Tuesday, July 10, 2018
I am both a business law professor and an energy law professor, which is sometimes surprising to people. That is, some folks are surprised that have a research focus in two areas that are seemingly very distinct. In one sense, that's true, at least in the academic realm. Most energy law scholars tend to have a focus on more close related disciplines, such as environmental law, administrative law, and property law. And business law scholars tend to trend toward things like commercial law, bankruptcy, tax, and contracts.
There is substantial overlap, though, in the energy and business law spaces, as I have noted on this blog before. I am even working on some research that looks specifically at the role laws and regulations have on business and economic development. My work with the WVU Center for Innovation in Gas Research and Utilization builds on this energy and business nexus.
I am pleased to share a newly published article I wrote with Amy Stein from the University of Florida's Levin College of Law. The piece is called Decarbonizing Light-Duty Vehicles, and it appears in the July issue of Environmental Law Reporter. It is available here. This article is based on our forthcoming book chapter that will appear in Legal Pathways to Deep Decarbonization in the United States (Michael B. Gerrard & John C. Dernbach eds.) and published by the Environmental Law Institute. The book expands on the U.S. work of the Deep Decarbonization Pathways Project, and was prepared in collaboration with that organization. Following is an excerpt that gives a sense of how energy and business law and policy sometimes intersect.
A last challenge surrounds the existing business models that revolve around the [internal combustion vehicle (ICV)]. First, a number of states have a strong incentive to maintain a core of ICVs due to their heavy reliance on the gasoline tax to fund highway infrastructure in their respective states. The gasoline tax has been in place since 1956 to help pay for construction of the interstate highway system. Since that time, Congress has directed the majority of the revenues from this tax to the Highway Trust Fund (HTF). At the federal level, Congress has not increased the tax in more than 20 years, leaving it at 18.4 cents a gallon. As of July 2015, state taxes on gasoline averaged 26.49 cents a gallon, bringing the total tax on gasoline to about 45 cents per gallon. All efforts to reduce reliance on gas-dependent vehicles therefore stand in sharp contrast to efforts to maintain a healthy highway fund. The interplay between fuel economy and the dependence on gasoline tax revenues should not be overlooked, as well as the conflicting demands placed on legislators.
Second, dealers, mechanics, and gas stations have a strong incentive to maintain the dominance of ICVs. Dealers may not be as familiar with [alternative fuel vehicles (AFVs)] and so are less likely to be able to demonstrate specifics about available incentives, nor be able to exude confidence about charging, range, and battery life-span. More importantly, dealers may also be hesitant to sell AFVs for some of the same reasons that customers may be inclined to purchase them—specifically, the expectation of reduced maintenance costs. These misaligned incentives exist because an essential part of a dealer’s business model relies on post-sale revenues related to the sale of used cars, oil changes, and engine maintenance repairs, avoided costs for AFV owners. More car dealers may need to explore options that evolve with the technology, including maintaining and repairing fleets of autonomous vehicles.
In short, although the United States has begun the transition to AFVs, there are a number of obstacles, financial, psychological, and cultural, that stand in the way of a greater shift to AFVs.
Amy L. Stein & Joshua Fershée, Decarbonizing Light-Duty Vehicles, 48 Environmental Law Reporter 10596 (2018) (footnotes omitted).
Tuesday, July 3, 2018
Bernard Sharfman has posted Dual Class Share Voting versus the “Empty Voting” of Mutual Fund Advisors’ and it is an interesting read. He argues:
Dual class shares (shares with unequal voting rights) arise when the board of directors of a company decides to raise capital through the sale of newly issued shares, but wants one or more insiders, who may be giving up economic control through the issuance of the shares, to retain voting control in the company. Typically, this occurs in an initial public offering (IPO), but it can also occur before. In an IPO, a company will usually issue a class of common stock to the public that carries one vote per share (ordinary shares), while reserving a separate class, a super-voting class, that provide insiders with at least 10 votes per share. However, both types of shares will have equal rights to the cash flow of the company. The issuance of dual class shares may create a wide gap between voting and cash flow rights over time, especially if the insiders periodically sell a significant amount of their ordinary shares.
But this is the critical point. A dual class share structure cannot exist without the permission of those shareholders who are purchasing the ordinary shares at the price offered. The bargaining process that leads to the issuance of dual class shares is referred to as “private ordering.” . . . .
. . .
By contrast, the empty voting of mutual fund advisors is not a firm specific corporate governance arrangement that results from private ordering. It is the consequence of the industry practice of centralizing the voting of mutual funds into the hands of their advisor’s corporate governance department. As a result of this delegation of voting authority, mutual fund advisors have the voting power, but not the economic interest in the shares that they vote.
I am not evangelical about dual-class shares, but I do appreciate his point on private-ordering, which is similar (as I have noted before) to my take in many circumstances. His distinction between dual-class shares and empty voting for mutual fund advisors is a compelling one, and I recommend checking out the whole post.
Tuesday, June 26, 2018
Call for Papers for
Section on Agency, Partnership, LLCs and Unincorporated Associations on
Respecting the Entity: The LLC Grows Up
at the 2019 AALS Annual Meeting
The AALS Section on Agency, Partnership, LLCs and Unincorporated Associations is pleased to announce a Call for Papers from which up to two additional presenters will be selected for the section’s program to be held during the AALS 2019 Annual Meeting in New Orleans on Respecting the Entity: The LLC Grows Up. The program will explore the evolution of the limited liability company (LLC), including subjects such as the LLCs rise to prominence as a leading entity choice (including public LLCs and PLLCs), the role and impact of series LLCs, and differences in various LLC state law rights and obligations. The program will also consider ethics and professional responsibility and governance raised by the LLC. The Section is particularly seeking papers that discuss the role of the LLC as a unique entity (or why it is not).
The program is tentatively scheduled to feature:
- Beth Miller, M. Stephen and Alyce A. Beard Professor of Business and Transactional Law, Baylor Law
- Tom Rutledge, Member, Stoll Keenon Ogden PLLC, Louisville, KY
Our Section is proud to partner with the following co-sponsoring sections:
- AALS Section on Business Associations
- AALS Section on Transactional Law and Skills
Please submit an abstract or draft of an unpublished paper to Joshua Fershee,Joshua.Fershee@mail.wvu.edu on or before August 1, 2018. Please remove the author’s name and identifying information from the paper that is submitted. Please include the author’s name and contact information in the submission email.
Papers will be selected after review by members of the Executive Committee of the Section. Authors of selected papers will be notified by August 25, 2018. The Call for Paper presenters will be responsible for paying their registration fee, hotel, and travel expenses.
Any inquiries about the Call for Papers should be submitted to: Joshua Fershee, West Virginia University College of Law, Joshua.Fershee@mail.wvu.edu or (304) 293-2868.
Tuesday, June 19, 2018
An interesting new article appears in the Chronicle of Higher Education: What Happened When the Dean’s Office Stopped Sending Emails After-Hours, by Andrew D. Martin, dean of the College of Literature, Science, and the Arts at the University of Michigan and a professor of political science and statistics, and Anne Curzan associate dean for humanities and a professor of English. Interesting concept, and an idea worth considering. Here's what they tried:
What if we experimented with a policy that set some limits in the dean’s office? Here’s what we came up with:
Limit email traffic to working hours. Except for emergencies, work emails are to be sent between the hours of 7 a.m. and 6 p.m., Monday through Friday. Use the delayed-send function to ensure that emails to and from people working in the dean’s office arrive only within that window.
Try to communicate in person. Whenever possible, associate and assistant deans should communicate with one another and with other professional staff employees in person or by telephone during the business day. Our administrative assistants can help us find quick drop-in times.
Avoid email forwarding. Refrain from forwarding an email to chairs and directors and asking them to forward it to others. When possible, send it yourself directly to the audience you want to communicate with.
Respect working hours. The dean and the associate and assistant deans should not expect — or request — support from professional staff employees outside of the 7 a.m. to 6 p.m. window. An exception is for emergencies, and then only from salaried staff members.
The authors say the rules became part of the dean's office's culture, and although it was not enforced, it is largely followed and has led to more efficient and effective work.
I have to admit, I think it would be hard, and I am notoriously bad for being almost tethered to my email. But I can also see why it would help. I feel absolutely compelled to reply to inquiries and requests. Sometimes I resist the urge to do so, but even then, my mental space has been taken up by obligations. It's not ideal. More important, it means that when I am sending emails after hours, I am getting into other people's space when it is not necessary. Emergencies are one thing, and they happen, but I can definitely do a better job of staying out of people's personal time, and I am going to give it a try.
Tuesday, June 12, 2018
Bernie Sharfman's paper, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, was just published, and I think he has a point. In fact, as I read his argument, I think it is consistent with arguments I have made about the difference between restrictions or unconventional terms or practices that exist at purchase versus such changes that are added after one becomes a member or shareholder. Here's the abstract:
The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.
Unless there are significant sunset provisions, a dual class share structure allows insiders to maintain voting control over a company even when, over time, there is both an ebbing of superior leadership skills and a significant decline in the insiders’ ownership of the company’s common stock. Yet, investors are willing to take that risk even to the point of investing in dual class shares where the shares have no voting rights and barely any sunset provisions, such as in the recent Snap Inc. IPO. Why they are willing to do so is a result of the wealth maximizing efficiency that results from the private ordering of corporate governance arrangements and the understanding that agency costs are not the only costs of governance that need to be minimized.
In this essay, Zohar Goshen and Richard Squire’s newly proposed “principal-cost theory,” “each firm’s optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control,” is used to argue that the use of dual class shares in IPOs is a value enhancing result of private ordering, making the movement’s renewed advocacy unwarranted.
The recommended citation is Bernard S. Sharfman, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, 63 Vill. L. Rev. 1 (2018).
I find his argument compelling, as I lean toward allowing contracting parties to enter into agreements as they so choose. I find this especially compelling at start-up or the IPO stage. I might take a more skeptical view of changes made after start-up. That is, if dual-class shares are voted created after an IPO by the majority insiders, there is a stronger bait-and-switch argument. Even in that case, if the ability to create dual-class shares by majority vote was allowed by the charter/bylaws, it might be reasonable to allow such a change, but I also see a self-dealing argument to do such a thing post-IPO. At the outset, though, if insiders make clear that, to the extent that a dual-class share structure is self-dealing, the offer to potential purchasers is, essentially, "if you want in on this company, these are our terms." I can work with that.
This is consistent with my view of other types of disclosure. For example, in my post: Embracing Freedom of Contract in the LLC: Linking the Lack of Duty of Loyalty to a Duty of Disclosure, I discussed the ability to waive the duty of loyalty in Delaware LLCs:
At formation . . . those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty. This is part of the bargain, and any member who does not agree to the terms need not become a member. Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated.
It was my view, and remains my view, that there some concerns about such changes after one becomes a member that warrant either restrictions or at least some level of clear disclosures of the possibility of such a change after the fact, though even in that case, perhaps self-dealing protections in the form of the obligations of good faith and fair dealing would be sufficient.
Similarly, in my 2010 post, Philanthropy as a Business Model: Comparing Ford to craigslist, I explained:
I see the problem for Henry Ford to say, in essence, that his shareholders should be happy with what they get and that workers and others are more his important to him than the shareholders. However, it would have been quite another thing for Ford to say, “I, along with my board, run this company the way I always have: with an eye toward long-term growth and stability. That means we reinvest many of our profits and take a cautious approach to dividends because the health of the company comes first. It is our belief that is in the best interest of Ford and of Ford’s shareholders.”
For Ford, there seemed to be something of a change in the business model (and how the business was operated with regard to dividends) once the Dodge Brothers started thinking about competing. All of a sudden, Ford became concerned about community first. For craigslist, at least with regard to the concept of serving the community, the company changed nothing. And, in fact, it seems apparent that craiglist’s view of community is one reason, if not the reason, it still has its “perch atop the pile.”
Thus, while it is true craigslist never needed to accept eBay’s money, eBay also knew exactly how craigslist was operated when they invested. If they wanted to ensure they could change that, it seems to me they should have made sure they bought a majority share.
I understand some of the concern about dual-class shares and other mechanisms that facilitate insider control, but as long as the structure of the company is clear when the buyer is making the purchase decision, I'm okay with letting the market decide whether the structure is acceptable.
Tuesday, June 5, 2018
Earlier this week, Keith Paul Bishop observed on his blog, "Professor Joshua Fershee has been fighting the good fight on limited liability company nomenclature, but I fear that he is losing." I am not willing to concede that I am losing (yet), but I have to concede that I am winning less often than I'd hoped.
Bishop noted my "helpful checklist" from last week for those writing about LLCs, but he argues, "it may be time to give up the fight and bestow an entirely new name on LLCs that is less likely to be confused with corporations. I am still not ready to give up the fight, but it is an interesting thought, and there are some options.
One path I have proposed before that I think would help: Let Corps Be Corps: Follow-Up on Entity Tax Status. In that post, I suggested that the IRS should just stop using state-law entity designations, and thus stop having “corporate” tax treatment. I explained:
My proposal is not abolishing corporate tax . . . . Instead, the proposal is to have entities choose from options that are linked the Internal Revenue Code, and not to a particular entity. Thus, we would have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax.
Federal requirements to be eligible for the various tax status options would remain, but the entity type itself would cease to be a consideration. And we'd have to change our language to reflect that.
But maybe LLCs could be something else. A current problem is that "company" is a synonym for "corporation" in common usage. Thus, it is easy to see why a layperson would think a "limited liability company" is the same thing as a "limited liability corporation." Of course, there are lots of words that have a broad meaning in common parlance, but a narrower meaning in the legal sense, so it is not inherently problematic to expect lawyers to be able to draw such a distinction. (For example, as a 1L, we learn that assault does not include physical contact, but in general usage, there would be the assumption of contact.)
Still, what else could we use? To start, if a change were in the works, I think the "c" needs to go. Otherwise, the assumption will remain that the "c" means "corporation." Here's an initial list:
- LLA: Limited Liability Association
- LLB: Limited Liability Business
- LLE: Limited Liability Entity
- LLG: Limited Liability Group
- LLO: Limited Liability Operation
- LLV: Limited Liability Vehicle
It would not need to be, necessarily, something that says "limited liability" as long as that is conveyed. So perhaps:
- EOA: Entity Assets Only
- CLB: Capped Liability Business
- NIL: No Individual Liability
- LCI: Losses Capped (at) Investment
- ILL: Investment Limited Losses
- WYSIWYG: What You See Is What You Get
- AMY or TED: Just a name. You can assign a name to anything. We could name our entity AMY or TED. (I considered SUE, but that already has a legal meaning)
I remain committed to trying to educate people so we can keep the current regime and just get it right, but it is good to have options. I welcome alternative ideas or critiques of any of these.
Long live the LLC!
Wednesday, May 30, 2018
Today I will continue my quest seeking to get courts to appreciate the need to pay attention to detail as to LLCs. Sometimes courts misidentify LLCs as "limited liability corporations" (and not the correct "limited liability companies") because they don't know the difference. Other times it is because they copied the language from the pleadings. And other times it's just typing "corporation" when "company" was intended. All such errors are understandable but should be fixed.
Today, we get an unpublished court opinion from last week that clearly has the correct information available, yet the opinion goofs anyway. The opinion states:
Every Limited Liability Corporation (LLC) in Delaware is required to have a registered agent to receive service of process for the corporation. Service directly upon the owners of the LLC is not legally necessary if the registered agent is properly served.
JERZY WIRTH Pl., v. AVONDALE IQ., LLC, Def., CV N10J-03776, 2018 WL 2383578, at *2 (Del. Super. May 25, 2018). Corporations and LLCs need registered agents, but here we are dealing with an LLC. The accompanying footnote gets it right, so this is simply an attention to detail problem. The footnote reads:
See 18 Del. C. § 10-105 (a) Service of legal process upon any domestic limited liability company or any series thereof established pursuant to § 18-215(b) of this title shall be made by delivering a copy personally to any manager of the limited liability company in the State of Delaware, or the registered agent of the limited liability company in the State of Delaware... (emphasis added/ See also Thompson v. Colonial Court Apartments, LLC, 2006 WL 3174767 (November 1, 2006, Cooch, RJ. (denying a motion to vacate a default judgment when service was properly made upon the registered agent and the defendant failed to file a responsive pleading).
Id. at *2 n.3. Sigh. There's some punctuation that could be fixed in the footnote, too, but at least the content there is right, citing correctly to the LLC Act. Getting the content is the most important issue, to be sure, but I think we can reasonably strive to get both right.
To that end, here's a modest proposal for courts (and lawyers) writing about LLCs:
- Do a global search for "limited liability corporations." Unless you're talking about the early days of corporations, you almost certainly need to change do a global change to "limited liability companies." Start here, because this is almost always wrong.
- Consider (strongly) doing a global search for "corp" so you catch all versions of "corporation" and "corporate." If you're talking about an LLC, that should probably be replaced with "company" or "entity" or something similar (e.g., piercing the entity veil").
- Similarly, if you're talking about multiple business forms, do your "corp" search and choose "entity" as your modifier (e.g., "entity governance," not "corporate governance").
- Double check your entity statutes to make sure you're citing the right one. Too often LLC cases cite to the corporations statute because the case they are citing was about corporations.
- Lastly, I'll also note to check whether corporate law should be applied at all to LLCs in that circumstance, although that goes to substance, not mechanics.
Tuesday, May 22, 2018
I was browsing through some recent veil piercing cases (because that's how I roll), and I came across this gem:
[I]t is unclear that merely using a corporation to limit personal liability rises to the level of fraud required to pierce the corporate veil.
Indagro SA v. Nilva, No. 16-3226, 2018 WL 2068660, at *3 (3d Cir. May 3, 2018). Given that limited liability is one of the primary benefits of incorporation, I think it is at least implied that using a corporation to limit personal liability is not fraud at all.
Moreover, the corporation at issue was a New Jersey corporation, and the state law provides:
N.J. Stat. Ann. § 14A:5-30 (West). This is pretty unequivocal. I get that fraud may be one of the acts that could give rise to personal liability, but the use of an entity to limit personal liability, when that is a core facet of the entity, is some pretty serious attempted bootstrapping.
The case gets it right, in the end, but still, I had to point this out. To imply that it could be fraud to use a corporation for the purpose of limiting personal liability, without anything more, is simply incorrect.
Tuesday, May 15, 2018
The Goldens contend that the trial court erred by denying their motion for summary judgment as to negligence claims asserted against them personally. They assert that corporate law insulates them from liability and that, while a member of an [sic] limited liability corporation may be liable for torts in which he individually participated, Ugo Mattera has pointed to no evidence that the Goldens specifically directed a particular negligent act or participated or cooperated therein. We agree with the Goldens that they were entitled to summary judgment on Ugo Mattera's negligence claim.An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor, and an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein.Jennings v. Smith, 226 Ga. App. 765, 766 (1), 487 S.E.2d 362 (1997) (citation omitted). Thus, if Baja Properties was negligent in constructing the house, an officer of the corporation could be held personally liable for the negligent construction if he specifically directed the manner in which the house was constructed or participated or cooperated in its negligent construction. See Cherry v. Ward, 204 Ga. App. 833, 834 (1) (a), 420 S.E.2d 763 (1992).
(a) A person who is a member, manager, agent, or employee of a limited liability company is not liable, solely by reason of being a member, manager, agent, or employee of the limited liability company, under a judgment, decree, or order of a court, or in any other manner, for a debt, obligation, or liability of the limited liability company, including liabilities and obligations of the limited liability company to any member or assignee, whether arising in contract, tort, or otherwise, or for the acts or omissions of any other member, manager, agent, or employee of the limited liability company, whether arising in contract, tort, or otherwise.
Tuesday, May 8, 2018
If I have learned anything over the years, it is that I should not expect any court to be immune from messing up entities. Delaware, as a leader in business law and the chosen origin for so many entities, though, seems like a place that should be better than most with regard to understanding, distinguishing, and describing entities. Sometimes they get things rights, as I argued here, and other times they don't. A recent case is another place where they got something significant incorrect.
The case starts off okay:
Plaintiffs brought this action under federal diversity jurisdiction, 28 U.S.C. § 1332(a)(1), asserting that complete diversity of citizenship exists among the parties. In Defendants’ Motion to Dismiss, however, they argue that complete diversity of the parties is lacking. Federal jurisdiction under § 1332(a)(1) requires complete diversity of citizenship, meaning that “no plaintiff can be a citizen of the same state as any of the defendants.” Midlantic Nat. Bank v. Hansen, 48 F.3d 693, 696 (3d Cir. 1995); Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005).
A natural person is a citizen of “the state where he is domiciled,”1 and a corporation is a citizen of the state where it maintains its principal place of business, as well as the state where it is incorporated. Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 418 (3d Cir. 2010). For purposes of § 1332, the citizenship of a limited liability corporation2 (“LLC”) is determined “by the citizenship of each of its members.” Id. Plaintiff Cliffs Natural Resources Inc. is incorporated in Ohio, and Plaintiff CLF Pinnoak LLC is incorporated3 in Delaware and maintains its principal place of business in Ohio. Third Am. Compl. ¶¶ 3–4, ECF No. 162. In moving to dismiss this action for lack of jurisdiction, Defendants assert that Seneca Coal Resources, LLC, a Delaware corporation,4 includes members who are Ohio citizens, thus destroying complete diversity as required for § 1332.
Wednesday, May 2, 2018
II. UNDISPUTED FACTS.. . . . The facts, viewed in the light most favorable to the Plaintiffs, are as follows. Plaintiff Edgar Lopez is a New Mexico resident. Compl. at 1, ¶ 1. Lopez owns and operates Plaintiff IMA, LLC, a New Mexico limited liability corporation that formerly managed the Perry Corners Shopping Center. . . . Lopez is the managing partner and the only surviving voting member of Hunt Partners, LLC, a Nevada corporation that has its principal place of business in New Mexico. . . . . Hunt Partners wholly owns, as the “sole equity member,” another LLC called “Perry Corners Shopping Center, LLC,” a Delaware Corporation with its principal place of business in New Mexico, which, in turn, owns as its only asset the Perry Corners Shopping Center, which is located in Georgia.
Monday, April 30, 2018
My essay on the use of traditional for-profit corporations as a choice of entity for sustainable social enterprise firms was recently published in volume 86 of the UMKC Law Review. I spoke on this topic at The Bryan Cave/Edward A. Smith Symposium: The Green Economy held at the UMKC School of Law back in October. The essay is entitled "Let's Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise," and the SSRN abstract is included below:
The past ten years have witnessed the birth of (among other legal business forms) the low-profit limited liability company (commonly known as the L3C), the social purpose corporation, and the benefit corporation. The benefit corporation has become a legal form of entity in over 30 states. The significant number of state legislative adoptions of new social enterprise forms of entity indicates that policy makers believe these alternative forms of entity serve a purpose (whether legal or extra legal).
The rise of specialty forms of entity for social enterprise, however, calls into question, for many, the continuing role of the traditional for-profit corporation (for the sake of brevity and convenience, denominated “TFPC” in this essay) in social enterprises, including green economy ventures. This essay argues that TFPCs continue to be a viable—and in many cases desirable or advisable choice of entity for sustainable social enterprise firms. The arguments presented are founded in legal doctrine, theory, and policy and include both legal and practical elements.
Somehow, I managed to cite to four BLPB co-bloggers in this single essay: Josh, Haskell, Stefan, and Anne. Evidence of a business law Vulcan mind meld? You decide . . . .
Regardless, comments, as always, are welcomed as I continue to think and write about this area of law and practice.
April 30, 2018 in Anne Tucker, Business Associations, Corporate Governance, Corporations, Haskell Murray, Joan Heminway, Joshua P. Fershee, Social Enterprise, Stefan J. Padfield | Permalink | Comments (2)
Tuesday, April 24, 2018
As I am inclined to do with cases and statutes, I spent some time this week chasing down incorrect definitions of the LLC (correctly defined as a "limited liability company"). I did some perusing of the Code of my home state of West Virginia for incorrect uses of "limited liability corporation," where limited liability company was intended. As I expected, there are multiple errors. Take, for example:
§ 31D-11-1109. Conversion of a domestic corporation to a domestic limited liability company.
. . . .
(i) When a corporation has been converted to a limited liability corporation pursuant to this section, the limited liability company shall, . . . .
This part of the Code uses "limited liability company" correctly throughout this provision, except in this one spot. This should be cleaned up, but it appears to be an error related to repeated use of corporation and company in the same statute (as opposed to a misunderstanding of the concept).
The West Virginia Code has adopted the use of "limited liability corporation" in place of "limited liability company" in a couple definitions provisions, too, which could be a little more problematic.
In the Motor Fuel Excise Tax portion of the Code, we have this, § 11-14C-2. Definitions:
(66) "Person" means an individual, firm, cooperative, association, corporation, limited liability corporation, estate, guardian, executor, administrator, trust, business trust, syndicate, partnership, limited partnership, copartnership, organization, limited liability partnership, joint venture, receiver and trustee in bankruptcy. "Person" also means a club, society or other group or combination acting as a unit, a public body including, but not limited to, this state and any other state and an agency, commissioner, institution, political subdivision or instrumentality of this state or any other state and, also, an officer, employee or member of any of the foregoing who, as an officer, employee or member, is under a duty to perform or is responsible for the performance of an act prescribed by the provisions of this article.
Literally, anyway, LLCs are not defined as persons in this Code section. I am confident that the intent here is quite clear, even if the execution is flawed, but still, this exhaustive list leaves out the West Virginia limited liability company created in WV Code § 31B, the Uniform Limited Liability Company Act.
A similar error occurs in Code Chapter 16, Public Health. Code § 16-2D-2 provides:
(29) “Person” means an individual, trust, estate, partnership, limited liability corporation, committee, corporation, governing body, association and other organizations such as joint-stock companies and insurance companies, a state or a political subdivision or instrumentality thereof or any legal entity recognized by the state.
Here, at least, the catch-all "any legal entity" does include LLCs, but LLCs are still not listed specifically.
This definition language is being repeated in draft legislation, as well, so the error is spreading. See, e.g., House Bill 2873, Budget and Spending Transparency Act ("(c) "Entity" or "recipients" means any corporation, association, union, limited liability corporation, limited liability partnership, legal business entity including nonprofit organizations, grantee, contractor or any county, municipal or other local government entity . . ..")
I am planning to spend some time this summer sending proposed fixes to some key legislators to see if we can get this corrected. Though I concede this is a small fix, it is also an easy fix, and I see no reason not to get it right. Maybe if I do the legwork, it can get done.
Tuesday, April 17, 2018
LLCs Are Not Corporations & You Can't Have A Parent-Subsidiary Relationship When There is Only One Entity
Oh boy. A 2010 case just came through on my "limited liability corporation" WESTLAW alert (that I get every day). This one is a mess. Recall that LLCs are limited liability companies, which are a separate entity from partnership and corporations, despite often having some similar characteristics to each of those.
CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation. Id. (describing the restructuring of OPRA following its incorporation). At the time this lawsuit was filed, however, there remains a question as to whether there were any formalities in place to separate OPRA from CBOE operations. In short, the parties dispute whether, at the time the suit was filed, OPRA operated independently or was operated jointly with CBOE.
*2 To this end, Realtime asserts that the lack of any corporate governance at OPRA [an LLC], such as Articles of Association or a partnership agreement, renders OPRA “simply a label with no formal business structure.” RESPONSE at 2, 4 (citing SEC RELEASE at 2) (“OPRA was not organized as an association pursuant to Articles of Association or as any other form of organization. Instead, OPRA simply served as the name used to describe a committee of registered national securities exchanges.”).
CBOE fails to identify grounds for institutional independence from OPRA at the time this suit was filed, and Realtime presents sufficient evidence to impute OPRA's contacts [for obtaining personal jurisdiction] to CBOE.
*5 In applying the Texas long arm statute, courts in this Circuit have followed the rule established by the Supreme Court in 1925 that “so long as a parent and subsidiary maintain separate and distinct corporate entities, the presence of one in a forum state may not be attributed to the other.” Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1159 (5th Cir. 1983) (citing Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333 (1925)). In this case, however, at the time the lawsuit was filed there were no clear legal boundaries to affirmatively identify a parent-subsidiary or sister-sister corporate relationship. . . . It is undisputed that prior to January 1, 2010, OPRA did not seek the protections of incorporation, RESPONSE, EXH. 13, OPRA LLC AGREEMENT (Doc. No. 238-14), and based on the current record, Realtime has put on more than a minimal showing that OPRA was under the managerial and day-to-day control of CBOE. See, e.g., Oncology Therapeutics Network v. Virginia Hematology Oncology PLLC, No. C 05-3033-WDB, 2006 WL 334532 (Feb. 10, 2006 N.D. Cal.) (noting, in the context assessing whether two related entities formed a single enterprise, that “At this juncture, plaintiff merely has to allege a colorable claim. Plaintiff does not have to prove the claim.”). Therefore, the strict separateness required under Cannon need not be applied here because OPRA did not seek protections to formally divide its dealings from that of its counterpart CBOE.
Instead, these facts make it appropriate to apply the single business enterprise doctrine. The single business enterprise doctrine applies when two or more business entities act as one. Nichols, 151 F. Supp.2d at 781–82 (citing Beneficial Personnel Serv. of Texas v. Rey, 927 S.W.2d 157, 165 (Tex. App.- El Paso 1996, pet. granted, judgm't vacated w.r.m., 938 S.W.2d 717 (Tex. 1997)). Under the doctrine, when corporations are not operated as separate entities, but integrate their resources to achieve a common business purpose, “each corporation may be held liable for debts incurred during the pursuit of the common business purpose.”Western Oil & Gas J.V., Inc., v. Griffiths, No. 300-cv-2770N, 2002 WL 32319043, at *5 (N.D. Tex. Oct. 28, 2002) (internal citations omitted). Being a part of a single business enterprise imposes partnership-style liability. Id. The facts presented here demonstrate that OPRA and CBOE operate as a single business entity, at least for the threshold inquiry of establishing jurisdiction.
Traditionally, courts have applied this doctrine when two corporations are acting as one. However, despite OPRA not having a defined corporate status at the time this suit was filed, there is demonstrable proof that CBOE was controlling OPRA's “business operations and affairs,” permitting the two entities to be fused for jurisdictional purposes.
include: (1) the agent having the power to act on behalf of the principal with respect to third parties; (2) the agent doing something at the behest of the principal and for his benefit; and (3) the principal having the right to control the conduct of the agent).
Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 169 n.130 (Del. Ch. 2003) (citing J.E. Rhoads & Sons, Inc. v. Ammeraal, Inc., 1988 WL 32012, at *4 (Del. Super. Mar. 30, 1988)).
Tuesday, April 10, 2018
I often use my space here to complain about courts and lawmakers being imprecise with regard to limited liability companies (LLCs). Today, I will focus on my home state of West Virginia, which recently passed a bill to support (and provide loans for cooperatives designed to provide) much-needed broadband development in the state. I applaud the effort, but the execution was not great.
Here's an example from the West Virginia Code:
12-6C-11. Legislative findings; loans for industrial development; availability of funds and interest rates.
. . . .
(f) The directors of the board shall bear no fiduciary responsibility with regard to any of the loans contemplated in this section.
This applies to a cooperative board that takes on loans for broadband projects. But it doesn't make sense. I think they used "fiduciary" when they meant "financial," as I assume they meant to say that the board members of the organization would not have “financial liability.” I am pretty sure they did not mean to remove fiduciary duties. Then again, who knows. Maybe they are fine with the directors using loans for personal vacations. (Just kidding. I am pretty sure they'd care.) I know that in finance, the term fiduciary can be used to describe money (meaning some that that relies on public trust for value), but that does not make sense here, either.
When the legislature returns for the next session, I plan to see if I can get this amended to track the LLC liability defaults. Maybe something like:
"(f) The directors of the board are not personally liable for any of the loans contemplated in this section."
I won't hold my breath, but it's worth a try.
Tuesday, April 3, 2018
Keith Paul Bishop, at the California Corporate and Securities Blog, provides an example of a court that actually pays attention to entity type. As he says, "it is nice to see that some judges do recognize that LLCs are not corporations." It sure is. In the case he cites, D.R. Mason Constr. Co. v. GBOD, LLC, 2018 U.S. Dist. LEXIS 41236, the court gets a lot right:
[A]lthough Plaintiff's Complaint does separately mention the term "shareholder," [*13] the Court will not draw the inference that this term means Plaintiff was promised traditional "stock." This inference would not be reasonable in these circumstances because Plaintiff alleges in its Complaint that Defendant GBOD is a limited liability company, not a corporation. (Compl. ¶ 3.) Under California law, LLCs distribute "membership interests," not shares of stock. See Cal. Corp. Code § 17704.07. Consequently, Plaintiff's pleading indicates the financial instrument at issue is not traditional stock. Moreover, courts tasked with deciding whether LLC membership interests constitute a security under the Exchange Act generally evaluate whether such interests are "investment contracts," not "stocks."
It is nice to see a court that acknowledges the different entity types and frustrating that this is not the norm. As Bishop explains:
Obviously, this case does not stand for the proposition that a membership interest never meets the definition of a "security" under the Exchange Act. Nor does the case deal with the issue of whether a membership interest constitutes a security under state law. It does demonstrate that some courts recognize the fact that LLCs are not corporations.
So, I sincerely hope people don't read to much into this. But I will acknowledge that some courts are getting it right. And thank Bishop for helping further the cause.
Tuesday, March 27, 2018
International law is usually not my thing (only in a few instances), but it's definitely Larry Catá Backer's thing. He has a new article out that may be of interest. If it's your thing, I recommend checking it out. He knows his stuff.
"Theorizing regulatory governance within its ecology: the structure of management in an age of globalization,"
Larry Catá Backer
Contemporary Politics 24(3):-- (2018)
Abstract: This article examines regulatory governance (‘RG’) within its own ecology. It considers RG as an ideology of governance, as its own set of techniques to that end, and as a methodology andpsychology of the relations of regulatory organisms to one another and to their context. The object is first to chart the structures and modalities of this ecology, and second to understand the properties that makes RG both coherent (singularly as the method of regulating a field, as the framework for the use of RG techniques, and as an ideology of governance), and structural (as a means of structuring regulation as an exercise of ordering power. After a brief introduction, the article introduces the regulatory context through a close reading of the operation of global garment supply chains in Bangladesh, examining RG in action within the ecology of global production. It then theorizes the meta structures of RG within this ecology as a mechanics for governance within institutions, and as an ideology for ordering systems of governance among institutions.
Tuesday, March 20, 2018
My goodness. In a recent case, a Massachusetts court deals with issues related to Bling Entertainment, LLC, which is, as you would expect, a limited liability company. It is NOT a partnership (as the court correctly notes), but ...
Yiming alleges Bling Defendants—as “managers, controlling members, and fellow members of Bling”—owed a duty of utmost good faith and loyalty to Yiming that they breached through their actions of fraud, self-dealing, embezzlement, and mismanagement. D. 16 ¶¶ 70-71. “It is well settled that partners owe each other a fiduciary duty of the utmost good faith and loyalty.” Karter v. Pleasant View Gardens, Inc., No. 16-11080-RWZ, 2017 U.S. Dist. LEXIS 50462, at *13 (D. Mass. Mar. 31, 2017) (quoting Meehan v. Shaughnessy, 404 Mass. 419, 433 (1989)). Bling is not a partnership, however, but is rather a limited liability corporation. D. 16 ¶ 10.
Nevertheless, Yiming argues the same duty applies, which is correct if Bling were a closely held corporation. See, e.g., Demoulas v. Demoulas Super Mkts., 424 Mass. 501, 528-29 (1997) (explaining that in Massachusetts, close corporations shareholders owe one another the duty of utmost good faith and loyalty); Zimmerman v. Bogoff, 402 Mass. 650, 657 (1988). In Massachusetts, a closely held corporation is “typified by: (1) a small number of stockholders; (2) no ready market for corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”Demoulas, 424 Mass. at 529 n.34 (quoting Donahue v. Rodd Electrotype Co. of New Eng., Inc., 367 Mass. 578, 586 (1975)).
In this context, the duty of “utmost good faith and loyalty” applies to majority and minority shareholders alike. See Zimmerman, 402 Mass. at 657-58. Although Yiming did not affirmatively plead that Bling is a close corporation, he did plead that this duty applied to Bling Defendants. D. 16 ¶ 70. Bling Defendants did not contest that they owed a fiduciary duty to Yiming. See D. 26 at 8-9. Accordingly, the Court declines to dismiss this claim.
Tuesday, March 13, 2018
A recent Georgia case highlights a whole host of things that frustrate me with litigation related to limited liability companies (LLCs). This one features an LLC making incorrect arguments and a court sanctioning that silliness. For example
Baja Properties argues that it is exempted from the rule set out in OCGA § 43-41-17 (b) by a provision in OCGA § 43-41-17 (h). Subsection (h) states, in part:
Nothing in this chapter shall preclude any person from constructing a building or structure on real property owned by such person which is intended upon completion for use or occupancy solely by that person and his or her family, firm, or corporation and its employees, and not for use by the general public and not offered for sale or lease. In so doing, such person may act as his or her own contractor personally providing direct supervision and management of all work not performed by licensed contractors.
contend that the trial court erred by denying their motion for summary judgment as to negligence claims asserted against them personally. They assert that corporate law insulates them from liability and that, while a member of an limited liability corporation [sic] may be liable for torts in which he individually participated, Ugo Mattera has pointed to no evidence that the Goldens specifically directed a particular negligent act or participated or cooperated therein. We agree with the Goldens that they were entitled to summary judgment on Ugo Mattera's negligence claim.An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor, and an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein.Jennings v. Smith, 226 Ga. App. 765, 766 (1), 487 S.E.2d 362 (1997) (citation omitted). Thus, if Baja Properties was negligent in constructing the house, an officer of the corporation could be held personally liable for the negligent construction if he specifically directed the manner in which the house was constructed or participated or cooperated in its negligent construction. See Cherry v. Ward, 204 Ga. App. 833, 834 (1) (a), 420 S.E.2d 763 (1992).
Tuesday, March 6, 2018
Prof. Jena Martin's New Human Rights Paper: Applying Bystander Intervention Training to Corporate Conduct
Friend and colleague Jena Martin has posted her new paper, Easing "the Burden of the Brutalized": Applying Bystander Intervention Training to Corporate Conduct. And when I say new, I mean new. It went on SSRN within the last hour.
Prof. Martin is an expert in business and human rights, and her new paper offers a new framework for corporations that are seeking to reduce or eliminate human rights violations. Her paper is designed to help corporation beyond due diligence and reporting to allow them to "engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses." It is a timely piece with some interesting and innovative suggestions. I look forward to seeing where the final version ends up.
The last few years have borne witness to a shift regarding how to address issues of oppression and social injustice. Across many different advocacy points - from police brutality to sexual violence - there seems to be a consensus that simply engaging the oppressor or the victim is not enough to affect real social change. The consensus itself is not new: it has been at the heart of many social justice movements over the years. However, what is new is the explicit evocation of the bystander within this framework. Too often, in conversations on conflicts generally (and negative human rights impact specifically), bystanders have been relegated to the sidelines, with no defined, specific role to play and no discussion within the larger narrative. Now, however, -- through the use of bystander intervention training -- these actors are taking on a more prominent role.
In previous articles, I have stated that the rhetoric and posture that transnational corporations (TNCs) maintain vis-à-vis human rights impacts is that of a bystander. Frequently, when human rights abuses occur, TNCs find themselves in the position of having to acknowledge their presence in the area of the underlying conflict, while profusely maintaining that none of their actions caused the harm against the community. Building off this prior work, this article seeks to answer the following question: are there lessons that can be learned from bystander intervention training in other contexts, that can be used for the benefits of TNCs within the field of business and human rights? I conclude that what is lacking in the current discourse on corporate policies regarding addressing negative human rights impacts is an articulation regarding when, and under what circumstances, it is appropriate for corporations to intervene in negative human rights disputes. This goes beyond the current proposals for human rights due diligence frameworks in that, rather than merely undergoing an assessment and then reporting this information out (as is required by most current legal frameworks that address business and human rights reporting) this would help corporations – informed by a bystander intervention framework – to engage with either the oppressor or the oppressed in a way that directly minimizes human rights abuses.