Conglomerate

The Alma Mater Statue at University of Illinois Takes a Spa Year.

2012-02-17T09:43:19-07:00

If you are an alumni of the University of Illinois, then the Alma Mater statue probably has a special place in your heart. I merely have the privilege of teaching here, and I love this statue, which welcomes you to campus. The words on the base of the statue send shivers: "To Thy Happy Children of the Future, Those of the Past Send Greetings." Alma Mater gets decorated for graduation, holidays, etc., and children young and old climb all over her. So, Alma Mater is going off-campus for some refurbishing. We will miss her until she returns.

DreamGiver

2012-02-17T00:54:33-07:00

BYU's Center for Animation is amazing. My daughter and son-in-law are both animation majors, and Murphy was the rendering supervisor on BYU's latest award-winning short, called "DreamGiver." You can watch it here.

Mormon Population Density

2012-02-17T00:01:00-07:00

I grew up in a county with 0.0% Mormons, and I now live in a county with 88.13% Mormons. See here for an interactive map.

Yes ... they are a lot different.

Default Fiduciary Duties in Delaware LLCs

2012-02-16T13:08:48-07:00

The Delaware Limited Liability Company Act provides:

(b) It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.

Del. Code Ann. tit. 6, §18-1101.

With regard to fiduciary duties, the DLLCA allows for complete waiver. See, e.g., Gerber v. Enter. Prods. Holdings, LLC, 2012 WL 34442, at *13 (Del. Ch. Jan. 6, 2012) ("Alternate entity legislation reflects the Legislature's decision to allow such ventures to be governed without the traditional fiduciary duties, if that is what the ... governing document provides for, and allows conduct that, in a different context, would be sanctioned.").

But what if the participants in an LLC are silent about fiduciary duties? Should the courts impose fiduciary duties, even though the DLLCA does not expressly provide for them?

In 2009 Chief Justice Myron Steele of the Delaware Supreme Court wrote a law review article arguing "that default fiduciary duties violate the strong policy favoring freedom of contract enunciated by Delaware's legislature" and that "the costs of default fiduciary duties outweigh the minimal benefits that they provide." Freedom of Contract and Default Contractual Duties in the Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 223-224 (2009). This prompted Larry Hamermesh to organize an online symposium on the topic of Default Fiduciary Duties in LLCs and LPs over at the The Institute of Delaware Corporate & Business Law.

In Auriga Capital Corp. v. Gatz Properties, LLC, Chancellor Strine confronts the issue of default fiduciary duties in a manager-managed LLC and reaches a different conclusion than Chief Justice Steele’s. Chancellor Strine's composed a section of the opinion under the heading "Default Fiduciary Duties Do Exist in the LLC Context," analogizing to fiduciary law in the corporate context. The text and history of the DLLCA provide some important clues, but Strine's analysis also depends heavily on the structure of the relationship between an LLC's manager and the LLC's members:

The manager of an LLC –- which is in plain words a limited liability “company” having many of the features of a corporation –- easily fits the definition of a fiduciary. The manager of an LLC has more than an arms-length, contractual relationship with the members of the LLC. Rather, the manager is vested with discretionary power to manage the business of the LLC.

While Professor Ann Conaway objects to Chancellor Strine's opinion on several grounds, I think Chancellor Strine is on solid ground. Professor Conaway purports to identify several "errors" in the opinion, none of which seems like an error to me, though, admittedly, each involves a contestable interpretation of the DLLCA. Facing uncertainty in the governing statute, Chancellor Strine analyzes the structure of the LLC and interprets the statute accordingly. He is taking the approach I advocated in The Critical Resource Theory of Fiduciary Duty:

The theory proposed here is animated by the view that fiduciary relationships form when one party (the "fiduciary") acts on behalf of another party (the "beneficiary") while exercising discretion with respect to a critical resource belonging to the beneficiary. The italicized typeface highlights the three core requirements of a fiduciary relationship. Each requirement plays an important role in distinguishing fiduciary from nonfiduciary relationships. When combined, these requirements show how the duty of loyalty that is the essence of fiduciary duty protects beneficiaries against opportunistic behavior by fiduciaries.

Note the last sentence of the passage from Chancellor Strine's opinion, quoted above (taking some liberty to imply the beneficiary): "the manager is vested with discretionary power to manage the business of the LLC [on behalf of the members]." Fiduciary duties serve a useful function in contexts like these. Participants in a Delaware LLC are permitted to waive the duties, but when they don't, courts should assume they apply ... just as they have done in similar relationships for hundreds of years.

The Scholarship of Professor Larry Ribstein

2012-02-16T11:06:38-07:00

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 dmoll@central.uh.edu.

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 dmoll@central.uh.edu

Fellowships for Aspiring Law Professors

2012-02-15T14:59:11-07:00

Paul Caron has posted his annual list of Fellowships for Aspiring Law Professors, a very useful guide for those hoping to break into law teaching.

ISS Doesn't "Like" Facebook

2012-02-15T11:29:44-07:00

I'm sure that the Facebook IPO will spawn at least as many legal articles as the Google IPO. (In fact, I began blogging as a guest blogger on Gordon's Venturpreneur site that summer of 2004 specifically to blog about the Google IPO.) The new piece of meat that has been thrown to academic lions is a negative report by the ISS entitled "Tragedy of the Dual Class Commons." The ISS does not seem to like the corporate governance structure of the Facebook IPO.

Like Google (and Zynga, LinkedIn and Groupon), Facebook has a dual-class structure, which ensures that the founders (in this case, founder) have voting control even after the IPO. ISS seems very skeptical of this method of disenfranchising shareholders, even though shareholders understand this situation before purchasing the shares. Of course, the interesting question is whether shareholders demand a discount for dual class common. I looked on SSRN and found several dual-class common papers, but it seemed from the abstracts that investors don't actually require much of a discount. Of course Google was oversubscribed by retail investors and the share price has done very well, but we don't have a basket of firms like Google without dual class common to compare Google to over time.But it will be interesting to analyze whether investors will be turned off by how little "voice" they are getting in the FB IPO. As even the ISS admits:

While good corporate governance practices, by increasing board and management accountability, can provide a robust framework to drive shareholder value, this IPO event itself presents a Hobson’s choice: accept governance structures which diminish shareholder rights and board accountability, or miss out on what appears to be one of the hottest business models of the internet age.

But Facebook has adopted more corporate governance belts and suspenders to preserve Zuckerberg's control than even seem rational. In its registration statement, Google lists as many risk factors the fact that its corporate governance structure is as pro-management as you can possibly imagine (except maybe Carlyle). Even though Facebook considers itself a "controlled company" for listing purposes, it seems almost paranoid that it will lose control. In case you haven't seen them, here are a few:

• any transaction that would result in a change in control of our company will require the approval of a majority of our outstanding Class B common stock voting as a separate class;

• we have a dual class common stock structure, which provides Mr. Zuckerberg with the ability to control the outcome of matters requiring stockholder approval, even if he owns significantly less than a majority of the shares of our outstanding Class A and Class B common stock;

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, certain amendments to our restated certificate of incorporation or bylaws will require the approval of two-thirds of the combined vote of our then-outstanding shares of Class A and Class B common stock;

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, vacancies on our board of directors will be able to be filled only by our board of directors and not by stockholders;

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our board of directors will be classified into three classes of directors with staggered three-year terms and directors will only be able to be removed from office for cause;

• when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of our common stock, our stockholders will only be able to take action at a meeting of stockholders and not by written consent;

• only our chairman, our chief executive officer, our president, or a majority of our board of directors will be authorized to call a special meeting of stockholders;

• advance notice procedures will apply for stockholders to nominate candidates for election as directors or to bring matters before an annual meeting of stockholders;

• our restated certificate of incorporation will authorize undesignated preferred stock, the terms of which may be established, and shares of which may be issued, without stockholder approval;

• certain litigation against us can only be brought in Delaware ; and
• Our board of directors will not initially be classified. Our restated certificate of incorporation and restated bylaws provide that when the outstanding shares of our Class B common stock represent less than a majority of the combined voting power of common stock, our board of directors will be classified into three classes of directors each of which will hold office for a three-year term. In addition, thereafter, directors may only be removed from the board of directors for cause. The existence of a classified board could delay a successful tender offeror from obtaining majority control of our board of directors, and the prospect of that delay might deter a potential offeror.

Moreover, FB has not opted out of Section 203 of the Delaware code, which would effectively bar most hostile takeovers. And, for the sake of completeness, FB as a controlled company is exempt from either NASDAQ or NYSE listing requirements regarding independent directors, which means that FB does not have to have any independent directors, either on the whole board or on a nominating committee or audit committee. These are all things that might give the ISS or other "good governance" monitors some pause. Particularly because the public float is going to be so low, as low as 5% of the shares available. So, if you are only offering such a small percentage, and your founder has the majority of the shares, why do you need so many anti-takeover provisions? Does Zuckerberg worry that his (nonindependent, insider) board may turn against him a la Adlerstein v. Wertheimer?

If I were teaching Corporations, and I was trying to show students how a founder could raise capital, diversify her economic interest, but retain total control, the FB IPO would be the hypothetical way to go.

Van Halen and Those Brown M&Ms

2012-02-15T09:30:16-07:00

Others have blogged about the Van Halen brown M&M clause (no brown M&Ms backstage), attributed to rock star over-indulgence and egocentrism. There's another, more rational explanation available here.

Brown M&Ms from Van Halen on Vimeo.

Jeremy Telman doesn't buy David Lee Roth's explanation. But it's so much fun!

Update: I thought the Glom had posted on this story back in the day, but I couldn't find it in our archives. Here's Gordon back in 2009.

Is it Inconsistent to Benefit From a Program You Think is Bad?

2012-02-14T10:48:54-07:00

On Sunday, the NYT published a long, front-page story that is getting a lot of attention, Even Critics of Safety Net Increasingly Depend On It. The article has a lot of interesting facts, like the amount of spending on government entitlement programs has skyrocketed, but those dollars are going less and less (as a percentage) to the lowest fifth of the population. Relatedly, though surveys show that most Americans believe that the programs that are growing the fastest are for the poor, these programs are not growing at all, except for Medicaid. And, the program that is growing the fastest is Medicare.

But the article wants to point out what it seems to see as a hypocrisy: that people who are arguing that government should be smaller, and voting their concerns, are beneficiaries of these programs. So, folks that argue that government should cut spending to the poor are taking advantage of free lunch programs and getting disability checks, Social Security and Medicare. The article seems to think that this irony is the result of some sort of "except me" selfishness or cognitive dissonance. If the latter is the case, then voters are surely not voting their interests, and next year they will wake up and realize that they can't make ends meet any more because they can't qualify for free lunch or their unemployment checks were much smaller. And then, of course, it's too late to re-cast your vote. The article seems to hold up these people as sort-of ignorant victims of Tea Party rhetoric who maybe shouldn't deserve to vote.

But, there could be alternative theories. It could be that a voter doesn't think that some of these programs should be funded by the government. But they are. So, if I can't control how that money is being spent, then it's in my interest to take advantage of the program until the program is ended. So, I may think that our summer research grants are too large (obviously a hypothetical) or that our teaching load is too small (again, just go with me). But, I'm not in a position to change either of those, so I might as well take the summer money and teach the prescribed load. But, if a Dean candidate came through saying that she would reduce summer grants and increase the teaching load (this candidate has become extinct due to evolution), then I wouldn't be a hypocrite or a creature of cognitive dissonance to vote for that candidate. Now, I have known a few people who turn down free government services they otherwise qualify for because they can pay their own way (special needs services for children, for example). But these folks are few and far between, I think.

No one in the article seems to articulate that "ride the wave" type of thinking (at least how the article is written), but some do seem to fit into the category of "I spent my life thinking I could count on Social Security and Medicare, and now I depend on it. But I do think the government should make cuts so as not to overburden the youth. But any cuts to my income would be devastating because I was counting on those." I don't think that's hypocritical or cognitive dissonance; that's just realistic pragmatism.

Fun with Word Frequencies

2012-02-14T10:21:48-07:00

We are talking about word frequencies today in Corpus Linguistics, and as my in-class experiment, I created a Wordle cloud from my most recent article, Private Ordering with Shareholder Bylaws:

If you don't know what the article is about, you can read the abstract, but reading the word cloud gives you a pretty good idea at a glance. Could word frequencies help us find the scholarship that most interests us?

Comments on the Volcker Rule

2012-02-14T07:45:29-07:00

The comment period just ended, and the Times has a piece on how active individual banks have been in filing their thoughts (with pictures of your favorite Davis Polk banking law celebrities, if you like that sort of thing). Ordinarily, banks leave these sorts of things to the banking associations. The WSJ has a piece summarizing the comments, and you can get your own taste here (SEC), here (CFTC), and here (Fed). Perhaps most encouragingly, Kim Krawiec, already something of an expert on this sort of commenting, is on the case. It certainly shows how financial lawyers may need to master some of the intricacies of participating in administrative rulemaking.

The SEC Investigates Private Equity

2012-02-13T07:22:59-07:00

The SEC is a resource constrained agency that clearly misses much wrongdoing. But by going after hedge funds with its insider trading powers, and now by investigating private equity, I think you can also tell a story of an agency that is increasingly unwilling to let some areas of the capital markets go as "buyer beware, big boys play here" alternatives to the heavily regulated public listings. Dodd-Frank made the SEC more of a player in derivatives regulation, and with money market funds too.

To be sure, there are still some dark pool markets out there. But instead of picking its battles, it looks to me like the agency is trying to be comprehensive in its oversight. As for the latest development, the SEC's investigation concerns the way that private equity firms value their hard-to-value assets, which may be being oversold to investors. It sounds like a Rule 10b-5 matter:

One focus of the inquiry is how private equity firms value their investments and report performance. Unlike the valuing of publicly traded stocks, valuing private equity investments — largely in private companies that are not listed on an exchange — can be a thorny and subjective process.

The S.E.C.’s concern, say people familiar with the government inquiry, is that some private equity funds might overstate the value of their portfolios to attract investors for future funds.

Social Capital-ism: Do We Need Parental Investment Caps?

2012-02-12T09:42:19-07:00

A few days ago, the NYT published an article about a recent study that show that the education gap between high and low income families is growing. Both the gap between those in the 10th and 50th percentile, between 50th and 90th percentile, and 10th and 90th percentile are growing as measured by test scores of children. And, the gap is present in kindergarten and doesn't narrow or widen appreciably. Finally, this gap has widened at the same time that the racial achievent gap has narrowed substantially.

The author of the study situates it in within the current income disparity debate (title: "The Widening Academic Achievent Gap Between the Rich and the Poor"), as does the NYT article ("Education Gap Grows Between Rich and Poor"). However, the author notes that his findings do not confirm or support the theory that the academic gap is primarily a result of the growing income disparity between the top 1% and the rest of the country. More important, the author finds, is that above the median income, families are investing more in their children per earned dollar and getting results. The author cites to studies describing how, in the past few decades, child-rearing advice has shifted from how to keep small children clean, well and quiet to how to keep them stimulated and jump start their learning processes. This study, cited by the NYT, shows the increase in dollars spent on children split into income deciles. And, as these families earn more dollars, they continue to spend the same percentage (more dollars) on their children.

What interests me is that these articles and studies suggest that there is a serious problem here. And, presumably, that this is a problem that should be corrected, though no one is suggesting how. I guess I'm crazy, but there's an underlying story here that is positive. People are investing in their children, and their children are benefitting from the additional hours and dollars that parents spend today. Nowhere in these studies does it say that the 10th percentile are testing worse at the end of the time period than at the beginning. (They also don't say that the 10th percentile are doing better, but I presume that if that group were doing worse, then it would benefit the study to say so.) So, we have had a net increase in parental investment. Isn't that a good thing? Obviously, it would be a better thing if every child in the study had the highest amount of parental involvement observed, regardless of income. And, there is a sobering reality that the parents of the children in the 10th percentile do not have the same amount of time or money to invest as those in the 90th percentile. And, it is very bad news that in the lower deciles, real income is decreasing. But what is the solution?

One of those quoted in the articles stresses that the difference is in parenting, not in pure income. So, giving families more money to spend is not going to necessary result in more investment of time or money. If this was a consequence of kids going to school without three meals a day or materials, then government can try to fix that, a la the War on Poverty. Or, if the gap widened during K-12, then have more public investment in education in low-income schools. But it's unclear what strategy is necessary to duplicate an existence in the upper deciles in which children are more likely to have two educated and involved parents with time to devote to modern parenting strategies and therefore show up in kindergarten at an advantage.

But in the meantime, these studies seem to strike a tone that it's lamentable that 90th percentile earners are engaging in "concerted parenting." (For those of you wondering, 90th percentile would be a family with one BigLaw junior associate and an at-home spouse. The tenth decile begins there and ends with Mark Zuckerberg.) Whether we use the phrase "Tiger Mom" or "Helicopter Parent," we should applaud more engaged parenting, right?

Credit Derivatives, Leverage, and Financial Regulation’s Missing Macroeconomic Dimension

2012-02-10T19:09:09-07:00

The 2011 symposium edition of the Berkeley Business Law Journal on Dodd-Frank is out. I would like to thank the editors and the Berkeley Center for Law, Business and the Economy for inviting me to a great conference. My contribution, Credit Derivatives, Leverage, and Financial Regulation’s Missing Macroeconomic Dimension is now up on ssrn. Here is the abstract:

Of all OTC derivatives, credit derivatives pose particular concerns because of their ability to generate leverage that can increase liquidity - or the effective money supply - throughout the financial system. Credit derivatives and the leverage they create thus do much more than increase the fragility of financial institutions and increase counterparty risk. By increasing leverage and liquidity, credit derivatives can fuel rises in asset prices and even asset price bubbles. Rising asset prices can then mask mistakes in the pricing of credit derivatives and in assessments of overall leverage in the financial system. Furthermore, the use of credit derivatives by financial institutions can contribute to a cycle of leveraging and deleveraging in the economy.

This Article argues for viewing many of the policy responses to credit derivatives, such as requirements that these derivatives be exchange traded, centrally cleared, or otherwise subject to collateral or 'margin' requirements, in a second, macroeconomic dimension. These rules have the potential to change – or at least better measure – the amount of liquidity and the supply of credit in financial markets and in the 'real' economy. By examining credit derivatives, this Article illustrates the need to see a wide array of financial regulations in a macroeconomic context.

Understanding credit derivatives’ macroeconomic effects has implications for macroprudential regulatory design. First, regulations that address financial institution leverage offer central bankers new tools to dampen inflation in asset markets and to fight potential asset price bubbles. Second, even if these regulations are not used primarily as monetary or macroeconomic levers, changes in these regulations, including changes in the effectiveness of these regulations due to regulatory arbitrage, can have profound macroeconomic effects. Third, the macroeconomic dimension of credit derivative regulation and other financial regulation argues for greater coordination between prudential regulation and macroeconomic policy.

Comments by e-mail are always welcome.

Tax Consequences of Facebook's IPO: Zuckerberg's Stock, Stock Optons and RSU's

2012-02-09T11:35:25-07:00

Yesterday I told my Corporate Tax class that we could teach a whole course on the tax implications of the Facebook IPO. I wasn't kidding. Here are a few of the interesting issues that highlight current debates in the taxation of corporations and their shareholders. (Gregg Polsky has also covered some of these on The Faculty Lounge.)

Mark Zuckerberg's stock: CEO Zuckerberg holds almost 414 million shares of stock. At the time of the IPO, he owes no taxes on that stock until a recognition event, such as sale. When and how did he acquire this stock? Most likely, much of it is "founder's stock." This is friend of the Glom Vic Fleischer's territory (See Taxing Founder's Stock). Zuckerberg probably contributed the algorithms and code for Facebook in return for stock as a nontaxable event either as a contribution to a corporation by a control group or (as Vic explains), making an election to have the stock distribution a taxable event, with the valuation of the stock as equal to the contribution. Even though the stock is more accurately described as consideration for Zuckerberg's labor, it will be taxed at some point as capital gains, which is now 15% and considerably less than the ordinary income rate. Gregg argues that this isn't that bad because the corporation doesn't get a deduction for it, so no deduction plus 15% is better than 35% deduction and 35% taxation, if you look at it from the point of view of the public fisc. I think Vic is looking at it from the point of view of regular folks who contribute labor for stock versus founders. Interesting debate.

Zuckerberg's and others stock options: From reports in the media, it seems that the stock options that Zuckerberg holds (and probably others) are nonqualifying stock options. The S-1 describes a 2005 stock option plan that issued incentive stock options, but stock options issued before then or under a different plan don't seem to be qualifying options. Should holders of nonqualifying stock options exercise those options at or after the IPO, they will encounter a taxable event regardless of whether they sell the stock. Zuckerberg has over 120 million stock options giving as compensation, which he plans to exercise. His exercise price is 6 cents. So, at something like $30/share,that's about $3.6 billion (say it like Mike Myers) of taxable ordinary income (the spread between exercise price and price at conversion). Zuckerberg's tax bill (federal and California) may well be one of the biggest tax bills ever. Apparently, he plans to sell enough shares to pay his taxes, which may reach $2 billion. Other holders will also face the same dilemma of having a tax bill even if they don't have any additional cash on hand. Those who exercise qualifying ISOs will not have a current tax liability if they do not sell. (I have now wandered away from things I know about, so I will stop.)

But, for each option that is exercised that is taxable as compensation, Facebook gets a deduction, even though no cash is (or has ever) gone out of the company for that expense. So, Facebook calculates that it will have tax refunds for awhile given the billions of dollars in compensation expense it will enjoy.

Restricted Stock Units: Starting in 2008, Facebook began granting service providers RSUs instead ot stock options, probably to avoid the 500 shareholder threshold for registration under 12(g) of the Securities Exchange Act. These RSUs are scheduled to vest six months after the IPO. The recipients will be taxed at ordinary rates for the difference between the FMV of the stock at the time and the price paid for the grant (if any). (Though, recipients could make an 83(b) election at the time of the grant when valuation is both less and less clear, but this may be a risky move.) Finally, Facebook has to withhold cash for that. Facebook has listed this as a risk factor in its S-1:

We anticipate that we will expend substantial funds in connection with the tax liabilities that arise upon the initial settlement of RSUs following our initial public offering and the manner in which we fund that expenditure may have an adverse effect.

Whew. That's enough.