dinners. The associates (or at least the junior associates) are usually back in the office working on the next matter.

This dinner was different. King & Spalding partner Russ Richards had just closed two relatively large deals in the same week with the assistance of same four associate attorneys. While the hours had been grueling, even by BigLaw standards, I didn’t expect to be invited to a closing dinner. Surprisingly, Russ not only invited the other three associates and me, but also encouraged us to bring a dates. Moreover, this was not a dinner to impress the clients; no clients were invited. We did not spend much time, if any, setting up future deals. We just celebrated work well done with wonderful wine, food, and company.

If there were more of this sort of unadulterated celebration of the harvest in BigLaw, I imagine the turnover would be much lower. And maybe one of the reasons Russ Richards excelled in a 45+ year career with the same firm is because he created moments of celebration and reflection like these. As I have argued before, I think one of the ways to make BigLaw more humane is to work in some time for celebration and rejuvenation, perhaps in the form of sabbaticals. A formal promotion to “senior associate” around the four-year mark, followed by a brief sabbatical (even as short as one month) would do wonders for the profession. Even longer sabbaticals, perhaps tied to a project improving the community, could be worthwhile as well.

Of course life is not, and probably should not be, constant celebration. To stretch Whyte’s metaphor further—as anyone who has tried their hand at farming knows—fruit that is the product of a season of sweat tastes sweeter than fruit obtained from a grocery deliver service. The gritty, difficult, back-spasm-inducing times are an important part of the process. That said, especially for those of us bent more in the direction of overwork, making some space to celebrate the harvest is essential.

Finally, and importantly, we should make a point to notice and celebrate the achievements of others. Whyte seems to focus on being present for the fruition of our own work, but I am convinced that pausing to celebrate the accomplishments of others can be even more worthwhile. 

Gabriel Rauterberg has just posted a fascinating new paper, The Separation of Voting and Control: The Role of Contract in Corporate Governance.  It’s about shareholder agreements, and in particular, the fact that they are surprisingly common not only in private companies, but also in public companies.  These agreements typically involve a founder and/or institutional investors like private equity funds, and contain various provisions related to corporate control, such as promises to support certain director nominees, and veto power over various types of corporate actions.  As Rauterberg explains, shareholder agreements grant the parties far more freedom to order their arrangements than do bylaws and charter provisions; corporate constitutive documents, for example, could not guarantee board seats for specific nominees.

Rauterberg points out that these raise interesting questions under Delaware law, especially with respect to whether these agreements improperly end-run around mandatory corporate governance provisions.  This is particularly so when the corporation itself is a party to the agreement, and the board is bound to take certain actions, like recommend a particular board nominee to shareholders or include a nominee on a particular committee.  As he puts it:

The tapestry of corporate law draws fundamental contrasts – between control rights and contractual rights, between the types of rights held by creditors (generally, promissory and  fixed) and by equity (generally, residual and discretionary), between internal and external, and ultimately, turning on all of the above, between those who do and do not owe  fiduciary duties and those who do and do not receive  fiduciary protection. It is simple to state why shareholder agreements challenge this picture: They grant significant corporate power to the paradigmatic “internal” patron – shareholders – but in a way that is fixed, external, and contractual, rather than routed through the board.

On this, I have to point out that preferred stock raises similar challenges.  As William Bratton and Michael Wachter have explained, “Preferred stock sits on a fault line between two great private law paradigms, corporate law and contract law.”  That fish-or-fowl problem has made Delaware courts quite uncomfortable with preferred shareholder rights; Bratton and Wachter go on to note that cases involving the rights of preferreds follow a simple maxim: “The preferred always lose.”; see also Victor Brudney (“For more than half a century the courts have systematically, if not uniformly, upheld the commons’ view of the scope of its discretion to act opportunistically toward the preferred stockholders under the preferreds’ investment contract or the statutes that the contract is said to incorporate.”)

The other interesting point that Rauterberg makes has to do with who counts as a controlling shareholder.  That’s a topic I’ve revisited a lot in this space – most recently here – and it’s an issue for Rauterberg as well.  Most companies with shareholder agreements also identify as controlled companies, but a significant minority do not, which is ultimately going to be a challenge that lands in Delaware’s lap.  Indeed, a couple of weeks ago I posted about Lemonade, which went public as a benefit corporation under Delaware law.  Lemonade’s two founding shareholders each hold just under 30% of Lemonade’s votes, and they have a shareholder agreement with Softbank – which has another 21% – that the three together will decide on the disposition of Softbank’s votes.  But Lemonade does not at this time identify itself as a controlled company.  So that’s going to be something to watch if litigation arises.

BLPB Readers, below is an announcement about an open faculty position at the University of Connecticut School of Business:
 
Assistant, Associate or Full Professor of Business & Human Rights at the University of Connecticut
The School of Business at the University of Connecticut invites applications for a tenure-track or tenured position at the rank of Assistant Professor, Associate Professor, or Professor of Business and Human Rights to begin in Fall 2021.

This faculty position will focus on the intersection of business and human rights broadly understood, including, but not limited to, environmental and social sustainability, corporate social responsibility, social innovation, and social entrepreneurship. The position will reside in the department/discipline of the successful candidate’s research and teaching domains, including Accounting, Finance, Management, Marketing/Business Law, and Operations and Information Management. The successful candidate will collaborate on the development and implementation of research, curricular, and public engagement activities with faculty affiliated with the Human Rights Institute and the Business and Human Rights Initiative at the University of Connecticut. See the following links for more information about the Human Rights Institute (https://humanrights.uconn.edu) and the Business and Human Rights Initiative (https://businessandhumanrights.uconn.edu). 

Preference will be given to applications received by September 18, 2020. For a full description of the position and to apply online, go to: https://academicjobsonline.org/ajo/jobs/16575.

On June 29, 2020, the Department of Labor reinstated it’s “five-part test” for determining what constitutes investment advice under the Employee Retirement Income Security Act (ERISA).  The test first went into effect in 1975 and remained the governing standard as financial products and the investment advice industry changed significantly.  In 2016, as part of its fiduciary rulemaking, Labor embraced a broader test which was later invalidated by the Fifth Circuit.

The reinstated five-part test governs when someone giving investment advice for a fee will be classified as a fiduciary under ERISA and subject to its obligations. To be subject to ERISA, the person must:

  • render advice with respect to the plan [or IRA] as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing, or selling securities or other property;
  • on a regular basis;
  • pursuant to a mutual agreement, arrangement, or understanding with the plan, plan fiduciary or IRA owner, that,
  • the advice will serve as a primary basis for investment decisions with respect to plan or IRA assets; and that
  • the advice will be individualized based on the particular needs of the plan or IRA.

The five-part test should be modified to better cohere with the current economic environment.  When Labor promulgated the five-part test in 1975, Congress had not yet modified the tax code to allow for employees to contribute a portion of their salary to 401(k) plans and most retirement assets were in defined-benefit pension plans.  That change came in 1978 and eventually ushered in the current defined-contribution era.  At present, the test does not cohere with the current legal and business environment and should be modified. 

Remove the Regular Basis Requirement

Labor could do substantial good by removing second part of the test, the requirement that advice must be given “on a regular basis.”  Single-shot events, such as the sale of annuities or other insurance products or a decision about whether to “roll over” assets from one account type to another have substantial impacts on a person’s retirement.   Labor previously recognized this issue in its 2016 rulemaking and found that trillions of dollars shifted each year with rollover transactions.  The “regular basis” requirement now excludes these transactions from ERISA’s scope and allows assets accumulated under ERISA’s protection to be dissipated without protection.

The “regular basis” requirement results in applying different standards to identical activities with identical effects.  A consultant who regularly provides advice about small issues would be subject to fiduciary requirements when giving advice about the disposition of an entire pool of assets.  Yet if a different consultant were hired to invest an entire pool of assets in a single transaction, the second consultant would not be bound by fiduciary obligations even though she would do the exact same thing with the same effects.  Maintaining the “regular basis” requirement effectively allows single-shot transactions to misallocate ERISA-protected assets with impunity.

Remove Requirements That an Investor and Advisor
Mutually Agree That Advice Will Serve as the Primary Basis for an Investment

Labor should also reaffirm its prior conclusion the “mutual agreement” and “primary basis” requirements should be modified because it does not cohere with the current defined-contribution plan environment.  Under the five-part test, a person may escape fiduciary status by arguing that there was no “mutual agreement” that their advice would be the “primary basis” for an investment decision.  Fine print in sales contracts disclaiming any mutual agreement and claiming that the purchaser warrants that they have made their own decision by signing the agreement may be proffered to rebut the existence of any mutual agreement.

This requirement allows salespeople to exploit the wide financial sophistication gap between Americans and the financial services industry.  Americans often struggle to understand even rudimentary financial concepts.  Labor should not abdicate its responsibility to protect retirement assets by allowing simple disclaimers to greenlight profiting from shoddy advice.

Moreover, Labor should not allow any financial professional to give substandard or self-serving advice merely because it may not be the “primary basis” for an investment decision.  Consider one scenario where a retirement saver hears from an uncle that his assets have been placed inside some complex annuity contract.  The saver may meet with an insurance company’s representative to inquire about the product because an uncle purchased it.  Here, the representative should not be free to give low-quality advice simply because the primary basis for exploring the option was the uncle’s purchase.

Identifying whether financial advice, independent research, or some other reason served as the “primary basis” for an investment decision may be impossible.  In any event, persons giving financial advice for a fee should not be able to dispense lower-quality advice on the theory that an investor should not rely on that advice as the primary basis for their investment.  This approach debases investment advice and turns it into a predatory trap.

So, I knew about TEDx and TED Talks, but I just learned about TED-Ed today in viewing Professors George Siedel & Christine Ladwig’s “Ethical Dilemma: The Burger Murders” (here).  If you’re planning to incorporate an ethics module into your business law courses this year, including their video and accompanying teaching materials could be a great, entertaining addition to your class that I think students would love.  Along with their fun, short video, Siedel and Ladwig have provided teaching materials (here) that include multiple choice and open ended questions; a “dig deeper” piece; and, a guided discussion section.  They posted only yesterday, and have already had 152,224 views and 744 comments!  Check it out!  And if you didn’t see my prior post on Siedel’s negotiation materials, check that out too (here)!      

As I have been working on a few projects involving law firms and legal education in the pandemic, I have come across a number of fun business law items involving mergers and acquisitions.  The news reports I have noted cover regulatory changes, case law, and planning/drafting.  Both small and large transactions are receiving attention.  I shared these with Business Law Section colleagues in the Tennessee Bar Association about a week ago.  I got some positive response.  So, I am sharing them here, too.  Feel free to post what you are seeing in this regard in the comments.

In the small business arena, a recent American Bar Association (ABA) Business Law Today article focuses in on clawback provisions in equity sale agreements.  These provisions, the article avers, “enable the former owner to participate in the consideration received in a subsequent sale of the business by the remaining owner or owners.” The article lists a number of key things to consider in drafting these kinds of provisions.

Another ABA Business Law Today piece notes the trend toward glorifying deal price in valuation determinations, as evidenced in recent Delaware court opinions on appraisal rights.  The article cites to three leading cases, two in 2017 and one in 2019, that address fair value determinations under Delaware law.  As to the most recent case, Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., No. 368, 2018 (Apr. 16, 2019) (per curiam), the article importantly notes that “the Delaware Supreme Court sides with the Chancery Court’s position—and reinforces recent Delaware jurisprudence—by holding that the deal price should act as a ceiling for a valuation, a result that will likely reinforce the trend in place since 2016 toward decreasing numbers of appraisal petitions.”

Another noteworthy M&A news item is the recent release by the Federal Trade Commission (FTC) and Department of Justice (DoJ) of final Vertical Merger Guidelines.  As multiple sources report (see, e.g., here and here), formal guidelines for non-horizontal mergers were last issued in 1984.  The most recent articulation of the FTC and DoJ Horizontal Merger Guidelines occurred in 2010.

Finally, an article in the National Law Review reminds us that it may be a good time to review client charters and bylaws to ensure that anti-takeover protections are up-to-date and adequate.  A helpful list of possible anti-takeover devices is included in the article.  The article also covers general corporate governance upgrades that may be warranted at this time.  Specifically, the article recommends “that boards evaluate potential revisions to their bylaws to allow for greater flexibility and clarity relating to shareholder meetings and board actions.”  Suggestions for shareholder meeting enhancements include ideas relating to virtual meetings and meeting procedures.  Advice on board action provisions relates to remote meetings and emergency bylaws.

Why should we care about these developments, observations, and recommendations?  Changes in the economy and in specific client circumstances relating to the COVID-19 pandemic may make M&A a more significant part of corporate governance and transactional activity for the next year or two.  As a result, it will be important for business lawyers to remain up-to-date on current M&A activity as well as related regulatory pronouncements and practice points.  As academics, we, too, may be engaged in related activities for the same reason.  Food for thought . . . .

Herbert Hovenkamp has posted “Antitrust and Platform Monopoly” on SSRN.  The abstract is below.  I was particularly struck by: “The history of antitrust law is replete with firms that are organized as single entities under corporate law, but that function as competitors and [are] treated that way by antitrust law.”

This article first considers an often-discussed question about large internet platforms that deal directly with consumers: Are they “winner take all,” or natural monopoly, firms? That question is complex and does not produce the same answer for every platform. The closer one looks at digital platforms they less they seem to be winner-take-all. As a result, we can assume that competition can be made to work in most of them.

Second, assuming that an antitrust violation is found, what should be the appropriate remedy? Breaking up large firms subject to extensive scale economies or positive network effects is generally thought to be unwise. The resulting entities will be unable to behave competitively. Inevitably, they will either merge or collude, or else one will drive the others out of business. Even if a platform is not a natural monopoly but does experience significant economies of scale in production or consumption, a breakup can be socially costly. In the past, structural relief of this type has led to higher prices or business firm failure. If breakup is not the answer, then what are the best antitrust remedies? One possibility is to break up ownership and management rather than assets. The history of antitrust law is replete with firms that are organized as single entities under corporate law, but that function as competitors and treated that way by antitrust law. This permits productive assets to remain intact, but forces decision makers to behave competitively.

Finally, this paper takes a look at the problem of platform acquisition of nascent firms, where the biggest threat is not from horizontal mergers but rather from acquisitions of complements or differentiated technologies. For these, the tools we currently use in merger law are poorly suited. Here I offer some suggestions.

Jeffrey Lipshaw has posted “The False Dichotomy of Corporate Governance Platitudes” on SSRN.  I have set forth the abstract below.  I had the pleasure of reading an early draft, and I highly recommend the paper.  Among other things, Jeff brings a level of practical experience to the topic (“more than a quarter century as a real world corporate lawyer and senior officer of a public corporation”) that makes his views a must-read.  Having said that, my own view is that the “shareholder vs. stakeholder” debate is meaningful even if it only really matters in “idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised.”

In 2019, the Business Roundtable amended its principles of corporate governance, deleting references to the primary purpose of the corporation being to serve the shareholders. In doing so, it renewed the “shareholder vs. stakeholder” debate among academic theorists and politicians. The thesis here is that the zero-sum positions of the contending positions are a false dichotomy, failing to capture the complexity of the corporate management game as it is actually played. Sweeping and absolutist statements of the primary purpose of the corporation are based on arid thought experiments and idiosyncratic cases in which corporate leaders have managed to be either bullheaded or ill-advised. In the real world, management regularly commits itself to multiple competing constituencies, including the shareholders.

There are three arguments. The first is from reality, borne out by a survey of pre-amendment CEO annual report letters to shareholders (2017) and post-amendment responses (2020) to the COVID-19 pandemic. The second is from economics. Neo-classical economic theory supporting the doctrine is misplaced; transaction cost analysis under the New Institution Economics does a far better job of explaining the primacy of wide corporate discretion in allocating surplus among the corporate constituencies. The third is from jurisprudence. Doctrinal dicta like “corporations exist primary to maximize shareholder wealth” are not so much right or wrong as meaningless. Rather, the business judgment rule, which justifies almost any allocation of corporate surplus having an articulable connection to the best interest of the enterprise, subsumes all other platitudes posing as rules of law.