Fellow BLPB editor, Stefan Padfield, raised some insightful questions on the continued reach and impact of defacto corporation doctrines and corporation by estoppel in an earlier, offline conversation.  [Stefan uses my Business Organizations casebook offered on the electronic platform ChartaCourse and was graciously providing me some feedback].  The conversation raised two related groups of questions. First what is the continued import and application of defacto corporation doctrine in a world of standardized incorporation processes.  Long gone are the days of lost mail (lost Email maybe) and corrections can be made nearly instanteously and will relatively little cost in the event of typos or other defects.  To what extent does the de facto doctrine, long a staple of the survey law school course on corporations, still play a relevant role in practice. I understand all of the doctrinal reasons law professors may want to continue to teach it because it tests the outer limits of the substance over form debate in corporations and the begs the questions how fragile or strong is the legal fiction of separately incorporated entities.  It is nearly as fun as piercing the corporate veil!  But in [insert finger quotes here] “real life” or “practice” how relevant is this doctrine?  

The MBCA Section 2.04 Liability for Preincorporation Transactions states “All persons purporting to act as or on behalf of a corporation, knowing there was no incorporation under this Act, are jointly and severally liable for all liabilities created while so acting.” Despite earlier attempts to eliminate the doctrine of de facto corporations (“Therefore a de facto corporation cannot exist under the Model Act. Comments to section 56 in 1969 Model Act), the current version makes clear that the de facto doctrine lives on.  “A number of situations have arisen, however, in which the protection of limited liability arguable should be recognized even though the simple incorporation process established by modern statutes has not been completed.”

The MBCA, as a uniform statute, is a guide, but not operative law under individual state corporate charters.  An initial count finds 27 jurisdictions with statutory language expressly acknowledging a knowledge-based standard for de facto corporations similar to that established in the MBCA.  Many other states recognize de facto doctrine solely through case law.  A few jurisdictions, such as Alaska and Idaho explicitly abolish de facto corporations via statutory text.  Idaho recently changed the statute to state:  “All persons purporting to act as or on behalf of a corporation, when there was no incorporation under this chapter, are jointly and severally liable for all liabilities created while so acting.”  Idaho Code Ann. § 30-29-204 (West)The highlighted word “when” replaced “knowing”.

Academic interest in de facto corporation doctrines, a hot topic in the early 1900’s (see, e.g. Edward H. Warren, Collateral Attack on Incorporation A. De Facto Corporations, 20 Harv. L. Rev. 456, 479-80 (1907)), has waned.  One exception is the 2009 article The Doctrine of Defective Incorporation and its Tenuous Coexistence with the Model Business Corporation Act, by Timothy Wyatt, 

This paper revisits the earlier studies and demonstrates that the apparently inconsistent findings were the result of analytical flaws. The paper then presents a new extensive study of post-MBCA defective incorporation cases, and demonstrates by statistical regression that the courts have continued to apply the defective incorporation doctrine (the MBCA notwithstanding) and that the courts have applied the doctrine in a way that is highly predictable: Where the defendant is active in the management of a business entity that is not validly incorporated, he will not be held personally liable for his actions on behalf of the corporation so long as he believed the corporation was valid at the time of the actions.

I conclude that, for the situation where the shareholders of a defective corporation seek limited liability, the concepts of “de facto corporation” and “corporation by estoppel” are largely indistinguishable and are really two different ways of stating the unitary common-law doctrine of defective incorporation. The outcomes of these cases are highly predictable if one considers whether the shareholder of the defectively incorporated entity is acting in good faith—a factor that has been neglected by previous commentators. I also conclude that, while the attempted abolition of the defective-incorporation doctrine by the MBCA injected some uncertainty into the outcomes of cases, the courts largely ignored the MBCA on this point. In fact, the judicial backlash against attempts to legislate defective incorporation out of existence may actually have strengthened the doctrine. 

My initial reading of this is that attempts to eliminate the doctrine have failed.  De facto corporations remains intact and a relevant legal theory.  Justifications for removing de facto incorporation persist even though the process of incorporation has changed.  The bottom line is that human error may still necessitate the doctrine. At a minimum, a variety of jurisdictions agree as evidenced by statute or common law. 

Related to the inquiry on de facto corporations is the extension of any changes or continued relevance to the uncorporate entities space.  Those issues will be tackled in a separate post.

 -Anne Tucker

It has been a crazy busy couple of weeks, and one thing I rely on the keep sane (or sane-ish) is music. This morning I was listening to the most recent Public Enemy album, Man Plans God Laughs, which includes a song called “Corplantationopoly.”  (The album is solid, and while it will never top Nation of Millions or Fear of a Black Planet, Chuck D is still powerful to hear.)  This got me to thinking about songs that reference business as part of their lyrics and/or theme.

With the availability of the internet, of course several such lists have already been compiled. Here is a sampling:

  1. 30 Best Songs About Business and Money
  2. Songs About Money, Business, Finance and Economics
  3. Top 10 Business Songs of All Time | Veritas Prep
  4. The Top 25 Entrepreneur Theme Songs | Addicted 2 Success
  5. 10 Famous Rap Songs About Money
I didn’t go to those, though.  Following is my quick list of my five best business songs.  “Best” in this context is the songs that came to mind that talked about business or money.  No voting. No quality assurance.  Pure memory and impulse.  So here you go, my five “best.”  I welcome thoughts and other suggestions (or criticisms, though I prefer thoughts and suggestions) in the comments.   
 
1. The Notorious B.I.G., Mo Money Mo Problems
 
I don’t know what, they want from me
It’s like the more money we come across
The more problems we see
 
2. Kanye West (ft. Jay Z), Diamonds from Sierra Leone (Remix)
 
I’m not a businessman. I’m a business, man!
 
3. Pet Shop Boys, Opportunities (Let’s Make Lots of Money)
 
I’ve had enough of scheming and messing around with jerks
My car is parked outside, I’m afraid it doesn’t work
I’m looking for a partner, someone who gets things fixed
Ask yourself this question, do you want to be rich?
 
4.  Cyndi Lauper, Money Changes Everything 
 
You think you know what you’re doin’
We don’t pull the strings
It’s all in the past now
Money changes everything
 
5. Tom Petty, Money Becomes King
 
The sound was my salvation
It was only everything
Before money became king.
 

Let Feeling, Passion, Reason, Sense appear—
But mark you! Let us have some Nonsense too!
    -Goethe

Whatever happened to humor in law reviews?

In the past, leading law reviews had no qualms about including legal humor. Yale, for example, published Jim Gordon’s How Not to Succeed in Law School, 100 YALE L. J. 1679 (1991). Northwestern published my The Gettysburg Address as Written by Law Students Taking an Exam, 86 Nw. U. L. REV. 1094 (1992). Michigan published Dennis Arrow’s incredible tome, Pomobabble: Postmodern Newspeak and Constitutional “Meaning” for the Uninitiated, 96 MICH. L. REV. 461 (1997).

At least two law reviews in the nineties published symposia on legal humor: BYU (Symposium on Humor and the Law, 1992 B.Y.U. L. REV. 313-558) and Nova (Nova [Humor in the] Law Review, 17 NOVA l. REV. 661-1001 (1993)). The BYU symposium even includes an excellent bibliography of legal humor: James D. Gordon, III, A Bibliography of Humor and the Law, 1992 B.Y.U. L. REV. 427.

The era of law review humor seems to have passed. There isn’t much legal humor in law reviews anymore. There are exceptions: Green Bag and the Journal of Legal Education publish quite a bit of humor. But the mainstream student-edited law reviews seem to have abandoned it.

I don’t know what happened. Perhaps this generation of law professors is more grave and earnest than my generation. Or maybe today’s law review editors simply aren’t willing to publish humorous articles. (They publish a good number of unintentionally humorous articles, but unwitting self-parody doesn’t count.)

Whatever the reason, it’s unfortunate. Humor can be a very effective tool. It’s also a sign of health in the legal profession and legal education. Humor exposes the cracks in a discipline; intolerance of humor is a sign of weakness. Beware the overly earnest argument.

I hope it’s not too late. Let’s stop treating everything so damn seriously and open the gate to a little nonsense. I want to laugh.

 

The Wall Street Journal reports on a growing phenomenon – in the wake of cases like RBC Capital Mkts., LLC v. Jervis, 2015 Del. LEXIS 629 (Del. Nov. 30, 2015), corporate boards considering M&A deals are rooting out investment banking conflicts by turning to smaller boutique firms to advise them.

My off the cuff reactions –

First, I find this notable if only because board directors are shielded from personal liability both by exculpatory clauses in corporate charters, and by D&O insurance. Scholars frequently argue that the lack of personal liability blunts the potential deterrent effects of shareholder lawsuits; I am fascinated to see a real-world demonstration that the lawsuit threat remains potent. It’s particularly striking in this instance because ultimately it is the conflicted banks – not the directors – who risk liability, and yet the directors are the ones who are exhibiting concern. This is a salutary result: the directors, of course, are the ones who have a fiduciary duty to protect shareholders. (But cf. Andrew F. Tuch, Banker Loyalty in Mergers and Acquisitions) But it’s not necessarily what one would have expected given the liability regime. The WSJ piece suggests that boards’ concerns stem from their fears that their corporations will be responsible for the banks’ legal fees, but I wonder if it’s more that lawsuits, especially ones that appear meritorious, really do have a shaming effect that shouldn’t be underestimated.

Second, to avoid conflicts, directors are hiring smaller, boutique advisory firms. In the post Dodd Frank world, many have questioned whether large mega banks are financially viable, and have suggested that breakups may be inevitable; chalk this up as another datapoint.

Finally, though, it’s worth pointing out that there is a legitimate question about how much shareholders will ultimately benefit. To the extent boutique firms are hired as secondary advisors to work with larger banks, is there a risk that the additional fees will cancel out any cost savings? And of course, there’s the standard argument that large banks’ connections and knowledge of industry is a benefit to their clients. We’ve seen this argument before – everywhere from the “revolving door” to independent directors to industry arbitrators to farcical questions about whether Supreme Court nominees have an opinion on Roe v. Wade – and it comes down to the claim that a loss of objectivity is the price of expertise. The problem is, it’s still not clear where the right balance lies.

For those of you who talk about the recent problems at Volkswagen in your classes, this recently posted article may be useful. I connected with Charles Elson briefly when I lived in Delaware, and he is certainly an authority on corporate governance. The article is available here and the abstract is posted below. 

———–

Although the primary cause of the emissions scandal at Volkswagen appears to have been misfeasance and malfeasance on a corporate-wide scale, we argue that such a problematic culture existed at Volkswagen because of the composition of the board itself in combination with the unique governance structure known as “co-determination,” that defines many German companies, including VW. There are three major problems from a corporate governance standpoint with the Volkswagen board. First, is the interest-conflicting nature of the dual-class stock held by the dominant shareholding Porsche and Piech families. Second, is the presence of a government as a major shareholder. And third is the organization of its characteristically German “two-tier” board around the principle of co-determination, which mandated significant labor representation. We argue that each of these elements of the VW ownership and governance structure contributed in varying degrees to the board failure of oversight that led to the management decision to evade emissions regulations.

Christopher Bruner recently posted a book chapter entitled The Corporation’s Intrinsic Attributes. I try to read everything Christopher writes, including his excellent Cambridge University Press book, Corporate Governance in the Common Law World, and I am looking forward to reading this new book chapter over spring break next week. The book chapter’s abstract is reproduced below for interested readers:

———————

Numerous treatises, casebooks, and other resources commonly present concise lists of attributes said to be intrinsic to the modern corporation and/or essential to its economic utility. Such descriptions of the corporate form often constitute introductory matter, conditioning how students, professionals, and public officials alike approach corporate law by presenting a straightforward framework to distinguish the corporate form from other types of business entities. There are two significant problems with such frameworks, however, from a pedagogic perspective. First, these frameworks describe the corporation by reference to purportedly fixed intrinsic attributes, conflicting sharply with the flux and dynamism that have in fact characterized the history of corporate law. Second, these frameworks differ markedly from each other in how they characterize the corporation’s attributes, each embodying a contestable perspective on the nature of the corporate form.

The diversity of perspectives that such inquiry reveals calls into question the degree to which we can validly deduce a single correct or optimal division of power between boards and shareholders, degree of regard for shareholder interests, and/or degree of liability exposure for boards and shareholders, based exclusively on premises purportedly intrinsic to corporate law itself – that is, without express appeal to external policy considerations and related regulatory fields. These matters map onto three core issues of corporate law and governance – power, purpose, and risk-taking, respectively – and the inability to resolve them by reference to the corporation’s purportedly intrinsic features suggests that re-conceptualizing the corporate form might facilitate more effective assessment of its capabilities.

This chapter undertakes that project. Section I begins with an historical discussion of the corporation’s emergence and early deployment for business in the United Kingdom and the United States. Section II turns to various contemporary descriptions of the corporation’s intrinsic attributes presented in modern reference materials, exploring their commonalities, differences, and theoretical implications. Section III explores the impossibility of resolving core issues of power, purpose, and risk-taking by reference to such conceptions of the corporate form, providing three US examples that map onto these respective issues – the scope of shareholders’ bylaw authority, the degree of board discretion to consider non-shareholder interests in hostile takeovers, and the regulation of financial risk-taking following the recent crisis. Each illustrates the necessity of resort to political discourse – a reality underscored through comparison with the United Kingdom, which reveals substantial divergence on such issues notwithstanding broad similarities between the US and UK corporate governance regimes.

The chapter concludes, in Section IV, by proposing that we refrain from describing the corporate form by reference to purportedly fixed intrinsic attributes. I argue that it would pay to re-conceptualize the modern corporation by reference to the tools it offers, and how those tools can be deployed – a series of governance “levers,” I suggest, that can be adjusted and calibrated in various ways to pursue a broad range of governance-related goals.    

Presidential candidate Donald Trump has repeatedly stated that he never plans to eat Oreo cookies again because the Nabisco plant is closing and moving to Mexico. Trump, who has starred in an Oreo commercial in the past, is actually wrong about the nature of Nabisco’s move, and it’s unlikely that he will affect Nabisco’s sales notwithstanding his tremendous popularity among some in the electorate right now. Mr. Trump has also urged a boycott of Apple over how that company has handled the FBI’s request over the San Bernardino terrorist’s cell phone.

Strangely, I haven’t heard a call for a boycott of Apple products following shareholders’ rejection of a proposal to diversify the board last week. I would think that Reverend and former candidate Al Sharpton, who called for the boycott of the Oscars due to lack of diversity would call for a boycott of all things Apple. But alas, for now Trump seems to be the lone voice calling for such a move (and not because of diversity). In fact, I’ve never walked past an Apple Store without thinking that there must be a 50% off sale on the merchandise. There are times when the lines are literally out the door. Similarly, despite the #Oscarssowhite controversy and claims from many that the boycott worked because the Oscars had historically low ratings, viewership among black film enthusiasts was only down 2% this year.

So why do people constantly call for boycotts? According to a Freakonomics podcast from January, they don’t actually work. Historians and economists made it clear in interviews that they only succeed as part of an established social movement. In some cases they can backfire leading to a “buycott,” as it did for Chik Fil A. The podcast also put into context much of what we believe are the boycott “success stories,” including the Montgomery Bus Boycott with Rosa Parks and the sit in movement related to apartheid in the 1980s.

I have spent much of my time looking at disclosure legislation that is based in part on the theory that informed consumers and socially-responsible investors will boycott or divest holdings (see here, here, and here). In particular, I have focused on the Dodd-Frank conflict minerals corporate governance disclosure and why I don’t think that using name and shame laws work—namely because consumers talk a good game in surveys but actually don’t purchase based on social criteria nearly as much as NGOs and legislators believe.

The SEC was supposed to decide whether to file a cert petition to the Supreme Court on the part of the conflict minerals legislation that was struck down on First Amendment grounds by March 9th but they now have an extension until April. Since I wrote an amicus brief in the case at the lower level, I have a particular interest in this filing. I had planned my business and human rights class on disclosures and boycotts around that cert. filing to make it even more relevant to my students, who will do a role play simulation drafted by Professor Erika George representing civil society (NGOs, investors, and other stakeholders), the electronics industry, the US government (state department, Congress, and SEC), Congolese militia, the Congolese government, and the Congolese people. The only group they won’t represent is US consumers, even though that’s the target group of the Dodd-Frank disclosure. I did tweak Professor George’s materials but purposely chose not to add in the US consumer group. After my students step out of their roles, we will have the honest discussions about their own views and buying habits. I’ll try not to burst any boycott bubbles.

It’s fun when students are interested in your scholarship.  Yesterday, one of my students engaged me to talk about my work on limited liability operating agreements as contracts.  (I have mentioned this work in class, and the student also is a regular reader of this blog, where I have referenced this work a number of times, including most prominently here.)  He began the exchange with something akin to the following question: “Why is it that we take two full semesters of contract law during the first year of law school and then all but ignore the connection of contract law to business entities once we get to Business Associations?”

I think I know what he means.  While the segregation of legal doctrine by subject matter in law schools enables instructors to focus students narrowly on a single–often new–body of law, it also tends to obscure the interconnections between and among applicable bodies of law, including connections between contract law and the law of business entities.  Admittedly (and I pointed this out to the student), the typical Business Associations course does typically address contracts at several points.  These junctures include, among others, the course segment in which sole proprietorships are distinguished from statutory forms of business entity, discussions on the nexus of contracts theory of the corporation, and dialog on the validity of shareholder agreements.

This conversation reminded me that I learned an important thing about the Restatement (Second) of Contracts at the 11th International Conference on Contracts (KCON XI) last weekend at St. Mary’s University School of Law in San Antonio, Texas.  (Keep in mind as you read this that I do not teach and have never taught the 1L course on contract law.)  What did I learn?  I learned how to use the Restatement properly in assessing the existence and validity of a contract!

Specifically, I learned that the traditional elements of a legally valid contract, those that I had learned in law school (offer, acceptance, and consideration) are, under the Restatement (Second) of Contracts, non-exclusive means of qualifying an agreement as a valid contract.  Specifically, Section 17 of the Restatement provides as follows:

(1) Except as stated in Subsection (2), the formation of a contract requires a bargain in which there is a manifestation of mutual assent to the exchange and a consideration.

(2) Whether or not there is a bargain a contract may be formed under special rules applicable to formal contracts or under the rules stated in §§82-94.

The comments to Section 17 cast additional light on types of contract–including several different kinds of formal contract,–that do not need to meet the requirements of mutual assent and consideration.  Moreover, the sections of the Restatement referenced in Section 17(2) include Section 90, which helpfully provides in subsection 1 that

[a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise. The remedy granted for breach may be limited as justice requires.

I guess I knew that, but somehow I missed remembering or fully understanding it.

All of this, and much more from KCON XI, will come in handy in my future work on contracts in the business entity context, deepening and enriching points I want to make.  It’s sometimes really enlightening–a scholarly “breath of fresh air”–to attend a conference of academics focused on a subject matter or scholarly tradition that is different from one’s own.  I may try to do this more often.

Also, my student’s point on the need to more often and more integrally show the interdisciplinary of law in the upper division classroom is not lost on me.  That’s an area in which I can make immediate changes.  And with the help of my contract law brethren from KCON XI, contract law is sure to be a part of the dialogue.

I have long followed the trials and tribulations of Chesapeake Energy and founder Aubrey McClendon, and I had been planning to write about yesterday’s indictment of McClendon for bid rigging in a couple weeks, after I gathered more information.  About an hour ago, though, reports broke that former Chesapeake CEO Aubrey McClendon died today.  According to CNBC:

Aubrey McClendon, a founder and former chief executive of Chesapeake Energy, died in a single-car crash Wednesday at age 56, a day after he was charged with conspiring to rig bids for oil and natural gas leases.

McClendon crashed into an embankment while traveling at a “high rate of speed” in Oklahoma City just after 9 a.m. Wednesday morning, said Capt. Paco Balderrama of the Oklahoma City Police Department. Flames engulfed McClendon’s vehicle “immediately,” and it was burnt so badly that police could not tell if he was wearing a seatbelt, he said.

Before going any further, my thoughts go out to his friends and family.  Regardless of how anything else comes together, their loss is real, and I feel badly for them.  

In years past, I have questioned how Chesapeake conducted some of their business, including their use of entities and their leasing practices in Michigan and whether loan practices McClendon used personally were at odds with his fiduciary duties to Chesapeake.  This round of bid rigging allegations were new to me (a Michigan case settled last year), and I was researching this set of allegations to see what I thought about this case.  I remain curious whether it was a case of “singling him out” unfairly, as he claimed, or were there some strong evidence of more.  

And even if he were being singled out, was it because the practice didn’t occur or is it just how everyone did business?  That question remains an open one, even if the case against McClendon is now closed.  I hope to learn more in the coming weeks.   

As to the impact on his former company, CNBC notes: 

Chesapeake said Tuesday that it did not expect to face criminal prosecution or fines related to McClendon’s charges. The company’s stock, which was already substantially higher Wednesday, briefly added to gains following news of McClendon’s death.
That’s a cold reminder that the market (and the news coverage of the market) moves on quickly.  It’s good that life continues on, of course, but sometimes reminders of that are still striking.