Tuesday, August 30, 2016

Criminal LLC Law: Shares in a What?

So, I am very anti-fraud, and I think cheaters should not prosper.  But I also think courts should know what they are talking about, especially in criminal cases. The following is from a new Second Circuit case: 
Although we review claims of insufficiency de novo, United States v. Harvey, 746 F.3d 87, 89 (2d Cir. 2014), it is well recognized that “a defendant mounting such a challenge bears a heavy burden” because “in assessing whether the evidence was sufficient to sustain a conviction, we review the evidence in the light most favorable to the government, drawing all inferences in the government's favor and deferring to the jury's assessments of the witnesses' credibility.”  . . . 
[W]e reject Jasmin's challenge to her Hobbs Act conviction. The evidence presented at trial more than sufficiently describes the consideration received by Jasmin in exchange for her official actions as Mayor, including the $5,000 in cash from Stern, “advance” cash for their partnership, and shares in the limited liability corporation that would develop the community center.
United States v. Jasmin, No. 15-2546-CR, 2016 WL 4501977, at *2 (2d Cir. Aug. 29, 2016). 
 
I can't actually figure out exactly what's going on here, but I know a few things: (1) "advance" cash for a partnership probably needs to be assessed more closely because, what partnership? and (2) there should not be shares in a "limited liability corporation." Or maybe there should be, if they just mean "corporation." But I think they mean an LLC, which should provide membership interests.  At a minimum, I would love to see a court call people out in such situations for perpetrating frauds with incorrect entity forms. Yeah, I'm that kind of law nerd. 

August 30, 2016 in Corporations, Joshua P. Fershee, LLCs, Shareholders, White Collar Crime | Permalink | Comments (1)

Tuesday, August 23, 2016

New Paper: Political Theories and Fiduciary Duities

I am still working my way through this new paper, Seeking an Angle of Repose in U.S. Business Organization Law: Fiduciary Duty Themes and Observations, from J. William Callison of Faegre Baker Daniels LLP. It's an interesting premise, and worth a look. Here's the abstract:

This article applies liberal, neoliberal, critical, feminist and communitarian political theories to limited liability company and partnership fiduciary duty law; discusses developments in that law over the last two decades by focusing on theory; suggests a pragmatic and balanced approach to fiduciary duty law that incorporates desirable features of different approaches; and suggests that law, as developed in uniform acts, has been moving toward a balanced approach.

The paper is available here: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2827771

August 23, 2016 in Joshua P. Fershee | Permalink | Comments (0)

Friday, August 19, 2016

A Look at Investor Risk and Community Risk In Private Prisons

The concept of private prisons has always seemed off to me.  Prisons have a role in society, but the idea of running such institutions for profit, it seems to me, aligns incentives in an improper way. The U.S. Justice Department apparently agrees and said yesterday that it plans to end the use of private prisons.  The announcement sent stocks tumbling for two private prison companies, Corrections Corp. of America (CCA) and GEO.  Both dropped as much as 40% and remain down more than 30% from where they were before the announcement.   

Obviously, this can't make shareholders happy, but I figured this had to be a known risk. I was right -- CCA's 10-K makes clear that such government decisions related to future contracts could lead to a reduction in their profitability.  So, the disclosure seems proper from a securities regulation perspective. Still, reading the disclosure raises some serious questions for me about the proper role of government.  I frankly find this kind of outsourcing chilling.  For example, CCA states: 

Our results of operations are dependent on revenues generated by our jails, prisons, and detention facilities, which are subject to the following risks associated with the corrections and detention industry.

We are subject to fluctuations in occupancy levels, and a decrease in occupancy levels could cause a decrease in revenues and profitability.  . . . We are dependent upon the governmental agencies with which we have contracts to provide inmates for our managed facilities.

. . . .

We are dependent on government appropriations and our results of operations may be negatively affected by governmental budgetary challenges. . . . [and] our customers could reduce inmate population levels in facilities we own or manage to contain their correctional costs. . . .

The idea of "customers" in this contest simply does not sit well with me.  It suggests a desire for something that is not a positive. CCA's 10-K continues: 

Competition for inmates may adversely affect the profitability of our business. We compete with government entities and other private operators on the basis of bed availability, cost, quality, and range of services offered, experience in managing facilities and reputation of management and personnel. While there are barriers to entering the market for the ownership and management of correctional and detention facilities, these barriers may not be sufficient to limit additional competition. In addition, our government customers may assume the management of a facility that they own and we currently manage for them upon the termination of the corresponding management contract or, if such customers have capacity at their facilities, may take inmates currently housed in our facilities and transfer them to government-run facilities. . . .

Competition is a good thing in many (I think most), but this is not one of them. These companies are responding to the existing demand for prison services, but there can be no question the real opportunity for market growth is to increase demand for such services (e.g., increase the number of prisoners, seek longer sentences).  This, too, is made clear in the disclosures:

Our growth is generally dependent upon our ability to obtain new contracts to develop and manage new correctional and detention facilities. This possible growth depends on a number of factors we cannot control, including crime rates and sentencing patterns in various jurisdictions, governmental budgetary constraints, and governmental and public acceptance of privatization. The demand for our facilities and services could be adversely affected by the relaxation of enforcement efforts, leniency in conviction or parole standards and sentencing practices or through the decriminalization of certain activities that are currently proscribed by criminal laws. For instance, any changes with respect to drugs and controlled substances or illegal immigration could affect the number of persons arrested, convicted, and sentenced, thereby potentially reducing demand for correctional facilities to house them. Immigration reform laws are currently a focus for legislators and politicians at the federal, state, and local level. Legislation has also been proposed in numerous jurisdictions that could lower minimum sentences for some non-violent crimes and make more inmates eligible for early release based on good behavior. Also, sentencing alternatives under consideration could put some offenders on probation with electronic monitoring who would otherwise be incarcerated. Similarly, reductions in crime rates or resources dedicated to prevent and enforce crime could lead to reductions in arrests, convictions and sentences requiring incarceration at correctional facilities. 

CCA does note that their "policy prohibits [them] from engaging in lobbying or advocacy efforts that would influence enforcement efforts, parole standards, criminal laws, and sentencing policies." These disclosures, though, sure make clear what kind of policies their shareholders would want to support.  

I don't have any illusion that government run prisons are much (if any) better, but I do think that government's incentives are at least supposed to be aligned with the public good when it comes to the prison system.  I often think government should take a more limited role than it does when it comes to regulations.  That is especially true when it comes to criminal law. But privatizing prisons is not reducing the role of government in our lives -- it is simply outsourcing one key portion of the government's role.  Private prisons do not equate to smaller government. Fewer laws, or relaxed enforcement and punishment, do. If the government is paying for it, it's still a government program.  

Here's hoping that the reduction in use of private prisons leads to a reduction in the use of all prisons.  Let's save those for truly the dangerous folks.  

August 19, 2016 in Corporations, Current Affairs, Human Rights, Joshua P. Fershee, Securities Regulation, White Collar Crime | Permalink | Comments (0)

Tuesday, August 16, 2016

Back to (Law) School: More Advice for New 1Ls

Whether we're ready or not (we mostly are), classes start tomorrow for West Virginia University College of Law. Orientation for new students started last week, and I had the chance to teach a group of our new students. I had three sessions with the group where we discussed some cases, how to brief a case, and did some writing exercises.  It's been a while since I worked with first-year students, and it was a lot of fun.  

In addition to the assigned work, I answered a lot of questions, in and out of the classroom.  Questions focused mostly on how to succeed as a law student. Although there's plenty of advice on the internet, and whole books dedicated to subject, and even my own blog posts.  Last year, I provided my Ten Promises For New Law Students to Consider.   This year, I had enough similarly themed questions, that I thought I'd add some detail to my basic advice for new law students. 

1) Do the work. 

Some students ask -- if I work law school like a job, is that a good idea?  As with everything, it depends.  I don't know how you work.  If you work regular hours, every day, where you focus on the task before you, then it can work well.  If you're someone who sits in front of a computer doing everything but your work until a deadline is looming, it's not so likely to work for you. 

So, if you work it like a job where you are the boss, and you have no employees.  And the work absolutely has to get done, then yes.  There will be days when you can work a normal 8 to 5 with a lunch break and get your work done, and there will be times when 80 hours a week is insufficient. If you work until the job is done, you'll be served well.  

1A) Doing the work does not mean looking at the cases.

Reading for class is not about checking the box. There may have been times when "looking" at all 40 pages that were assigned would do the trick. Maybe as an undergrad.  Of course, I was a mostly terrible undergrad, so I didn't even do that often enough.  But law school is about figuring out what matters. That means you need to read the cases more than once.  I have seen twice as the rule of thumb, though I think three times is the right place to start.  It's not just about recognizing that something happened.  It's knowing what happened and what that means, in the context of the case and beyond.  And that requires time and careful reading. And, by the way, class is far more interesting when you know what's being discussed. Seriously. 

2) Be a good classmate and be the best possible you.

You can be competitive without being a jerk.  Your competition is really with yourself.  UCLA basketball coach John Wooden always reminded his players to be the best they could be -- not to try to be better than someone else.  If you always use someone else as the bench mark, you may be holding yourself back, even if you do better than them.  Try to remember that. There will be people who are better than you, at some point, at everything.  Be the best you that you can be.  Good things will follow.  And if it doesn't go as well as you hoped, if you did the work the best you could, you will still be okay.  (See 1 and 1A above.) 

3) Most people aren't cheating, but if they are, turn them in.

Every once in a while, I hear some students who are convinced that there is rampant cheating. "Some people worked together on their memo." Maybe, but usually not.  "Someone's (uncle/sister/cousin) who is a (prosecutor/M&A lawyer/judge), wrote their memo!"  Probably not.   Most lawyers understand the ethical problems with that. And who wants to write another law school memo after you passed the bar exam?  It would take a pretty odd combination of work ethic and lack of basic morals to make that a common occurrence.   

But even worse -- give us some evidence if you do know something.  Or some names, and we will investigate.  I hate cheating, and I want it stopped.  I went to law school with my wife, and we didn't even leave out any of our legal writing materials in our home.  The rules matter.  And you need to practice following them from day one.  That said, I don't think most of my students are or were cheaters, and they have rarely given me any reason to doubt their integrity.  

More than once over the years, I have also heard students say, "well, I don't want to hurt anyone's career."  First, what?  If you know someone is not following the rules, they need to be turned in. Lawyers have such an obligation, though I think it is one that is not often enough fulfilled.  I have heard of attorneys who had opposing counsel forge their signature, and the attorney still did not turn them in.  If we allow it, it continues.  

In addition, I have also heard students say, "I can't prove it, but I KNOW they are cheating."  If you can't point to facts that show it it, you probably don't KNOW, anything.  Your strongly suspect. And might be wrong. Don't forget, lots of people posture when they are stressed or fearful.  Focus on your work, and good things are likely to follow. 

4) Everything is harder.

I wonder if poor grades are sometimes the reason some students decided others are cheating.  I suspect it is sometimes.  The numbers suggest that most of our students are used to getting good grades, so a B can seem like something went wrong.  But law school is the next step up.  I often use a sports analogy -- law school is like an athlete going from college to the pros (or the olympics).  The competition is better because everyone at the next level has a better skill set.  If there is a curve (and there usually is, official or unofficial, in the first year), then students are being compared to one another.  It's not just how well did you do -- it's how well did you do relative to others.  That may seem unfair, but those are (usually) the rules.  Be prepared to work hard, and know others will be, too.  There is room for everyone to succeed, but not everyone can be at the top.  

5) You are not your grades.

Don't let a grade define you.  Your paper may be a C+.  But you are not.  Your A* (which was how the highest grade in the course was noted when I was in law school), doesn't make you an A*, either.  Your work can be a reflection of you, but it is not you. Sometimes things don't go well. Sometimes you might not have worked hard enough.  Sometimes you're sick.  And, yes, sometimes the professor's view of the world is flawed.  Other times, a student might have studies three things all semester. And it's the three things tested on the exam.  You can only control your work and your effort.  You must react and respond to the rest.  

So, I know I am biased.  I loved law school. It's why I do what I do.  Not everyone will feel that way.  But give yourself a chance. Prepare. Engage. Ask questions. Be wrong.  And learn.  

Have a great year!  Oh, and by the way, take Business Organizations before your graduate.  It's pretty much essential.  

August 16, 2016 in Joshua P. Fershee, Law School, Teaching | Permalink | Comments (0)

Tuesday, August 9, 2016

Things Law Professors Say: I Needed to Unpack Law Professors’ Normative Behavior

I am not the first to notice that law professors, and academics generally, have their own jargon and favorite buzzwords.  Some websites do a nice job of highlighting (or mocking) many of the odds turns of phrase many of us use.  Lawyers in the practicing bar do this, too, of course, and other professionals, especially business people (see, e.g., Dilbert) and public relations professionals.

I try not to be too jargon-y, but I have caught myself more than a few times.  I am big on “incentivize,” for example.   After attending a great SEALS Conference (likely more on that to come), I came away with a bunch of new ideas, a few new friends, and some hope for future collaboration.  I also came away noticing that, sometimes, as a group, “we talk funny.”  On that front, two words keep coming to my mind: “unpack” and “normative.”

So, when did we all “need” to start “unpacking” arguments?

This seemed like a relatively recent phenomenon to me, so I checked.  A Westlaw search of “adv: unpack! /3 argument” reveals 140 uses in Secondary Sources.  The first such reference appears in a 1982 law review article: Michael Moore, Moral Reality, 1982 Wis. L. Rev. 1061 (1982).  The phrase doesn’t appear again until 1988, in this article: Jeffrey N. Gordon, Ties That Bond: Dual Class Common Stock and the Problem of Shareholder Choice, 76 Cal. L. Rev. 1 (1988). Of the 140 citations, 113 (or 80%) of those have appeared since January 1, 2000 (69, or nearly 50%, have appeared since 2010). Relatively modest numbers, frankly, compared to how often I think I heard it said, but maybe we're just getting ramped up.  

And when did things become “normative?”

It also seemed to me that it’s relatively recent that the things we expect to happen (or people to do) became “normative” in legal academic circles. Before that, I think we called things the standard or the norm, but it was far less common that legal academics discussed “normative” behavior in the way we do now.   

A Westlaw search bears this out, too. A search of all secondary sources on Westlaw before January 1, 2000, revealed that the term had been used in 2,668 pieces. Since that date, normative has shown up in 7,270.  The term has obviously been around for a long time, and has value in many contexts, but saying “normative” is the new normal.  

To be clear, I don’t think the use of all jargon is bad, and I appreciate that as law professors do more interdisciplinary work, we will expand our jargon into other fields.  Sometimes specific words help us communicate more precisely in a way that increases usefulness and understanding.  I like terms of art and specificity.  (See, e.g., any of my rants about LLCs.) I’m just observing what seems like a shift in how we talk.  That’s not necessarily a bad thing. Maybe it’s just a thing. 

I welcome any comments on these terms, or even better, a list of other words or phrases I missed.  I know there's a lot more out there.  

August 9, 2016 in Conferences, Current Affairs, Joshua P. Fershee, Law School, Teaching, Writing | Permalink | Comments (2)

Tuesday, August 2, 2016

Sustainability & Sustainable Business: Natural Gas Does Not Kill Renewables

I am traveling to the SEALS Annual Meeting today, which means my summer is over.  We start orientation next week at WVU College of Law, and I have absolutely no idea where the time went. 

I will be keeping myself busy at the conference, where I am participating in a number of events, including a discussion group on Sustainability & Sustainable Business and one on White Collar Crime.  Today, I thought I'd write a little bit about the first subject, and engage in a bit of shameless self-promotion, as well. 

The intersection of sustainability and business is a significant part of my work.  My areas of focus are business law and energy law, and I have spent much of my research time looking at how companies respond to regulation, including the effects of environmental regulations.  (I also teach courses in Energy Law and Business Organizations, as well as a course called Energy Business: Law and Strategy, which merges the two subjects.)  

I was recently asked to submit a response to Prof. Felix Mormann's paper, Clean Energy Federalism, which appeared in the Florida Law Review.  His paper, which I think is well done, offers "two case studies, a novel model for policy integration, and theoretical insights to elucidate the relationship between environmental federalism and clean energy federalism." His article argues that renewable portfolio standards (mandates that require a certain percentage of electricity generated come from renewable energy sources) and feed-in tariffs (guaranteed payments for renewable energy that are independent of the market price) can be used together to find a "better, more efficient allocation of investor and regulatory risk."  

The recent influx of cheap natural gas from shale formations (using hydraulic fracturing and horizontal drilling) has lead some to believe that renewable energy goals like the ones Prof. Mormann proposes will be ineffective, or at least much weaker. Although cheap natural gas does change way the electricity market was expected to evolve, my response argues that the change does not necessarily make renewable energy goals unattainable or even less attainable.  My response, Natural Gas is Changing the Clean Energy Game, But the Game is Not Over, appears in the Florida Law Review Forum. Here's the abstract (and the paper is available here):      

In his article, Clean Energy Federalism, Professor Felix Mormann analyzes the keys facets of how energy law and environmental law intersect, as he considers how to implement a program to “decarbonize America’s energy economy.” In this forward-thinking piece, Professor Mormann considers the potential role of renewable portfolio (RPSs) and feed-in tariffs (FITs) and how concurrent implementation at the federal and state level could support a lower-carbon energy future. His conclusion—“that one clean energy policy (RPS) be implemented at the federal and another (FIT) at the state level”—is likely correct from a policy-optimization perspective. Still, as Professor Mormann acknowledges, such policies can face enormous political hurdles.

This Response acknowledges the enormous role fossil fuels still play in our electricity generation sector and notes that renewables still account for less than 15% of the overall U.S. generation market. The energy sector, though, can be expected to continue its diversification, in part because diversification is valuable for utility reliability and resilience, as well as for financial management purposes. With lower natural gas prices, fuel switching has continued at pace, with the bulk of the new natural gas generation replacing coal-fired generation. This is a positive development for those looking to displace coal, but the change to natural gas also delays at least some of the shifting to renewables.

This response argues that all is not lost because of that delay. The coal-fired generation that is displaced by natural gas could create at least some opportunity for a parallel increase in renewable electricity generation. Although some may believe that low natural gas prices undercut the option of bringing new renewable energy online, that does not need to be the case. Professor Mormann’s option is still a reality, and the likelihood of success is more a question of priority than opportunity.

 

August 2, 2016 in Conferences, Joshua P. Fershee, Law and Economics, Technology | Permalink | Comments (2)

Tuesday, July 26, 2016

Slow Down on the Reverse Veil Piercing of LLCs (Which Are STILL Not Corporations)

Anyone who reads this blog knows that I have issues with how people mess up the distinction between LLCs (limited liability companies) and corporations. In some instances, it is a subtle, likely careless, mistake.  Other cases seem to be trolling me.  Today, I present you such a case: Sky Cable, LLC v. Coley, 2016 WL 3926492 (W.D.Va., July 18, 2016).  H/T: Jay D. Adkisson. The case describes the proceedings as follows: 

DIRECTV asks the court to reverse-pierce the corporate veil and declare that Randy Coley is the alter ego of his three limited liability companies, such that the assets held by those LLCs are subject to the judgment in this case.

Okay, so claiming to pierce the "corporate veil" of an LLC is wrong (it doesn't have a "corporate" anything), but it's also exceedingly common for lawyers and courts to make such an assertion. This case takes the improper designation to the next level.  

First, the court describes the LLCs in questios as "the Corporate Entities."  It then goes on to discuss "Coley's limited liability companies."  Ugh.  The court further relates, "DIRECTV stated that in a forthcoming motion, it would ask the court to reverse-pierce the corporate veil given Coley's abuse of the corporate form."  No such form, but perhaps we can now blame DIRECTV's counsel, in part, for this hot mess.  

Here's the court's Legal Framework: 

Generally, corporations are recognized as entities that are separate and distinct from their officers and stockholders. [Author's note: THERE ARE NO SHAREHOLDERS IN LLCS!] "But this concept of separate entity is merely a legal theory, 'introduced for purposes of convenience and to subserve the ends of justice,' and the courts 'decline to recognize [it] whenever recognition of the corporate form would extend the principle of incorporation "beyond its legitimate purposes and [would] produce injustices or inequitable consequences.' "" DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 683 (4th Cir. 1976) (citations omitted). When appropriate, and " 'in furtherance of the ends of justice,' " a court may pierce the corporate veil and treat the corporation and its shareholders as one, id. (quoting 18 Am. Jur. 2d at 559), if it finds a corporation and its shareholders have misused or disregarded the corporate form, United States v. Kolon Indus., Inc., 926 F. Supp. 2d 794, 815 (E.D. Va. 2013). This is often referred to as an "alter ego theory."

The court continues: "Delaware courts take the corporate form and corporate formalities very seriously.... " Case Fin., Inc. v. Alden, No. CIV. A. 1184-VCP, 2009 WL 2581873, at *4 (Del. Ch. Aug. 21, 2009)." The opinion then states that veil piercing concepts"apply equally to limited liability companies which, like corporations, have a legal existence separate and distinct from its members."  The concept may, but LLCs do not have to follow the same formalities as corporations to maintain separate existence.  Even if veil piercing were appropriate here, the entire case continues to misstate the law of veil piercing LLCs. Note: Delaware courts do hold some blame here: Westmeyer v. Flynn, 382 Ill. App. 3d 952, 960, 889 N.E.2d 671, 678 (2008) ("[U]nder Delaware law, just as with a corporation, the corporate veil of an LLC may be pierced, where appropriate.").

Based on the opinion, it does seems as though the defendant here was being shady, at best, and perhaps outright fraudulent.  I don't suggest that, based on the facts presented, the defendant shouldn't be held accountable for his debts. Still, in addition to the misstatements of the law, I am not sure veil piercing was necessary.  As the court notes, "veil piercing is an equitable remedy and an extraordinary one, exercised only in exceptional circumstances "when 'necessary to promote justice.'"  It seems to me, then, the court (and the plaintiff) should discuss other remedies first, relying only on veil piercing where "necessary." 

As such, I'd like to see a discussion of fraudulent or improper transfer before veil piercing -- did the defendant improperly move assets that should have been available to the plaintiff into an entity? Before veil piercing three entities, it seems to me the court should determine what should have been available to the plaintiff -- if the answer is "nothing" then no amount of shady behavior should support veil piercing.  If there should be assets, then the question should still be "which ones?"  If the answer is all of the assets in all of then entities, then okay.  But if the court is veil piercing three entities merely to ensure adequate recovery, that's an overreach, it seems to me.  In addition, how about reviewing if there was actual fraud in how the defendant acted?  That, too, could support recovery without the extraordinary veil piercing remedy.  

Ultimately, it's possible the court got the outcome right here.  But it clearly got the law wrong.  A lot.  

 

July 26, 2016 in Corporations, Delaware, Joshua P. Fershee, LLCs | Permalink | Comments (2)

Tuesday, July 19, 2016

Is Entity Type Material?

Today I will pose a simple question: Is Entity Type Material?  

Of course, context matters, so here's where this is coming from: On July 1, 2016, Canterbury Park Holding Corporation filed an 8-K making the following announcement: 

SHAKOPEE, Minnesota (July 1, 2016) - Canterbury Park Holding Corporation, a Minnesota corporation (Nasdaq Global Market: CPHC) (the “Company”), today announced that it has completed its previously announced reorganization of the Company’s business into a holding company structure (the “Reorganization”), pursuant to which a recently-formed Minnesota corporation with the same name, Canterbury Park Holding Company (“New Canterbury”), has replaced the Company as the publicly held corporation owned by the Company’s shareholders. At the market open today, July 1, 2016, the shares of common stock of New Canterbury will commence trading on the Nasdaq Global Market under the ticker symbol “CPHC,” the same ticker symbol previously used by the Company.

As a result of the Reorganization, the Company has been merged into a limited liability company subsidiary, Canterbury Park Entertainment LLC. In addition, the Company’s shareholders have automatically become shareholders of New Canterbury on a one-for-one basis, holding the same number of New Canterbury shares and the same ownership percentage after the Reorganization as they held immediately prior to the Reorganization. The business operations, directors and executive officers of the company will not change as a result of the Reorganization.

The exhibits list, though, provides: 

Exhibit No.
Description
2.1
Agreement and Plan of Merger, dated March 1, 2016, among Canterbury Park Holding Corporation, a Minnesota corporation, New Canterbury Park Holding Corporation, a Minnesota corporation, Canterbury Park Entertainment LLC, a Minnesota limited liability corporation. (Incorporated by reference to Exhibit 2.1 to the Registration Statement on Form S-4 (File No. 333-210877) filed with the SEC on April 22, 2016.)

A what?  You probably guessed it: a "Minnesota limited liability corporation." No, it's a limited liability company, as properly noted in the press release. 

Okay, so I suspect it's not really material to the SEC or most other investors in the sense that this is a mistake, as long as the filing and exhibit are otherwise accurate. I looked at the May 27, 2016, DEF 14A, which did list the LLC correctly.  However, in searching that document I found this was part of the 14A:

GGCP Holdings is a Delaware limited liability corporation having its principal business office at 140 Greenwich Avenue, Greenwich, CT 06830.

Sigh.  Well, it may not matter to the SEC, but it's material to me.  

 

July 19, 2016 in Joshua P. Fershee, LLCs, Securities Regulation | Permalink | Comments (2)

Wednesday, July 13, 2016

Let Corps Be Corps: Follow-Up on Entity Tax Status

This is just me musing a bit, but in following up my post on how LLCs can choose to “be corporations” for federal tax purposes, meaning they get C corp tax treatment, I was thinking that maybe the IRS could just stop using state-law designations at all.  That is, stop having “corporate” tax treatment at all. 

My proposal is not abolishing corporate tax – that’s a much longer post and one I am not sure I’d agree with.  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

This post deals with the tax code, which means I am in over my head, and because this is tax related, it means the solution is a lot more complicated than this proposal.  But now that the code provisions are not really linked to the state law entity, I think we should try refer to state entities as state entities, and federal tax status with regard to federal tax status.  Under such a code, it would be a little easier for people to understand the concept behind state entity status, and it would make more sense to people that a “C Corp” does mean “publicly traded corporation” (a far-too common misunderstanding).  Thus, we could have C Tax corporations, S Tax LLCs, K Tax LLCs, for example.  We'd know tax status and state-entity status quite simply and we'd separate the concepts. 

A guy can dream, right?

July 13, 2016 in Corporations, Joshua P. Fershee, Legislation, LLCs, Unincorporated Entities | Permalink | Comments (0)

Tuesday, July 5, 2016

When LLCs Can Be Corporations (For Tax Purposes Only)

So, readers of this blog know that I despise the misuse of the term "limited liability corporation" when the writer or speaker means "limited liability company," which is the correct term for an LLC.  There is a time, though, when an LLC can be a corporation, and that is for federal tax purposes if the entity makes such a choice.  

Entity choice is a state law decision, but and LLC can elect to be treated as a corporation under the Internal Revenue Code. The Internal Revenue Service recently issued Publication 3402, which explains: 

Classification of an LLC Default classification.

An LLC with at least two members is classified as a partnership for  federal income tax purposes. An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes). Also, an LLC's federal tax classification can subsequently change under certain default rules discussed later.

Elected classification.

An LLC can elect to be classified as an association taxable as a corporation or as an S corporation. After an LLC has determined its federal tax classification, it can later elect to change that classification. For details, see Subsequent Elections, later. LLCs Classified as Partnerships If an LLC has at least two members and is classified as a partnership, it generally must file Form 1065, U.S. Return of Partnership Income. Generally, an LLC classified as a partnership is subject to the same filing and reporting requirements as partnerships. See the Instructions for Form 1065 for rep

Still, this should really be called an LLC that has elected federal tax status as a corporation or an "LLC FCorp." Or something like that. But at least in this situation, an LLC is something of a corporation.  

July 5, 2016 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (5)

Tuesday, June 28, 2016

Annotated Highlights from SEC Keynote Address on International Corporate Governance

SEC Chair Mary Jo White yesterday presented the keynote address, for the International Corporate Governance Network Annual Conference, "Focusing the Lens of Disclosure to Set the Path Forward on Board Diversity, Non-GAAP, and Sustainability." The full speech is available here.    

In reading the speech, I found that I was talking to myself at various spots (I do that from time to time), so I thought I'd turn those thoughts into an annotated version of the speech.  In the excerpt below, I have added my comments in brackets and italics. These are my initial thoughts to the speech, and I will continue to think these ideas through to see if my impression evolves.  Overall, as is often the case with financial and other regulation, I found myself agreeing with many of the goals, but questioning whether the proposed methods were the right way to achieve the goals.  Here's my initial take:   

Continue reading

June 28, 2016 in Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, Securities Regulation, Shareholders, Social Enterprise | Permalink | Comments (1)

Tuesday, June 21, 2016

LLC Member Crimes Not Crimes of the LLC (and LLCs Are Not Corporate Entities)

Last week, a federal court determined that an insurance disclosure that asked about an "applicant's" criminal history did not apply to an LLC member's individual criminal past.  In Jeb Stuart Auction Servs., LLC v. W. Am. Ins. Co., No. 4:14-CV-00047, 2016 WL 3365495, at *1 (W.D. Va. June 16, 2016), the court explained: 

“Question Eight” on the [insurance] application asked, “DURING THE LAST FIVE YEARS (TEN IN RI), HAS ANY APPLICANT BEEN INDICTED FOR OR CONVICTED OF ANY DEGREE OF THE CRIME OF FRAUD, BRIBERY, ARSON OR ANY OTHER ARSON-RELATED CRIME IN CONNECTION WITH THIS OR ANY OTHER PROPERTY?” Hiatt, on behalf of Jeb Stuart (who [sic] was the sole [LLC] applicant for the insurance policy), answered, “No.” Hiatt signed the application and left.

As you might imagine, Hiatt had been convicted of "hiring individuals to wreck cars so that he could receive the proceeds from the applicable insurance policies," and, yep, about a month later, the building burned down.  Id. at *2.

The insurance company cancelled the policy because it claimed Hiatt had lied on the application, and Hiatt sued for the improper cancellation of the policy because he did not lie (he prevailed) and for attorneys fees claiming “the insurer, not acting in good faith, has either denied coverage or failed or refused to make payment to the insured under the policy.” Id. at *3.  Judge Kiser determined that not attorneys' fees were warranted: 

Neither party was able to rely on a case on point regarding the issue of whether questions on an LLC's insurance application asking about criminal history applied to the members of the LLC, to the corporate entity, or to both. Although I believe the answer to that question is clear, I am not aware of any other court being called upon to answer it. Therefore, although it was unsuccessful in asserting its defense to Jeb Stuart's claim, West American's position did present a novel legal question. As such, the final Norman factor weighs in favor of a finding of good faith.
Id. at *5.  I'll buy that, though I think it's a stretch. Would the court have thought this was a close call if an employee signed Amazon or IBM instead of Jeb Stuart? I doubt it.  Maybe the court meant that a small business or single-member LLC makes it a closer call?  Should it?  I don't think so. Suppose Jeb Stuart was the claimant, but the property was under water, so all of the recovery was supposed to go to a bank.  Would this tactic be appropriate then?  I would think not, and it would seem "less close," I suspect. Hopefully, this case answering the question will put this to rest, but I don't love it.  Still, I concede it is a plausible interpretation, but wrong, when put in context. 
 
The Judge explains his thinking, stating that "[p]rimarily, as West American argued, the question of whether an LLC has a prior criminal history is, admittedly, confusing." Id. at *4.  As I just noted, I don't think that's remotely true if it's a large entity.  We care about who gets the payment, not who signs, I think. That is, the question is designed to track incentives, not applicants.  Maybe -- maybe -- this is a harder case if the question were about the "beneficiary" or "real party in interest" and not the "applicant." 
 
The Judge notes, "Criminal laws typically target and punish individuals, and the types of crimes addressed by Question Eight overwhelmingly ensnare individuals, not corporate entities." Id.  I'll buy that.  He continues: "Therefore, although the question, by its terms, applied to the applicant (the LLC), a reasonable person reading Question Eight might interpret it to apply to the individuals that make up the LLC." Id.  Perhaps, but not always. Again, now I worry about the size of the entity.  And who the applicant is.  
 
Judge Kiser finished: "Undoubtedly, that is what West American envisioned when it drafted the application, and Question Eight in particular. This factor weighs in favor of West American."  But we construe ambiguity against the drafter for a reason, right?  Is it clear that's what they meant?  I don't know that it is, especially because this appears to be their standard form, not something applying to just this application. 
 
What's clearly wrong is the discussion of Jeb Stuart as "a single-member limited liability corporation ('LLC')." Id. at *1.  (It's a limited liability company.) As are the statements above (did you think I missed them?) calling LLCs "corporate" entities  at Id. **4-5.  
 
On the facts here, this seems like a reasonable outcome, but I don't like the path this is headed down.  That is, this case suggests that it might be reasonable for a sophisticated entity to argue that because "some people" think something.   Even if they knew (or should have known) better.  Even worse, by conflating LLCs and corporations, this case helps reinforce inaccuracies in what "some people" think.

June 21, 2016 in Corporations, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (1)

Tuesday, June 14, 2016

Trump Not Pro-Business, Just Pro-Trump

The New York Times ran the article How Donald Trump Bankrupted His Atlantic City Casinos, but Still Earned Millions last weekend. It's an interesting piece that provides a look at Donald Trump's east coast casino experience.  The article is, as one might expect, critical of his dealings and notes that Trump made money even when his ventures when bankrupt.  

Though I will not defend any of Trump's dealings, there are few issues raised that I think are worthy of a some discussion and clarification.1  The post that follows suggests how to consider Trump's business history and place that history in a political context.

Continue reading

June 14, 2016 in Behavioral Economics, Corporate Governance, Corporations, Current Affairs, Joshua P. Fershee, Securities Regulation | Permalink | Comments (2)

Tuesday, June 7, 2016

Seeking Excellence Is Not Always the Same As Winning

I read an article this morning that resonated with me.  It was odd, because it was about a University of Michigan sports coach. As a dedicated Spartan, that's not always easy to reconcile. 

Michigan's softball team lost in the College World Series, and there was understandable disappointment.  I thought coach Carol Hutchins message, though, was spot on: 

“One thing I learned after the national championship, it definitely doesn’t define you,” she said. “If winning defines you, you’re not focused on the right things. I’m defined by all the women that I’ve been able to help grow up and who have impacted my life equally. I define myself by that.

“We’ve won a lot of games here, we’ve lost a lot of games here. It’s a sport. We do the best we can every day.”

Yes. You can't control who you play.  You control how you prepare, and how you try, and how you care.  Sometimes, you can control how you play, but not always who you play against or the tools you have at your disposal.

This is true as a lawyer, too.  You may have bad facts. Or a bad client. Or a whole host of other hurdles. On a bad day (hopefully) you may go up against someone who is just better than you. You can control how you prepare, how hard you work, and how much you care.  The rest, is out of your hands.  

You can't let winning define your worth. If you do, there's a good chance you will underestimate your value when you lose. And overestimate it when you win. A little perspective goes a long way, and odds are, with perspective, as long as you sustain your effort, you have a better chance at winning more often.  

June 7, 2016 in Joshua P. Fershee, Law School | Permalink | Comments (1)

Tuesday, May 31, 2016

Energy Policy: Trump Won't Let Facts Get in the Way of A Good Sound Bite

Donald Trump was in my home state of West Virginia recently, and he promised to bring back coal jobs: 

And West Virginia. And we’re going to get those miners back to work. I’ll tell you what. We’re going to get those miners back to work . . . 

Let me tell you, the miners in West Virginia and Pennsylvania which was so great to me last week and Ohio and all over, they’re going to start to work again. Believe me. You’re going to be proud again to be miners.

How he plans to do this is not clear, but part of it will be to attack the EPA's Clean Power Plan.  Okay, but that's a relatively recent development, and was certainly not the cause of the decline in coal production since the last production peak in 2008. The primary cause: cheap and abundant natural gas from horizontal drilling and hydraulic fracturing. 

In my former home state of North Dakota, Trump was telling voters he would rescind President Obama’s climate change rules and work to make the Keystone XL pipeline a reality to ship petroleum from Canada’s oil sands to the U.S. Gulf Coast refineries.  Further, Trump has stated that he would relax regulations that limit coal leases on federal lands and reduce hydraulic fracturing regulations on federal lands.  

It appears, then, that his plan to support the coal, oil, and natural gas industries will be to lower costs.  That should increase supply, right?  The problem for each industry, though, is that excess supply has lowered prices so much that all three areas are cutting back on activity (and jobs). Reducing governmental restrictions would lower costs even more, which is not likely to increase jobs or production in the current climate. Any such change might increase margins for existing activities, but it would not likely incentivize a change in behavior that would lead toward the state goals of increased employment. As the Financial Times recently explained:

One of the factors behind that [oil market] collapse was Saudi Arabia’s strategy of continuing to produce at high levels above 10m barrels per day, rather than cutting output to ease the glut of oil. 

More oil (or gas or coal) equals lower prices.  Lower taxes and regulations equals lower cost of exploration and production, which leads to? More oil (or gas or coal) and lower prices.  Even worse, low prices tend to encourage automation, which is particularly not good for jobs. 

One can debate whether there is value in reducing these kinds of regulations, but one needs to explain how greater supply and lower prices is going to help any of these industries in the way the policies are purporting to (or another justification is needed). But then, Trump has not explained how he intends to implement any of his promises or how any of his proposals would work.  

Newsflash: Just saying something, no matter how confidently and assertively it is said, doesn't make it true. I sure hope a majority of voters recognize this come November.   

May 31, 2016 in Current Affairs, International Business, Joshua P. Fershee, Law and Economics | Permalink | Comments (0)

Tuesday, May 24, 2016

Another Teaching and Life Lesson on the Run: It's Easier at the Top and We Don't Get There Alone

Some time ago, I wrote the post Better Teaching Idea: Try to Notice When the Wind Is at Your Back. That post emerged from some observations while running, and today's post has the same origin.

This month I have been trying to up my miles again for no particular reason. I don't run for races. I run to run. And to feel like I am at least doing something to stay in some semblance of good shape (it's not really working).  I now run 4 miles most days. Maybe a little more or less, but that's the norm this month.  The past two days, I ran from my house, which is at the top of a hill. It is more of a mountain when I am running up it. (I promise, I am getting somewhere with this.)  

I often go down to the rail trail along the river, which is a mostly flat, pretty place to run.  The last two days, I have been running from my house. This means that if I want to get any distance in, I need to go down the mountain.  And, of course, it means I need to get back to the top.  Now, I could stay at the top.  It's relatively flat on our street, and I can run a quarter of a mile down and back and stay at the top of the mountain. That's a lot of down and backs to get in four miles.  No thanks. It's easier, but not much fun. (Note: you can follow along my running escapades on Twitter @jfershee and Nike+.

IMG_8642
The Mon River Trail: A Mostly Flat, Pretty Place to Run

My usual route from my house takes my down the mountain, then back up the mountain, where I turn around and retrace my steps.  That means I am running up the steepest part of the run at mile 3.5.  It's not always my favorite part of the run, even if it is my most triumphant.  As I was slogging my way back up the mountain, my mind wandered and I caught myself thinking again, "It would have been a lot easier to just stay at the top."  And it is. It's true in running, and it's true in most everything else we do.  

IMG_8849
Pace over elevation - slow pace today.

It doesn't matter how you get to the top.  Once you're there, it's easier to stay there than it was to get there.  It may take a lot of work to get to the top. For most people, it does. But someone can just take you to the top, too. Once you're there, it's easier to stay there. And once you leave, it's hard to get back up. 

Knowing all of this is important.  And it is important to remember that not everyone has the same amount to climb to get to the top of whatever it is they are climbing.  I did not come from money, but I had everything I needed.  I am a straight, white male. The data show that starts you ahead of the game.  I went to good public schools.  I went to college. And law school.  This required a lot of work to move ahead, but the opportunity was there for me in a way it isn't for many.

It's easy to start thinking that everyone is starting from the same point.  And it's a lot easier to notice the people who are ahead of you on the way up. It's not that often that we look back, which can skew our perspective in unproductive ways.  

As teachers, it's important to recognize that we can be part of helping our students move up their mountain.  And they may not be starting from the same place we were. They may have further to go. Some may have less.  It's our job to help them get where they want go.  As a corollary, it's also important to remember that just because they might have farther to go, it's not our job to limit the mountains they can climb. To the contrary, it's our job to help them see that the sky truly is the limit. 

That's my take away for the day: as hard as it is to keep climbing to the top, don't ever think you're doing it alone.  Appreciate who helped you. Keep slogging. And when you get to the top, don't forget to see if you can help someone else up.   

May 24, 2016 in Joshua P. Fershee, Law School, Lawyering, Teaching | Permalink | Comments (4)

Wednesday, May 18, 2016

Dear California: LLCs are Not Corporations. Or Are They?

California is the back on my short list for the state's inability to successfully differentiate between corporations and limited liability companies (LLCs).  Last week, an "unpublished/noncitable" decision that was published on Westlaw provided a good example.

The opinion states: 

A corporation—including a limited liability corporation—may be served by effecting service on its agent for service of process. (Code Civ. Proc., § 416.10, subd. (a); see also Corp.Code, § 17701.16, subd. (a) [allowing service on limited liability corporations under Code Civ. Proc., § 413.10 et seq.].)7
*12 One of the ways a limited liability corporation can be served is by substituted service. (1 Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2015) ¶ 4:172, p. 4–26.) This requires that a copy of the summons and complaint be left at the office of the person to be served (or, in some cases, at the mailing address of the person to be served), in the presence of a person who is apparently in charge, “and by thereafter mailing a copy of the summons and complaint by first-class mail, postage prepaid to the person to be served at the place where a copy of the summons and complaint were left.” (Code Civ. Proc., § 415.20, subd. (a).)
City of Fontana v. Bani, LLC, No. E062018, 2016 WL 2864971, at *11-12 (Cal. Ct. App. May 12, 2016).

No, no, no.  First, even in California, an LLC is a "limited liability company." It says so right in the act. Cal. Corp. Code § 17701.01 (West) ("This title may be cited as the California Revised Uniform Limited Liability Company Act.").

And, yet, I have to admit, if you note the cite to the LLC act, California lawmakers have made this less clear than in other states. Yes, that's right. In California, the LLC Act is part of the California Corporations Code.  Cal. Corp. Code §§ 17701.16 - 17713.13 (West).  For that matter, so are partnerships, under Title 2.  Sigh.   

Would it be so terrible if the Corporations Code were called what it is: the Business Entities Code? As currently structured, LLCs and partnerships are arguably types of corporations under California law, as the above cases suggests. One could argue the headings don't change the meaning or intent of the laws. See Cal. Corp. Code § 6 (West) ("Title, division, part, chapter, article, and section headings contained herein do not in any manner affect the scope, meaning, or intent of the provisions of this code.").  The problem with that is that the code text says otherwise: "This act shall be known as the Corporations Code." Cal. Corp. Code § 1 (West).  

To reinforce that notion, the Code Commission notes from the 2014 main volume explain: 

This code was listed in the appendices of Code Commission reports showing code classification as the “Corporations, Partnerships, and Associations Code.” The 14 syllables of that title appear to make it impractical, but no shorter phrase indicative of the full subject-scope has been found. Therefore, resort has been had to the rhetorical device of synecdoche, and the entire code designated by the name of longest part.

I admit I had to look up synecdoche to be sure I was on the right track, but the term supports, I think, my point that California is treating LLCs and partnerships as corporations (or some subset thereof).  See, for example, this explanation

Synecdoche is a literary device in which a part of something represents the whole or it may use a whole to represent a part.

Synecdoche may also use larger groups to refer to smaller groups or vice versa. It may also call a thing by the name of the material it is made of or it may refer to a thing in a container or packing by the name of that container or packing.

Still, even if it were accurate to says LLCs and partnerships are "types" of corporations under the California code, one thing is still clear: an LLC is a limited liability company, which is, at a minimum, a specific type of "limited liability corporation." 

I supposed I can see how "14 syllables" might be deemed "impractical," but not at the cost of imprecision.  The "Business Entities" -- or even just "Entities" or "Associations" -- Code would seem like a better, more accurate, option.  

Oh well.  At least the court cited the part of the California code for service of an LLC.  That much, they got right.  

May 18, 2016 in Corporate Personality, Corporations, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (0)

Tuesday, May 10, 2016

LLCs Still Aren't Corporations, And At Least Some of Us Seem to Care

I had a plan to write on something else today, but I got a note from Keith Bishop sharing his blog post, which he was right to think I would appreciated.  In his post, Bishop discusses a California case

The LLC May Well Be The Platypus Of Business Organizations

What happens to the attorney-client privilege when a corporation dissolves?  Magistrate Judge Sallie Kim recently answered that question in Virtue Global Holdings Ltd. v. Rearden LLC, 2016 U.S. Dist. LEXIS 53076 (N.D. Cal. April 5, 2016):

When a corporation ceases to exist, “the corporate powers, rights and privileges of the corporation shall cease.” Cal. Corp. Code §1905(b). In that case, no entity holds the attorney-client privilege for Original MO2. City of Rialto, 492 F.Supp.2d at 1197 (“a dissolved corporation is not entitled to assert the attorney-client privilege”).

I am somewhat baffled by the ruling because the entity asserting the privilege in the case was not a corporation at all (Section 1905 is in the General Corporation Law).  The entity attempting to claim the privilege was, according to the information provided in the opinion, indubitably a California limited liability company.  Thus, the court should be citing the California Revised Uniform Limited Liability Company Act, not the General Corporation Law.

California, like many others states, seems to make the error relatively often.

Today, though, I will pick on the news.  A Google News search of "limited liability corporation" for the past twenty-four hours provides a few such instances.  (Note for new readers, an LLC is a "limited liability company," not corporation.) 

I'll highlight two.  According to one news outlet, the University of Illinois just extended a $2 million line of credit to an entity do research in Singapore.

To set up shop in another country, the university created a limited liability corporation, Singapore Research LLC. The LLC then established a private entity in Singapore which allows the center to compete legally for government grants.

Oops. Next, another news outlet reports:

A Nevada energy company said it wants to purchase an unfinished nuclear power plant from the Tennessee Valley Authority (TVA) and use the site in northeast Alabama to produce electricity with new technology.

Michael Dooley, managing partner of Phoenix Energy of Nevada, told the Associated Press his company wants to use the mothballed Bellefonte Nuclear Plant site as the base for a new, non-nuclear generation method.

. . . 

Phoenix Energy of Nevada describes itself as a privately-held Nevada limited liability corporation, incorporated in October 2010, Kallanish Energy learns.

This time, though, the report is right.  Phoenix Energy of Nevada, LLC (PENV) says on its web page it "is a Veteran owned closely and privately held viable early stage mid-market Nevada State Limited Liability Corporation (LLC) Small Business Company founded and incorporated in October 2010." Nope. It's an LLC.   

I know I complain about this a lot, but there is value in getting it right. Reporters should get it right, and those who own the entity really should get it right.  One of these days some court will find that an LLC didn't follow the corporate formalities required of a "limited liability corporation" and they won't even know to object.  

I concede when one writes things like "company" and "corporation" a lot, a mistake may occur from time to time, especially when the distinction is not, on its face, crucial. My concern is less that people make mistakes. It's more that they don't know they are making one.  That's where I come in.  

On the plus side, I am about halfway through grading my Business Organizations exams, and not one person has called an LLC a corporation. 

May 10, 2016 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (1)

Wednesday, May 4, 2016

Entities Should Ask About Politics and Religion: Round Two

In follow up to my post yesterday, my trusted and valued co-blogger Joan Heminway asked a good question (as usual) based one of my comments.  My response became long enough that I thought it warranted a follow-up post (and it needed formatting).  Joan commented: 

you say: "there should be no problem if, for example, Delaware corporate law did not allow a for-profit entity to exercise religion for the sole sake of religion. I think that is the case right now: that’s not a proper corporate purpose under my read of existing law." Are you implying that a corporate purpose of that kind for a for-profit corporation organized in Delaware would be unlawful? Can you explain?

My response: I am suggesting exactly that, though I concede one might need a complaining shareholder first. My read of eBay, and Chief Justice Strine’s musing on the subject, suggest that an entity that is run for purposes of religion (not shareholder wealth maximization) first and foremost, is an improper use of the Delaware corporate form. (“I simply indicate that the corporate law requires directors, as a matter of their duty of loyalty, to pursue a good faith strategy to maximize profits for the stockholders.”)  Chancellor Chandler explained in eBay:

The corporate form in which craigslist operates, however, is not an appropriate vehicle for purely philanthropic ends, at least not when there are other stockholders interested in realizing a return on their investment.

I think this definition of philanthropic easily includes religious ends (or should).

Chancellor Chandler continued:

Jim and Craig opted to form craigslist, Inc. as a for-profit Delaware corporation and voluntarily accepted millions of dollars from eBay as part of a transaction whereby eBay became a stockholder. Having chosen a for-profit corporate form, the craigslist directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.

I don’t see how this should play any differently if it applied to religion. Consider, for example, this possible spin:

Jane and Carrie opted to form Religion, Inc., as a for-profit Delaware corporation and voluntarily accepted millions of dollars from BigCo as part of a transaction whereby BigCo became a stockholder. Having chosen a for-profit corporate form, the Religion directors are bound by the fiduciary duties and standards that accompany that form. Those standards include acting to promote the value of the corporation for the benefit of its stockholders.

Further to the point, Chancellor Chandler added:

I cannot accept as valid . . .  a corporate policy that specifically, clearly, and admittedly seeks not to maximize the economic value of a for-profit Delaware corporation for the benefit of its stockholders—no matter whether those stockholders are individuals of modest means or a corporate titan of online commerce.

Thus, a for-profit business can be religious in nature—e.g., make religious books or products or sponsor religious seminars—but as a Delaware corporation, the purpose of the entity must be to “promote the value of the corporation for the benefit of its stockholders.”

This is the potential problem with the Hobby Lobby case as to Delaware lawThere, the companies had a lot to lose:

If they and their companies refuse to provide contraceptive coverage, they face severe economic consequences: about $475 million per year for Hobby Lobby, $33 million per year for Conestoga, and $15 million per year for Mardel. And if they drop coverage altogether, they could face penalties of roughly $26 million for Hobby Lobby, $1.8 million for Conestoga, and $800,000 for Mardel.

These losses were justified in that case as being necessary to exercise religion, and not to further a corporate purpose. Of course, they had to make that claim, because otherwise they couldn’t get the benefit of RFRA, which requires demonstrating “an honest conviction,” which could be problematic if the reason was couched in business terms, and not religious ones. 

Incidentally, I think the business judgment rule should probably protect this decision, anyway, but I don’t know that Delaware law would support that view. In fact, it shouldn't based in recent case law, and I think plainly eBay says no on that one. The Supreme Court says RFRA protects the right to pursue religious ends. It doesn't mean Delaware law does.  (Note: Hobby Lobby is not a Delaware entity, so the rules are admittedly different.) 

Thus, my fix seek to balance these competing possible outcomes. Tell shareholders your plan, and they can’t question it later, even if that plan costs the company $475 million in losses. Where the law has evolved, I don't think it's fair to suggest it was part of the bargain for all companies, thought maybe investors in Hobby Lobby did know.  But it doesn't matter.  I thought craigslist’s long-standing business plan was sufficient notice, too. Chancellor Chandler disagreed.

May 4, 2016 in Corporate Governance, Corporations, Delaware, Joshua P. Fershee, LLCs, Management, Shareholders | Permalink | Comments (10)

Tuesday, May 3, 2016

Entities Should Ask Before Exercising Citizens United and Hobby Lobby Rights

A recent Vanity Fair article discussing Citizens United is making the rounds. (I saw it on Facebook!)  The article notes:  

It had already been established, in Buckley v. Valeo (1976), that anyone has a First Amendment right to spend his or her own money advancing his or her own cause, including a candidacy for political office. Citizens United extended this right to legally created “persons” such as corporations and unions.

I have been giving some more thought to whole “personhood” discussion of late, and my thoughts have taken me back to both Hobby Lobby and Citizens United. What follows is a long blog post that pulls together my thoughts on these two cases in an admittedly not well developed way.  But it's a start (though I really should be grading).  

Continue reading

May 3, 2016 in Corporations, Joshua P. Fershee, Legislation, LLCs, Religion, Shareholders, Unincorporated Entities | Permalink | Comments (9)