Tuesday, November 18, 2014
I’m starting to think that courts are playing the role of Lucy to my Charlie Brown, and proper description of LLCs is the football. In follow up to my post last Friday, I went looking for a case that makes clear that an LLC’s status as a disregarded entity for IRS tax purposes is insufficient to support veil piercing. And I found one. The case explains:
Plaintiff . . . failed to provide any case law supporting his theory of attributing liability to Aegis LLC because of the existence of a pass-through tax structure of a disregarded entity. Pl.'s Opp'n. . Between 2006 and 2008, when 100% of Aegis LLC's shares were owned by Aegis UK, Aegis LLC was treated as a disregarded entity by the IRS and the taxable income earned by Aegis LLC was reflected in federal and District of Columbia tax returns filed by Aegis UK. Day Decl. Oct. 2012 [48–1] at ¶ 37. In the case of a limited liability corporation with only one owner, the limited liability corporation must be classified as a disregarded entity. 26 C.F.R. § 301.7701–2(c)(2). Instead of filing a separate tax return for the limited liability corporation, the owner would report the income of the disregarded entity directly on the owner's tax return. Id. Moreover, determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders. See United States v. Acambaro Mexican Restaurant, Inc., 631 F.3d 880, 883 (8th Cir.2011). Given the above analysis, the undersigned finds that there is no unity of ownership and interest between Aegis UK and Aegis LLC.
As Charlie Brown would say, "Aaugh!"
So the case makes clear, as I was hoping, that it is not appropriate to use pass-through tax status to find a unity of interest and ownership in a way that will support veil piercing. But the court then screws up the description of the very nature of LLCs. This is not a “case of a limited liability corporation!” It's a case of a limited liability company, which is a not a corporation.
Moreover, to use the court’s language, while it is true that “determining whether corporate formalities have been disregarded requires more than just recognizing the tax arrangements between a corporation and its shareholders,” the premise of the case has to do with an LLC’s status. Thus, the court should, at a minimum, make clear it knows the difference. The statement, then, would go something like this: "Determining whether LLC formalities have been disregarded requires more than just recognizing the tax arrangements between an LLC and its members.”
It’s worth noting the entity formalities for LLCs are significantly less that those of corporations, so the formalities portion of LLC veil piecing test should be minimal, but that's a different issue.
Anyway, like Charlie Brown, I will keep kicking at that football, expecting, despite substantial evidence to the contrary, that one day it will be there for me to kick. At least I don't have to go it alone.
Friday, November 14, 2014
The Supreme Court of Wyoming recently decided to pierce the limited liability veil of a single-member LLC. Green Hunter Wind Energy, LLC (LLC), had a single member: Green Hunter Energy, Inc. (Corp). LLC entered into a services contract with Western Ecosystems Technology, Inc. (Western). The court determined that veil piercing – thus allowing Western to recover LLC’s debts from Corp – was appropriate for several reasons. I think the court got this wrong. The case can be accessed here (pdf).
The court provides the following rule for piercing the veil of a limited liability company, providing three basic factors 1) fraud; 2) undercapitalization; and 3) “intermingling the business and finances of the company and the member to such an extent that there is no distinction between them.” The court noted that the failure to following company formalities was recently dropped as a factor by changes to the state LLC statute.
Here’s where the court goes wrong:
(1) As to undercapitalization, the court completely ignores the fact that Western freely contracted with the LLC with little to no cash. If Western wanted the parent Corp to be a guarantor, it could have required that. If Western thought LLC was acting as an agent for Corp, Western should have claimed that. It seems to me this is directly analogous to an actual parent-child relationship. Western contracted with adult (but penniless) child. Child didn't have money when the contract was signed or when the bill was submitted. Western then calls parent and says, "Pay up." Western is free to call, but parent can say, “No. You dealt with my kid, not me, and I didn't agree to this debt.”
(2) There is a better argument this should be different if this were a tort suit where Western did not choose to engage with the LLC, but that's not the case here. I don't see how Western can claim undercapitalization now when they had the opportunity to ask before the contract was formed. Western is the least cost avoider here and assumed the risk of dealing with a lightly capitalized company. It seems to me that should be part of the assessment. Undercapitalization is, as the court notes, “a relative concept.” The court cites potential abuse of LLC laws if they were to adopt such a rule that motivates companies to ask for guarantees. instead adopting a rule that could incentivize companies like Western actively avoid ask ingfor guarantees. Why? Because if you ask for a guarantee and are refused, it could be used against you later. But if you don’t ask, you may get to piece the veil and seek a windfall recovery by getting a post hoc guarantee that was not available via negotiation.
The court’s rationale is as follows:
It makes good business sense for a contract creditor to try to obtain a guarantee from the member or retainer from the limited liability company itself. But we are mindful of the reality of the marketplace that many businesses are not in a position—competitively or economically—to insist on guarantees. For that reason, we decline Appellant’s invitation to find piercing inappropriate in this case because Western did not protect itself from Appellant’s misuse of the LLC by attempting to obtain a guarantee or other form of security. To do so would invite abuse of entities, as is the case here.
No way. If you can’t “competitively or economically” secure a guarantee, then too bad. If the legislature wants to create guarantees or minimum capitalization requirements for all entities, fine. Otherwise, this is absurd.
(3) Further, Court state that "the district court correctly concluded that the LLC 'failed to adequately capitalize the LLC, that LLC was undercapitalized at all times relevant to this suit and the LLC lacks corporate assets." Wrong. Again, if Western knew the finances of LLC at the time of contracting (as it could and should have), then it wasn’t undercapitalized. LLC simply existed and Western did not seek to avoid the risk of dealing with such an entity.
More important, though LLCs cannot have “corporate assets.” It’s a limited liability company, not a corporation. Sheesh. I’ll add this one to my list of courts getting LLC distinctions wrong. (See, e.g., here, here, here, and here.) I would have loved to see the Supreme Court correct the district court on that, at least.
(4) The court incorrectly suggests that the tax filings of the parent corporation and a subsidiary LLC can be a factor in the veil piercing analysis. Sorry, but no. For a single-member LLC, for federal tax purposes, the LLC will probably be a disregarded entity. As such, the LLC will usually (if not always) look like part of the parent corporation. To even consider the tax filing necessarily makes one factor weigh toward piercing. That’s wrong.
Early in the opinion, the court notes, “Piercing seems to happen freakishly. Like lightning, it is rare, severe, and unprincipled.” (quoting Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89 (1985) (internal quotation marks omitted)). In this case the court seems to be trying to make veil-piercing law in LLCs more predictable. I’m concerned they are – they are making is more likely the veil piecing will occur, at least in the single-member LLC context. To the extent we’re going to allow single-member LLCs, that’s unfortunate.
Tuesday, November 11, 2014
About four years ago, despite decades of actively avoiding the idea, I started running. I am no Forrest Gump, but I run 3.5 miles on a reasonably regular basis– usually four or five times a week, sometimes more, and rarely less. My primary running locations, North Dakota and then along the Monongahela River in West Virginia, are both quite windy. The North Dakota winds so are significant, that they can mimic hills, which is what allowed cyclist Andy Hampsten to train for hills in “one of the flattest areas in the world.”
I do a lot of out-and-back runs – out 1.75 miles and back along the same route. During such runs, I often notice a similar phenomenon: I may not have any idea it’s windy if the wind is at my back when I start running. When I get to my turnaround, though, I find a stiff wind in my face. This happens enough that I should probably figure out it is windy before I get to the turnaround, especially since it can lead to a faster pace on the way out, but I still rarely notice. I just think I’m having a good pace day.
In contrast, it’s pretty hard to miss when the wind is in your face. Everything feels hard. Everything feels sluggish and slow. And it feels like, all of a sudden, you have barriers in your way.
During these runs, it often makes me think about how many other places (in the figurative sense) this happens. We all have our challenges, and we often have much to overcome. But some have more challenges than others. Because our individual challenges are real, it can be easy to miss that we may have fewer challenges than other people have.
The things that are barriers to our goals are sometimes obvious to us. For example, as those in the current job hunt for a law professorship likely know, a lack of a top-14 law degree can be a significant limit on the number of options one might have entering the legal academy. It certainly felt like a barrier to certain jobs when I was on the market, anyway.
Because of that, it would be easy to discount other benefits I have because of who I am. I grew up in a safe neighborhood with good schools. I am a white male, which means people have expectations for me that are different than others. There is a level of presumed competence. And, comparatively, presumed authority and ability. If there's no more text visible, please click below to read the whole post.
Tuesday, November 4, 2014
Back in 2010, Art Durnev published a short paper, The Real Effects of Political Uncertainty: Elections and Investment Sensitivity to Stock Prices, available here. The article studies the interaction between national elections and corporate investment. Today is not a national election -- we get two more years before we have to choose our next president -- but it's still seems like an apt day to think about the role of elections on corporate activity.
The most interesting part of the article, to me anyway, is the test of the relationship between political uncertainty and firm performance. As the article explains,
If prices reflect future profitability of investment projects, investment-to-price sensitivity can be interpreted as a measure of the quality of capital allocation. This is because if capital is allocated efficiently, capital is withdrawn from sectors with poor prospects and invested in profitable sectors. Thus, if political uncertainty reduces investment efficiency, firm performance is likely to suffer. Consistent with this argument, we show that firms that experience a drop in investment-to-price sensitivity during election years perform worse over the two years following elections.
The conclusion: this signifies that political uncertainty significantly impacts real economic outcomes. Therefore, "political uncertainty can deteriorate company performance because of inferior capital allocation."
So, it's election day. Please vote, regardless of your views. Voting is a right, a privilege, and duty. And if you're in charge of a firm's investment decisions, consider this study. As we approach the next national election, you might want to be wary of dropping your investment-to-price sensitivity leading up to the next election. If you do, odds are your firm will do worse in the two years following the election.
And, while we're talking presidential politics, here's another study worth considering: Effects of Election Results on Stock Price Performance: Evidence from 1980 to 2008. Here's the abstract (and, please, go vote!):
We analyze whether the results of the 1980 to 2008 U.S. presidential elections influence the stock market performance of eight industries and we examine factors that are expected to affect firms’ stock returns around these elections. Our empirical analysis reflects firms’ exposure to government policies in two ways. First, to determine whether investors presume any Democratic or Republican favoritism towards or biases against certain industries we perform an event study for each of the eight industries around the eight elections. Second, we include the firms’ marginal tax rate as proxy for the firms’ exposure to uncertainty about fiscal policy in a regression analysis. We do not find a consistent pattern in industry returns when comparing the effect of Democratic versus Republican victories. However, the extent of the reaction differs among industries. The victory of a Democratic candidate rather negatively influences overall stock returns, while the results are rather mixed for Republican victories. Furthermore, a change in presidency from either a Democratic to a Republican candidate or from a Republican to a Democratic candidate causes stronger stock market effects than re-election or the election of a president from the same party. We also find that the firms’ marginal tax rate is positively correlated with abnormal stock price returns around the election day. The results are relevant for academics, investors and policy makers alike because they provide insight on the question whether stock market participants respond to expected changes in policy making as a result of presidential elections.
Wednesday, October 29, 2014
The West Virginia University College of Law is seeking applications and nominations to replace our former dean, Joyce McConnell, who is now the provost of the University. The College of Law just completed the addition of a new wing (part of a $26 million infrastructure project), and has made significant and exciting progress. We're seeking a dean who can help continue that trend.
Admitting my bias, WVU is a great place to be. It's beautiful, especially in the fall, and we have access to much more than many people recognize. In addition to a solid opportunities to enjoy music and the arts in Morgantown, we're a lot closer to other areas of interest, if big city access is desired. We're 75 miles to Pittsburgh; about 3 hours and 15 minutes to Baltimore, Washington, DC, and Cleveland, OH; 6 hours to New York City; a little less to Niagara Falls; 5 hours to Philadelphia, PA, and Lexington, KY. You get the idea.
The posting is below. Please apply if you are interested, and please share this with anyone else you think might be interested. And, of course, please feel free to contact me directly with any questions.
The full posting is available at the link above or just click the button below.
Tuesday, October 28, 2014
Many financial industry analysts are bearish on the oil industry right now. I'm not sure they're right, as I note below, but I also think it's important to recognize that financial market impact of oil price fluctuations is not the only impact U.S. oil production has on markets generally.
One thing I want to make clear at the outset, though, is that I am not a financial analyst, or an economist (as I have previously noted). My comments here are reactions to things analysts are saying based on my experience researching U.S. shale oil markets and activity, as well as the U.S. transportation sector in recent years. My thoughts are related to my expectations for how I think the companies and people in the industry are likely to react, and reflect my hope that financial market changes don't negatively impact other essential planning, in areas related to health, safety, and the environment, the industry desperately needs.
Back to the market predictions: Goldman Sachs and some other analysts see the oil sector as over saturated and anticipate continued supply gluts to keep prices down. According to a report from Goldman analysts, U.S. price indicator West Texas Intermediate (WTI) crude will fall to $75 a barrel and Brent crude is expected to be at $85 a barrel in the first quarter of 2015. That would be a $15 per barrel discount from the last such report.
In accord is Jim Cramer, of MSNBC fame, who says, "This is uniquely a perfect storm against oil." Several others see an OPEC "price war" with some saying oil is teetering on the brink of collapse. I'm even less sure that's right, in part because of where Jim Cramer comes out on this. (I'm not a huge fan of his advice or style, but for those who don't know, I'll let Jon Stewart catch you up on that here.) I don't see a "perfect storm" or even much more than a "light shower" coming in the oil sector from pricing or demand problems.
I'm not alone. Others see this recent price dip as real, but short lived. Dan Dicker, president of money manager MercBloc, sees oil prices increasing within the next two years going up to $125 per barrel or even $140. Dicker called the pricing a "Mirage." (I think these predictions are a bit bold in the other direction, too, as I expect to some fluctuation but think prices will reside mostly north of $85-$90 barrel, then increase into the $100s. Again, though, remember this is a law professor's opinion.)
Though I am sure he is not alone, Jim Cramer is the one person I have seen suggesting that a U.S. oil slowdown is likely, at least if oil prices drop to $70 a barrel. Possible, but I still don't see it. As I have suggested elsewhere, I don't think the price of oil, which is largely a global price, will drop to a point where it is not profitable to oil companies. Obviously the price can (and will) fluctuate, and the reality is that oil demand increases and decreases, but it has a higher baseline than I think some people are appreciating.
For years we heard about Peak Oil and the end of oil, but what we were really seeing was the end of really cheap oil. As the recent shale boom has demonstrated, there's plenty of oil available at the right price. The current price dip, I think, just an indication that supply is more abundant than expected, but not that the oil market is about to crater. Thus, perhaps we will see a slowing of the rate of new drilling activity, but I don't see an actual slowdown in growth in the sector -- just in the rate of growth.
Historically, we've had other ways to deal with price drops, too. The Complete Idiot's Guide to Options And Futures, 2nd Edition, By Scott Barrie, repeats the old trader's adage, "the best cure for low prices is low prices," and "the best cure for high prices is high prices." Low oil prices in the 1990s helped lead the way for the boom of SUVs. Before that, in the 1970s, companies like Honda and Toyota made their way into the U.S. market with their fuel-efficient vehicles following the oil embargo and high gas prices. Unlike when those market changes occurred, though, we have a full complement of both SUV and hybrids available to take advantage of price changes in the relatively near term when gas prices change.
Ultimately, if stock price is why people care about oil prices and production in the United States, it's entirely possible the bears are right that company valuations will come down in the near term. In the mid to long term, though, oil production is going to at least stay steady. As such, regardless of the market impact of the oil boom, oil will continue to flow, which will mean it will continue to need transportation. Therefore, it's important that we assess safety risks for infrastructure improvements, such as oil and gas pipelines, that can improve safety in areas that like rail and trucking, which are currently being taxed by the current level of oil and gas development in the country. In addition, a potential slowing of growth rates does not mean that other environmental and social challenges will go away soon.
Of course it makes sense to plan for a financial future and predicting how oil will fare in the coming months is part of the analysis for some. But changes in market expectations don't quickly, or necessarily significantly, impact the real world experience for those in affected areas. Frankly, a slow down in growth rates likely would be welcome in many areas experiencing the oil boom, but a slow down doesn't mean the work necessary to maximize economic opportunity, minimize environmental harm, boost social conditions, and improve safety can come to an end. It might simply be a chance for impacted areas to catch up before the next boom begins (or this one continues). We shouldn't miss that chance.
Tuesday, October 21, 2014
In Business Organizations today, I spent some time reviewing the differences between varying entity types. I made the point that courts often make mistakes on this front, especially with LLCs and corporations, and it reminded me I needed to follow up on my own pet LLC protection project.
Over the years, I have taken more than a passing interest in how often courts refer to (and ultimately treat) LLCs. I have this thing where I think LLCs are not treated as well doctrinally as they should. In February of this month, I made the argument, Courts Should Get the Doctrinal Distinction Between LLCs and Corporations, and I have made other similar arguments (here, here, and here).
As part of this I committed to noting when courts refer to LLCs as "limited liability corporations" and not "limited liability companies," as they should. Almost one year ago, I noted this continuing theme, repeating the search I did for a 2011 article, where I found in a May 2011 search of Westlaw’s “ALLCASES” database that there were 2,773 documents with the phrase “limited liability corporation," in describing an LLC. (That article is here.) Things are not getting much better. Since Oct. 15, 2013, there have been 410 more cases making that same mistake. Just since my February 4, 2014 post, reference above, there have been 300 of those cases.
As I read through some of these cases, many of which don't seem to turn on whether the entity is a limited liability company or a corporation, I have noticed that some of the cases may have an entity structure issue that no one is raising. That's a failure of at least one of the parties, and potentially the court. I plan to follow up with a few example of such cases, but for now, I'll part with my familiar refrain: as long as courts keeping describing limited liability companies as corporations, I'll keep pointing it out.
Tuesday, October 14, 2014
To be clear, I'm not an economist. I do, however, have an interest in economics, economic theory, and especially behavioral economics. I incorporate basic concepts of economics into my courses, especially Business Organizations and Energy Law. This week's announcement of Jean Tirole as the 2014 Nobel Laureate in economics thus caught my eye.
I admit I did not much about Tirole before the announcement, and after just a little reading, it's clear to me that I need to know more. A nice summary of Tirole's work (written by Tyler Cowen) can be found here. Cowen introduces the announcement and Tirole this way:
A theory prize! A rigor prize! I would say it is about principal-agent theory and the increasing mathematization of formal propositions as a way of understanding economics. He has been a leading figure in formalizing propositions in many distinct areas of microeconomics, most of all industrial organization but also finance and financial regulation and behavioral economics and even some public choice too. He is a broader economist than many of his fans realize.
Tirole is a Frenchman, he teaches at Toulouse, and his key papers start in the 1980s. In industrial organization, you can think of him as extending the earlier work of Ronald Coase and Oliver Williamson with regard to opportunism and recontracting, but applying more sophisticated and more mathematical forms of game theory. Tirole also has been a central figure in procurement theory and optimal contracts when there is asymmetric information about costs. The idea of mechanism design runs throughout his papers in many different guises. Many of his papers show “it’s complicated,” rather than presenting easily summarizable, intuitive solutions which make for good blog posts. That is one reason why his ideas do not show up so often in blogs and the popular press, but they nonetheless have been extremely influential in the economics profession. He has shown a remarkable breadth and depth over the course of the last thirty or so years.
Cowen then summarizes (or at least introduces) much of Tirole's work. I am now working my through a paper Tirole wrote with Jean-Jacques Laffont that discusses when regulatory capture is likely to happen. (Cowen notes, " I have yet to see the insights of this paper incorporated into the rest of the literature adequately.")
The papers is called The Politics of Government Decision-Making: A Theory of Regulatory Capture. Two of my favorite lines:
- "The assumption that Congress is a benevolent maximizer of a social welfare function is clearly an oversimplification, as its members are themselves subject to interest-group influence."
- "In contrast with the conventional wisdom on interest-group politics, an interest group may be hurt by its own power."
Here's the abstract (paper available on JSTOR):
The paper develops an agency-theoretic approach to interest-group politics and shows the following: (1) the organizational response to the possibility of regulatory agency politics is to reduce the stakes interest groups have in regulation. (2) The threat of producer protection leads to low-powered incentive schemes for regulated firms. (3) Consumer politics may induce uniform pricing by a multiproduct firm. (4) An interest group has more power when its interest lies in inefficient rather than efficient regulation, where inefficiency is measured by the degree of informational asymmetry between the regulated industry and the political principal (Congress).
It's worth a read, even if the math part is a little beyond some of us.
H/T: Geoffrey Manne
Tuesday, October 7, 2014
Maryland State Senator and American University Washington College of Law professor Jamie B. Raskin recently wrote an opinion piece for the Washington Post, A shareholder solution to ‘Citizens United’. In the piece, he explains that
Supreme Court Justice Anthony M. Kennedy’s majority opinion in Citizens United essentially invites a shareholder solution. The premise of the decision was that government cannot block corporate political spending because a corporation is simply an association of citizens with free-speech rights, “an association that has taken on the corporate form,” as Kennedy put it. But if that is true, it follows that corporate managers should not spend citizen-shareholders’ money on political campaigns without their consent.
Senator Raskin further notes that the Congress doesn't appear interested in moving forward with the Disclose Act, and the Securities and Exchange Commission has not pursued requiring campaign spending disclosures. In response, the senator has a proposal:
Our best hope for change is with the state governments that regulate corporate entities throughout the year and receive regular filings from them. I am introducing legislation in January that will require managers of Maryland-registered corporations who wish to engage in political spending for their shareholders to post all political expenditures on company Web sites within 48 hours and confirm that any political spending fairly reflects the explicit preference of shareholders owning a majority interest in the company.
Further, if no “majority will” of the shareholders can form to spend money for political candidates — because most shares are owned by institutions forbidden to participate in partisan campaigns — then the corporation will be prohibited from using its resources on political campaigns.
Back in early 2010, as a guest blogger here, I wrote a post, Citizens United: States, where I noted my reaction to the case, which was that I wondered how states would react and that the case made the issue "an internal governance issue, which is a state-level issue." (Please click below to read more.)
Tuesday, September 30, 2014
There is a growing drumbeat for banning laptops in the classroom, as a recent New Yorker article explained. The current case for banning laptops appeared on a Washington Post blog (among other places), in a piece written by Clay Shirky, who is a professor of media studies at New York University, and holds a joint appointment as an arts professor at NYU’s graduate Interactive Telecommunications Program in the Tisch School of the Arts, and as a Distinguished Writer in Residence in the journalism institute.
The piece makes a compelling case for banning laptops, and I agree there are a number of good reasons to do so. I’ll not recount the whole piece here (I recommend reading it), but here’s a key passage:
Anyone distracted in class doesn’t just lose out on the content of the discussion but creates a sense of permission that opting out is OK, and, worse, a haze of second-hand distraction for their peers. In an environment like this, students need support for the better angels of their nature (or at least the more intellectual angels), and they need defenses against the powerful short-term incentives to put off complex, frustrating tasks. That support and those defenses don’t just happen, and they are not limited to the individual’s choices. They are provided by social structure, and that structure is disproportionately provided by the professor, especially during the first weeks of class.
I am sympathetic to this line of thinking, and I am even more sympathetic to another point made in the article: that the laptop distractions can leak from one student engaging in social media or other non-classroom activities to those around them. That is a serious concern.
Still, I don’t ban laptops in my classes, though I have thought about it. I let students use them in my larger-enrollment classes: Business Organizations, which usually is near the cap of 70, and Energy Law, which is usually in the 34-55 range. There is no doubt the risk of distraction in those courses is higher than in others. Interestingly, in my last two seminar-style classes, I did not have a ban, either, but students rarely used laptops. They opted-in for the discussions (self-selection for certain topics can certainly help on that front).
I continue to think about how I want to proceed, but for now, I see value in allowing my students the option to choose how they wish to engage. There have been some other defenses of the idea of keeping laptops in the classroom (see, e.g., here), but my views are an amalgam of different styles and rationales.
First, part of learning, especially in becoming a life-long learner (which is what lawyers need to be), one must choose to engage. Law students are grown ups, and they must learn how they learn. They must decide. I won’t be there when they get to their job and they have to use the computer to actually do the work of a lawyer. They will, at some point, have to decide when to focus and when to play.
Second, I value diversity of styles in the classroom. That is, if most other professors are using open-book exams or take home exams, mine will probably be closed book, and closed note. I have taught using quizzes, blog posts, midterms, short papers, etc., to add some variety to the experience. Now that more classes, at least at my school, are without laptops, it actually gives me a reason to consider keeping them.
Finally, at least so far, allowing laptops is part of my deal with students. It’s part of how I connect and model for them my view and expectation that they are grown ups. I give them power, and I expect them to act appropriately. As my friend, former colleague, and teaching mentor Patti Alleva (recognized as one of the nation's best law teachers) explained in a recent National Law Journal piece, teaching is ultimately about respect and what she calls “intentionality.” She explains:
The simple fact is that teaching does not always produce learning, even if thoughtfully done. Creating that causal link between the two can be a mystifying challenge, especially given the infinite number of unknowable factors and forces that may reduce a teacher's effectiveness or a student's willingness or ability to learn.
. . . .
Teachers, as fiduciaries of their students' educational experience, owe them compassionate deference, based on a benefit of the doubt, coupled with high but reasonable expectations for a meaningful learning collaboration.
. . . .
Ultimately, the best professors are themselves students who learn as much as they teach. And they seek, not to impose ideas on students, but to help equip them with the metacognitive tools to test those ideas and use them in service of problem-solving. Hopefully, students will develop their own senses of respect — for the legal profession, for themselves as aspiring lawyers and for the learning partnership we share. So, if years ago, in that tense seminar room, each of us left with respect for our disagreements and for the pedagogic processes that allowed us to critically and creatively examine, and grow from, those differences, then invaluable learning did take place that day with respect providing a bridge between teaching and learning when other things may have temporarily obscured the connection.
I hope that as teachers we can all appreciate that we, like our students, have different views on the best way to teach and to learn. Just because we choose different paths, it doesn't make any path wrong. As long as the path is thoughtfully chosen, with a purpose and a goal, there’s a good chance it’s right for that teacher, in that moment, for that class. And if it’s not, the key is not about dwelling on the mistake. It’s about learning, adjusting, and doing a better job next time, because the best teachers really are the ones who are trying to “learn as much as they teach.”
Tuesday, September 23, 2014
March of the Benefit Corporation: So Why Bother? Isn’t the Business Judgment Rule Alive and Well? (Part III)
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installments can be found here and here (NLPB) and here and here (BLPB).)
In prior posts we talked about what a benefit corporation is and is not. In this post, we’ll cover whether the benefit corporation is really necessary at all.
Under the Delaware General Corporation Code § 101(b), “[a] corporation may be incorporated or organized under this chapter to conduct or promote any lawful business or purposes . . . .” Certainly there is nothing there that indicates a company must maximize profits or take risks or “monetize” anything. (Delaware law warrants inclusion in any discussion of corporate law because the state's law is so influential, even where it is not binding.)
Back in 2010, Josh Fershee wrote a post questioning the need for such legislation shortly after Maryland passed the first benefit corporation legislation:
I am not sure what think about this benefit corporation legislation. I can understand how expressly stating such public benefits goals might have value and provide both guidance and cover for a board of directors. However, I am skeptical it was necessary.
Not to overstate its binding effects today, but we learned from Dodge v. Ford that if you have a traditional corporation, formed under a traditional certificate of incorporation and bylaws, you are restricted in your ability to “share the wealth” with the general public for purposes of “philanthropic and altruistic” goals. But that doesn't mean current law doesn't permit such actions in any situation, does it?
The idea that a corporation could choose to adopt any of a wide range of corporate philosophies is supported by multiple concepts, such as director primacy in carrying out shareholder wealth maximization, the business judgment rule, and the mandate that directors be the ones to lead the entity. Is it not reasonable for a group of directors to determine that the best way to create a long-term and profitable business is to build customer loyalty to the company via reasonable prices, high wages to employees, generous giving to charity, and thoughtful environmental stewardship? Suppose that directors even stated in their certificate that the board of directors, in carrying out their duties, must consider the corporate purpose as part of exercising their business judgment.
Please click below to read more.
Tuesday, September 16, 2014
After my long trip away from my wonderful family in western North Dakota, I stopped in Chicago for the ABA Site Evaluation Workshop on my way home. I'm not quite where my co-blogger is on the whole accreditation thing, but it was not my favorite thing to add another day away from my family. On the plus side, I got to see my brother and his family the night before it, and I appreciated my time with my colleagues from WVU and beyond, so it was okay.
It was hard to be away, but it sure was a great to get home. I even got to come home to this after a long five days:
On so many levels, I am very, very fortunate.
Thursday, September 11, 2014
Today started in Williston, ND, and we then went to Mountrail County. We vistied Tioga and Stanley, then headed south through New Town and Killdeer on the way back to Dickinson, where we stay tonight before flying out tomorrow morning (ridiculously early, I might add).
We started the day at Williston State College, where we learned about the TrainND program and other degree programs. TrainND works with companies to do OSHA and other safety training, and trained more than 16,000 people last, the vast majority of whom were employed. The College also offers degree programs for those seeking to be Lease Operators and PLC-trained operators. Interesting for academics, the college had 38% turnover last summer. The college has invested in campus housing for faculty, which can be part of the incentive package to bring people. Apartments run from $2600/mo for 1 and 2 BR options, with home rentals over $3K. Seventy percent of new faculty hires are moving into the new campus housing apartments (which looked nice from the outside). Just like the industry, the college is "catching up" with the whole thing.
We saw more densely packed well sites, such at this 9-pack (nine wells on one well pad). This is an advantage of hydraulic fracturing, in that one well pad can handle multiple wells, which leads to less land impact per well.
We also saw major traffic, including long lines of traffic coming over the
Four Bears Bridge at Lake Sakakawea. We didn't have a terrible time driving, and it was not the horror story that has been repeated at times, but it was striking to have open rolling hills with very few signs of people, other than wells, flares, and trucks.
We saw two natural gas faciltities, aswell, today, which is encourging, as it's important to have facilities to take the natural gas that's coming out of the ground along with the oil.
Also of interest was a waste water facility, which is critical to better oil production. I have written many times that the biggest concern about hydraulic fracturing in not the fracking or drilling process; it's surface concerns about spills of things like the waste water coming back up the well. (Drilling matters, too, but protecting ground water in that context is about good well casings, and the concerns are largely the same as conventional drilling.)
Such facilities are important, as they have helped vastly reduce the use of impoundment pits used for waste water in the early Bakken experience.
I heard for at least the third time today that the EPA is the biggest risk the industry faces. I continue to believe this is a red herring. That is, the biggest risk the industry faces is a major disaster from careless activities. It seems that many of the biggest concerns on that front are being handled well in North Dakota (better, in my sense, than in the Marcellus Shale). It's not to say everything is right, but there does seem to be a commitment to getting the process done well. Economic incentives are largely aligned with that goal, too.
The one thing that concerns me here, conceptually, is that people don't seem that concerned about water safety. I know most of the industry is working hard to keep things clean, but a bad chemical spill, oil spill, or waste water spill in the lake (picture above) could be disastrous. It's not that I have seen anything specific that makes me worry about the lake. I didn't. It's just that I'd prefer to hear, "We're worried about water contamination, but we're doing our best to prevent it." Instead, " I have have heard repeatedly, "Water issues aren't really a concern." I think that means that major issues haven't arisen, and not that people don't care, but that doesn't mean issue can't or won't arise.
Finally, as to the EPA, I don't think the EPA is poised to do much to slow hydraulic fracturing in oil country. And I don't think they should. That said, a major disaster would open the door to EPA or other federal action. Such a disaster would invite a shut down, and I know the industry doesn't want that. If the industry continues to improve, as it has since 2007, major disasters should be avoided. Here's hoping industry, regulators, and the people of the region continue to improve safety so that the benefits of heavy oil production increasingly outweigh the downsides. It can be done, and I sincerely hope it is.
Wednesday, September 10, 2014
We covered a lot of ground today, driving up from Medora, ND, to Williston, ND, through Watford City. The traffic was not terrible for us, though the truck traffic and the road construction was slow going for a while. We're told we missed the worst of the traffic because our timing was good. It still felt like big city traffic in what is not a big city.
Watford City has been a prime example of a place where the oil boom has caused significant growing pains. A recent article in The Atlantic asked, What If Your Small Town Suddenly Got Huge?, and explained:
The Bakken oil boom has brought rapid growth to many towns and cities in western North Dakota, including Williston, north of the Missouri River, and Dickinson, alongside Interstate 94. But Watford City, where the population has jumped from just 1,400 people six years ago to more than 10,000 today, has experienced a particularly dramatic shift in character.
There is dirt being moved everywhere: for roads, for housing, and, of course, for oil. Driving this region you see very few homes, rolling hills, a few small buttes, and some abandoned farm homes. Oil wells blend in surprisingly well in many spots, as the sites are often small, and they look like small farms, without the farm house or barn. The colors of the sites blend in with the landscape, and are often easy to miss if they are far from the road, other than the flicker (and sometimes blaze) of flared natural gas that comes up with the oil and has no where else to go.
It continues to be striking to me that here in oil country, that gas is burned rather than saved, when back in West Virginia and the rest of the Marcellus Shale play (and in Texas's Barnett Shale), millions of dollars are spent per well to pull that exact commondity from the ground. Efforts to gather the gas here in North Dakota are underway, but it's not an easy undertaking. There is little immediate need here for natural gas, as there is abundant electricity already available because of lignite coal, and even some wind and hydro power in the state. The crew camp we visited on Tuesday is completely electric (no natural gas)-- even for heat, because the prices are so low.
Later in the day discussed traffic issues in the area with the state Department of Transportation, landowner issues with a landowner group, and air and water quality with a state health department official. I plan to write more on each of these issues in the next few weeks, so for now I'll just note that, as you'd expect, traffic is bad; landowners without mineral rights are sometimes not happy; and the health department has some challenges.
We also had the chance to speak with a geologist in the area, who explained the basics of the formation and how it works. It was interesting, but I'll leave that to the geology folks, as there are plenty of sources discussing that (PDF). The thing I wanted to note now was her explanation of the North Dakota's library of core samples. A recent Bismarck Tribune article explains:
In the early 1950s when the oil activity began, then-North Dakota State Geologist Wilson M. Laird, Ph.D., went to the legislature and lobbied to preserve the rocks of the producing zones and store them into a library. They bought Laird's concept, created a law based on the Model Act drafted by the Legal Committee of the Interstate Oil Compact Commission and the archives began.
This collection of rocks may be the most valuable rocks on the planet as they hold the secrets to the Bakken. Those secrets are being unlocked everyday as new technologies are created in response to the publicly-owned core samples of North Dakota.
Some states have adopted similar libraries, some have not. Looking across state lines at Montana where the Bakken crude also roams underfoot, less production is occurring. According to many in the industry, the historical shared data within the Wilson Laird library is one of the key reasons.
"In 2013, industry and academia examined 79,000 feet of core, an all-time record in the core library." Ed Burns, North Dakota State Geologist said. "More specifically, we had 28 companies and nine separate universities use the library."
In the past sharing data was not as common due to the large amounts of information, intellectually property rights and competition. North Dakota was the exception to that rule.
Apparently core samples are required about every 30 feet (horizontally or vertically) once the well gets below 8,000 feet vertically. (There are some exceptions when things get going quickly, but even then samples are needed about every 90 feet.) Because so much of North Dakota's information is publicly available, this information can help companies figure out what to look for in the drilling process, which can help maxmize production from wells.
This kind of forced data sharing is rather remarkable in that it's not something we usually see among competitors. That said, in an industry with a depleteable resource where virtually every state has a law outlawing "waste," it does makes some sense. See, e.g., the North Dakota Century Code:
43-02-03-06. Waste prohibited. All operators, contractors, drillers, carriers, gas distributors, service companies, pipe pulling and salvaging contractors, or other persons shall at all times conduct their operations in the drilling, equipping, operating, producing, plugging, and site reclamation of oil and gas wells in a manner that will prevent waste.
The industry would be well served to share such information and show a similar commitment to avoiding waste in all aspects of the process (not just oil and gas). We'd probably see less water use, better environmental protection, and faster clean up where things go wrong. There's some indication that at least the best of the industry are doing so, and I sincerely hope that continues. Stay tuned for Day 4.
Following are some pictures from my adventures so far, as described in my prior posts on my Bakken Oil trip in western North Dakota, here and here. Thanks to co-blogger Haskell Murray for the suggestion.
This is a picture of one of the mudrooms from a crew camp near Dickinson, ND, in Dunn County:
This is a VIP room in the same facility. It has a private bath, while other rooms are smaller and share a jack-and-jill style bathroom.
This is the sign for the guest laundry -- No Greasers.
This is a picture of the crude oil site for loading oil on the tanker cars.
A crude storage tank:
Most of the oil coming out of North Dakota, 1 million barrels a day, is shipped by rail:
This is North Dakota crude. It comes from the ground a little more orange in color, but mellows to this over time. It's not thick; it almost like iced tea.
Flaring natural gas remains a problem, though some gathering is underway to help reduced the amount of flaring in the state.
Finally, some pictures from Theodore Roosevelt National Park:
Tuesday, September 9, 2014
This experience has been rather remarkable, and I'm only two days in to the trip. We covered a lot of miles today, and not all of it was related to the oil and gas business. I started the day with a run, at a misty 43 degrees, after a high of 85 yesterday. This is not relevant, other than to saw I was a bit cold this morning.
Target Logistics Dunn County Lodge
A few visits of interest today: First: Target Logistics Dunn County Lodge, which is a crew camp site. These are often know as "man camps." They prefer "workforce housing." I'll stick with crew camps.
It was was an impressive site for quickly built housing. The facility provides housing that does not take away from the local community, and deals with parking, water, and utility issues, as well as other resource issues. The site has about 600 beds, and costs about $8-$10 million to build. They plan about a 20-month payoff for the build, which they met. Impressive.
Prices are geared to be market competitive. The average is about $120 per night, which includes all food and utilities, though companies negotiate their own deals. The people who work in the area tend to be transient -- two weeks on two weeks off. People who do hydraulic fracturing tend to do two weeks on, on week off. Construction people do four weeks on, two weeks off. The people who service the facility (and are also not locals, because the market is tight) work six weeks on two weeks off, and they pay their own travel.
There are mostly men on the site, but women are there. They have their own rooms or share rooms with other women with a "jill and jill" bathroom share. People generally work within 45 miles or they find other facilities. The site is zero tolerance -- no alcohol, no firearms, no visitors. The have on-site workout facilities, laundry, and food service. It's clean, well organized, and safe. It's the Cadillac of temporary housing. And I'd try very hard not to ever, ever live there. While I admit, it's better than some of my college housing, it lacks the sense of free will I had then.
Bakken Oil Express
Next was a trip to Bakken Oil Express, an oil shipping facility. It was impressive in its organization and its operation. It was big, with oil tanks, a rail yard, and lots of trucks. Oil there moves by unit train, which is 104 cars. The site has several tanks, and they can store 640k gallons of oil. Tanks are generally 90k or 105k gallons. An average truck brings 225 barrels of oil. It takes 17 to 18 hours to load a train, and the site loads about 1.5 trains per day. That is about 685 gallons per car.
A diesel refinery is supposed to come on line on the site to serve the region, which is expected in December. The site has about 75 employees, with salaries at $27/hour and up.
The site is working to upgrade safety, including fire suppression, which it doesn't have now. They are building foaming pipes to help if they have a problem. Right now, the plan in case of fire is to ship out what's possible, and let it burn out.
Theodore Roosevelt National Park
This is a park you should see. I think I'd say that of all national parks, but I love this one. The park is facing several challenges. This includes protecting the "sound scape and sense of solitude," that made Teddy Roosevelt love the place so much. This is a challenge for a park that has major highways running through it and major mineral operations being sought in the nearby land parcels.
The park has done well working with companies, who have responded well to requests to keep noise and other issues away from the park when issues have been raised. Bakken flaring (or natural gas) has been an issue, too, and the park is working to preserve the night sky. The area has had (and continues to have ) amazing view of the stars and the night sky, and flaring can cause haze and horizon light that makes the sky less amazing. They are working on it.
There is no drilling in the park, but drilling near has impacts, too. So far, industry, the park, and the community have done well to minimize impacts.
Tomorrow, we visit more communities, which are widely known to have had even larger impacts than what I have seen so far. The oil boom has been good for the region in many ways, but it's been hard, too. We're about to get a sense of how hard.
Monday, September 8, 2014
Today marked the first day of several meeting with people from North Dakota to discuss the oil boom and how it has impacted the state. I lived in the state, and I loved it, so I think I am a little more connected than many to what's happened here. That said, I lived on the other side of the state from the oil boom, and I only spent five (largely great) years in North Dakota, so while I'm informed, I have hardly "lived the boom." I've just been watching and trying to pay attention.
A few things I was told tonight struck me as significant:
1. Housing costs are still a huge issue. Building a new house in Dickinson can run upwards of $250 per square foot. A one-bedroom apartment can easily run $1300.
2. In 1997, there were 698 hotel rooms in the city, largely for tourism jumping off for the North Dakota Badlands. By 2004, that number was 754. As of 2013, that number has increased to 1632. (The number is true of 2014, too.)
3. In 2005, the average daily rate for a hotel room was $53.96
By 2008: $68.95
2013: $112.37 (280 rooms were added in 2013).
This does not likely mean that things are slowing down, thought perhaps they are stabilizing. More permanent housing has also been going up at a significant rate, so the increased number of hotel rooms, combined with those leaving the temporary housing market, likely explains the (relatively) modest decrease in average daily rate.
4. Traffic and road maintenance remain a big concern. One person I met tonight said he'd had a paved road to his house for years, until the oil boom came, and it's now back to being a gravel road.
5. I learned the term "Bakken charge," which I'm told refers to the premium one pays for goods and services in this region. Examples given include $5 Little Caesar's Pizzas, which are $5.99 here (or 20% more) and flyers from big box stores with 20% ot 40% higher prices than the same flyers in other markets.
6. The idea of community action is less of a focus here than in other areas, like what we've seen in some spots in West Virginia. It's not that people don't care, but they don't necessarily participate in community actions. Once can opine on the reasons why, and I have my guesses, but as a lawyer, I'll stick to reporting what I've been told on this one: if you want support, you need to go to the people where they are. (That seems like sound advice anywhere.)
7. All those people asking for minimun wage at fast-food restaurants across the country "are really just asking to be paid like the they live in Dickinson, ND."
8. A major biggest employment challenge is finding people "who can pass a drug test. Some employers say when that when potential applicants are asked that question, 'half the people just turn and walk out.""
I learned a lot more than this after a good conversation with interesting people, but I'll leave it here for tonight.
I'm currently flying at about 30,000 feet on my way to Dickinson, North Dakota. Regular readers know I do much of my research in the energy sector and that the impacts of horizontal drilling and hydraulic fracturing have had on the local, regional, national, and global economies are an interest of mine. This trip marks my first return to North Dakota since I left the University of North Dakota School of Law in the summer of 2012, and it will be my most extended trip to the Bakken oil patch in the western part of the state.
I have the benefit of traveling with a group from West Virginia University, and we're gathering information for a variety of applications, all of which I hope will help us plan for a more sustainable economic and environmentally viable energy future. The trip is scheduled to include meetings with government officials (state and local), industry representatives, landowners, farmers, educators, and others. I'm looking forward to this rare opportunity to hear so many different perspectives from people living in the heart of the U.S. oil boom.
Over the last few years, I have written about the challenges and opportunities related to the shale oil and gas reserves made available through horizontal drilling and hydraulic fracturing, with a focus on the economic, environmental, and social impacts. I'm curious to see how my earlier assessments stack up with new information regarding the current situation. Throughout the week, I plan to write about things I learn, provide some updates about what's happening, and maybe share some thoughts about what's next from the business, legal, and regulatory perspectives. Follow me on Twitter, too, @jfershee for (hopefully) in-the-moment updates.
Stay tuned for more to come, and for those interested, here are some of my recent pieces on the subject:
- North Dakota Expertise: A Chance to Lead in Economically and Environmentally Sustainable Hydraulic Fracturing, 87 North Dakota Law Review 485 (2011) (invited) (symposium issue)
- The Oil and Gas Evolution: Learning from the Hydraulic Fracturing Experiences in North Dakota and West Virginia, 19 Texas Wesleyan Law Review 23 (2012) (invited) (symposium issue)
- Facts, Fiction, and Perception in Hydraulic Fracturing: Illuminating Act 13 and Robinson Township v. Commonwealth of Pennsylvania, 116 W. Va. L.Rev. 819 (2014) (invited)
Wednesday, September 3, 2014
(Note: This is a cross-posted multiple part series from WVU Law Prof. Josh Fershee from the Business Law Prof Blog and Prof. Elaine Waterhouse Wilson from the Nonprofit Law Prof Blog, who combined forces to evaluate benefit corporations from both the nonprofit and the for-profit sides. The previous installment can be found here (NLPB) and here (BLPB).)
What It Is: So now that we’ve told you (in Part I) what the benefit corporation isn’t, we should probably tell you what it is. The West Virginia statute is based on Model Benefit Corporation Legislation, which (according to B Lab’s website) was drafted originally by Bill Clark from Drinker, Biddle, & Reath LLP. The statute, a copy of which can be found, not surprisingly, at B Lab’s website, “has evolved based on comments from corporate attorneys in the states in which the legislation has been passed or introduced.” B Lab specifically states that part of its mission is to pass legislation, such as benefit corporation statutes.
As stated by the drafter’s “White Paper, The Need and Rationale for the Benefit Corporation: Why It is the Legal Form that Best Addresses the Needs of Social Entrepreneurs, Investors, and, Ultimately, the Public” (PDF here), the benefit corporation was designed to be “a new type of corporate legal entity.” Despite this claim, it’s likely that the entity should be looked at as a modified version of traditional corporation rather than at a new entity.
To read the rest of the post, please click below.
Tuesday, September 2, 2014
At the New York Times Dealbook, Andrew Ross Sorkin notes that public pension funds have been lately silent on the issue of corporate inversions. (See co-blogger Anne Tucker on inversions here and here.) Sorkin writes, "Public pension funds may be so meek on the issue of inversions because they are conflicted."
Maybe I am reading too much into his choice of words, but "meek" implies more to me than "moderate" or "mild" and instead conveys a value judgment that fund managers have an obligation to speak out. I am not pretty sure that's not true.
I definitely don't like companies heading offshore for mild gains, and I don't think I would support such a choice, but as a director, I'd sure analyze the option before deciding. Fund managers, too, have obligations to look out for their stakeholders, and unless I had a clear charge on this front or thought the inverting company was clearly wrong, I'd probably stay quiet, too.
Although the meek may inherit the earth, at least at this point, I might substitute "meek" with "cautious" or even "prudent." But that's just me.