Last week, Chancellor Andre Bouchard dismissed the derivative complaint filed against Walmart concerning the WalMex bribery scandal, on the grounds of issue preclusion:  Earlier, a federal court in Arkansas had dismissed identical claims filed by a different set of plaintiffs. 

The reason that the Arkansas decision came so much earlier than the Delaware decision was, of course, that the Arkansas plaintiffs filed their complaint without first exercising their inspection rights under Section 220.  The Delaware plaintiffs did exercise their rights, as Delaware has repeatedly counseled plaintiffs should do, and fought Walmart for years over it – taking a trip to the Delaware Supreme Court as a result.

Standing alone, then, this case stands for the proposition that Delaware has no way of enforcing its own guidance to plaintiffs that they seek books and records before filing a derivative claim. 

But there’s hope – because this is exactly the kind of destructive competition among plaintiffs’ firms that forum selection bylaws were meant to address.  Had such a bylaw been in place, all of the plaintiffs could have been shunted into a Delaware forum.

Right?

Unfortunately, no.  Because defendants have the freedom to ignore a forum selection bylaw if their interests are served by dealing with a weaker set of plaintiffs in a foreign forum.

I’ve expressed concern about this issue before, and my fears came to fruition in Gordon Niedermayer, et al. v. Steven A. Kriegsman, et al. and CytRx Corp., C.A. No. 11800-VCMR, tr. ruling (Del. Ch. May 2, 2016).  There, the company waived its forum selection bylaw just in time to choose which group of plaintiffs with which to settle.  When the Delaware plaintiffs challenged the waiver, the court upheld it: though the court warned directors against forum selection “gamesmanship,” it found no such gamesmanship here.

Though I’m not expressing an opinion on the particular ruling in CytRx, the situation stands as a warning of how Delaware procedural law – which is becoming as much a part of its corporate jurisprudence as its substantive standards – may be threatened.  For example, in cases like In re Trulia Stockholder Litigation, 2016 WL 325008 (Del. Ch. Jan. 22, 2016), Delaware has declared a new war on “intergalactic releases” for meaningless disclosures in merger litigation – a move largely applauded by many commenters.  But Trulia and cases like it will be reduced to rubble if plaintiffs can simply file in other jurisdictions, while defendants – seeking certainty that their deal is insulated from further challenge – waive forum selection bylaws as it suits them.

Indeed, according to a study by C. N. V. Krishnan, Steven Davidoff Solomon, & Randall S. Thomas, experienced defense counsel take advantage of the fact that doubtful merger agreements tend to result in challenges in multiple fora, reaching sweetheart settlements with the most amenable group of plaintiffs.  In other words, the very weakness of the merger is what neuters the plaintiffs’ challenge: Lower premiums invite litigation by multiple firms, whom defendants can then play off each other.

If Delaware doesn’t come up with a way to manage this situation, the market will – and not to Delaware’s benefit.

 

As previously mentioned, last week I presented at the Center for Nonprofit Management’s Bridge to Excellence Conference. 

Below I share a few thoughts. Some of these thoughts I have shared before about other conferences, but I think they bear repeating.

  1. Value of Practitioner Conferences. As an academic, it is easy for me to stay mostly in the academic world. I do think, however, going to practitioner conferences can be quite useful. Maybe most important, these conferences can help you meet people who are in practice, especially in your local area. People I have met at practitioner conferences have served as guest speakers in my classes, provided individual advice to students, helped students find jobs, and provided ideas for blog posts and scholarship. Practitioner conferences can also be useful as they tend to address very practical problems and remind me that I want my scholarship to speak to not only academics, but also the bar, bench, and business people. Attending one practitioner conference can lead to more opportunities—other speaking engagements, board member openings, and consulting opportunities, and the like. 
  2. Check Technology Before Speaking. I learned this early in my academic career, and I found the IT person well before my talk and made sure the technology worked well. We had no issues. In other sessions, however, there were a number of technology delays and hiccups. Especially, if you plan to use a video file, make sure that the file loads and that the sounds works beforehand. One of the speakers made the mistake of mocking PowerPoint before launching her Storify presentation, which would not load at all because of Internet issues. Thankfully, you did not let that slow her down and provided an engaging presentation. Checking technology beforehand is not always possible, and IT support is not always available, but it is a rare conference that doesn’t have a technology issue at some point, so I think more planning is usually appropriate. 
  3. Think-Pair-Share and Q&A. Think-Pair-Share is a well-known teaching technique that I often use in my classes. You pose a question. Allow some time for thought. Break the room into small groups to discuss. Then ask for volunteers to share thoughts. I tried this technique at the conference yesterday and thought it worked well. We did not have an incredible amount of time, so I did not allow much time for individual thought beforehand, but the audience seemed to enjoy the discussion and the thoughts shared were mostly quite useful. One benefit of this technique is that it gets the audience involved. Another benefit is that it allows the audience members to meet and talk with people they may not have had a chance to otherwise. I was able to leave a few minutes at the end of my presentation for Q&A, but not nearly as much as I would have liked. Personally, I often find the Q&A among the most valuable time, depending on the audience and the questions. I generally wish more speakers left more time for Q&A.
  4. Time Between Sessions. CNM provided significant time between sessions – always at least 20 minutes, I think. But, as always seems to happen at conferences, sessions run long, and that time gets squeezed. The networking time between sessions can be incredibly useful, and so I think  it is important to get speakers to honor the time limitations and leave a good bit of time between sessions, knowing that there will be delays. Part of the responsibility of staying on track falls on the speaker. The conference organizers can help by starting on time and providing notice when time is short. CNM did quite a good job keeping things on track, but even so, I wished for a bit more time between sessions.
  5. Vendor “Passports” and Drawings. CNM included a vendor “passport” in our materials. You got an orange sticker for each vendor you spoke to and if you filled out the passport (which had blank boxes next to vendor names) you could be entered into a drawing for excellent prizes at the end of the day. This seemed to be a good way to get attendees to engage with the vendors (who are also usually conference sponsors), and it seemed to be a good way to keep the attendees at the conference until the end of the day.  
  6. Speed Consulting. CNM had a speed consulting session where you could speak briefly with experts in finance, law, management, grant-writing, etc. I could see a session like this being used at academic conferences, where more senior faculty members would offer bits of advice to prospective professors or more junior professors. I imagine, however, that more in-depth questions would have to be scheduled for another time. It did seem to be a good time to get some very preliminary thoughts and meet experts. 
  7. Mementos. Thoughts may vary on this, but I like conferences that provide attendees and/or speakers with unique takeaway items. Some may think too much money is wasted on these trinkets, and that can be the case if the item is quite generic, but I think mementos can be a nice touch. I keep a few such items from conferences on my office shelves and they are nice reminders of the conferences. At CNM’s conference, they provided little elephants, because the theme was “elephants in the room.” I especially liked this gift because both of my young children are crazy about elephants and it was nice to bring them something home from work. One of my table-mates gave me her elephant so I had one for each child. 

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Today, I received notice of a web seminar on corporate political activity to be hosted by one of my former firms, King & Spalding.

Interested readers can register for the free web seminar here.

More information, from the notice I received, is reproduced below.

————

Election 2016: What Every Corporate Counsel Must Know About Corporate Political Activity     

Thursday, May 26, 2016, 12:30 PM – 1:30 PM ET

                In this election year, corporations and their employees will be faced with historic opportunities to engage in the political arena. Deciding whether and how to do so, however, must be made carefully and based on a thorough understanding of the relevant law. In this presentation, King & Spalding experts will address this timely and important area of the law and provide the guidance that corporate counsel need when engaging in the political process.            

California is the back on my short list for the state’s inability to successfully differentiate between corporations and limited liability companies (LLCs).  Last week, an “unpublished/noncitable” decision that was published on Westlaw provided a good example.

The opinion states: 

A corporation—including a limited liability corporation—may be served by effecting service on its agent for service of process. (Code Civ. Proc., § 416.10, subd. (a); see also Corp.Code, § 17701.16, subd. (a) [allowing service on limited liability corporations under Code Civ. Proc., § 413.10 et seq.].)7
*12 One of the ways a limited liability corporation can be served is by substituted service. (1 Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2015) ¶ 4:172, p. 4–26.) This requires that a copy of the summons and complaint be left at the office of the person to be served (or, in some cases, at the mailing address of the person to be served), in the presence of a person who is apparently in charge, “and by thereafter mailing a copy of the summons and complaint by first-class mail, postage prepaid to the person to be served at the place where a copy of the summons and complaint were left.” (Code Civ. Proc., § 415.20, subd. (a).)
City of Fontana v. Bani, LLC, No. E062018, 2016 WL 2864971, at *11-12 (Cal. Ct. App. May 12, 2016).

No, no, no.  First, even in California, an LLC is a “limited liability company.” It says so right in the act. Cal. Corp. Code § 17701.01 (West) (“This title may be cited as the California Revised Uniform Limited Liability Company Act.”).

And, yet, I have to admit, if you note the cite to the LLC act, California lawmakers have made this less clear than in other states. Yes, that’s right. In California, the LLC Act is part of the California Corporations Code.  Cal. Corp. Code §§ 17701.16 – 17713.13 (West).  For that matter, so are partnerships, under Title 2.  Sigh.   

Would it be so terrible if the Corporations Code were called what it is: the Business Entities Code? As currently structured, LLCs and partnerships are arguably types of corporations under California law, as the above cases suggests. One could argue the headings don’t change the meaning or intent of the laws. See Cal. Corp. Code § 6 (West) (“Title, division, part, chapter, article, and section headings contained herein do not in any manner affect the scope, meaning, or intent of the provisions of this code.”).  The problem with that is that the code text says otherwise: “This act shall be known as the Corporations Code.” Cal. Corp. Code § 1 (West).  

To reinforce that notion, the Code Commission notes from the 2014 main volume explain: 

This code was listed in the appendices of Code Commission reports showing code classification as the “Corporations, Partnerships, and Associations Code.” The 14 syllables of that title appear to make it impractical, but no shorter phrase indicative of the full subject-scope has been found. Therefore, resort has been had to the rhetorical device of synecdoche, and the entire code designated by the name of longest part.

I admit I had to look up synecdoche to be sure I was on the right track, but the term supports, I think, my point that California is treating LLCs and partnerships as corporations (or some subset thereof).  See, for example, this explanation: 

Synecdoche is a literary device in which a part of something represents the whole or it may use a whole to represent a part.

Synecdoche may also use larger groups to refer to smaller groups or vice versa. It may also call a thing by the name of the material it is made of or it may refer to a thing in a container or packing by the name of that container or packing.

Still, even if it were accurate to says LLCs and partnerships are “types” of corporations under the California code, one thing is still clear: an LLC is a limited liability company, which is, at a minimum, a specific type of “limited liability corporation.” 

I suppose I can see how “14 syllables” might be deemed “impractical,” but not at the cost of imprecision.  The “Business Entities” — or even just “Entities” or “Associations” — Code would seem like a better, more accurate, option.  

Oh well.  At least the court cited the part of the California code for service of an LLC.  That much, they got right.  

Breaking academic news:

Elsevier, a world-leading provider of scientific, technical and medical information products and services, announced today the acquisition of the Social Science Research Network (SSRN)….SSRN will be further developed alongside Mendeley, a London-based free reference manager and scholarly collaboration network owned by Elsevier….

Elsevier provides web-based, digital solutions – among themScienceDirect, Scopus, Elsevier Research Intelligence and ClinicalKey – and publishes over 2,500 journals, including The Lancet and Cell, and more than 33,000 book titles, including a number of iconic reference works. Elsevier is part of RELX Group, a world-leading provider of information and analytics for professional and business customers across industries. http://www.elsevier.com

What does this change mean for publishing authors and researchers?  Content will remain free to post and download. Elsevier acquired Mendeley in 2013 creating controversy over Mendeley’s continued “trustworthiness” as a part of a for-profit enterprise. Since the acquisition, Mendeley doubled its subscribers from 2.5 to 5 million.  Elsevier’s interest in SSRN, a profitable site for over 13 years, is primarily in its potential for generating user data and analytics.  Integrating SSRN and Mendeley services is predicted to strengthen

“connections between SSRN author pages and Mendeley professional profiles, and workflow connections that allow Mendeley collaborative groups to submit papers for distribution and perhaps eventually review and publication.  There will also be other opportunities to strengthen SSRN for its authors, with plans to link preprints on SSRN with Scopus, bringing analytics about article “performance” to SSRN authors, and to bring improved links between working papers and preprints with their eventual published versions.”

Would it be too much to hope for a cosmetic overhaul of the website too?

The acquisition raises some interesting questions for those in academics whose scholarly productivity, national reputation and other outputs are increasingly measured with data points provided from sites like SSRN.  Changes to the substance of the website may change how those metrics are generated and what they mean.  The creation of new metrics available to authors (and schools) may provide for more reportable data points for our annual faculty reports with the questions remaining how useful are those metrics and what do they tell us about the value of ideas?

-Anne Tucker

 

OK.  I count 17 Form C filings (not including a few amended filings, two of which are noted below) on “Day 1” of U.S securities crowdfunding.  Not a bad showing for the first day out, in my view.

First in line? Bloomery Investment Holdings, LLC with an offering of LLC interests on StartEngine Capital LLC.  The firm filed its Form C a bit after 6:30 AM.   Early risers!  Eager beavers!  (Maybe too eager, since an amendment was filed less than two hours later–apparently because the attendant Form C .pdf was rejected in the initial filing.)  The firm’s subsidiary is a moonshine-based liqueur producer.  At this writing, $11,700 of the target threshold funding of $300,000 (1000 units at $300 per unit) has been committed–$288,300 to go!  ($600 came in while I was typing this post.)  And it looks like the base of operations is in West Virginia, Josh!  Do you know these folks?  (Slogan: “Take a Shot on Us.”)

StarEngine also is hosting another crowdfunded offering filed today.  The issuer on this offering, GameTree PBC (yes, Haskell, a public benefit corporation!), a social network for gamers based in Solana Beach, California.  GameTree is selling common stock at $2 per share and has set a threshold funding target of $100,000.  As of this writing, the firm had raised $8,360–$91,640 to go.  The Form C filing for this offering also was amended.  The reason? “Needed to re-upload campaign screen shots. First upload did not work.”  So, it seems there may be some glitches–or at least propensities for operator error.

This is pure spectator sport for me right now.  I am interested to see that issuers are actually fling and that offerings are attracting some financing commitments.  But some of what I am reading is pretty funny stuff.  I don’t have time to do a play-by-play on any of these filings (too busy a week this week).  I must admit that I am especially amused by this “financial risk factor” in the GameTree materials:

Management has no experience managing companies with publicly traded securities.

The legal issues related to public securities are Byzantine and myriad. While it is our intention to follow the law as we understand it and seek the advice necessary to follow best practices, we recognize that mistakes with negative financial results to investors can occur. Crowdfunding is a new method for raising capital and laws are quickly changing and evolving. Changes in securities law may void and/or alter equity arrangements with shareholders.

I just had to quote that one here . . . .  I nearly fell off my chair laughing.  And here is the GameTree risk factor on benefit corporation status, so Haskell can have something to look at and consider:

GameTree is a public benefit corporation and thus may engage in activities in pursuit of its public benefit at the expense of financial gain.

Unlike traditional corporations in which operations and business goals are tied exclusively to the pursuit of profit, GameTree may also take actions in alignment with its stated public benefit at the expense of profit maximization. It is still a for­profit corporation in distinction from a charitable non­profit which has a benefit as its sole purpose.

These disclosures are not what I would’ve drafted in either case.  But neither disclosure is inaccurate, in my view.  And each is relatively simple.  

It will be interesting to continue to look at some of the SEC filings and related online disclosures as time passes.  I hope to be able to devote additional time to that after I have finished grading exams and papers.  In the mean time, I would enjoy reading your reactions here.

Money Monster, directed by Jodie Foster, is the latest addition to the pop cultural anti-finance zeitgeist.  George Clooney plays – well, Jim Cramer, with Julia Roberts as his long-suffering director.  Their usual television buffoonery is interrupted by a disgruntled investor who lost his life savings by following Clooney’s advice to invest in – well, Knight Capital.  Now he insists on holding Clooney hostage at gunpoint until he can get an explanation for the trading “glitch” that caused his investment to go sour.

 

Warning:  Below be spoilers, though I’ll try to keep them to a minimum (roughly movie review standards).

Continue Reading Saturday Movie Blogging – Money Monster

Yesterday, I presented on negotiation theory and stakeholder engagement at the Center for Nonprofit Management’s Bridge to Excellence Conference.

At a session after mine, I was directed to a PowerPoint entitled What Every Board Member Should Know: A Guide for Tennessee Nonprofits. The PowerPoint was authored by the Tennessee Attorney General, the Tennessee Secretary of State, and the President of the Center for Nonprofit Management. The document is rather simple, but might be useful as a primer for nonprofit board members in Tennessee.  

The conference attendees appeared to be a few hundred nonprofit practitioners and only about three or four professors, two of whom were among the presenters. After my morning presentation, I stuck around and listened to some of the other speakers and enjoyed an excellent lunch. I am a sucker for free food. 

At the conference, I was struck by how nonprofit board members were discussed by some of the speakers and attendees. One question that was posed was – “how do you deal with a board member who is not pulling his or her weight as a fundraiser?” I guess I knew that nonprofit board members were chosen, at least in part, for their ability to give or raise money, but I never really saw fundraising as a major or primary role. The blunt phrase used was “give, get, or get off.” Most of my thinking has been on for-profit board members and their role in governance, so this significant focus on another role was a bit unexpected.

Another question asked was – “how do you deal with a board member that is over-involved and thinks he or she is the executive director of the nonprofit?” Again, because of my focus on for-profit boards, this question hasn’t been one that surfaced for me; I am usually thinking about how to get board members more involved. In fairness, I do recognize that officers are responsible for the day-to-day running of the organization, and I could see how a board member might overstep. Thankfully, the flip-side, the problem of the under-involved board member, was also discussed.

I left the conference wondering how effective nonprofit board members will be in governing when so much emphasis is put on their fundraising role, and when they are warned to not become over-involved in the operational side of the organization. 

Board diversity was also a major topic – race and gender, and also age (there is evidently a push to get the next generation involved on nonprofit boards instead of just the “same old suspects”) and skills and even personality type and political views. I didn’t hear any discussion, outside of my session, on socio-economic diversity on boards, which is interesting given the communities that are often served by nonprofits, but maybe not surprising giving the role of fundraising. In my session, I did discuss the role of stakeholder boards, which I am writing on in the for-profit context, as a way to give voice to all major constituents, not just donors.      

I may reflect further on this conference in future posts as it was certainly an interesting and useful day.   

For my second blog posting, I thought I would get into a bit of what I am working on in my research.

As Anne said in her intro, my work is interdisciplinary. The other discipline in which I work is moral philosophy and the branch of it that has to do with institutions, political philosophy. I believe that moral and political philosophy can help a great deal in our understanding of the law on banking, finance, and corporate governance, adding insights that often get overlooked in the dominant interdisciplinary approaches related to these areas of law. I have only a subsidiary interest in legal philosophy and to this end I would direct your attention to “Analytical Jurisprudence and the Concept of Commercial Law,” published in the Penn State Law Review in 2009, in which I developed a concept of a transnational commercial law on legal positivist grounds.

Some questions of interest to me are:

  • What is the moral responsibility of individual agents in mitigating collective harm associated with the financial system? “Individual agent” refer to any person with moral capacity, from homeowner to senior bank manager. Once we get clear on how to allocate moral responsibility, we can then decide whether regulation by law is required or preferred or whether ethics alone is enough.  
  • What is a fair or just distribution of systemic financial risk? How shall we structure institutions to get this distribution right?
  • Issues of egalitarian justice associated with debt and access to credit. Debt has a disproportionately greater adverse effect on the less well off, who tend to rely on it more to buy things necessary for a decent life in their society, such as housing, education, cars to get to work, health care (in the USA) etc.

See my article, “Luck, Justice and Systemic Financial Risk,” published in the Journal of Applied Philosophy. (email to request a copy). I am also working on another piece more for the law audience entitled “Debt in Just Societies”.  The abstract follows:

A post-Great Recession consensus has emerged that persons, firms, banks, and governments have too much debt. The article deals with legal solutions to the dilemma that debt presents to societies: successful societies benefit from a substantial

Continue Reading Guest Blogger Linarelli on Moral Philosophy & Finance