The AALS Annual meeting starts today in New York.  The full program is available here, and listed below are two Section meeting announcements of particular interest to business law scholars:

Thursday, January 7th from 1:30 pm – 3:15 pm the SECTION ON AGENCY, PARTNERSHIP, LLC’S AND UNINCORPORATED ASSOCIATIONS, COSPONSORED BY TRANSACTIONAL LAW AND SKILLS will meet in the Murray Hill East, Second Floor, New York Hilton Midtown for a program titled:

“Contract is King, But Can It Govern Its Realm?”  

The program will be moderated by Benjamin Means, University of South Carolina School of Law.  Discussants include:

  • Joan M. Heminway, University of Tennessee College of Law
  • Lyman P.Q. Johnson, Washington and Lee University School of Law
  • Mark J. Loewenstein, University of Colorado School of Law
  • Mohsen Manesh, University of Oregon School of Law
  • Sandra K. Miller, Professor, Widener University School of Business Administration, Chester, PA

BLPB hosted an online micro-symposium in advance of the Contract is King meeting.  The wrap up from this robust discussion is available here.

Friday January 8th, from 1:30 pm – 3:15 pm join the SECTION ON BUSINESS ASSOCIATIONS AND LAW
AND ECONOMICS JOINT PROGRAM at the Sutton South, Second Floor, New York Hilton Midtown for a program titled:

 “The Corporate Law and Economics Revolution Years Later: The Impact of Economics and Finance Scholarship on Modern Corporate Law”.  

The program will be moderated by Usha R. Rodrigues, University of Georgia School of Law, and feature the following speakers:

  • Frank Easterbrook, Judge, U.S. Court of Appeals for the Seventh Circuit, Chicago, IL
  • H. Kent Greenfield, Boston College Law School
  • Roberta Romano, Yale Law School
  • Tamara C. Belinfanti, New York Law School
  • Kathryn Judge, Columbia University School of Law
  • K. Sabeel Rahman, Brooklyn Law School

At the conclusion of the program, the officers of the Section on Business Associations would like to honor 13 faculty members
for their mentorship work throughout the year. 

I hope to see many of you in New York soon!

-Anne Tucker

Kent Greenfield recently published a provocative article with Democracy on ending Delaware’s dominance over corporate law.  As is Greenfield’s way, he makes a familiar story sound fresh and raises an interesting question.  Is it democratic for a state with less than 1% of the country’s population to have its laws control more than half of the Fortune 500 companies?  Greenfield says no.

Power without accountability has no democratic legitimacy. If companies could choose which state’s environmental, employment, or anti-discrimination law applied to them, we’d be outraged. We should be similarly outraged about Delaware’s dominance in corporate law.

Greenfield suggests two alternative paths for ending Delaware’s dominance.  First:  states could amend their business organization statutes so that the law of the state of incorporation (Delaware) doesn’t govern the corporation, rather the law of the principal place of business would.   Second, and perhaps more radically, nationalize corporate law.  

The undemocratic critique is an astute observation. It takes the debate outside of the “race to the bottom” standard trope and into territory with perhaps more broad public appeal.  Leaving aside the state competition for headquarters, tax base and jobs with solution one and potential political friction with solution two, both solutions address the undemocratic critique.  

-Anne Tucker

On Saturday, January 9, 2016, I will be spending the day at the AALS Section on Socio-Economics Annual Meeting at the Sheraton New York Times Square Hotel.  Among other things, I will be part of a panel discussion from 9:50 – 10:50 AM, Death of the Firm: Vulnerabilities and the Changing Structure of Employment.  My co-panelists will be June Carbone and Katherine Stone (I am very tempted to give up my 15 minutes and just sit back and listen to these two great scholars, but please don’t use the comments section to encourage me to do that).  As I understand it, the gist of the discussion will be that while firms once supported a significant part of the safety net that provided employee health and retirement benefits, they have recently abdicated more and more of these responsibilities.  At the same time, however, what may be described as subsidies granted by the state to firms — particularly corporations — as part of a social contract whereby these firms provided the aforementioned benefits, have not been correspondingly reduced.  In fact, the rights of corporations have been expanded by, for example, cases like Citizens United and Hobby Lobby — suggesting a possible windfall for the minority of individuals best positioned to reap the benefits of corporate growth and insulation.  Obviously, competing interpretations of the relevant history abound.  Regardless, please stop by if you have the opportunity.  Continuing to beat a favorite drum of mine (see here, here, and here), I will be applying the lens of corporate personality theory to the foregoing issue and arguing that corporate personality theory has a role to play both in understanding how we got here and how best to move forward.  Additional details, including the entire day’s program, can be found here.

On Monday, January 11, 2016, I will also be participating in the Society of Socio-Economists Annual Meeting, also at the Sheraton. Program details are available here. Again, please stop by if you have the opportunity.

Some day, I may tire of calling out courts (and others) that refer to limited liability companies (LLCs) as “limited liability corporations, but today is not that day. Looking back on 2015, I thought I’d take a quick look to see who the worst offenders were, starting with the state courts.  I figured I’d start with Delaware.

As a state that is proud of its status as a leader as a key forum of choice for corporations, and Delaware has done well for uncorporations, as well, it seemed logical.  The book Why Corporations Choose Delaware, written by Lewis S. Black, Jr., and printed and distributed by the Delaware Department of State,  Division of Corporation, explains:

Delaware continues to be the favored state of incorporation for U.S. businesses. Delaware has been preeminent as the place for businesses to incorporate since the early 1900s, and its incorporation business, supplemented by the growth in numbers of such “alternative entities” as limited liability companies, limited partnerships and statutory trusts, continues to grow smartly.

And Delaware does have a generally well-informed and skilled judiciary.  Still, even Delaware is not above calling an LLC a “limited liability corporation.” Better than many jurisdictions, Westlaw reports that the state had just three cases in 2015 making that error, and no such mistakes were noted after March 2015.  Not ideal, but not bad. 

Here are some other states I reviewed for 2015 (again, using Westlaw): 

  • Michigan: 0
  • Pennsylvania: 3
  • Ohio: 4
  • Florida: 5
  • Nevada: 6
  • California: 7
  • New York: 7
  • Texas: 8

Overall, state courts called LLCs “corporations” 105 times in 2015.  Federal courts did the same 280 times in 2015.  As such, it works out to just over once a day that some U.S. court is making this mistake.  

Big picture, given the number of cases courts see each year, it may seem that these are small numbers. Not really.  A search of federal courts for the term “limited liability company” turns up 2949 cases from 2015, which suggests that around 10% of cases (9.49%) referring to LLCs in some substantive manner made a reference to a “limited liability corporation.” NOTE:  If one searches for “LLC,” the number of cases exceeds 10,000 for 2015, but I decided that a court taking the time to spell out “limited liability company” suggested that the entity choice had a heightened relevance to the case.

At the state level, the numbers are a little better.  State courts referred to “limited liability companies” 1691 times in 2015. With 105 cases calling an LLC a corporation, that works out to just over 6% of the time.  Not great, but a substantial improvement.  

I admit this is not a scientific review of the data and I am making some assumptions, but the sheers number do, I think, support the notion that all our courts can do better on this issue. And give state courts credit — although federal courts are often viewed the more prestigious courts, state courts are holding their own on this issue.  Perhaps state courts are a little more careful because entities are generally (though not always) creatures of state law.

This is not, I am sure, just the courts.  I suspect a lot of these errors come from attorneys who call LLCs corporations, then the court just take their lead.  Still not okay, but I can imagine that some courts just follow the lead of those arguing the cases before them on such issues.  

So, for 2016, I issue a challenge to all U.S. courts and the lawyers who practice in them: let’s cut these numbers in half!  (I’d like them to go to zero, but one needs to be somewhat realistic, right?)  

Assume you acquire some nonpublic information about a company that will have no predictable effect on the company’s stock price, but will affect the volatility of that stock price. Is that information material nonpublic information for purposes of the prohibition on insider trading?

That’s one of the issues addressed in an interesting article written by Lars Klöhn, a professor at Ludwig-Maximillian University in Munich, Germany. The article, Inside Information without an Incentive to Trade?, is available here. His answer (under European law)? It depends.

Here’s the scenario: one company is going to make a bid to acquire another company. The evidence shows that, on average, the shareholders of bidders earn no abnormal returns when the bid is announced. There’s a significant variation in returns across bids: some companies earn positive abnormal returns and some companies earn negative abnormal returns. But the average is zero. Of course, the identity of the target might affect the expected return, but to pose the problem in its most complex form, let’s assume that you don’t know the target, just that the bidder is planning to make a bid for some other company.

In that situation, the stock is just as likely to go down as to go up if you buy it. Because of that, Professor Klöhn argues that the information should not be considered material to anyone buying or selling the stock.

However, the information about the bid will make the bidder’s stock price more volatile. The average expected gain is zero, but either large gains or large losses are possible, increasing the risk of the stock. Professor Klöhn argues that, since this risk can be diversified away, it should not affect the bidder’s stock price. However, the increased volatility would allow a trader to profit trading in derivatives based on the bidder’s stock. In other words, the information should affect the value of derivatives. Therefore, the information should be considered material in that context, and anyone using the nonpublic information to trade in derivatives should fall within the prohibition on insider trading.

It’s an interesting article, not very long and definitely worth reading. Professor Klöhn’s focus is on European securities law, but American readers should have no trouble following the discussion.

Marcia’s post about the importance of teaching ethics reminded me of a Bloomberg story from a little while ago.

It’s been widely reported that today’s students have been shunning investment banks and instead have been seeking careers in Silicon Valley.  Well, according to William Dudley, president of the Federal Reserve Bank of New York, that’s not just because Silicon Valley pays more and has an aura of excitement.  In fact, it’s at least partly due to the fact that Wall Street strikes students as an unethical place to work – prompting students to seek alternative opportunities.

Obviously, that’s a problem: If the most ethical students shun Wall Street, it can only make matters worse, not better; and there is at least some evidence that the perception of corruption in finance may lead women away from those jobs, contributing to ongoing gender disparities  (not that Silicon Valley is all that much better in this regard).

There’s obviously no easy fix, but it does occur to me that one thing we need to teach students is not simply how to think ethically or make ethical choices, but also the concrete, practical skill of saying “no,” even when that means going against your friends, or your boss.  Back in my college days as a psychology major, I took classes with people like Philip Zimbardo (who specializes in group dynamics and social pressure). One of the important take-homes was that we assume that teaching students right from wrong in the abstract will be sufficient to lead them to behave in ethical ways in the future. In fact, acting on one’s ethical instincts is a distinct skill, and one that must be taught, right along with how we train students to sit quietly and be respectful and obedient to authority. Or, to put it more simply, to know the good is not to do the good; knowing is not enough.

Happy New Year!

Last year I wrote a bit about New Year’s resolutions.

As some of you know, I wasn’t able to go the full year without checking my e-mail on Saturdays. In fact, that resolution was toast a few weeks into 2015.

One of the problems, I think, was that I had 20 resolutions in 2015. We all have limited self-control, and we can experience overload in January.

I have been doing New Year’s resolutions for as long as I can remember, with varied amounts of success, but I am going to try something a bit different this year.

The Cass Sunstein article I included last year gave me the idea. In the article, he states “But how can we ensure that our resolutions actually stick? Behavioral economists have three answers: Make them easy and automatic, make them a matter of habit, and make them fun. A resolution is more likely to work if it is concrete and can be translated into a simple routine.”

This year, instead of a long list of resolutions, I plan to focus on forming one habit each month. I hope the habits will continue after that month, but after one month of intense focus, hopefully the habit will have moved into the less laborious System 1.

Interested to see how this works. It may be a more sustainable solution. If you form the right habits, then it is less likely that you will have to continue setting the same goals (like “lose weight” and “save more”) each year. For example, my saving-related resolutions are always the simplest to keep because I just change my direct deposit rules and let it run its course. Direct deposit acts a bit like an already formed habit – easy and automatic. Of course, many habits are quite difficult to form, but I think focusing on one a month sounds doable. Whether I can keep all 12 going in December 2016 (and beyond) remains to be seen.

Good luck to all those making resolutions! 

This is the time of year when many people make New Year’s resolutions, and I suppose that law professors do so as well. I’m taking a break from teaching business associations next semester. Instead, I will teach Business and Human Rights as well as Civil Procedure II. I love Civ Pro II because my twenty years of litigation experience comes in handy when we go through discovery. I focus a lot on ethical issues in civil procedure even though my 1Ls haven’t taken professional responsibility because I know that they get a lot of their context from TV shows like Suits, in which a young “lawyer” (who never went to law school) has a photographic memory and is mentored by a very aggressive senior partner whose ethics generally kick in just in the nick of time. It will also be easy to talk about ethical issues in business and human rights. What are the ethical, moral, financial, and societal implications of operating in countries with no regard for human rights and how should that impact a board’s decision to maximize shareholder value? Can socially-responsible investors really make a difference and when and how should they use their influence? Those discussions will be necessary, difficult, thought-provoking, and fun.

I confess that I don’t discuss ethics as much as I would like in my traditional business associations class even though some of my 2Ls and 3Ls have already taken professional responsibility. This is particularly egregious for me since I spent several years before joining academia as a compliance and ethics officer. I also use a skills book by Professor Michelle Harner, which actually has an ethics component in each exercise, but I often gloss over that section because many of my students haven’t taken professional responsibility and I feel that I should focus on the pure “business” material. Business school students learn about business ethics, but law students generally don’t, even though they often counsel business clients when they graduate.

Yesterday, I tweeted an article naming five corporate scandals that defined 2015: (1) the Volkswagen emissions coverup (2) the “revelation” regarding Exxon’s research warning of man-made climate change as early as 1981 and its decision to spend money on climate change denial; (3) climate lobbying and the “gap between words and action,” in particular the companies that “tout their sustainability credentials” but are “members of influential trade associations lobbying against EU climate policy”; (4) the Brazil mining tragedy, which caused the worst environmental disaster in the country’s history, and in which several companies are denying responsibility; and (5) the “broken culture” (according to the Tokyo Stock Exchange) of Toshiba, which inflated its net profits by hundreds of millions of dollars over several years.

All of these multinational companies have in-house and outside counsel advising them, as did Enron, WorldCom, and any number of companies that have been embroiled in corporate scandal in the past. Stephen Bainbridge has written persuasively about the role of lawyers as gatekeepers. But what are we doing to train tomorrow’s lawyers to prepare for this role? Practicing lawyers must take a certain number of ethics credits every few years as part of their continuing legal education obligation but we should do a better job as law professors of training law students to spot some of the tough ethical issues early on in every course we teach. This is especially true because many students who graduate today will work for small and medium-sized firms and will be advising small and medium-sized businesses. They won’t have the seemingly unlimited resources I had when I graduated in 1992 and went to work for BigLaw in New York. Many of the cases I worked on were staffed with layers of experienced lawyers, often in offices from around the world. If I naively missed an issue, someone else would likely see it. 

So my resolution for 2016? The next time I teach business associations, I may spend a little less time on some of the background on Meinhard v. Salmon and more time on some of the ethical issues of that and the other cases and drafting exercises that my students work on. If you have ideas on how you weave ethics into your teaching, please comment below or email me at mnarine@stu.edu.

I wish all of our readers a happy and healthy new year.

OK.  No more complaining about grading–at least for another few months.  Whew!  I think I am getting too old for this crazy few weeks in December that involve holiday preparations and reading for the purpose of assessment.

This week, as I promised last week, I do want to say a bit more about the exams themselves, however.  I noticed certain patterns of wrong answers this year (some of them common to ones noted in prior years that I have tried in various ways–unsuccessfully–to address in my teaching).  I sent a message to my students that captured those common mistakes.  An edited list of the observations I shared with them about those errors is included below.

  • Management/Control vs. Agency.  Management and control as an entity attribute is not the same as agency. The former involves internal governance–who among the internal constituents of the firm has the power to exercise the firm’s rights and keep it operating, from a legal (and practical) point of view. The latter relates to the firm’s liability to third parties. These two matters are set forth in different rules in each statute we covered in our course last semester. In the corporation, for example–the most complicated firm we studied, the board has the highest level of management and control rights. The officers have management and control power delegated by the corporation’s organizational/organic documents (charter and bylaws, and maybe a shareholder agreement) and by the board. The shareholders have more limited management and control powers (through electing directors and approving charter and bylaw amendments, mergers and acquisitions, sales of all/substantially all the corporation’s assets, and voluntary dissolutions). Of those three internal constituents, only the officers are agents of the firm who can bind the corporation to contracts and transactions with third parties. [I continued by offering other examples from partnership and LLC law.]  . . .  The main point is that one should not conflate management/control and agency. They are separate considerations.
  • Compensation vs. Distributions.  Rights to compensation and distribution are both financial benefits to the recipient, but they are different from each other in almost all respects. Compensation (salary and benefits) is paid in exchange for services. . . .  Distributions represent returns (including current returns, like dividends, as well as amounts paid in dissolution–at the end of wind-up) to owners/equity investors. The MBCA also defines distributions to include amounts received in exchange for shares when the corporation buys them back from its shareholders.
  • Limited Liability – Owners vs. Managers.  Both shareholders, as corporate owners, and directors/officers, as corporate managers, may enjoy some form of limited liability. Separate those concepts out, however. Shareholders are afforded limited liability under the statutes in a different way than directors/officers. This is largely because the former do not typically have fiduciary duties to the firm, while the latter do. So, the latter must be accountable for the interests of the firm in taking action for or on its behalf.
  • The Judicial Process.  When asked to convey information about how a court addresses cases in an area, the best approach is to identify the court’s standard of review or methodology/process as evidenced in the applicable body of cases–not to summarize each case individually . . . . Although the case summary approach may ultimately respond to the inquiry, it is not a sure way to do that and it is not efficient in any case. Imagine a client sitting through a series of case summaries after asking how a court handles a particular issue . . . . Ask yourself: would the client know that her question was answered in the end, and if so, would she be able to understand the answer?
  • Using IRAC.  IRAC is a legal reasoning approach used to apply law to facts to resolve a legal question involving a legally cognizable action. If you are asked a question on an exam about a rule of law that does not engage a fact pattern, then you do not need IRAC. Part B of the exam did not involve the application of law to dispute resolution or other activities. Yet, some of you tried to set out an answer in IRAC form for that part of the exam. It wasn’t ultimately very successful (since there could not be an “A”).
  • Avoiding Redundancy/Inconsistency.  In using IRAC or another legal reasoning technique, state the legal rule once in all of its relevant detail; then, use it. A number of you repeated the rule several times (sometimes with differing levels of detail) in answering a single exam query. This redundancy cost you time that could have been better spent on other parts of the exam, in many cases, and the approach sometimes led to inconsistent applications of the rule (because it was stated differently). For example, many of you stated (correctly) that the current RULPA allows limited partners to enjoy limited personal liability for the obligations of the limited partnership even if the limited partners exercise control. But later in the same response, some of you took that back by noting (incorrectly) that certain types of control would subject limited partners to personal liability for the obligations of the firm. Both cannot be true . . . .
  • Using “Held” and Other Variants of “Holding”.  . . . [S]tatutes do not have holdings. Lawyers do not say that statutes “hold” particular rules. Rather, statutes “provide” or “state” or “set forth” matters or rules. Also, many of you misuse the word “hold” when referring to information from cases. A holding in a case is the response to a legal issue raised in the case. So, you should not say that a case “held” something unless that something represents the response to a legal issue raised in the case. For example, it’s inaccurate to say that a case “held” something that represents a policy consideration or dicta.

That’s it.  (Although I cannot resist, especially in light of Josh Fershee’s post yesterday, adding that one student did refer to LLC owners as shareholders–a bad cut-and-paste job from an earlier answer, imv.)  I suspect that many who teach Business Associations see some of these same things with their students.  Some of these mistakes are generic errors that also may be observed in other courses.  No doubt, as I observed last week, some of these errors would not be made in situations that do not involve the stress and time pressure that an in-class examination entails.  To me, however, all of these issues were important enough to bring to the attention to the entire class.  I also invited–encouraged–all students to come back and review their exams, whether they “did better, as well as, or less well than . . . expected, hoped, or wanted.”  I hope that many of my students do take me up on that offer/suggestion.  But I am not holding my breath.