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Tweet of the Day

New York Attorney General Overreaches in Climate-Change Complaint Against Exxon https://t.co/yKzPOUqEHO

— Professor Bainbridge (@ProfBainbridge) December 10, 2018

From the "You had one job. Just one." file

Never dictate the headline over the phone. (h/t @NeilMcMahon) pic.twitter.com/0kPUGxQ2sd

— Mark Harris (@MarkHarrisNYC) December 10, 2018

Not a hoax! From the Jamestown (NY) Post-Journal. pic.twitter.com/ETozVTfuQw

— Mark Harris (@MarkHarrisNYC) December 10, 2018

KPB on "Do Ineffective Internal Controls Expand A Shareholder's Right Of Inspection?"

Keith Paul Bishop reports:

Section 1601 of the California Corporations Code establishes a shareholder's right to inspect the "accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board".  A shareholder's inspection, however, must be for a "purpose reasonably related" to the shareholder's interest as a shareholder. Id.  This is commonly referred to as a "proper purpose" requirement.

When a corporation provides its audited financial statements to its shareholders, can a shareholder have a proper purpose in seeking inspection of the underlying financial records?  Professor Harold Marsh Jr. theorized that in such cases, a shareholder would have to show that "there was some substantial reason to believe that the reports submitted to the shareholders were erroneous".  Marsh's California Corporation Law §15.09[B].  

In  Farnum v. Iris Biotechnologies, 2018 Cal. App. Unpub. LEXIS 8069, the California Court of Appeal took note of a corporation's disclosure in its Form 10-K that management had concluded that the corporation's internal controls over financial reporting were not effective.  Thus, the Court concluded that the company had recognized that its "audited financial statement" [sic] was "incomplete".  This is an odd statement in light of the fact that the company's Form 10-K included the requisite financial statements and an auditor's opinion.  Nonetheless, the case is an example of ineffective internal controls over financial reporting providing a basis for expanded shareholder inspection.  The opinion, however, is not precedential because the court did not certify it for publication or order it to be published.

More legal hurdles for outsourcing the board

Regular readers will recall that Todd henderson and my book Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance asks "why does the law require governance to be delivered through individual board members? While tracing the development of boards from quasi-political bodies through the current 'monitoring' role, we find the reasons for this requirement to be wanting. Instead, we propose that corporations be permitted to hire other business associations - known as 'Board Service Providers' or BSPs - to provide governance services. Just as corporations hire law firms, accounting firms, and consulting firms, so too should they be permitted to hire governance firms, a small change that will dramatically increase board accountability and enable governance to be delivered more efficiently.

As we recognize, there are a number of existing legal barriers that would have to be overcome. Keith Paul Bishop just flagged a few more. (A link to our book would have been nice.)

Josh Fershee asks "Can LLC Members Be Employees? It Depends (Because of Course It Does)"

Josh writes:

Tom Rutledge posts the following over at the Kentucky Business Entity Law Blog:

LLC Members Are Not the LLC’s Employees

There is now pending before the Eighth Circuit Court of Appeals of a suit that may turn on whether the relevant question, namely whether an LLC member is an employee of the LLC, has already been determined by a state court. In that underlying judgment, the Circuit Court of Cole County, Missouri, issued a judgment dated October 9 18, 2017 in the case Joseph S. Vaughn Kaenel v. Warren, Case No.: 15 AC-CC 00472. That judgment provided in part:

As an equity partner of Armstrong Teasdale, LLP, [Kaenel] is not a covered employee protected by the Missouri Human Rights Act.

I am curious as to which case this is that is pending.  Tom knows his stuff and knows (and respects) the differences between entities, so I assume there is more to than appears here.  

For example, the fact that a state court determined that an LLP equity partner is not an employee does not inherently answer the question of whether an LLC member is an employee. It could, but it does not have to do so.  

This prompts two thoughts. First, although LLCs are not supposed to be a hybrid of the corporation and the partnership but rather their own unique entity, courts often treat them as such a hybrid and look to the corresponding law of corporations or partnerships by way of analogy. (I suspect that the Uniform Law Commissioner's adoption of the hub and spoke model of harmonizing unincorporated entity laws has accelerated this trend.) If so, I would expect courts in this content to look to the considerable body of law dealing with whether non equity partners are partners.

Second, while pondering this issue, a thought occurred; namely, maybe we should look to securities law. If the LLC membership is a security, then the members who work for the company should be employees. By definition they lack the control associated with ownership of the business (note that owning a security is not the same thing as owning the business; sere.g., shareholders).

What was Elizabeth Warren thinking? Her structure of the CFPB comes back to bite her.

On a party-line vote, the Senate approved Kathy Kraninger for a five-year term as the head of the Consumer Financial Protection Bureau. You will recall, of course, that many of us were critical of the structure of the CFPB, which Senator Warren in her infinite wisdom basically structured so as to be unaccountable to either the President or Congress. That particular decision has now come back to bite her in the proverbial Biblical beast of burden, as Bloomberg Law reports:

Consumer advocates and Democratic lawmakers fear that Kraninger will go farther than periodically skipping funding draws from the Fed. They worry that Kraninger will attempt to enact a proposed Trump administration fiscal 2019 budget that she helped write while she was at the Office of Management and Budget. As the CFPB’s director, Kraninger would be able to enact a proposed $147 million cut, about 23 percent of the the bureau’s budget, on her own and without any input from Congress.

The lesson is never to assume that your acolytes will be in charge permanently.

Social justice warrior CEOs should keep their mouths shut, absent board approval, as should conservative CEOs

Bloomberg reports:

In these polarizing times, chief executives are increasingly called on to take a stand on political and social issues. They shouldn’t, a Stanford University study suggests, at least not without the blessing of their boards.

Consumers remember more instances when they’ve boycotted in protest of a CEO’s politics than they recall products they’ve bought to show their support, according to the study. Even if consumer furor doesn’t have a massive or immediate financial impact, the controversy can damage the brand and distract executives from other, more important activities, said David Larcker, a professor at the Stanford University School of Business and a co-author of the research.

“From a board perspective, there really ought to be some discussion if the CEO is going to do something that’s going to attract a lot of attention,” said Larcker, who has studied CEO behavior for decades. “Even though that person is speaking for themselves, they’re identified with a company, and it can affect purchase behavior.”

 

Thanksgiving Dinner: Blood orange glazed duck with Ridge 1996 Monte Bello

The Duck

• 5½ pound Rohan duck
• ½ onion, roughly chopped
• 1 stalk celery, roughly chopped
• 2 oranges, quartered
• 1 tablespoon kosher salt
• ½ teaspoon freshly ground black pepper
• ½ teaspoon 5 spice powder

Preheat oven to 475°.

Trim excess skin from front and tail of duck. Remove and discard giblets etc. from the interior of the duck. Cut off and remove duck neck (which comes tucked into the cavity), reserve for future stock making. Rub duck inside and out with half of spice mix. Combine onion, celery, and orange pieces in a bowl and toss with the remaining spice mix. Stuff into duck and tie legs.

Put a rack into a roasting pan that has a lid. Set duck breast side up on rack.

Bring 2 cups of water to a boil (I like to use my electric kettle). Pour boiling water into pan until it almost touches the duck. Cover. Put roasting pan into oven and drop oven temperature to 325°. Roast for 40 minutes. Remove from oven and transfer duck to a cutting board or platter. Pour water and duck fat from pan into a fat separator. Be sure to save the fat to use for roasting potatoes or some similarly yummy purpose.

Return duck to pan breast side down, cover, and return to oven. Roast 40 minutes.

Raise oven temperature to 375°. Remove lid. Flip duck breast side up. Roast 15 minutes. Smear glaze all over duck. Roast 15 more minutes. Check temperature by inserting an instant read thermometer into the inner thigh near the breast. I like my duck at 160°.

Let duck rest 15 minutes, carve, and serve with orange sauce on the side.

Orange glaze and sauce

• ½ teaspoon 5 spice powder
• 3 tablespoons Grand Mariner
• 8 tablespoons Sarabeth's Blood Orange Marmalade

Combine spice, liquor, and marmalade in your All-Clad 1-Quart sauce pan and bring to a simmer over medium heat. When mixture has thickened set half aside to use as a glaze.

Add the following to the remaining mixture in the sauce pan:

• 1 tablespoon Grand Mariner
• 1 tablespoon Sarabeth's Blood Orange Marmalade
• 1 8 ounce can mandarin oranges with their juice
• 2 tablespoons sherry vinegar
• salt to taste

Bring to a simmer and let thicken slightly.

@RidgeVineyards 1996 Monte Bello. Like an old claret. Earth. Tobacco. Leather. Cedar. Prunes. Currants. One of the best aged California Cabernets I’ve ever had. Grade: 99 pic.twitter.com/jdY2ey1Hx7

— Professor Bainbridge (@ProfBainbridge) November 23, 2018

Question for the day

Question for #lawtwitter. What's the most insulting citation sentence you've ever seen in a #lawreview article. Something like: "For an astonishingly incompetent review of the cases, see ...."

— Professor Bainbridge (@ProfBainbridge) November 15, 2018

Park on "Insider Trading and the Integrity of Mandatory Disclosure"

My friend and UCLAW colleague Jim Park has just posted a new article:

Insider trading regulation has been primarily shaped by two theories. The first argues that unequal access to material information corrupts the integrity of securities markets. The second contends that insider trading primarily undermines the property rights of a corporation. The dominance of the market integrity and property frameworks has obscured an important reason to regulate insider trading – it can undermine the integrity of the disclosure mandated by the securities laws. Such disclosure is meant to benefit all investors and should not be exploited by a few. Insider trading is particularly problematic in a periodic disclosure system where the release of significant information is deliberately delayed so it can be analyzed and verified. This Article argues that protecting the integrity of mandatory disclosure is a compelling reason for insider trading regulation. This disclosure approach suggests clearer limits to the reach of insider trading law and enforcement than the market integrity and property theories.

Park, James J., Insider Trading and the Integrity of Mandatory Disclosure (October 1, 2018). 2018 Wisconsin Law Review (Forthcoming); UCLA School of Law, Law-Econ Research Paper No. 18-12. Available at SSRN: https://ssrn.com/abstract=3258608

Anabtawi on "The Twilight of Enhanced Scrutiny in Delaware M&A Jurisprudence"

My friend and colleague Iman Anabtawi has posted a new article:

Merger and Acquisition (M&A) transactions create the potential for self-interested behavior by the boards of directors of acquired, or target, corporations because target boards may have self-interested reasons for preferring one acquirer over any other. The preferred acquirer may, for example, be more likely to retain the services of certain board members or to employ them in some other capacity after the completion of the transaction. In recognition of these potential conflicts of interest, the courts have recognized that target boards of directors may not always be incentivized to exercise their business judgment in M&A transactions in the best interests of shareholders and have therefore held them to the heightened standard of review of enhanced scrutiny. Enhanced scrutiny contemplates substantive judicial review of the reasonableness of the target board’s conduct in the sale of the company. Until recently, enhanced scrutiny review was not susceptible to being adjusted downward to business judgment-level review through procedural safeguards, such as the constitution of a special committee of the board or shareholder ratification. A special committee was not considered to be an effective means of cleansing an inherent conflict, and shareholder approval of the transaction was deemed to approve only the board’s decision to sell, as opposed to the board’s conduct of the sale process. The Delaware Supreme Court revisited the issue, holding that the shareholder ratification doctrine applies to a shareholder approval of an M&A transaction on the rationale that shareholders, particularly institutions, are at least as well-positioned as judges to evaluate the merits of a sale. As a result, approval of an M&A deal by target shareholders displaces enhanced scrutiny of the board of directors’ conduct in managing the sale in favor of the business judgment rule, effectively making the target board’s decision unreviewable. This Article argues that recent Delaware jurisprudence on shareholder ratification constitutes a fundamental shift in M&A jurisprudence, predicts that, while it will reduce deal litigation, it will have unnecessary detrimental effects on deal process, and proposes a procedural mechanism for mitigating those effects in the form of a bifurcated shareholder vote on each of the deal process and the sale transaction.

Anabtawi, Iman, The Twilight of Enhanced Scrutiny in Delaware M&A Jurisprudence. 43 Delaware Journal of Corporate Law (January 2019, Forthcoming); UCLA School of Law, Law-Econ Research Paper No. 18-11. Available at SSRN: https://ssrn.com/abstract=3248474

Holman Jenkins: "Google Confronts Its Bolsheviks"

From behind the WSJ paywall:

We may have to refine our theories of creative destruction. America’s big tech companies—Google in particular—suddenly seem less at risk from nascent competitors than from the politicization of their own employees. ...

The Google protests have been led by a group calling itself the Tech Workers Coalition, whose avowed purposes are ideological rather than strictly work-related. It got its start helping the Teamsters organize subcontractors who operate Silicon Valley’s employee shuttle buses. ...

They want politics to be in control of business. That includes deciding which products and services will be developed. According to San Francisco’s KQED, the activist group is reluctant even to name its “founders” due to the word’s “negative associations with what they call the capitalist-driven ethos that has become pervasive in Silicon Valley.” ...

Notice an irony here: Google’s bosses are shielded from any challenge coming from disappointed shareholders by a special voting-rights lockup. This was justified at the time of Google’s initial public offering as protecting management’s ability to make brave, long-term decisions without concern for short-term market reaction.

Now management seems to be in need of some bravery to defend the company’s long-term interests against a small band of employees who feel entitled to substitute their political hobby horses for their employer’s business priorities.