Ideoblog

KKR's corporation in uncorporate dressing

I’ve been talking a lot about the role of large partnership-type firms (which I call uncorporations), e.g., here. I’ve been arguing that, even if they’re publicly held, these firms can and do efficiently substitute partnership-type features such as investor liquidity and high-powered managerial incentives for corporate-type monitoring.

But Dennis Berman’s discusses in today's WSJ a KKR publicly held vehicle, KKR Financial Holdings LLC (KFN) that looks more like a corporation than its "LLC" designation would suggest.  Berman suggests that KKR would prefer to sweep this entity under the rug as it focuses on the IPO of its main business. KFN is trading at a discount to its book value, which Berman attributes at least partly to

investors' continued worries about KFN's fee structure, which looks like a remnant of a bygone era. For example, KFN investors pay a 1.75% management fee based on the size of KFN's equity. This takes away an incentive for KKR to buy back stock, even though this seems an obvious path for a company trading at such a discount to book. In addition, KFN has no high-water-mark feature, a typical hedge-fund provision which keeps the funds from earning incentive fees until they completely make up any investor losses. Those incentive fees, which can award up to 25% of profits above a 2% quarterly hurdle rate, are paid quarterly, so managers just need to post a good three month's performance to cash in. Most hedge-fund managers need to hold things together for a year to get paid. During 2007, when KFN lost $100 million, its managers made incentive fees of $17.5 million.

Contrast KFN with the hedge funds discussed elsewhere in today’s WSJ:

[B]ecause of the economics of hedge funds, it can be tough for some funds to stay in business if they're down too far for too long. In exchange for a cut of trading profits that usually amounts to at least 20% of all gains, hedge funds generally promise their investors that they will recover any losses before they begin to take their share. So a fund that loses 10% won't be able to reap profits beyond a management fee until it recovers that loss, called a "high-water mark." The problem is many funds pay their employees hefty bonuses out of that performance fee, so top analysts and traders may leave if they don't see a prospect of a big bonus for years to come. Also, it has become harder for some funds to borrow money on easy terms, limiting funds' ability to rack up impressive gains. The solution for some hedge funds, especially those whose managers reaped millions in recent years, will be to shut down.

So the hedge fund managers' interests are significantly better aligned with those of the owners than are KFN's managers.  Also, the funds, lacking the “permanent” capital provided by an IPO, have to constantly meet capital market demands or shut down.

In other words, just because it's an LLC, doesn't mean that KFN is an uncorporation.

Ryan redux

VC Noble offers a sort of defense of his Ryan v. Lyondell opinion (which I discussed here and here) in denying defendants' interlocutory appeal. Francis Pileggi usefully summarizes the most recent opinion.

The bottom line is that the Vice Chancellor suggests that the effect of the exoneration available under Delaware 102(b)(7) will be better understood after the facts are fully developed at trial. But the problem remains that a trial will be necessary despite allegations that verge on a mere due care violation.  This, in itself, is problematic for defendants who may have expected more protection from liability for mere, even if serious, misjudgments.

Still calling for agency/partnership papers

REMINDER!!!

The Section on Agency, Partnerships and Limited Liability Companies is calling for papers for the 2009 AALS Annual Meeting in San Diego. We are interested in presentations on the application of modern theories and empirical methods of business associations to agency and unincorporated firms. The program has two goals: First, to show how these theories can be enriched by taking them outside the "box" of corporate law; and second, to show the relevance of agency and unincorporated firms to the mainstream of corporate theory and empirics. A non-exhaustive list of possible topics includes the nature and function of fiduciary duties, agency theory, the role and enforcement of contracts, jurisdictional competition and choice of form, the relationship of federal and state law, jurisprudence, international and institutional comparisons, and legal and economic history. Please email either a draft paper if available, or if not an abstract and outline, to Larry E. Ribstein, University of Illinois College of Law, ribstein [at] law.uiuc.edu by no later than September 1, 2008.

Slater & Gordon, doing well

With global markets struggling and IPOs down, it's nice to know that at least one recently public firm is doing well.  Slater & Gordon, the world's first publicly traded law firm, seems to have prospered in its new form.  Here's one of my many posts on this development, with some links.

Meanwhile, law firms around the world, and especially in the UK, must be watching, and wondering what they could do with a pile of new cash.

Mrs. Palin goes to Washington

Having lived my life in film, I can’t help comparing this story to the one about the Senator from Montana.

Supposedly this is going to help the Obama campaign. Now he can say, “hey, she’s even less experienced than I am.” That should be a winner.

I’m with Tyler Cowen on this experience thing:

Rightly or wrongly, many American voters will view Palin's stint as mayor of small town, her background in sports, her role in a beauty contest (yes), her trials raising teenage children, and her decision to stick with her principles and have a Downs Syndrome baby as all very valuable and relevant forms of experience. The more the word "experience" is repeated, no matter what the context, the more it will hurt Obama.

Actually, I think rightly. Do Obama supporters think that Senators get better experience?  Well here's the voice of that experience.

The real question comes down to judgment, which will be revealed one way or the other in the debates and the stress of the campaign.  Maybe she'll even get to make a speech like this. 

More lawyers in the boardroom

Here's another innovation for which we can thank SOX and securities litigation: more lawyers in the boardroom.  To add to the company's inside and outside counsel, now independent directors are bringing in their own lawyers.  Here's a Law.com article, HT PoL.

Let's hope they keep a little space and time for the business people.

More evidence favoring short-selling

I have often criticized regulatory attacks on short-selling and cited evidence of short-sellers' positive effects on market efficiency, e.g., here. Here's some more: Karpoff & Lou, Do Short Sellers Detect Overpriced Firms? Evidence from SEC Enforcement Actions:

We examine short selling in the stocks of firms that subsequently are identified by the SEC as having misrepresented their financial statements, and report three findings. First, abnormal short interest increases steadily in the 19 months before the misrepresentation is publicly revealed. The amount of this increase and the level of short interest immediately before public revelation are positively related to the severity of the misrepresentation. Second, the speed with which misrepresentation is publicly revealed is positively related to the level of short interest. And third, there is no evidence that short interest facilitates a downward price spiral when bad news hits the market. To the contrary, short selling decreases the amount by which prices are inflated by these firms' misrepresentations, thus limiting uninformed investors' losses when they purchase shares during the misrepresentation period. Overall, this evidence indicates that short sellers anticipate the eventual discovery and severity of financial misconduct. Short selling also conveys external benefits to uninformed investors, by helping to detect financial misconduct and by keeping prices closer to fundamental values during periods in which firms provide incorrect financial information.

KPMG dismissal affirmed

The Second Circuit affirmed the dismissal of individual defendants in the KPMG case on the ground that the government had violated their 6th amendment rights by effectively denying them access to funds to defend themselves.   Here's a post on the dismissal with links to my previous discussions of this case, and here's the WSJ Law Blog on the affirmance.  I only have time today to add that it's a good thing, for all the reasons discussed in my prior posts.

Seinfeld on good faith in partnerships

We don’t usually think of Jerry Seinfeld as an authority on partnership law, but a very recent Maryland case reveals this other side. (See also Unincorporated Business blog, and the WSJ Law Blog.) 

In Clancy v. King, famous writer Tom Clancy and his ex-wife were partners in a limited partnership that was to engage in activities relating to the writing and sale of books.  The agreement provided for good faith and fiduciary duties, but broadly allowed Clancy to compete with the partnership:

Neither the Partnership nor any Partner shall have any rights or obligations, by virtue of this Agreement, in or to any independent ventures of any nature or description, or the income or profits derived therefrom, in which a Partner may engage, including, without limitation, the ownership, operation, management, syndication and development of other businesses, even if in competition with the Partnership's trade or business.

The majority held that this clause permitted Clancy to modify one of the partnership’s ventures so that that venture could no longer use Clancy’s name. The court relied on the broad power of freedom of contract, particularly in limited partnerships, citing yours truly several times on that issue in notes 13 and 14.

Interestingly, the court held that the agreement was enforceable even under Maryland’s RUPA-based fiduciary opt-out provision that requires such provisions to “identify specific types or categories of activities that do not violate the duty of loyalty.”(emphasis added).

However, the court held that bad faith could be shown by evidence that Clancy’s act was intended to punish his ex-wife.

The court’s authority for this interpretation was, amazingly, Jerry Seinfeld, in his Wig Master episode from 1996. Seinfeld buys a jacket from a store that promises to let him return it for a refund. He tried to return it after he got into a fight with the salesman, saying he was returning it because “I don’t care for the salesman that sold it to me.”:

Clerk: Well, if there was some problem with the garment. If it were unsatisfactory in some way, then we could do it for you, but I’m afraid spite doesn’t fit into any of our conditions for a refund.

Jerry: That's ridiculous, I want to return it. What's the difference what the reason is?

The manager then says he can’t return it purely for spite.

Jerry: Well, so fine then ... then I don't want it and then that's why I'm returning it.

Bob: Well you already said spite so....

Jerry: But I changed my mind.

Bob: No, you said spite. Too late.

So Jerry could return the jacket for any reason, including that he didn’t want it, but not for spite. But the contract said any reason, period. It’s not clear how spite is not within this contract because this kind of contract and transaction essentially leaves the question of whether the jacket is suitable (so to speak) up to the buyer.

In general, the implied covenant of good faith (as distinguished from the corporate duty of good faith) rests on the parties' expectations, as I've explained often, most recently here.  Now, perhaps one could argue that the contract in Clancy is different from the one in Seinfeld – it’s one to make a joint profit. The parties therefore expect that they will act in a profit-maximizing way. Acting out of spite to reduce the revenues of the partnership is contrary to this expectation. As the court said, quoting another case:

under the covenant of good faith and fair dealing, a party impliedly promises to refrain from doing anything that will have the effect of injuring or frustrating the right of the other party to receive the fruits of the contract between them.

On the other hand, the parties did bargain that Clancy could deny “the fruits of the contract” by competing. If, as the court held, he can appropriate the “fruits” this way, why can't he appropriate them out of spite?

The reason is that the parties did agree to good faith and fiduciary duties, as noted above.  They also denied a party the power to act in contravention of the agreement. So it's necessary to reconcile these obligations with the competition opt-out.  The dissent, in fact, reasoned that the general fiduciary duty should trump the opt out. So as sympathetic as I am with the majority, I might have been more persuaded by the dissent if it had relied on the language of the agreement.  However,the case may end up coming out the same way under either rule.

A legal lesson here is that the sea of broad freedom of contract looks like it's starting to wash over the contract-limiting language in RUPA, subject to the same sort of qualifications we see of the broader language in the Delaware opt-out provision.

Two drafting and planning lessons here:

1.  Don't have clauses in the agreement that pull in two different directions -- here, broad opt out covered by explicit good faith and fiduciary duties.

2.  Be careful before you do partnerships with your spouse.

Carney on the PCAOB

Dealbreaker's John Carney has a great post explaining why the DC Circuit’s recent case upholding SOX actually involves no mere technicality but a serious issue of delegation of power to administrative agencies, and why the Supreme Court may reverse if it gets the opportunity.

My only addition is to wonder if the DC Circuit figured that by upholding SOX with a strong dissent, it might be sending a message to Congress to amend to eliminate the problem. The court thereby avoids the chaos that would have ensued under the alternative holding of declaring the PCAOB unconstitutional. Because SOX lacks a severability clause, the effect of that would be to invalidate all of SOX and throw the whole thing back to Congress.

Of course, if that was the strategy, it doesn’t eliminate the problem, because once this part of SOX goes to Congress, the log-rolling on the whole act will begin, which could throw a lot of issues up for grabs – e.g., breaks for small and foreign firms.

Corporate crime in Russia and the US

Tom Kirkendall notes that Russia’s treatment of former Yukos executive Michael Khodorkovsky is being viewed here as evidence of Russia’s corrupt business and judicial system, and wonders if the same reasoning could be applied to some corporate crime prosecutions in this country. Good question.

USNWR rankings at the top of the news

The WSJ gives page-1 coverage to law school rankings, and particularly the practice of “gaming the system by channeling lower-scoring applicants into part-time programs that don't count in the rankings.” It notes that US News is considering counting these part-timers, and the effect it could have, not only on the rankings, but on who gets to go to law school

by narrowing a traditional pathway to law school for minorities and working professionals. Those groups often perform worse on the important Law School Admission Test, or LSAT, and schools could feel pressure to raise their admission thresholds.

As for the charge of “gaming” the system, Phillip Closius, former Toledo dean, who successfully used the part-time strategy to improve the school’s ranking, says:

U.S. News is not a moral code, it's a set of seriously flawed rules of a magazine, and I follow the rules...without hiding anything.

The article quotes former Houston dean Nancy Rapoport, who lost her job at least partly because of Houston’s fall in the rankings, comparing managing the rankings to “trying to meet analysts' quarterly expectations by massaging the numbers."

So there we have a few useful points I've been making over the years.  On the one hand, law schools are no different from the businesses legal academics often like to condemn (see, e.g., here and here). On the other hand, the same points I've been making about the moral unclarity of "gaming" the system apply in both contexts. 

And, of course, it's interesting this is page one news.

Another Democratic convention

Just in time for the real Democratic convention we have a celebration of the Democratic Convention of our time – the one in Chicago in 1968:

Scheduled to take place in Grant Park, at Michigan and Balbo on Aug. 28, starting at 5 p.m., much of the re-enactment itself has yet to be decided. An MC5 cover band is booked (the Detroit quintet played for protestors in '68), as is an anarchist marching band from New York. . . .

They say they want the re-enactment to be whimsical and fun, and prompt people to think about the legacy of 1968 and how that lessons related to the contemporary political situation, which includes, like '68, a presidential contest and foreign wars. "If we're walking around with a bunch of signs that say, 'U.S. out of Vietnam,' people are going to look at that and say, 'Wait-U.S. out of Vietnam? We're not in Vietnam," Warfield said. "We're in Iraq," said Hamlett. "We're not protesting. We want the U.S to get out of Vietnam."

Whimsical and fun?  Certainly not like the original.  Yes, I was there at the original one, listening to the MC5 in Lincoln Park, then running through Old Town, and still later at Michigan and Balboa where, supposedly, the whole world was watching while the crowd battled Mayor Daley’s troops. And even later, there was a trial of the so-called conspirators. And, yes, I was there too, in Judge Julius Hoffman’s courtroom, visiting with Abbie Hoffman and friends at the end of the day, and writing about it all for the University of Chicago Maroon. And then, on the north side of Chicago, I watched the Weathermen, the yippies’ (not to be confused with the yuppies) successors, rampaging by.

For now, I observe this reenactment, and the current Mayor Daley’s embrace of former Weatherman Bill Ayres with some amusement. I guess I'm part of history -- as if some veteran of the 1860 war wandered into a Civil War reenactment.

And if anyone wonders why I’m not caught up in the excitement, I would just say, won’t get fooled again (by the way, the ancient Richie Havens, of all people, is now out with an insipid cover of that).

Waiving judicial dissolution: our remedies oft in ourselves do lie

The helpful Francis Pileggi brings news of Chancellor Chandler’s recent opinion in In R & R Capital, LLC v. Buck & Doe Run Valley Farms, LLC, 2008 WL 3846318 (Del.Ch., Aug. 19, 2008) (no link yet). As Mr. Pileggi summarizes, the court enforced a clause explicitly waiving the members’ right to seek judicial dissolution.

The case involves litigation all over the country involving various entities that own land and race horses. (The Chancellor quotes one of the judges in a related case as remarking that race horses are a “[g]reat way to lose money.”)

In this opinion, the court first dismissed a dissolution claim brought by the owners of the LLC that was a sole member of the subject LLC because the Delaware statute, 18-803, requires the suit to be brought by a member or manager or their personal representative or assignee.

The other entities had the following clause:

Waiver of Dissolution Rights.The Members agree that irreparable damage would occur if any member should bring an action for judicial dissolution of the Company. Accordingly each member accepts the provisions under this Agreement as such Member's sole entitlement on Dissolution of the Company and waives and renounces such Member's right to seek a court decree of dissolution or to seek the appointment by a court of a liquidator for the Company.

The court held this didn’t conflict with another clause of the agreement providing for dissolution on court decree because the waiver provision applied only to actions by a member, and not one for a member (i.e., by the personal representative or assignee).

The court then addressed the main issue: whether this waiver is enforceable. This was an important open question. The courts are jealous of their power to be a final arbiter in these disputes, and judicial dissolution arguably operates as a safety valve when other aspects of the agreement fail.

As I discuss in Ribstein & Keatinge Sec. 11:5, n. 27 and here, there's some authority for letting the parties substitute arbitration for judicial dissolution if the arbitration clause is very carefully drafted. (Given this tendency to strictly interpret judicial dissolution waivers, I think the defendant dodged the bullet there. Let that be a lesson to those who stick boilerplate dissolution clauses in the agreement.) But what if the agreement, though clear, includes no safety valve – that is, it doesn't merely substitute arbitration.  Would that be enforceable?

Chancellor Chandler said yes. He emphasized Delaware’s strong public policy favoring freedom of contract, as he and other Delaware judges often have in recent cases (see, e.g., here for discussion a recent Chandler opinion and here for the Delaware Supreme Court’s view).

The Chancellor’s opinion includes four important principles:

First, it makes clear just how strong Delaware’s freedom-of-contract principle is – so strong, that a clear enough agreement (note the language of the clause here, quoted above) can bar plaintiff’s last-resort judicial dissolution remedy. As the court emphasized (footnote omitted):

The allure of the limited liability company. . . would be eviscerated if the parties could simply petition this court to renegotiate their agreements when relationships sour. Here, the sophisticated members of the seven Waiver Entities knowingly, voluntarily, and unambiguously waived their rights to petition this Court for dissolution or the appointment of a receiver under the LLC Act. This waiver is permissible and enforceable because it contravenes neither the Act itself nor the public policy of the state.

Second, the Chancellor provides an overall approach to the mandatory-enabling divide in the Delaware statute. A provision is mandatory only if the statute explicitly says it is. And those provisions are usually the ones protecting third parties.

Third, the court stresses that the parties have good reasons for opting out of litigation. In other words, instead of the usual emphasis on the benefits of protecting plaintiffs, we get a welcome analysis of the benefits of enforcing waivers like this:

[T]here are legitimate business reasons why members of a limited liability company may wish to waive their right to seek dissolution or the appointment of a receiver. For example, it is common for lenders to deem in loan agreements with limited liability companies that the filing of a petition for judicial dissolution will constitute a noncurable event of default. In such instances, it is necessary for all members to prospectively agree to waive their rights to judicial dissolution to protect the limited liability company. Otherwise, a disgruntled member could push the limited liability company into default on all of its outstanding loans simply by filing a petition with this Court.

Fourth, for those concerned about eliminating the remedy of last resort, the Chancellor noted that in fact there is a remaining "backstop" (Deborah DeMott's word) – the implied contractual covenant of good faith and fair dealing. In this case, the petitioners still had available a potential suit against the party that the petitioners had characterized as the wrongdoer. The outcome of that suit will depend on the contract, determined in the light of the implied covenant.

Finally, I can’t leave this case without noting the court’s heavy reliance on two writers whose birthdays happen to fall on the same day. The first is yours truly who is cited in n. 21 on the importance of uncorporations’ flexibility (Rise of the Uncorporation); on the role of mandatory rules in protecting third parties (Ribstein & Keatinge, Sec. 4:16); and as one whose “scholarship on limited liability companies has been frequently cited by both this Court and the Supreme Court, emphasizes that it is the rigor with which Delaware courts apply the contractual language of LLC Agreements that makes limited liability companies successful” (n. 44, citing The Uncorporation and Corporate Indeterminacy, and my article on RULLCA).

Who’s that other guy? He's the one who's cited in the first note as saying “the contract’s the thing” (or some such thing); and in the last note as saying, “our remedies oft in ourselves do lie.”

The power of managerial voice

Note to managers:  no sobbing during earnings conference calls. 

That's a lesson from Mayew and Venkatachalam, The Power of Voice: Managerial Affective States and Future Firm Performance. Here's the abstract:

In this study, we measure managerial affective states during earnings conference calls by analyzing conference call audio files using vocal emotion analysis software. We hypothesize and find that negative affect displayed by managers discussing their firms' results and prospects is informative about the firm's financial future. In particular, we find that managers exhibiting negative affect are less likely to meet or beat earnings expectations over each of the three subsequent quarters. However, market participants do not immediately impound these implications. Negative affect is not associated with analyst forecast revisions of next quarter's earnings. Over the subsequent 180 trading days, cumulative abnormal returns are negatively associated with negative affect, revealing that the market eventually impounds the implications of negative affect into price. Together our findings suggest that vocal cues contain useful information about firms' fundamentals, incremental to, and of comparable magnitude to, qualitative information conveyed by the linguistic content.

Seems to me the profits from this strategy are short-lived.  Analysts will soon catch on, so there goes the information advantage.  And around that time expect to see the emergence of affect-masking software. 

But would use of that software violate the securities laws? 

Governance, the uncorporation and subprime

Charles Calomiris illuminates what really happened in subprime.

To begin with, he notes that the crisis, rather than being a surprise, was the quite expected result of investors’ unrealistic assumptions about risk of loss. Calomiris notes that rating agencies expected 4.5%-6% losses on subprime mortgage-backed securities pools. Independent analysts knew these were way too low. This assumption enabled financing at indefensibly high ratings, and therefore low rates.

These numbers were based on experiences during 2000-05 when there happened to be a dramatic rise in housing prices, which affected both the number of and losses from defaults. Experts could have sharpened their forecasts by looking at business cycles, rather than focusing on a narrow range of dates that could not provide useful guidance about the future. And it stands to reason that if the industry makes drastically more subprime loans, the quality of the borrowers will decline and expected losses will rise, as did, in fact happened.

Of course, the rating agencies and institutional investors were all in on this. But as Calomiris says

they were all investing someone else’s money and earning huge salaries, bonuses, and management fees for being willing to pretend that these were reasonable investments. And furthermore, they knew that other competing asset managers were behaving similarly and that they would be able to blame the collapse (when it inevitably came) on a surprising shock. The script would be clear, and would give “plausible deniability” to all involved. “Who knew? We all thought that 6% was the right loss assumption! That was what experience suggested and what the rating agencies used.”

Calomires also points to various regulatory policies that helped this disaster along, particularly including the great power delegated to the ratings agencies, SEC anti-notching rules that encouraged ratings inflation, rules that discouraged banks from holding junior tranches in their securitizations (by raising minimum capital requirements for banks that did this).

But as Calomires points out, one set of investors did better than all the others – hedge funds. Now why would that be? Because, he says, their managers’ fees based on profits (and, I would add, their own substantial investments in their funds) aligned their interests with those of their investors. They couldn’t afford to simply herd with the others – they had to actually pay attention to reality.

Calomires notes that hedge fund managers are not subject to the regulation that applies to mutual fund managers, who get paid according to how many customers they can suck in rather than their funds' returns. As Calomires says:

Because hedge fund compensation structure is not regulated, and because both investors and managers are typically highly sophisticated people, it is reasonable to expect that the hedge fund financing structure has evolved as an “efficient” financial contract, which may explain the superior performance of hedge funds.. . .

Managers who gain from the size of their portfolios rather than the profitability of their investments will face strong incentives not to inform investors of deteriorating opportunities in the marketplace and not to return funds to investors when the return relative to risk of their asset class deteriorates.

Readers of this blog will already see where I’m headed with this. This story directly supports what I have been saying about the advantages of what I call partnership, or “uncorporate,” governance structures that involve not only high-powered owner-like compensation, as Calomires stresses, but also distributions to owners and limited term of the fund, both of which tend to expose managers to capital market discipline. See my Uncorporating the Large Firm, which discusses the use of these structures in several types of firms, including hedge funds.

I argue that these devices can be superior to the sort of monitoring structures that publicly held corporations and other firms governed on the corporate model typically rely on. So we see that all of the so-called independent directors in the world and the other trappings that are considered so essential to the modern corporation did not stop a huge segment of the investment industry from deliberately ignoring reality, and causing vast dislocations as a result. Yet despite this, as I show in my article, there is still a bias against uncorporate structures in large firms.

The story of the subprime bust is yet another reason why we cannot afford to overlook the importance of governance to the economy, and to remain blind to alternatives to a governance orthodoxy that continues to lead us astray.

PCAOB upheld

The opinion is here, holding that the structure of the PCAOB doesn’t unconstitutionally attenuate the president’s constitutional appointments power. You can read Jay Brown’s examination of the opinion, working back from here (he’s now up to 17 posts altogether on this case). I’ve focused on the implications for SOX of the PCAOB being overturned, so I probably won’t have much to say about this opinion.

The legacy of Tzolis

Readers will recall that I had unkind words for the NY Court of Appeals opinion in Tzolis v. Wolff, 10 N.Y.3d 100, 855 N.Y.S. 2d 6, 884 N.E. 2d 1005 (2008). 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.

Guess what case the dissent cited in support? Of course the majority labored mightily to distinguish it.

The last word on partnerships

Couldn’t resist sharing a case I’ve been reading recently -- Lach v. Man O'War Management, LLC, 2008 WL 746480 (Ky., March 20, 2008). The majority refused to let the general partners transform the limited partnership into an LLC, though they appeared to be clearly authorized to do so, because this would favor the incumbent general partners.

But there was no evidence that the partners had actually hurt the partnership by doing so. So why should this be any kind of breach of duty?

Well, the dissent noticed this problem, and said (*18, n. 2):

Notably there is no case in the fiduciary duty section of Bromberg and Ribstein on Partnership comparable to the one before this Court.

Yes, I would say that’s notable.

Update:  Kentucky lawyer Tom Rutledge has more details on the case.

The Deal Professor on the Uncorporation

Steve Davidoff, the NYT’s Deal Professor, suggests a “partnership solution for investment banks”:

[M]any now decry the costs of being public and advocate the private corporation as a more superior economic form that can minimize systemic risk. In support, they look to the large private equity firms and their ability to earn such high excess returns for so many years as examples of the superiority of the private company. For more on this Professor Larry Ribstein at IdeoBlog sets forth the arguments for private companies, or what he calls Uncorporations. * * * Every quarter, the marks get worse. In Lehman’s and Merrill’s cases, their balance sheets ultimately were not structured well to withstand this kind of crisis in confidence. But if the MDs were owners — looking out for each other and a chief executive who, when he went to the country club, had to face them — would all of this have happened? There is some anecdotal evidence that the partnership model might have helped. The bank that largely anticipated and avoided the problems with subprime securities and other financial instruments is Goldman Sachs. Goldman famously unwound its partnership structure in 1999 but retains the most partnership-like attributes of the banks, even having a super-class of managing directors known as partnership managing directors, whom the firm attempts to treat like the old Goldman partners of yore. * * *

Yes, I do tout the advantages of partnership structure, even for large firms, in my Uncorporating the Large Firm. But I point out that what I call “uncorporate discipline” – which includes significant ownership by managers and greater owner access to the firm’s cash – may work for publicly held firms as well as closely held. In other words, the relevant dichotomy is not between closely and publicly held, but between the corporation and the uncorporation.

The bottom line is that Lehman and Merrill might stay public while restructuring more along the lines of the publicly traded "private" equity firms -- or, for that matter, Goldman.