Thanksgiving is my favorite holiday.  For about 14 years we've made Cook's Illustrated's high-roast turkey (butterfly and brine the bird, then roast it at 450 on a broiler pan set atop homemade dressing.  It takes less than 2 hours and the dressing is bastedly divine).  This year, for the first time I let each child pick a recipe from our archive of Cook's Illustrated and Cook's Country magazines for us to make together.  Cara chose a cranberry-apple crumble that was to die for (Cook's Country), Ethan and I made gingerbread cookies that really were worth eating (Cook's Illustrated), and Anna and I made Quaker Bonnet biscuits that were pretty good.  In an egregious lapse of judgment, I elected not to serve said biscuits at Thanksgiving dinner itself (we had a lot of starchy sides already), thus giving my middle child yet another grievance for her tally.

In short, we are loyal fans of the America's Test Kitchen conglomerate.  I love to cook, but I don't get to do it that much anymore.  If I try a new recipe I want to be pretty sure it's going to be good.  Enter these magazines.  Before the recipe you get a detailed description of what worked, what didn't worked, and why.  I want to know that each ingredient and each step is worth it, and I'm not blanching carrots or roasting poblanos for no reason. 

So for our family at least, Christopher Kimball's divorce from the Vermontian empire he's created is big news, as is his new venture Milk Street.  Which was a leetle to close for comfort to the enterprise he left, according to ATK, which filed a suit alleging breach of fiduciary duties, corporate theft, interference with contract, and other goodies.  ATK has a site explaining Why we are suing Christopher Kimball.  Here's the WaPo with 6 takeaways. 

Is it just me, or is there a terrific fact-pattern here?  You can get the complaint, a chronology, and emails there. Of course, this is from a woman constructed a long essay built around a lady entering a series of pie baking contests. 

'Tis the season!

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I hope everyone is having a great Oscar Sunday!  Scholastica and ExpressO tell me that I have successfully submitted my latest paper, but I think they mean that I have successfully uploaded my latest paper.  Anyway, months before it is published (if at all), you can get <i>The Limited Liability Partnership in Bankruptcy</i> here.  Here is the abstract:

Brobeck. Dewey. Howrey. Heller. Thelen. Coudert Brothers. These brand-name law firms had many things in common at one time, but today have one: bankruptcy. Individually, these firms expanded through hiring and mergers, took on expensive lease commitments, borrowed large sums of money, and then could not meet financial obligations once markets took a downturn and practice groups scattered to other firms. The firms also had an organizational structure in common: the limited liability partnership.

In business organizations classes, professors teach that if an LLP becomes insolvent, and has no assets to pay its obligations, the creditors of the LLP will not be able to enforce those obligations against the individual partners. In other words, partners in LLPs will not have to write a check from personal funds to make up a shortfall. Creditors doing business with an LLP, just as with a corporation, take this risk and have no expectation of satisfaction of claims by individual partners, absent an express guaranty. In bankruptcy terms, creditors look solely to the capital of the entity to satisfy claims. While bankruptcy proceedings involving general partnerships may have been uncommon, at least in theory, bankruptcy proceedings involving limited liability partnerships have recently become front-page news. The disintegration of large, complex LLPs, such as law firms, does not fit within the Restatement examples of small general partnerships that dissolve fairly swiftly and easily for at least two reasons. First, firm creditors, who have no recourse to individual partners’ wealth, wish to be satisfied in a bankruptcy proceeding. In this circumstance, federal bankruptcy law, not partnership law, will determine whether LLP partners will have to write a check from personal funds to satisfy obligations. Second, these mega-partnerships have numerous clients who require ongoing representation that can only be competently handled by the full attention of a solvent law firm. In these cases, the dissolved law firm has neither the staff nor the financial resources to handle sophisticated, long-term client needs such as complex litigation, acquisitions, or financings.  These prolonged, and lucrative, client matters cannot be simply “wound up” in the time frame that partnership law anticipates. The ongoing client relationship begins to look less like an obligation to be fulfilled and more like a valuable asset of the firm.

Partnership law would scrutinize the taking of firm business by former partners under duty of loyalty doctrines against usurping business opportunities and competing with one’s own partnership, both duties that terminate upon the dissolution of the general partnership or the dissociation of the partner. However, bankruptcy law is not as forgiving as the LLP statutes, and bankruptcy trustees view the situation very differently under the “unfinished business” doctrine. The bankruptcy trustee, representing the assets of the entity and attempting to salvage value for creditors, instead seeks to make sure that assets, including current client matters, remain in partnership solution unless exchanged for adequate consideration, even if the partners agree to let client matters stay with the exiting partners. This Article argues that the high-profile bankruptcies of Heller Ehrman LLP, Howrey LLP, Dewey & LeBeouf, LLP, and others show in stark relief the conflict between general partnership law and bankruptcy law. The emergence of the hybrid LLP creates an entity with general partnership characteristics, such as the right to co-manage and the imposition of fiduciary duties, but with limited liability for owner-partners. These characteristics co-exist peacefully until they do not, which seems to be at the point of dissolution. Then, the availability of limited liability changes partners’ incentives upon dissolution. Though bankruptcy law attempts to resolve this, it conflicts with partnership law to create more uncertainty.

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Bringing Numbers into Basic and Advanced Business Associations Courses: 

How and Why to Teach Accounting, Finance, and Tax

Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law.   Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play.  In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation.  Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections.  While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.

The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations.  In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject.  Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.

Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014 (preferably by April 15, 2014).  The Executive Committee will review all submissions and select two papers by May 15, 2014.  A very polished draft must be submitted by November 1, 2014.  The Executive Committee is exploring publication possibilities, but no commitment on that has been made.  All submissions and inquiries should be directed to Jeffrey M. Lipshaw, Associate Professor, Suffolk University Law School [email protected] (617-305-1657).

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I will have to return before this meeting, but I wish I could be there for it ...

The Scholarship of Professor Larry Ribstein

    Moderator: Douglas K. Moll, University of Houston Law Center

    Speakers:

    Kelli A. Alces, Florida State University College of Law

    Matthew T. Bodie, Saint Louis University School of Law

    J. William Callison, Partner, Faegre Baker Daniels, LLP, Denver, CO

    Ann Ribstein, University of Illinois College of Law

    Roberta Romano, Yale Law School

    Commentators: Lyman P.Q. Johnson, Washington and Lee University School of Law

    Daniel S. Kleinberger, William Mitchell College of Law

    Jeffrey M. Lipshaw, Suffolk University Law School

    Larry Ribstein was a friend to many and a colleague to all of us in the academy. With his untimely passing, he left behind a pioneering and influential body of work across a vast range of subjects. Our program seeks to honor Larry’s legacy by focusing on his scholarship in the unincorporated area. Our speakers include invited presenters as well as presenters who responded to a Call for Papers on the influence of Professor Ribstein's scholarship.

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OK, so I'm rethinking how I teach BA.  Gordon and I have taken on a few writings in the area of partnership, and we knew that it would deepen our current knowledge of partnerships.  But I didn't think it would complete change my thinking.

So, when I teach LLPs, I do it in the traditional way, and a quick perusal of the numerous BA texts tells me I have lots of company.  In limited liability partnerships, partners don't have personal liability for partnership obligations.  In most states, for both tort and contractual obligations.  Partners' capital is at risk, but partners never have to write a personal check out of their own funds, unless the liability arose out of their own behavior (or those they supervised, etc.).  So, if a creditor has a claim that isn't satisfied out of partnership assets, the creditor suffers a loss.  End of story.  Except I'm not sure now that it ever happens that way.

I suppose there are instances where insolvent LLPs just dissolve and their creditors go on their way, but another option is that the creditors would force the LLP into bankruptcy (or the LLP would voluntarily file for bankruptcy).  And bankruptcy has its own rules.

LLP Shield v. Clawback:  So, in bankruptcy, the trustee can claw back amounts distributed to partners within two years under certain circumstances.  Because of this right to clawback, partners have an incentive to settle so that they can move toward financial and professional certainty.  So, we've seen settlement agreements with partners in Brobeck, Coudert Brothers, and now Dewey.  The "L" in LLP seems to be a little "l" at best.  Partners who are sufficiently prescient to leave 2.5 years are more before filing seem to fare much better at shielding themselves, even though they are no longer in the shield.

LLP Shield v. Winding Up v. Unfinished Business Doctrine:  If I ever write a BA casebook, I'm going to feature In re Brobeck, Phleger & Harrison LLP, 408 B.R. 318 (N.D. Calif. 2009).  So, Brobeck is teetering toward its eventual bankruptcy (filed September 2003).  Some smart folks there know that there is a California state case, Jewel v. Boxer, that holds that "in the absence of an agreement to the contrary, partners have a duty to account to the dissolved firm and their former partners for profits they earn on the dissolved firm's "unfinished business," after deducting for overhead and reasonable compensation."  The only way these partners are going to work again is if other law firms think they are bringing a book of business.  So, it suits everyone in the about-to-dissolve firm fine if they all go ahead and waive this right on behalf of the partnership.  They know that the unfinished business profits would just be going to Citibank (their major creditor) anyway.  Months later, Brobeck is in bankruptcy and its partners are safely tucked into other firms, just like the "L" in LLP intended.  (Other non-California courts have followed both the Jewel doctrine and the Jewel-waiver as fraudulent conveyance reasoning.)

But, the trustee sued the new firms anyway.  The court did a funny thing.  The court upheld the Jewel waiver as valid.  However, the court held that the Jewel waiver transferred a property right of the partnership (the right to profits) too close to bankrutpcy, so the waiver was clawed back.

So, I'm not sure when partners in an LLP get to walk away, as I have so blithely suggested in my BA case.  The shield seems to work best when the entity has enough assets to satisfy claims or when the entity has had so little assets that it hasn't made a distribution in a very long time.  Hmm.

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CALL FOR PAPERS

AALS Section on Agency, Partnerships, LLCs, and Unincorporated Associations

The Scholarship of Professor Larry Ribstein

2013 AALS Annual Meeting

New Orleans, LA

Larry Ribstein was a friend to many and a colleague to all of us in the academy.  With his untimely passing, he leaves behind a pioneering and influential body of work across a vast range of subjects, including partnerships and limited liability companies, corporate and securities law, choice of law, financial regulation, white-collar crime, legal ethics, and the legal profession.

The AALS Section on Agency, Partnership, LLCs, and Unincorporated Associations seeks to honor Larry’s legacy by focusing on his work at the 2013 AALS Annual Meeting in New Orleans.  We are soliciting papers on a broad range of issues dealing with Larry’s partnership, LLC, and/or “uncorporation” scholarship.  Among the topics that might be addressed are:  

•      An evaluation of the impact of Larry’s scholarship in a particular area;

 •      A discussion of issues or positions that Larry changed his mind on over time, and how;

 •      An examination of how Larry’s work in other areas informed his work in the unincorporated sphere, and vice-versa;

 •      “Larry as blogger” and the influence of his web postings

Submission procedure: A draft paper or proposal may be submitted via email to Professor Douglas Moll at [email protected]. 

Deadline date for submission: April 1, 2012

Form and length of paper; submission eligibility: There is no requirement as to the form or length of proposals.  Faculty members of AALS member and fee-paid law schools are eligible to submit papers. 

Registration fee and expenses: Program participants will be responsible for paying their annual meeting registration fee and expenses.

How will papers be reviewed?: Papers and proposals will be selected after review by the Section’s Executive Committee.

Will the program be published?: The section plans to contact the law reviews at schools where Professor Ribstein taught in the hopes of publishing the papers submitted for the meeting as a symposium.  At this time, however, no guarantees of publication can be made.

Contact for submission and inquiries:     Professor Douglas Moll, University of Houston Law Center. 713-743-2172 or [email protected]

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This week, the media is abuzz with the announcement that AOL is acquiring The Huffington Post for $315 million.  (In contrast, few people seem to have noticed that Ensco and Pride International are creating the second-biggest deep-water drilling company, at a pricetag of $7.3 billion.)  But, for corporate law scholars, the interesting twist is not who will own Huffington Post, but who owns it now.

OK, you can understand college kids not getting everything in writing, but middle-aged millionaires?  Really?  This month's Vanity Fair has an interesting article about the behind-the-scenes fight that officially began with Peter Daou and James Boyce sued Arianna Huffington and The Huffington Post.com in mid-November 2010 claiming that they were the creators of The Huffington Post.  (The complaint is here.)  They allege breach of contract, idea misappropriation, and most importantly to us business law professors, breach of fiduciary duties because they formed a "joint venture."  Bingo!  However, they don't want damages, they want the credit (and a donation to the charity of their choosing).

 So, is the claim a worthy one?  Well, according to the facts alleged in the complaint, there's a lot more there to hang one's partnership hat on than in Holmes v. Lerner (Urban Decay), which Gordon has blogged about before.  But, after the launch of site, neither Daou or Boyce's actions look like someone who believes that he is a partner in anything, unlike the other case where Patricia Holmes worked for the venture for a year with no salary.  The site apparently was the product of a brainstorming session on December 3, 2004 at Huffington's home, where she invited a group of disappointed Kerry supporters and Hollywood movers and shakers to discuss the creation of a "liberal Drudge Report."  However, prior to this breakfast confab, Daou and Boyce had dreamed up this idea in the hours after the presidential election and presented it to Huffington, their close friend.  On November 14, 2004, they gave to her a 15-page memorandum outlining the idea behind "1460," a blog they hoped would mobilize the Democratic base prior to the next election (there are 1,460 days between presidential elections).  Here is the November 14, 2004 proposal for "1460."  The two met with Huffington the morning before the Dec. 3 breakfast to prepare for the larger meeting, and then discussed the idea further with her and Kenny Lerer, who would end up financing the blog.  Lerer apparently did not like Daou and Boyce, and after he and Huffington asked the two to write up a strategic plan ("blueprint") for the blog, the blog was financed and launched on May 9, 2005, without them being investors or employees. 

(What is interesting to remember, way back then at the early stages of blogging, is that the crowd was very skeptical of professional blogs, including The Huffington Post.  Here was Gordon's first take; here was one of Ann Althouse's first thoughts.  Even Larry David, the actor and investor in The Huffington Post, said "“All I remember is Arianna telling me about this on a number of occasions and feeling sorry for her because I thought it was such a terrible idea.”  I guess we didn't call this one very well.  However, the launch of The Huffington Post was the beginning of the maturation of the blogosphere from when David Lat and Wonkette blogged for free to the current state of institutional, professional blogging.)

However, for six years, Daou and Boyce never complained about either not being credited as founders or receiving any sort of remuneration/ownership interest.  The two blogged from time to time on the site and never said an ill word to or about Huffington.  However, after Andrew Breitbart, a conservative blogger who wrote Huffington blog posts under contract at its inception, claimed to have founded The Huffington Post, Daou and Boyce were dismayed to hear Huffington say in public that Breitbart had nothing to do with the creation of the website, but not mention Daou or Boyce.  After bringing up this slight with Huffington via email, they were eventually rebuffed and redirected to "legal."  Of course now, one wonders if the timing coincides more with the market putting a price on the website.

So, how does this play out now that AOL has put a $315 million pricetag on The Huffington Post?  The lawsuit seems to fail on the de facto partnership front for no other reason than Daou and Boyce do not seem to have thought that they were partners for over six years.  The website received venture funding during that time, and the two were not involved in any of those conversations.  Had they believed themselves to be owners of the website, then surely they would have chimed in at that time.  I don't know enough about the "misappropriation of idea" cause of action to opine.  I have not been able to find a copy of the answer, which should have ben filed by now, but it might give more clues to the future of the claim.

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Mohsen Manesh's new paper, Delaware and the Market for LLC Law, is a fascinating project, and I am grateful to him for allowing us to feature his paper in the Junior Scholars Workshop. Like Larry Ribstein and Bob Lawless, I admire Mohsen's scholarly ambition, but I feel like this paper has some distance to travel before it is complete.

Mohsen begins with the claim that Delaware lacks the sort of market power in the competition for LLC charters that it has in the competition for corporate charters. His evidence for this claim is the lack of price discrimination in LLC taxes. Like Larry and Bob, I am skeptical of this claim, but I am willing to play along for the sake of argument. I am more interested in his examination of contractability and indeterminacy under LLC law, and my interest in these arguments eventually leads me back to Mohsen's initial claim regarding Delaware's supposed lack of market power.

Indeterminacy in corporate law is often said to play a crucial role in enhancing Delaware's market power. On the nature of indeterminacy in corporate law, Mohsen observes: "Delaware corporate law, and in particular its judge-made law of fiduciary duties, tends to favor contextual, fact-intensive standards over bright-line rules." Note that the charge of indeterminacy is not necessarily an indictment of Delaware law. Indeterminacy is probably inherent and almost certainly desirable in fiduciary law. The somewhat counterintuitive claim that this indeterminacy enhances Delaware's market power is based on two observations: (1) indeterminate law is hard to copy, and (2) indeterminate law increases the importance of judges (and Delaware has the best judges).

So far, so good. Now the crucial move: Mohsen asserts that LLC law is less indeterminate than corporate law because LLCs are "creatures of contract." In Mohsen's words:

Virtually all of the default provisions specified in the Delaware LLC Act may be superseded or otherwise contractualized by the terms of a LLC’s governing agreement. As a result, many of the mandatory and indeterminate provisions that are imposed under Delaware corporate law—including the judge-made law of fiduciary duties—may be contractually waived, modified or clarified under Delaware LLC law.

According to Mohsen, one implication of this contractability is that LLCs can avoid the cost of uncertainty inherent in corporate law. I have several problems with Mohsen's argument.

First, Mohsen selects an unfortunate example to illustrate the mandatory indeterminacy of Delaware corporate law. He argues that DGCL Section 271, governing the sale of "all or substantially all" of a corporation's assets is a mandatory provision, meaning that it "cannot be modified, clarified or otherwise waived by the terms of a corporation's governing documents." While the statute does not expressly allow for contrary terms in the corporate charter, the process for selling assets is often subject to contractual specification. If powerful shareholders want a say in the sale of assets -- even when that sale constitutes less than "all or substantially all" of a corporation's assets -- they simply have to insert a negative covenant into their deal terms.

Second, while Mohsen illustrates how an LLC's governing documents could "contractualize" certain matters that, in a corporate context, might be evaluated under a mandatory, indeterminate, fiduciary standard, he does not provide evidence that LLCs routinely avail themselves of this opportunity. He rightly acknowledges that drafting highly specified contracts is expensive and difficult, and that should lead him to ask: would most Delaware LLCs invest in such contracts? The answer to this question depends on what these LLCs look like, and I agree with Bob Lawless that it would be nice to know more about this. Are most of these LLCs Mom-and-Pop businesses? Or are they non-operating companies? In any event, my guess is that the vast majority of Delaware LLCs are tightly controlled by one individual or parent company, thus eliminating the need for highly specified contracts.

Third, if one of the major advantages of LLCs is contractability, which reduces indeterminacy, why are so many LLCs formed in Delaware? Mohsen observes that many states have copied Delaware's LLC Act, which provides that its principal policy is "to give the maximum effect to the principle of freedom of contract." If contractability is the key feature of LLC law, why don't other states compete more effectively with Delaware? Under Mohsen's theory, contractability reduces indeterminacy, which implies that Delaware judges have no special advantages. Rather than puzzling over Delaware's lack of market power, I am left puzzling over Delaware's success in attracting LLC formations when its product has no discernible advantages.

By the way, Larry Ribstein disagrees with Mohsen on this point, arguing, "The contractual nature of LLCs increases the value of Delaware courts’ contract-enforcement technology." In other words, the important thing about Delaware is how the judges will interpret future contracts, and that feature of the Delaware system is not easily replicated by other states. This seems plausible to me, but it is in tension with the notion that contractability reduces indeterminacy and, thus, poses a significant challenge to Mohsen's paper.

Fourth, Mohsen dismisses the importance of the contractual duty of good faith and fair dealing too quickly, arguing, "the Delaware courts have made clear that the implied contractual covenant is doctrinally distinct and substantially narrower than the open-ended fiduciary duties imposed by corporate law." The Delaware courts have certainly made statements like this, but my sense is that the treatment of this doctrine is far more complex than Mohsen gives credit. Indeed, earlier this summer, I heard Chief Justice Steele address two distinct lines of cases involving the contractual duty of good faith and fair dealing and suggesting that these precedents were in serious conflict.

In the end, all of my points revolve around a single complaint, namely, that Mohsen exaggerates the extent to which the contractability of LLCs reduces indeterminacy when compared to corporations. Given that his argument rests on this claim, however, it is a point worth arguing.

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I am very happy to see somebody exploiting the theoretical and empirical potential of expanding the study of business organizations to fully include unincorporated business entities. And I applaud Professor Manesh’s selection of an intriguing question to study, something that I’ve been curious about but never pursued: Why do Delaware’s fees for forming LLCs look so much different than those for corporations?

To briefly summarize his thesis, Manesh argues that Delaware’s flat $250 fee for LLCs, compared to its much higher and graduated fees for corporations, indicates Delaware’s lack of market power in the market for LLCs. Kahan & Kamar (Price Discrimination in the Market for Corporate Law, 86 Cornell Law Review 1205 (2001)) theorized that Delaware’s scaling of corporate fees to firms’ capitalization showed price discrimination, something a producer can do with market power. Since Delaware doesn’t do that for LLCs it must not have market power in that area.

One problem with this analysis is that it assumes LLCs and corporations are comparable for purposes of pricing. But there is no reason to think this is the case. Corporations are standardized products. Delaware builds on this standardization to compute the corporate franchise tax in ways that apply fairly simply to all corporations in the state, as described in the article. LLCs’ main attraction, by contrast, is that they are not standardized, but rather creatures of contract, as Manesh discusses. LLCs’ capital structures depend on idiosyncratic contracts rather than statutory standard terms. If Delaware tried to apply something like the corporate franchise tax to LLCs they would simply engage in regulatory arbitrage to minimize the tax.

Why doesn’t Delaware force LLCs to be just as standardized as corporations so it can charge for them like it does for corporations? First, there just isn’t as much money in it because there’s much less variation in size of LLCs than corporations. Second, if Delaware forced LLCs to be as standardized as corporations, LLCs would lose a lot of their attraction, as Manesh himself argues. As a result, Delaware would get a lot fewer LLCs. By contrast, corporations, or at least large Delaware corporations, benefit from standardization apart from law compliance: they are traded in a public securities market, where variations cause information costs that would be reflected in securities prices. Corporations trying to arbitrage Delaware’s franchise tax would have to pay a penalty for being different.

(A broader problem with Manesh’s analysis is that the relationship between price discrimination and market power is less clear than Manesh assumes. See Kobayashi and Wright on Illinois Tool Works vs. Independent Ink on the non-inference of anti-competitive markets from price discrimination in the antitrust context. )

So, contrary to Manesh’s assumption, Delaware doesn’t necessarily lack market power in the LLC market just because it doesn’t price discriminate. But having made his assumption, Manesh then explains why the assumed fact about lack of market power is true: LLC law is based on the parties’ contracts and therefore is less indeterminate than its corporate law. Delaware therefore cannot attract LLC business to its courts through indeterminacy as it does for corporations.

I agree with Manesh’s observation about corporate vs. LLC indeterminacy – in fact I wrote and published that article a couple of years ago. I don’t necessarily buy K & K’s reasoning as to corporations. Rather, as discussed in my indeterminacy article, I think indeterminacy is inherent in the corporate form. But even assuming LLCs and corporations differ in this respect, I disagree with where Manesh goes from there.

Let’s begin with the evidence that Delaware does attract LLCs to its courts. Kobayashi and I find that Delaware is a massive winner in the national market for formations of large LLCs. Although this would be seem to suggest Delaware has power in the LLC market, Manesh doesn’t seem troubled by this finding, since he is relying on the absence of price discrimination. More interesting for present purposes is that Kobayashi and my regression analysis indicates that Delaware’s success is not because of any feature of Delaware’s law that we could find. Indeed, Manesh also notes that the feature that one might expect would attract LLCs to Delaware – the statutory provision allowing freedom of contract – has been replicated by other states. This suggests that large LLCs are attracted to Delaware because of Delaware’s legal infrastructure of courts and lawyers.

So why are LLCs drawn to Delaware’s courts if, as Manesh concludes, there’s relatively little those courts need to do for LLCs?The answer is that courts do have a lot to do for LLCs – that is, enforce their contracts. The contractual nature of LLCs increases the value of Delaware courts’ contract-enforcement technology. It is easy for a state to say in its statute that its courts will enforce contracts, but much more difficult to actually follow through on that promise, and to come up with intelligible and coherent contract-enforcement jurisprudence. As I have discussed in several writings, including my indeterminacy article above, my book (Rise of the Uncorporation and a number of blog posts (e. g. , Delaware courts have developed a very sophisticated approach to contract interpretation and enforcement in unincorporated firms. Other states can’t pick up formation business simply by linking to Delaware’s law because they also need to provide assurances as to how they’ll decide future cases.

In other words, LLCs are not flocking to Delaware just because it enforces contracts, but because of the way it enforces contracts. Although Manesh thinks that the “network” of Delaware’s cases is all about interpreting mandatory rules, in fact it is at least partly about applying any rules, whether or not contractual, to necessarily unpredictable fact situations. If Delaware were to follow Manesh’s suggestion and become more indeterminate to compete for LLCs, this would threaten, not solidify, its dominance in the market for LLCs.

(As an aside, I have a quibble about Manesh’s analysis of “network externalities” as a reason for the attractiveness of Delaware law. This confuses network effects in business association law and network externalities. My article with Kobayashi about choice of form, which Manesh cites a couple of times, shows some pretty good evidence that these aren’t network externalities. Contrary to Manesh’s brief discussion of this paper, this holds for both choice of form and choice of law, since the basic constraints are the same in both areas. )