October 13, 2014
The Marmon Group: A Mini-Berkshire?
Posted by Usha Rodrigues

As I blogged a few days ago, I've been reading Larry Cunningham's Berkshire Beyond Buffett: The Enduring Value of Values.  The thesis is that Berkshire Hathaway's value will endure beyond its founder, Warren Buffett, because of the larger values of the organization.  After making his case he argues (like a good lawyer) that a precedent and analogous case already exists: the Pritzger's Marmon Group.

You know you're a corporate law geek if the mere mention of the Marmon Group made you sit up and take notice.  The Marmon Group plays a role in 2 classic corporate law stories.   Larry mentions one: every student of corporate law should remember the Marmon Group as the bidder in the infamous corporate law case Smith v. Van Gorkom.  If you don't remember the 1985 Delaware Supreme Court case, you didn't have me as a Corporations professor.  Spoiler alert: the directors are found to have breached their fiduciary duty and are thus personally liable for potentially millions of dollars in damages.

What many casebooks omit--but not Klein, Ramseyer, Bainbridge, which I am happily using this term--is that the case settled for $23 million.  $10 million came from D&O insurance, and "almost $11 million came from the Pritzkers." The Pritzkers had no legal duty to pay for the directors' settlement--but they did it because they felt it was the right thing to do.

The Marmon Group's second corporate law claim to fame is as a player in Barbarians at the Gate, thhe father of corporate tick-tocks.  The Marmon Group backed one of the bidders, the First Boston Group.  There's this great scene where in a second round of the auction they need to raise more money.  First Boston makes a 45-minute presentation to a British sugar company, S& W Berisford, on a Saturday night.  First Boston hoped that Berisford could make a decision by Tuesday.  20 minutes later, the company committed $125 million. 

One of First Boston's advisors asks "Do these people have any idea what they're doing?... I mean, they're going to commit $125 million.  Why should they do it."

Handelsman stared at Finn as if it was the silliest question he'd ever heard.  "Jay [Pritzker] asked them to."

The common theme from these two stories? Sophisticated businesspeople regularly act for motivations other than money.  Again and again in Berkshire Beyond Buffett, either Berkshire itself or one of its subsidiaries demonstrates that money is not ultimately what drives them. Most notably, many of Berkshire's current subsidiaries turned down higher offers from other acquirers because they valued the reputation for hands-off management that Berkshire promises.

Here's a concrete example I used with my Corporations class when discussing conflicting interest transactions.  One of Berkshire's subsidiaries was operated by a devout Mormon whose stores were closed on Sundays.  He wanted to expand out of the state, but Buffett was skeptical.  He thought the model could work in highly religious Utah, but not beyond.  Here is Cunningham quoting Buffett:

Bill then insisted on a truly extraordinary proposition: He would personally buy the land and build the store--for about $9 million as it turned out--and would sell it to us at his cost if it proved to be successful.  On the other hand, if sales fell short of his expectations, we could exit the business without paying Bill a cent.

The store was "an instant success", and Berkshire wrote the Bill a $9 million check.  Bill refused to take a penny of interest.  It's a good example of insider transactions that benefit the firm.  It also suggests Larry might actually be right about Bershire's staying power.  I can't help thinking there is a lot of value in offering businessmen like this the combination of liquidity and autonomy Berkshire provides, insulating them from the  demands of Wall Street.

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October 09, 2014
Teaching corporate legal strategy
Posted by David Orozco

For our last guest post, Robert and I would like to share our experiences using the five pathways in the classroom to teach legal strategy to business students. Overall, applying this research in the classroom has been a rewarding experience that has challenged us to improve the framework’s conceptual foundation and demonstrate its relevance in the business world.

When we first experimented using the five pathways in our respective graduate business courses three years ago, we were unsure about how well it might be received. To our relief, the framework was well received from the start. In a recent end of year survey that I give to my MBA students, several of them mentioned that the framework was one of the learning highlights in their required business law course. Various students mentioned that the framework allowed them to view the law in a different way and also helped them appreciate the opportunities and benefits of engaging attorneys to help solve business problems. This is in contrast to the viewpoint, held by some managers, that law is an external, dense and static force that constrains business behavior as opposed to enabling value creation.

Robert and I introduce the framework early in our courses, and then apply it to examples and cases throughout the term. To drive home the framework’s applicability, we created a specific team-based homework assignment (Download HW 1) that asks students to choose a recent news story involving a business law issue that follows the prevention, value or transformation pathway, and to analyze the issue from a law and strategy perspective. The articles that students recently have chosen to analyze include stories about NFL contract negotiations, the FCC’s review of the Comcast Time Warner merger, and Airbnb’s legal fight against the New York Attorney General. These cases provide plenty of material for discussion in class, and serve as potential research topics.

Although the framework has yet to be applied in the context of a law course, we think it could potentially engage law students and attorneys who seek to understand how the law strategically relates to their clients’ business.

Ultimately, we’d like to see the framework applied in diverse learning environments, so we encourage you to make use of the framework and contact us if you have any questions or ideas about how to apply it. If you decide to use the five pathways in your classroom or company, we’d love to hear about your experiences.

We’d like to conclude by extending a warm thanks to The Conglomerate and its readers for allowing us this opportunity to share our ideas related to law and strategy. We’ve greatly enjoyed participating as guest bloggers in such a distinguished collaborative space.

Sincerely,

David and Robert

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October 01, 2014
The Five Pathways in Action
Posted by David Orozco

In this post, which follows our earlier discussion of legal strategy, we’ll offer examples of companies situated within each of the five pathways. As Robert and I mentioned in our article, most companies follow the compliance pathway. Such companies insource legal compliance through their in-house legal department, or they may choose to partner with an external compliance verification service. A firm such as ISN, for example, has built a business handling compliance issues for corporations and their subcontractors. According to the Society of Compliance and Corporate Ethics, compliance is a thriving industry due to the increased legal penalties and regulations that companies face in today’s heightened legal environment.

The avoidance pathway is less frequent, given the high stakes and liability attached to this type of strategy. General Motors may have engaged in avoidance if it misled regulators about its faulty ignition switches. Avoidance issues tend to be costly to deal with, given the loss of trust and enhanced penalties that arise from this behavior.

The more interesting and rare pathways involve prevention, value, and transformation. An interesting and controversial prevention legal strategy involves trademark policing, which, in its most egregious form, devolves into the unethical and legally dubious practice of trademark bullying. For example, Chik-fil-A employs an aggressive strategy that targets large and small companies alike and uses the threat of trademark litigation to prevent anyone from encroaching upon its trademarked brands and brand equity. Setting aside the overreaching and legally dubious aspects of this approach, some companies legitimately use a preventive legal strategy that involves cease and desist letters, litigation, and U.S. Patent and Trademark Office administrative oppositions to protect the value of their brands and advertising. The Chik-fil-A case serves as a useful reminder, however, that aggressive legal strategies may push the boundaries of ethical behavior, sound legal argument, and public opinion. 

Two recent examples illustrate how employing a legal strategy in the value pathway can generate positive and tangible financial returns. The first instance involves hedge funds investing in a corporate acquisition target and then filing suit in Delaware to challenge the valuation and seek an appraisal from the court. This legal strategy is referred to as appraisal arbitrage. Many of these cases either settle or result in substantially higher prices for the party seeking the appraisal.

Another value strategy that has been in the headlines recently involves tax inversions. Burger King’s recent decision to acquire Canada’s Tim Horton’s will yield business synergies, but it also exploits a legal maneuver allowed under current tax law permitting a company acquiring a foreign entity to reincorporate in the foreign jurisdiction. By reincorporating in Canada, Burger King will effectively lower its tax rate from 35% to 15%.

The last and rarest of legal strategies is transformation. This occurs when the top executives in a corporation integrate law as a core aspect of the firm’s business model to achieve sustainable competitive advantage. Few companies are able to achieve this strategic pathway, and it’s certainly not for everyone. One company that notoriously used law to achieve abnormally large market share and margins in the ticket processing industry was Ticketmaster. The ticket service provider used venue ticket licensing contracts that included several key provisions such as long term renewable exclusivity terms (up to 5 years), and more infamously, fee sharing provisions. Ticketmaster’s business model was, essentially, to take the bad rap for charging exorbitant convenience fees and sharing those fees with the venue, thus contractually locking them into a highly profitable and exclusive business system. It didn’t hurt that Ticketmaster’s pioneering CEO Fred Rosen was a Wall Street attorney turned impresario.

Another company that is showing signs of attempting to pursue a transformative legal strategy is Tesla Motors. Tesla’s recent announcement to offer open licensing terms for its battery and charging station patents illustrates a pioneering mentality that seeks to build a business ecosystem with other auto manufacturers. By doing so, Tesla has made a major legal bet that giving up patent exclusivity rights in the short term will yield long-term competitive advantage by helping to diffuse electric battery and recharging technology. The other legal strategy Tesla has pursued relates to its pioneering distribution model of direct sales to the consumer, bypassing the traditional dealership model established for conventional automobiles. To achieve this direct-to-customer model, Tesla has engaged state regulators to achieve exemptions from state dealership franchise laws. Tesla is clearly strategizing and innovating along many fronts that involve business, technology and law. It remains to be seen, however, whether these legal strategies will offer Tesla a long-term sustainable competitive advantage.

In our next and last post, we’ll discuss our experience teaching the five pathways of legal strategy to business students and how it has been a valuable resource in the classroom. 

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September 09, 2014
CFP: AALS Business Associations Section
Posted by Usha Rodrigues
The Future of the Corporate Board
AALS Annual Meeting, January 4, 2015
 
The AALS Section on Business Associations is pleased to announce that it is sponsoring a Call for Papers for its program on Sunday, January 4th at the AALS 2015 Annual Meeting in Washington, DC. 
The topic of the program and call for papers is “The Future of the Corporate Board.” 
How will boards adapt to recent changes and challenges in the business, legal, and social environment in which corporations operate?  The recent global financial crisis and the continuing need for many corporations to compete internationally mean that today’s boards face economic pressures that their predecessors did not.  This pressure is heightened by the rise of activist investors, many of whom aggressively push for changes to corporate management and governance. On the legal front, new regulations, such as Dodd-Frank, impose heightened compliance and other burdens on many companies and boards.  And on the social front, pressures for socially responsible corporate behavior and greater racial and gender diversity on boards continues.  Our program seeks to examine the ways in which boards have, and will in the future, respond to these challenges.    
Form and length of submission
Eligible law faculty are invited to submit manuscripts or abstracts that address any of the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the Annual Meeting.  Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.  
The initial review of the papers will be blind.  Accordingly the author should submit a cover letter with the paper.  However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school.  The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes. 
Deadline and submission method
To be considered, papers must be submitted electronically to Kim Krawiec at krawiec@law.duke.edu.  The deadline for submission is SEPTEMBER 122014
Papers will be selected after review by members of the section’s Executive Committee.  The authors of the selected papers will be notified by September 28, 2014. 
The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.
Eligibility
Full-time faculty members of AALS member law schools are eligible to submit papers.  The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.

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September 03, 2014
Autonomy At Berkshire Hathaway, A Guest Post From Larry Cunningham
Posted by David Zaring

Larry's book on Berkshire Beyond Buffett is due in a month, and we'll be reading it on the Glom. Here's a taste, prepared by Larry, and if you follow the link, you can see a full chapter of the book.

Berkshire corporate policy strikes a balance between autonomy and authority. Buffett issues written instructions every two years that reflect the balance. The missive states the mandates Berkshire places on subsidiary CEOs: (1) guard Berkshire’s reputation; (2) report bad news early; (3) confer about post-retirement benefit changes and large capital expenditures (including acquisitions, which are encouraged); (4) adopt a fifty-year time horizon; (5) refer any opportunities for a Berkshire acquisition to Omaha; and (6) submit written successor recommendations. Otherwise, Berkshire stresses that managers were chosen because of their excellence and are urged to act on that excellence.   

Berkshire defers as much as possible to subsidiary chief executives on operational matters with scarcely any central supervision. All quotidian decisions would qualify: GEICO’s advertising budget and underwriting standards; loan terms at Clayton Homes and environmental quality of Benjamin Moore paints; the product mix and pricing at Johns Manville, the furniture stores and jewelry shops. The same applies to decisions about hiring, merchandising, inventory, and receivables management, whether Acme Brick, Garan, or The Pampered Chef. Berkshire’s deference extends to subsidiary decisions on succession to senior positions, including chief executive officer, as seen in such cases as Dairy Queen and Justin Brands.

Munger has said Berkshire’s oversight is just short of abdication. In a wild example, Lou Vincenti, the chief executive at Berkshire’s Wesco Financial subsidiary since its acquisition in 1973, ran the company for several years while suffering from Alzheimer’s disease—without Buffett or Munger aware of the condition. “We loved him so much,” Munger said, “that even after we found out, we kept him in his job until the week that he went off to the Alzheimer’s home. He liked coming in, and he wasn’t doing us any harm.” The two lightened a grim situation, quipping that they wished to have more subsidiaries so earnest and reputable that they could be managed by people with such debilitating medical conditions.   

There are obvious exceptions to Berkshire’s tenet of autonomy. Large capital expenditures—or the chance of that—lead reinsurance executives to run outsize policies and risks by headquarters. Berkshire intervenes in extraordinary circumstances, for example, the costly deterioration in underwriting standards at Gen Re and threatened repudiation of a Berkshire commitment to distributors at Benjamin Moore. Mandatory or not, Berkshire was involved in R. C. Willey’s expansion outside of Utah and rightly asserts itself in costly capital allocation decisions like those concerning purchasing aviation simulators at FlightSafety or increasing the size of the core fleet at NetJets.

Ironically, gains from Berkshire’s hands-off management are highlighted by an occasion when Buffett made an exception. Buffett persuaded GEICO managers to launch a credit card business for its policyholders. Buffett hatched the idea after puzzling for years to imagine an additional product to offer its millions of loyal car insurance customers. GEICO’s management warned Buffett against the move, expressing concern that the likely result would be to get a high volume of business from its least creditworthy customers and little from its most reliable ones. By 2009, GEICO had lost more than $6 million in the credit card business and took another $44 million hit when it sold the portfolio of receivables at a discount to face value. The costly venture would not have been pursued had Berkshire stuck to its autonomy principle.

The more important—and more difficult—question is the price of autonomy.  Buffett has explained Berkshire’s preference for autonomy and assessment of the related costs: 

We tend to let our many subsidiaries operate on their own, without our supervising and monitoring them to any degree. That means we are sometimes late in spotting management problems and that [disagreeable] operating and capital decisions are occasionally made. . . . Most of our managers, however, use the independence we grant them magnificently, rewarding our confidence by maintaining an owner-oriented attitude that is invaluable and too seldom found in huge organizations. We would rather suffer the visible costs of a few bad decisions than incur the many invisible costs that come from decisions made too slowly—or not at all—because of a stifling bureaucracy.

Berkshire’s approach is so unusual that the occasional crises that result provoke public debate about which is better in corporate culture: Berkshire’s model of autonomy-and-trust or the more common approach of command-and-control. Few episodes have been more wrenching and instructive for Berkshire culture than when David L. Sokol, an esteemed senior executive with his hand in many Berkshire subsidiaries, was suspected of insider trading in an acquisition candidate’s stock.

(The above is an excerpt from Chapter 8, Autonomy, from Lawrence Cunningham’s upcoming book, Berkshire Beyond Buffett: The Enduring Value of Values; the full text of the chapter, which considers the case for Berkshire’s distinctive trust-based model of corporate governance, can be downloaded free here.)

[To read the full chapter, which can be downloaded for free, click here and hit download]

 

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August 09, 2014
Disruptive Legal Technologies: Benefit Corporations and the Crowdfunding of Firms
Posted by Eric Orts

Two recent developments in the law and practice of business include:  (1) the advent of benefit corporations (and kindred organizational forms) and (2) the application of crowdfunding practices to capital-raising for start-ups.  My thesis here is that these two innovations will become disruptive legal technologies.  In other words, benefit corporations and capital crowdfunding will change the landscape of business organization substantially.

A disruptive technology is one that changes the foundational context of business.  Think of the internet and the rise of Amazon, Google, etc.   Or consider the invention of laptops and the rise of Microsoft and the fall of the old IBM.  Automobiles displace horses, and telephones make the telegraph obsolete.  The Harvard economist Joseph Schumpeter coined a phrase for the phenomenon:  “creative destruction.”

Technologies can be further divided into two types:  physical technologies (e.g., new scientific inventions or mechanical innovations) and social technologies (such as law and accounting).   See Business Persons, p. 1 (citing Richard R. Nelson, Technology, Institutions, and Economic Growth (2005), pp. 153–65, 195–209).  The legal innovations of benefit corporations and capital crowdfunding count as major changes in social technologies.  (Perhaps the biggest legal technological invention remains the corporation itself.)

1.  Benefit corporations began as a nonprofit idea, hatched in my hometown of Philadelphia (actually Berwyn, Pennsylvania, but I’ll claim it as close enough).  A nonprofit organization called B Lab began to offer an independent brand to business firms (somewhat confusingly not limited to corporations) that agree to adopt a “social purpose” as well as the usual self-seeking goal of profit-making.  In addition, a “Certified B Corporation” must meet a transparency requirement of regular reporting on its “social” as well as financial progress.  Other similar efforts include the advent of “low-profit” limited liability companies or L3Cs, which attempt to combine nonprofit/social and profit objectives.  In my theory of business, I label these kind of firms “hybrid social enterprises.”  Business Persons, pp. 206-15.

A significant change occurred in the last few years with the passage of legislation that gave teeth to the benefit corporation idea.  Previously, the nonprofit label for a B Corp required a firm to declare adherence to a corporate constituency statute or to adopt a similar constituency by-law or other governing provision which signaled that a firm’s sense of its business objective extended beyond shareholders or other equity-owners alone.  (One of my first academic articles addressed the topic at an earlier stage.  See “Beyond Shareholders:  Interpreting Corporate Constituency Statutes.”  I also gave a recent video interview on the topic here.)  Beginning in 2010, a number of U.S. states passed formal statutes authorizing benefit corporations.  One recent count finds that twenty-seven states have now passed similar statutes.  California has allowed for an option of all corporations to “opt in” to a “flexible purpose corporation” statute which combines features of benefit corporations and constituency statutes.  Most notably, Delaware – the center of gravity of U.S. incorporations – adopted a benefit corporation statute in the summer of 2013. According to Alicia Plerhoples, fifty-five corporations opted in to the Delaware benefit corporation form within six months.  Better known companies that have chosen to operate as benefit corporations include Method Products in Delaware and Patagonia in California.

2. Crowdfunding firms.  Crowdfunding along the lines of Kickstarter and Indiegogo campaigns for the creation of new products have become commonplace.  And the amounts of capital raised have sometimes been eye-popping.  An article in Forbes relates the recent case of a robotics company raising $1.4 million in three weeks for a new project.  Nonprofit funding for the microfinance of small business ventures in developing countries seems also to be successful.  Kiva is probably the best known example.  (Disclosure:  my family has been an investor in various Kiva projects, and I’ve been surprised and encouraged by the fact that no loans have so far defaulted!)

However, a truly disruptive change in the capital funding of enterprises – perhaps including hybrid social enterprises – may be signaled by the Jumpstart Our Business Start-ups (JOBS) Act passed in 2012. Although it is limited at the moment in terms of the range of investors that may be tapped for crowdfunding (including a $1 million capital limit and sophisticated/wealthy investors requirement), a successful initial run may result in amendments that may begin to change the face of capital fundraising for firms.  Judging from some recent books at least, crowdfunding for new ventures seems to have arrived.  See Kevin Lawton and Dan Marom’s The Crowdfunding Revolution (2012) and Gary Spirer’s Crowdfunding:  The Next Big Thing (2013).

What if easier capital crowdfunding combined with benefit corporation structures?  Is it possible to imagine the construction of new securities markets that would raise capital for benefit corporations -- outside of traditional Wall Street markets where the norm of “shareholder value maximization” rules?  There are some reasons for doubt:  securities regulations change slowly (with the financial status quo more than willing to lobby against disruptive changes) and hopes for “do-good” business models may run into trouble if consumer markets don’t support them strongly.  But it’s at least possible to imagine a different world of business emerging with the energy and commitment of a generation of entrepreneurs who might care about more in their lives than making themselves rich.  Benefit corporations fueled by capital crowdfunding might lead a revolution:  or, less provocatively, may at least challenge traditional business models that for too long have assumed a narrow economic model of profit-maximizing self-interest.  James Surowiecki, in his recent column in The New Yorker, captures a more modest possibility:  “The rise of B corps is a reminder that the idea that corporations should be only lean, mean, profit-maximizing machines isn’t dictated by the inherent nature of capitalism, let alone by human nature.  As individuals, we try to make our work not just profitable but also meaningful. It may be time for more companies to do the same.”

So a combination of hybrid social enterprises and capital crowdfunding doesn’t need to displace all of the traditional modes of doing business to change the world.  If a significant number of entrepreneurs, employees, investors, and customers lock-in to these new social technologies, then they will indeed become “disruptive.”

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August 07, 2014
New Directions in Corporate Disclosure: Politics, Environment, and Religion
Posted by Eric Orts

Corporate disclosure, especially in securities regulation, has been a standard regulatory strategy since the New Deal. Brandeisian “sunlight” has been endorsed widely as a cure for nefarious inside dealings. An impressive apparatus of regulatory disclosure has emerged, including annual and quarterly reports enshrined in Forms 10K and 10Q. Other less comprehensive disclosures are also required: for initial public offerings and various debt issuances, as well as for unexpected events that require an update of available information in the market (Form 8K).

For the most part, corporate disclosure has focused on financial information: for the good and sufficient reason that it is designed to protect investors – especially investors who are relatively small players in large public trading markets. Some doubts have been raised about the effectiveness of this kind of disclosure and, indeed, the effectiveness of mandatory disclosure in general. A recent book by Omri Ben-Shahar and Carl Scheider, More Than You Wanted to Know: The Failure of Mandated Disclosure, advances a wide-ranging attack on all mandatory disclosure. (I think that their attack goes too far: I’ll be coming out with a short review of the book for Penn Law’s RegBlog called “Defending Disclosure”).   Assuming, though, that much financial disclosure makes sense, what about expanding it to include other activities of business firms?

Consider three types of nonfinancial information that might usefully be disclosed: information about a business firm’s activities with respect to politics, the natural environment, and religion.

1. Politics. One good candidate for enhanced corporate disclosure concerns business activities in politics. Lobbying laws require various disclosures, and various campaign finance laws do too. It is possible to obscure actual political spending through the complexity of corporate organization. (For a nice graphic of the Koch brothers’ labyrinth assembled by the Center for Responsive Politics, see here.) Good reporters can ferret out this information – but they need to get access to it in the first place. My colleague Bill Laufer has been an academic leader in an effort to encourage public corporations to disclose political spending voluntarily, with Wharton’s Zicklin Center for Business Ethics Research teaming up with the nonpartisan Center for Political Accountability to rank companies with respect to their transparency about corporate political spending. The rankings have been done for three years now, and there are indications of increased business participation.  Recently, even this voluntary effort has been attacked by business groups such as the U.S. Chamber of Commerce for being “anti-business.” See letter from U.S. Chamber of Commerce quoted here.  Jonathan Macey of Yale Law School has also objected to the rankings in an article in the Wall Street Journal, arguing that the purpose of political disclosure is somehow part of “a continuing war against corporate America.” These objections, however, seem overblown and misplaced. What is so wrong about asking for disclosure about the political spending of business firms? One can Google individuals to see their record of supporting Presidential and Congressional candidates via the Federal Election Commission’s website, yet large businesses should be exempt? Political spending by corporations and other business should be disclosed in virtue of democratic ideals of transparency in the political process. Media, non-profit groups, political parties, and other citizens may then use the resulting information in political debates and election campaigns. Also, it seems reasonable for shareholders to expect to have access to this kind of information.

In Business Persons, I’ve gone further to argue (in chapter 7) that both majority and dissenting opinions in Citizens United appear to support mandatory disclosure as a good compromise strategy for regulation. One can still debate the merits of closer control of corporate spending in politics (and I believe that though business corporations indeed have “rights” to political speech these rights do not necessarily extend to unlimited spending directed toward political campaigns). It seems to me hard to dispute that principles of political democracy – and the transparency of the process – support a law of mandatory disclosure of corporate spending in politics.

2. Natural environment. Increasingly, many large companies are also issuing voluntary reports regarding their environmental performance (and often adding in other “social impact” elements). Annual reports issued under the International Standards Organization (the ISO 14000 series), the Global Reporting Initiative, and the Carbon Disclosure Project are examples. The Environmental Protection Agency (EPA) has also established a mandatory program for greenhouse gas emissions reporting, which is tailored to different industrial sectors. One can argue about whether these kinds of disclosures are sufficiently useful to justify their expense, but my own view is that they help to encourage business firms to take environmental concerns seriously. Many firms use this reporting to enhance their internal efficiency (often leading to financial bottom-line gains). As important, however, is the engagement of firms to consider environmental issues – and encouraging them to act as “part of the solution” rather than simply as a generating part of the problem.

One caveat that is relevant to all nonfinancial disclosure regimes:   The scope of firms required to disclose should be considered.  I do not believe that the case is convincing that only public reporting companies under the securities laws should be included.  (For one influential argument to the contrary, see Cynthia A. Williams, “The Securities and Exchange Commission and Corporate Social Transparency,”  112 Harvard Law Review 1197 (1999)).  Instead, it makes to sense for different agencies appropriate to the particular issue at hand to regulate:  the Federal Election Commission for political disclosures and the EPA for environmental disclosures.

3. Religion? In the wake of the Hobby Lobby case, some have called for greater disclosure about a firm’s values on this score both with respect to employment and investors. See, e.g., Joan Heminway’s piece here. Stephen Bainbridge has also called attention to this question here.  Probably it makes sense to consider disclosure as a partial solution, though the idea of mandatory government disclosure of religious characteristics makes me nervous on “separation of church and state” grounds. It might be better to “wait” (as Frank Partnoy advises us often to do in his recent book) and see how the Hobby Lobby line of cases develops. My guess is that some tensions will become apparent that may result in keeping Hobby Lobby limited to the context of close and usually small corporations (though Hobby Lobby itself is an exception, having more than 10,000 employees).
 
But a rule of disclosure might not be the best approach with respect to religion and firms. Better in this context perhaps to bite the bullet and ascertain when for various legal purposes a business firm “crosses the line” from a private organization (with rights of self-organization and self-determination with respect to many internal business practices) to a public-facing organization (with duties to treat public customers, employees, and business partners in a non-discriminatory manner). These issues are not easy. As I suggest in Business Persons (chapter 3), a central problem in business theory concerns “the public/private distinction” which I conceive as involving “two faces of the business enterprise.” Here, the religious preferences of private owners require balancing with the public role undertaken when holding out one’s shingle in public markets. Drawing legal lines isn’t always easy, but often it’s necessary.  And disclosures alone will not always be sufficient.

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August 05, 2014
The Legal and Social Ontology of the Firm
Posted by Eric Orts

Thanks to Gordon Smith and my Wharton colleague David Zaring for inviting me as a guest blogger on The Conglomerate.  I am a new entrant in the blogosphere here, and I appreciate this invitation very much.

What follows is a written version of remarks that I presented at the Society for Business Ethics in Philadelphia on August 3 at a panel on “Corporate Personhood – For or Against or Whether It Even Matters?” organized by Kendy Hess of Holy Cross.  (Thanks, Kendy!)  The panel also included excellent presentations on the topic by two of my Wharton colleagues, Gwen Gordon and Amy Sepinwall, as well as Kendy.  A longer version will be presented in a conference in London in September, and a written version will also be included in a book that I'm co-editing with Craig Smith called The Moral Responsibility of Firms (forthcoming in Oxford University Press).  It will also inform chapter 1 of a book that is underway (and still forthcoming) currently called Rethinking the Firm: An Interdisciplinary Interpretation (also under contract with OUP). 

In these posts, I've been kindly invited to revisit some themes of my new book on Business Persons:  A Legal Theory of the Firm.  So I hope that I'll generate some interest in the book:  or perhaps make some of the ideas there more accessible in "blog-sized" pieces.  The following contribution is a first entry.

***

Let me be provocative first and say affirmatively: Corporations are legal persons and it matters. The thesis is qualified, however, by the fact that to say that corporations are persons is a conclusion that only then begins arguments about what it actually means in practice with respect to particular issues.  The fact that corporations are “persons” means only that we provide them – through law – with certain capacities and powers, and certain rights and obligations.  It remains to be decided what the nature and limits of these capacities and powers, and rights and obligations, may and will be.

Three main arguments support my claim.

1. Firms exist.  Some economists (and lawyers following them) have argued that firms do not really exist.  They are mere fictions, they say, and any serious epistemological analysis must look past the “legal fiction” of the firm – or the “corporation” in the form we are discussing here – to the actual human beings who are involved.  Although this methodological reduction may be useful for some kinds of analysis (economic modeling, etc.), it is wrong from a realistic legal and social perspective.  Firms exist because the law has evolved to say that they exist.  They are constructions of human relationships that are socially sanctioned and legally recognized.  They are “fictions” in the sense that they are created through the artificial mechanisms of law and government.  They are also “real” because people acting under law and in society believe in them and make them real.  Firms are therefore what I’ve called “real fictions”:  both nominalism and realism are right, but only when they are combined together into a nominalist realism.  See Business Persons, ch. 1.  Philosophers such as Margaret Gilbert, John Searle, and Philip Pettit support this view.  People acting in social groups form collective realities, which are reinforced and articulated by organizational law.  Business firms – including for-profit corporations – are in this sense social constructions.  Corporations are like money and nation-states.  Exxon-Mobil and Patagonia are as real as China and the United States.  They exist because we believe in them.  We act as if they exist – and so as social constructions they exist.  They have power and authority.

2. Firms are persons.  The method of legal recognition is to bestow “personality”:  The law recognizes an individual human being as a “person” who has “standing” to bring or defend a claim in court.  A person has rights: personal rights against mistreatment and rights against violations of one’s dignity and physical integrity.  The law matters here.  Consider the situation of a slave (historically not so very long ago in the United States) or an illegal immigrant (such as children from other countries crossing the southern border of the United States today).  The law does not recognize them fully as “persons” – or at least not to the same level of available rights and obligations as “citizens.”  Even children of citizens do not have a complete set of rights:  they cannot drive cars or enter contracts legally until reaching an age allowing legal capacity.  The law makes other distinctions:  “person” is a legally denominated concept.  It is extended (or not) for various reasons of philosophy and social policy.  Is a fetus a “person”?  What rights does a “terrorist” have?  Even: is a dog, such as my dog Butterbean, a legal person for certain purposes?  I cannot, for example, torture him for fun (assuming that I’m that kind of person, which I’m not).  In this sense, then, a dog too is a person:  he has some minimal rights recognized under law (though he'll need someone else to speak for him).

An analogous argument applies to firms.  They are “persons” because the law recognizes them as such and as having certain rights and obligations:  standing in court, holding of property, a party to contracts, an organizational principal, a target for tort liability, and a potential plaintiff to insist on its “rights,” whatever they may be.  The exact nature of these various rights of firms remains to be decided:  The controversial recent cases of Citizens United and Hobby Lobby extend claims of political and religious freedom to include corporations as persons.  Are these cases correctly decided?  The answer does not, I believe, turn on whether they are considered “persons” or not.  Firms are uncontroversially legal persons for many purposes.  The question is whether or not we should extend certain kind of rights to firms as “persons” derivatively – representing the people who act collectively through them.  Note that the answer can be qualified.  We may say: “Yes, corporations hold property and should have standing to object on constitutional grounds if a government attempts to expropriate the property without compensation.”  But we may also say: “No, corporations usually represent diverse groups of people regarding religion, so in these cases it is not correct to say that corporations should have religious rights" (contrary, of course, to the holding of Hobby Lobby).  I make this latter argument in a previous blog for The Conglomerate on Hobby Lobby here.

3. Legal personality matters, but it is not dispositive. Firms exist, firms have legal personality, and it matters.  The fact that a corporation is a person does not settle the argument for or against an assertion of rights or obligations.  This is a mistake in argumentation, in my view, that opinions on both sides of the divided Justices of the Citizens United and Hobby Lobby cases make.  In these kinds of cases, the Court should ask – as legislatures and citizens should as well – what is the purpose of a firm and of a corporation given the question that we're asking?  Arguably, as Justice Alito argues in Hobby Lobby, business firms are not just profit maximizers (as some students are taught in some business school classes).  They are moral creatures because the people who compose them are moral creatures (or, at least they have the potential to be moral -- nobody's perfect!)  But we then have to dig deeper and ask “who” is involved in the firm.  Why are we asking the question: “persons” for what purposes?  Perhaps firms should have political rights, but perhaps also they should be constrained in this respect for good reasons of political theory and modern democracy.  Perhaps some kinds of firms should have religious rights, but the scope of these potential rights should be constrained.  Rights of employees may be equal to those of owners and managers in this context.  There are other limits in principle that need to be drawn here too:  but my main point here is that doing so assumes that “legal personality” matters.  It is then a question of filling in the institutional portrait:  who is this person?  What kind of person?  And how does the nature of this person relate to the considerations in play on a specific issue?

4. Conclusion.  My argument is designed mostly to set up rather than to answer the hard questions, so I hope that my position will not be too controversial.  Here again are my main propositions.

a.  Firms exist. For our purposes here, corporations are a kind of firm.  (The difference between for-profit and profit corporations raises another set of issues.)

b.  Firms, including corporations, have legal personality.  The question is not whether firms are persons, but what the fact that they are persons means with respect to particular further questions regarding the rights or obligations that we should extend to them as persons.

c.  Legal personality matters, but is not dispositive.  To argue about whether firms are persons or not persons does not advance the ball very much.  The popular debate conflates the meanings of "persons" and "people."  Firms are persons; begin there.  And then engage the substantive policy issues as hand.  Move the discussion forward, while recognizing the truth of the “real fictions” of firms as legal persons.

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July 18, 2014
The Continuing Saga of Hobby Lobby and Disclosure
Posted by joanheminway

Many thanks to The Glom for allowing me to chime in here.  As you might be able to tell from the number of comments I have left for others (too many, I fear), I have been fascinated by the range and depth of the posts so far.  And thanks to co-bloggers Brett and Alan for mentions of my earlier Hobby Lobby post on disclosure issues over at the Business Law Prof Blog in their earlier posts here.  FYI, I posted there again on this subject earlier this week.  But (as Steve Bainbridge anticipated) I am not done yet . . . .

Since that post earlier this week, The Wall Street Journal published an article noting that the Obama administration clarified an employer's responsibility, under the Employee Retirement Income Security Act of 1974, to notify employees if they eliminate or change benefits.  The Washington Post and others also carried the story; Jayne Barnard also mentions this in her post earlier today.  The clarification comes in the form of an FAQ (which was not easy to find on the U.S. Department of Labor website).  Senator Richard Durbin (D-IL), in a news release praising this executive branch action, notified the public that he was introducing legislation that apparently would compel for-profit employers to make similar disclosures to job applicants.  A similar kind of bill has been introduced in the New York State legislature.  So, it seems, employment-related disclosures are being addressed or discussed in a number of different venues.  We'll have to see where all this ends up.

But what of the disclosure issues for shareholders and other investors?  Is the materiality filter in federal securities law's mandatory disclosure (including gap-filling) and anti-fraud rules appropriately sensitive to the issues for these corporate constituents?  And what about entities whose disclosure activities are not regulated under federal securities laws?  What protections might state securities laws provide?  Is fiduciary duty law enough to compel disclosures to shareholders or other investors in the absence of applicable disclosure rules under securities laws?  Of course, when it comes to shareholders, I am worried here about the minority (non-controlling) holders (since the controlling shareholders are those protected by the Court's decision in Hobby Lobby).  I see that other Glom symposium bloggers (here and here) have bemoaned the fact that the corporate entity itself has been lost in the Hobby Lobby shuffle, as it were.  Among the constituencies that are forgotten with the loss of the entity in the Hobby Lobby analysis are the minority shareholders and the board of directors.

I am troubled that the final, broadly applicable disclosure analysis may reduce itself to fiduciary duty claims.  In his symposium post, Haskell Murray notes the language in Justice Ginsberg's dissent observing that employees of for-profit corporations "commonly are not drawn from one religious community."  Well, the non-controlling shareholders in a for-profit corporation also may have sincerely held religious beliefs that are different from those of the controlling shareholders.  How, if at all, does the board give effect to the concerns of those minority shareholders in exercising its fiduciary duties?  What does "good faith" and "in the best interests of the corporation [and its shareholders]" mean in this context?

Moreover, religious beliefs may change over time for some or all of the shareholders, given that they are beliefs of individuals with free will.  But as long as those individual beliefs are shared by the controlling holders, it seems the Hobby Lobby Court would find them to be the beliefs of the corporation--without having given any consideration to the role of the board as the manager of the business and affairs of the corporation.  Lyman Johnson's focus on corporate purpose (and Alan also mentioned it) therefore becomes important.  But I want to make a different, yet related, point than the shareholder wealth maximization issue they raise.  In the Hobby Lobby opinion, the Court appears to read a corporate purpose into the Hobby Lobby charter that provides a constraint on corporate action.  (At least that's one plausible reading of the case.)  Yet, there is no disclosure of this constraint anywhere.

Even assuming applicable disclosure responsibilities under Hobby Lobby based on securities or corporate law, the nature of those disclosures and the basis for them is somewhat elusive.  I have a lot of questions.  How do the controlling shareholders make their compliance-related sincerely held religious beliefs known to the board, assuming the board is not constituted solely or even primarily of those shareholders?  How does the board ascertain that relevant beliefs are held by a group of shareholders that is controlling?  Should a corporate board be required to take periodic surveys of shareholders to make sure everyone has/still has the same sincerely held religious beliefs, to the extent they impact corporate compliance with law?  As someone who spent a number years advising corporate boards of directors in disclosure-oriented settings, I struggle with the Court's opinion in Hobby Lobby in a number of practice-oriented respects.  These questions approach one area of concern.  Public companies would have a standardized way to get at some of this information--through their transaction-related and annual Directors and Officers (D&O) Questionnaires.  But (in my experience) private firms--the firms most likely to avail themselves of the RFRA-related ACA exemption at issue in the Hobby Lobby case--do not often use this type of compliance device, absent a regulatory or contractual reason to do so.

I may be making a disclosure mountain out of a molehill; I may just be the disclosure-lawyer hammer looking for the disclosure-topic nail.  If so, feel free to tell me that.  Even so, maybe there's something else of interest for someone to comment in this post. . . .

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Hobby Lobby: A Concern, a Prediction, and a Question (Maybe Two)
Posted by Jayne Barnard

Thanks to all who have contributed such interesting and thoughtful posts to this discussion.   We will be talking about the impact of Hobby Lobby for a long, long time. 

My comments are brief, and not lofty.  I am a pragmatist.   

1.   Is there any hope for a work-around to ensure that employees of closely-held corporations that claim a religious exemption from the contraceptive mandate can get free or inexpensive access to the morning after pill and IUDs?  Slate claims that, as a result of Hobby Lobby, "tens of millions" of employees are at risk of losing access.   Even if, as I suspect, that number is highly inflated, the financial and political costs of providing access may well be insurmountable.  Certainly, insurance companies are not going to give coverage away for free.   

Sadly, Justice Kennedy’s claim that “an accommodation may be made to employers without [imposing] a burden on the government” is remarkably naïve.  (Yes, this is the same Justice Kennedy who, in Citizens United, said that there is nothing about allowing corporate political contributions that cannot be corrected "through the procedures of corporate democracy.") 

 2. Justice Alito writes in the majority opinion that  “[w]e do not hold…. that for-profit corporations and other commercial enterprises can 'opt out of any law ... they judge incompatible with their sincerely held religious beliefs.'"  He specifically pooh poohs the notion that corporations whose shareholders oppose on religious grounds the hiring of people of color could ever prevail on a RFRA claim.  (How interesting that he writes that anti-discrimination laws based on race serve a compelling governmental interest, but says nothing about anti-discrimination laws based on sex, religion, national origin, age, or disability.  More importantly, he says nothing about state laws that prohibit employment discrimination based on sexual orientation.)  Perhaps the Becket Fund, whose lawyers are very, very savvy, will not bring actions challenging Title VII or state law requirements on religious grounds, but others surely will.  Employment discrimination wrapped in religious conviction will be the next explosive litigation minefield.  (And, the baton will be passed from the Glom to employment law blogs.)

3.  Will HHS provide a list of closely-held corporations that seek exemption from the contraceptive mandate?  The White House announced yesterday that these corporations must be transparent with their employees, which seems a no-brainer.  Shouldn't these corporations also be transparent with their customers and the public?  Can such a list be provided by HHS without Congressional authorization?

 

 

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June 11, 2014
Delaware as “Market-Dominant Small Jurisdiction”
Posted by Christopher Bruner

Those familiar with US corporate law are well aware that, in this field, a single small jurisdiction looms very large.  The state of Delaware is today the legal home to more than half of US public companies and about 64% of the Fortune 500.  It’s widely understood that no other US state even comes close, and there’s a substantial US corporate legal literature exploring the contours of, and seeking to explain, Delaware’s domestic dominance.  As I’ve ventured into the field of cross-border finance, however, I’ve been struck by the fact that Delaware isn’t really unique.  Taking a broad view of the regulatory fields relevant to cross-border corporate and financial services, there’s a set of small jurisdictions that are not merely successful in their respective fields of specialization, but are in fact globally dominant in those fields. 

In a current working paper I’ve selected a handful of these jurisdictions that I find particularly interesting; assessed whether extant theoretical paradigms can shed much light on their successes; and proposed an alternative approach that I think better captures their salient characteristics and competitive strategies – the so-called “market-dominant small jurisdiction,” or MDSJ.  The jurisdictions studied include Bermuda, well-established among the world’s preeminent insurance markets; Singapore, a rising power in wealth management; Switzerland, the long-standing global leader in private banking; and Delaware, the predominant jurisdiction of incorporation for US public companies and a global competitor in the organization of various forms of business entities.

The interesting question, of course, is why these small jurisdictions have been able to achieve global dominance in their respective specialties – and the paper includes an extended treatment of various theoretical lenses to which one might turn for an explanation.  None, however, can account for the range of jurisdictions that I identify.  Notably, while taxation (or lack thereof) certainly looms large as a competitive strategy in each case, the “tax haven” literature can’t explain the global dominance of these particular jurisdictions.  Simply put, it’s implausible that a new entrant could meaningfully challenge the competitive position of any of these jurisdictions simply by copying their tax codes, or any other component of their regulatory structures for that matter.  Each has a substantive domain of service-based expertise providing a source of real competitive advantage beyond the jurisdiction’s black-letter law – and this renders it effectively impossible to compete with these jurisdictions simply by copying and pasting their laws into one’s own books.  

The“offshore financial center” literature looks beyond tax, emphasizing cross-border services as such, yet encounters its own problems.  This literature has been heavily preoccupied with recent entrants, reflecting strong preoccupation with the global acceleration of cross-border finance since the late 1960s – an inclination that’s tended to distract this literature from the commonalities with early movers like Delaware and Switzerland, which rose to prominence in the early 20th Century.  In this light, it’s critical to observe that some of the most successful of the small jurisdictions active in cross-border finance aren’t actually “offshore” at all – again, including Delaware and Switzerland.  I argue that the onshore/offshore distinction has obscured more than it illuminates; it simultaneously fails to provide a comprehensive account of what’s truly distinctive about the range of successful small jurisdictions, and overstates the distinction between “us” (onshore) and “them” (offshore) – particularly in terms of involvement in problematic practices, which occur in both settings (of which more below).  The rhetorical function of this distinction is largely to paint small jurisdictions’ activities as uniquely and exclusively problematic, obscuring both small-market positives and big-market negatives. 

In developing my alternative – this “market-dominant small jurisdiction” (MDSJ) concept – I draw upon these and other literatures while endeavoring to avoid their limitations.  I argue that, notwithstanding substantial differences, these jurisdictions do exhibit fundamental commonalities in their contextual features and economic development strategies:

MDSJs are small and poorly endowed in natural resources, limiting their economic development options.  This creates a strong incentive to innovate in law and finance, while rendering credible their long-term commitment to the innovations undertaken.  These jurisdictions substantially depend on their legal and financial structures, and the market knows it. 

They possess legislative autonomy – the critical resource for such innovation.  This is obvious for sovereigns like Singapore and Switzerland, yet full-blown sovereignty isn’t required.  Delaware possesses sufficient room to maneuver under the internal affairs doctrine, and Bermuda – a British overseas territory – benefits from an express delegation of legislative authority.

MDSJs tend to be culturally proximate to major economic powers, and favorably situated geographically vis-à-vis those powers.  These ties can arise in various ways – through colonialism, common histories, and/or geography.  But in each case, their identification with – and capacity to interact closely with – multiple powers positions them to perform important regional and global “bridging” functions in cross-border finance. 

  • Bermuda has long bridged the Atlantic, maintaining strong ties with the UK and North America alike.  They benefit from the substantial ballast of association with the British legal system and insurance market (i.e. Lloyds) on one side, and proximity to the massive US economy and insurance market on the other. 
  • Singapore has long bridged East and West, having been established as a British colony to maintain an East Asian trade route.  Their location allowed them to contribute to the creation of a 24-hour global securities trading system – in the morning taking the baton from US markets that just closed, and in the afternoon handing the baton to European markets that just opened.  Since the 2000s Singapore has developed a two-way wealth management strategy, serving as the entry point for Western money into East Asia, and the entry point for rapidly accumulating East Asian money into the West – a strategy facilitated by a highly educated, bilingual (Mandarin-English) working population. 
  • Switzerland, located in the heart of Europe, borders on and transacts in the native languages of each of the surrounding economic powers.  German, French, and Italian are all official languages, and English-language proficiency is widespread as well. 
  • Delaware plays an under-explored bridging function in the US political economy, standing between and interacting with both the finance capital (New York) and the political capital (DC) – a geographic feature touted in corporate marketing materials. 

In addition to these contextual commonalities, MDSJs exhibit similar economic development strategies.  Notably, they’ve heavily invested in human capital, professional networks, and related institutional structures.  The aim is to foster a community of financial professionals with the incentives and capacity to develop high value-added niche specializations – a project eased by the fact that these are small places.  In each case the relevant public and private stakeholders often know one another personally, facilitating consensus and responsiveness to evolving markets.  Additionally, these public and private constituencies share largely homogenous interests – they all prosper if finance prospers.

Finally, MDSJs consciously seek to balance close collaboration with, and robust oversight of, the relevant professional communities – the aim being to at once convey flexibility, stability, and credibility.  Essentially these jurisdictions seek to avoid over-regulation frowned upon by the market, while at the same time avoiding under-regulation frowned upon by regulators in other jurisdictions.  In so doing, they generally try to bring private-sector experience to bear upon the regulatory design process, seeking to maintain cutting-edge regulatory regimes while at the same time conveying stability and credibility to global markets and their foreign regulatory counterparts. In each case this dual aim is reinforced by additional confidence-enhancing features – notably, low levels of perceived public corruption, and multi-party support for the development of financial services capacity.

The paper explores the embodiment of these characteristics in some depth, and ultimately suggests that examining such jurisdictions through this lens could offer tangible benefits as we continue to assess their costs and benefits in cross-border finance.  While potential abuse of the structures available in each of these jurisdictions is acknowledged – including money laundering and tax evasion – these problems are not unique to so-called “offshore” jurisdictions.  Notwithstanding Delaware’s extraordinary contribution to the development of substantive corporate law – principally attributable to their expert bench and bar – the state has been roundly criticized for creating some of the world’s most opaque shell companies.  At the same time, US calls for greater tax transparency are undercut by the fact that we ourselves don’t tax interest income on – and accordingly don’t require 1099s for – non-resident alien accounts.  In this light, to avoid charges of a regulatory double standard, US policymakers seeking greater financial and tax transparency – efforts I broadly support – may have to start by cleaning up their own backyards.

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Call for Papers: AALS Business Associations Section
Posted by Erik Gerding

AALS Program of the Business Associations Section

The Future of the Corporate Board

AALS Annual Meeting, January 4, 2015

The AALS Section on Business Associations is pleased to announce that it is sponsoring a Call for Papers for its program on Sunday, January 4th at the AALS 2015 Annual Meeting in Washington, DC. 

The topic of the program and call for papers is “The Future of the Corporate Board.” 

How will boards adapt to recent changes and challenges in the business, legal, and social environment in which corporations operate?  The recent global financial crisis and the continuing need for many corporations to compete internationally mean that today’s boards face economic pressures that their predecessors did not.  This pressure is heightened by the rise of activist investors, many of whom aggressively push for changes to corporate management and governance. On the legal front, new regulations, such as Dodd-Frank, impose heightened compliance and other burdens on many companies and boards.  And on the social front, pressures for socially responsible corporate behavior and greater racial and gender diversity on boards continues.  Our program seeks to examine the ways in which boards have, and will in the future, respond to these challenges.    

Form and length of submission

Eligible law faculty are invited to submit manuscripts or abstracts that address any of the foregoing topics. Abstracts should be comprehensive enough to allow the review committee to meaningfully evaluate the aims and likely content of papers they propose. Papers may be accepted for publication but must not be published prior to the Annual Meeting.  Untenured faculty members are particularly encouraged to submit manuscripts or abstracts.  

The initial review of the papers will be blind.  Accordingly the author should submit a cover letter with the paper.  However, the paper itself, including the title page and footnotes must not contain any references identifying the author or the author’s school.  The submitting author is responsible for taking any steps necessary to redact self-identifying text or footnotes. 

Deadline and submission method

To be considered, papers must be submitted electronically to Kim Krawiec at Krawiec@law.duke.edu.  The deadline for submission is SEPTEMBER 122014

Papers will be selected after review by members of the section’s Executive Committee.  The authors of the selected papers will be notified by September 28, 2014. 

The Call for Paper participants will be responsible for paying their annual meeting registration fee and travel expenses.

Eligibility

Full-time faculty members of AALS member law schools are eligible to submit papers.  The following are ineligible to submit: foreign, visiting (without a full-time position at an AALS member law school) and adjunct faculty members, graduate students, fellows, non-law school faculty, and faculty at fee-paid non-member schools. Papers co-authored with a person ineligible to submit on their own may be submitted by the eligible co-author.

Please forward this Call for Papers to any eligible faculty who might be interested.

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May 28, 2014
Law and Society: the Corporate Law Panels
Posted by David Zaring

Law and Society has its usual strong contingent of corporate law panels - Anne Tucker has the details.  I'll be presenting at the conference early early early Sunday morning on international financial regulation; do come say hello, if you like that sort of thing.

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May 23, 2014
Hobby Lobby, Corporate Law, and RFRA
Posted by Alan Meese

The Religious Freedom Restoration Act applies only to "persons." Invoking this limitation, the Obama Administration claims that for-profit corporations such as Hobby Lobby are not RFRA persons, thus negating Hobby Lobby’s challenge to the Administration’s contraception mandate. In particular, the Administration claims that treating corporations as RFRA persons capable of exercising religion contravenes "fundamental tenets" of American corporate law.

In a brief amicus curiae, 44 professors of corporate and criminal law have elaborated on this argument. These scholars contend that treating corporations as RFRA persons that exercise their shareholders' religion violates basic principles of corporate law and would undermine that law's goals. The scholars’ brief emphasizes that corporations are separate legal entities protected from intrusion by shareholders, who enjoy limited liability behind the corporate veil. These essential attributes of corporateness, these scholars say, categorically preclude shareholders’ religion from “passing through” a boundary between shareholders and the firm and thus prevent shareholders from "impos[ing] their personal religious beliefs" on the firm. Allowing such imposition, the scholars say, would encourage intra-corporate struggles over religious identity, struggles that would sometimes result in litigation and discourage investment.

In a recent essay, Nate Oman and I argue that the Obama Administration and the scholars who support it are mistaken on this point and that for-profit corporations are in fact RFRA persons. Corporations often adopt policies that reflect shareholders’ religious beliefs. Examples include Jewish-owned restaurants or groceries that keep Kosher and remain closed on the Jewish sabbath, Christian-owned establishments that decline to sell alcohol and/or close on Sunday, and Muslim-owned firms that refuse to enter contracts that require the payment of interest. These practices do not offend corporate law, and the scholars cite no case to the contrary.

None of this is a surprise. Americans are the most religious people in the developed world. Moreover, the now-prevalent theory teaches that firms are nexuses of contracts among suppliers of various inputs. Modern corporate law reflects this contractual vision, allowing investors to alter default rules so as to facilitate the exercise of religion under the aegis of the corporate form. While the “standard” corporation entails separation of ownership from control of the sort found in large, publicly traded firms, the vast majority of corporations are closely held entities like Hobby Lobby, firms that courts and scholars have dubbed “chartered partnerships,” “incorporated partnerships,” or “corporations de jure and partnerships de facto.”

Several facets of modern corporate law empower shareholders to impose their religious beliefs on such corporations. Shareholders can adopt provisions in the corporate charter or the firm’s bylaws that limit what products firms may sell, days firms will operate, and how firms treat employees, customers, or the wider community. None of these provisions would contravene corporate law, which allows firms to pursue “any lawful businesses or purposes.” Shareholders can also enter shareholder agreements that govern operation of the firm or require unanimous consent before the firm takes certain actions. Indeed, shareholders can eliminate the Board of Directors altogether and operate the firm as a de facto partnership. Delaware law, for instance, expressly provides that shareholders may “treat the corporation as if it were a partnership or [ ] arrange relations among the stockholders or between the stockholders and the corporation in a manner that would be appropriate only among partners.” Shareholders may properly rely upon these devices (and perhaps others) to induce corporations to pursue religious objectives, even to the detriment of profits.

To be sure, shareholders of such “chartered partnerships” would retain limited liability (unless waived in the corporate charter) as well as entity status. But non-profit corporations, including churches, synagogues and mosques, and their members possess these very same attributes without forfeiting their ability to exercise religion. States confer limited liability on shareholders of for-profit corporations to encourage investment, risk taking and the like. Moreover, entity status reduces transaction costs that would result from individual shareholder transacting. Nothing about the rationales for these institutional devices justifies limiting the ability of shareholders to induce firms to pursue religious objectives.

Perhaps, however, pursuit of religion by for-profit corporations is inconsistent with the goals of corporate law, thereby suggesting that Congress did not extended RFRA to such entities. For example, the law professors’ brief suggests that allowing RFRA exemptions will lead to costly derivative suits over whether a corporation ought to adopt a particular religion and that firms will manufacture spurious religious claims to avoid onerous regulations.

We doubt it. Under current law a for-profit corporation may pursue a religious mission. It’s unclear why the predicted corporate-governance litigation over religion hasn’t already happened. It’s telling that the critics have been unable to cite a single derivative action or corporate governance dispute related to religion. In theory, it is possible that firms might manufacture insincere religious claims. This, however, has nothing to do with the corporate form. Natural persons also have incentives to manufacture religious claims. In applying RFRA, courts properly inquire into the sincerity of religious beliefs, booting spurious claims.

Finally, one might object that it simply makes no sense to give free-exercise rights (even statutory ones) to corporations. After all, a corporation has no soul, and religion is something that only natural persons can practice. We disagree. First, churches and other religious entities are corporations and no one has ever claimed that this fact disables them from practicing religion or meriting protection. Furthermore, these claims are not confined to uniquely “religious” corporations. Many churches, for example, are organized as LLCs. As a legal matter, they have the same form as Chrysler. The validity of RFRA claims should not turn on a claimant’s corporate status or lack thereof.

Perhaps the real problem is the for-profit character of firms like Hobby Lobby. Natural persons, however, also pursue profits. It would be very odd to say that a sole proprietorship or a partnership may claim the protections of RFRA but a corporation or an LLC may not. At a deeper level, it would be perverse to suggest that once a person is engaged in profit making activity they have given up their right to practice their religion. Such a principle would gut the idea of religious freedom.

Implicit in these arguments against RFRA personhood for corporations are two problematic assumptions. The first is that religion is fundamentally an individual and private affair, rather than a collective and public affair. This is a good description of a seventeenth-century Calvinist examining his or her soul for the signs of irresistible grace. This account does not work very well for many other approaches to religion. Jewish law, for example, denies that there is a distinction between the “private” and “religious” activity of the home and the “public” and “secular” activity of the marketplace. God’s demand that Israel live according to his law applies equally in both realms. Likewise, Catholic theology has a rich tradition of understanding corporate religious experience within a host of subsidiary organizations, including for-profit firms.

None of this means that the RFRA claims of for-profit corporation should always succeed. Courts should scrutinize all RFRA claims for sincerity, substantial burden, and whether any substantial burden is narrowly tailored to further a compelling interest. There is, however, no good reason for categorically excluding for-profit corporations from RFRA’s protection for religious freedom.

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May 13, 2014
Utah Benefit Corporation Act
Posted by Gordon Smith

Some of my non-lawyer friends assume that, as a law professor, I am well versed on the interstices of every law that might apply to their lives, so I had a good chuckle this morning when I read that 352 new laws took effect in Utah today. Wow. The legislature was busy this last term.

The law that is getting the most publicity: the prohibition on dialing or texting while driving.

The law that will have the most immediate effect on my life: increasing the speed limits on rural highways.

The law that most scares me: allowing people to hunt without first completing a hunter-education course.

The law that I assumed was already in place: the "revenge porn" law, which prohibits distribution of "intimate images" without consent and with intent to cause emotional distress or harm.

A new law that is getting a lot less attention (but see here) is the adoption of the Benefit Corporation Act. I am still a skeptic, but over half of states now have or will soon have a statute in place. Do we teach these in Business Organizations? It's probably time to add them ... as if we don't have enough to do in that course.

Permalink | Business Ethics| Business Organizations| Life in Utah | Comments (0) | TrackBack (0) | Bookmark

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