My former research assistant Sam Moultrie and his colleague Andrea Schoch Brooks have authored a short article entitled “Defining a Proper Purpose for Books and Records Actions in Delaware.“

The article unpacks two recent Delaware books and records cases: AbbVie and Citigroup. Worthwhile reading for those who wish to stay current on this area of the law. 

My last post outlined the criminological and behavioral ethics theories that help explain why corporate executives commit unethical and illegal acts.  I’d like to unpack that a bit more by providing some specific rationalizations used by white collar offenders.  This list includes the first five rationalizations to be identified by researches (sometimes called the “famous five”), and then supplements three others that are particularly relevant.  Not surprisingly, there are disagreements as to exactly how many rationalizations there are and precisely how they operate.  But, as one team of researchers put it, what is interesting about rationalization theory is what rationalizations do, “not the flavors they come in.”

Denial of Responsibility.  Called the “master account,” the denial of responsibility rationalization occurs when the offender defines her conduct in a way that relieves her of responsibility, thereby mitigating “both social disproval and a personal sense of failure.”  Generally, offenders deny responsibility by claiming their behavior is accidental or due to forces outside their control.  White collar offenders deny responsibility by pleading ignorance, suggesting they were acting under orders, or contending larger economic conditions caused them to act illegally.

Denial of Injury.  This rationalization focuses on the injury or harm caused by the illegal or unethical act.  White collar offenders may rationalize their behavior by asserting that no one will really be harmed.  If an act’s wrongfulness is partly a function of the harm it causes, an offender can excuse her behavior if no clear harm exists.   The classic use of this technique in white collar crime is an embezzler describing her actions as “borrowing” the money—by the offender’s estimation, no one will be hurt because the money will be paid back.  Offenders may also employ this rationalization when the victim is insured or the harm is to the public or market as a whole, such as in insider trading or antitrust cases.

Denial of the Victim.  Even if a white collar offender accepts responsibility for her conduct and acknowledges that it is harmful, she may insist that the injury was not wrong by denying the victim in order to neutralize the “moral indignation of self and others.”   Denying the victim takes two forms.  One is when the offender argues that the victim’s actions were inappropriate and therefore he deserved the harm.  The second is when the victim is “absent, unknown, or abstract,” which is often the case with property and economic crimes.  In this instance, the offender may be able to minimize her internal culpability because there are no visible victims “stimulat[ing] the offender’s conscience.”  White collar offenders may use this rationalization in frauds against the government, such as false claims or tax evasion cases, and other crimes in which the true victim is abstract.

Condemning the Condemners.  White collar offenders may also rationalize their behavior by shifting attention away from their conduct on to the motives of other persons or groups, such as regulators, prosecutors, and government agencies.  By doing so, the offender “has changed the subject of the conversation”; by attacking others, “the wrongfulness of [her] own behavior is more easily repressed.”  This rationalization takes many forms in white collar cases: the offender calls her critics hypocrites, argues they are compelled by personal spite, or asserts they are motivated by political gain.  The claim of selective enforcement or prosecution is particularly prominent in this rationalization.  In addition, white collar offenders may point to a biased regulatory system or an anticapitalist government.

Appeal to Higher Loyalties.  The appeal to higher loyalties rationalization occurs when an individual sacrifices the normative demands of society for that of a smaller group to which the offender belongs.  The offender does not necessarily reject the norms she is violating; rather, she sees other norms that are aligned with her group as more compelling.  In the white collar context, the group could be familial, professional, or organizational.  Offenders rationalizing their behavior as necessary to provide for their families, protect a boss or employee, shore up a failing business, or maximize shareholder value are employing this technique.  Notably, female white collar offenders have been found to appeal to higher family loyalties more than their male counterparts.

Metaphor of the Ledger.  White collar offenders may accept responsibility for their conduct and acknowledge the harm it caused, yet still rationalize their behavior by comparing it to all previous good behaviors.  By creating a “behavior balance sheet,” the offender sees her current negative actions as heavily outweighed by a lifetime of good deeds, both personal and professional, which minimizes moral guilt.  It seems likely that white collar offenders employ this technique, or at least have it available to them, as evidenced by current sentencing practices—almost every white collar sentencing is preceded by a flood of letters to the court supportive of the defendant and attesting to her good deeds.

Claim of Entitlement.  Under the claim of entitlement rationalization, offenders justify their conduct on the grounds they deserve the fruits of their illegal behavior.  This rationalization is particularly common in employee theft and embezzlement cases, but is also seen in public corruption cases.

Claim of Relative Acceptability/Normality.  The final white collar rationalization entails an offender justifying her conduct by comparing it to the conduct of others.  If “others are worse” or “everybody else is doing it,” the offender, although acknowledging her conduct, is able to minimize the attached moral stigma and view her behavior as aligned with acceptable norms.  In white collar cases, this rationalization is often used by tax violators and in real estate and accounting frauds.

I’ve identified the use of these rationalizations by white collar offenders such as Rajat Gupta, Peter Madoff, Allen Stanford, and others.  But I’d be interested to hear from readers where they’ve seen “vocabularies of motive” in the white collar world.  (If you’re not sure, try starting with Bloomberg’s oral history of Drexel Burnham Lambert, in what has to be the largest collection of rationalizations ever assembled.) 


Business and Human Rights Junior Scholars Conference
                          
The Rutgers Center for Corporate Governance, The University of Washington School of Law, and the Business and Human Rights Journal (Cambridge University Press) announce the first Business and Human Rights Junior Scholars Conference, to be held September 18, 2015 at the Rutgers School of Law – Newark in Newark, New Jersey, just outside of New York City.  The Conference will pair approximately ten junior scholars writing at the intersection of business and human rights issues with senior scholars in the field.  Junior scholars will have an opportunity to present their papers and receive feedback from senior scholars.   Upon request, participants’ papers may be considered for publication in the Business and Human Rights Journal (BHRJ), published by Cambridge University Press.
 
All junior scholars will be tenure-track professors who are either untenured or have been tenured in the past three years.  The Conference is interdisciplinary; scholars from all disciplines are invited to apply, including law, business, human rights, and global affairs.  The papers must be unpublished at the time of presentation.
 
To apply, please submit an abstract of no more than 250 words to msantoro@business.rutgers.edu andarama@uw.edu with the subject line Business & Human Rights Conference Proposal.  Please include your name, affiliation, contact information, and curriculum vitae. 
 
The deadline for submission is June 15, 2015.  Scholars whose submissions are selected for the symposium will be notified no later than July 15, 2015. We encourage early submissions, as selections will be made on a rolling basis.
  
About the BHRJ
 
The BHRJ provides an authoritative platform for scholarly debate on all issues concerning the intersection of business and human rights in an open, critical and interdisciplinary manner. It seeks to advance the academic discussion on business and human rights as well as promote concern for human rights in business practice.
 
BHRJ strives for the broadest possible scope, authorship and readership. Its scope encompasses interface of any type of business enterprise with human rights, environmental rights, labour rights and the collective rights of vulnerable groups. The Editors welcome theoretical, empirical and policy / reform-oriented perspectives and encourage submissions from academics and practitioners in all global regions and all relevant disciplines.
 
A dialogue beyond academia is fostered as peer-reviewed articles are published alongside shorter ‘Developments in the Field’ items that include policy, legal and regulatory developments, as well as case studies and insight pieces.
 
 

Some of you may recall that I blogged last summer about a SEALS (Southeastern Association of Law Schools) discussion group on “publicness.”  That post can be found here.  My contribution to the discussion group was part of a paper that then was a work-in-process for the University of Cincinnati Law Review that I earlier had blogged about here.

That paper now has been released in electronic and hard-copy format.  I just uploaded the final version to SSRN.  The abstract for the paper reads as follows:

Conceptions of publicness and privateness have been central to U.S. federal securities regulation since its inception. The regulatory boundary between public offerings and private placement transactions is a basic building block among the varied legal aspects of corporate finance. Along the same lines, the distinction between public companies and private companies is fundamental to U.S. federal securities regulation.

The CROWDFUND Act, Title III of the JOBS Act, adds a new exemption from registration to the the Securities Act of 1933. In the process, the CROWDFUND Act also creates a new type of financial intermediary regulated under the Securities Exchange Act of 1934 and amends the 1934 Act in other ways. Important among these additional changes is a provision exempting holders of securities sold in crowdfunded offerings from the calculation of shareholders that requires securities issuers to become reporting companies under the 1934 Act.

This article attempts to shed more light on the way in which the CROWDFUND Act, as yet unimplemented (due to a delay in necessary SEC rulemaking), interacts with public offering status under the 1933 Act and public company status under the 1934 Act. Using the analytical framework offered by Don Langevoort and Bob Thompson, along with insights provided in Hillary Sale’s work, the article briefly explores how the CROWDFUND Act impacts and is impacted by the public/private divide in U.S. securities regulation. The article also offers related broad-based observations about U.S. securities regulation at the public/private divide.

I hope that you are motivated to read the article–and that you get something out of it if you do read it.  The thinking involved in creating the article was often challenging (even if the expressed ideas may not reflect or meet that challenge).  Yet, writing the article, in light of the super work already done by Don Langevoort, Bob Thompson, and Hillary Sale, was joyful and illuminating for me in many ways.  

I often say that I stand on the shoulders of giants in my teaching and scholarship.  That was transparently true in this case.  If only all academic research and writing could be so rewarding.  

Professor  Steven Davidoff Solomon posted this article to the DealBook yesterday highlighting France’s new 2-votes for long-term shareholders law:  The Florange Law.  

The centerpiece of the Florange Law is a mandate that French companies give two votes to any share held for longer than two years. This goes against the historical one-vote-for-every-share system that most countries have. The law allows an opt-out if two-thirds of shareholders approve one by March 31, 2016.

ISS issued a guide (Download Impact-of-florange-act-france) opposing the law and encouraging investors to pressure directors to opt out of the law (through amendments to corporate bylaws) before the deadline.  

Professor Davidoff Solomon questions the strength of the one-share-one-vote corporate democracy in the U.S., noting that recent IPOs, like Facebook, went public with two classes of stock as a anti-takeover measure.  There is also the related question of what impact a law like this would have given the turnover rates of many institutional investors. 

-Anne Tucker

From the industrious editors at Chapman Law Review soliciting papers for their 2016 Symposium on Cybesecurity:

Cybersecurity has become a critical national security and corporate security problem in the last fifteen years. Examples include hackings of the Pentagon, SONY, Target, JPMorgan Chase, Home Depot, various universities, and hospitals. A lively debate is now raging in Congress, academia, and in the corporate world over what steps should be taken. Attorneys are at the forefront of the problem in advising clients and securing confidential information. What duties do attorneys and corporations have to prevent a cyberattack? What duties do attorneys and corporations owe to their clientele? What actions should attorneys and corporations take to mitigate a cyberattack once it occurs? What measures can businesses take to respond in the future? What steps should the U.S. Government take to protect its public and private entities? How can the U.S. Government respond to attacks on private entities? What domestic law governs cyberattacks and their responses? 

The Chapman Law Review will explore these and other questions at our next symposium on January 29, 2016, to be held at the Dale E. Fowler School of Law at Chapman University.  We invite interested scholars and practitioners to submit abstracts for papers to present at the symposium on the topic of cybersecurity, focusing on cyberattacks, corporate hackings, available government responses, and attorneys’ corresponding ethical duties.

Submission Information

We are looking for papers between 10,000 and 15,000 words. If you would like to apply to participate in the Symposium, please submit an abstract of no more than 500 words by June 22, 2015. The deadline for the completed paper will likely be in October 2015.  Selected papers will be published in a special issue of the Chapman Law Review in approximately April 2016, and the authors will participate in the 2016 Chapman Law Review Symposium on Friday, January 29, 2016.

If you have questions about the Symposium, please contact Alexa Stephenson, Senior Symposium Editor, at steph156@mail.chapman.edu. 

Vice Chancellor Laster recently issued an opinion in In re Carlisle Etcetera, LLC (available here), that has the potential to encourage (or at least fail to punish) sloppy practices and unnecessarily expands equitable standing for judicial dissolution.  In doing so, the case increases litigation risk for LLCs. 

The case involves an LLC made up of two member parties that formed Carlisle Etcetera, LLC. (Carlisle): WU Parent and Tom James Co. (James). The LLC agreement called for a manager-managed board, that would serve as sole manager.  WU Parent appointed two board designees, as did James.  Board decisions required “unanimous approval.”  At some point, for tax reasons, WU Parent assigned its membership interest to WU Sub. Thereafter, Carlisle identified WU Sub as a 50% member interest in tax filings and the LLC’s accountants referred to WU Sub as “an equal member” of the LLC.  The parties discussed an updated LLC agreement that would have made clear that an initial member of the LLC could transfer ownership to a wholly owned affiliate that would retain membership status, though that agreement was never finalized.  

[Please click below to read more.]

Continue Reading Delaware LLC Case Sends Wrong Signal, Unnecessarily Expands Equitable Standing

In my last post, I asked whether business leaders had unknowingly provided the legal industry with a long-term solution to declining interest in the legal profession (based on the drop in applications to law school) and potential waning influence.  I suggested that business leaders (inadvertently or otherwise) may be the driving force that ends up saving the legal profession.  I would like to take the discussion one step further.

There is no doubt in my mind that, historically, companies rarely did much legal training for the lawyers they hired.  They simply bought talent—usually by offering employment to attorneys with private practice experience that was valuable to the corporation.  Sometimes this worked extremely well, and sometimes it failed miserably.  Why? Business leaders sometimes possess only basic knowledge of what quality legal talent really looks like (after all, they usually are not lawyers themselves).  Moreover, they often have difficulty finding a lawyer who can operate in a corporate environment and have high-level legal skills.  The “a lawyer is a lawyer” mentality still prevails. 

Adding to the difficult situation is that private firm attorneys often view corporate attorneys as those who could not flourish in private practice (for whatever reason—lack of skill, drive, ability, focus, etc.), and they consequently may be perceived at times by their own companies as somewhat suspect (“If they were really good attorneys, wouldn’t they be practicing with a firm?”).  It becomes a Kobayashi Maru-type of character test for such in-house attorneys—virtually, a no-win situation.  They are hired to help, but at times not fully trusted to do so because they are on staff.  Professional respect, and compensation, for in-house attorneys lags behind that for lawyers in private firms.

Corporations are struggling with the concept of attorneys as part of entrepreneurial teams.  Few companies hire law students directly out of law school for the very same reasons that firms are currently limiting their new-hires—lack of return on their dollar.  Lawyers take 5-15 years to build the experience necessary to obtain the “gravitas” needed for a high level of trust, depending on the field.  Many lawyers never achieve this status; they are simply caught in an eddy of repeating activity.  (Perhaps this issue is worthy of a separate post!)

At this juncture, the in-house path remains precarious, and pursued at one’s peril.  At most companies, there is no specified legal track, unlike the well-worn management paths.  Many corporate legal positions are much lower paying than firm jobs, and often of the “J.D. preferred” type of position—helpful to be a lawyer, but not necessary.  Graduating law students usually do not choose this corporate path—it is chosen for them, as they graduate from lower tier law schools, have less than stellar grades, or perhaps due to personal obligations involving location or family.  Perhaps such students never had a great desire to be lawyers, drifting into professional school through lack of other opportunities.   Additionally, inside companies, non-lawyers often feel that their in-house attorneys are a form of threat, and sometimes attempt to undermine them.* Advanced education continues to be viewed, probably irrationally, with some suspicion in the business environment.  Perhaps because the lawyers presently in-house have offered little to benefit the business operations, or because they are just not well understood.

These attitudes appear to be changing.  As the legal environment continues evolve, students may actually enter law school for the specific purpose of being in-house counsel, perhaps even having a specific company or industry in mind prior to taking their first class.  Law schools are well advised to shift their focus to accommodate this new reality.  Law schools that play the game well will again become a dominant option for bright college students.  What does this future look like?  That will be the subject of my next post.  More soon!

 –Marcos Antonio Mendoza 

 

*Interestingly, I have never heard a single MBA joke (has anyone?), but frequently hear lawyer jokes.  However, many millennials report to me that lawyer jokes are no longer de rigueur around them—in other words, people feel sorry for them and the challenges they face!

You may recall my blog post this fall about the Delaware Chancery Court opinion in In Re Nine Systems Corporation Shareholders Litigation. That case discusses what happens when a self-dealing transaction results in a fair price, thus causing no damage to the corporation, but the process followed was fair. The court held that the plaintiff could still recover attorneys’ fees and costs. I noted that the only people likely to be satisfied with that result were plaintiffs’ attorneys. (It makes no difference to the plaintiffs in the case because they had a contingent fee agreement with their attorneys-no recovery, no attorneys’ fees to be paid.)

The Chancery Court just entered its order awarding plaintiffs’ counsel, Jones Day, $2 million dollars in attorneys’ fees and expenses. That’s right, the attorneys get $2 million even though, as the Vice Chancellor notes, “the quantifiable benefit obtained in this litigation was $0.” Thus, the defendants have to pay $2 million to counsel for helping the court determine that nothing they did harmed the corporation or its shareholders.

It could have been worse; plaintiffs’ counsel asked for $11 million.

I’m afraid that this opinion will give plaintiffs’ attorneys an incentive to search for problems with the process in conflict-of-interest cases just so they can get in on the Nine-Systems action and collect attorneys’ fees. No harm to the corporation? No problem!