Bizorgs

Teaching the Case Studies

The AALS Standing Committee on Curriculum Issues has asked me to do a session on case studies as part of the program on "Teaching Beyond the Appellate Opinion." (See the Annual Meeting Program in pdf here.) This year and last, I have used the case studies as a basis for team homework assignments in my Business Associations course. (For more on why I use teams in the classroom, see here.) I run through a PowerPoint of the case study in class, then assign the students a transactionally oriented problem based on the case study. For example, this semester, my first homework assignment of the semester is based on the Red Hat case study, and I asked students to answer the questions at the end of the case study as a team. It is a very simple assignment to generate from my side, and it invites transactional thinking, which I want to encourage.

Adlerstein Litigation Redux

Adlerstein v. Wertheimer is a favorite for teachers of our book, and Karl Okamoto recently alerted me to the resolution of Joseph Adlerstein's lawsuit against his former law firm, Duane Morris, over a claim of legal malpractice. Dave Hoffman blogged about this lawsuit at Concurring Opinions, and Law.com has the rest of the story:

Joseph K. Adlerstein sued Duane Morris in 2004 after he failed to receive $1.6 million of a $1.8 million settlement with his former company, SpectruMedix. He claimed the firm committed legal malpractice by failing to ensure the settlement agreement included some form of security in the event SpectruMedix didn't pay up.

The case, Adlerstein v. Duane Morris, was filed a year after Duane Morris sued Adlerstein for not paying more than half of his $480,000 legal bill. He had paid the firm $200,000 -- the only portion of the settlement with SpectruMedix he actually received.

Throughout the trial, Duane Morris had argued that it asked SpectruMedix and its then-new Chairman Ilan Reich for security but Reich refused.

Duane Morris' counsel, Nicholas M. Centrella of Conrad O'Brien Gellman & Rohn, said in court that it was Adlerstein's fault for walking away from an earlier settlement agreement that would have guaranteed $800,000 to be paid in five days. He made a second mistake, Centrella had said, when he signed the agreement for the $1.8 million even after he allegedly knew there was no security.

Clifford E. Haines of Clifford E. Haines & Associates represented Adlerstein and argued in court that it was Duane Morris' duty to ensure security or advise Adlerstein that he might be making a bad decision by signing an agreement with no security.

The jurors came back with a 7-to-1 verdict in favor of Duane Morris. Haines said it was the seven women against the one male juror.

The attorneys did get a chance to talk to the jury after the verdict was given. Haines said the jurors seemed to feel that Adlerstein should have understood the terms of the agreement.

"They were troubled by the fact that Dr. Adlerstein had in fact signed the agreement," he said.

At the time of the story (this past February), Adlerstein's attorney was intent on filing appeals, so we may not have seen the end of this case, yet. But I can't find any additional updates online.

We're Famous!

Kaimi Wenger blogged about the second edition of the casebook at Concurring Opinions. Early returns on the new edition have been positive, and we hope that continues. I am teaching it right now and loving it. Please let us know if you have any suggestions for the third edition ... it's never too early to start!

Chancery Denies Interlocutory Appeal on Ryan v. Lyondell

Ryan v. Lyondell generated a whole lot of consternation in the blogosphere (some of which is collected here), but in my view, the commentary was largely overblown in this case, as Vice Chancellor Noble clarified today in his letter opinion denying an interlocutory appeal by the defendants. (See the letter opinion here and Francis Pileggi's helpful summary here.)

Of course, the defendants could have saved themselves the trouble if they had read my post on the initial opinion. My post on their memorandum in support of this motion of interlocutory appeal further showed why they were barking up the wrong tree, and Vice Chancellor Noble wrote as much in today's opinion, repeatedly emphasizing that his initial opinion did not eviscerate Section 102(b)(7), nor did it signal the revival of a "liability crisis" like the one that followed Smith v. Van Gorkom. (Of course, even that historical curiosity is more complicated than just that.) The court contrasted this case with Van Gorkom as follows:

The directors in this instance walked into a potential liability trap with their eyes wide open: they knew the Company was “in play,” they knew what the proper discharge of their fiduciary obligations in connection with a sale of control demanded, and yet they appear, on the limited record before the Court, to have done nothing to prepare for a possible sale.

That's the central point of the new opinion: on the summary judgment record, the defendants "did nothing (or virtually nothing)" to fulfill their Revlon duties. Thus, "the directors may have consciously disregarded their known fiduciary obligations in a sale scenario." In other words, the defendants may have acted in "bad faith." Thus, the court wants to see a more developed record. That is all.

Adobe Presenter

One of the most important aspects my course re-design project this summer was my strategy to move my PowerPoint lectures outside of the classroom. When I explained to my teaching advisers at the BYU Center for Teaching and Learning the tension between my desire for adequate, if not comprehensive, coverage and the time demands of interactive, team-based learning, their first question was this: can you move any of your current classroom activities outside the classroom to free up more of your classroom time?

I have always used PowerPoint lectures to introduce new topics. These lectures condense and reformulate the readings, ideally providing students with simple takeaways on each topic. I try to keep these lectures short, usually around 5-10 minutes, and students rarely speak. These lectures seemed like perfect candidates for internet distribution.

Over the past few years, I have also used PowerPoint slides to discuss cases, and I have found that they can be very effective at giving students a "picture" of a case (usually a diagram tracking the various transactions that prompted the litigation). During these discussions, I typically call on a student or students, and we engage in the traditional Socratic analysis of the case. But as I reflected on this over the summer, I realized that these segments of class were not very engaging, nor were they as necessary for second- and third-year law students, who have traveled a good distance up the learning curve of legal analysis, as they were for first-year students. (See Steve Bainbridge, who also makes this point.)

While these PowerPoint sessions may not be the most valuable use of class time, the students seem to value them relatively highly. So I have decided to retain the activities, but move them outside the classroom.

The challenge then became a technological one. Lectures are easy to record, and PowerPoint slides are easy to produce, but I was looking for an effective means of combining the lecture with the slides. Enter Adobe Presenter. This simple add-on to Microsoft PowerPoint allows me to record a lecture in my office while syncing the lecture with the PowerPoint slides. You can see an example of the results here. We are still working out some of the technical kinks, and I need to become more comfortable speaking to a microphone, but I am encouraged by this first effort, and my goal is to do as many presentations as possible outside of class, reserving the class time for more active learning that I will blog about in a future post.

If you would like to read more about my teaching goals, check out the teaching posts at The Conglomerate, where I have been discussing the decisions that I made in the re-design of my Business Associations syllabus. Sometimes to a hostile crowd.

Teaching Krispy Kreme

One of the things I love about the Krispy Kreme case study in Chapter 1 is that it allows the students to learn something about franchising. Given the importance of franchising to the U.S. economy, we spend precious little time on it in law schools.

Earlier this week, Jayne Barnard emailed to note that she sent her students to franchise.com and AmericasBestFranchises.com to learn more about the industry. She also recommends Entrepreneur.com for a look at the Top 10 franchises for 2008 (the list has a number of companies that appear frequently in the case reporters because of their strained relations with franchisees).

First Class

What do you do in the first class of the year?

My first class session is on Monday, and I have assigned pages 1-7 of the casebook. This allows me to introduce the law of agency and to deal with one of the most interesting issues in that field: formation.

Our vehicle for exploring that issue is a new case entitled U.S. v. Cyberheat, decided by a federal district court in Arizona. We chose this case in part because we thought that the students would be able to relate to the facts. Who hasn't received spam?

We also like the idea that the case involves agency law embedded in a federal regulatory scheme. We see this again later in the chapter with Castillo v. Case Farms of Ohio, Inc. Cases like these subtly convey the message that this body of law is hugely important.

A third reason we like the case is that it involves the "outward-looking consequences" of agency relationships. In other words, this case positions the putative agency relationship between Cyberheat and its affiliates as a counterpoint to regular people who just want to read their email without spam. Many of the students who enroll in the basic business associations course are brand new to business, but most have had a year of law school and understand the threat of liability. The fact that liability here is dependent on agency law gives the topic some salience.

All of that is directed at conveying the importance of agency law, but one of my main goals on the first day of the course is to introduce some of the big themes of the course. Arguably the most important theme -- one that too often is left unexpressed -- is that we are dealing with "business associations." Though we often treat these associations as people, our task it to open that black box and peer inside. What goes on inside an association? How does that affect the association's interactions with others?

Finally, I want my course to have a transactional spin, so on the first day of class I am going to ask the teams of students to represent Cyberheat. Based on what you have read in the case, could you modify the affiliate agreement to be more certain that you would avoid a finding of agency?

Thank You!

We just heard from our publisher that the second edition of the casebook is attracting many new adoptions, well beyond expectations. If you have adopted the casebook, thank you!

Building a loyal constituency for a casebook typically requires several editions, we are told, but the publisher was pleased with the sales of the first edition, and they seem positively ecstatic about the first semester with the second edition.

As I noted when we announced the second edition, we made some important structural changes to the book that will make it more intuitive and, thus, easier for most people to teach. If you have any suggestions regarding the book, please do not hesitate to contact us. As we noted in the acknowledgments to the second edition, several adopters of the first edition made important contributions to the new edition. We look forward to hearing from you.

Tzolis v. Wolff Update

Larry Ribstein reports on "The Legacy of Tzolis," a case on derivative litigation that we included in Chapter 3 ("Limited Liability Companies"):

There the court read a derivative suit remedy into the NY LLC statute despite fairly clear evidence that the legislature didn’t want it there.

One danger of this sort of shenanigans is loss of predictability. If the court’s going to read stuff into statutes, how can we tell what statutes do and don’t say?

Well, it didn’t take long for the birds to come home to roost in Albany. Appleton Acquisition, LLC v. National Housing Partnership, 10 N.Y.3d 250, 886 N.E.2d 144, 856 N.Y.S.2d 522 (2008) held that NY’s limited partnership statutory appraisal remedy precluded common law fraud remedies. But wait, said the dissent: since the statute didn’t clearly abrogate the common law fraud remedy, it should be allowed.

For Larry's original post on Tzolis, see here.

CA v. AFSCME: Teaching Notes

CA v. AFSCME is a fascinating case, and it will be fun to teach. I am writing a law review article examining the issues raised by the case, and the following notes are from an early draft of the article.

The ultimate issue presented in this case was whether CA, Inc. would be allowed to exclude a proposal for a shareholder-adopted bylaw from its proxy statement on the ground that the proposed bylaw would be an improper subject for shareholder action under Delaware law or, alternatively, that the bylaw would cause CA to violate Delaware law. The proposal sought to amend CA’s bylaws as follows:

RESOLVED, that pursuant to section 109 of the Delaware General Corporation Law and Article IX of the bylaws of CA, Inc., stockholders of CA hereby amend the bylaws to add the following Section 14 to Article II:

"The board of directors shall cause the corporation to reimburse a stockholder or group of stockholders (together, the "Nominator") for reasonable expenses ("Expenses") incurred in connection with nominating one or more candidates in a contested election of directors, including, without limitation, printing, mailing, legal, solicitation, travel, advertising and public relations expenses, so long as (a) the election of fewer than 50% of the directors to be elected is contested in the election, (b) one or more candidates nominated by the Nominator are elected to the corporation’s board of directors, (c) stockholders are not permitted to cumulate their votes for directors, and (d) the election occurred, and the Expenses were incurred, after this bylaw's adoption. The amount paid to a Nominator under this bylaw in respect of a contested election shall not exceed the amount expended by the corporation in connection with such election."

The board of directors of CA opposed the bylaw and requested a no-action letter from the SEC. In connection with its no-action request, CA submitted an opinion letter from the Delaware law firm of Richards, Layton & Finger P.A. stating, "in our opinion the Proposal is not a proper subject for stockholder action and, if implemented by the Company, would violate the General Corporation Law." In response, AFSCME submitted an opinion letter from the Delaware law firm of Grant & Eisenhofer P.A. stating, "Our Opinion [is that] the Proposed Bylaw is valid under Delaware law [and that] Delaware law recognizes stockholders' ability to enact bylaws such as the one contained in the Proposal."

The SEC certified the following questions to the Delaware Supreme Court:

(I) Is the AFSCME Proposal a proper subject for action by shareholders as a matter of Delaware law?

(II) Would the AFSCME Proposal, if adopted, cause CA to violate any Delaware law to which it is subject?

As a matter of Delaware law, these questions implicated Sections 109 and 141(a) and forced the Delaware Supreme Court to address the interplay of those sections. Section 109 empowers shareholders to adopt, alter, or repeal bylaws, which may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." Meanwhile, section 141(a) empowers a board of directors to manage the "business and affairs of every corporation…, except as may be otherwise provided in this chapter or in its certificate of incorporation." Jeffrey Gordon has described these two sections as linked in a "recursive loop": the shareholder power to adopt, alter, or repeal bylaws is limited by "law," which includes the power of the board of directors to manage or supervise the management of the corporation; meanwhile the board's power to manage or supervise the management of the corporation is limited by other provisions in the DGCL ("this chapter"), which include the shareholder power to adopt, alter, or repeal bylaws.

Given the insoluble tension between Sections 109 and 141(a), the resulting opinion was inevitably somewhat contradictory, and the issue will undoubtedly require additional litigation in future cases, unless the Delaware legislature decides to amend the DGCL to resolve some of the lingering issues. I will focus the students on two novel and somewhat startling assertions made by the Court: (1) that "the DGCL has not allocated to the board and the shareholders the identical, coextensive power to adopt, amend and repeal the bylaws"; and (2) "It is well-established Delaware law that a proper function of bylaws is not to mandate how the board should decide specific substantive business decisions, but rather, to define the process and procedures by which those decisions are made."

The first assertion seems plausible enough on the face of Section 109, which states without qualification that the shareholders of a corporation are invested with the power to "adopt, amend or repeal bylaws," while the directors have no statutory "power to adopt, amend or repeal bylaws," but only such power as is conferred upon them by the certificate of incorporation. The concluding sentence of Section 109(a) seems designed to drive the point home that shareholders have an immutable statutory power, whereas the power of directors is dependent on the certification of incorporation, which the Delaware courts routinely treat as a contract.

Whether the source of the bylaw power is the DGCL or the certificate of incorporation probably should not matter, but remember that we are trying to make sense of the Court’s assertion, "the DGCL has not allocated to the board and the shareholders the identical, coextensive power to adopt, amend and repeal the bylaws." In light of the foregoing analysis of Section 109(a), it may seem surprising that the Court intended to draw exactly the opposite inference from the language of the statute, namely, that the bylaw power of the shareholders was not as broad as the bylaw power of directors.

To reach this result, the Court observed that Section 109(a) "does not exist in a vacuum," but it must be read together with Section 141(a). After quoting that section, which grants to the board of directors the authority to manage or supervise the management of the "business and affairs of every corporation," the Court asserted:

No such broad management power is statutorily allocated to the shareholders. Indeed, it is well-established that stockholders of a corporation subject to the DGCL may not directly manage the business and affairs of the corporation, at least without specific authorization in either the statute or the certificate of incorporation. Therefore, the shareholders' statutory power to adopt, amend or repeal bylaws is not coextensive with the board's concurrent power and is limited by the board’s management prerogatives under Section 141(a).

In observing that the principle of director primacy is "well-established," the Court cited a raft of cases, the earliest of which was Aronson v. Lewis, Justice Moore's enigmatic decision articulating the standard (though incoherent) definition of the business judgment rule. In that case, Justice Moore stated, "[a] cardinal precept of the General Corporation Law of the State of Delaware is that directors, rather than shareholders, manage the business and affairs of the corporation."

The CA Court relied on Aronson's "cardinal precept" in another footnote to escape the recursive loop of Sections 109(a) and 141(a). The Court reasoned:

Because the board's managerial authority under Section 141(a) is a cardinal precept of the DGCL, we do not construe Section 109 as an "except[ion] ... otherwise specified in th[e] [DGCL]" to Section 141(a). Rather, the shareholders' statutory power to adopt, amend or repeal bylaws under Section 109 cannot be "inconsistent with law," including Section 141(a).

Although bylaws adopted under Section 109 are invalid if they are inconsistent with Section 141(a), the Court rejected CA;s argument that "any bylaw that in any respect might be viewed as limiting or restricting the power of the board of directors automatically falls outside the scope of permissible bylaws." The Court correctly observed, "That reasoning, taken to its logical extreme, would result in eliminating altogether the shareholders' statutory right to adopt, amend or repeal bylaws." Thus, the Court was left with a nasty "split the difference" problem.

Before turning to the Court's solution, we pause the highlight the fundamental flaw in the Court's reasoning, namely, that the "cardinal precept" was articulated and propagated in cases deciding the appropriate scope of shareholder intervention via litigation. These are not cases in which shareholders deliberately intervened in corporate governance ex ante, but rather cases in which the shareholders attempted to undo a board action ex post.

With regard to the second assertion mentioned above, that the "proper function of bylaws" is to lay down procedural rules, not to make substantive decisions. The Court made this assertion as part of its "split the difference" analysis. The assertion seems problematic in light of the broad description of bylaws in Section 109(b), which reads in relevant part:

[B]ylaws may contain any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.

The only authorities cited for the Court’s distinction between procedural and substantive bylaws are two Court of Chancery opinions, neither of which even remotely supports the notion that bylaws are exclusively procedural. But the more problematic aspect of this part of the opinion is that the Court has now invited litigation of the nature of bylaws without much guidance on how to distinguish procedural and substantive bylaws. The Court characterized various bylaws as "purely procedural," then concluded that the AFSCME bylaw proposal, "though infelicitously couched as a substantive-sounding mandate to expend corporate funds, has both the intent and the effect of regulating the process for electing directors of CA." As a result, the bylaw was a "proper subject for shareholder action" under Rule 14a-8.

Despite being a "proper subject for shareholder action" under Rule 14a-8 (the first certified question), the AFSCME bylaw was still "inconsistent with law" (the second certified question) because "the board of directors would breach their fiduciary duties if they complied with the Bylaw." In my view, the Court misapprehended the proper relationship between shareholder-adopted bylaws and fiduciary duty.

To explain the difficulties with the Court's opinion, I invoke the analogy of an agency relationship in which the shareholders are the "principal" and the board of directors is the "agent." The very definition of an agency relationship contemplates the right of control by the principal, and the agent has a concomitant duty of obedience. It is axiomatic that the agent does not breach its duty by following the principal's orders.

Following this line of reasoning in the corporate context, I contend that the Court in CA erred by reaching the following conclusion:

[T]he Bylaw, as drafted, would violate the prohibition, which our decisions have derived from Section 141(a), against contractual arrangements that commit the board of directors to a course of action that would preclude them from fully discharging their fiduciary duties to the corporation and its shareholders.

As with its analysis of Aronson’s "cardinal precept," the Court again failed to account for the unique factual context presented by shareholder-adopted bylaws. The Court extracted the fiduciary principle from Paramount Communications, Inc. v. QVC Network, Inc., in which the Delaware Supreme Court invalidated a deal protection device in a merger agreement. In that case, the board of directors of Paramount Communications, Inc. approved the device to protect a merger agreement between their company and Viacom from any hostile interventions by QVC Network, Inc. The Court held that the "Paramount directors could not contract away their fiduciary obligations."

The Court in CA also cited Quickturn Design Systems, Inc. v. Shapiro, in which the Delaware Supreme Court invalidated a "delayed redemption provision" in a poison pill. According to the Quickturn Court, the delayed redemption provision was invalid because it "prevent[ed] a newly elected board of directors from completely discharging its fundamental management duties to the corporation and its stockholders for six months."

The CA Court recognized the obvious distinction between these two cases and the case at bar, namely, that QVC and Quickturn both involved actions by the board of directors to limit their own authority, whereas CA involved an action by shareholders to limit the board's authority. But the Court called this "a distinction without a difference":

The reason is that the internal governance contract – which here takes the form of a bylaw – is one that would also prevent the directors from exercising their full managerial power in circumstances where their fiduciary duties would otherwise require them to deny reimbursement to a dissident slate. That this limitation would be imposed by a majority vote of the shareholders rather than by the directors themselves, does not, in our view, legally matter.

It's hard to imagine how the Court found this argument persuasive. The form of the argument transparently circular, and, if taken seriously, it would prohibit all bylaws. After all, as the Court recognized earlier in its opinion, every bylaw impinges to some extent on the power of the board of directors, thus "prevent[ing] the directors from exercising their full managerial power in circumstances where their fiduciary duties would otherwise require them to" act. The Court had properly framed the issue as requiring it to decide "what is the scope of shareholder action that Section 109(b) permits yet does not improperly intrude upon the directors' power to manage corporation's business and affairs under Section 141(a)," but its conclusory resolution of that issue is unsatisfactory because it unwittingly concludes that there is no scope of shareholder action. The result in CA is the latest chapter in a long history of cases in which the Court has enshrined "director primacy."