I’ve been thinking a lot about the way technology can influence the path of the law – in terms of both judging and scholarship.

For example, the introduction of electronic legal databases like Westlaw has almost certainly changed how judges function.  They may be more reliant on clerks today than they used to be, because the sheer accessibility of so much relevant case information requires assistance to sift through.  I also wonder if precedent – rather than inductive or explicitly policy-based reasoning – has become more important (or is at least given greater emphasis) because of the ease with which earlier caselaw can be located.

Over at Prawfs, they’re discussing Judge Posner and the ethics of independent judicial factual research – something that technology has made far easier for judges to do.

Here at BizLawProf, we’ve talked about the relevance of law reviews in a world where SSRN can make articles immediately available (not to mention a world where law professors can, you know, umm, blog).

A number of law professors post articles to SSRN that aren’t articles so much as they are a form of advocacy – legal briefs, after a fashion, intended to sway a deliberations on a particular issue under judicial or political consideration, in situations where an amicus brief may not be procedurally appropriate or possible.  (And sometimes professors just post straight-up legal briefs).  Such postings could herald a shift in the law professors’ role – or at least a shift in emphasis – by allowing professors to influence policy outside of traditional channels.

But there’s another aspect of SSRN’s technology that I think may turn out to be critically influential in the long run.

Every morning I have email delivered to my inbox that tells me about new postings in a variety of areas related to corporate and securities regulation.  And of those articles, about half come from law professors – and the other half come from business professors.  High theory articles are presented to me side by side with in-the-weeds empirical analysis of how slight changes in, say, CEO compensation packages result in slight changes in shareholder returns or discretionary accruals.

This mode of presentation, I think, is necessarily destined to influence legal scholarship – notwithstanding the laments of those who think the academy has gone too far in the direction of “law and.”  The architecture of SSRN – and its method of categorizing articles by general subject and without regard for field, method, or source – represents a nonneutral argument about what scholars should be thinking about, should be considering, when they conduct their research.  And it will be interesting to see where that ultimately takes us.

 

The 2015 American Bar Association LLC Institute will be held November 12-13 in Arlington, Virginia.  I’m speaking this year (on LLC dissolution with Carter Bishop and Doug Moll and on a panel hashing out issues at the intersection of LLC [operating] agreements and contract law), and have attended/spoken at several earlier Institutes.  The complete program is available on Tom Rutledge’s blog.

If you would like to attend this year and need information on how to get registered, you can reach out to Tom (Thomas.rutledge@skofirm.com) and he will get you whatever you need.  Tom is very user-friendly and an amazing colleague, if you haven’t yet met him.  He is particularly adept (among his many talents) at bringing the law academy and the law practice community together in productive ways.  The LLC Institute is a great example.

Also, if you are working on issues relating to LLC law or are considering wading into those waters, be thinking about program ideas for future Institutes.  Planning for the 2016 LLC Institute already is underway.  Many of the sessions at the Institute focus or are based on the scholarship of law academics on LLCs and other unincorporated business associations.  For example, at the 2014 LLC Institute, programs centered on articles written by our business law colleagues Benjamin Means and Colin Marks.  The LLC Institute is a great environment (comprising academics and high-level, focused practitioners) in which to exchange ideas.  I highly recommend it.

Regular readers of this blog know that I have chastised the SEC on several occasions for its lengthy delay in adopting rules to implement the exemption for crowdfunded securities offerings. (It has now been 1,268 days since the President signed the bill, 998 days past the statutory rulemaking deadline, and 702 days since the SEC proposed the rules.)

The long wait may soon be over. According to BNA, SEC Chair Mary Jo White said yesterday that the SEC will finish adopt its crowdfunding rules in the “very near term.”

I don’t know exactly what “very near term” means to a government official. Given my luck, it probably means immediately prior to the two crowdfunding presentations I’m scheduled to give in October. Nothing like a little last-minute juggling to keep me on my toes.

Stephen Choi (NYU), Jill Fisch (Penn), Marcel Kahan (NYU), and Ed Rock (Penn) have posted an interesting new paper entitled Does Majority Voting Improve Board Accountability?

The authors report the dramatic increase in majority voting provisions. In 2006, only 16% of the S&P 500 companies used majority voting, but by January of 2014, over 90% of the S&P 500 companies had adopted some form of majority voting. (pg. 6). As of 2012, 52% of mid-cap companies and 19% of small-cap companies had adopted majority voting provisions. (pg. 7)

For the most part, the spread of majority voting has not led to significant reduction in election of nominated directors. In over 24,000 director nominations from 2007 to 2013, at companies with majority voting provisions, “only eight (0.033%) [nominees] failed to receive a majority of ‘for’ votes.” (pg.4)

The authors claim that their “most dramatic finding is”:

a substantial difference between early and later adopters of majority voting. The early adopters of majority voting appear to be more shareholder-responsive than other firms. These firms seem to have adopted majority voting voluntarily, and the adoption of majority voting has made little difference in shareholder-responsiveness going forward. By contrast, later adopters, as a group, seem to have adopted majority voting only semi-voluntarily. Among this group, majority voting seems to have led to more shareholder-responsive behavior. (pg. 2)

As the authors suggest, their article “highlights the importance of segregating early and later adopters of the [corporate governance] innovations, because the reasons for and the effects of adoption may differ systematically between these groups.” (pg. 44)

Last week I blogged about the Yates Memorandum, in which the DOJ announced that any company that expected leniency in corporate deals would need to sacrfice a corporate executive for prosecution. VW has been unusually public in its mea culpas apologizing for its wrongdoing in its emission scandal this week. VW’s German CEO has resigned, the US CEO is expected to resign tomorrow, and other executives are expected to follow.

It will be interesting to see whether any VW executives will serve as the first test case under the new less kind, less gentle DOJ. Selfishly, I’m hoping for a juicy shareholder derivatives suit by the time I get to that chapter to share with my business associations students. That may not be too far fetched given the number of suits the company already faces.

This comes to us courtesy of Rachel Ezrol at Emory Law:

 

A Vulnerability and the Human Condition Initiative & Feminism and Legal Theory Workshop Project

A Workshop on Vulnerability at the Intersection of the Changing Firm and the Changing Family

When: October 16-17, 2015
Where: Emory University School of Law

 Registration is FREE for Emory students, faculty, and staff.

http://events.r20.constantcontact.com/register/event?oeidk=a07eb2ejk3i2e13daef&llr=7da4m4gab

From the Call for Papers:

Theories of dependency situate the limitations that attend the caregiving role in the construction of the relationship between work and family.  The “worker,” defined without reference to family responsibilities, becomes capable of autonomy, self-sufficiency, and responsibility through stable, full-time employment.  The privatized family, created by the union of spouses, is celebrated in terms of a self-sufficient ideal that addresses dependency within its own ranks, often through the gendered assumptions regarding responsibility for caretaking.   The feminist project has long critiqued these arrangements as they enshrine the inequality that follows as natural and inevitable and cloak the burdens of caretaking from examination or critique. The interpenetrations of the family and the firm have thus been understood as both multiple and wide-ranging. Both this system and the feminist critique of it, however, are associated with the construction of wage labor that arose with industrialization.  This workshop will apply the lens of vulnerability to consider the implications that arise from large scale changes in the structure of employment – changes that place this prior ideal of stable self-sufficiency beyond the reach of much of the population.

Issues For Discussion May Include:

This workshop will use vulnerability theory to explore the implications of the changing structure of employment and business organizations in the information age.  In considering these changes, we ask in particular:

  • How does the changing relationship between employment and the family, and particularly the disappearance of the breadwinner capable of earning a stable “family wage,” affect our understanding of the family and its association with care and dependency?             
  • How does the changing structure of employment and business organization affect possibilities for reform? What should be the role of a responsive state in directing these shifting flows of capital and care?
  • How might a conception of the vulnerable subject help our analysis of the changing nature of the firm? What relationships does it bring into relief?
  • What kind of legal subject is the business organization?  Are there relevant distinctions among business and corporate forms in regard to understanding both vulnerability and the need for resilience?
  • How are business organizations vulnerable? The family? Have these vulnerabilities shifted over time, and what forms of resilience are available for both institutions to respond to new economic realities?
  • What, if any, should be the role of international and transnational organizations in a neoliberal era? What is their role in building both human and institutional resilience?
  • Is corporate philanthropy an adequate response to the retraction of state regulation? What forms of resilience should be regulated and which should be left to the ‘free market’?
  • How does the Supreme Court’s willingness to assign rights to corporate persons (Citizen’s United, Hobby Lobby), affect workers, customers and communities?  The relationship between public and private arenas?

Rachel Ezrol
Program Coordinator | Emory University School of Law
1301 Clifton Road | Atlanta, GA 30322 | Room G500 Gambrell Hall
404-712-2420 (t) | 404-727-1973 (f)
Vulnerability and the Human Condition Initiative
Feminism and Legal Theory Project

Yesterday (September 22, 2015) the SEC announced proposed rules regarding mutual funds and ETFs aimed at regulating liquidity and redemption risks as well as enhancing disclosures.  Included in the 400+ pages of proposed rules and analysis, the SEC focused on swing pricing, a practice to mitigate the impact of forward pricing required under Rule 22c-1 of the Investment Company Act. Before this feels too in the weeds of securities law, let’s discuss what this means.  Funds are required to redeem shareholders’ interests at NAV (net asset value pricing), when faced with redemption requests by shareholders wanting to exit the fund.  The fund then sells assets to pay the NAV to the departing shareholder or keeps a certain pool of assets liquid to meet such requests.  The costs of these trades or lost investment cost of the liquid assets are born by the shareholders who remain in the funds.  Additionally, shareholders who purchase new shares of the fund, do so at the daily NAV, which doesn’t reflect the liquidity cost imposed by the departing shareholders.  Similarly, when the fund receives the investment of new shareholders, the fund invests that money, but the purchase price NAV does not reflect the trading cost of when the fund purchases new portfolio assets. Consider these helpful examples from the proposed rules:

If a fund has valued portfolio asset X at $10 at the beginning of day 1, and market activity on day 1 (including the fund’s sale of portfolio asset X) decreases the market value of portfolio asset X to $9 at the end of day 1, the fund’s remaining holdings of portfolio asset X at the end of day 1 would be valued at $9 to reflect the asset’s market value on that day. However, staff outreach has shown that it is common industry practice, as permitted by rule 2a-4, for the fund’s current NAV to not reflect the actual price at which the fund has sold the portfolio assets until the next business day following the sale.  In the example above, if the fund selling portfolio asset X sold the asset during the day at $8 on day 1, the price that the fund received for these asset sales would not be reflected in the fund’s NAV until day 2. Thus, redeeming shareholders would have received an exit price that would reflect portfolio asset X being valued at the close of the market at $9 on day 1, whereas remaining shareholders would hold shares on day 2 whose value reflects portfolio asset X being sold at $8 (the actual price that the fund received when it sold the asset on day one).

Similarly, as noted above, the price that a purchasing shareholder pays for fund shares normally does not take into account trading and market impact costs that arise when the fund buys portfolio assets to invest the proceeds received from shareholder purchases. ….. the fund’s NAV on day 1 (and the purchase price an incoming shareholder were to receive on day 1) reflects portfolio asset X being valued at $10, but the fund were to purchase additional shares of portfolio asset X on day 2 at $11, the price that a purchasing shareholder pays on day 1 would not reflect the costs of investing the proceeds of the shareholder’s purchases of fund shares. These costs instead would be reflected in the fund’s NAV on days following the shareholder’s purchase, and thus would be borne by all of the investors in the fund, not only the shareholders who purchased on day 1. p.186-187

Shareholders who exit mutual funds pay for none of these transaction costs and entering shareholders only pay a fraction of them.  Who foots the long-term bill?  The existing fund shareholders do.  I wrote about this feature of mutual fund investment here on BLPB last December when I was thinking about the impact of mutual fund investment features on long-term shareholders like retirement and 529 College Plan investors—investors I refer to as Citizen Shareholders in my scholarship. 

To address these transaction costs the SEC proposed rule 22c-1(a)(3) to allow for partial swing pricing (not mandating it) when redemptions and purchases exceed a certain threshold.  In addition to enhancing the NAV’s reflection of the true value of the fund, swing pricing may deter first mover advantage incentives to redeem shares early in negative liquidity stress.  To understand more about liquidity and redemption risks, you can also read the accompanying White Paper from the Division of Economic and Risk Analysis: Liquidity and Flows of U.S. Mutual Funds. 

The Commission is seeking comments on the proposed partial swing pricing (and other rule amendment).  These changes are proposed in conjunction with other liquidity management tools and disclosure enhancements, features that I hope to highlight here on BLPB in future posts. 

For those of you interested in securities laws, this post requires no further explanation or introduction.  For readers more concerned with traditional corporate governance, the proposed rules should be of interest to you as well.  These rules signal an increased focus by the SEC on mutual funds and ETFs regarding pricing, risk management, and disclosure. Institutional investors wield tremendous voting power and financial clout in public companies– pressures imposed on these investors will be felt secondarily by the operating companies whose stock is held by these funds.  If there was ever a meaningful distinction between corporate governance and securities, those boundary lines are under increasing pressure in light of institutional investor ownership trends.

Finally, let me just say that after a long hiatus from blogging….it is good to be back.

-Anne Tucker

As I earlier noted, I participated in a continuing legal education program at The University of Tennessee College of Law last Friday on the basics of crowdfunding.  My partners in crime for the last hour of the event were two folks from Chattanooga, Tennessee (yes, home of the famous choo choo) who have been involved in crowdfunding efforts for local businesses.  One used crowdfunding to finance a change in the location of a business; the other used crowdfunding to gauge interest in his business concept and raise seed capital.  They described their businesses and financing efforts in the second segment of the program (after a foundational hour on crowdfunding from me). 

The business location change was for The Camp House, a coffeehouse owned and operated as part of The Mission Chattanooga, a local church.  Private events, including music performances, also take place at the venue.  The Camp House raised over $32,000 through a crowdfunding campaign on Causeway.  Matt Busby, Director of The Camp House, educated us on donation crowdfunding through a non-profit platform.

The new business concept and capital raise was for Treetop Hideaways (a/k/a, The Treehouse Project), a business that designed, built, and rents time in a luxury treehouse.  The principals raised over $34,000 on Kickstarter.  One of the two men behind this project, Enoch Elwell, offered us practical information about reward crowdfunding.  Enoch also told attendees about his work with local entrepreneurs through CO.LAB and CO.STARTERS.

In the last hour of the program, the three of us reflected on crowdfunding successes and failures and speculated about the future of crowdfunding (using their experiences and my research as touchstones).  It was a wide-ranging discussion, filled with disparate tidbits of information on business formation, finance, and governance, as well as professional responsibility and the provision of practical, cost-sensitive legal advice.  Both Matt and Enoch turned out to be great folks to talk to about business finance, choice of entity, and the role of lawyers in small business formation and operation.  Their observations were thoughtful and sensible.  I learned a lot from them, and participants (practitioners and students) also indicated that they learned a lot.  Everyone had fun.  It was pure business lawyer/law student joy on a Friday afternoon!  :>)

For those who were not at the program on Friday and would have liked to have been there, all is not lost.  We plan to post a recorded version of all three program segments here in a few weeks.  Continuing legal education credit will be available in Tennessee for viewing the online recording, upon completion of the test provided and payment of the applicable fee.

This post is related to another great post from Tom Rutledge at the Kentucky Business Entity Law Blog, Diversity Jurisdiction and Jurisdictional Discovery: The Third Circuit Holds That “Hiding The Ball” Will Not Work. Tom’s post is about Lincoln Benefit Life Company v. AEI Life, LLC, No. 14-2660, 2015 WL 5131423, ___ F.2d__ (3rd Cir. Sept. 2, 2015), which is available here. 

Lincoln Benefit allows a plaintiff, after a reasonable inquiry into the resources available (like court records and public documents), to allege complete diversity in good faith, if there is no reason to believe any LLC members share the same state of citizenship.  Thus, the diversity claim can be made on “information and belief.”  Tom explains that

While it may do nothing to address the fact that diversity jurisdiction may be unavailable consequent to de minimis indirect ownership  . . .  it does limit the ability of a defendant to “hide the ball” as to its citizenship while objecting that the other side has not adequately pled citizenship and therefore diversity. 

This concern arises out of the fact that LLCs, as unincorporated associations, are treated like partnerships for purposes of federal diversity jurisdiction, meaning that an LLC is a citizen of every state in which it has a member. Thus, if an LLC has members that are partnerships or other LLCs, then a plaintiff would need to drill down all the way until they find get to natural people or corporations to know all the states in which the LLC is a citizen.  (As a reminder, under 28 U.S.C. § 1332,  federal diversity jurisdiction requires that the dispute both involve more than $75,000 and that there be complete diversity between all plaintiffs and all defendants.)  

For corporations, the statute provides: “a corporation shall be deemed to be a citizen of every State and foreign state by which it has been incorporated and of the State or foreign state where it has its principal place of business . . . .”

Some may argue that LLCs, with the limited liability shield for all members, are just like corporations and should be treated as such for diversity purposes.  I think there is instant appeal to treating LLCs as corporations in that setting, but after further thought, I don’t think it’s as simple as it looks (at least, not for me). As one who continues to argue that LLCs and corporations are distinct entities, I think there is a real (and valid) difference between “incorporated” as required under § 1332 and the more general term, “formed.”

I would agree that one can make a reasonable argument (though I think contrary to § 1332, and not my choice) that where limited liability applies to all unit holders (or members), then the corporation rule for diversity should apply to all entities that are formed (not just incorporated). If so, though, then that would likely include LPs and LLLPs, too, because any entity that requires filing, (i.e., all limited liability entities) could then reasonably be views as “formed” under state law. That is okay, if that’s the desired policy, but it’s not limited to LLCs in that case.

Still, there are those who would argue that one can interpret “incorporated” in § 1332 to mean “formed,” but I think that’s wrong.  “Formed” has its origins in partnership law. See, e.g., Uniform Partnership Act § 202 (1997) (“Formation of partnership.”). Id.§ 202(c) (“In determining whether a partnership is formed, the following rules apply . . . .”).   A legislature could make such a change, but it should be a legislative change. 

Despite the best efforts of thousands of courts, LLCs are formed, not “incorporated.” See Uniform LLC Act § 202(d): “(1) A limited liability company is formed when the [Secretary of State] has filed the certificate of organization and the company has at least one member, unless the certificate states a delayed effective date pursuant to Section 205(c).” As such, under current law for federal diversity, “incorporated” applies to corporations only. 

Beyond that, as to LLCs specifically, I think there is a difference between member-managed LLCs and manager-managed LLCs in carrying out the corporate analogy. That is, a manager-managed LLC is (usually) quite comparable to a corporation and a member-managed LLC is more easily compared to a partnership. That raises the question: should there be a control test, if that’s really the question, as to how diversity applies?  There is no control test for close corporations, either, I would note, and instead a bright line is applied by entity, not control or risk of liability. 

Furthermore, if it’s just the concept of complete limited liability, I would argue that an LP with a corporate GP (that only operates for the purposes of that LP) is functionally similar to an LLC in terms of liability, yet there seems to be less of a question how we analyze the LP for diversity purposes. 

It seems to me Lincoln Benefit got the test right, under current law.  Let’s see how that goes before we start conflating LLCs and corporations in yet another area.