First of all, I want to thank the editors of the Business Law Prof Blog for allowing me to guest blog over the summer.  I thoroughly enjoyed my stay here and they have been kind enough to let me continue posting from time to time as a contributing editor.  Thanks again to all of you.

    The National Conference of Commissioners on Uniform State Laws (“NCCUSL”) (also known as the “Uniform Law Commission”) promulgates several influential business organization statutes:  the Revised Uniform Partnership Act (1997), the Revised Uniform Limited Partnership Act (1985), the Uniform Limited Partnership Act (2001), and the Revised Uniform LLC Act (2006), to name a few.  Some of these statutes have been widely adopted.  The Revised Uniform Partnership Act, for example, has been adopted by 38 states (as well as the District of Columbia and the Virgin Islands) according to the Uniform Law Commission’s website.  As another example, the Uniform Limited Partnership Act (2001) has been adopted by 19 states (as well as the District of Columbia) according to the same website.

    From 2009-2013, NCCUSL engaged in an intensive effort to harmonize all of the uniform acts covering unincorporated business organizations.  The “Harmonization Project” included the compilation of a Uniform Business Organizations Code, which comprises a “hub” of common provisions and various spokes addressing different business organizations (e.g., general partnerships or limited partnerships).  Each spoke has also been promulgated as a stand-alone act in the event that a jurisdiction does not want to adopt the entire Business Organizations Code.

    The result of this Harmonization Project is that NCCUSL’s uniform acts covering unincorporated business organizations have all changed.  Among others, there is now a 2013 version of the general partnership statute, the limited partnership statute, and the limited liability company statute that differ — in some places materially — from the prior versions that you may be familiar with.  The comments have also been rewritten.

    In future posts, I plan on discussing some of the changes that the Harmonization Project has brought about.  If you are interested, please stay tuned . . . .

Stock pricing in the securities market responds to supply and demand.  This is intuitive with regard to individual securities.  We understand that if more people want to buy a stock (demand) than sell it (supply), then the price moves up. Conversely, the price decreases if more want to sell than buy.  I wonder to what extent regulators have examined the role of retirement saving plans in flooding the market with demand to buy new securities and which can drive up stock prices overall.  Consider this historical graph of the NYSE trading average.  Observe the sharp rise beginning in the late 1980’s with the introduction of individual retirement savings plan and the beginning of the defined contribution society. 

Nyse-composite-may

chart source: Forecast Chart

New Department of Labor regulations open the door for state governments to sponsor retirement savings plans for non-government workers.  See for example, California’s proposed plans.  The rules, proposed in 2015, became final on August 30, 2016.  You can read a summary of the proposed plans published by The Brookings Institute and a DOL interpretive bulletin.  Also being considered are proposed rules authorizing high-population cities to sponsor similar plans in states that don’t create the non-government worker retirement savings plans.  Collectively, these regulations are intended to facilitate the retirement savings of the estimated 55 million small business workers who do not currently have the option of participating in a retirement savings plan.  This policy decision  encourages retirement saving and promotes individual financial stability.  It also means that more worker/saver/investors (a group I have called Citizen Shareholders in prior works) will be encouraged to invest in the private securities market.  The demand cycle continues and can be sustained so long as there are as many or more worker/saver/investors as there are folks  liquidating their retirement savings. In other words, a severely aging workforce/population could pose a demand/supply problem for the securities market.

-Anne Tucker

 

What does it mean to opt out of fiduciary duties?  In follow-up to my co-blogger Joan Heminway’s post, Limited Partnership Law: Should Tennessee Follow Delaware’s Lead On Fiduciary Duty Private Ordering?, I will go a step further and say all states should follow Delaware’s lead on private ordering for non-publicly traded unincorporated business associations. 

Here’s why:  At formation, I think all duties between promoters of an unincorporated business association (i.e., not a corporation) are always, to some degree, defined at formation. This is different than the majority of other agency relationships where the expectations of the relationship are more ingrained and less negotiated (think employee-employer relationship).  

As such, I’d make fiduciary duties a fundamental right by statute that can be dropped (expressly) by those forming the entity.  I’d put an additional limit on the ability to drop fiduciary duties: the duties can only be dropped after formation if expressly stated in formation documents (or agreed unanimously later). That is, if you didn’t opt out at formation, tell all those who could potentially join the entity how you can change fiduciary duties later. This helps limit some (though not all) freeze-out options, and I think it would encourage investors to check the entity documents closely (as they should).

At formation, the concerns we might have of, for example, an employee without fiduciary duties, are not the same as they are for co-venturers. Those starting an entity have long negotiated what is a breach of the duty of loyalty, for example.  In contrast, I think fiduciary duties in most employer-employee (and similar) relationships reflect the majoritarian default and they facilitate the relationship existing at all. For LLCs and partnership entities, I think that’s less clear. Entity formation is relatively rare compared to how often we enter other agency relationships, and they almost always involve significant negotiation (if not planning).  And if they don’t, the rules we expect traditionally should be the default. But where the parties talk about it, and they usually do, allowing a more robust sense of freedom of contract has value.  

Even in Delaware, where one can negotiate out of fiduciary duties, there remains the duty of good faith and fair dealing. I think of that as meaning that the parties still have a right to the essence of the contract.  That is, the contract has to mean something.  It has to have had a purpose and potential value at formation, and no party can eliminate that.  But, the parties only have a right to what was bargained for.  As such, what we might traditionally consider a breach of the duty of loyalty could also breach the duty of good faith and fair dealing, but a traditional breach of the duty of loyalty might not be sufficient to find liability where there is expressly no duty of loyalty. Instead, the act must so contradict the purpose of the contract that it rises to the level of a breach the duty of good faith and fair dealing. 

Part of the reason I support this option is that I think case law has already validated it, but in such an inartful manner that it confuses existing doctrine. See, e.g., McConnell v. Hunt Sports Enterprises, 132 Ohio App. 3d 657, 725 N.E.2d 1193 (Ct. App. 1999) (“An LLC, like a partnership, involves a fiduciary relationship. Normally, the presence of such a relationship would preclude direct competition between members of the company. However, here we have an operating agreement that by its very terms allows members to compete with the business of the company.”).

In closing, I will note that I am all for express provisions that require investors to pay attention at the outset. I don’t believe in helping cheaters hide the ball. I just think law that encourages investors and others joining new ventures to pay attention is useful and will provide long-term value to entities.  I don’t think that eliminated fiduciary duties at formation raise any more of a risk than we already have with limited or modified fiduciary duties at formation. With the more limited protections described above, freedom of contract should reign. 

I originally was going to write about overconfidence today.  But I will reserve that post for a later date.  Instead, for today, I am sharing with you a Tennessee legislative drafting issue on which my voice (together with the voices of others) has been solicited and asking for your views and comments.

A committee of the Tennessee Bar Association has been working on proposed revisions to the Tennessee Revised Uniform Limited Partnership Act.  Several thorny issues remain for consideration and final decision making, among them, whether Tennessee law, like Delaware limited partnership and limited liability company law, should allow for the elimination of general partner fiduciary duties.  The committee soon will be voting on this issue, and we are circulating among us our current views (having earlier debated the matter in telephone conference calls).  I took a shot at writing down my views for the group and circulated them last night.  I am including the main substantive part of what I wrote here, minus some typos that I caught after the message was sent (and please forgive the disfluencies in places), and requesting comments from you:

Continue Reading Limited Partnership Law: Should Tennessee Follow Delaware’s Lead On Fiduciary Duty Private Ordering?

Although I knew that Labor Day was a creation of the labor movement (about which I have mixed views), I had never looked up the history of the holiday in the United States.  The Department of Labor, unsurprisingly, has a nifty, short webpage with some nice historical facts.  Among them: the holiday has roots back into the 1880s and was originally a municipal creation, then became a state holiday in a number of states before Congress approved the holiday in 1894.  The brief history on the webpage concludes with the following paragraph:

The vital force of labor added materially to the highest standard of living and the greatest production the world has ever known and has brought us closer to the realization of our traditional ideals of economic and political democracy. It is appropriate, therefore, that the nation pay tribute on Labor Day to the creator of so much of the nation’s strength, freedom, and leadership — the American worker.

Great stuff.  

Labor and employment lawyers have focused commentary over the past week on legal matters relating to their spheres of influence in acknowledging Labor Day.  Proskauer partner Mark Theodore posted a piece on a pair of recent NLRB decisions, and a union commentator, executive director of the Center for Union Facts, posted an advocacy piece promoting proposed federal legislation–the Employee Rights Act (which, according to the article, is “legislation which would protect employees from out-of-touch union bosses.”).  

All of this may be of interest to business lawyers.  Or it may not.  But tomorrow, I will honor the holiday by working–at least for part of the day.  And that does seem, somehow, fitting . . . .

 

At this point, it almost feels like I’ve been following the securities fraud case against Halliburton my entire career.   I was grimly amused when I heard that the Fifth Circuit had granted an interlocutory appeal – again! – to hear a challenge to class certification – again! and I diligently tracked the docket on Bloomberg, only for it to belatedly sink in that – wait a minute, I actually live in New Orleans now.  I can go see the oral argument in person, live, in color.

So I did.

It was … interesting. 

[More under the jump]

Continue Reading Halliburton Again – Groundhog Day

In his article, Making It Easier for Directors to “Do the Right Thing?” 4 Harv. Bus. L. Rev. 235, 237–39 (2014), Delaware Supreme Court Chief Justice Leo Strine wrote:

[E]ven if one accepts that those who manage public corporations may, outside of the corporate sales process, treat the best interests of other corporate constituencies as an end equal to the best interests of stockholders, and believes that stockholders should not be afforded additional influence over those managers, those premises do very little to actually change the managers’ incentives in a way that would encourage them to consider the interests of anyone other than stockholders. . . . even if corporate law supposedly grants directors the authority to give other constituencies equal consideration to stockholders outside of the sale context, it employs an unusual accountability structure to enable directors to act as neutral balancers of the diverse, and not always complementary, interests affected by corporate conduct. In that accountability structure, owners of equity securities are the only constituency given any rights. Stockholders get to elect directors. Stockholders get to vote on mergers and substantial asset sales. Stockholders get to inspect the books and records. Stockholders get the right to sue. No other constituency is given any of these rights. (emphasis added, citations omitted)

There has been a lot of anger and shock in the reporting over the price increases by EpiPen-maker Mylan. See, e.g., here, here, here, and here, but I think Chief Justice Strine’s observation about the general accountability structure of corporate law is at least a partial explanation. (To be sure, there also appears to be an executive compensation story, though the executive compensation structure may be driven by the shareholder-centric accountability structure. That said, Mylan appears to be a Netherlands-incorporate company, and I know very little about the structure of its corporate law.)

The price for an EpiPen has increased a staggering amount since 2007 when pharmaceutical company Mylan acquired the product – wholesaling for $100 in 2007; $103.50 in 2009; $264.50 in 2013; $461 in 2015; $608.61 in 2016.

The general tone of the reporting in the mainstream media is one of outrage.

But isn’t this to be expected? Granted, the business judgment rule provides a lot of leeway, and I would not argue that Mylan was “forced” to hike prices, even if Mylan were incorporated in Delaware. But if we give shareholders virtually all of the significant corporate governance tools, isn’t it obvious that directors and officers will often seek shareholder interests even when it is harmful to communities? The bigger story here may be that certain norms and the fear of negative press have been able to keep plenty of other companies from following suit.

My article Adopting Stakeholder Advisory Boards, due out next semester in the American Business Law Journal, suggests giving some of the corporate governance accountability tools (such as certain voting rights) to a stakeholder advisory board made up of stakeholder representatives. The article argues that adoption of stakeholder advisory boards should be mandatory for large social enterprises (because they both chose a social entity form and have the resources) and should be voluntarily adopted by other serious socially-conscious companies. An accountability change of this sort might bring public expectations and the corporate law accountability structure into line.

Separately, are there certain industries – like the health care industry – that we want to be less profit-focused than others? For those industries, perhaps requiring (or making attractive through regulations/taxes) the choice of a social enterprise form (like benefit corporation) may make some sense. However, as noted in my article, the benefit corporation accountability structure is quite shareholder-centric, similar to the structure for traditional corporations. Granted, socially-motivated shareholders may exert some pressure on benefit corporations and the benefit corporation law may give them a somewhat better chance to do so, but if we want real change, I think the corporate accountability structure needs to be more completely redesigned.

Personal Note: When I was a child, my mom carried an EpiPen for me, following an incident involving plastic armor, a tennis racket, and whacking a big bee nest. 

I previously wrote on the Commonsense Principles of Corporate Governance released by high profile investors and corporate titans such as Jamie Dimon and Warren Buffet. Others, such as Steve Bainbridge have also weighed in. Now proxy advisory firm Glass Lewis has spoken, stating in part:

While the Principles may disappoint investors expecting a more comprehensive and robust approach similar to that found in the UK and other countries, there are a few areas where the principles promote forward-thinking stances. For example, the Principles criticize dual class voting structures and state that companies should consider specific sunset provisions based upon time or a triggering event to eventually eliminate dual class structures. This is notwithstanding the dual class structure at signatory Warren Buffet’s company Berkshire Hathaway…

There are several areas the Principles do not address, including key anti-takeover defenses such as poison pills, supermajority vote requirements and classified boards. The Principles generally address some issues such as special meeting rights and term/age limits for directors but do not recommend specific thresholds or tenure limits…

Despite the Principles’ relatively narrow scope and high level, we believe they contain enough substance to spark a dialogue inside boardrooms, which could lead to increased shareholder engagement from boards that traditionally have relied on executives and investor relations departments to lead those efforts. In our view, direct engagement between investors and boards leads to greater transparency and fosters mutual understanding of the company and its strategy, promoting long-term value creation. As a result, the Principles could have a salutary effect on companies, shareholders and the market.

Given the concern expressed by some in the business community and Congress about the “undue influence” of proxy advisory firms, the Glass Lewis statement is worth a read.

House Representative Carolyn B. Maloney, Democrat of New York, sent a formal request to a slew of federal agencies to share trading data collected in connection with the Volcker Rule. The Volcker Rule prohibits U.S. banks from engaging in proprietary trading (effective July 21, 2015), while permitting legitimate market-making and hedging activities.  The Volcker Rule restricts commercial banks (and affiliates) from investing investing in certain hedge funds and private equity, and imposes enhanced prudential requirements on systemically identified non-bank institutions engaged in such activities.

Representative Maloney requested  the Federal Reserve, Federal Deposit Insurance Corporation, Commodity Futures Trading Commission, Office of the Comptroller of the Currency, and the Securities and Exchange Commission to analyze seven quantitative trading metrics that regulators have been collecting since 2014 including: (1) risk and position limits and usage; (2) risk factor sensitivities; (3) value-at-risk (VaR) and stress VaR; (4) comprehensive profit and loss attribution; (5) inventory turnover; (6) inventory aging; and (7) customer facing trade ratios.

Representative Maloney requested the agencies analyze the data and respond to the following questions:

  • The extent to which the data showed significant changes in banks’ trading activities leading up to the July 21, 2015 effective date for the prohibition on proprietary trading. To the extent that the data did not show a significant change in the banks’ trading activities leading up to the July 21, 2015 effective date, whether the agencies believe this is attributable to the banks having ceased their proprietary trading activities prior to the start of the metrics reporting in July 2014.

  • Whether there are any meaningful differences in either overall risk levels or risk tolerances — as indicated by risk and position limits and usage, VaR and stress VaR, and risk factor sensitivities — for trading activities at different banks.

  • Whether the risk levels or risk tolerances of similar trading desks are comparable across banks reporting quantitative metrics. Similarly, whether the data show any particular types of trading desks (e.g., high-yield corporate bonds, asset-backed securities) that have exhibited unusually high levels of risk.

  • How examiners at the agencies have used the quantitative metrics to date.

  • How often the agencies review the quantitative metrics to determine compliance with the Volcker Rule, and what form the agencies’ reviews of the quantitative metrics take.

  • Whether the quantitative metrics have triggered further reviews by any of the agencies of a bank’s trading activities, and if so, the outcome of those reviews

  • Any changes to the quantitative metrics that the agencies have made, or are considering making, as a result of the agencies’ review of the data received as of September 30, 2015.

The agencies’ response to the request may provide insight into Dodd-Frank/Volcker Rule, the role of big data in the rule-making process (and re-evaluation), and bigger issues such as whether systemic financial risk is definable by regulation and quantifiable in data collection.  I will post regulatory responses, requested by October 30th, here on the BLPB.

-Anne Tucker