Today I hit “submit” on an article I was asked to review for an international law journal. Because the process required blind peer review, I won’t be any more specific other than to say that the article related to a topic that I have written and spoken about extensively over the past few years. Unfortunately, the author did not cite any of the main (or even ancillary) articles on the topic and instead focused on a number of disparate theories that barely related to the title or topic of the piece. In short, the article had a few good pages and might make a few decent articles, but only after major revisions. I knew what the article was missing because I have read almost every other piece written on the topic.

As a junior academic, I admit that the most frustrating part of the law review process is the lack of peer review, at least in the United States. My colleagues in the EU review articles of 10-12,000 words on average and generally have 1-2 other reviewers deciding on publication of a scholar’s piece. The review period tends to be 6-8 weeks (or so I have been told) and generally journals require exclusive submission. In worst case scenarios, authors can wait several months for an acceptance or rejection. Although I am not a fan of the exclusive submission process, I do prefer the peer review model. It may be subjective, but it’s no more subjective than having articles accepted by 2Ls and 3Ls, who may have no expertise or familiarity with the topic they are reviewing.

A 2014 essay by Josephine Potuto raises another issue with the U.S. law review system—how the articles are edited. The abstract states simply:

Law professors publish in law reviews, not peer-reviewed journals. They are edited by law students. The editing process can be both irritating and exasperating. From experiences lived and those shared by colleagues across the country, I provide concrete examples of where law student editors go wrong, and also explain why.

Finally, in an effort to improve the process, I recommend that faculty advisors and editors read some of my co-bloggers’ insights on the topic.

https://www.businesslawprofessors.com/business_law/2016/02/winning-the-citation-lottery-attracting-quality-articles-to-lower-ranked-law-reviews/

https://www.businesslawprofessors.com/business_law/2016/04/a-constructive-resolution-to-what-otherwise-would-have-been-another-ugly-law-review-experience-/

https://www.businesslawprofessors.com/business_law/2014/11/nightmare-in-law-review-land-/

https://www.businesslawprofessors.com/business_law/2014/07/remind-me-whats-the-point-of-law-reviews-1/

https://www.businesslawprofessors.com/business_law/2014/09/more-on-the-irrelevance-of-law-reviews/

https://www.businesslawprofessors.com/business_law/2014/07/would-blind-review-and-other-law-reviews-changes-impact-pt/

https://www.businesslawprofessors.com/business_law/2014/07/modifying-the-law-review-submission-and-review-process/

https://www.businesslawprofessors.com/business_law/2014/07/the-value-of-the-imperfect-law-review-system/

https://www.businesslawprofessors.com/business_law/2011/06/some-thoughts-for-law-review-editors-and-law-review-authors/

https://www.businesslawprofessors.com/business_law/2011/05/vonneguts-law-pattern-finding-in-law-reviews/

https://www.businesslawprofessors.com/business_law/2014/10/two-law-review-exclusive-submission-windows/

Happy grading to all and I wish you a productive summer. I will be writing less frequently in May due to  a honeymoon and then a research trip to Cuba, which of course, I will blog about. I’m also writing a law review article on Cuba, so hopefully editors won’t hold this column against me!

In follow up to my post yesterday, my trusted and valued co-blogger Joan Heminway asked a good question (as usual) based one of my comments.  My response became long enough that I thought it warranted a follow-up post (and it needed formatting).  Joan commented: 

you say: “there should be no problem if, for example, Delaware corporate law did not allow a for-profit entity to exercise religion for the sole sake of religion. I think that is the case right now: that’s not a proper corporate purpose under my read of existing law.” Are you implying that a corporate purpose of that kind for a for-profit corporation organized in Delaware would be unlawful? Can you explain?

My response: I am suggesting exactly that, though I concede one might need a complaining shareholder first. My read of eBay, and Chief Justice Strine’s musing on the subject, suggest that an entity that is run for purposes of religion (not shareholder wealth maximization) first and foremost, is an improper use of the Delaware corporate form. (“I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.”)  Chancellor Chandler explained in eBay:

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.

I think this definition of philanthropic easily includes religious ends (or should).

Chancellor Chandler continued:

Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.

I don’t see how this should play any differently if it applied to religion. Consider, for example, this possible spin:

Jane and Carrie opted to form Religion, Inc., as a for-profit Delaware corporation and voluntarily accepted millions of dollars from BigCo as part of a transaction whereby BigCo became a stockholder. Having chosen a for-profit corporate form, the Religion directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.

Further to the point, Chancellor Chandler added:

I cannot accept as valid . . .  a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce.

Thus, a for-profit business can be religious in nature—e.g., make religious books or products or sponsor religious seminars—but as a Delaware corporation, the purpose of the entity must be to “promote the value of the corporation for the benefit of its stockholders.”

This is the potential problem with the Hobby Lobby case as to Delaware law.  There, the companies had a lot to lose:

If they and their companies refuse to provide contraceptive coverage, they face severe economic consequences: about $475 million per year for Hobby Lobby, $33 million per year for Conestoga, and $15 million per year for Mardel. And if they drop coverage altogether, they could face penalties of roughly $26 million for Hobby Lobby, $1.8 million for Conestoga, and $800,000 for Mardel.

These losses were justified in that case as being necessary to exercise religion, and not to further a corporate purpose. Of course, they had to make that claim, because otherwise they couldn’t get the benefit of RFRA, which requires demonstrating “an honest conviction,” which could be problematic if the reason was couched in business terms, and not religious ones. 

Incidentally, I think the business judgment rule should probably protect this decision, anyway, but I don’t know that Delaware law would support that view. In fact, it shouldn’t based in recent case law, and I think plainly eBay says no on that one. The Supreme Court says RFRA protects the right to pursue religious ends. It doesn’t mean Delaware law does.  (Note: Hobby Lobby is not a Delaware entity, so the rules are admittedly different.) 

Thus, my fix seek to balance these competing possible outcomes. Tell shareholders your plan, and they can’t question it later, even if that plan costs the company $475 million in losses. Where the law has evolved, I don’t think it’s fair to suggest it was part of the bargain for all companies, thought maybe investors in Hobby Lobby did know.  But it doesn’t matter.  I thought craigslist’s long-standing business plan was sufficient notice, too. Chancellor Chandler disagreed.

Last week, Hamdi Ulukaya, founder and CEO of Chobani, announced a 10% company stock grant to all company employees.  Chobani joined the ranks of high profile stock grants including Whole Foods, Starbucks, Apple and Twitter.  Stock grants, while more common in tech industries, are a part of hybrid corporate law-employment law conversation on shared ownership.  Employee ownership in companies can occur in several different forms such as ERISA-governed benefit plans where the company stock issued or bought as a part of a retirement saving plan. Alternatively, a stock grant may be structured as a bonus plan, a standard compensation, or a vesting employee benefit eligible after threshold years and types of service.  All of these plans fall under the rubric of shared ownership.  In 2015, the National Center for Employee Benefits estimated that over 9000 companies participated in some form of shared ownership.

In a similar vein, actors in the hit (and record-breaking with 16 Tony Nominations) musical Hamilton have entered into a profit-sharing agreement with producers.  The deal is different for these actors, but the sentiment is the same in sharing profits, aligning interests, and promoting employee loyalty.

Shared ownership plans, especially the ERISA-governed ones can have specific tax and financing benefits for companies.  Creating a shared ownership plan, however is often focused on creating certain firm-specific benefits such as recruiting and retaining talent, and improving firm performance by aligning interests between employees and the company.   The recruitment and retention aspect can be especially valuable to start-up firms that struggle to compete with mature firms on salary and reputation. Empirical studies have found improved workplace performance, on average, for firms with shared capitalism plans, with positive effects observed most strongly when combined with policies such as low supervision, decision-making participation, and competitive pay.

I note these stories with particular interest for several reasons. The first is that I am routinely embarrassed by how little play I give employees in my corporation class .  I seem all too happy to ignore this very important piece of the corporate power puzzle, engine for the machine, etc., etc.  Second, I have been looking at shared ownership in the context of a recent research project, so look for more on that topic in a separate post once the project progresses.  Third, my sense is that social enterprise movement will bring with it greater demands for shared ownership as a means to address social factors such as retirement security, employee autonomy and wage inequality. Look for more of these stories in the headlines and an emphasis on it in scholarship.

-Anne Tucker

I am looking forward to attending and presenting at Emory University School of Law’s upcoming conference (June 10-11) focused on the art and science of teaching transactional law and skills.  I received word yesterday from Sue Payne, the Executive Director of Emory Law’s Center for Transactional Law and Practice, that the keynote speakers for the conference are “the dynamic duo of Martin J. Katz and Phoenix Cai will deliver a keynote address entitled – ‘Encouraging this Particular Form of (Very Fun) Madness – Roles for Deans and Faculty Members.'” The notice se sent to me on the keynote speakers offers the following information about Professors Katz and Cai and the conference as a whole:

Marty Katz is Dean and Professor of Law at the University of Denver, Sturm College of Law. Under his leadership, Denver Law developed and implemented a major strategic plan that included initiatives in experiential learning and specialization. He is a founding board member of Educating Tomorrow’s Lawyers, a national consortium of law schools that serve as leaders in the experiential education movement. Dean Katz’s recent publications include “Facilitating Better Law Teaching – Now” (Emory Law Journal) and “Understanding the Costs of Experiential Legal Education” (Journal of Experiential Learning).    

Phoenix Cai is the founding director of the Roche International Business LLM Program and Associate Professor of Law at the University of Denver, Sturm College of Law. The Roche LLM in International Business Transactions is an intensive and experiential graduate program designed to train both U.S. and foreign lawyers in private transactional law. Prior to joining Denver Law, Professor Cai was a corporate lawyer specializing in both domestic and international mergers and acquisitions, banking, finance, and securities law.

Don’t miss this opportunity to hear Dean Katz and Professor Cai share their thoughts about how deans and faculty members can promote excellence in transactional law and skills education.

For more information about the Conference, including a list of the many other esteemed presenters and the topics they will cover, go to our conference website. If you would like to register for the Conference, please go here.

I hope to see many of you there.  My presentation focuses on teaching the drafting of corporate bylaws.  I will say more on it in this space later.

Submissions: manuscripts or abstracts must be submitted electronically to Professor Michelle Harner, Chair-Elect of the Section on Business Associations, at mharner@law.umaryland.edu August 24, 2016.

The AALS Section on Business Associations and the AALS Section on Comparative Law are pleased to announce a Call for Papers for a joint program to be held on January 5, 2017, at the AALS 2017 Annual Meeting in San Francisco.  The topic of the program is “Business Law in the Global Gig Economy:  Legal Theory, Doctrine, and Innovations in the Context of Startups, Scaleups, and Unicorns.”  

Startups and entrepreneurs have long played an important role in the U.S. economy.  From Henry Ford to Mark Zuckerberg, entrepreneurs have revolutionized the ways in which their customers receive products and services. As Phil Libin, CEO of Evernote, has explained, “There’s lots of bad reasons to start a company. But there’s only one good, legitimate reason, and I think you know what it is: it’s to change the world.”

That philosophy continues today as entrepreneurs disrupt markets and challenge business and legal norms. Traditional notions of the firm, fiduciary duties, contractual bargains, and optimal capital structures may not aptly fit entrepreneurial approaches. Indeed, entrepreneurs’ business models, financing needs, and operational objectives require lawyers and scholars to rethink governance, capital structures, and regulatory schemes that may limit or impede further innovation, both nationally and transnationally.  

Continue Reading Call for Papers – Joint Program AALS Sections on Business Associations and Comparative Law

A recent Vanity Fair article discussing Citizens United is making the rounds. (I saw it on Facebook!)  The article notes:  

It had already been established, in Buckley v. Valeo (1976), that anyone has a First Amendment right to spend his or her own money advancing his or her own cause, including a candidacy for political office. Citizens United extended this right to legally created “persons” such as corporations and unions.

I have been giving some more thought to whole “personhood” discussion of late, and my thoughts have taken me back to both Hobby Lobby and Citizens United. What follows is a long blog post that pulls together my thoughts on these two cases in an admittedly not well developed way.  But it’s a start (though I really should be grading).  

Continue Reading Entities Should Ask Before Exercising Citizens United and Hobby Lobby Rights

What factors generate a healthy secondary market in securities?  That is my question for this week.  I have found myself struggling with this question since I was first called by a reporter writing a story for The Wall Street Journal about a work-in-process written by one of our colleagues, Seth Oranburg (a Visiting Assistant Professor at Chicago-Kent College of Law).  The article came out yesterday (and I was quoted in it–glory be!), but the puzzle remains . . . .

Secondary securities markets have been hot topics for a while now. I followed with interest Usha Rodrigues’s work on this paper, for example, which came out in 2013.  Yet, that project focused on markets involving only accredited investors.  

Seth’s idea, however, is intended to prime a different kind of secondary market in securities: a trading platform for securities bought by the average Joe (or Joan!) non-accredited investor in a crowdfunded offering (specifically, an offering conducted under the CROWDFUND Act, Title III of the JOBS Act).  [Note: I will not bother to unpack the statutory acronyms used in that last parenthetical expression, since I know most of our readers understand them well.  But please comment below or message me if you need help on that.]  Leaving aside one’s view of the need for or desirability of a secondary market for securities acquired through crowdfunding  (which depends, at least to some extent, on the type of issuer, investment instrument, and investor involved in the crowdfunding), the idea of fostering a secondary securities market is intriguing.  What, other than willing buyers and sellers and a facilitating (or at least non-hostile) regulatory environment, makes a trading market in securities?

Continue Reading Calling All Secondary Securities Market Aficionados! A Little Help?

Securities regulations have increasingly required disclosure of, and shareholder input into, corporate executives’ pay.  For years, public corporations have been required to disclose the salaries of named executive officers, Dodd-Frank instituted (nonbinding) shareholder say-on-pay votes, and very soon, companies will be required to disclose the ratio of the CEO’s pay to median employee pay.

Many have argued that disclosure creates a Lake Wobegon effect:  No one wants to admit that their CEO gets below-average pay, and so disclosure ends up causing pay levels to rise across the board.

Now, a new study by Hongyan Li and Jin Xu looks at the effect in the context of CFO pay.  

Prior to 2006, the SEC required disclosure of the pay of five highest paid executive officers, including the CEO.  In 2006, however, the SEC changed its regulations to require disclosure of CFO pay, regardless of whether the CFO was one of the most highly paid.  The authors used the change as a natural experiment to discover the effect of disclosure on both CFO salary levels and CFO behavior.

Using a sample of S&P 1500 firms from 1999 through 2013, they find that at firms that had not previously disclosed CFO pay, CFO pay increased at a greater rate than at firms that had been disclosing CFO pay all along.  More worryingly, they also found that after companies began disclosing CFO pay, the quality of financial reporting deteriorated.  I.e., it seems as though once the CFO position becomes more prominent – and more highly paid – CFOs feel more need to “sing for their supper” in the form of generating positive (and potentially artificial) results.

That said, there seems to be room for further analysis.  The authors divide companies into 4 groups based on whether they reported CFO pay prior to the 2006 changes (always reported, often, seldom, and never) and they find that on some measures, the increase in earnings management is confined to the seldom and/or often groups.  So the story is not as simple as disclosure = deterioration.  Still, the study highlights flaws in a regulatory philosophy based on the disciplining effects of disclosure.

Earlier this month, B Lab, the 501(c)(3) nonprofit organization that oversees the certification of B corps, announced that it will move its October 2016 retreat from North Carolina because of North Carolina’s controversial House Bill 2 (“HB2”).

In an April 12 e-mail to “Friends of the B Corp Community,” the B Lab team wrote:

Standing for inclusion, the global B Corp community has decided to relocate the 2016 B Corp Champions Retreat and related events from North Carolina in light of the newly-enacted State law HB2 which limits anti-discrimination protections, particularly for members of the LGBT community.

Immediately, B Lab will work with the North Carolina B Corp community and others to get HB2 off the books and make North Carolina more inclusive and business-friendly.

B Lab also linked to this longer statement in that e-mail.

The Model Benefit Corporation Legislation and the laws following the Model require that a third-party standard be used by benefit corporations to measure their social and environmental impact. B Lab’s standard is currently the most popular standard, but it is not required or even mentioned by the benefit corporation statutes. Allowing for various third-party standards helps prevent the benefit corporation law from being overly political. I do wonder, however, if B Lab’s public stand on this issue will make the benefit corporation laws harder to pass in more conservative states, because of B Lab’s large role in cultivating both the certified B corp and benefit corporation communities.

Further, this situation leads to a question I asked in 2012 — would B Lab exercise their veto power and deny certification to Chick-fil-A, if Chick-fil-A applied for certification and managed the required social score? As I wrote in 2012, I don’t see anything in the benefit corporation laws that would prevent Chick-fil-A from becoming a benefit corporation, but I am less sure if Chick-fil-A would be successful in obtaining certification from B Lab. B Corp certification is separate from the entity formation process, and the certification is under the control of B Lab rather than the government. 

Also, I am not a nonprofit expert, but I wonder whether B Lab is flirting with the lobbying restrictions for 501(c)(3)s, especially when it promises to “work with the North Carolina B Corp community and others to get HB2 off the books.” They also seem to be involved in the attempts to pass benefit corporation laws in states across the country. (Thoughts from nonprofit lawyers or professors welcomed in the comments or by e-mail…I am told that 501(c)(3)s are allowed to do an “insubstantial” amount of lobbying).

In any event, in seems that non-profits, social enterprises, and traditional for-profits are becoming more and more active in social and political debates. And these organizations are often powerful, influential players.