I am teaching Sports Law this semester, which is always fun.  I like to highlight other areas of the law for my students so that they can see that Sports Law is really an amalgamation of other areas: contract law, labor law, antitrust law, and yes, business organizations.  I sometimes cruise the internet for examples to make my point that they really need to have a firm grounding the basics of many areas of law to be a good sports lawyer.  Today, I found a solid example, and not in a good way.  

I found a site providing advice about “How to Start a Sports Agency” at the site https://www.managerskills.org.  This is site is new to me.  Anyway, it starts off okay: 

Ask any successful sports agent: education is the foundation upon which you will build your business. The first step is to earn your bachelor’s degree from an appropriately accredited institution.

. . . .

Once you have obtained your bachelor’s degree, the next step will be to pursue your master’s degree. Alternately, you may choose to pursue a law degree.

While a law degree is not required, the skills you acquire during your studies will be particularly beneficial when it comes to negotiating contracts for your clients. Most major leagues, including the NFL and the NBA, requires their sports agents to possess a master’s degree.

All true. A law degree should also help when it comes to figuring out your entity choice.  The site’s advice continues: 

The next step is to choose a professional name for your business and to create a limited liability corporation (LLC). If you have one or more business partners, then you will need to create a limited liability partnership (LLP).

Yikes.  I mean, yikes.  First, an LLC is a limited liability company!

Second,  I believe that after Massachusetts allowed single-member LLCs in 2003, all states allowed the creation of single-member LLCs, so an LLC is an option. An LLP might be an option, and some professional entities for certain lawyers might be an option (or requirement), such as the PLLC or PC.  But the idea that one needs to choose an LLP if there is more than one person participating in the business is flawed. It is correct that to be an LLP, there would need to be more than one person, but this is not transitive.  

Anyway, while not great advice, this gives me some good material for class tomorrow.  I will probably start with, “Don’t believe everything you read on the Internet.” 

Like many in the law academy, I find three-day holiday weekends a great time to catch my breath and catch up on work items that need to be addressed.  This Labor Day weekend–including today, Labor Day itself–is no exception to the rule.  I am working today, honoring workers through my own work.  My husband and daughter are doing the same.

This blog post and the announcement it carries are among my more joyful tasks for the day.  I have been remiss in not earlier announcing and promoting our second annual Business Law Prof Blog symposium, which will be held at The University of Tennessee College of Law on September 14.  The symposium again focuses on the work of many of your favorite Business Law Prof Blog editors, with commentary from my UT Law faculty colleagues and students.  This year, topics range from the human rights and other compliance implications of blockchain technology to designing impactful corporate law, with a sprinkling of other entity and securities law related topics.  I am focusing my time in the spotlight (!) on professional challenges in the representation of social enterprise firms.  More information about the symposium is available here.  For those of you who have law licenses in Tennessee, CLE credits are available.

I am looking forward to again hosting some of my favorite law scholars at this symposium.  I am sure some will blog about their presentations here (Marcia already has previewed her talk and summarized all of our presentations, and I plan to later blog about mine), Transactions (our business law journal) will publish the symposium proceedings, and videos will be processed and posted on UT Law’s CLE website later in the year.  But if you are in the neighborhood, stop by and hear us all in person!  We would love to see you.

Transactions(BLBP-ConnectingThreadsLogo)

Did I lose you with the title to this post? Do you have no idea what a DAO is? In its simplest terms, a DAO is a decentralized autonomous organization, whose decisions are made electronically by a written computer code or through the vote of its members. In theory, it eliminates the need for traditional documentation and people for governance. This post won’t explain any more about DAOs or the infamous hack of the Slock.it DAO in 2016. I chose this provocative title to inspire you to read an article entitled Legal Education in the Blockchain Revolution.

The authors Mark Fenwick, Wulf A. Kaal, and Erik P. M. Vermeulen discuss how technological innovations, including artificial intelligence and blockchain will change how we teach and practice law related to real property, IP, privacy, contracts, and employment law. If you’re a practicing lawyer, you have a duty of competence. You need to know what you don’t know so that you avoid advising on areas outside of your level of expertise. It may be exciting to advise a company on tax, IP, securities law or other legal issues related to cryptocurrency or blockchain, but you could subject yourself to discipline for doing so without the requisite background. If you teach law, you will have students clamoring for information on innovative technology and how the law applies. Cornell University now offers 28 courses on blockchain, and a professor at NYU’s Stern School of Business has 235 people in his class. Other schools are scrambling to find professors qualified to teach on the subject. 

To understand the hype, read the article on the future of legal education. The abstract is below:

The legal profession is one of the most disrupted sectors of the consulting industry today. The rise of Legal Tech, artificial intelligence, big data, machine learning, and, most importantly, blockchain technology is changing the practice of law. The sharing economy and platform companies challenge many of the traditional assumptions, doctrines, and concepts of law and governance, requiring litigators, judges, and regulators to adapt. Lawyers need to be equipped with the necessary skillsets to operate effectively in the new world of disruptive innovation in law. A more creative and innovative approach to educating lawyers for the 21st century is needed.

For more on how blockchain is changing business and corporate governance, come by my talk at the University of Tennessee on September 14th where you will also hear from my co-bloggers. In case you have no interest in my topic, it’s worth the drive/flight to hear from the others. The descriptions of the sessions are below:

Session 1: Breach of Fiduciary Duty and the Defense of Reliance on Experts

Many corporate statutes expressly provide that directors in discharging their duties may rely in good faith upon information, opinions, reports, or statements from officers, board committees, employees, or other experts (such as accountants or lawyers). Such statutes often come into play when directors have been charged with breaching their procedural duty of care by making an inadequately informed decision, but they can be applicable in other contexts as well. In effect, the statutes provide a defense to directors charged with breach of fiduciary duty when their allegedly uninformed or wrongful decisions were based on credible information provided by others with appropriate expertise. Professor Douglas Moll will examine these “reliance on experts” statutes and explore a number of questions associated with them.

Session 2: Fact or Fiction: Flawed Approaches to Evaluating Market Behavior in Securities Litigation

Private fraud actions brought under Section 10(b) of the Securities Exchange Act require courts to make a variety of determinations regarding market functioning and the economic effects of the alleged misconduct. Over the years, courts have developed a variety of doctrines to guide how these inquiries are to be conducted. For example, courts look to a series of specific, pre-defined factors to determine whether a market is “efficient” and thus responsive to new information. Courts also rely on a variety of doctrines to determine whether and for how long publicly-available information has exerted an influence on security prices. Courts’ judgments on these matters dictate whether cases will proceed to summary judgment and trial, whether classes will be certified and the scope of such classes, and the damages that investors are entitled to collect. Professor Ann M. Lipton will discuss how these doctrines operate in such an artificial manner that they no longer shed light on the underlying factual inquiry, namely, the actual effect of the alleged fraud on investors.

Session 3: Lawyering for Social Enterprise

Professor Joan Heminway will focus on salient components of professional responsibility operative in delivering advisory legal services to social enterprises. Social enterprises—businesses that exist to generate financial and social or environmental benefits—have received significant positive public attention in recent years. However, social enterprise and the related concepts of social entrepreneurship and impact investing are neither well defined nor well understood. As a result, entrepreneurs, investors, intermediaries, and agents, as well as their respective advisors, may be operating under different impressions or assumptions about what social enterprise is and have different ideas about how to best build and manage a sustainable social enterprise business. Professor Heminway will discuss how these legal uncertainties have the capacity to generate transaction costs around entity formation and management decision making and the pertinent professional responsibilities implicated in an attorney’s representation of such social enterprises.

Session 4: Beyond Bitcoin: Leveraging Blockchain for Corporate Governance, Corporate Social Responsibility, and Enterprise Risk Management

Although many people equate blockchain with bitcoin, cryptocurrency, and smart contracts, Professor Marcia Narine Weldon will discuss how the technology also has the potential to transform the way companies look at governance and enterprise risk management. Companies and stock exchanges are using blockchain for shareholder communications, managing supply chains, internal audit, and cybersecurity. Professor Weldon will focus on eliminating barriers to transparency in the human rights arena. Professor Weldon’s discussion will provide an overview of blockchain technology and how state and nonstate actors use the technology outside of the realm of cryptocurrency.

Session 5: Crafting State Corporate Law for Research and Review

Professor Benjamin Edwards will discuss how states can implement changes in state corporate law with an eye toward putting in place provisions and measures to make it easier for policymakers to retrospectively review changes to state law to discern whether legislation accomplished its stated goals. State legislatures often enact and amend their business corporation laws without considering how to review and evaluate their effectiveness and impact. This inattention means that state legislatures quickly lose sight of whether the changes actually generate the benefits desired at the time off passage. It also means that state legislatures may not observe stock price reactions or other market reactions to legislation. Our federal system allows states to serve as the laboratories of democracy. The controversy over fee-shifting bylaws and corporate charter provisions offers an opportunity for state legislatures to intelligently design changes in corporate law to achieve multiple state and regulatory objectives. Professor Edwards will discuss how well-crafted legislation would: (i) allow states to compete effectively in the market for corporate charters; and (ii) generate useful information for evaluating whether particular bylaws or charter provisions enhance shareholder wealth.

Session 6: An Overt Disclosure Requirement for Eliminating the Duty of Loyalty

When Delaware law allowed parties to eliminate the duty of loyalty for LLCs, more than a few people were appalled. Concerns about eliminating the duty of loyalty are not surprising given traditional business law fiduciary duty doctrine. However, as business agreements evolved, and became more sophisticated, freedom of contract has become more common, and attractive. How to reconcile this tradition with the emerging trend? Professor Joshua Fershée will discuss why we need to bring a partnership principle to LLCs to help. In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j). As such, the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default. The duty of loyalty norm is sufficiently ingrained that more active notice (and more explicit consent) is necessary, and eliminating the duty of loyalty is sufficiently unique that it warrants unique treatment if it is to be eliminated.

Session 7: Does Corporate Personhood Matter? A Review of We the Corporations

Professor Stefan Padfield will discuss a book written by UCLA Law Professor Adam Winkler, “We the Corporations: How American Businesses Won Their Civil Rights.” The highly-praised book “reveals the secret history of one of America’s most successful yet least-known ‘civil rights movements’ – the centuries-long struggle for equal rights for corporations.” However, the book is not without its controversial assertions, particularly when it comes to its characterizations of some of the key components of corporate personhood and corporate personality theory. This discussion will unpack some of these assertions, hopefully ensuring that advocates who rely on the book will be informed as to alternative approaches to key issues.

 

It’s not that there isn’t other news, it’s just that this is swimming in warm water.  A few days ago, SurveyMonkey filed an S-1 for its forthcoming IPO, and there are a few things that jumped out at me.

First, there’s a survey!

Survey3

Survey4

(Okay, I’m feeling a little attacked right now.)

Second, there’s a warning!  I previously warned about warnings; poorly drafted ones can warn the registrant right out of a truth on the market/materiality defense if there’s a subsequent securities fraud claim.  SurveyMonkey seems to get it right, though:

Warning1

So, unlike warnings that have gotten issuers into trouble in the past, this one doesn’t explicitly tell anyone not to rely on external information.  It’s just warning you that external information isn’t attributable to SurveyMonkey.

(Which, incidentally, highlights the artificiality of the entire exercise; does anyone seriously believe that from an investor/market perspective, there’s any real difference between “you should only rely on us” language and “we have not authorized anyone else” language?)

And finally, as I promised in my subject line, there’s the litigation limit:

Forum1

Okay, so much to talk about here.  First, if you’ve been following along, you know that I’ve repeatedly posted about – and written one article and one book chapter discussing – the question whether corporate governance documents can limit federal securities claims.  My view is, they can’t.  But, as I previously mentioned, that issue is currently being tested in Delaware, with oral argument currently scheduled for September 27, so we may have a clear answer soon (umm, well, after the appeal that I assume will follow whatever the Chancery court decides).

And this matters a heckuva lot, because funneling Securities Act claims into federal courts may not seem like much of a deal, but that’s just a stalking horse for the more explosive question, namely, whether corporations can use their governance documents to require that federal securities claims be arbitrated, and likely, arbitrated individually rather than on a class basis.  That issue has seen a resurgence of interest, with SEC Commissioners current and former seeming to encourage the idea, and the Consumer Federation of America recently issuing a white paper arguing against it.  If Delaware decides – as I think it should – that litigation limits in corporate governance documents can only be applied to state claims, then it’s difficult to see what mechanism companies could use to dictate the arbitration of federal claims, no matter what the SEC says. (Though I suppose they’ll come up with something, but there will then be the question whether that “something” is a contract subject to the Federal Arbitration Act, etc, etc.)

Finally, I note that SurveyMonkey put its forum selection clause in its bylaws.  That’s a change from other companies that recently went public, like Snap, Roku, Blue Apron, and Stitch Fix, all of which included the provisions in their charters where they would be much more difficult for shareholders to change (umm, also, some of those shareholders can’t vote).  In any event, SurveyMonkey is implicitly giving its shareholders the option of repealing the bylaw if they want to (assuming SurveyMonkey’s directors don’t, you know, change it right back).

So, that’s the state of play, and as far as I’m concerned the ball’s now in Delaware’s – not the SEC’s – court.

The New York Times recently published a compelling article about a dispute a woman had with J.P. Morgan Securities after she discovered odd activity in her mother’s account.  The account, which was to help provide for her mother through retirement, had losses at times when the market otherwise rallied:

Around the time of her mother’s move, Ms. Dewart noticed what looked like unusual activity in the account, which she and her older sister had overseen for about four years. A closer look revealed that it was down $100,000 in a month.

“My own accounts were rallying, so I thought this was strange,” she said.

She notified the firm that something seemed awry. As someone who does research and policy analysis for a living, she also put her own skills to work.

She pored over piles of statements and trade confirmations, built spreadsheets and traded phone calls and emails with the broker who handled the account, Trevor Rahn, his manager and the manager’s manager. She hired a lawyer and worked with a forensic consultant.

After about six months, she learned that the account, worth roughly $1.3 million at the start of 2017, had been charged $128,000 in commissions that year — nearly 10 percent of its value, and about 10 times what many financial planners would charge to manage accounts that size.

Much financial misconduct may go undetected when sophisticated Wall Street firms manage money for ordinary people.  Here, Ms. Dewart appears unusually sophisticated and determined.  It still took her about six months to figure out exactly how much money had gone out the account in commissions in a single year.  For the average, financially-illiterate American, odds of truly understanding account activity may be even lower.

Law must play a role here.  Legal standards should provide adequate assurances to make sure that financial advisers remain faithful to their clients and do not opportunistically mismanage their accounts.  This has been a hot issue for some time. The Department of Labor’s fiduciary rule attempted to do this for retirement money. The SEC is now considering how to craft an appropriate “Best Interests” regulation to better govern broker behavior.  As it works to craft the right regulation, it should keep in mind how much misconduct may go undetected because people don’t know much about the area and often struggle to connect the dots.

Speaking of connecting the dots, there are a few dots relevant to the New York Times Story that didn’t make it into the article.  Publicly available sources provide additional context if you know where to look.  Let’s start with the settlement amount.  The article reports that J.P. Morgan eventually credited some of the commissions back and later settled as sum Ms. Dewart is “prohibited from discussing” because of the confidentiality agreement. The existence of the confidentiality agreement does not mean that amount is not actually public information.  According to the BrokerCheck report for Mr. Rahn, J.P. Morgan paid a settlment of $64,590 in connection with a complaint that came in on November 13, 2017.  In the Times article, J.P. Morgan cagily stated that Ms. Dewart “agreed to an appropriate resolution of this matter in June.”  The BrokerCheck form reveals that matter’s status was “settled” with a status date of June 13, 2018.  This probably means that after all that, Ms. Dewart recovered $64,590.  

But there is no reason to wonder whether that settlement involved Ms. Dewart.  The information, although not on BrokerCheck, is already public record.  Florida has excellent sunshine laws and will produce reports from the CRD Database on request–and quickly too.  It took me less than 24 hours to pull the report.  It confirms that the settlement involved Ms. Dewart.

Is this settlement amount fair and reasonable given the allegations and what happened?  This is probably unknowable.  All the documents are not publicly available.  But there is good reason to believe that Ms. Dewart didn’t manage to recover the opportunity costs for the period of time the account was allegedly mismanaged.  In many instances, these cases settle on a net-out-of-pocket basis.  That means that the investor may be able to get back some of what they “lost” relative to their initial investment.  For example, if you invest $100 and end up with $70 after a year, then the out-of-pocket loss may be $30.  But if the market went up 20% during the same time period, the actual losses (taking into account the lost opportunity to get market gains) are probably closer to $50.  In practice, this means that a bull market allows a stunning amount of exploitation.  Many customers will never alert to opportunity cost losses if their accounts are going up.

There is another dot worth connecting here.  Mr. Rahn has another disclosure on his BrokerCheck report.  It reveals that another firm has an outstanding judgment/lien against Mr. Rhan for $763,424.76.  If the lien hasn’t been paid, Mr. Rahn owes Deutsche Bank Securities about three quarters of a million dollars.  The Lein appears to be based on an arbitration award against Mr. Rhan from a claim that was filed in 2011.  That award can be found by searching for Mr. Rahn in the FINRA Awards Database.  Apparently, Deutsche Bank sued Mr. Rahn for not paying a promissory note.  The award is notably because Mr. Rahn was also assessed $205,654.59 to cover Deutsche Bank’s attorney’s fees.  The CRD report reveals that he received a withholding notice on August 9, 2014.  This means that Mr. Rahn probably loses a portion of his pay each pay period to pay off the outstanding lien.  Although there is always an incentive for commission-compensated brokers like Mr. Rahn to do more transactions than necessary to make more money, investors may want to be careful about working with brokers that have financial problems or substantial outstanding debts.

 

 

In a recent California appellate opinion disposing of the second appeal of an earlier judgment seems to have the court irritated.  It does appear the appellant was trying to relitigate a decided issue, so perhaps that’s right.  But the court makes its own goof.  After referring repeatedly to the “limited liability company” at issue, the court then goes down a familiar, and disappointing, path.  The court explains: 

In any event, the Supreme Court opinion which Foster contends we disregarded, Essex Ins. Co. v. Five Star Dye House, Inc. (2006) 38 Cal.4th 1252, 1259, has no relevance here. Essex decided whether an assignee of a bad faith claim could also recover attorney fees. (Ibid.) This holding has nothing to do with whether a limited liability corporation may assign its appellate rights in an improper attempt to circumvent the rules requiring corporations to be represented by attorneys.

JENNITA FOSTER, Plaintiff & Appellant, v. OLD REPUBLIC DEFAULT MANAGEMENT SERVICES, Defendant & Respondent., No. B280006, 2018 WL 4075910, at *2 (Cal. Ct. App. Aug. 27, 2018) (emphasis added).  
 
It’s not clear whether Essex Insurance Company is an LLC or a corporation, though it’s a strong bet it is a corporation. (A search of California entities and a quick look at the docket were inconclusive.) Regardless, I know that case does not discuss LLCs and that the instant case definitely deals with a “limited liability company.”  It is “unpublished/noncitable,” according to Westlaw, so I guess that’s good, but it is still out there. 
 
Ultimately, the court’s apparent frustration seems warranted, but it is a little ironic (and a bit amusing) that the court misstates the entity type in the smackdown.  

Are corporations (and other business associations) political actors?  Of course.  Some of Marcia’s posts here on the BLPB have raised, for example, questions about the use of boycotts as firm political activity.  See, e.g., here.  Marcia also pointed out here that National Football League teams (typically owned by and operated through some form of business association) have been caught up in political activity surrounding the players-kneeling-during-the-national-anthem controversy.

The Vanderbilt Law Review has recently published an essay on the political corporation written by a Dream Team of sorts–two friends who are married to each other–at the University of South Carolina School of Law, Susan Kuo and Ben Means.  Susan teaches advocacy and dispute resolution courses (currently focusing on criminal law and procedure, conflicts, and social justice issues) and is the Associate Dean for Diversity and Inclusion.  Ben is likely known to many BLPB readers as a business law guy (with a special focus on small and family owned busnesses). He’s been a member of the executive committee for the Association of American Law Schools (AALS) Section on Business Associations and is past chair of the AALS Section on Agency, Partnership, LLCs, and Unincorporated Business Associations.  They bring their individual and collective talents to this essay, entitled The Political Economy of Corporate Exit.  Here is the SSRN abstract.  

Corporate political activity is understood to include financial contributions, lobbying efforts, participation in trade groups, and political advertising, all of which give corporations a “voice” in public decisionmaking. This Essay contends that the accepted definition of corporate political activity overlooks the importance of “exit.” Corporations do not need to spend money to exert political influence; when faced with objectionable laws, they can threaten to take their business elsewhere. From the “grab your wallet” campaign to the fight for LGBT rights in states such as Georgia, Indiana, and North Carolina, corporate exit has played a significant role in recent political controversies.

This Essay offers the first account of corporate exit as a form of political activity and identifies two basic rationales: (1) attaching economic consequences to public choices, and (2) avoiding complicity with laws that violate a corporation’s values. This Essay also shows how citizens can harness corporate economic power when conventional political channels are inaccessible. In an era of hashtag activism and boycotts sustained via social media, corporations cannot afford to ignore consumers, employees, investors, and other stakeholders.

I communicated with Ben about this piece a while back and was excited about it then.  I am looking forward to getting into it in short order.  Looks like a relevant, insightful read.