I’ve previously blogged about using negotiation exercises in my undergraduate and graduate Business Law/Legal Environment courses (here).  I’ve also mentioned that, having taught both business law and negotiation courses in a law school, I know that such exercises would also work well in a law school business law course.   

Last August, at the Annual Conference of the Academy of Legal Studies in Business, I had the good fortune of catching up with Professor Susan Marsnik from the University of St Thomas Business School.  Eventually, our conversation turned to one of my favorite topics: negotiation!  Marsnik mentioned that Professor George Siedel, the Williamson Family Professor of Business Administration Emeritus and the Thurnau Professor of Business Law Emeritus at the University of Michigan, had written some great negotiation materials (here), and they were free!  Obviously, I couldn’t wait to learn more!  And now that I have, via Marsnik’s help, I wanted to pay it forward!  

Siedel’s comprehensive negotiation materials center on the sale of a house, and include Seller/Buyer roles.  He shares that “Over the years, I have developed and tested “The House on Elm Street” exercise in undergraduate and MBA courses and in executive seminars in North America, South America, Asia and Europe.  The courses and seminars have been developed for (or have included) a wide range of participants, such as athletic directors, attorneys, engineers, entrepreneurs, managers, and physicians.” (p. 2) 

What is absolutely wonderful about Siedel’s materials is that he also provides not only a slide deck, but also a twenty-page teaching note, Why and How to Add Negotiation to Your Introductory Law Course, to guide you through how to teach the exercise.  This is key.  He states (and I agree) that many professors don’t include negotiation exercises in their business law courses because there is already so much material to cover, and perhaps more importantly, they don’t feel qualified to teach it.  That’s the beauty of these materials: Siedel walks you through teaching the exercise, step by step!  Many negotiation exercises for purchase do include teaching notes.  However, Siedel’s teaching notes are free, and among the most comprehensive that I’ve seen.  What are you waiting for?

In my experience, students love negotiation exercises.  Probably like many BLPB readers, I’m tweaking and finalizing my spring 2020 course syllabi as the new semester is around the corner.  I encourage you to review Siedel’s excellent materials, and consider including negotiation exercises in your business law courses.  It would be ideal if: 1) students were to be able to read at least some of a good negotiation text such as Siedel’s Negotiation for Success: Essential Strategies and Skills or Richard Shell’s Bargaining for Advantage: Negotiation Strategies for Reasonable People, and 2) you had a full 75 minutes to debrief the negotiation exercise.  However, from my perspective, you shouldn’t let the absence of either deter you, especially from trying out the negotiation exercise for the first time.  That’s exactly how I’m about to proceed, and I’ll keep you posted on how it all turns out.

Finally, a huge THANK YOU to Professor Siedel for creating and making these materials available!

    

     

Business Associations is a tough course to teach, whether it is taught in a three-credit-hour or four-credit-hour format.  I have written before (here, here, and here) about the challenges of teaching fiduciary duties in this course.  And I recently posted here and here about the characterization of a classic oversight conundrum as a matter of corporate fiduciary duty law in Delaware.

I just recently finished grading my Business Associations exams from last semester.  They were a good lot overall, but they evidenced several somewhat common errors that seemed to beg for broad dissemination to the class. So, I sent them all a message inviting them to come in and review their exams and highlighting certain things for their attention of a more general nature.  

Today, I offer you that general counsel that I gave to my Business Associations students based on that review of their written final exams.  It is set forth below, absent my introductory and closing remarks.  As you’ll see, some of it relates to substantive law, and some of it relates to exam or other skills.  Perhaps this is of use to those of you who just taught or are about to teach the course.  Maybe some students will read it and learn from it.  Regardless, here it is.

  • Agency rules and management rules in business associations law are often confused. Agency rules express the authority of a person to act on behalf of the firm in transactions with third parties–those who enter into transactions with the firm. For example, by default under the RUPA, each partner in a RUPA partnership is an agent of the partnership that can bind the partnership to contracts with others. Management rules, by contrast address the governance and control authority of a particular firm constituent within the governance structure of the firm. Thus, agency rules relate to authority that is outward-facing (pertaining to transactional parties) and management rules relate to authority that is inward-facing (pertaining to internal constituents of the firm). For example, by default under the RUPA, each partner has an equal right to manage the partnership.
  • Similarly, the concept of “limited liability” is commonly understood to refer to the limited liability of a firm owner for the firm’s obligations. For example, under the RUPA, each partner is jointly and severally liable for the obligations of the partnership, whereas under corporate law, shareholders are not personally liable for the corporation’s obligations to third parties. Exculpation, which eliminates the monetary liability of directors in the corporate context, relates to corporate governance claims–legal actions for breach of the fiduciary duty of care. This is internal governance litigation that does not relate to corporate obligations to third parties. So, while exculpation does limit (eliminate) a director’s personal liability for a breach of the duty of care, it is not part of what people generally refer to as “limited liability” in a corporate context.
  • Fiduciary duties are typically understood to instill or increase trust in relationships. Accordingly, they are commonly employed to provide a benefit in circumstances involving untrustworthy business associates. Yet a number of you seemed to think they were an undue burden to business venturers in circumstances where trust may be lacking (i.e., where fiduciary duties should be useful). You will need to make a solid argument to most folks to justify that the detriments outweigh the benefits.
  • If an exam or assignment question asks for you to talk about why one set of rules is better than another in addressing a specific scenario, make sure you contrast examples from the two sets of rules, applying each to the relevant facts.
  • Read questions carefully and closely. When a question asks for you to reference or rely on statutory default rules,ensure that your response references or relies on statutory default rules–not on ways on which those rules can be or have been agreed around through private ordering. When a question asks for information or an evaluation or rules relating to member-managed LLCs, ensure you directly address member-managed LLCs in lieu of (or at least before) commenting on manager-managed LLCs or the flexibility of moving back and forth between member-managed and manager-managed LLCs.
  • Don’t forget to cite to an appropriate source for rules on which you rely in your legal analysis.
  • Keeping track of and managing time is important to the bar exam and other in-class timed exercises. If you ran out of time in responding to the prompts on this exam, evaluate why. I can help, if need be. But understanding how and why your time management skills may have failed you can be important.

Feel free to add your observations or advice of a similar (or different) nature in the comments.  I am teaching Advanced Business Associations this semester, so I can work on some of these things during that course.  In any event, I wish you all a happy and healthy semester and year, whatever you may be teaching or doing.

Most readers are probably familiar with the case of Morrison v. Berry.  There, Fresh Market was taken private by Apollo in a two-step tender offer.  After the deal closed, a shareholder filed a lawsuit alleging that the directors had breached their duties and failed to obtain the best price for shareholders because Ray Berry, founder of Fresh Market and Chair of the Board, along with his son, colluded with Apollo to roll over their shares in the new company and rig the sales process in Apollo’s favor.  Defendants contended that shareholders’ acceptance of Apollo’s offer cleansed any breaches under Corwin; therefore, the critical question was whether the shareholders were fully informed.  VC Glasscock held that any omissions were immaterial as a matter of law, and the Delaware Supreme Court reversed, holding that omissions regarding the Berrys’ level of precommitment to Apollo were material.

After remand, the plaintiff filed a new complaint and the defendants renewed their motions to dismiss.  And on December 31, VC Glasscock granted in part and denied in part those motions.  In particular, he held:

(1) The directors other than Ray Berry were independent and disinterested, and neither the sales process nor the omissions evinced bad faith.  In particular, enough was disclosed about Berry’s mendacity and the pressures facing the Board that any additional omissions could not have been intended to fool anyone, since, reading between the lines, shareholders could have sussed out the truth.  (“If the Director Defendants’ intent was to ensure that the 14D-9 would entice stockholders to vote for the merger in the mistaken belief that the directors were unaware of activist pressure, or to hide that Berry’s weight was behind the Apollo bid, they did a poor job, indeed. So poor, I find, that a reasonable inference of bad faith in the omissions cannot be drawn.”).  This, of course, is Glasscock’s way of reaffirming his original conclusion that the omissions were not material; the first time around, he held that enough was disclosed that shareholders did not require more details, and the second time around, he held that since so much was disclosed, the remaining omissions must not have been intentional deceptions.

(2) The plaintiff plausibly alleged that Ray Berry acted in bad faith and out of self-interest by misleading the Board about his relationship with Apollo.

(3) Two officer defendants (one of whom was also a director) were not protected by Fresh Market’s 102(b)(7) provision.  Though the plaintiff did not plausibly allege they acted disloyally/in bad faith, the plaintiff did plausibly allege at least negligence with respect to the omissions.  Again, however, Glasscock alluded to his earlier ruling: “another reasonable interpretation is that the 14D-9 represents a good faith but failed effort to make reasonable disclosures…  As [one defendant] points out, I initially and erroneously determined that the omissions in the 14D-9 were not material.”  But, since inferences on a motion to dismiss are drawn in favor of the plaintiff, these claims would survive – for now.

(4) Finally, the court reserved judgment on the plaintiff’s aiding and abetting claims.  The plaintiff alleged that JP Morgan, Cravath, Apollo, and Ray Berry’s son Brett Berry all aided and abetted breaches by concealing Ray Berry’s discussions with Apollo, contributing to the omissions in the 14D-9, and by concealing from the Board that JP Morgan secretly fed Apollo information. 

So, the things that stand out for me:

First, the case is being maintained, in part, due to the inability of corporate officers to exculpate negligence violations under 102(b)(7).  Megan Shaner has written a lot about how officer duties are underdeveloped in Delaware law (see, e.g., Officer Accountability, 32 Ga. St. U.L. Rev. 355 (2016)); this case may become one of the few that permits an exploration of the subject.

Second, I am discomfited by the suggestion that the court’s initial mistake in concluding that the omissions were immaterial might be relevant to a determination of defendants’ scienter.  The logic, apparently, is that if a court innocently believed these facts to be immaterial, corporate officers and directors may have operated under the same good faith misapprehension.

Leaving aside the difference in context – corporate insiders know far more about the business, the shareholders’ priorities, and the details of any omissions than a judge does (especially on a motion to dismiss) – I wonder how far the logic could extend.  After all, in securities cases under Section 10(b), it’s not uncommon to see dismissals on materiality grounds that are reversed on appeal.  Does the initial dismissal suggest that an inference of scienter is defeated, especially given the higher pleading standards for a 10(b) case? Couldn’t you draw exactly the opposite inference, i.e., if corporate insiders actually know a fact, and intentionally leave it out of a narrative but do hint at its existence (making “partial and elliptical disclosures,” in the Delaware Supreme Court’s phrasing), doesn’t that suggest they were strategically playing coy about the facts?

(I am also reminded of In re Ceridian Corp. Securities Litigation, 542 F.3d 240 (8th Cir. 2008), where the errors in the defendant company’s financial statements were so overwhelming that the court figured the mistakes must have been inadvertent; no intelligence could have designed them.)

 

Third, the court rejected the plaintiff’s allegation that director and CEO Richard Anicetti was motivated to keep the buyout price low because if he stayed with the company, he’d be compensated based on whether Apollo earned particular multiples of invested capital (MOIC) – payments that would become increasingly lucrative the less that Apollo paid Fresh Market stockholders.  Now, compensation tied to MOIC is a new tactic that Guhan Subramanian and Annie Zhao recently identified as having been adopted by private equity buyers to manipulate corporate management; here, however, Glasscock wasn’t buying the argument, in part because any such moves on Anicetti’s part would have cost him up front, to the extent he received a lower price for his own shares.  Still, I expect we’ll continue to see litigation over the practice.

And … yeah, I don’t have a pithy wrap-up here, but I do think the aiding-and-abetting determinations will be interesting.

I want to get an early start on wishing a HAPPY NEW YEAR to all BLPB readers!  May 2020 be one of your best years yet!  I’m celebrating by going to my very first “Shrimp Drop” with my mom.  Turns out that Fernandina Beach, FL. is the “Birthplace of the Modern Shrimping Industry.”  I do love shrimp!

Other than this, I can’t think of a more exciting way to ring in 2020 than by reading a new, fantastic article on banking!  Fortunately, I didn’t have to look far.  Jeremy C. Kress and Matthew C. Turk recently posted: Too Many to Fail: Against Community Bank Deregulation (here).  Legal scholarship has thus far paid scant attention to community banks.  After reading their work, you’ll understand why this shortfall is unfortunate, and this article so important.  Here’s the abstract:  

Since the 2008 financial crisis, policymakers and scholars have fixated on the problem of “too-big-to-fail” banks. This fixation, however, overlooks the historically dominant pattern in banking crises: the contemporaneous failure of many small institutions. We call this blind spot the “too-many-to-fail” problem, and document how its neglect has skewed the past decade of financial regulation. In particular, we argue that, for so-called community banks, there has been a pronounced and unjustifiable shift toward deregulation, culminating in sweeping regulatory rollbacks in the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.

As this Article demonstrates, this deregulatory trend rests on three myths. First, that community banks do not contribute to systemic risk and were not central to the 2008 crisis. Second, that the Dodd-Frank Act imposed regulatory burdens that threaten the survival of the community bank sector. And third, that community banks cannot remain viable without special subsidies or regulatory advantages. While these claims have gained near-universal acceptance among legal scholars and policymakers, none of them withstands scrutiny. Contrary to the conventional wisdom, community banks were key participants in the 2008 crisis, were not uniquely burdened by post-crisis reforms, and continue to thrive economically.

Dispelling these myths about the community bank sector leads to the conclusion that diligent oversight of community banks is necessary to preserve financial stability. Accordingly, this Article recommends a reversal of the community bank deregulatory trend and proposes affirmative reforms, including enhanced supervision and macro-prudential stress tests, that would help mitigate systemic risks in the community bank sector.

 

The title of this post is the core question behind a transactional law laboratory that I am co-teaching with my amazing colleague Eric Amarante for a seven-week period starting next week.  The course is being taught to the entire 1L class (intimidating!) in one two-hour class meeting each week.  In essence, the course segments explore, principally through the subjects taught in the first-year curriculum, the nature of transactional business law.  This is our first semester teaching this course, which is a substantially revised version of a course UT Law added to its 1L curriculum three years ago.  We are pretty jazzed up about it–but understandably nervous about how our course plan will “play” with this large group.

Because 1Ls come to transactional business law from various different backgrounds and experiences (including different first-semester law professors), we plan to begin by striving to develop some common ground for our work.  To that end, I am asking for a late Christmas present or early New Year’s gift from all of you: your answer to one or more of the following questions.  How would you define transactional business law?  What are some examples of this kind of practice?  What makes a good transactional business lawyer?  Why should every law student need to know something about transactional business law (and what should they need to know)?  Let me know.

These are the kinds of questions we’ll be probing through discussions, drafting, problem-solving, and other in-class and out-of-class experiences in the context of contract law, property law, tort and criminal law, agency law, professional responsibility, and more.  The objective is substantive exposure, not mastery.  Although teaching 125+ students at once is a tall order (and we will be breaking the class down into small groups for various activities), I admit that I am a bit excited about this.  I hope you are, too, and that a few of you will respond in the comments or send me a private message.

In the mean time, enjoy the waning holiday season.  I wish a happy new year to all.  And (of course) I wish good luck to the many among you who also are starting a new semester in the coming weeks.

This fall semester flew by. Hoping to make time to read and listen to more good content next semester. Always open to suggestions, especially podcasts because my commute is now about 30 minutes each way. 

Books

A Guide to the Good Life: The Ancient Art of Stoic Joy – William B. Irvine (Philosophy) (2009). Review of stoicism and an attempt at modern application. “Unlike Cynicism, Stoicism does not require its adherents to adopt an ascetic lifestyle. To the contrary , the Stoics thought that there was nothing wrong with enjoying the good things life has to offer, as long as we are careful in the manner we enjoy them. In particular, we must be ready to give up the good things without regret if our circumstances should change.” (46).

Utilitarianism – John Stuart Mill (Philosophy) (1863). Reread before my spring business ethics class. “It is better to be a human being dissatisfied than a pig satisfied; better to be Socrates dissatisfied than a fool satisfied. And if the fool or the pig think otherwise, that is because they know only their own side of the question. The other party to the comparison knows both sides.” (7). “Next to selfishness, the principal cause that makes life unsatisfactory is a lack of mental cultivation.” (10). 

Just Mercy – Bryan Stevenson (Non-fiction, Law) (2014). Stories of injustice in our criminal legal system. Reread in advance of our SEALSB Conference in Montgomery, AL. Stevenson founded the Equal Justice Institute (EJI) in Montgomery. The EJI’s museum and memorial are well worth your time; like the book, they are quite moving. 

Podcasts

The Dream – an investigation of multi-level marketing companies (MLM).

Road to the Olympic Trials – Peter Bromka ran just two seconds shy of the standard; he will take another shot at the Houston Marathon in January. 

Elizabeth Anscombe on Living the Truth (Jennifer Frey – University of South Carolina, Philosophy). Focuses on Anscombe’s theory of intentionality of action.

Ipse Dixit Legal Scholarship Podcasts (hosted by Brian Frye – University of Kentucky, Law)

I’ve previously blogged about – and written an essay about – how one of the knock-on effects of Corwin and MFW is to increase the distance between the treatment of controlling shareholder transactions, and other transactions, under Delaware law.  As a result, the outcome of many a motion to dismiss turns solely on the presence or absence of a controlling shareholder – which puts increasing pressure on the definition of control in the first place.  In particular, I’ve argued, courts uncomfortable with Corwin’s Draconian effects may be tempted to expand the definition of control in order to avoid early dismissals of cases that smack of unfairness.

The latest example of the genre comes by way of Vice Chancellor McCormick’s ruling on the motion to dismiss in Garfield v. BlackRock Mortgage Ventures et al.  There, an enterprise organized as an “Up-C” sought to transform itself into an ordinary corporation, largely for the benefit of the two founding investors, BlackRock and HC Partners, as well as several directors and corporate officers.  The question was whether the transaction was fair to the public stockholders, who overwhelmingly voted in favor of the deal.  If BlackRock and HC Partners were not deemed to be controllers, the stockholder vote would cleanse the deal under Corwin and the case would be dismissed; if they were, the court would be permitted to substantively examine the transaction’s fairness.

Together, BlackRock and HC Partners controlled 46.1% of the vote, had Board representation, and had blocking rights; thus, the court easily found that if they acted together, they had control. The critical question was whether they had, in fact, agreed to act in concert, or whether they simply had concurrent, but independent, interests in the transaction.  For these sorts of inquiries, the standard on which Delaware courts have settled is that to constitute a group, the putative controllers must be “connected in some legally significant way—such as by contract, common ownership, agreement, or other arrangement—to work together toward a shared goal.”

To determine whether this standard was met, McCormick looked for both transaction-specific facts suggestive of an agreement, as well as historical facts indicting that the defendants had agreed to coordinate in the past.  Here, BlackRock and HC Partners’s long history of coordinated involvement with the company, coupled with their critical roles in approving the reorganization, created an inference of concerted action.  As a result, the plaintiff had plausibly alleged the presence of a controlling group, and Corwin did not apply.  Motion to dismiss denied.

So, there are a couple of things that interest me here. 

First, it’s another example of “controller-creep.”  The cases on which McCormick relied, Sheldon v. Pinto, 2019 WL 4892348 (Del. Oct. 4, 2019) and In re Hansen Medical Shareholders Litigation, 2018 WL 3025525 (Del. Ch. June 18, 2018), also identified “historical” ties as a factor to consider when inferring the presence of an agreement among putative members of a control group, but in those cases, the courts demanded that plaintiffs identify multiple investments in multiple companies – and refused to infer an agreement without them.  Here, by contrast, McCormick found a history just due to the defendants’ investment in this single company.

Second, there are many areas of law where the presence of an agreement among parties, rather than simply concurrent self-interest, is critical (13D filings, antitrust law, RICO), and courts therefore have to closely examine the defendants’ behavior to see if such an agreement can be inferred.  There seems to be little cross-pollination in the caselaw, however (though in Hansen, one “historical” factor used to infer the existence of an agreement was a 13D filing from a previous venture), and to be honest, that’s how it should be – there are different policies at play in different areas of law, not to mention different legal standards on a motion to dismiss, and it makes sense courts would therefore approach the analyses differently.  That said, in the Garfield briefing, I detect efforts by the BlackRock defendants in particular to import antitrust concepts into the controlling shareholder inquiry, via the suggestion that agreements can only be inferred if there’s evidence that the parties sacrificed their immediate self-interest in service of a larger goal.  Correctly, I think, McCormick chose not to pursue that argument.

Third, though, I get back to my problem with this entire line of precedent, which is well-illustrated by this case.  We’re talking about a transaction structured to benefit a small number of shareholders with outsized voting power and management control; BlackRock and HC Partners had veto rights and were intimately involved in the planning stage even before the presentation to the Board.  If the goal is to protect the public stockholders, why on earth should it matter whether these two formally agreed to act together? Whether they did or they didn’t wouldn’t make the transaction any less favorable to them, or any less coercive to the public stockholders.  And that’s because control exists on a spectrum, not as an on/off switch, and two large investors with concurrent interests, board representation, and 46.1% of the voting power are just as threatening to the public stockholders, and exert just as much influence, whether they’ve formally agreed to act together or not.  Plus, recall that the whole (purported) reason controlling shareholder transactions cannot be cleansed by a shareholder vote is that we presume shareholders are afraid to buck a controller.  Shareholders can’t be intimidated by a secret agreement they know nothing about; if we were truly serious about inquiring into shareholder coercion, we’d be asking about shareholder perceptions of an agreement, not whether there actually was one.  So what we’re seeing, again, is how the “controlling shareholder” legal analysis imposed by Corwin/MFW is often divorced from the underlying business reality, which ultimately leads courts down a garden path of irrelevance.