ba archive 2009
This is the archive for 2009. See below for earlier years.
We will be meeting on Tuesdays, Wednesdays and Thursdays from 2.00-3.20 pm in Room F109.
The materials for this class will be Klein, Ramseyer and Bainbridge’s Business Associations, Cases and Materials on Agency, Partnerships, and Corporations (7th Ed. 2009) and the accompanying statutes book. I recognize that assigning a statutes book increases the expense, but I tried teaching this class last year relying on the online availability of statutory material and found that the class seemed to focus less on the statutes as a result. I will also provide some supplementary material (via this blog).
We will be studying the rules that regulate business forms: the relationships within business firms and between firms and their creditors and prospective investors. The course occurs during a major financial crisis. Much of the response to the crisis relates to financial firms, rather than to business firms in general, but some have suggested that the public has lost trust in business.
The Arthur W. Page Society and the Business Roundtable collaborated to produce a report this year on The Dynamics of Public Trust in Business- Emerging Opportunities for Leaders. This report states:
The three core dynamics of public trust in business are Mutuality, Balance of Power, and Trust Safeguards.
Mutuality is the state of affairs where multiple parties seek to pursue courses of action deemed to be of shared benefit. Balance of power refers to mechanisms of fairness that prevent one party from imposing its will on or simply overpowering the interests of another. Trust safeguards are legal compliance mechanisms that promote fairness in business relations via punitive damages for bad actors and/or reparative measures for those harmed.
Few, if any, would argue that the individuals in the financial services industry who repackaged huge tranches of subprime mortgages to look like AAA rated loans were acting in the interests of their customers, business partners, or the public (mutuality); or that their actions and the likely consequences were transparent to investors in mortgage-based securities (balance of power); or that these activities were sufficiently regulated by the government (trust safeguards).
While calls for regulatory changes (trust safeguards) are certainly warranted in light of the global economic crisis and the Madoff scandal, this will not bring about the cultural changes necessary to build and manage public trust in business if the sole reaction to the crisis is more regulation. Restoring public trust in business also requires businesses to operate more in the public interest (mutuality) and build symbiotic relationships with stakeholders (balance of power). It requires greater transparency and accountability by business with key enhanced roles here for the Board of Directors, while restoring trust in our financial services firms also demands greater transparency and accountability by those official regulators of these firms.
FIRST CLASS ASSIGNMENT
For the first class on Tuesday August 18 at 2.00 pm, please read pages 1-7 of the casebook (Gorton v Doty) and consider the questions on page 6. Please also read Littleton v McNeely (8th Cir. 2009). Do you think that the argument for recognizing an agency relationship is stronger in one of these cases than in the other?
The class will begin with a study of principles of agency law. Agency principles are important in many different contexts. You will already be familiar with the concept of respondeat superior, and we will see that agents can also bind their principals to liability under contracts. From the perspective of an unpaid creditor, agency principles can be used to reach into deep pockets (if the principal is wealthy or has insurance).
When thinking about the materials on authority bear in mind that officers of corporations (CEOs, CFOs etc) are agents of their corporations. The principles that apply to determine whether they have authority to bind their corporations are general agency principles.
August 18, 2009: ASSIGNMENT FOR CLASSES 2 and 3
The syllabus states that we will read pages 1-38 of the Casebook this week. Please also read the excerpts from the 2nd and 3rd Restatements of Agency in the Statutes Book (pp 1-30).
August 19, 2009: We have been considering issues of form and substance in the context of agency law. The decision of the 11th Circuit last month in CFTC v Gibraltar sheds more light on this issue:
We will examine the evidence in the record with respect to consent and control. As to consent, we note that FxCM went to great pains to disclaim any agency relationship with GMC. The Agreement between the parties contains multiple provisions specifically disclaiming any agency relationship, and many of the documents presented to GMC’s clients, including the Limited Power of Attorney Form, the Notice to Trader Document, and the Trader Agreement, contain similar disclosures. FxCM’s officers testified at trial that they employed counsel with an expertise in CFTC law to draft these documents for the specific purpose of ensuring they did not enter into an agency relationship… While “[e]xpress disclaimers of agency do not necessarily eliminate the existence of an agency relationship,” … the fact that FxCM expended such considerable efforts to avoid an agency designation is palpable evidence that FxCM did not intend to consent or acquiesce to an agency relationship with GMC. Beyond the language of the documents, additional evidence supports a lack of consent or support. As the district court notes, FxCM shared no employees with GMC, split no commissions with GMC, and provided GMC with no meaningful market research or trade information…. GMC did agree to send its customers exclusively to FxCM. Such an exclusivity agreement is often indicative of agency…. Here, however, this exclusivity is just one factor among many, and without more, we cannot find that it exclusively establishes agency. The district court’s conclusion that FxCM did not consent to a relationship with GMC is certainly plausible in light of the record as a whole.
Facts matter.
WEEK 2: August 24-28, 2009
We’ll begin this week on page 29, considering how the changes from the 2nd to the 3rd Restatement would affect the outcome in Watteau v Fenwick. You’ll need to read to page 41 for Tuesday, and I’ll aim to get to page 59 on Wednesday and then page 75 on Thursday.
August 27: As you’ll have noticed, we’re running about 10 pages behind right now.
With respect to Miller v McDonalds, you will want to be aware that the Florida approach to the issue is different from the one reflected in the Casebook. A 1995 decision of the Florida Supreme Court in Mobil v Bransford means that it is harder to argue apparent agency in the context of franchises in Florida than the McDonalds case might imply. In a recent decision in Miller v Thrifty Rent-A-Car (plaintiff was attempting to hold Thrifty liable for acts of a South African licensee) the 3rd DCA said:
The Bransford opinion preserves a modified version of apparent authority called the “common knowledge” rule through which courts are directed to presume that members of the public know that an ordinary franchise relationship is not a representation of agency…Thus, for tort liability to attach, the franchisor must make a representation that goes beyond the basic franchise relationship “by indicating that the franchisor was in substantial control of the business.” … “[V]icarious liability on the grounds of apparent agency may no longer exist as a viable cause of action in Florida. In most cases, plaintiffs will not be able to prove apparent agency since [they] will not be able to establish the required element of the franchisor’s representation of agency status.”… At the same time, the franchisor may still be liable when it “has participated in some substantial way in directing or managing acts of the franchisee,” …a standard similar in substance to the traditional respondeat superior test… Although Bransford does not explain exactly what constitutes a representation that the franchisor is “in substantial control of the business,” the case does make clear that a franchisee’s mere use of the franchisor’s trademarks is insufficient as a matter of law to establish the reliance prong of apparent authority.
Do you think that “members of the public know that an ordinary franchise relationship is not a representation of agency” ?
WEEK 3: August 31- September 4, 2009 We will look at Majestic Realty briefly on Tuesday and then move on to look at the fiduciary duties cases on pages 76-86. Please be sure to read the Restatement provisions on fiduciary duties also and to look at the questions. On Wednesday we will start to look at partnership (as a rough guide please read pp 87-104 for Wednesday and 105-117 for Thursday).
Please read both the Uniform Partnership Act (UPA) and the Revised Uniform Partnership Act (RUPA) in the Statutes book. RUPA was designed to deal with some problems which were not addressed by UPA and to make some changes. Note that the Florida Partnership Statute is based on RUPA (Florida is one of 39 jurisdictions to have adopted a RUPA-based statute). As you read the statutes, try to notice what the changes are. We will go over these in class.
Restatements are produced by the American Law Institute (ALI) whereas Uniform Acts are produced by the National Conference of Commissioners on Uniform State Laws (NCCUSL). Members of NCCUSL are appointed by state governments and the texts NCCUSL develops have an effect on the law when they are enacted by state legislatures. The ALI describes itself as “the leading independent organization in the United States producing scholarly work to clarify, modernize, and otherwise improve the law”. Restatements are often relied on by courts in deciding cases. When we start studying corporate law we will be looking at the RMBCA which is a Model Act produced by the American Bar Association (ABA), a non-governmental group. However, like Uniform Acts, Model Acts impact the law when statutes based on them are enacted by state legislatures.
September 1, 2009: From the Defense Department’s Transition Assistance Program:
Wearing Your Uniform: Do’s and Don’ts
* Always proper: After separation, it is appropriate to wear your uniform during Reserve duty.
* Sometimes proper: Under certain conditions, you may wear your uniform as a civilian. Generally, if you served honorably, you may wear your uniform:
*
o For military weddings, funerals, memorial services, or inaugural ceremonies.
o For patriotic parades on national holidays and for any military parades.
o For ceremonies in which a U.S. active or Reserve unit is taking part.
* Never proper: Never wear the uniform under circumstances that would detract from its prestige or tend to discredit the Armed Forces (such as attending a totalitarian or subversive function or while engaging in a business activity). Also, it is against the law for unauthorized persons to wear a uniform of the U.S. Armed Forces.
WEEK 4: September 7-11, 2009
September 10: Notes on the Capital Problem
September 8: The California Limited Partnership statute at issue in Perretta v Prometheus provided:
(1) The limited partners shall have the right to vote on the following matters, and the actions specified herein may be taken only by the general partners and then only with the affirmative vote of a majority in interest of the limited partners… …(B) The merger of the limited partnership or the sale, exchange, lease, mortgage, pledge, or other transfer of, or the granting of a security interest in, all or a substantial part of the assets of the limited partnership other than in the ordinary course of its business.
September 4: The case of Biller v Toyota (link is to 117 page complaint) raises some issues relevant to this class. Biller was an attorney working for Toyota on discovery issues in rollover litigation, and decided that Toyota was committing discovery abuses in this litigation. In the end Biller resigned from Toyota. The complaint says that he was faced with a choice between resigning and joining an illegal conspiracy to conceal evidence and obstruct justice and, as an attorney he had no choice. He claimed constructive wrongful discharge, and Toyota agreed to pay him $3.7 million in settlement. The severance agreement contained very restrictive confidentiality provisions which Toyota is attempting to enforce. For example, according to the complaint linked to above, when Biller set up a litigation counseling business Toyota claimed he could not even mention he had worked for Toyota. Biller now argues that the confidentiality clause is illegal and contrary to public policy and seeks to restrain Toyota from enforcing it against him. Meanwhile, the severance agreement contained an arbitration clause. The Consumerist blog asks: “Is he a brave whistleblower, or a deeply disgruntled ex-employee who left the company after a mental breakdown?”
I will aim to get to page 117 on Tuesday. Please read to page 139 for Wednesday and 158 for Thursday.
In thinking about the partnership issue with respect to Price Waterhouse you might look at the list of PWC office locations and the PWC Global pages generally. PWC Global has a Code of Conduct. PWC says:
The PricewaterhouseCoopers network includes any entity which is authorised to carry on business under a name which includes all or part of the PricewaterhouseCoopers name, is a direct or indirect affiliate or subsidiary of a PricewaterhouseCoopers entity or is otherwise within (or associated or connected with an entity within) or is a correspondent firm of the worldwide network of PricewaterhouseCoopers firms, where “entities” or an “entity” includes partnerships, firms, corporations or other entities wherever located.
Compare what Deloitte says:
“Deloitte”is the brand under which 165,000 dedicated professionals in independent firms throughout the world collaborate to provide audit, consulting, financial advisory, risk management, and tax services to selected clients. These firms are members of Deloitte Touche Tohmatsu (“DTT”), a Swiss Verein. Each member firm provides services in a particular geographic area and is subject to the laws and professional regulations of the particular country or countries in which it operates. DTT helps coordinate the activities of the member firms but does not itself provide services to clients. DTT and the member firms are separate and distinct legal entities, which cannot obligate the other entities. DTT and each DTT member firm are only liable for their own acts or omissions, not those of any other entity. Each DTT member firm is structured differently in accordance with national laws, regulations, customary practice and other factors, and may secure the provision of professional services in their territories through subsidiaries, affiliates, and/or other entities.
September 3: Pursuing the theme of gender we have been talking about some this week, Simpson Thacher & Bartlett announced that for the first time it will have a woman (in fact two women) on its Executive Committee. Elections to the committee involve secret ballots and each partner has one vote. The firm is an LLP and describes what this means as follows:
Simpson Thacher & Bartlett has registered as a limited liability partnership under the laws of the State of New York. The personal liability of our partners is limited to the extent provided in such laws.
Specifically, under the laws of the State of New York, each partner of a registered limited liability partnership is not personally liable for debts, obligations and liabilities of the firm, except that each partner of a registered limited liability partnership remains personally and fully liable and accountable for any negligent or wrongful act or misconduct committed by him or her or by any person under his or her direct supervision and control while rendering professional services on behalf of the firm or as otherwise provided by the laws governing registered limited liability partnerships.
Registration as a limited liability partnership has not resulted in any change in the firm’s practice, personnel or the conduct of its lawyers. The firm is now known as Simpson Thacher & Bartlett LLP. Additional information is available upon request.
Cravath is an LLP, although apparently not Wachtell.
WEEK 5: September 14-18, 2009
We’re only about 5 pages behind the syllabus plan at this point. We’ll start with Day v Sidley & Austin on Tuesday. As a rough guide, please read pp 144-161 for Tuesday, 161-178 for Wednesday and 179-188 for Thursday.
Please do ask me if you have questions we don’t resolve in class. I’d much rather try to address questions now than at the end of the semester.
September 15: Would s 602 of RUPA require a different approach to the issue in Page v Page from the one taken by the court in that case?
September 16 Please be sure to read RUPA ss 306 and 1001-3 for tomorrow. And, as the llp default rules are a bit different from general partnership default rules and we are going to be looking at corporations and llcs soon, here is the list of questions to think about to help distinguish between different business forms:
What formalities are required for formation?
What periodic formalities are required?
What are the owners’ financial rights?
What are the owners’ management rights?
Do non-owners have management rights?
What are the duties of owners to each other?
What are the duties of managers to owners?
What are the duties of owners to creditors of the firm?
What are the duties of managers to creditors of the firm?
Who has the right to terminate the entity?
What default rules apply on termination?
Here is an UPA/RUPA comparison sheet
September 17:
Florida Statutes s 620.1303
No liability as limited partner for limited partnership obligations.–An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.
Florida Statutes s 620.9003(3):
The Secretary of State may administratively revoke the statement of qualification of a partnership that fails to file an annual report when due or to pay the required filing fee. The Secretary of State shall provide the partnership at least 60 days’ written notice of intent to revoke the statement. The notice is effective 5 days after it is deposited in the United States mail addressed to the partnership at its chief executive office set forth in the last filed statement of qualification or annual report. The notice must specify the annual report that has not been filed, the fee that has not been paid, and the date on or after which the revocation will become effective. The revocation is not effective if the annual report is filed and the fee is paid before the effective date of the revocation.
WEEK 6: September 21-25, 2009
UPDATE September 23: In Access Cardiosystems, Inc. v. Fincke 340 B.R. 127 (Bankr. D. Mass. 2006) the court required a promoter to transfer all of his rights in respect of a pending patent application to the corporation he had formed to work with others to exploit the technology to which the patent application related. The court pointed out that the Massachusetts Supreme Judicial Court had stated in 1977 that “the problems of the common law liability of promoters as fiduciaries have been largely dormant since the enactment of federal securities legislation in the 1930’s.”
On veil piercing please read Laborers’ Pension Fund v. Lay-Com, Inc (7th Cir. 2009) decided September 2 (or you can read the case formatted differently here).
On Tuesday we will finish up llps and discuss control and liability in LPs. I mentioned the risk that the liability shield in llps could be lost if periodic filing/fee payment requirements are not met. The Florida statute has some protections against this risk in Florida Statutes s 620.9003(3):
The Secretary of State may administratively revoke the statement of qualification of a partnership that fails to file an annual report when due or to pay the required filing fee. The Secretary of State shall provide the partnership at least 60 days’ written notice of intent to revoke the statement. The notice is effective 5 days after it is deposited in the United States mail addressed to the partnership at its chief executive office set forth in the last filed statement of qualification or annual report. The notice must specify the annual report that has not been filed, the fee that has not been paid, and the date on or after which the revocation will become effective. The revocation is not effective if the annual report is filed and the fee is paid before the effective date of the revocation.
We discussed disclosure of the fact of limited liability through requirements that limited liability entities are designated by names which reflect the limited liability (llp, llc, lp, inc.). New York has significant (and expensive) disclosure requirements for limited liability entities (llcs, llps and lps) which involve paid newspaper advertisements.
Florida has followed the recent revisions to the Uniform Limited Partnership Act (which are not described in the casebook – the casebook refers to an earlier set of revisions) and abolished the control rule. See Florida Statutes s 620.1303
No liability as limited partner for limited partnership obligations.–An obligation of a limited partnership, whether arising in contract, tort, or otherwise, is not the obligation of a limited partner. A limited partner is not personally liable, directly or indirectly, by way of contribution or otherwise, for an obligation of the limited partnership solely by reason of being a limited partner, even if the limited partner participates in the management and control of the limited partnership.
Next week’s readings from the casebook: Tuesday 179-188 (plus we will look at the RUPA llp provisions and the business forms questionnaire and begin to outline some of the differences between partnerships and corporations; we’ll also go through the questions/examples on pp 182-4) please also read CB pp 189-194; Wednesday 195-213; Thursday pp 214-232 (and read RMBCA (described in your statutes book as Model Business Corporation Act (1984)) ss 7.40-7.46 and Florida Statutes s. 607.07401).
The early corporations material allows us to explore some of the implications of firms being treated as entities separate from their owners. The cases on veil piercing show that courts have been prepared to ignore the separateness of corporations from their owners in some circumstances (veil piercing is not governed by statute). It is important to notice that whereas when we have been studying partnership cases we have often assumed that there was a coincidence of ownership and management rights (though cf e.g. Day v Sidley & Austin) the corporate form assumes that shareholders own the business and directors manage (or supervise the management of) the business. The derivative suit cases illustrate the separation between these two roles: directors have the power to manage the business whereas shareholders typically have quite limited voting rights.
WEEK 7: September 28-October 2, 2009
We will be studying derivative litigation next week (CB pp 214-263; RMBCA ss 7.40-7.46 and Florida Statutes s. 607.07401).). For some interesting comments on derivative suits you might want to look at this D&O Diary post on the Broadcom options backdating derivative suit.
We will focus on:
1. the distinction between direct and derivative claims
2. the demand requirement and demand futility
3. special litigation committees
Notes on the distinction between direct and derivative claims
Last year in Feldman v Cutaia the Delaware Supreme Court stated:
In Tooley v. Donaldson, Lufkin & Jenrette, Inc, this Court set forth the analytical framework for ascertaining whether a cause of action is direct or derivative. In Tooley, we held that this determination can be made by answering two questions: “[W]ho suffered the alleged harm . . . and who would receive the benefit of any recovery or other remedy . . . ? If the corporation alone, rather than the individual stockholder, suffered the alleged harm, the corporation alone is entitled to recover, and the claim in question is derivative. Conversely, if the stockholder suffered harm independent of any injury to the corporation that would entitle him to an individualized recovery, the cause of action is direct.
.. Feldman alleges that the Challenged Stock Options resulted in Telx issuing stock for inadequate consideration, and that his equity holdings in the Company were thereby diluted. A claim for wrongful equity dilution is premised on the theory that the corporation, by issuing additional stock for inadequate consideration, made the complaining stockholder’s investment less valuable. In Gentile v. Rossette, this Court stated that dilution claims are “not normally regarded as direct, because any dilution in value of the corporation’s stock is merely the unavoidable result (from an accounting standpoint) of the reduction in the value of the entire corporate entity, of which each share of equity represents an equal fraction.”In the absence of a controlling stockholder, “such equal ‘injury’ to the [company’s] shares resulting from a corporate overpayment is not viewed as, or equated with, harm to specific shareholders individually.”…
…Where all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders, then the claim is derivative in nature. The mere fact that the alleged harm is ultimately suffered by, or the recovery would ultimately inure to the benefit of, the stockholders does not make a claim direct under Tooley. In order to state a direct claim, the plaintiff must have suffered some individualized harm not suffered by all of the stockholders at large.
Notes on the demand requirement and demand futility
In order to really understand some of what is going on in these cases we need to note that the business judgment rule (referred to in Grimes v Donald at p 228) protects decisions of a Board of Directors from review by the courts unless the person challenging the decision can establish that there was fraud, illegality or conflict of interest, or that there was no rational business purpose for the decision (which would include decisions involving waste) or that the decision was grossly negligent (we will look at the details of the doctrine later).
Also note that in Rales v Blasband (1993) the Supreme Court of Delaware stated:
Where there is no conscious decision by directors to act or refrain from acting, the business judgment rule has no application…. The absence of board action, therefore, makes it impossible to perform the essential inquiry contemplated by Aronson–whether the directors have acted in conformity with the business judgment rule in approving the challenged transaction….
Instead, it is appropriate in these situations to examine whether the board that would be addressing the demand can impartially consider its merits without being influenced by improper considerations. Thus, a court must determine whether or not the particularized factual allegations of a derivative stockholder complaint create a reasonable doubt that, as of the time the complaint is filed, the board of directors could have properly exercised its independent and disinterested business judgment in responding to a demand. If the derivative plaintiff satisfies this burden, then demand will be excused as futile.
September 29, 2009: Millberg Weiss references: New York Times article on the firm’s settlement for $75 million of the kickback charges; NYT Dealbook article on the cost of kickbacks; an article by Michael Dorf. The firm is now Millberg LLP. The firm’s website describes a recent derivative suit in which Millberg and Bernstein Litowitz Berger & Grossmann LLP were designated co lead counsel:
A stockholder derivative lawsuit was filed on April 3, 2009, in the Superior Court of the State of California, County of Los Angeles on behalf of The Ryland Group, Inc….against Ryland’s Board of Directors …and certain of its executive officers. Ryland is engaged in home building and mortgage-lending and financing in the United States. The action alleges breaches of fiduciary duty, waste of corporate assets, unjust enrichment and violations of state and federal laws during the period January 1, 2003 through the present … The action is captioned City of Miami Police Relief Pension Fund v. R. Chad Dreier, et al.
Ryland is a Maryland corporation but the suit is initiated in California. The complaint bases jurisdiction on the corporation’s doing business in California and on the commission of torts in California which have injured persons and property within the state.
As to direct versus derivative claims, consider Medkser v. Feingold (11th Cir 2008) (claims by investors of intentional misrepresentations which fraudulently induced plaintiffs to invest were direct claims even if other investors were similarly injured; claims that defendants used their positions as managers and directors of the entities to abscond with funds were derivative: “The loss of value to these Plaintiffs’ investment in IDT and Brandaid is indistinguishable from the loss to all other investors who were similarly harmed when funds were transferred from the corporate account to personal accounts of the defendants… In terms of the conversion and loss of invested funds and subsequent loss in the value of their investment, these plaintiffs “retain the same opportunity to be made whole by a corporate recovery from the wrongdoer” as do all the other similarly situated investors”). Contractual rights can be pursued as direct claims. Statutory claims can be direct claims. We’ll look at securities claims later. Some claims by employee shareholders may be able to be brought as direct claims under ERISA (see, e.g. US Sugar Corporation Litigation, SD Fl. 2008).
September 30, 2009 Richard Cordray, the Attorney General of Ohio announces he is suing Bank of America on behalf of pension funds (the 155 page class action complaint is here):
Years of abuses on Wall Street not only sent the economy into a tailspin; they did severe damage to countless shareholders. Those shareholders aren’t just wealthy investors but teachers, local and state government workers and many others, as represented by the pension funds that they pay into to support their retirements….
This is one of seven significant securities lawsuits that the Ohio Attorney General’s Office has participated in this year. The office has brought those complaints on behalf of a variety of Ohio state funds-PERS, STRS, the Ohio Police and Fire Pension Fund and the Ohio Bureau of Workers’ Compensation.
As counsel in these lawsuits, Cordray is working to protect the hard-earned retirement benefits and financial futures of tens of millions of investors, retirees, workers and families hailing from all fifty states.
October 1, 2009: A member of the class directed my attention to this news article in the NYT which begins: “Less than a year ago, Bank of America’s chief executive, Kenneth D. Lewis, celebrated his daring takeover of Merrill Lynch as the crowning triumph of a long career. On Wednesday, that conquest proved to be his downfall, as he announced his resignation after months of legal and political scrutiny over the star-crossed merger.”
WEEK 8: October 5-9, 2009
On Tuesday we will begin with the Oracle case. Then we will read the section on role and purposes of corporations (pp 264-280). As you read the cases, think whether you can tell whether they represent direct or derivative suits, and why. I’d also like you to think generally about the issue of corporate social responsibility. Note that the cases reflect issues with respect to corporate powers and also with respect to the directors’ duties. The Florida statute provides:
607.0830 General standards for directors…. (3) In discharging his or her duties, a director may consider such factors as the director deems relevant, including the long-term prospects and interests of the corporation and its shareholders, and the social, economic, legal, or other effects of any action on the employees, suppliers, customers of the corporation or its subsidiaries, the communities and society in which the corporation or its subsidiaries operate, and the economy of the state and the nation.
Think about how corporations present their contributions to society. For example, you might want to look at the Publix website (Publix is incorporated in Florida). You can see the corporations filings with the SEC via this website to get an idea of how useful such documents might be as “tools at hand”. What other corporations’ corporate social responsibility programs are you familiar with? Do you think about such matters in making decisions as a consumer?
We will also begin reading about LLCs this week (perhaps Wednesday but definitely Thursday). Please read up to p. 309.
October 6: As we think about profit maximization, you might want to read Leo Strine’s post at NYT Dealbook yesterday on Why Excessive Risk-Taking Is Not Unexpected. He writes:
It is well known that businesses aggressively seeking profit will tend to push right up against, and too often blow right through, the rules of the game as established by positive law. The more pressure business leaders are under to deliver high returns, the greater the danger that they will violate the law and shift costs to society generally, in the form of externalities. In that circumstance, if the rules of the game themselves are too loosely drawn to protect society adequately, businesses are free to engage in behavior that is socially costly without violating any legal obligations…
During the last 30 years, it is indisputable that: (1) regulatory standards have been greatly relaxed, giving the financial industry free rein to leverage itself to the hilt and to engage in a wide range of speculative and increasingly opaque, complex activities, often without rigorous safeguards; (2) the power of stockholders to influence the composition of corporate boards and the direction of corporate strategy has been markedly enhanced; (3) institutional investors who hold stocks, on average, for a very brief period of time and are highly focused on short-term movements in stock prices have become far more influential and prevalent; and (4) “pay for performance”compensation systems were implemented to align the interests of managers with stockholders by giving managers incentives to pump up corporate profits in a manner that will increase the corporation’s profits and stock price immediately, rather then durably.
… there is now a separation of “ownership from ownership”that creates conflicts of its own that are analogous to those of the paradigmatic, but increasingly outdated, Berle-Means model for separation of ownership from control.
October 7:
Florida statutes s 607.0301:
Purposes and application.–Corporations may be organized under this act for any lawful purpose or purposes, and the provisions of this act extend to all corporations, whether chartered by special acts or general laws, except that special statutes for the regulation and control of types of business and corporations shall control when in conflict herewith.
And a Florida corporation’s powers include the powers:
To make donations for the public welfare or for charitable, scientific, or educational purposes… To make payments or donations or do any other act not inconsistent with law that furthers the business and affairs of the corporation..
Here is a link to Target’s 2009 Corporate Responsibility Report. The report focuses on a range of CSR issues but includes issues relating to legal compliance and compliance with corporate governance standards. It states:
In spring 2009, Ethisphere magazine recognized ourcommitment to ethical conduct in ranking Target among the world’s most ethical companies for the third year in a row. In its audit of more than 10,000 companies across 30 industries, the magazine recognized companies that “have demonstrated an understanding that ethical practices are not only necessary, but can support a stronger and more solid business overall.”Our reputation for legal and ethical behavior enhances our brand.”
Here is a link to an article on fraudulent transfer claims in the the Heller Ehrman bankruptcy.
October 8: Today’s bonus: selected provisions from the Florida LLC statute.
WEEK 9: October 12-16, 2009
We will start the week by finishing up with LLCs. Please read the selected provisions from the Florida LLC statute I handed out in class. Please also read two recent Delaware decisions involving LLCS: R&R Capital, LLC v. Merritt (Del. Ch. 2009) and Zrii v Wellness Acquisition Group (Del. Ch. 2009).
On Thursday I mentioned some comments of Myron Steele, Chief Justice of the Delaware Supreme Court in a recent article (Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies 46 Am. Bus. L J 221 (2009) (if you’re interested you can access the article via UM’s electronic journals). In the article the Chief Justice argues that for the courts to develop default fiduciary duties for LLCs would interfere with the statute’s strong policy in favour of freedom of contract, and that the benefits of default fiduciary duties are slight in relation to the costs they impose. He writes:
The wholly Byzantine approach, whereby parties must define the duties and rights they intend to keep while simultaneously disclaiming other duties that the parties wish to exclude, adds unnecessary chaos into the parties’ contract negotiations, thereby increasing their contracting costs. Instead, assuming a clean slate where the organic agreement crafts the rights and duties owed among and between members and managers gives the parties clear expectations about which duties will apply and clear expectations about the other parties’ conduct.
How does the Florida statute differ from this approach? Do the facts of the 2 recent Delaware decisions above affect your views on which approach is better?
Then please read pages 310-335 in the Casebook. Also please read RMBCA ss 8.30, 8.31, 8.33, and 8.42.
October 15: If you read the obituaries of Bruce Wasserstein who just died you may get a sense of the times in which Smith v Van Gorkom was decided. The Washington Post says: “Bruce Wasserstein, 61, an inventive and forceful banker whose frenetic-paced Wall Street career closely tracked the era of hostile takeovers and the tycoons who spawned them, has died.” The New York Times says: “Many of the deals that symbolized the frenzy that was the 1980s Wall Street – Texaco’s acquisition of Getty Oil, ABC’s sale to Capital Cities – bore their fingerprints.” Tracy Corrigan at the Telegraph writes:
However, not everyone thought he changed the way M&A was conducted for the better. He was indeed known as “Bid ‘em up Bruce”but this nickname was not entirely affectionate. It refers to his legendary ability to persuade his client companies to overpay for their targets, which is not universally viewed as a virtue, even on Wall Street. He was also one of the bankers who developed the leveraged takeover, allowing companies to buy rivals by loading up with debt, most famously in the case of RJR Nabisco, as chronicled in Barbarians at the Gate. Bigger deals, of course, meant bigger fees for the bankers.
WEEK 10: October 19-23, 2009
Please read CB pp 336-374. The Delaware Chancery Court recently addressed the issue of the effect of shareholder approval of a merger in In re John Q. Hammons Hotels Inc. Shareholder Litigation (Chancellor Chandler, Oct. 2009). Plaintiffs challenged the price paid for the publicly held shares, arguing that the controlling stockholder (Hammons) obtained benefits which were not shared with the minority stockholders. A third party (Eilian) negotiated the merger with a special committee which was formed to represent the interests of the minority shareholders. Chancellor Chandler said that the procedural protections for the minority shareholders (special committee with outside counsel’s advice and financial advice from Lehman Brothers) could have produced a situation where the court would have applied the business judgment standard of review but the facts of this case meant that entire fairness was the standard of review. The opinion states:
The Merger Agreement provided that each share of Class A common stock would be converted into the right to receive $24 per share in cash upon consummation of the Merger. The Merger was contingent on approval by a majority of the unaffiliated Class A stockholders, unless that requirement was waived by the special committee. The Merger Agreement included a termination fee of up to $20 million and a “no shop”provision that placed limitations on the Company’s ability to solicit offers from other parties.
Plaintiffs argued that the possibility that Hammons would walk away from the deal meant that the committee had an incentive to act to prevent this and make the deal happen, and that the advisers suffered from conflicts of interest. Chancellor Chandler wrote:
I reject… defendants’ argument that the procedures used in this case warrant application of the business judgment standard of review. Although I have determined that Hammons did not stand “on both sides”of this transaction, it is nonetheless true that Hammons and the minority stockholders were in a sense “competing”for portions of the consideration Eilian was willing to pay to acquire JQH and that Hammons, as a result of his controlling position, could effectively veto any transaction. In such a case it is paramount-indeed, necessary in order to invoke business judgment review-that there be robust procedural protections in place to ensure that the minority stockholders have sufficient bargaining power and the ability to make an informed choice of whether to accept the third-party’s offer for their shares.
Here, the vote of the minority stockholders was not sufficient both because the vote could have been waived by the special committee and because the vote only required approval of a majority of the minority stockholders voting on the matter, rather than a majority of all the minority stockholders. Defendants would no doubt argue that the special committee merely had the ability to waive the vote but chose not to waive it in this case and that the Merger was in fact approved by a majority of all the minority stockholders. Importantly, however, the majority of the minority vote serves as a complement to, and a check on, the special committee. An effective special committee, unlike disaggregate stockholders who face a collective action problem, has bargaining power to extract the highest price available for the minority stockholders. The majority of the minority vote, however, provides the stockholders an important opportunity to approve or disapprove of the work of the special committee and to stop a transaction they believe is not in their best interests. Thus, to provide sufficient protection to the minority stockholders, the majority of the minority vote must be nonwaivable, even by the special committee. Moreover, requiring approval of a majority of all the minority stockholders assures that a majority of the minority stockholders truly support the transaction, and that there is not actually “passive dissent”of a majority of the minority stockholders.
Also, be sure to read DGCL s 144, RMBCA ss 8.60-8.70, Florida Statutes ss 8.32, 8.33. Focus on the differences between the different statutes.
NB. On Friday, Francis GX Pileggi posted a report of recent Delaware decisions on the question of how Delaware courts address the issue of pending proceedings relating to the same matters in courts in different jurisdictions. The details are really beyond the scope of our course, but if you’re interested in the issue you might want to take a look. The post also addresses an issue we have been considering, as to the limits on contracting (and the fraud exception):
As an aside to its analysis, the Court also addressed a important issue that has broad application in many cases. The plaintiff in this Delaware case asserted that a waiver that the defendant in the Delaware case signed would prevent him from raising defenses to a certain agreement. However, the Court would not agree that Delaware law prevents an intentional fraud defense to enforcement of an agreement, relying on Abry Partners V, L.P v. F & W Acq. LLC, 891 A.2d 1032, 1035 (Del Ch. 2006). The Court quoted from Abry, a case involved two sophisticated parties arguing over a stock purchase agreement, and which addressed whether public policy would allow enforcement of a provision that limited liability for misrepresentation of fact: “… when a seller intentionally misrepresents a fact embodied in a contract–that is, when a seller lies–public policy will not permit a contractual provision to limit the remedy of the buyer to a capped damage claim.”
WEEK 11: October 26-30, 2009
We will not have a class on Thursday this week. On Tuesday we’ll begin with the Zahn case, and then finish with the ratification cases (including the notes on the Hammons case which I put up for last week). We have been seeing that corporate law tends to give incentives to corporate officers and directors to ensure that board/committee decisions (and even some shareholder decisions) are not made by people who have an interest in the outcome of those decisions. So in this case the 3rd Circuit asks what a disinterested board would do. But by doing so, the court overlooks the fact that the capital structure of the corporation establishes parameters within which the board must work. What is the point in a corporation issuing redeemable/callable shares if a court can later invalidate the redemption. But notice also that the resolution of the issue comes about by focusing on disclosure. The class A shares were both callable and convertible. If the calling of the shares is always a signal that the class A stockholders should exercise their conversion rights there is no need for a court to intervene to require disclosure. But is it?
After finishing this section we will move on to the good faith materials. Please read to page 403 of the casebook.
WEEK 12: November 2-6, 2009
This week we will start with Stone v Ritter. Then please read Gantler v Stephens (Del. 2009) (we’re reading this case at this point because of the discussion of officer’s duties; apart from this the case comments on shareholder ratification and also on disclosure (which we will be addressing next)).
As to Jones v Harris, the case is pending before the Supreme Court and oral arguments begin on Monday. The case has generated a large number of amicus briefs and blog postings.
I do know that I agreed that we could look at some hypotheticals soon, but I’m going to ask you to read to page 437 of the casebook for this week with a view to starting on some securities regulation material before we do that.
November 5: In this week’s news, Omnicare agreed to pay $98 million to settle with the Justice Department with respect to claims it solicited and/or paid kickbacks (here is the complaint). Compliance systems are part of the settlement. The Justice Department press release states:
As part of the settlement, Omnicare has agreed to enter into an amended and restated corporate integrity agreement with the Office of Inspector General of the Department of Health and Human Services, while IVAX also has agreed to enter into a corporate integrity agreement. Those agreements provide for procedures and reviews to be put in place to avoid and promptly detect conduct similar to that which gave rise to this matter.
In such circumstances, where the corporation is caught up in compliance issues, do you think the BJR rationale should apply to protect the Board with respect to decisions it makes (or allows to be made) about compliance with the terms of the settlement? Does the idea that the BJR protects the ability to the Board to make business decisions involving risk taking apply here? Or should we think about this as an issue that is appropriately regulated by the market – if shareholders think that the settlement is significant they may sell their shares? It doesn’t in fact look as though the share price was affected by the announcement. Today Omnicare published its third quarter results:
Operating cash flow for the quarter ended September 30, 2009 was $168.8 million versus $103.0 million in the comparable prior-year quarter. The 2008 third quarter included one extra weekly payment to the Company’s drug wholesaler of approximately $65 million.
Earnings before interest, income taxes, depreciation and amortization (EBITDA) for the third quarter of 2009, including the special items and accounting changes discussed below, were $159.0 million versus $156.5 million in the third quarter of 2008. Excluding the special items and accounting changes, adjusted EBITDA in the 2009 quarter was $168.4 million versus $178.8 million in the 2008 quarter.
During the third quarter of 2009, the Company repaid $75.0 million of its senior term A loan, had no borrowings outstanding on its revolving credit facility and, at September 30, 2009, had $327.1 million in cash on its balance sheet. The Company’s total debt to total capital at September 30, 2009 was 36.1%, down approximately 390 basis points from 40.0% at September 30, 2008 as restated for the retrospective adoption of the authoritative guidance for accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement).
In the context of these numbers the $98 m doesn’t look like so much. The announcement reflects the period to September 30th so does not include references to the settlement. Omnicare’s announcement of the settlement (it’s worth looking at this announcement for the forward looking statement language) states:
The Settlement Agreement does not include any finding of wrongdoing or any admission of liability by Omnicare. The Company denies the contentions of the federal government and the qui tam relators as set forth in the complaints and further denies any liability related to those contentions. The allegations include claims that the Company purportedly purchased a medical supply business at an above-market price to induce the referral of business; allegedly received improper payments from pharmaceutical manufacturers; and purportedly provided consultant pharmacist services to customers at below cost and fair market value to induce the referral of business. The Company agreed to settle the matters in order to avoid expensive and time-consuming litigation and to focus on its mission of providing high-quality pharmaceutical care for the frail elderly.
Under the terms of the Settlement Agreement, Omnicare has agreed to pay $98 million plus interest (from June 24, 2009, the date of the aforementioned agreement in principle) to the federal government and the participating states and the District of Columbia and related expenses. Consistent with previous disclosure, this amount has been reserved by Omnicare. Omnicare has also voluntarily entered into an Amended and Restated Corporate Integrity Agreement (CIA) with the Department of Health and Human Services. The CIA will be in effect for a period of five years and provides for, among other things, training and oversight to demonstrate Omnicare`s commitment to comply with the applicable laws and regulations governing pharmacies.
The previous disclosure was in the 10Q quarterly report filed at the end of July, which disclosed the $98m amount stating there was no assurance a final settlement would be reached. In late July there was a spike in trading in Omnicare shares associated with a decrease in the share price. But this does not necessarily reflect any sort of reaction to the announcement of the possible settlement.
NOTE ON THE EXAMINATION: I WILL NOT BE PROVIDING COPIES OF THE STATUTES LIST FOR THE EXAMINATION AND YOU MAY NOT TAKE COPIES OF THE LIST INTO THE EXAM WITH YOU.
The list I provided here is to help you focus on some of the statutes in preparing for the exam, and not material you should expect to see on Sunday morning.
If you have questions you want to ask me by email and send the to me by about 5pm Saturday I will try to answer them.
Good luck.
Class Handouts
Syllabus
Littleton v McNeely (8th Cir. 2009)
Notes on the Capital Problem
Laborers’ Pension Fund v. Lay-Com, Inc (7th Cir. 2009)
selected provisions from the Florida LLC statute
R&R Capital, LLC v. Merritt (Del. Ch. 2009)
Zrii v Wellness Acquisition Group (Del. Ch. 2009).
Gantler v Stephens (Del. 2009).
Statutes List for the Examination
Please also note the archive page.
List of Questions for Review
I will post here questions people want to review at the review sessions:
1. BJR and entire fairness
2. Zahn v Transamerica
3. when are directors’ duties owed to shareholders?
4. the test for a security
5. Liability in an LLP
6. Instances when the Business Judgment Rule is displaced
7. Under-capitalization rationale for veil piercing
8. Are we responsible for the time frames discussed in the various statutes
9. Review of Default Rules in UPA/RUPA which ones can be contracted around
10. Whether there is a difference between apparent authority and apparent agency. Miller v. McDonald seemed to suggest there was one.
11. Is Zapata limited to situations in which demand was excused, or do DE courts apply the 2-part test in cases where the demand was made and rejected?
12. Is there an actionable duty of good faith (independent of the duties of loyalty and care) after Stone?
13. enterprise liability; differences between enterprise and veil piercing, reverse veil piercing.
WEEK 14: November 16-20, 2009
On Tuesday we’ll start with the problems on pages 470-1. For the rest of the week please read to page 520 (this includes short sections on short swing profits and indemnification and insurance, but I’m more concerned to cover the insider trading material than the rest). O’Hagan suggests that disclosing an intent to trade to the information source will protect a person from being liable as a misappropriator, but this is not necessarily the case. In SEC v Rocklage (1st Cir. 2006) the Court said that an announcement of an intention to pass information on after it was received did not prevent the acquisition of the information from being deceptive:
On December 31, 2001, Mr. Rocklage learned that one of the company’s key drugs had failed its clinical trial. That afternoon, he phoned Mrs. Rocklage to discuss the trial results and he reached her while she was in a limousine. Before discussing the results with her, Mr. Rocklage made clear his intention that the results be kept confidential. He told her that she was not to react to what he was about to say, and he instructed her not to discuss the results in front of the limousine driver. She agreed. From the time that Mr. Rocklage joined Cubist in 1994, he had routinely communicated material, nonpublic information to his wife, and she had always kept the information confidential. Based on Mrs. Rocklage’s agreement, and based on their prior history of sharing nonpublic information about the company and her keeping that information confidential, Mr. Rocklage had a reasonable expectation that she would not disclose the trial results to anyone. Based on his understanding that she would keep the information confidential, Mr. Rocklage informed his wife that the clinical trial had failed. Before the results were
disclosed to her, Mrs. Rocklage understood her husband’s expectation of confidentiality….Unbeknownst to her husband, Mrs. Rocklage had a preexisting understanding with her brother, defendant Beaver, that she would inform him with “a wink and a nod”if she learned significant negative news about Cubist. At the time that Mrs. Rocklage learned the negative trial results, she knew or had reason to believe that Beaver owned Cubist stock. She also knew or had reason to know her brother would
trade in Cubist securities if she disclosed the nonpublic information to him… After that conversation, and on or about the evening of December 31, 2001, Mrs. Rocklage informed her husband that she planned to signal her brother to sell his stock. Mr. Rocklage urged her not to do so, and he expressed his displeasure at the idea. Nevertheless, sometime before the morning of January 2, 2002, Mrs. Rocklage called Beaver and gave him “a wink and a nod”regarding Cubist…. In light of her disclosure to her husband, Mrs. Rocklage’s mechanism for “distributing”the information to her brother may or may not have been rendered non-deceptive by her stated intention to tip. But because of the way in which Mrs. Rocklage first acquired this information, her overall scheme was still deceptive: it had as part of it at least one deceptive device. Thus as a matter of the facts alleged in the complaint, and taking all facts and inferences in favor of the plaintiff, a § 10(b) claim is stated. The defendants (the wife, her brother, and the brother’s friend) agreed to settle the charges.
The Galleon insider trading enforcement action involves information from employees of issuers, from an analyst at Moody’s, a rating agency, from an employee of a consulting firm that did investor relations work for issuers, from a company in which Galleon invested and to which it appointed a director, and from an executive of one corporation who obtained information about a company it was proposing to acquire during the due diligence process.
Note on themes of the class:
We began the semester with some thoughts about trust (or lack of trust) in business. Do you have different views about the following statement you read at the beginning of the semester after the reading you have done in this class?:
Restoring public trust in business also requires businesses to operate more in the public interest (mutuality) and build symbiotic relationships with stakeholders (balance of power). It requires greater transparency and accountability by business with key enhanced roles here for the Board of Directors, while restoring trust in our financial services firms also demands greater transparency and accountability by those official regulators of these firms.
I have drafted and posted here a Statutes List for the Examination. Please note that it incorporates this document (although we spent more time in class on some of these provisions than on others).
November 18: The SEC announced that it was charging two executives of Tvia Inc (which is currently in chapter 11) for improperly inflating the corporation’s reported financial results:
The SEC alleges that Tvia’s former Vice President of Worldwide Sales, Benjamin Silva III of Fremont, Calif., made side deals with customers and concealed the terms from Tvia’s executives and auditors, which fraudulently caused the company to report millions of dollars in excess revenue…..
The SEC’s complaint, filed in federal district court in San Jose, alleges that Silva’s side agreements illegally inflated Tvia’s revenue by approximately $5 million from September 2005 through June 2006. This caused the company’s quarterly revenue to be consistently overstated, including by as much as 165 percent in one quarter. The SEC further alleges that in order to divert auditors’ attention from delinquent customer payments, Silva fraudulently applied payments from new customers to old receivables.
According to the SEC’s complaint, Silva’s misconduct allowed him to meet his revenue targets at the company. For his efforts in meeting those targets, Silva received an award of options to buy 70,000 shares of Tvia stock. Before the fraud was discovered in early 2007, Silva exercised and sold all of his available Tvia options for a profit of $300,000.
The SEC’s complaint against Silva charges him with violations of the antifraud, reporting, books and records and internal control provisions of the federal securities laws, and seeks a permanent injunction, disgorgement of Silva’s ill-gotten gains plus prejudgment interest, and a financial penalty. The SEC also seeks a court order permanently barring Silva from acting as an officer or director of any public issuer.
In March 2009 Tvia made a Regulation FD disclosure of materials to be presented in connection with proposed sales of the corporation’s assets.
Also note a useful post by Elizabeth Nowicki on Concurring Opinions about the overhearing of information and Bruce Carton’s hypothetical based on twitter at compliance week.
WEEK 13: November 9-13, 2009
We will have review sessions on Tuesday November 24th (this is our last regularly scheduled class session) from 2-3.30pm in F109 and Tuesday December 1st from 2-3.30pm in F108 (note the different room). Attendance is optional. I’m also happy to answer questions by email or in person.
Next week we will continue with the securities regulation material. We’ll cover Escott v BarChris reasonably quickly and look at the hypo on page 435. Please also read Basic v Levinson and the questions and problem for Tuesday (ie up to page 451). Please read to page 471 for Wednesday and 490 for Thursday.
There’s a large enforcement action going on right now involving an alleged insider trading ring around Galleon Management LP and Raj Rajaratnam (the SEC has a nice chart showing the relationships) and the SEC is also taking action against some lawyers.
Here are some past exams:
Fall 2008
Fall 2007
Notes on Fall 2007 exam
Fall 2006
Fall 2005
Spring 2005
Fall 2003
Fall 2002
Spring 2002
(2007 syllabus) (List of statutes for the 2007 exam).
2008 agency archive
2008 partnership/llc archive
2008 corporations/securities archive
2007 agency archive
2007 partnership archive
2007 legal personality archive
2007 corporations archive
2007 securities archive