I am posting this at the request of our Associate Dean for Academic Affairs, Alex Long:

The University of Tennessee invites applications for a possible visiting professor for the fall or spring semester in 2016-17. The position would involve teaching Business Associations and one other business-related course (including, perhaps, Contracts I or II). If interested, please submit a CV and cover letter via email to Alex Long, Associate Dean for Academic Affairs & Professor of Law, The University of Tennessee College of Law at along23@utk.edu. Prior teaching experience (law school or broader university teaching) is strongly preferred. The closing date for applications is Monday, February 29, 2016.

I also am happy to respond to questions about this opening.

Strine

I haven’t seen his name on any of the short lists to replace Justice Scalia, but I would love to see the current Chief Justice of the Delaware Supreme Court, Leo Strine, get the nomination.

The benefits of nominating Chief Justice Strine include:

  • Promise of an entertaining nomination process. With all that he has said and written, there would be a lot of fodder, but he would be sure to hold his own. 
  • A nominee whose wit and writing style could rival Justice Scalia’s.
  • Diversity. Chief Justice Strine went to Penn for law school, not Harvard or Yale. (Granted, he does teach at Harvard).
  • Serious corporate law knowledge, and, at least on this blog, we know the Supreme Court of the United States needs help in this area.
  • Extremely bright, curious, and widely read. He likely has knowledge of and an opinion on most areas of law, well outside of just corporate law.

Anyway, I am sure President Obama will go with a more conventional pick, but I do hope to see a Supreme Court justice with corporate law expertise on the court eventually.

Today I tried an experiment in flipping the classroom. Instead of lecturing in class, I sent my Civil Procedure students a number of videos to watch in advance so that we could work through complex problems during class. I admit that I did this because I dread teaching supplemental jurisdiction, but I was surprised by the positive feedback that I received from the students. This is a topic that confuses students every year and although we are not finished with the unit, it does seem less painful this time around. I did not use my own videos, but I will be developing some soon for both Civil Procedure and for the next time I teach Business Associations.

I use a modified version of the flipped classroom already for Business Associations when I send the students YouTube clips to help them increase their understanding on complex issues but it doesn’t come close to having the whole lecture on video so that we can focus on drafting or working through hypos. In my Transnational Business and Human Rights Class I also use videos and extensive at home readings and limited lecture so that we can do simulations, but again, that is not the classic flipped classroom model.

Have any of you experimented with a flipped classroom for all or some of your business courses? If so, what are the pros and cons? Please comment below or send me a private email at mnarine@stu.edu.

Justice Scalia’s sudden passing has generated a tidal wave of media and academic attention on the future of the Supreme Court.   As a corporate law scholar, I have to admit to a tinge of jealousy to be seemingly outside of this controversy, the hand wringing, and the political equivalent of Dungeons and Dragons that has ensued as people examine the various maneuverers available to our elected politicians and those vying-to be elected.

My solution? I searched for pending corporate cases hanging in the balance of the new, and indeterminate, vacancy on the Supreme Court.  I wanted to know if there were any cases pending  that would likely be decided differently in a post-Scalia court, or at least hang in a 4-4 split and thus uphold the lower court ruling.  There isn’t a big juicy corporate law case pending, or at least one that I readily identified.

Not to be deterred, however, there is a case worth highlighting. Americold Realty Trust v. ConAgra Foods, Inc., was argued on January 19th before the Supreme Court (transcript available here).  The issue before the Supreme Court in Americold was how to establish the citizenship of a real estate trust for purposes of diversity citizenship.  Is the trust’s citizenship dependent upon the citizenship of the controlling trustees (as argued by Americold)?  Or is it dependent upon the citizenship of the trust beneficiaries (argued by ConAgra Foods), or some combination? Locating citizenship with trustees narrows the potential states and ensures diversity citizenship whereas citizenship with the beneficiaries, of which there are thousands, implicates most states and thus frustrates federal jurisdiction.

At the heart of the oral argument was the 1990 ruling Carden v. Arkoma Associates, which established a bright line between the citizenship of corporations (located in the state of incorporation) and the citizenship of all other artificial business entities (located in the states of the beneficial owners of the business). 

In Carden, the Supreme Court wrote:

In 1958 it revised the rule established in Letson, providing that a corporation shall be deemed a citizen not only of its State of incorporation but also “of the State where it has its principal place of business.” 28 U.S.C. 1332(c). No provision was made for the treatment of artificial entities other than corporations, although the existence of many new, post-Letson forms of commercial enterprises, including at least the sort of joint stock company …, the sort of limited partnership association …, and the sort of Massachusetts business trust … We have long since decided that, having established special treatment for corporations, we will leave the rest to Congress; we adhere to that decision. 

Drawing on the Carden precedent, the question became whether the REIT as issue in Americold was organized as a traditional corporation or not. 

Ronald Mann writing for the SCOTUS Blog summarized Justice Scalia’s role in oral argument on this issue with the following:

Justice Antonin Scalia early on asked, “[w]ho owns these assets under Maryland law? Is it . . . this new corporation-type entity? That’s the entity that can sue.” That conclusion led him to dismiss out of hand Americold’s contention that the citizenship of the trust managers should be decisive: “[T]he trustees are sort of in the position of managers, just as though you hired a CEO.”

Scalia’s skepticism about the REIT functioning like a corporation was shared by the other Justices despite the fact that modern REITs, in many ways, resemble corporations more so than other unincorporated business entities.  REITs have dispersed and diffused shareholders, often with shares traded on public exchanges.  This position was articulated by an amicus brief filed by National Association of Real Estate Investment Trusts (NAREIT).  The Justices however signaled a truly formalistic approach asking if the entity was indeed formed as a corporation (not did it function as one or was it capitalized as one). Only if so would the state of incorporation rule prevail.

A Justice Scalia-influenced Supreme Court’s last word on corporate jurisprudence may very likely be one of pure form over substance.  Merely asking which entity form was used without looking at the distinguishing features of a corporation and the justifications for why corporations were treated differently beginning in 1958 produces a corporate law legacy of flimsy jurisprudence. Failing to take into account the market realities and relying upon strict categorical distinctions without reference to function would create a bright line, but not necessarily a bright result.

-Anne Tucker

My co-blogger Joan Heminway a short while back wrote a great article, The Ties That Bind: LLC Operating Agreements as Binding Commitments, 68 SMU L. Rev. 811 (2015). (symposium issue)

I often (and perhaps even usually) agree with Joan on issues of law and life, but there’s a spot in Joan’s article with which I disagree.  Joan says:

Although partnership law varies from state to state, as a general matter, partners are not expressly required to contract to form a partnership,88 and a partnership agreement is not defined in a manner that mandates adherence to the common law elements of a contract.89

  1. Under the Revised Uniform Partnership Act, a partnership exists when two or more persons associate as co-owners to carry on a business for profit. REVISED UNIFORM PARTNERSHIP ACT § 101(6), 202(a) (1997).
  2. See, e.g., Sewing v. Bowman, 371 S.W.3d 321, 332 (Tex. App.– Houston [1st Dist.] 2012, no pet.). The Revised Uniform Partnership Act provides the following definition for a partnership agreement: “the agreement, whether written, oral, or implied, among the partners concerning the partnership, including amendments to the partnership agreement.” REVISED UNIFORM PARTNERSHIP ACT § 101(7).

Joan has case law support, so at least in some jurisdictions, she’s right (as usual), but I think the opinion she relied on got it wrong.  That is, I disagree with the idea that “partners are not expressly required to contract to form a partnership” because I think the partnership definition — see footnote 88 above — satisfies (and must satisfy) the requisites for a contract. Unlike an LLC, partnerships can be formed by mere agreement of the parties, which is an agreement I think must rise to the level of a contract.

Partnership law is such that “the association of two or more persons to carry on as co-owners a business for profit forms a partnership, whether or not the persons intend to form a partnership.”  § 202. Formation of Partnership., Unif. Partnership Act 1997 § 202. There must be an agreement to associate for a purpose. To me, that requires consideration and assent.  If one has associated sufficiently under the law to make one both a partner and an agent of another (and thus liable for the partner), I don’t see how there is a lack of sufficient consideration or assent to form a contract.  

Another Texas case, which the Sewing court decided not to apply, provided:

Clearly, an offer and its acceptance in strict compliance with the offer’s terms are essential to the creation of a binding contract. American Nat’l Ins. Co. v. Warnock, 131 Tex. 457, 114 S.W.2d 1161, 1164 (1938); Smith v. Renz, 840 S.W.2d 702, 704 (Tex.App.—Corpus Christi 1992, writ denied). However, even if an offer and acceptance are not recorded on paper, dealings between parties may result in an implied contract where the facts show that the minds of the parties met on the terms of the contract without any legally expressed agreement. Smith, 840 S.W.2d at 704; City of Houston v. First City, 827 S.W.2d 462, 473 (Tex.App.—Houston [1st Dist.] 1992, writ denied). Accordingly, the parties’ conduct may convey an objective assent to the terms of an agreement, and whether their conduct evidences their agreement is a question to be resolved by the finder of fact. Estate of Townes v. Townes, 867 S.W.2d 414, 419 (Tex.App.—Houston [14th Dist.] 1993, writ denied). If the finder of fact determines that one party reasonably drew the inference of a promise from the other party’s conduct, then that promise will be given effect in law. E–Z Mart Stores, Inc. v. Hale, 883 S.W.2d 695, 699 (Tex.App.—Texarkana 1994, writ denied).

Ishin Speed Sport, Inc. v. Rutherford, 933 S.W.2d 343, 348 (Tex. App. 1996)

I see the formation of a partnership—the agreement to carry on a business as co-owners for profit—to be a higher level agreement than a contract (i.e., contract plus), not less than a contract.  We view partnership as a more significant connection between parties than an agency relationship, which does not require consideration. How would it be possible for me to agree with another person to carry on a business as a co-owner seeking profit, without meeting the minimal requirements contract formation? I simply can’t see it.  Once a court finds there is a partnership, the agreement that satisfied the partnership threshold carried reciprocal obligations that I must have agreed to, even if I did not knowingly agree at the time to all the obligations that then occur by operation of law because I made the agreement.  

A partnership is more than just a contract, and I might even be willing to concede that some of the obligations of a partnership under partnership law are outside or independent of contract law. But to me, if there is a partnership, somewhere, there is an underlying contract.  Thus, the question is not whether there is a contract where there is a partnership.  The question is what is the scope of the contract?

Just a quick note to remind everyone that (as previously announced) the submission deadline for the 2016 National Business Law Scholars Conference is this Friday, February 19:

The National Business Law Scholars Conference (NBLSC) will be held on Thursday and Friday, June 23-24, 2016, at The University of Chicago Law School. 

This is the seventh annual meeting of the NBLSC, a conference that annually draws legal scholars from across the United States and around the world.  We welcome all scholarly submissions relating to business law.  Junior scholars and those considering entering the legal academy are especially encouraged to participate. 

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by February 19, 2016.  Please title the email “NBLSC Submission – {Your Name}.”  If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.”  Please specify in your email whether you are willing to serve as a moderator.  We will respond to submissions with notifications of acceptance shortly after the deadline.  We anticipate the conference schedule will be circulated in May. 

The full call for papers can be found here.

Time for a rant. Some of you may not notice the difference; I’m told that almost everything I write seems like a rant, even when I think I’m being restrained.

Today’s topic is misleading comparisons—in common parlance, comparing apples and oranges—and today’s example comes from the Delaware Supreme Court in the famous case of Weinberger v. UOP, Inc., 457 A.2d 701 (1983).

Weinberger, for those of you who may not remember, involved a challenge to a cash-out merger between UOP and its controlling shareholder, Signal. The merger price was $21 a share, but a report prepared by Signal (not disclosed to UOP and its shareholders) indicated that any price up to $24 a share would be a good investment for Signal. The Supreme Court reversed the Chancery Court’s determination that the transaction met the fairness test.

I have no quarrel with either the result or the general analysis in Weinberger. It’s a good opinion, and it makes several important contributions to Delaware corporate law. It expounds on the meaning of “fairness” in duty-of-loyalty situations and lays out a roadmap for controlling shareholders to follow to avoid duty-of-loyalty challenges. It eliminates the “business purpose” requirement in cash-out mergers. And it gets rid of the much-criticized Delaware block method for determining fair value in appraisal proceedings.

I also have nothing against former Justice Moore, the author of the opinion. He was a capable Delaware Supreme Court justice who wrote some of the court’s most memorable and lasting opinions, including Unocal and Revlon. But he also wrote one sentence that irks me every time I read it, as I recently did for my Mergers and Acquisitions class.

Here’s the language that drives me batty:

The Arledge-Chitiea report . . . shows that a return on the investment at $21 would be 15.7% versus 15.5% at $24 per share. This was a difference of only two-tenths of one percent, while it meant over $17,000,000 to the minority.

457 A.2d at 709 (emphasis added).

Justice Moore is comparing two different units, percentage points of return and dollars. Rewrite it so that both parts of the sentence are in the same units and you see how meaningless it is:

This was a difference of over $17,000,000 [to Signal], while it meant over $17,000,000 to the minority.

Every extra penny to the minority shareholders is a penny less to Signal—no more, no less. That doesn’t mean Signal shouldn’t have had to pay more pennies, only that the sentence in question, once you’re comparing equivalent units, provides absolutely no support to the result. It sounds like something I might say to tease my three-year-old grandson: “I’ll give you 100 pennies if you give me only 1 dollar.”

Once you’re looking for it, it’s amazing how often you see this kind of reasoning. It’s very common in politics: “This bill will only add an average of 20 cents to the tax bill of each taxpayer, but it will provide over $25 million to fight [insert latest cause here].” The amount you’re taking from taxpayers is the same as what you’re spending, but the units being compared are different: cost per taxpayer versus overall spending.

Usually an apple-and-oranges comparison like this is the sign of a weak argument. That’s what makes its use in Weinberger even more irksome: it wasn’t needed. The opinion stood quite well on its own without it.

It’s only one sentence, but it doesn’t take much to irritate me. Ask my wife.

 

In recent years, and particularly since the Supreme Court’s decision in Citizens United v. FEC, 558 U.S. 310 (2010), there have been increasing calls for the SEC to require public companies to disclose their spending on political activities.

The situation is complex because while there may be many reasons for transparency on the subject, it is difficult to tie disclosure specifically to the needs of investors as investors.  Most political spending is likely undertaken by companies to benefit the firm itself – that is, in fact, precisely why people find it objectionable – and it is difficult to articulate why investors as investors (rather than, say, as employees or as citizens) should care about political spending any more than any other ordinary business decision for which we have no required disclosures.

The SEC has resisted increasingly loud calls that it regulate in this area, likely due to this precise problem.  In December, Congress passed a budget that actually forbade the SEC from using funds to regulate political spending in the following year, though that has not ended the matter for Democrats.  (Interestingly, I note that it was only after the budget had passed both Houses that there started to be any real press on the subject and the issue still didn’t get much press traction until after the budget was signed into law. I’m no political expert but if I had to guess, I’d say that the reason for the relative stealth was that the SEC supported the measure as a way of alleviating some of the political pressure on itself).

In any event, over the years, there have been a variety of attempts to show that political spending is/is not beneficial to investors, often with a view toward providing a solid foundation for SEC regulation.  One study, Corporate Lobbying and Fraud Detection by Frank Yu and Xiaoyun Yu, found that political activity – namely, lobbying – helps firms conceal fraud.  Based on class actions filed between 1998 and 2004, and class period length, they concluded that firms that engage in political lobbying managed to keep their fraud under wraps for longer periods than non-lobbying firms.  They also found that lobbying expenses increased during fraud periods.

Which is why I read with interest a new study by Matthew McCarten, Ivan Diaz-Rainey, and Helen Roberts that extends Yu and Yu’s original research.  According to the authors, the Sarbanes Oxley Act has significantly mitigated the impact of lobbying.  They find that post-SOX, lobbying is no longer correlated with longer class periods/fraud detection; they attribute the change, at least in part, to various SOX corporate governance provisions, such as the requirement that the CEO and CFO certify SEC filings, and increased whistleblower protection.

These results are intriguing, though I have some reservations.  The authors treat any action filed in 2005 or later as post-SOX (to account for delays in SOX’s implementation since its passage in 2002).  But this was also a period of great upheaval in securities class actions.  In 2005, the Supreme Court decided Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, which introduced loss causation as a new and heavily litigated variable in class actions – and one that can dramatically affect the length of a class period.  Moreover, over the years, courts have become increasingly strict in their analysis of Section 10(b) pleadings: As Hillary Sale documented, requirements for pleading scienter have ratcheted up over the years (and I’d argue that the standards have only tightened since her paper was published; among other things, confidential sources have become de rigueur).  Cases like Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) and Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) – as well as their precursors in the circuits – have made it increasingly difficult to bring claims not only against secondary actors, but also against corporate executives who do not directly speak to the public.  The combined effect of these developments make me question whether class action data – especially class action data that purports to measure changes over time – is a reliable proxy for fraud.

That said, none of these developments has anything to do with lobbying, so theoretically, they may not affect McCarten et al.’s findings.   The paper is an interesting one, both for what it adds to the debate on disclosure of political spending, and also for its implications about SOX’s effectiveness (which was, at the time of its passage, famously described as “quack corporate governance”).