Before I went to law school, I worked in the video game industry, first for the industry trade association, the Interactive Digital Software Association (now known as the Entertainment Software Association). From there I moved to public relations for the public relations firm Golin/Harris in Los Angeles where my work was focused on product launches for Nintendo. (This was from 1998-2000.) In those jobs, I had the chance to work with some amazing people (and clients), and the experience has served me well, even as I went on to become a lawyer and professor. 

 One of those people was the managing director of the Los Angeles Golin/Harris office when I was hired, Fred Cook, who is now the CEO of Golin/Harris.  Fred recently wrote a book that has caught the attention of the business world and is a top-25 book for corporate customers according to 800-CEO-READ.   His book is Improvise: Unconventional Career Advice from an Unlikely CEO, and it’s worth a look.

Here’s an excerpt:

People entering the business world today are a commodity. They’ve gone to the same schools, taken the same courses, read the same books, and watched the same movies. Every summer they’ve dutifully worked at internships in their chosen field in hopes of landing the perfect job the day they graduate from college.

. . . .

While a college education is a prerequisite for most jobs, a life education should also be required. School delivers information. Life delivers ideas. Ideas that drive business. Twitter was an idea. Red Bull was an idea. South Park was an idea.

When I participate on industry panels, someone in the audience always asks what attributes make for a successful employee. My fellow panelists rightly answer that they’re looking for skilled writers, articulate communicators, and aggressive self-starters. My response? I would trade ten of the above for one person with a big idea. But brilliant ideas aren’t created in a vacuum. They’re formed by the experiences we have and the people we meet.

As usual, what Fred is talking about here is broader than just business or public relations. It applies to business lawyers, and non-business lawyers, and law professors, and pretty much everyone else who has a life to live and goals for a fulfilling career.  We all have the chance to find our passion, if we’re willing to live, take chances, and find out what we are capable of doing.

 Fred’s unique path to being a CEO is rather similar to my path to becoming a law professor in that it would be reasonable to call me an “unlikely law professor.” I was a mostly terrible undergraduate student at three major universities, and I did not go to a top-14 law school. I did well in law school (and practice) and that made it such that when I went on the job market a leading business law academic told me that my candidacy was “plausible.” And so it was.  Fred is an unlikely CEO, perhaps, but he is most certainly an appropriate one.  I like to think the same is true for me in my role.

My life experiences helped me in practice and helped me get my job as a law professor, and those experiences continue to help me as a lawyer, a scholar, and a teacher.  By having had a career outside the law, I have additional experiences that inform my thinking about the law and the legal profession.  I know (among other things) what it means to hire and fire people, make media calls, and schedule caterers for huge events. Of course, lawyers can do these things, too, but it’s different as a lawyer.

Beyond that, the people you meet along the way inform you, and guide you, and help you see the kind of person you want to be.  I’m thankful for the large number of good people who have been a part of my work-life experience so far, and Fred is one of those people. I’m glad he has written a book that will share some of his insight with a much broader audience.  Check it out. 

In the comments to one of Anne Tucker’s earlier posts, I mentioned that Chris Bruner’s book Corporate Governance in the Common-Law World (2013 Cambridge University Press) was on my summer reading list.

Looks like I am a little late to the party.  Over at PrawfsBlawg, there is already a book club on Bruner’s book with a number of excellent posts, including a few by the author.  Maybe the book club inspired demand is one of the reasons I got a letter from Cambridge University Press yesterday letting me know that my copy of Bruner’s book was going to take longer to deliver than expected.

Looking forward to reading the actual book, but for now, the posts make interesting reading.   

The Supreme Court of Appeals of West Virginia recently had the opportunity to address the role (if any) of veil piercing in West Virginia LLCs.  The state statute is silent on the subject, but the court determined veil piercing was there, anyway.  It was close, though, as the West Virginia Circuit Court took on the following question with the corresponding answer: 

Does West Virginia’s version of the Uniform Limited Liability Company Act, codified at W. Va. Code § 31B el seq., afford complete protection to members of a limited liability company against a plaintiff seeking to pierce the corporate veil?

ANSWER: YES

 Kubican v. The Tavern, LLC, 2012 WL 8523515 (W.Va.Cir.Ct.)

Under West Virginia LLC law:

[T]he debts, obligations and liabilities of a limited liability company, whether arising in contract, tort or otherwise, are solely the debts, obligations and liabilities of the company. A member or manager is not personally liable for a debt, obligation or liability of the company solely by reason of being or acting as a member or manager. . . . The failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business is not a ground for imposing personal liability on the members or managers for liabilities of the company.

 W. Va. Code § 31B-3-303 [1996].

 The Supreme Court of Appeals of West Virginia recently took the certified question and disagreed, determining that veil piercing is permitted in LLCs in the state. Kubican v. The Tavern, LLC, 752 S.E.2d 299, 313 (W. Va. 2013) (pdf here). There are legitimate arguments on both sides of this issue, so it was proper for the court to answer the question.  The reasoning behind the court’s decision, though, is not very satisfiying. 

The Supreme Court explained, in the syllabus, the law on veil piercing for corporations, as follows:

[T]o ‘pierce the corporate veil’ in order to hold the shareholder(s) actively participating in the operation of the business personally liable …, there is normally a two-prong test: (1) there must be such unity of interest and ownership that the separate personalities of the corporation and of the individual shareholder(s) no longer exist (a disregard of formalities requirement) and (2) an inequitable result would occur if the acts are treated as those of the corporation alone (a fairness requirement).” Syllabus point 3, in part, Laya v. Erin Homes, Inc., 177 W.Va. 343, 352 S.E.2d 93 (1986).

 For LLCs, the court eliminates the “disregard of formalities requirement” in part one, but kept the rest of the corporate veil-piercing test the same.  The court provided:

 To pierce the veil of a limited liability company in order to impose personal liability on its member(s) or manager(s), it must be established that (1) there exists such unity of interest and ownership that the separate personalities of the business and of the individual member(s) or managers(s) no longer exist and (2) fraud, injustice, or an inequitable result would occur if the veil is not pierced.

The problem, of course, is that part one of the LLC test is the same as that of the corporate veil piercing test, minus the explanation that part one is “the disregard of formalities requirement.”  The court is comfortable saying that the veil piercing test: 

is a fact driven analysis that must be applied on a case-by-case basis, and, pursuant to W.Va. Code § 31B–3–303(b) (1996) (Repl. Vol. 2009), the failure of a limited liability company to observe the usual company formalities or requirements relating to the exercise of its company powers or management of its business may not be a ground for imposing personal liability on the member(s) or manager(s) of the company.

However, now that the “unity of interest and ownership” test no longer looks at corporate formalities and looks simply to other factors to make the determination.  The court notes the nineteen factors that can be used in corporate veil-piercing cases, like undercapitalization, commingling of funds, etc., and explains that similar considerations may apply for LLCs. The court is right to point out that other states have made the same determination on similar statutes, but that doesn’t clearly make those decisions correct. See, e.g., Bainbridge, Abolishing LLC Veil Piercing (pdf here).  In addition, West Virginia’s veil-piercing test under Laya stated more clearly than other states have that corporate formalities are the main issue for the unity of interest test. 

Courts continue to look to veil piercing to rectify harms such as commingling of funds or using entity funds for personal endeavors.  This does not inherently warrant veil piercing. Instead, courts can find such uses of funds fraudulent transfers or improper uses of entity funds that the member needs to pay back. That is not veil piercing; that is simply requiring the member to put back in the entity that which was wrongfully withdrawn. 

Further, there are other arguments that can be made to hold LLC members liable for the entity’s debts. If the members pay directly the bills for the entity, it may be that the members have become guarantors for the entity.  In the Kubican case, the allegation was that the members used the entity credit cards for things like visits to the chiropractor, dinners, and even a trip to Myrtle Beach.  Again, though, if true, all of those funds should be returned to the entity to pay any claims the plaintiff is awarded from the LLC, but it does not need to be that the limited liability veil must be disregarded in full. 

It is at least an open question whether the West Virginia legislature intended to preserve veil piercing for LLCs. The often cited Flahive case in Wyoming determined it was a mere oversight of that state’s legislature to provide veil piercing in the LLC context expressly.  Since then, though, states have shown they know how to include LLC veil piercing by statute (see, e.g., Minnesota: Minn. Stat. § 322B.303(2) (2003) & North Dakota: N.D. Cent. Code § 10-32-29(3)).  If the legislature determines that veil piercing is proper in LLCs, then so be it. Until then, though, courts should ensure entity funds are available for entity debts, but they should also be far more willing to follow the statute as written and respect the unique nature of LLCs. 

Rule 10b-5(b) makes it unlawful to make false or misleading statements in connection with the purchase or sale of a security. In Janus Capital [Janus Capital Group, Inc. v. First Derivative Traders, — U.S. –, 131 S. Ct. 2296 (2011)], the Supreme Court limited the scope of 10b-5(b) by narrowly defining the term “make.” According to the court, a “maker” for purposes of 10b-5 liability “is the person or entity with ultimate authority over the statement, including its content and whether and how to communicate it.” One is not liable under Rule 10b-5(b) merely because one drafts or publishes a statement for someone else or even if, as in Janus, one posts that other person’s statement on one’s own web site.

Last week, in Prousalis v. Moore, a panel of the Fourth Circuit held that Janus applies only to private rights of action, not to criminal enforcement actions by the government. This interpretation of Janus is wrong. There’s no justifiable reason not to apply the Janus Capital interpretation in criminal cases.

The Fourth Circuit begins by pointing out that Janus involved a private right of action, not a criminal action and the court’s holding is therefore limited to private rights of action. That’s correct, but tells us little. The court was interpreting the exact same text as that applied in criminal actions. Its holding should apply to criminal actions as well, unless there’s some strong argument to distinguish that context.

The court notes language in Janus expressing a general desire to narrowly circumscribe private rights of action. The majority opinion in Janus does include language to that effect. But Janus also contains a detailed analysis of the word “make” and concludes that its ordinary meaning is limited in accordance with the court’s holding. And nowhere does Janus indicate that criminal actions (or civil enforcement actions by the SEC, which Prousalis doesn’t even mention) would be treated any differently. In fact, Justice Breyer’s dissent in Janus criticized the majority opinion for the effect it would have on SEC enforcement actions. Justice Breyer argued that “under the majority’s rule it seems unlikely that the SEC itself in such circumstances could exercise the authority Congress has granted it to pursue primary violators who ‘make’ false statement or the authority that Congress has specifically provided to prosecute aiders and abettors to securities violations.”

The Fourth Circuit points out that Janus relied on two earlier opinions, Central Bank and Stoneridge Investment Partners, each of which also involved a private right of action. But lower court cases subsequently applied Central Bank to SEC enforcement actions until Congress amended the Exchange Act, correctly noting that nothing in Central Bank limited its holding to private rights of action.

The Fourth Circuit opinion next argues that interpretation of the text of Rule 10b-5 should depend on context, and criminal liability poses a different context than civil liability. The court is right that the word “make” can mean different things in different contexts. But the court isn’t interpreting two different clauses with the word “make” in them. The textual context is exactly the same because the court is interpreting exactly the same text as the Janus court.

The Fourth Circuit argues that considerations of legislative primacy and judicial restraint also support its conclusion. According to the court, it is up to Congress to determine the elements of a criminal offense and the court shouldn’t disturb what Congress has provided regarding criminal enforcement. However, Congress has said only that defendants may be criminally liable for willful violations of the Exchange Act and the rules adopted pursuant to the Exchange Act. See Securities Exchange Act § 32(a), 15 U.S.C. § 78ff(a). Congress has not specified the elements of a criminal violation of Rule 10b-5, except to say that the violation must be willful. The SEC drafted the rule, and notions of deference to Congress are out of place in interpreting the SEC’s language.

Finally, the Prousalis opinion notes that “no other appellate court has adopted Prousalis’s argument; indeed, counsel was unable to identify a single district court that had applied Janus in the criminal context.” However, the Prousalis opinion itself fails to cite a single case consistent with its conclusion—that Janus does not apply in a criminal case. Why not? Because, as far as I know, there aren’t any. And a number of cases asking whether Janus applies to provisions other than Rule 10b-5(b) have assumed that Janus does apply to civil enforcement proceedings by the SEC.

One can reasonably disagree with the holding in Janus Capital. But, as long as Janus Capital stands, Prousalis is wrong.

In ATP Tour, Inc., et al. v. Deutscher Tennis Bund, et al., the Supreme Court of Delaware upheld a fee-shifting provision in a non-stock corporation’s bylaws, providing that unsuccessful plaintiffs in intracorporate litigation would be required to pay the fees and costs of defendants.

The court was answering a certified question from the Third Circuit, and thus was careful to note that it was only answering the question in the abstract, and that any such bylaw would have to be tested in a particular instance to determine if it was equitable.  But the court agreed that the bylaw appropriately concerned the “business of the corporation, the conduct of its affairs,
and its rights or powers or the rights or powers of its stockholders, directors, officers or employees” as the DGCL requires, and therefore was within the power of the directors to adopt.  The court also held that the purpose to deter litigation was not, in the abstract, “improper,” such that the bylaw could be invalidated on that ground.

The court was careful to repeat that this was a “nonstock” corporation, but nothing in the opinion suggests that the outcome would be any different for a publicly-traded corporation.

I’ve got to admit, I’m kind of amazed, looking at it from a purely cynical perspective.  Previously, in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013), a Delaware Chancery court upheld forum selection provisions in the corporate bylaws of a publicly traded corporation, using a similar rationale – but it’s impossible not to notice that that decision only benefitted Delaware, since it was a foregone conclusion that most corporations choosing to enact such bylaws would select Delaware as the forum.

If corporations enact fee-shifting provisions, though, that could seriously deter intracorporate litigation in general – which would not, in the long run, be particularly beneficial to Delaware.

Of course, it remains to be seen how Delaware courts will treat specific instances of fee-shifting provisions in particular cases – it may ultimately set the bar so high for review of such clauses that effectively they have little application. It’s also very difficult to gauge how such clauses will or should apply to class actions or to derivative claims – in those cases, the individual plaintiff bringing the lawsuit does so on behalf of all stockholders, and therefore it hardly makes sense for it to shoulder burdens properly allocable to all stockholders.  But even outside of those contexts, a fee-shifting provision could be a powerful new form of antitakeover device.

But the next question is the elephant in the room – binding arbitration of shareholder disputes.  Even if Delaware would otherwise be inclined to reject such clauses as a bridge too far, after permitting forum selection provisions and fee-shifting provisions, under the Federal Arbitration Act, Delaware may be required to treat arbitration clauses similarly.  (A Maryland court recently held that arbitration clauses in the bylaws of a REIT were binding on all shareholders; that decision was then endorsed by a federal court in Del. County Emples. Ret. Fund v. Portnoy, 2014 U.S. Dist. LEXIS 40107 (D. Mass. Mar. 26, 2014)).  And if that happens … well, there are a number of possibilities, but the most obvious would be a dramatic reduction of shareholder litigation in Delaware.

 

You must all realize that we are in a service business. In this day and age of faxes, emails, internet, etc. clients expect you to be accessible 247. Of course, that is something of an exaggeration — but not much. . . . Unless you have very good reason not to (for example when you are asleep, in court or in a tunnel), you should be checking your emails every hour.  One of the last things you should do before you retire for the night is to check your email. That is why we give you blackberries.

– Bill Urquhart (Quinn Emanuel)

A recent Mother Jones article reminded me of the infamous e-mail from law firm partner Bill Urquhart, a portion of which is quoted above.  While Mr. Urquhart’s e-mail may have been a bit blunt, I think it captures the e-mail checking expectations at many of the top law firms.

My e-mail checking habits were formed at two large law firms and those habits have carried over into my current position as a professor.  E-mail checking is reflexive for me.  I don’t really want to know how many times a day I check my e-mail, but I would bet it is over 25x on most days. 

As the Mother Jones article and the studies it cites suggest, it seems that productivity could be increased and stress could be reduced through a more healthy relationship with e-mail.  Personally, I’d love to find that perfect balance where I am appropriately accessible and responsive, but also have blocks of time to focus on larger projects.      

What do our readers think?  How often should lawyers check (and respond to) their e-mail? Professors?

Last week I blogged about enterprise risk management,  lawyers, and their “obligations” to counsel clients about human rights risks based in part on statements by the American Bar Association and Marty Lipton of Wachtell, who have cited the UN Guiding Principles on Business and Human Rights. I posted the blog on a few LinkedIn groups and received some interesting responses from academics, in house counsel, consultants, and outside counsel, which leads me to believe that this is fertile ground for discussion. I have excerpted some of the comments below:

 “Corporations do have risk with respect to human rights violations, and this risk needs to be managed in a thoughtful manner that respects human dignity. I did wonder, though, whether you see any possible unintended consequences of asking attorneys to start advising on moral as well as legal rights?”

“I agree. Great post. Lawyers should always be ready to advise on both legal risks and what I call “propriety”. If a lawyer cannot scan for both risks, then he or she is either incompetent or has integrity issues. Companies that choose to take advice from a lawyer who is incompetent or has integrity issues probably have integrity issues too. I’m not sure I would leave leadership on ERM as a whole in the hands of a lawyer, unless that person has very good risk credentials.”

“As a lawyer, and a casinos and  banks counselor, recently, due to a Constitution reform in Mexico, I have been more involved in the Universal Declaration of Human Rights and the “Pacto de San Jose Costa Rica” (American Convention of HR) where you find out that the law in the best benefit of the citizen will be applicable, even over the Constitution. Of course that has an important impact over secondary laws and over many industries as well. So, you are absolutely right: “are we lawyers ready to be good counselors to our clients?”. My personal thought is that we have to get involved in all those Human Rights laws and with the impact that they have with our country’s laws. That is where the world is going in the benefit of our species.”

“Exciting idea. I’m going to give a typical lawyer answer; it depends on the lawyer. This reflects what …. said above about competence. I would give a trifle more leeway for those that realize they need more research/education on the topic before advising on it.”

“I have a very strong opinion that the role of an in-house counsel or GC sitting on a Board or Exec. committee cannot be, and should not be, limited to pure legal matters, legal compliance and company legal risk, but rather need to play a key role on corporate business sustainability. Likewise, outside counselors should have this in the top of their agendas. Certainly this has never been the trend in Spain or in some EU countries, and involvement of senior executive legal counsel in corporate decisions relating CSR, Human Rights or similar issues that do have a clear impact on corporate ethics credentials and corporate integrity is now being slowly accepted and perceived as a great added value by the Boards. I am personally convinced that in the next years we will see an interesting evolution on this.”

I agree with the all of the comments, but particularly the last one. Here’s ABA Rule 2.1 in it’s entirety- 

Counselor Rule 2.1 Advisor 
“In representing a client, a lawyer shall exercise independent professional judgment and render candid advice. In rendering advice, a lawyer may refer not only to law but to other considerations such as moral, economic, social and political factors, that may be relevant to the client’s situation.” 

When I taught professional responsibility, Rule 2.1 typically led to heated discussions. During my stint as a compliance officer, though I often engaged in “moral” and ethical discussions. As for unintended consequences, as the first commenter points out, there could be many. People’s “morals” may differ, just as companies have different “cultures.” Companies with different cultures operating in countries with different cultures- now that’s a whole other layer of complexity. Lawyers and/or compliance officers may not want to “rock the boat” with “moral” discussions and may be more comfortable sticking to black letter law. When it comes to human rights where some multinationals may be dealing with non-binding “soft law” or operate in countries where the binding law is not enforced, what “moral” yet practical advice should lawyers give to their clients on the ground?

These are topics that I plan to write about and that I enjoyed discussing with students in courses I have taught in the past on corporate governance, compliance and corporate social responsibility. Next week I will attend a conference at Columbia University on teaching business and human rights, and I am sure these issues will be front and center. Clearly, based on discussions on LinkedIn, they already are for many practicing lawyers.

 

I am generating my summer reading list–both business and pleasure. At the top of my list is Other People’s Houses, by Jennifer Taub (Vermont Law School), which will be available from Yale Press on May 27th.   The official website for the book describes the project as:

Drawing on wide-ranging experience as a corporate lawyer, investment firm counsel, and scholar of business law and financial market regulation, Taub chronicles how government officials helped bankers inflate the toxic-mortgage-backed housing bubble, then after the bubble burst ignored the plight of millions of homeowners suddenly facing foreclosure.

Focusing new light on the similarities between the savings and loan debacle of the 1980s and the financial crisis in 2008, Taub reveals that in both cases the same reckless banks, operating under different names, received government bailouts, while the same lax regulators overlooked fraud and abuse. Furthermore, in 2013 the situation is essentially unchanged. The author asserts that the 2008 crisis was not just similar to the S&L scandal, it was a severe relapse of the same underlying disease. And despite modest regulatory reforms, the disease remains uncured: top banks remain too big to manage, too big to regulate, and too big to fail.

The following are a few excepts of the book review just posted on Kirkus:

Taub’s narrative recounts a couple who “innocently” purchased a Dallas-area condo and were deemed “too small to save.” “Meanwhile, all the decision-makers who, in a dizzying series of transactions, fueled the Nobelman mortgage received government support, and very few suffered negative consequences.”  With “5 million homes lost to foreclosure and another 10 million still left underwater,” Taub “blisters the ‘legal enablers’ who, by their acts or omissions, failed to corral predatory practices and wild speculation.”  The review concludes that Other People’s Houses is “[m]eticulously argued and guaranteed to raise the blood pressure of the average American taxpayer.”

That last line is the hook–guaranteed to raise my blood pressure?  Sign me up.  

Leave a comment if you have a book, business or pleasure, that is topping your list.  I would love to start a BLPB summer reading list… 

-Anne Tucker

The New York Times Dealbook Blog reports that France is opposing GE’s attempt to acquire a large portion of Alstom:

“While it is natural that G.E. would be interested in Alstom’s energy business,” France’s economy minister, Arnaud Montebourg, said in a letter to Jeffrey R. Immelt, the G.E. chairman and chief executive, “the government would like to examine with you the means of achieving a balanced partnership, rejecting a pure and simple acquisition, which would lead to Alstom’s disappearing and being broken up.”

The government’s legal means for stopping a deal would appear to be limited, though it could refuse to approve such an investment on national security grounds. The government does not hold Alstom shares, but the company is considered important enough to have received a 2.2 billion euro bailout in 2005. And Mr. Montebourg noted in the letter on Monday that the government was Alstom’s most important customer.

Alstom’s energy units, which make turbines for nuclear, coal and gas power plants, as well as the grid infrastructure to deliver electricity, contribute about three-quarters of the company’s 20 billion euros, or about $30 billion, in annual sales.

Alstom is France’s largest industrial entity, and the government says the deal, as the Times put it, “should be reconfigured on a more equitable footing.”  France is concerned about “maintain[ing] its technological sovereignty.”  

That’s fine, I suppose, but it seems to me this kind of forced restructuring is more likely to result in a weaker Alstom long term, even if it extends the life of the entity as it now appears.  There may be times when foreign ownership of an entity is a real threat to national security, but this appears more likely to be national pride, than national security because the security concerns can be addressed in other ways.  Sometimes foreign ownership is better the alternative, even if it makes a major, traditional company a more international conglomerate.  Right, Chrysler?