Being near to celebrity, even academic celebrity, can be exciting.  I feel unjustifiable pride and exhilaration in the nomination of George Washington Law School professor Lisa Fairfax to be a SEC commissioner. The White House announced her nomination last October, and the U.S. Senate Committee on Banking, Housing and Urban Affairs held hearings yesterday for Lisa Fairfax (democratic nominee) and Hester Peirce (republican nominee).  Professor Fairfax is being heralded as having “written extensively in favor of shareholder rights, shareholder activism, and gender and racial diversity on corporate boards.”  Her scholarship is available on her SSRN page. Hester Peirce, another academic of sorts, is a senior fellow at the Mercatus Center at George Mason University researching financial markets and an adjunct professor.  The Mercatus Center is a “university-based research center… advanc[ing] knowledge about how markets work to improve people’s lives by training graduate students, conducting research, and applying economics to offer solutions to society’s most pressing problems.” Her writing is available here.

The hearing process was reported by the WSJ as “tough” for both nominees. The confirmation process is by no means a given in the current political climate. A video of the hearing is available for viewing.  Additionally, each nominee submitted a statement and financial records as a part of the confirmation process.    Download FairfaxStatement   Download FairfaxFinancialDisclosure  Download PeirceStatement   Download PeirceFinancialDisclosure  

Lisa Fairfax summarized her credentials to be a Commissioner: 

As a law professor, over the last fifteen years I have had the privilege of teaching Corporations and Securities Law to the next generation of practitioners, judges, and regulators, so that they can understand the increasingly complex world in which companies must operate, markets must perform, and regulators must monitor. My teaching, along with my research and writing in these areas, have given me a deep understanding of the issues confronting the SEC, as well as a strong desire to help tackle those issues head on.

Fairfax’s statement also stated her view of the SEC:

[I] believe deeply in the SEC’s three part mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. … I believe that the SEC’s three-part mission statement is more than a statement; it is a set of guiding principles that should shape every aspect of the agency’s activities. …I believe the SEC’s work must be aimed at ensuring that investors are protected at all times, and that investors have confidence in the markets and the financial system.

The SEC also has a responsibility to facilitate access to needed capital for all participants in the market, from the corporation and small business owner in need of cash and credit, to the individual investing to support a family, finance a child’s education, or ensure a comfortable retirement.

Hester Peirce, who previously worked with the SEC’s Division of Investment Management, Commissioner Paul Atkins, and the SEC Investor Advisory Committee wrote:

My desire to serve at the SEC is motivated by the conviction that the capital markets help unlock people’s potential. Investors build their retirement nest eggs, their down payments, and their children’s college funds. Vibrant capital markets find and fund individuals and companies with brilliant ideas that can enhance people’s lives and the nation’s prosperity.

My belief in the capital markets’ ability to enrich our communities is built on lessons I have learned at the Peirce family dinner table, in classrooms at Case Western Reserve and Yale, and from mentors and colleagues throughout my career.

I am academically (and personally) interested in the role of retirement investors in capital markets so I noted with interest that both nominees spoke of the relevance of capital markets and the SEC to individual (retirement) investors.

The Committee is expected to vote on April 7, 2016.

-Anne Tucker

While we adjust to the departure of our long-time contributor (and friend) Steve Bradford and plan for the future, the Business Law Professor Blog editors seek interested guest bloggers willing to write one or more substantive posts on a business law topic (scholarship, doctrinal development, current event, etc.).  We are open to a variety of business law backgrounds with a particular interest in adding coverage of commercial law and related topics.  For questions or if you would like to nominate yourself or a colleague to guest blog between now and the end of summer 2016, please send an email to amtucker@gsu.edu with the subject line: “BLPB Guest Blogger”.  Our selection process will depend upon the volume and variety of responses.

-Anne Tucker

In my Energy Business: Law & Strategy course, I use Larry A. DiMatteo’s article, Strategic Contracting: Contract Law as a Source of Competitive Advantage, 47 Am. Bus. L.J. 727 (2010).  I have been using the article in the class since 2012 (this is the third time I have taught it), and I think it does a great job of providing a theoretical backdrop for practical application.  I teach the article in combination with a one-sided proposed Memorandum of Understanding to help students think about the contracting process and and the long-term implications of what might seem like a small-scale negotiation. I highly recommend the piece.  

In reading the article this time around, though, I was struck by how differently the piece treats limited liability companies (LLCs) and corporations and the way concerns about opportunistic behavior are raised in the context of the latter.   In one portion of the article, DiMatteo notes: 

Corporate strategy that fails to take account of the strategic use of law is likely to waste opportunities for competitive advantages. A corporate legal strategy can be used to gain competitive advantages both internally and externally.

I wholeheartedly agree, and this is part of the reason I teach my course.  Although I don’t think this is true of just “corporate” strategy, because the same applies to other entities, such as educational institutions, environmental organizations, LLCs, and even governments.  Regular readers will not be surprised that I would choose to start the sentence “entity strategy” instead of “corporate strategy, ” but his point is still well taken.  

Later in the piece, Prof. DiMatteo takes the following position with regard to LLCs: 

The freedom of contract paradigm that underlies LLCs allows for broad flexibility in strategically drafting the operating agreement. I will make a distinction here between proper and improper strategic drafting, because a distinction based on legality is insufficient. That is, improper terms may be perfectly legal under some states’ LLC statutes. The argument here is that the freedom of contract construct can lead to contractual abuse, albeit a legally sanctioned abuse. For example, a combination of clauses could be inserted into the operating agreement that strips nonmanager members of all power and protections, such as removal of fiduciary duties relating to the managing member, an indemnification clause to protect the managing member from liability for malfeasance, and a clause providing that the nonmember managers have no right to withdraw or to seek dissolution. These types of provisions may be legal under some statutory schemes, but strict enforcement of these clauses by the managing member would be abusive.

I fail to see why strategic use of law in this context is more problematic than the strategic use of law in other contexts. I do understand and validate concerns about on-going expectations of fiduciary protections related to entities, and that is why, as I have suggested previously, that the lack of fiduciary duties and post-formation changes to fiduciary duties (especially loyalty) should include disclosure and perhaps other structural protections.  (I am less concerned about those forming the entity agreeing to limit or eliminate fiduciary duties because they are agreeing to the option at formation when they can object or walk away.) Still, I don’t see any reason that freedom of contract in LLCs is fundamentally different from freedom of contract in any other setting, at least as along as you account for a potential knowledge gap about fiduciary duties. In contrast, I liked how Larry Ribstein framed the question of possible promoter liability for LLCs in New York, where he argued that one could make a complaint that “alleged a misrepresentation which would be actionable without implying a fiduciary duty.”

I do agree with Prof. DiMatteo when he says, “In the end, contracts can be a strategic tool in obtaining a competitive advantage, or they can be a tool to support collaboration by minimizing the opportunities for advantage taking.” Freedom of contract in LLC formation embraces both of these concepts, too.  I just think that those forming the entity should be the ones to determine which path they will take.  

There once was a blogger named Steve.
A positive mark he did leave.
His witty, smart style
Kept us reading a while.
The loss of his posts we shall grieve.

So long from the blogosphere, friend.  We know, as you have promised, that you’ll never be far away.  But we shall, indeed, miss your byline here at the BLPB.

 

And everything that seemed possible at twenty-four, twenty-five, is now just such a joke, such a ridiculous fiction, every birthday an atrocity.
    -Dave Eggers, A Heartbreaking Work of Staggering Genius

Today is my 60th birthday. It’s also the end of my blogging here on the Business Law Prof Blog.

No, we don’t have a mandatory retirement program. I’ve just run out of interesting things to say. (Some of you would say that happened months ago.)

Having interesting things to say is not a requirement for blogging. The blogosphere is filled with writers who keep churning away even though they haven’t had a fresh thought in years. But I’m not motivated solely by the sound of my own voice. I don’t want to keep writing if I’m not contributing anything worthwhile. I’m stepping aside to make room for those younger than me with fresher ideas.

Thank you to my co-bloggers, all of whom are younger than me and have fresher ideas: Ann, Anne, Haskell, Joan, Josh, Marcia, and Stefan. They always have interesting things to say and I’ve learned a lot from them, both on and off the blog. I will continue to read their thoughtful posts, even though I won’t be contributing myself.

Thanks also to my readers, especially those of you who commented on what I wrote. I appreciate your attention to what I had to say. I learned from your comments, even when I didn’t agree with you. “The vanity of teaching often tempteth a man to forget he is a blockhead.” (George Savile) You let me know when I was a being a blockhead.

I hope I’ve kept you informed, entertained, and amused.

Never miss a good chance to shut up.
    -Scott Beach

Goodbye.

I’ve become interested in the proposal to require auditing firms to disclose the names of engagement partners, and other firms, involved in an audit of a public company. Though I can’t pretend to have waded through all the comments that have been submitted on this issue, I gather one of the concerns is that disclosure will increase potential liability under Section 10(b). I actually think that it will and it won’t, and as someone who feels that auditors should be held to more stringent standards than the law currently allows, I have mixed feelings about the proposal.

[More under the jump]

Continue Reading Lifting the Veil of Auditor Anonymity

If you follow sports related news, you know that tennis star Maria Sharapova recently tested positive for a banned performance enhancing drug called Meldonium. Details here and here and here.  According to one source, over 60 athletes have tested positive for Meldonium this year; the drug was just recently added the banned substances list. Sharapova claims she was unaware that she was taking a banned substance. 

A number of Sharapova’s biggest sponsors have suspended or ended their relationship with her and/or delayed planned events. These sponsors include, Nike, Porsche, and TAG Heuer. Head and Evian appear to be sticking with her. Head chairman Johan Eliasch claimed that Sharapova simply made an “honest mistake.”

The companies that have cut ties with Sharapova have likely been able to do so through what is often called a morals clause or a morality clause in the endorsement contract. Some background on morals clauses can be found here and here and here. And here is an interesting contract law question from Eric Goldman that involves morals clauses. 

Some of our December graduates haven just taken the Florida bar exam. As always, I asked them about the business associations questions. Florida drastically changed its LLC rules in 2014, but still hasn’t asked any questions about LLCs, focusing instead on partnerships and corporations (at least according to the students). From a review of the released questions, the bar didn’t ask about LLCs before the amendments either.

I teach BA again next year and I’m struggling with what to emphasize. Business Associations is not required in many Florida law schools, but it is at St. Thomas, and many students enter the class with trepidation. Most will only take the one required course and won’t go on to advanced classes in securities regulation, corporate taxation, or other drafting courses. I try to focus the required BA class on skills that graduates will need in the workplace in addition to preparing them for the bar by using released test questions. Now I wonder how to balance the tension between the rise of LLCs and the many changes in laws related to securities regulation with the bar’s continued focus on partnerships and traditional corporations.

Yesterday the Obama administration added Miami to the list of tech hire jurisdictions. The Kauffman Index ranks Miami as second in the country for startups. Last month, a blogger highlighted my city’s proximity to Latin America and our emerging tech scene. With these realities in mind, should I add even more to what I already teach about legal issues that entrepreneurs and startups face even if that’s not what the Florida bar tests? I never want to “teach to the test” but I also want to make sure that I am responsible in my pedagogy, which for me includes marking up operating agreements, spending time demystifying IPO filings, and introducing them to hybrid entities that entrepreneurs ask about.

Unlike 20 other states, Florida has not adopted the Uniform Bar Exam, but I believe that any test that asks students to do the kind of critical analysis they would have to do in practice is a good thing. This week the Florida bar established a new committee to consider the issue, but I don’t have high hopes for a quick change to the bar exam. Lawyers here recently killed a proposal for reciprocity, and some see the UBE as a back door effort to flood Florida with out of staters.

So I have a conflict. How do other professors tackle the coverage issue? Comment below or feel free to email me at mnarine@stu.edu.

Last month, I published a post that promised subsequent posts on productive scholarly activity.  Specifically, that initial post focused on joy as a driver of scholarly productivity.  I noted there that the colleague who prompted me to start this series–my muse of sorts–thought readers might be interested in knowing about how I organize my research materials, among other things.  I pick up that idea here.

There is no single or simple answer to this question.  I am in a constant evolution in this part of my work, and the matter is complicated by the fact that research materials can be electronic, hard-copy, or orally conveyed.  I do now have some routines, however, and I have come to a few broadly applicable realizations along the way.  Most are likely obvious.  Nevertheless, I share them here today.

At the outset, it is critical to note that my work habits include mobility as a core value.  I work from wherever I am.  So, I have learned that my important research materials need to be captured in some way on my computer when possible.  

Continue Reading Roots of Scholarly Productivity (Take II)