HBLR Online is a portal to timely pieces about recent developments in business law. As an important forum for opinion and scholarship, HBLR Online is designed to be a cutting edge guide to developments in the field of business law. HBLR Online also provides opportunities for student members to develop their own editing and writing skills. Accordingly, HBLR Online will contain pieces by students as well as outside contributors.
LLCs and Corporations: A Fork in the Road in Delaware?
June 06, 2011
Joshua P. Fershee: The limited liability company (LLC) has evolved from a little used entity option to become the leading business entity of choice. The primary impetus for this change was an Internal Revenue Service (IRS) determination in 1988 that permitted pass-through tax status for a Wyoming LLC. Then, in 1997, the IRS passed its check-the-box regulations permitting LLCs (and other non-corporate entities) to simply opt-in to the benefits of partnership tax treatment. These two rulings have been viewed as having “had a profound, unprecedented, and perhaps unpredictable impact on the future development of unincorporated business organizations.” Since that time, some scholars argued that the LLC should be treated as a third, and separate, entity unto itself with its own developing body of law. Nonetheless, many courts have applied corporate law to LLCs with seemingly little appreciation of the differences between LLCs and corporations. That may be about to change.
Contingent Convertible Bonds and Banker Compensation: Potential Conflicts of Interest?
April 22, 2011
Gaurav Toshniwal: Two issues related to financial regulation have received significant academic and regulatory attention since the financial crisis: Contingent Convertible Bonds (“CoCos”) and banker compensation. The discussion, however, has largely been silent on the interaction between the two. This brief note explores the potential conflicts that may exist in the design and implementation of CoCos because of the incentive structure created by managerial compensation. Regulators, academics and market participants will need to address these concerns in designing the regulatory framework for CoCo instruments and managerial compensation.
The AT&T Arbitration Clause as a Replacement for Class Action
April 09, 2011
Michael Springer: Recently, the Supreme Court heard oral arguments in the suit between AT&T and Vincent and Liza Concepcion on whether the Federal Arbitration Act preempts California contract law. This case raises a policy issue that will not necessarily be answered by the Supreme Court: the efficacy of the class action lawsuit. While the class action definitely serves a significant purpose, there are other methods of solving the problem it seeks to address. In fact, the very arbitration clause the Supreme Court of California struck down as unconscionable can both serve the same function as a class action suit and do so in a manner that is arguably better for the consumer. Class action suits serve two main functions. The class action allows plaintiffs to pursue a legal claim that they otherwise would not, and the class action provides incentives for companies to behave in socially desirable ways. The first of these functions, while ostensibly served, hardly carries weight in the world today.
Durbin Sticks to Guns, Chooses Slurpees Over Consumers: An Overview of the Durbin Amendment and Its Potential Adverse Impact on Consumers
April 09, 2011
Brandon Gold When the chairmen of the Federal Reserve Board and Federal Deposit Insurance Corporation and the Acting Comptroller of the Currency express doubts about a regulation designed to eliminate seventy percent of a market, and when the queen and spokeswoman of consumer financial protection, Elizabeth Warren, refuses to comment on a financial rule supposedly enacted to protect consumers, one would expect a rational legislator to, at a minimum, delay such a measure until they could properly understand its ramifications. Dick Durbin, the number two democrat in the Senate, refuses to fit that mold. Instead, Durbin, the author of the self-titled “Durbin Amendment” to the Dodd-Frank Act, refuses to reconsider the legislation directing the Federal Reserve to limit debit card interchange fees and threatens to filibuster any bill brought before the Senate that seeks to delay its implementation.
Harmony or Cacophony? A Preliminary Assessment of the Responses to the Financial Crisis at Home and in the EU
April 08, 2011
J. Scott Colesanti To be sure, the recent reforms to the U.S. regulatory system are far from final. Even if House Republicans do not succeed in turning back the clock, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) require so many studies, interpretations, and effectuating regulations that it will evade meaningful analysis for years. And while the nominally bipartisan Financial Crisis Inquiry Commission recently issued its report on causes for the financial crisis, that spirited document both spread the blame and disclosed infighting so as to cloud sufficiently any lasting impressions. Separately, the European Union—tasked with confronting the same economic foes while facing its own legislative obstacle of supranationalism—has issued robust rounds of Directives, Regulations, and Recommendations. Similar to efforts in the United States, the culmination of these reforms will trigger debate about business regulation on that continent for years to come.
In Dodd-Frank’s Shadow: The Declining Competitiveness of U.S. Public Equity Markets
March 28, 2011
David Daniels As we enter into 2011, things are looking up. The Dow Jones has recently broken through 12,000 and is climbing to pre-recession heights. The economy has emerged from the greatest downturn since the Great Depression and continues to show modest growth. Unemployment is slowly decreasing. But all is not well. A potentially worrying trend that gained traction at the beginning of the millennia continues to unfold: the decline of the competitiveness of U.S. public equity markets. For example, consider the U.S. primary equity markets. In 2000, these markets attracted 54% of all global initial public offerings (IPOs)—IPOs by foreign companies issued on at least one public exchange outside the company’s domestic market. Similarly, foreign companies raised about 82% of the dollar value of all global IPOs on U.S. public exchanges.
March 18, 2011
Amy J. Schmitz On July 21, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), which among other things calls for creation of the Consumer Financial Protection Bureau (CFPB) to serve as a centralized agency charged with protecting consumers from lending abuses and improper practices. The question is when and whether this agency will come to fruition—or suffer as a casualty of political warfare. This CFPB has instigated a firestorm among liberals and conservatives. Liberals raise the CFPB as an engine for consumer protection from rampant lender abuses and “big bad banks.” Conservatives denounce the Bureau as expensive regulatory fluff in a “leftist” campaign to take over private business.
Questioning the 500 Equity Holders Trigger
March 18, 2011
William K. Sjostrom, Jr. An obscure provision of the Securities Exchange Act of 1934 (Exchange Act) has received unprecedented attention in recent months because of the prominent role it appears to be playing in Facebook’s decision on going public. Specifically, Exchange Act Section 12(g)(1) requires any company with “total assets exceeding [$10,000,000] and a class of equity security . . . held of record by five hundred or more . . . persons” to register such security under the Exchange Act. The measurement date for these thresholds is the last day of a company’s fiscal year. It then has 120 days from that date to register. Today, the practical effect of this rule is to force certain types of firms into the public markets earlier than is desirable. A shift from a shareholder-based trigger to one based on trading volume would preserve the Rule’s underlying policy concerns while mitigating this unintended effect.
Corporate Reorganization as Corporate Reinvention: Borders and Blockbuster in Chapter 11
March 17, 2011
Ruth Sarah Lee At its heart, Chapter 11 is supposed to be about giving struggling businesses a new beginning, predicated on the idea that “a failing business can be reshaped into a successful operation . . . a predictable creation from a people whose majority religion embraces the idea of life from death and whose central myth is the pioneer making a fresh start on the boundless prairie.” However, major Chapter 11 cases filed in the past few months, and the subsequent discussions they provoked, raise a new question to peruse: how new should the new beginning be—how fresh the fresh start? When a corporation vows to change its business model in order to pay back its debts and become more successful, how much is it supposed to change? Can it morph into a completely different corporation after it emerges? Corporations like Borders Group, Inc. (“Borders”) or Blockbuster Inc. (“Blockbuster”) might be making Chapter 11 the fashionable, new way to metamorphose.
Injury or Deterrence: The End of Class-Action Litigation and Its Benefit to Consumers
March 10, 2011
Jason Sherman On November 8, The Wall Street Journal asked, “Is D-Day Approaching For Class-Actions Lawsuits?” The next day, the Supreme Court heard oral arguments for AT&T Mobility v. Concepcion. The lower courts held AT&T Mobility’s (“ATTM”) adhesion contract’s arbitration clause unconscionable because it prevented class actions through either litigation or arbitration. However, the Federal Arbitration Act, as argued by ATTM, may preempt the finding by the lower courts, ultimately allowing corporations to use “no class action” clauses to shield themselves from class action litigation or arbitration. The media has mostly predicted that the case will be resolved in favor of ATTM, and as Professor Brian Fitzpatrick said, “it could end class-action litigation in American as we know it.” Many believe this lack of access to class action will “have harmful public policy consequences” that “would cut off the only meaningful method to redress widespread discrimination, fraud, or other violations of the law.”
A Brief History of Hedge Fund Adviser Registration and Its Consequences for Private Equity and Venture Capital Advisers
February 01, 2011
William K. Sjostrom, Jr. Historically, hedge fund advisers have not had to register under the Investment Advisers Act of 1940 (the Advisers Act) because of the private adviser exemption. This exemption applied to an investment adviser who (1) had fewer than fifteen clients during the previous twelve months, (2) did not publicly hold itself out as an investment adviser, and (3) did not advise registered investment companies. Even though a hedge fund routinely has fifteen or more investors, hedge fund advisers were able to meet the fewer than fifteen client requirement because they only had to count as clients the funds they advised (which they were careful to keep at fourteen or fewer) and not individual investors in the funds.
Understanding the Commercial Real Estate Debt Crisis
February 01, 2011
Tanya D. Marsh The popular, if simplistic, understanding of the most recent economic crisis is that it was triggered by the bursting of an unprecedented residential real estate bubble. In this narrative, the bubble was caused by interrelated factors—the irrational beliefs of homeowners that property values would continue to rise and the aggressive lending practices, which focused on maximizing the size and volume of loan originations at the expense of prudent underwriting. Although we see signs of a slow recovery, the bubble’s collapse continues to have a destabilizing effect on every corner of our economy and society, from financial institutions struggling with “toxic assets” on their balance sheets, to community disruption caused by residential foreclosures.
Concerted Refusals to License Intellectual Property Rights
January 18, 2011
Christina Bohannan and Herbert Hovenkamp The Federal Circuit recently issued a patent misuse decision that has implications for both innovation policy and antitrust law. Unilateral refusals to license intellectual property rights are virtually never antitrust violations, as is true of most unilateral refusals to deal. The Patent Act provides that a unilateral refusal to license cannot constitute patent “misuse,” which is a defense to an infringement suit based on the patentee’s anticompetitive acts, restraints on innovation, or improper sequestering of the public domain. Concerted refusals to deal are treated much more harshly under the antitrust laws because they can facilitate collusion or, in the case of technology, keep superior products or processes off the market.
Citizens United and the Nexus-Of-Contracts Presumption
January 18, 2011
Stefan J. Padfield Citizens United v. Federal Election Commission has been described as “one of the most important business decisions in a generation.” In Citizens United, the Supreme Court of the United States invalidated section 441(b) of the Federal Election Campaign Act of 1971 as unconstitutional. That section prohibited corporations (and unions) from financing “electioneering communications” (speech that expressly advocates the election or defeat of a candidate) within 30 days of a primary election. The five Justices in the majority rested their holding on the assertion that “Government may not suppress political speech on the basis of the speaker’s corporate identity.” In reaching this conclusion, the majority relied on a view of the corporation fundamentally as an “association of citizens.”
January 18, 2011
Frederick Ryan Castillo Digging deeper into their analytical toolbox, policymakers, academics, and regulators are increasingly exploring whether, and to what extent, a system of contingent capital can strengthen the resilience of the banking sector. The global financial crisis unearthed fragile and troubled banks, riddled with excessive leverage, poor quality capital buffers, and liquidity problems. Because these institutions were deemed “too big to fail,” governments were forced to intervene and prop them up by way of costly, taxpayer-funded bailouts. With the benefit of hindsight, regulators are now looking at contingent capital as a potentially speedy and less costly alternative for recapitalizing banks in periods of financial distress.
One Way That Dodd-Frank’s Liquidation Authority Could Achieve Parity With The Bankruptcy Code
November 29, 2010
Harvey R. Miller and Maurice Horwitz On October 19, 2010, the FDIC published a proposed rule governing the implementation of Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Title II of Dodd-Frank creates an orderly liquidation authority for the resolution of systemically important financial institutions. According to the FDIC’s Notice of Proposed Rulemaking Implementing Certain Orderly Liquidation Authority Provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, “[t]he liquidation rules of Title II are designed to create parity in the treatment of creditors with the Bankruptcy Code and other normally applicable insolvency laws.”
FINRA Proposed Rule Change Would Give Customers Option of All-Public Arbitration Panels
November 29, 2010
Barbara Black Brokerage firms customarily include in their customers’ agreements a predispute arbitration agreement requiring that investors arbitrate their disputes before an arbitration panel of the Financial Industry Regulatory Authority (FINRA). Current rules governing customers’ claims over $100,000 require each three-person panel to include one non-public, or industry, arbitrator in addition to one public arbitrator and one chair-qualified public arbitrator. Investor advocates long have argued that the mandatory inclusion of an arbitrator with ties to the securities industry was unfair to investors and gave the securities industry one decision-maker who would be sympathetic to its position.
Normalizing Match Rights: Comment on In re Cogent, Inc. Shareholder Litigation
November 29, 2010
Brian JM Quinn Early in October of this year the Chancery Court handed down its opinion in In re Cogent, Inc. Shareholder Litigation. In many respects, the ruling was pedestrian. Shareholders of Cogent, a Delaware corporation in the business of providing automated fingerprint identification systems, challenged management’s decision to sell the corporation to the 3M Company for $10.50/share in cash. The essence of the shareholders’ challenge focused on supposed inadequacies in the sales process that, according to the plaintiffs, resulted in a breach of the directors’ Revlon obligations. The shareholders further alleged that deal protections and other provisions in the merger agreement were preclusive, arguing that such provisions made it unlikely that a potential bidder lurking on the edges of the transaction might come forward.
Is the “Tax Poison Pill” the Last Stand for Protecting NOLs After Health Care Reform?
November 29, 2010
Michael R. Patrone The Delaware Court of Chancery’s recent Selectica opinion garnered substantial attention, but the court’s decision upholding the tax poison pill may be of even greater importance with the passage of the Health Care and Education Reconciliation Act of 2010 (H.R. 4872)—less than a month after Vice-Chancellor Noble issued his opinion. During the global economic recession, many companies accrued substantial tax losses that can be carried forward for up to twenty years and used to offset future income for federal tax purposes, called net operating loss carryforwards (“NOLs”). These valuable tax assets will provide substantial financial benefits for companies down the road but are vulnerable to spoilage from significant changes in company ownership.
Distilling the Debate on Proxy Access
November 29, 2010
David Page In August 2010, the SEC issued its final rule on proxy access, which gives shareholders the right to place director nominees directly on the company’s proxy card, thereby sparing shareholders a large part of the expense of waging a traditional proxy contest. This rulemaking, and the SEC’s subsequent decision in October to delay implementing the rule pending a challenge from the Business Roundtable, has fueled a vigorous debate on the merits of proxy access and the details of its implementation. Some of the arguments made by commentators and academics are particularly interesting and useful in framing the contours of the debate.
The Rise and Fall of the Proxy Access Idea: A Narrative
November 29, 2010
Laurenz Vuchetich Every person involved in the creation or exercise of any discipline tends to strive toward absolutes. Is the idea of proxy access a step closer to immaculate corporate governance? According to the most recent actions of its introducers, it is not—or at least not yet.