As I have pointed out in earlier posts on this blog, the June decision in Hobby Lobby failed to define closely-held business for purposes of the religious exemption.  On August 22nd, the U.S. Department of Health and Human Services (HHS) issued proposed rules, open for comments for 60 days, that include a definition of closely-held under one of two approaches borrowed from state law definitions like with S corporations and from IRS regulations.

In common understanding, a closely held corporation – a term often used interchangeably with a “close” or “closed” corporation – is a corporation the stock of which is owned by a small number of persons and for which no active trading market exists. ….Under the first proposed approach, a qualifying closely held for-profit entity would be an entity where none of the ownership interests in the entity is publicly traded and where the entity has fewer than a specified number of shareholders or owners….

Under a second, alternative approach, a qualifying closely held entity would be a forprofit entity in which the ownership interests are not publicly traded, and in which a specified fraction of the ownership interest is concentrated in a limited and specified number of owners.

HHS invites comments on the proposed definitions, the preferred approach, and the threshold cut offs for ownership concentration or numbers of owners.

Importantly, and answering a question raised in several posts in the on line symposium at The Conglomerate, the proposed rules would require a valid corporate action, taken in accordance with state law, to assert that the owners’ religious views form the basis of the entity’s objection.   HHS also invites comments “on whether to require documentation of the decision-making process and disclosure of the decision.”

-Anne Tucker

 

West Virginia is the latest jurisdiction to adopt benefit corporations – the text of our legislation can be found here.   As with all benefit corporation legislation, the thrust of West Virginia’s statute is to provide a different standard of conduct for the directors of an otherwise for-profit corporation that holds itself out as being formed, at least in part, for a public benefit.  (Current and pending state legislation for benefit corporations can be found here.)

As WVU Law has two members of the ProfBlog family in its ranks (Prof. Josh Fershee (on the Business Law Prof Blog) and Prof. Elaine Waterhouse Wilson (on the Nonprofit Law Prof Blog)), we combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides.  For those of you on the Business Prof blog, some of the information to come on the Business Judgment Rule may be old hat; similarly, the tax discussion for those on the Nonprofit Blog will probably not be earth-shaking.  Hopefully, this series will address something you didn’t know from the other side of the discussion!

Part I: The Benefit Corporation: What It’s Not:  Before going into the details of West Virginia’s legislation (which is similar to statutes in other jurisdictions), however, a little background and clarification is in order for those new to the social enterprise world.  A benefit corporation is different than a B Corporation (or B Corp).  B Lab, which states that it is a “501(c)(3) nonprofit” on its website, essentially evaluates business entities in order to brand them as “Certified B Corps.” 

It wants to be the Good Housekeeping seal of approval for social enterprise organizations.  In order to be a Certified B Corp, organizations must pass performance and legal requirements that demonstrate that it meets certain standards regarding “social and environmental performance, accountability, and transparency.” Thus, a business organized as a benefit corporation could seek certification by B Lab as a B Corp, but a business is not automatically a B Corp because it’s a state-sanctioned benefit corporation – nor is it necessary to be a benefit corporation to be certified by B Labs.  

In fact, it’s not even necessary to be a corporation to be one of the 1000+ Certified B Corps by B Lab. As Haskell Murray has explained,

I have told a number of folks at B Lab that “certified B corporation” is an inappropriate name, given that they certify limited liability companies, among other entity types, but they do not seem bothered by that technicality.  I am guessing my fellow blogger Professor Josh Fershee would share my concern. [He was right.]

A benefit corporation is similar to, although different from, the low-profit limited liability company (or L3C), which West Virginia has not yet adopted. (An interesting side note: North Carolina abolished its 2010 L3C law as of January 1, 2014.)  The primary difference, of course, is that a benefit corporation is a corporation and an L3C is a limited liability company.  As both the benefit corporation and the L3C are generally not going to be tax-exempt for federal income tax purposes, the state law distinction makes a pretty big difference to the IRS.  The benefit corporation is presumably going to be taxed as a C Corporation, unless it qualifies and makes the election to be an S Corp (and there’s nothing in the legislation that leads us to believe that it couldn’t qualify as an S Corp as a matter of law).   By contrast, the L3C, by default will be taxed as a partnership, although again we see nothing that would prevent it from checking the box to be treated as a C Corp (and even then making an S election).   The choice of entity determination presumably would be made, in part, based upon the planning needs of the individual equity holders and the potential for venture capital or an IPO in the future (both very for-profit type considerations, by the way).  The benefit corporation and the L3C also approach the issue of social enterprise in a very different way, which raises serious operational issues – but more on that later. 

Finally, let’s be clear – a benefit corporation is not a nonprofit corporation.  A benefit corporation is organized at least, in some part, to profit to its owners.  The “nondistribution constraint” famously identified by Prof. Henry Hansmann (The Role of Nonprofit Enterprise, 89 Yale Law Journal 5 (1980), p. 835, 838 – JSTOR link here) as the hallmark of a nonprofit entity does not apply to the benefit corporation.  Rather, the shareholders of a benefit corporation intend to get something out of the entity other than warm and fuzzy do-gooder feelings – and that something usually involves cash.

In the next installments:

Part II – The Benefit Corporation: What It Is.

Part III – So Why Bother?  Isn’t the Business Judgment Rule Alive and Well?

Part IV – So Why Bother, Redux? Maybe It’s a Tax Thing?

Part V – Random Thoughts and Conclusions

EWW & JPF

Call for papers cosponsored by the United Nations Environment Programme (http://www.unep.org/) – abstract deadline is Aug. 31 with the event in Dec.  The emphasis is on empirical work with clear policy proposals. 

Exerpts:
“The event is a research symposium that the Canadian-based Centre for International Governance Innovation (CIGI) is co-hosting with the UNEP Inquiry into the Design of a Sustainable Financial System in early December. The Convening is intended to address key pertinent theoretical and empirical questions that support the broader applied, policy research agenda concerning the contours of a sustainable financial system.

….The symposium will be for a limited number of people, primarily those who have submitted papers. We will be in a position to provide some support to attend the symposium, which will take place from 1-3 December 2014 in Waterloo, Ontario.”

Download CIGI – Inquiry – Research Convening_call_2014 

Anne Tucker

 

This follows on Ann’s post yesterday on Gender and Crowdfunding.  Ann, so glad you’ve joined me and Steve Bradford as securities crowdfunding watchers!  Delighted to have you in that informal, somewhat disgruntled “club.”

I have been interested in whether securities crowdfunding will democratize business finance.  (I note here that Steve Bradford’s comment to Ann’s post raises the broader question of crowdfunding’s ability to better engage underrepresented populations in general.)  My interest has, however, been more on the investor (backer) side of the crowdfunding equation than on the business (entrepreneur) side.  

As Ann notes, given the delay in the Securities and Exchange Commission (SEC) rulemaking under Title III of the Jumpstart Our Business Startups (JOBS) Act, the information on gender and crowdfunding that we have so far comes from other types of crowdfunding.  This information may or may not map well to markets in securities crowdfunding.  But it’s still worth reviewing the information that we do have.

Continue Reading Sex, Lies, and . . . Crowdfunding

Students often ask me how they can improve their performance in my classes. There’s one thing they can do that will increase their learning with no additional work on their part: stop multitasking.

Multitasking is bad. The research is clear: students, even today’s students who grew up multitasking, learn less when they’re doing other things at the same time. See, for example, here and here. It’s a very simple point: if you surf the Internet, email, text, instant message, talk on the phone, or watch TV while you’re studying (or in the classroom), you learn less. Effective study (and work) requires focus.

It’s such an easy, effortless way to improve learning: just focus exclusively on what you’re reading, without any distractions. Turn off instant messaging. Close the web browser and the email program. Silence your phone. Turn off the TV.

I make that point to my students at the beginning of my classes.  but, for some of them, it just doesn’t sink in. I guess that shouldn’t surprise me: people text while they’re driving even as the casualties continue to mount.

I recently found an exercise on the Internet that illustrates the point in a straightforward, simple way. I’m going to distribute it to my students this year (with the author’s permission) and see if it helps. (For what it’s worth, it took me 34 seconds to complete the exercise without multitasking and 52 seconds to do it multitasking.)

The SEC is in the process of crafting rules to facilitate crowdfunding of unregistered securities offerings.  There’s been a lot of back and forth about the merits of this idea – Michael Dorff, for example, has argued that it’s a sucker’s game, because the only businesses that will require crowdfunding are those too toxic for angel investors to touch.  Meanwhile, Steve Bradford just posted about a study suggesting that the “crowd” is better at identifying winning business ideas than individual investors – even the professionals.

One idea that’s been floated, however, is that crowdfunding will open doors for disadvantaged groups – like women.

Indiegogo, a crowdfunding website, recently boasted that women founders reach their target funding in much greater numbers than do women who seek startup capital through traditional means.  Women have had similar results on Kickstarter.

There’s been a lot written recently about how women fare poorly in the tech world when they seek startup funding.  Women report navigating a lot of pretty toxic sexism from the mostly-male angel investors with whom they must negotiate.

I have my doubts about the viability of crowdfunding, but I’ll be interested to see whether it can also level playing fields in unexpected ways.

I love a good debate and appreciate the opportunity (provided by Professor Bainbridge’s thoughtful post yesterday) to engage a bit more deeply on the thesis of Wednesday’s post suggesting an approach for how to incorporate Citizens United and Hobby Lobby into the survey BA/Corporations course. 

By way of recap and ruthless summary, Stephen Bainbridge wants nothing to do with these issues (or other constitutional law questions) in his course because of the:

  1. Existing emphasis of public law over private law and resulting imbalance in law school curriculum;
  2. False impression that constitutional law is the holy grail of law teaching and practice;
  3. These cases present a hornet’s nest of controversial and divisive topics; and
  4. Coverage constraints.  The menu options of what we can (should) teach is already more ambitious than time allows.

And to no surprise to anyone, anywhere:  Stephen Bainbridge is right on the money with all of these points.

As a survey course and one that almost every student in my law school (Georgia State) takes, I feel a responsibility to provide context for the subject matter that we teach and to do my best to “hook” students who didn’t come to my class with an interest in corporate law. 

First, hear me now when I say that corporate law matters.  It matters to the business owners who form and operate a firm.  It matters to the individuals and other businesses who interact with the firm as a supplier or customer or creditor or employee.  These first two points are significantly incorporated into the traditional BA syllabus.  Corporate law also matters to general members of society because corporations wield tremendous power in elections, in lobbying (regulatory capture anyone?), in shaping retirement savings, in religious and reproductive rights debates and setting other cultural norms around issues like corruption, sustainability, living wage, etc.   Multi-national corporations with ubiquitous brand recognition aren’t the only powerful actors.  The Hobby Lobby ruling tells us that those creatures governed largely by private law—the closely held corporation—also play a major role.  To teach corporate law in a vacuum that ignores this broader context is to teach nuclear physics without discussing the atom bomb and its consequences (if I can use hyperbole).  Should the broader context be the focus of the class? Absolutely not.  Can it be woven into context setting discussions or used as a way to elicit student participation?  In my class at least.

Second, not every student in BA enrolled out of pure self-interest; not everyone has a business background.  I consider my course to be a great equalizer in law school:  we take the health sciences majors, the B-schoolers, the political science and the anthropology kids and at the end of the semester everyone can explain basic financial concepts, the different menu options of firms, proxy fights, and even poison pills. We do this best when we can engage all of the students, which sometimes means helping students see why it might matter to them and how the subject connects with the things that they care about.  For some that will be the clever ways you can use private agreements to shape outcomes and hedge against risk, for others it will be seeing why corporate law matters even if you don’t care about corporations (see paragraph above).

My last point is that being an effective classroom teacher generally requires a sense of self-awareness about your comfort zone, your strengths, and your weaknesses (among other things). I have lots of colleagues, at GSU and other institutions (many of them BLPB editors), whom I admire, but if I tried to teach class the way that they did, I would fall short of the mark.  We teach to our own strengths and infuse classes with a sense of our own personality and passion.  I don’t think I have convinced anyone not previously inclined to incorporate these materials; and I wonder if Stephen has caused any course corrections with his thoughts.  We may have just reinforced the positions that you already held.  Either way, happy teaching to all readers who have started or are preparing to start the new semester and the new school year.

-Anne Tucker

This summer, on the recommendation of two colleagues, I read Mindset by Carol Dweck (Stanford Psychology Professor).

On Wednesday, in my first set of fall semester classes, I mentioned Dweck’s descriptions of “fixed mindset” and “growth mindset” because I thought it might be helpful for students to consider.    

Dweck says that those with a “fixed mindset” embrace a static view of intelligence, avoid challenges, get defensive in the face of obstacles and criticism, and are threatened by the success of others.  People with a “fixed mindset” view failure as a negative verdict on their worth as a person. (pg. 244-46).  

In contrast, Dweck says that those with a “growth mindset” believe that intelligence can be developed, embrace challenges, persist and learn in the face of obstacles and criticism, and are inspired by the success of others.  People with a “growth mindset” view failure as an opportunity to learn and improve. (pg. 244-46).

To be clear, I (and Dweck) realize that there are limits to personal growth – otherwise I would be at an NFL practice right now instead of blogging – but it is helpful to realize that we can generally improve substantially with effort.   

In the long run, Dweck finds that those with a “growth mindset” tend to outperform those with a “fixed mindset.” Dweck also finds evidence that people can change their dominant mindset over time. 

I see students with both types of mindsets.  You can spot the “fixed mindset” student easily – “I am not a C student!”  The “growth mindset” student is just as easy to identify – “I got a C on this exam. I’d like to meet with you about my test and talk about how I can improve.”

Students are not the only ones who can learn from Dweck’s work.  When faced with criticism, defensiveness feels natural to me, but I am, slowly, learning to unpack the criticism and look for lessons that could help me grow and improve.    

Two news articles about the Dodd-Frank whistleblower law caught my eye this week. The first was an Op-Ed in the New York Times, in which Joe Nocera profiled a Mass Mutual whistleblower, who received a $400,000 reward—the upper level of the 10-30% of financial recoveries to which Dodd-Frank whistleblowers are entitled.

Regular readers of this blog may know that I met with the SEC, regulators and testified before Congress before the law went into effect about what I thought might be unintended effects on compliance programs. I have blogged about my thoughts on the law here and here. 

The Mass Mutual whistleblower, Bill Lloyd, complained internally and repeatedly to no avail. Like most whistleblowers, he went external because he felt that no one at his company took his reports seriously. He didn’t go to the SEC for the money. As I testified, people like him who try to do the right thing and try resolve issues within the company (if possible) deserve a reward if their claims have merit.

The second story had a different ending. The Wall Street Journal reported on the Second Circuit opinion supporting Siemens’ claim that Dodd-Frank’s anti-retaliation protection did not extend to its foreign whistleblowing employees. In that case, everything– the alleged wrongful conduct, the internal reporting, and the termination–happened abroad. The employee did disclose to the SEC, but only after he was terminated, and therefore his retaliation claim relates to his internal reports. The court’s reasoning  about the lack of extraterritorial jurisdiction was sound, but this ruling may be a victory for multinationals that may unintentionally undermine the efforts to bring certain claims to internal compliance officers. 

I proudly serve as a “management representative” on the Department of Labor’s Whistleblower Protection Advisory Committee with union members, outside counsel, corporate representatives, and academics. Although Dodd-Frank is not in our purview, two dozen other laws, including Sarbanes-Oxley are, and we regularly hear from other agencies including the SEC. I will be thinking of these two news articles at our next meeting in September.

I will also explore these issues and others as the moderator of the ABA 8th Annual Section of Labor and Employment Law Conference, which will be held in Los Angeles, November 5-8, 2014. Panelists include Sean McKessey, Chief of the SEC’s Office of the Whistleblower, Mike Delikat of Orrick, Herrington & Sutcliffe LLP, and Jordan A. Thomas of Labaton Sucharow LLP.

The program is as follows: 

 Program Title: Whistleblower Rewards:  Trends and Emerging Issues in Qui Tam Actions and IRS, SEC & CFTC Whistleblower Rewards Claims

Description:     This session will explore the types of claims that qualify for rewards under the False Claims Act and the rewards programs administered by the Securities & Exchange Commission, Commodity Futures Trading Commission, and Internal Revenue Service, the quantity and quality of evidence needed by the DOJ, IRS, SEC, and CFTC to investigate a case successfully, and current trends in the investigation and prosecution of whistleblower disclosures. The panel also will address, from the viewpoint of in-house counsel, the interplay between these reward claims and corporate compliance and reporting obligations.

If you can think of questions or issues I should raise at either the DOL meeting in DC next month or with our panelists in November, please email me at mnarine@stu.edu or leave your comments below.