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Malaga, Spain

I’m in the midst of grading, revising an article, researching for another article, starting a travel blog, and preparing for next semester. Normally, this would cause some level of stress. But this year, for the first time, I chose to take a vacation before grading. I took a cruise around the Canary Islands and the Spanish coast. I didn’t think about work at all, and I have come back refreshed and ready to grade. Now, when I’m reading exams, I’m more relaxed and less frustrated. I’m convinced that the pre-grading vacation led to my state of mind, and will likely lead to a better grading process for me. If you’re grading and frustrated, here are some pictures to help you relax too.

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Sunset off the coast of Tenerife with Mt. Teide in the background

 

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Las Palmas

 

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Mt. Teide, the 3rd largest volcano in the world

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The exterior of Hassan II Mosque in Casablanca, Morrocco

 

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Mijas, Spain

As I have noted in the past, it is not just judges that make the mistake of calling limited liability companies (LLCs), “limited liability corporations.”  Today, I got a notice of a Texas case using the later definition.  Here’s the excerpt:

The statute defines a “licensed or registered professional” to mean “a licensed architect, licensed professional engineer, registered professional land surveyor, registered landscape architect, or any firm in which such licensed or registered professional practices, including but not limited to a corporation, professional corporation, limited liability corporation, partnership, limited liability partnership, sole proprietorship, joint venture, or any other business entity.” Tex. Civ. Prac. & Rem. Code Ann. § 150.001(1-a) (emphasis added).

CH2M Hill Engineers, Inc., v. Springer, No. 09-16-00479-CV, 2017 WL 6210837, at *2 (Tex. App. Dec. 7, 2017). 
 
My first thought was, “Doesn’t everyone cut and paste statutory language these days?  How could they get that wrong?”  I went to look up the code, and even before the code section had loaded, it dawned on me:  Of course, they cut and pasted it.  It’s the code that’s wrong.  Sure enough, it is.
 
Another recent example comes from a Westlaw source: Business Transactions Solutions § 60:358. I am going to tread lightly here because my mission is not to be a snarky jerk (I can be one sometimes, but that is not my goal).  The source provides what appears to be a model letter to an LLC client that has some very useful information, but I am going to be critical of a couple parts.  The letter opens: “[T]he following is a summary of our discussion concerning business responsibilities that must be met to maintain your LLC status.”  Good start.  And then: “Failure to comply with LLC formalities can result in individual liability to the members if the ‘corporate veil is pierced.'” I know this is colloquial talk, but couldn’t it just say “if the limited liability veil is pierced?”
 
The draft letter continues:
You can also be liable for the company’s debts by implied actions or negligent conduct. If you disregard LLC formalities or commingle your personal interests with the company’s assets or interests, you can open the door for an adverse party to “pierce the corporate veil” and render you personally liable for the LLC’s debts. To avoid such consequences, you should never refer to your company as “my” business or “our” business. Such a statement could later be used against you as being a material representation that the business was a proprietorship or a partnership rather than a corporation.
There’s a lot here with which I disagree. For example, LLCs don’t, in my view, have formalities. And an LLC is not a corporation.  The letter also explains that “[m]anagers control the policy of the LLC, (this is similar to a director in a corporation)” and refers to the LLC’s “corporate name ” and “corporate records.” Some of this is accurate colloquially, but don’t you hire a lawyer for precision?  I appreciate the idea that lawyers should share a lot of this kind of information with clients, and a lot of this is useful, but this really can be better. The LLC letter should be different than the corporation letter.  

Anyway, this is another example where a lot of my complaints are simply nits, and they probably impact nothing.  But it’s not all nits.  Some of this is substance that matters.  So, I keep picking nits. 

 

The twelfth annual meeting of the Law and Entrepreneurship Association (LEA) will occur on February 9, 2018 at the University of Alabama School of Law

The LEA is a group of legal scholars interested in the topic of entrepreneurship—broadly construed. Scholars include those who write about corporate law and finance, securities, intellectual property, labor and employment law, tax, and other fields related to entrepreneurship and innovation policy.

Our annual conference is an intimate gathering where each participant is expected to read and actively engage with all of the pieces under discussion. We call for papers and proposals relating to the general topic of entrepreneurship and the law.

Proposals should be comprehensive enough to allow the LEA board to evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the meeting. Works in progress, even those at a relatively early stage, are welcome. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Mirit Eyal-Cohen at meyalcohen@law.ua.edu with a proposal or paper by December 31, 2017. Please title the email “LEA Submission – {Name}.”

For additional information, please email Professor Mirit Eyal-Cohen at meyalcohen@law.ua.edu.

While I was in France last week touring and attending an academic conference, a French music legend died and was mourned.  Johnny Hallyday, the King of French rock ‘n’ roll (known widely as the “French Elvis”), died earlier this month at the age of 74 after a battle with lung cancer.  I learned of this in a circuitous way–because one of his songs, Quelque Choses de Tennessee (Something of Tennessee), was playing on the radio in a hotel shuttle van and caught my attention (for obvious reasons, although the song refers to Tennessee Williams, not the state, as it turns out).  Also, I happened to be in Paris the day of his funeral, when many roads (including the Avenue des Champs-Élysées) were blocked off for the related activities.

Curiosity about the song and the singer led me to the Internet.  My Internet searching revealed Hallyday as the singer and described an interesting life.  This guy loved the United States–not only adopting rock ‘n’ roll, but also writing lyrics about this country based on his U.S. travels.  Perhaps most famous is Mon Amérique à Moi (My America and Me), which includes the following lyrics near and dear to my heart (sung in French, of course):

My America is modest and quiet
She says to me, “Good morning!” with a big smile
Serves hot coffee, vanilla apples
Invites me to spend Christmas in Tennessee
And to go horseback riding in West Virginia . . . .

Cool.  Honestly, I am amazed that I hadn’t heard of this guy before.  I am sorry that he left this world before I knew of his music.  But I am glad to have found it.

My research also revealed that Johnny Hallyday had business-related law issues–specifically French wealth tax law issues.  Of course, show business–like other businesses–generates income and, therefore, income taxes.  An article on Hallyday’s death in Variety, for example, notes that “he struggled for a long time to reimburse 100 million francs in back taxes.”  A CATO Institute article (quoting from a book coauthored by the author of the article) offers a bit more information:

Hallyday created a media sensation when he fled to Switzerland in 2006 to avoid the tax. He has said that he will come back to France if Sarkozy “reforms the wealth tax and inheritance law.” Hallyday stated: “I’m sick of paying, that’s all … I believe that after all the work I have done over nearly 50 years, my family should be able to live in some serenity. But 70 percent of everything I earn goes to taxes.”

Interestingly, in addition to his time in Switzerland, Hallyday resided for many of his last years in Los Angeles for tax reasons.

So, here’s to Johnny Hallyday, a fan of U.S. culture who brought that culture to the French populace.  May he rest in peace, free of illness, pain, and French wealth taxes.  And may his music be a lasting memory and legacy.  Check it out, if you are unfamiliar with it.  It has some Elvis, some Johnny Cash, and something else in it.

The SEC’s Investor as Owner Subcommittee of the Investor Advisor Committee has just posted a discussion draft regarding dual class share structures in advance of the December 7 meeting at which such structures were under consideration.  (As of this posting, details of what transpired at the meeting are not online).

Dual class structures are increasingly common these days; presumably, that’s in large part due to the fact that institutional investor power has become a serious threat to management control, and dual class shares are a mechanism for pushing back.  (Staying private is another mechanism, and the more that companies choose that route, the more bargaining power they have when they eventually go public, etc etc).

Suffice to say that despite various defenses of dual class shares that have been offered, the Investor as Owner Subcommittee is not impressed.  It highlights a number of risks, which basically come down to that public investors may have different views about corporate strategy than the control group – precisely the feature that endears the structure to some commenters – and that controllers may use their control to further cement their own control (i.e., Google and the nonvoting shares).  And then of course there are the risks that are backlashes the first risks: exclusion from indices and associated decline in share value and liquidity, litigation risks when investors inevitably challenge the controllers’ actions.

Since this is the SEC, the Subcommittee can’t really recommend that dual class shares be barred entirely; the best it can do is recommend additional disclosure, and that it does.  Among other things, it wants clear line items disclosing that holders of x% of equity have x% of the votes, as well as the risks that controllers may use their control to further entrench themselves, and index and listing risks.   And to make absolutely certain investors aren’t confused, the Subcommittee recommends that even the label “common stock” be reserved for one share/one vote stock; stock with lesser rights should be called something else.  The Subcommittee also recommends further monitoring to identify the types of disputes that arise out of these structures.

As with many SEC disclosure requirements, the proposals seem aimed less at simply informing investors than to pressure companies into adopting certain forms of governance.  Whether the SEC takes heed in this new, highly deregulatory administration, remains to be seen.

I have had an opportunity to read the oral argument transcript (112 pages) from Tuesday’s oral argument in the Masterpiece Cakeshop case. 

One of the first things that struck me was that it seemed pretty clear that most of the justices have already taken sides. This is not surprising, but it does sadden me. 

I wish that judges, especially justices on the Supreme Court of the United States, were really trying to get the “correct” answer rather than reasoning backward from some predetermined outcome.  Perhaps that is naive. Perhaps that is not possible. My former Constitutional Law professor warned of some of the political issues with the Supreme Court and recently wrote about the issues in his book Supreme Myths: Why the Supreme Court Is Not a Court and Its Justices Are Not Judges. 

Only Justice Kennedy is thought to be “in play” in this case. All intelligent people of integrity, however, should be aware of their biases, open to the possibly that their initial thoughts are wrong, and open to persuasion based on the law and the facts. Maybe that is too much to ask. Or maybe on of the “reliably conservative” or “reliably liberal” justices will surprise us in this case. In any event, I am definitely looking forward to reading this opinion; it will undoubtedly bring significant consequences.   

(As an aside, corporate law scholars may be interested in pages 96-98 regarding who is speaking – Masterpiece Cakeshops (the entity) or Jack Phillips (the individual)). 

 

Two weeks ago, I asked whether companies were wasting time on harassment training given the flood of accusations, resignations, and terminations over the past few weeks. Having served as a defense lawyer on these kinds of claims and conducted hundreds of trainings, I know that most men generally know right from wrong before the training (and some still do wrong). I also know that in many cases, people look the other way when they see or hear about the complaints, particularly if the accused is a superstar or highly ranked employee. Although most men do not have the power and connections to develop an alleged Harvey Weinstein-type “complicity machine” to manage payoffs and silence accusers, some members of management play a similar role when they ignore complaints or rumors of inappropriate or illegal behavior. 

The head in the sand attitude that executives and board members have displayed in the Weinstein matter has led to a lawsuit arguing that Disney knew or should have known of Weinstein’s behavior. We may see more of these lawsuits now that women have less fear of speaking out and Time honored the “Silence Breakers” as the Person of the Year. As I read the Time  article and watched some of the “silence breakers” on television, it reminded me of 2002, when Time honored “The Whistleblowers.” Those whistleblowers caused Congress to enact sweeping new protection under Sarbanes-Oxley.  Because of all of the publicity, companies around the country are now working with lawyers and human resources experts to review and revamp their antiharassment training and complaint mechanisms. As a result, we will likely see a spike in internal and external complaints. But do we need more than lawsuits? Would more women in the boardroom and the C-Suite make a difference in corporate culture in general and thereby lead to more gender equity?

Last week, Vĕra Jourová, the EU Commissioner for Justice and Gender Equality put forth some proposals to redress the gender pay gap in Member States’ businesses. She recommends an increase in the number of women on boards for companies whose non-executive Boards are more than 60% male. These companies would be required to “prioritize” women when candidates of “equal merit” are being considered for a position. Germany, Sweden, and the Netherlands have already previously rejected a similar proposal.

I’m generally not in favor of quotas because I think they produce a backlash. However, I know that many companies here and abroad will start to recruit more female directors and executives in an effort to appear on top of this issue. Will it work? We will soon see. After pressure from institutional investors such as BlackRock and State Street to increase diversity, women and minorities surpassed 50% of  S & P open board seats in 2017. Stay tuned. 

 

The DePaul Law Review recently posted the article, Cooperatives: The First Social Enterprise, written by my friend and colleague Elaine Waterhouse Wilson (West Virginia Univ. College of Law). I recommend checking it out. Here is an overview: 

As the cooperative and social enterprise movements merge, it is necessary to examine the legal and tax structures governing the entities to see if they help or hinder growth. If the ultimate decision is to support the growth of cooperatives as social enterprise, then those legal and tax structures that might impede this progress need to be re-examined.

This Article considers some of the issues that may impede the charitable sector in supporting the growth of the cooperative business model as a potential solution to issues of income inequality. To do so, the Article first defines a “cooperative.” Part II examines the definition of a cooperative from three different viewpoints: cooperative as social movement, cooperative as economic arrangement, and cooperative as legal construct. From these definitions, it is possible to identify those elements inherent in the cooperative model that might qualify as a tax-exempt purpose under the Internal Revenue Code (the Code) §501(c)(3). Part III reviews the definition of “charitable” for § 501(c)(3) purposes, specifically in the context of economic development and the support of workers. This Part demonstrates that many of the values inherent in the cooperative model are, in fact, charitable as that term is understood for federal tax purposes.

If a cooperative has charitable elements, however, then it should be possible for the charitable sector to support the cooperative move- ment. Part IV analyzes the possibilities and limitations of direct support by the charitable sector, including mission-related investing by charities and program-related investing by private foundations. In this regard, the cooperative can be viewed in many respects as an ex- isting analog to the new social enterprise forms, such as the benefit corporation or the L3C. Finally, Part V provides recommendations for changing both federal and state law to further support the cooperatibe movement in the charitable sector.