Tuesday, February 9, 2016
My home state in West Virginia is struggling. The economy is struggling because two of the state's main industries -- coal and natural gas -- are facing falling production (coal) and low prices (gas). Severance taxes for the state account for approximately 13% of the budget, and both are down dramatically. Tax revenues for the state were down $9.8 million in January from the prior year and came up $11.5 million short of estimates. For the year-to-date, the state collected $2.29 billion, which is $169.5 million below estimates. Oddly enough, state sales and income taxes for January both exceeded estimates, but not enough to offset other stagnation in the state.
The state has long been known as a coal state, and that industry has dominated the legal and political landscape. West Virginia has been criticized for having a legal system that is "anti-business," with the United States Chamber of Commerce finding stating that West Virginia is the 50th ranked state in terms of the fairness of its litigation. (See PDF here.) CNBC (with input from the National Association of Manufacturers) also ranked West Virginia last in terms of business competitiveness, so the starting point is not good.
Now, the West Virginia legislature is considering the state's Religious Freedom Restoration Act, which many (including me) see as about legalizing specific forms of discrimination, and not promoting or supporting religion. And some religious groups agree. As the Catholic Committee of Appalachia’s West Virginia Chapter explains:
We appreciate the background of 1993 federal act with the same name, and the history leading up to it, with its pertinence to protecting Native American sacred lands and religious practices from governmental infringement. With the U.S. Supreme Court’s decision that RFRA would only be applicable to federal actions, we can recognize, also, the value of an argument for versions of a law to be passed at the local level. However, the primary motivation behind West Virginia’s bill #4012, and others like it, seems not to be the protection of legitimate religious exercises, but securing the ability of religious groups to discriminate against marginalized populations on the basis of religious convictions.
Just as important for purposes of this post, many West Virginia businesses oppose the bill. Local Embassy Suites and Marriott hotels representatives spoke out against the bill, and the Charleston (WV) Regional Chamber of Commerce and Generation West Virginia, along with several city mayors, have opposed the bill, as well. They have good reason. When the state of Indiana passed a similar bill, Indianapolis promptly lost as many as twelve conventions and estimates around $60 million. Ouch. As one mayor said, West Virginia legislators need to "Get out of the way."
Morgantown, home to my institution, was the state’s second city to pass an LGBT non-discrimination ordinance in February 2014. West Virginia University’s faculty senate also unanimously yesterday approved a resolution condemning the bill. And there was a chance to make clear the intent of the bill was not intended to be used as a way to discriminate against someone based sexual orientation through a proposed amendment making that clear. Unfortunately, the amendment was deemed “not germane.”
Beyond coal, natural gas, chemicals, and timber, tourism is one of our state's main industries. It's also a great one. From whitewater rafting to skiing to hiking, the state is a great place for outdoor activities. Craft breweries and a few great local restaurants are helping make the state a destination. Unfortunately, the debate about this bill, especially in the wake of the backlash in Indiana, is hurting the state's ability to make build up it's tourism industry by making many people feel unwelcome.
It's really too bad as a local restaurant, Atomic Grill, made international news for how they responded to comments about their waitresses and has been lauded for their response to other intolerance in their restaurant.
I don't like this bill because, to me, it's either a tautology or an attempt to discriminate through legislation. But beyond that, it's stupid, terrible way to promote business in the state. We spend enough time trying to get people to come visit -- and when people do, they almost always like it. It really is a great place in so many ways. At a time when the entire state is looking at 4% budget cuts across the board -- when we need to be building bridges to broader audiences -- the state's legislature is screwing around with bills that have zero economic upside and reinforce stereotypes about the people of our state.
Being pro-business means being pro-consumer, which really means being pro-people. This bill is none of those. We need to do better, and it's disappointing our time and our money are being wasted like this.
Tuesday, February 2, 2016
Embracing Freedom of Contract in the LLC: Linking the Lack of Duty of Loyalty to a Duty of Disclosure
I have been giving a lot of thought to the idea of waiving the duty of loyalty in LLCs in Delaware. The more I think about it, the more I am okay with the concept of allowing members of an LLC to decide to do away with the duty of loyalty when they form the entity. Delaware, of course, retains the implied covenant of good faith and fair dealing in any contract, and I think parties to a contract should be able to decide the terms of their deal.
Still, I am sympathetic to those who are concerned about eliminating the duty of loyalty because it does seem rather awful, and yet, I am also a proponent of freedom of contract. How to reconcile these things? Well, I am now of the mind that perhaps we need to bring a partnership principle to LLCs to help. In partnerships, the default rule is that changes to the partnership agreement or acts outside the ordinary course of business require a unanimous vote. See UPA § 18(h) & RUPA § 401(j). I think changes to the duty of loyalty should have the same requirement, and perhaps that even the rule should be mandatory, not just default.
At formation, then, those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty. This is part of the bargain, and any member who does not agree to the terms need not become a member. Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated. This is not especially concerning to me.
What would concern me more is a change in the duty of loyalty after one becomes a member. That is, if the majority of LLC members could later change the loyalty provision, then that seems problematic to me, as fiduciary duties are not just to protect the majority. As such, it seems to me more proper that changes to the duty of loyalty, when a member does not have any say in that change, is what should be restricted. Like in changing a partnership agreement, if everyone agrees, then there is not a problem. And if you accept the provision when you join, it is not a problem. But you shouldn't have a fiduciary duty removed or modified after the fact without your consent.
Because the duty of loyalty is a fixture that most people expect, I do see value in requiring (at least for some time) that there be clear disclosure of the applicable to duties to potential LLC members. But at least for the moment, I am feeling the freedom of contract option on the duty of loyalty is quite reasonable.
Tuesday, January 26, 2016
The Wall Street Journal yesterday reported that oil and stocks are working together closer than they have in twenty-six years.
Oil and stock markets have moved in lockstep this year, a rare coupling that highlights fears about global economic growth.
As oil prices tumbled early in 2016, global equities recorded one of their worst-ever starts for a new year. On Monday, oil and stocks were lower again. The S&P 500 index was down 0.7% in midday New York trading, and Brent crude futures, the global benchmark, were down $1.37 a barrel, or 4.3%, to $30.81. That followed a joint rebound on Friday.
The correlation between the price of Brent and the S&P 500 stock index is at levels not seen in the past 26 years. January isn’t over yet, but over the past 20 trading days—an average month—the correlation is 0.97, higher than any calendar month since 1990 . . . .
The correlation may not be a strong as reports indicate, though. Some reports suggest that the correlation is not nearly as close as it seems. As this analysis explains, "[e]ven if correlations between assets are trending higher that doesn’t mean that the outcomes have to be even remotely similar. While stocks are down around 8% this year, oil has fallen nearly 20%."
The changes in commodity price correlation and volatility have profound implications for a wide range of issues, from commodity producers’ hedging strategies and speculators’ investment strategies to many countries’ energy and food policies. We expect these effects to persist so long as index investment strategies remain popular among investors.
It's hard to predict what this correlation can mean, or whether one is driving the other. Certainly a spike in oil supply demand could cause an increase in oil prices, and that demand would like help support the stock market. But oil prices could stay low, and we could still see the market go up if other indicators make investors happy.
Sales of trucks and sport utility vehicles are rapidly outpacing sales of all other vehicle types in the U.S. as consumers ditch four-door sedans and flock to a seemingly endless selection of small, midsize and gargantuan SUVs. According to 2015 sales data released by the world’s top automakers on Tuesday, trucks and SUV sales dominated last year.
We'll see how long it lasts. As they say, the cure for low prices is low prices, and the cure for high prices is high prices. For now oil and gas are low -- the market will fix that one way or another soon enough.
Tuesday, January 19, 2016
Section 2 of the Sherman Act provides:
Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding $100,000,000 if a corporation, or, if any other person, $1,000,000, or by imprisonment not exceeding 10 years, or by both said punishments, in the discretion of the court.
The Washington Examiner, among other outlets, reports that President Obama and former Republican presidential candidate Mitt Romney are fighting a section 2 lawsuit together. The lawsuit, filed by a group of third-party political groups including the 2012 nominees for the Libertarian Party and the liberal Green Party, claims the Commission on Presidential Debates committed antitrust violations:
This action challenges a per se continuing illegal conspiracy or agreement between the RNC, the DNC, and the Commission, with the direction, assistance, and collusion, over the course of many years, of several co-conspirators and affiliated persons, including Fahrenkopf, McCurry, Obama, Romney, and other presidential candidates of the Republican and Democratic Parties. The conspiracy commenced prior to the formation of the Commission, and no Defendant has withdrawn or abandoned it. The overall objective was and continues to be the entrenchment market power in the presidential debates market, the presidential campaign market, and the electoral politics market of the two major political parties by exercising duopoly control over presidential and vice presidential debates in general election campaigns for the presidency. That objective was achieved in 2012 when the individual Plaintiffs were arbitrarily excluded substantially because of hostility towards their political viewpoints from presidential and vice presidential debates between the nominees of the two major parties organized and conducted by Defendants on October 3, 2012, October 11, 2012, October 16, 2012, and October 22, 2012, respectively.
Romney's brief responds:
Presidential debates are a quintessential political, non-commercial activity... .
The antitrust laws were not intended to regulate non-commercial markets like the 'marketplace of ideas' (even assuming such 'markets' exist as anything more that metaphors). Plaintiffs' claims therefore fail. . . . .
Soliciting votes is fundamentally different from selling widgets. The former implicates core constitutional values that are absent from the commercial arena. The First Amendment forbids Congress from telling political candidates where to go, what to do, what to say, or— crucially here—who they have to debate. Just as President Obama has an absolute right to refuse to debate every person who attacks his Administration, Governor Romney had an absolute right during the 2012 presidential campaign to refuse to debate Gary Johnson, Jill Stein, or any other candidate waging a long-shot bid for the presidency. The only possible sanction for that refusal is a political one.
I'm not an antitrust expert, but this case seems like a loser even if the concept of the claim is viable. The Examiner piece quotes an expert, Geoffrey Manne, executive director of the nonpartisan think tank International Center for Law and Economics, who said the case was out of the ordinary, but not inconceivable:
"The short answer is that it is not crazy... The commission is a private entity, not a government one, so it doesn't get immunity," he said, adding, "The question is whether the activity amounts to a restraint of trade." It was hard to tell how a court might come down on that, he said.
Manne knows his stuff, and I trust his point that the claim could have legs. I also agree a court might buy it. Still, I think it ultimately fails in most courts. It seems to me that it is reasonable to have some limits on who participates in debates (do we all get stage time?), and because of that, plaintiffs would likely have to show that the current structure is an unreasonable restraint on trade. Then you start getting into where to draw those lines, and I think you have a problem with the marketplace. That is, not all speech is being shut out, and two people don't have to agree to share a platform with others.
Furthermore, if people cared, CNN or FoxNews or TruTV or HBO, could have debates with the other candidates and invite all of them. I'd argue they should. But the fact that people don't vote with their eyeballs suggests the restraint isn't really as simple as the debate commission. It's a lack of interest. I'd like to see a broader discussion of ideas -- maybe a real platform of people who think government should be inclined to stay out of bedrooms and boardrooms, for example. But I don't think the Commission on Presidential Debates is really responsible for the nation's inability to demand more information, more interaction, and more accountability.
Maybe in 1976 or even 1986, but not in 2016. There's just too many options for the other candidates to get their word out if the people care. People should care, but I don't think antitrust law was designed to make that happen, nor do I think it can.
Thursday, January 14, 2016
On Sunday, the world lost a musical giant in David Bowie, who died of cancer at 69. He was the first artist who that made me a true music fan. Like buy all the records, read the biographies, hang-posters-on-the-wall type fan. I grew up with a love for Motown music, especially Smokey Robinson, the Supremes, and the Four Tops, that I still have, but my appreciation for that music came from listening to my parent's records.
When it came time to choose my own artists, other kids were into Led Zeppelin and Pink Floyd, but Bowie emerged as my guy. He was later followed by bands like R.E.M., the English Beat, and The Cure, among others, as I moved into more of the college radio scene, and I really liked Joan Jett, but Bowie was always The Guy. My fandom started with an album I poached from my aunt, Heroes. I also got ahold of David Live (1974), and then worked my way back before going forward. The Rise and Fall of Ziggy Stardust and the Spiders from Mars, Space Oddity, The Man Who Sold the World, Aladdin Sane, Diamond Dogs, and Hunky Dory were the next to follow. I even own a copy of the Christmas record featuring David Bowie and Bing Crosby.
Let's Dance came out in 1983. It was a hit, and yet criticized for being too mainstream. I was twelve, and thought it was great. I still do, though in a very different way than much of his other work. The connected tour for the album, the Serious Moonlight Tour, featured Bowie in a bow tie. I thought it was the coolest thing. I bought one and learned to tie it myself. I still have the tie, and I wore it to teach my first Business Organizations class of the semester on Tuesday (and my Energy Business Law and Strategy course). Contrary to what some want to believe now that E. Gordon Gee is the president of my institution, bowties originated with Bowie for me, not President Gee. (And yes, it is likely that only a law professor could connect someone as cool as Bowie with bowties, and probably only this law professor.)
I write this as much for me, as anything, I suppose, but a few things about David Bowie strike me as relevant to this blog. First, he was always ahead of his time, looking for what was next. He didn't back down, he said what he thought in a strong, but usually respectful way. He was, unfortunately, well ahead of his time in criticizing MTV for its lack of programing diversity. Not so much for calling them out -- others did that, too -- but in the way he did it, as you can see here.
His eye for talent was remarkable, too. David Sanborn played sax on David Live. Luther Vandross sang backup on Young Americans. Stevie Ray Vaughn played on Let's Dance, and Reeves Gabrels (now with The Cure) with Tin Machine. Adrian Belew played on Lodger. Bowie, in turn, sang back up and played sax on Lou Reed's Transformer. And his work with Iggy Pop, Queen, Tina Turner, Trent Reznor, and others crossed genres and time.
Finally, he tried creative financial vehicles. As one report explains,
In 1997, Bowie, born David Robert Jones, securitized revenue from 25 albums (287 songs) released before 1990. At the same time, he swapped distribution rights on his back catalogue for a $30 million advance on future royalties in a deal with EMI. The 10-year “Bowie Bond” he created with banker David Pullman promised a 7.9% return and raised $55 million, along with a media frenzy. A flurry of other artists followed, but the Bowie Bonds skidded toward junk status by 2004, downgraded by Moody’s from A3 to Baa3.
The trend never really took off, though. Despite never missing a payment, the bonds did not do well, though that did not appear to hurt Bowie. People got worried about online music sharing soon after the deal was struck. Still, the idea of monetizing intangible assets, was rather forward looking, even if some believe that loans, and not bonds, are the better suited to assets like music. For Bowie, in music and otherwise, new things were worth trying, even if they didn't always go as planned. I still wished I'd gotten in on that deal, regardless. I always felt like I missed out.
I know Bowie is something of an acquired taste for some (and an unacquirable one for others), but the outpouring of support following his death shows a tremendous amount of respect and admiration. He may even get his first U.S. number one album with his Blackstar album, which was recently released. Some believe the track Lazarus and the related video were his goodbye to the world. It's hard to argue it's not.
He will be missed, but I'm glad his legacy provides such a tremendous body work. I think the Sirius/XM Bowie channel should be permanent, and not just a limited-run engagement.
As I write this, I got a notice that Alan Rickman, also 69, has died of cancer. Cancer sucks. As David Bowie noted in this short, but poignant, interview from 2002, "Life is a finite thing." It sure is.
Tuesday, January 5, 2016
Some day, I may tire of calling out courts (and others) that refer to limited liability companies (LLCs) as "limited liability corporations, but today is not that day. Looking back on 2015, I thought I'd take a quick look to see who the worst offenders were, starting with the state courts. I figured I'd start with Delaware.
As a state that is proud of its status as a leader as a key forum of choice for corporations, and Delaware has done well for uncorporations, as well, it seemed logical. The book Why Corporations Choose Delaware, written by Lewis S. Black, Jr., and printed and distributed by the Delaware Department of State, Division of Corporation, explains:
Delaware continues to be the favored state of incorporation for U.S. businesses. Delaware has been preeminent as the place for businesses to incorporate since the early 1900s, and its incorporation business, supplemented by the growth in numbers of such “alternative entities” as limited liability companies, limited partnerships and statutory trusts, continues to grow smartly.
And Delaware does have a generally well-informed and skilled judiciary. Still, even Delaware is not above calling an LLC a "limited liability corporation." Better than many jurisdictions, Westlaw reports that the state had just three cases in 2015 making that error, and no such mistakes were noted after March 2015. Not ideal, but not bad.
Here are some other states I reviewed for 2015 (again, using Westlaw):
- Michigan: 0
- Pennsylvania: 3
- Ohio: 4
- Florida: 5
- Nevada: 6
- California: 7
- New York: 7
- Texas: 8
Overall, state courts called LLCs "corporations" 105 times in 2015. Federal courts did the same 280 times in 2015. As such, it works out to just over once a day that some U.S. court is making this mistake.
Big picture, given the number of cases courts see each year, it may seem that these are small numbers. Not really. A search of federal courts for the term "limited liability company" turns up 2949 cases from 2015, which suggests that around 10% of cases (9.49%) referring to LLCs in some substantive manner made a reference to a "limited liability corporation." NOTE: If one searches for "LLC," the number of cases exceeds 10,000 for 2015, but I decided that a court taking the time to spell out "limited liability company" suggested that the entity choice had a heightened relevance to the case.
At the state level, the numbers are a little better. State courts referred to "limited liability companies" 1691 times in 2015. With 105 cases calling an LLC a corporation, that works out to just over 6% of the time. Not great, but a substantial improvement.
I admit this is not a scientific review of the data and I am making some assumptions, but the sheers number do, I think, support the notion that all our courts can do better on this issue. And give state courts credit -- although federal courts are often viewed the more prestigious courts, state courts are holding their own on this issue. Perhaps state courts are a little more careful because entities are generally (though not always) creatures of state law.
This is not, I am sure, just the courts. I suspect a lot of these errors come from attorneys who call LLCs corporations, then the court just take their lead. Still not okay, but I can imagine that some courts just follow the lead of those arguing the cases before them on such issues.
So, for 2016, I issue a challenge to all U.S. courts and the lawyers who practice in them: let's cut these numbers in half! (I'd like them to go to zero, but one needs to be somewhat realistic, right?)
Tuesday, December 29, 2015
A quick break from grading for my year-end report on the use of "limited liability corporation" instead if the correct "limited liability company" when referring to LLCs. Hold on to your hats.
Since December 31, 2014, Westlaw reports the following using the term "limited liability corporation":
- Cases View all 381
- Trial Court Orders View all 93
- Administrative Decisions & Guidance View all 169
- Secondary Sources View all 1,071
For example, Massachusetts has the following proposed legislation from, Sen. Tarr, Bruce (R), with the following summary: " An Act relative to limited liability corporation filing fees." 2015 Massachusetts Senate Bill No. 238, Massachusetts One Hundred Eighty-Ninth General Court. Of course, the proposed change is to the state's Limited Liability Company Act, Mass. Gen. Laws Ann. ch. 156C, § 12 (West 2015).
And one proposed change to "limited liability corporations" is not sufficient for that state this year. Rep. Arciero, James (D), similarly proposed "An Act relative to limited liability corporations dealing with children." 2015 Massachusetts House Bill No. 304, Massachusetts One Hundred Eighty-Ninth General Court. The sponsors of these bills show that the "limited liability corporation" mistake is, at least, bipartisan.
Section 104(k)(1) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (42 U.S.C. 9604(k)(1)) is amended-
. . . .(3) by adding at the end the following:'(I) an organization described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of that Code;'(J) a limited liability corporation in which all managing members are organizations described in subparagraph (I) or limited liability corporations whose sole members are organizations described in subparagraph (I);'(K) a limited partnership in which all general partners are organizations described in subparagraph (I) or limited liability corporations whose sole members are organizations described in subparagraph (I); or'(L) a qualified community development entity (as defined in section 45D(c)(1) of the Internal Revenue Code of 1986).'.
Tuesday, December 22, 2015
My colleague Steve Bradford noted a little while back that this is the season grading, not grade whining. (Colleague Joan Heminway followed up with some sound advice on avoiding grade whining, too.) Add to the grading season an upcoming ABA site visit, and a few other deadlines, I'm feeling more overwhelmed than usual. And, this morning, I went for my run in wet and rainy 55-degree weather with some a stiff wind in my face (on the way out).
The wind in my face, coupled with Steve's sound words, reminded me of a post I wrote in November 2014, Better Teaching Idea: Try to Notice When the Wind Is at Your Back. When I got into the office, I read it again to try to help me get back to my work with a good mindset. The close of that piece was this:
If we want to be better teachers, better lawyers, and better people, we’d all do well to try to recognize when the wind might be (or might have been) at our backs. At various times, because of our race, gender, sexual orientation, class, religion, familial situation, education, or other reality, we have faced challenges, feeling the wind blowing directly in our faces. But at some point, most of us had the wind at our back, at least as compared to someone else. And certainly, some of us have had the help more than others.
Recognizing the challenges others face does not make our challenges less real or our accomplishments less significant. It just gives us the chance to have a closer, if not full, understanding of the challenges others face. Ideally, that can make us more fair, more accessible, and more reasonable. It is right to try, especially for those of us who have reaped the benefit of the wind at our backs more often than others.
I still very much believe this is true, and with the holidays rapidly approaching, it's a good reminder to me to be thankful for all I have, and to appreciate how well I have it.
I wish you all happy holidays, efficient grading, good beer and wine (not whine), and great friends and family.
Tuesday, December 15, 2015
As I continue my mission to solidify the limited liability company (LLC) as its own entity, and not a corporation or corporate derivative, I have come to realize that U.S.-based distinctions are usually easier than international ones. One challenge we have is that we often try to find direct entity analogies from country to country, when none may exist.
Case in point: Over at Lexology.com lat week, an article titled Is litigation funding in peril? appeared. The article states, "In its ruling (KKO 2015:17), the Finnish Supreme Court found that under certain criteria it is possible to hold the shareholders of a limited liability company liable for the company's liabilities." So, if this were a U.S. LLC, we'd know there are no "shareholders" of an LLC. We have members (or should). But, I am no expert in Finnish law, but it is different than U.S. law. According to Wikipedia (that all-knowing source), Osakeyhtiö, abbreviated Oy, means "stock company," thought others sources says it means "limited company" or limited stock company." Nonetheless, the shareholder characterization appears acceptable for a Finnish (but not a U.S.) entity.
Finnish entities do not break down the same way as U.S. entities (this is not surprising). Thus, in Finland, there are limited partnerships, limited companies, and public limited companies. My suspicion is that the Osakeyhtiö is actually more like a corporation, as "the management is provided by the management board," but general parlance is that it is an LLC because of how it translates.
The Lexology article discusses limited liability companies, but then repeatedly discusses piercing the "corporate" veil and the "corporate structure" of the entities in questions. To draw a direct analogy to U.S. entities, and to try to hold my overseas colleagues to U.S. language, would be unfair. It may be that in a non-U.S. jurisdiction, "limited liability companies" in such an instance means the more general "limited liability entities," and is not intended as a term of art for the LLC. However, there is language that can be employed globally to help make entity distinctions more clear, particularly when talking about general concepts for a more general audience. Avoiding terms of art where specificity is not intended would be helpful.
For example, if we talk about a "limited liability veil," we can use that to apply to all limited liability entities. This is particularly apt when discussing situations where multiple entities are in play, and perhaps we're discussing veil piercing of a partner corporation and its subsidiary LLC.
Similarly, we can talk about "entity structure," instead of "corporate structure," to ensure we're not assigning specific rules and obligations to the wrong entity type.
Cross-border entity issues are inherently complex, and understanding how foreign courts will view various business arrangements is always a challenge. Foreign courts often have to grapple with foreign entities, and must decide how to reconcile the entity choice with domestic law. I appreciate the challenge, and recognize that there are rarely easy answers. I do think, though, that avoiding specific entity language when more general language will suffice, it's a good idea, because we can avoid inadvertently attaching domestic rules to a foreign entity.
We use analogies as anchors to help us understand concepts. That can be good, and it can be helpful. But we must be careful not to overdo it. Despite some similarities, LLCs are distinct from corporations and LLPs. And the Oy is different than the GmbH or the S.A. or the NV. Comparisons are inevitable, and often helpful. But, if we get more specific than we need to, before we need to, we run the risk of framing the question incorrectly and prematurely.
Tuesday, December 8, 2015
If you use Facebook, Twitter, Instagram, or just the internet, you are probably aware of the concept of clickbait. What is "clickbait?" Well, Merriam Webster dictionary defines it as follows:
something (such as a headline) designed to make readers want to click on a hyperlink especially when the link leads to content of dubious value or interest <It is difficult to remember a time when you could scroll through the social media outlet of your choice and not be bombarded with: You'll never believe what happened when … This is the cutest thing ever … This is the biggest mistake you can make … Take this quiz to see which character you are on … They are all classic clickbait models. And they are irritating as hell. There's no singular way to craft clickbait, but the essence is clear: Lure—no trick—readers to your site. — Emily Shire, Daily Beast, 14 July 2014> < … “clickbait,” those seductive Huffington Post-esque headlines that suck up your attention but don't deliver what they promise? — Oliver Burkeman, The Guardian (London), 10 Aug. 2013> < … there's an incentive to combine clickbait, to get people in, with strong content to keep them on the site. — Steve Hind, interviewed on National Public Radio, 10 Nov. 2013>
Lists and polls are common ways to get people to click on a headline. "All 50 States in the U.S., Ranked By Their Beer." "500 Greatest Songs of All Time." "The 100 Most Important Cat Pictures of All Time." That last one is from Buzzfeed, which claims it doesn't do clickbait because it "hasn't worked since 2009." If you say so.
Anyway, it appears that Business Law Prof Blog is deemed a "media outlet" by some enterprising public relations folks, so I get regular emails pitching books and polls and experts to write about. I rarely, if ever, use the material, but as a former public relations professional, I am willing to take a quick look to see if it's something of potential interest to our readers. This week, I got an email that caught my eye. It came with the subject line: 2015’s Best & Worst College Cities & Towns in America – WalletHub Study.
The overall top 10 college towns from this poll:
- Ann Arbor, MI
- College Station, TX
- Iowa City, IA
- Provo, UT
- Gainesville, FL
- Pittsburgh, PA
- Atlanta, GA
- Austin, TX
- Cambridge, MA
- Columbia, MO
Any list like this is subject to criticism (no way Gainesville, FL, is better than Athens, GA), but depending on the criteria, it can be valid. It's hard for me to argue about Ann Arbor. I met my wife in Ann Arbor, and it is a great city. Not sure it's number one, but okay.
This kind of list is great clickbait for me. I love college towns. I grew up in one: East Lansing, Michigan. And I have taught in three: State College, PA; Grand Forks, ND; and Morgantown, WV. There's something special to me about college towns, so I was curious to see how they made these rankings. First, of course, I started by looking at the list for some of my favorites. No East Lansing. No State College. No Grand Forks. No Morgantown. Two Big Ten schools and a Big Twelve school. Huh?
So I inquired about the methodology and I was told the data used was from the 2014 American Community Survey 1-Year Estimates. Thus, cities that were not included in the Census 2014 ACS 1-year estimates data tables could not be included in the survey. So, I started looking for other cities with significant colleges that were not on the list. Here's a list of cities that were not included in the survey that I have identified so far, in alphabetical order. There are some pretty serious college towns on this list:
- Athens, OH
- Ames, IA
- Asheville, NC
- Auburn, AL
- Chapel Hill, NC
- Charlottesville, VA
- Clemson, SC
- College Park, MD
- Corvallis, OR
- East Lansing, MI
- Hanover, NH
- Huntington, WV
- Ithaca, NY
- Laramie, WY
- Manhattan, KS
- Morgantown, WV
- Moscow, ID
- Pleasant, MI
- New Brunswick–Piscataway, NJ
- Oxford, MS
- Oxford, OH
- Princeton, NJ
- Pullman, WA
- Stanford, CA
- Starkville, MS
- State College, PA (or University Park, PA)
- Stillwater, OK
- Storrs, CT
- West Lafayette, IN
- Williamsburg, VA
Every list will have it's flaws, and we can always debate how a study is run. The point is not to bash the study itself. I simply thought it worth pointing out that the input data is going to have a major impact on the output. So, for a study of top college towns in the 2014 American Community Survey 1-Year Estimates, this is a good list. If one were trying to find a list of cities to do a mailing or other outreach to connect with college students, it might not be so hot. Or if one were thinking about retiring to a college town, a good number of top options would not be on this list.
The takeaway, in law, in business, and in life, your output is only as good as the data you put in. If the output doesn't seem quite right, go back and check in the inputs. Sometimes, you'll find the data just showed something unexpected. Other times, that data that was input might not have been complete or accurate enough to give good answers.
Thursday, December 3, 2015
Facebook (not surprisingly) and other social media blew up when Facebook CEO, Mark Zuckerberg, and his wife, Dr. Priscilla Chan, released an open letter to their new baby daughter, Max. (Congratulations to all, by the way.) The Chan Zuckerberg family announced that they would be giving a ton of money to support important causes, which caused people to get excited, get skeptical, and get mad.
One big complaint has been that the family chose a limited liability company (LLC), which is not a corporation (more on that later), rather than a not-for-profit entity to do the work. Some say this makes it a scam. I say hooey. Even if it were a scam, it’s not because they chose an LLC.
- First, without knowing the LLCs members or structure, there’s no reason to say the LLC cannot be a 501(c)(3). But, more important, the Letter to Max never says they will give money to charity. Never.
The letter says:
As you begin the next generation of the Chan Zuckerberg family, we also begin the Chan Zuckerberg Initiative to join people across the world to advance human potential and promote equality for all children in the next generation. Our initial areas of focus will be personalized learning, curing disease, connecting people and building strong communities.
We will give 99% of our Facebook shares -- currently about $45 billion -- during our lives to advance this mission.
How the Chan Zuckerberg’s choose to advance that mission can easily be through an LLC, whether it is tax-exempt or not. They may have chosen the for-profit (or benefit) LLC as the entity so that they could seek profit in certain ways, with the thought that the profit seeking supports the mission. Or maybe they want to be able to give to for-profit entities to build and grow business in areas that further their mission, but lacks status that would satisfy IRS nonprofit requirements.
Regardless, the choice of LLC may be a good one. I am thinking these folks have good counsel and financial advisors, so the entity choice probably serves their purposes, or at least their best estimate of those future purposes. And I am all for them putting that kind of money behind what seems to me like an excellent mission. So, like them or hate, but back off their choice of entity. (Leave the LLC alone!)
And, since this would not be a post of mine without noting the utter media failure in referring to the LLC, again, it’s a limited liability company, not corporation, as several news outlets have reported. PBS tends to be my favorite news source, which makes it all the more painful that they may be the source of this limited liability corporation nonsense.
The apparent source of the limited liability “corporation” nonsense is the PBS Newshour, link here. I know the U.S. Supreme Court has gotten this wrong, too, but I had hope for better from PBS. Oh well. I'll still be listening to PBS for quality news, and I'll still be happy to hear when someone commits to putting billions of dollars behind good causes. If either one doesn't follow through, I'll be disappointed, but I am not ready to give up hope on either one, just yet.
Tuesday, December 1, 2015
No, I am not really going to deep into the crowdfunding legal world. I am mostly venting. My co-bloggers, especially Steve Bradford, Joan Heminway, and Haskell Murray, are far more knowledgable than I am on the actual legal regime.
Kickstarter and other sites have done some creative things to help people start their businesses, and I am fine with that. There are travel jackets and luggage, as well as other things like potato salad and gadgets that someone thinks someone else needs. That's all good. But some of the ideas just seem dumb to me. Case in point: the PicoBrew, about which one outlet noted: Seattle company develops 'Keurig for beer.'
So, the deal is that you can make your own beer recipes (or borrow from others), and make beer at home. Fast(ish). KOMO News explained:
Depending on the recipe, users add grain to the main compartment of the step filter and add hops into the appropriate hop cages inside the unit. The entire canister slides into the Zymatic and the brewing begins.
The brewing takes about four hours, leaving the unfermented beer in the keg that originally held the water. Add the yeast, then after a week of fermentation you get beer ready to be carbonated for dispensing from the keg.
So, if I want a (potentially) good craft beer, I can plan a week ahead, and zowie, with a little work I will have a bit more than a 12 pack at the ready. The Keurig was bad enough -- it's wasteful, expensive. And, did I mention it's really wasteful? But it can make pretty good coffee in a way that is more convenient in some circumstances. So there's that.
PicoBrew doesn't seem to have any of those things. I mean, it does let you act like you brewed beer yourself, if you wanted to be that guy or gal. But really, this seems like an expensive gift for people who don't know really understand what it means to make your own beer.
I am all for people coming up with ideas to build creative businesses. And I am all for letting people spend their money on things they like (goofy or not). But that this thing raised $1.4 million still seems wrong to me. I know, some people really like this making stuff at home without really "making" much of it, but even with the recipe delivery services, there you're just over paying for someone else to do most of the work for you. I get that. That allows you to pay someone else to do most of what you don't want to do, while giving you flexibility and fresher food. Maybe it's pricey and not too creative from a cooking perspective, but still sensible for some folks.
The PicoBrew website quotes CNET as saying, "They tasted liked craft beers I would pay money for." After paying $500 to $1000 for the machine, plus ingredients, I am pretty sure you would still be paying money for the beer. And you would be doing the work, waiting for it to ferment, and carbonating it, too. I just don't see the great value. Personally, I'd much rather buy my craft beers straight from the good folks at places like Bell's, Founders, and Chestnut Brew Works, LLC(!). Now if I could just get a distributor in the state to make the first two more accessible. Hey, Kickstarter . . .
Tuesday, November 24, 2015
Like many people, I am traveling for the holiday this week. Because of that, I'll keep this short. Since November 15, 2015, six more courts have listed an LLC as a "limited liability corporation," instead of the correct, ""limited liability company." The culprits:
1) JACK LOUMENA, Pl., v. WALTER P HAMMON, et al., Defendants. Additional Party Names: Travis I. Krepelka, 15-CV-03613-LHK, 2015 WL 7180679, at *2 (N.D. Cal. Nov. 16, 2015) ( "PAI 'is a limited liability corporation which was originally owned, at least in part, by...Timothy Tibbott.' . . . Aug. 25, 2014 Order at 5.") .
2) Ironridge Glob. IV, Ltd. v. Securities and Exch. Commn., 1:15-CV-2512-LMM, 2015 WL 7273262, at *11 (N.D. Ga. Nov. 17, 2015) ("Notwithstanding the plain text of § 1391(c), the SEC argues that (1) § 1391(c) was intended to apply to corporations, partnerships, limited liability corporations, and labor unions—not federal agencies—according to “a natural reading of the full text of the statute” and its legislative history; and (2) to read § 1391(c) otherwise would facilitate forum shopping.").
3) In the caption: Perez v. Sophia's Kalamazoo, LLC, d/b/a SOPHIA'S HOUSE OF PANCAKES, a limited liability corporation, et al., Defendants., No. 1:14-CV-772, 2015 WL 7272234 (W.D. Mich. Nov. 17, 2015).
4) In the caption: Oracle America, Inc., a Delaware Corporation, Plaintiff, v. The Oregon Health Insurance Exchange Corporation, dba Cover Oregon, an Oregon Limited Liability Corporation, and The State of Oregon, by and through The Oregon Health Authority and The Oregon Department of Human Services, Defendants, No. 3:14-CV-01279-BR, 2015 WL 7296233 (D. Or. Nov. 18, 2015).
This post concludes the Contract Is King, But Can It Govern Its Realm? Micro-symposium. The symposium was hosted as part of the AALS section on Agency, Partnership, LLCs and Unincorporated Associations in advance of the section meeting on January 7th at 1:30 where the conversation will be continued.
I summarized the conversation and provided links to all of the individual posts. Bookmark this page-- there is great commentary at your finger tips on a range of topics. Please keep reading (and commenting) on these great contributions by our insightful participants to whom we are very grateful.
Jeffrey Lipshaw kicked off the symposium conversation with his post (available here) questioning, in practice, how different LLCs are from traditional corporations. He used a great map analogy to talk about the role of formation documents and default rules as gap fillers.
“The contractual, corporate, and uncorporate models are always reductions in the bits and bytes of information from the complex reality, and that’s what makes them useful, just as a map of Cambridge, Massachusetts that was as complex as the real Cambridge would be useless.”
After asserting that LLCs differ from corporations only in matters of degrees, Jeff went on to to them illustrate how degrees of difference may still matter. He provided a good example of a situation where the ability to eliminate fiduciary duties may produce the right result—an option only available in alternative entities not corporations.
Mohsen argued that if contract is king, business revenue rules the reign in Delaware. Franchise taxes and revenues generated from being the business domicile of so many businesses, in all forms, is a source of riches, one that Mohsen argued will be protected by preserving a commitment to freedom of contract.
“Delaware’s annual tax charged to alternative entities is flat. All LLCs and LPs, no matter how large or small, whether publicly traded or closely held, pay the state only $300 annually for the privilege of being a Delaware entity. Thus, unlike the corporate context, where Delaware’s business is dependent on attracting large, publicly traded corporations, in the alternative entity context, Delaware’s business depends on volume alone.”
In his first post, Mohsen also addressed Delaware Chief Justice Strine and Vice Chancellor Laster’s provocative “Siren Song” book chapter, where the pair advocate for mandatory fiduciary duties in publicly traded LLCs and LPs. Mohsen questioned the limitation arguing that
“[M]any of critiques that Strine and Laster levy at publicly traded alternative entities– unsophisticated investors, the absence of true bargaining, and confusing contract terms that often unduly favor the managers—could be levied at many private entities as well. If so, then why should Strine & Laster’s proposal be limited to public entities?”
Sandra Miller blogged here about investor sophistication and its relationship to fiduciary duty waivers. She highlighted her scholarship in the area and provided helpful links to her papers discussing her points in greater detail.
“[T]here are asymmetries in the marketplace that make it unlikely that the marketplace will efficiently discount the effects of waivers. Given the investor profile, at a very minimum, the duty of loyalty should be non-waivable for publicly-traded entities.”
Joan Heminway questioned whether LLC operating agreements are contracts, and if not the implication for fiduciary duties, statue of frauds, capacity and public policy challenges and enforceability against third parties.
“[W]ith judicial and legislative attention on freedom of contract in the LLC, the status of the LLC as a matter of contract law may shed light on the extent to which contract law can or should be important or imported to legal issues involving LLC operating agreements...So, while contract may be king in LLC law, we may question whether a contract even exists under LLC law.”
Joan also highlighted her recent appearance at the ABA LLC Institute in a related post available here and shared the many functions of an operating agreement (whether contract or not!).
Daniel Kleinberger contributed to the conversation in four parts (appearing in three separate posts here (1), here (2) and here(3)). Daniel focused on Delaware’s implied contractual covenant of good faith and fair dealing and the covenant’s role in Delaware entity law. He carefully distinguished the covenant from the UCC implied covenant of good faith and fair dealing and from the corporate standards of good faith as articulated in Stone v. Ritter and Smith v. Van Gorkum. Thirdly he addressed waivers of good faith and fair dealing both in the governing agreement and arising from contract in Delaware and under the Uniform Limited Partnership Act.
“Perhaps ironically (or some might even say “counter-intuitively”), the Uniform Limited Liability Company Act (2006) (Last Amended 2013) permits an ULLCA operating agreement to go where a Delaware operating agreement cannot.”
In his final post, available here, Kleinberger addressed interpretation questions with implied covenants analogizing the analysis to that used with impracticability.
“For impracticability or a breach of the implied covenant to exist, the situation at issue must have been fundamentally important to the deal and yet unaddressed by the deal documents. Put another way: the notion of a “cautious enterprise” means that only a condition that is egregious or at least extreme is capable of revealing a gap to be remedied by the implied covenant.”
BLPB editor, Joshua Fershee, was inspired by the topic and contributed his own post to the micro-symposium. In his post, he declared himself a Larry Ribstein devotee and highlighted how the structural differences in the LLC form, as opposed to the corporate form, provide business benefits for LLC members.
“The flexibility of the LLC form creates opportunity for highly focused, nimble, and more specific entities that can be vehicles that facilitate creativity in investment in a way that corporations and partnerships, in my estimation, do not.”
Greg Day, another BLPB-generated contribution to the conversation, blogged about sophisticated parties’ utilization of freedom of contract in LLC, and sophisticated investors demand for the conformity of traditional corporate formation over LLCs.
“[W] hen Delaware LLCs become big, and attract big funds, a condition of investment almost always requires an LLC to convert into a Delaware corporation. It seems that the lack of predictability associated with the freedom of contract scares potential investors who prefer the comforts of fiduciary duties, among other corporate staples. …So the parties who ostensibly are best served by contractual freedoms—i.e., sophisticated parties—appear to be the ones most likely to demand the traditional corporate form. And on a related note, this helps to explain why such a paltry number of LLCs and LPs have become public companies.”
Finally, Peter Molk & Verity Winship also contributed a last-minute addition to the symposium highlighting their empirical work on LLC operating agreement dispute resolution provisions as it relates to the question of contracting rights in unincorporated entities. They reported some of their early findings and linked it to the discussion about contractual freedom and the implications of mandatory fiduciary duties.
“More than a third of the agreements in our sample selected the forum for resolving disputes, primarily through exclusive forum provisions or mandatory arbitration provisions. The agreements also modified litigation processes through terms that imposed fee-shifting, waived jury trials, and, less commonly, through other means like books and records limitations.”
Participants in the Micro-Symposium were asked to respond to a series of questions (available here) that will be further discussed at the AALS section meeting. Joan MacLeod Heminway (BLPB editor), Dan Kleinberger, Jeff Lipshaw, Mohsen Manesh, and Sandra Miller.will be panelists at the AALS meeting and joined by Lyman Johnson and Mark Loewenstein.
Thursday, November 19, 2015
Regular readers of this blog know that I am fervent that the distinction between entities matters, particularly when it comes to LLCs and corporation. I’m happy to be a part of this micro-symposium, and I have enjoyed the input from the other participants.
My comments relate primarily to the role of contract in LLCs and how that is different that corporations. Underlying my comments is my thesis that LLCs and corporations are meaningfully distinct. This view is in contrast to Jeff Lipshaw, who argued in his post:
[I]f uncorporations differ from corporations, it’s more a matter of degree than of any real difference. Both are textual artifacts. We have created or assumed obligations pursuant to the text at certain points in time, and we use the artifacts and their associated legal baggage opportunistically when we can. I am not convinced that organizing in the form or corporations or uncorporations makes much difference on that score.
I tend to be more of a Larry Ribstein disciple on this, and I wish I had the ability to articulate the issues as eloquently and intelligently as he could. Alas, you’re stuck with me. (Editor's note: As Jeff Lipshaw says in his comment below, he did not say the forms of LLCs and corporations are not distinct. He is, of course, correct, and I know very well he knows the difference between the forms. In fact, a good portion of what I understand of the practical implications of the LLC comes from him. I do believe that the choice of form matters, and at least should matter in how courts review the different entities, as I explain below. And I do think the LLC is better, or should be (if courts will allow it), because of what the form allows interested parties to do with it. The flexibility of the LLC form creates opportunity for highly focused, nimble, and more specific entities that can be vehicles that facilitate creativity in investment in a way that corporations and partnerships, in my estimation, do not.]
In his book, The Rise of the Uncorporation, Ribstein stated, “Uncorporations [his term for noncorporate entities] come in all shapes and sizes, and are increasingly encroaching on traditionally ‘corporate’ domain. The thesis is that form matters.” He goes on to explain that the differences between corporations and noncorporate entities have practical implications for those in business (and their lawyers). I think he was right.
It seems that some view the limited liability protection that comes with both an LLC and a corporation as the main, if not sole, defining function of the firm. If that were true, then it would be accurate that LLCs and corporation are functionally the same. I think the evolution and purposes of the limited partnership, the LLC, and the corporation suggest that these entities at least should (if they don’t in fact) serve different purposes and roles for those who create them.
The LLC Revolution helped facilitate formation of entities with pass-through taxation and limited liability protection. And it is true, that limited liability one chief benefit of the corporation, and the rise of the corporation can be tracked to that benefit. But, entity choice is more that just liability and taxation, too, at least where there are real entity choices that provide options.
Corporations are far more off-the-rack in nature, and they have a tremendous number of default rules. These rules facilitate start up, and help skip a number of conversations that promoters and initial investors might otherwise need to have. (Of course, they probably should have these conversations, but if they don’t, there are more significant gap fillers than for other entities.)
Ribstein observed, “Uncorporations not only explicitly permit, but also indirectly facilitate contracts. A firm’s contractual freedom should be evaluated not only in terms of the flexibility permitted by a given business association statute, but in light of the alternative available standard forms.” As such, the clearer and more distinct the terms of the various entity-form statutes are, the more significant a firm’s choice of form can be. And if the choice is an LLC, that choice should be respected.
As my countless posts lamenting the fact that courts can’t seem to get the distinction between LLCs and corporations clear, there’s evidence that Lipshaw is right as to the current state of the law, or some meaningful portion of it. But that doesn’t make it right.
Tuesday, November 17, 2015
The defense for Don Blankenship, former CEO of Massey Coal, rested today without putting on any witnesses. Blankenship is on trial because he is charged with conspiring to violate federal safety standards. Investigators believe that Blankenship's methods contributed to a mine disaster that killed 29 people at the Upper Big Branch mine in West Virginia.
One part of the trial has an interesting business law component. Prosecutors have tried to show the Blankenship's interest in making more money was a key factor in cutting corners. One West Virginia news paper reported it this way:
“The government is using his compensation package as an indication of how much production mattered to Don,” said Mike Hissam, partner at Bailey & Glasser. “They’re using his compensation to establish a motive for him lying and making false statements to investors, their theory being his compensation was so tied up with company stock he had a motive for lying to the SEC and the public to protect his own personal net worth.”
It's possible that this is accurate, but I am leery of that line of thinking. It's not that I don't think it's possible Blankenship cut corners because it cost money, but it's not clear to me that would be the main of even a significant reason, if he did. The problem with this line of thinking is that Don Blankenship has tons and tons of money. So the risk is that the jury looks at and says, "Nope -- he's already rich. Why would that motivate him so much?" Further, while Blankenship stood to make money when things went well, his net worth was tied to company stock, so bad outcomes hurt him, too. The incentive story is not as easy as it seems.
My theory for the jury on this point would be more like this: Blankenship played the game to win. He liked winning, and he was used to winning, and he would not stop. His winning made him rich. And what was it that made him a winner? More coal coming out of the ground. His coal. Coal, not money, earned points. Coal, not protecting lives, earned points. Safety measures and slow downs or shut downs lost points. And Blankenship was about scoring points. If the rules didn't help him, he tried to change the rules. And who was hurt along the way did not matter. Because hurt people don't score points. Only coal matters in Blankenship's game.
Anyway, there's a reason I'm not a prosecutor, but I put my theory forth because I am a little skeptical that the money-as-the-goal message will resonate with a jury the way prosecutors hope. (To be clear, this is not the only theory prosecutors put forth -- it's just the one I am focusing on.) My colleague Pat McGinley explained the challenges with Blankenship this way:
"There are a considerable number of people who view Mr. Blankenship in his role as the Massey CEO as arrogant and dismissive of criticism," he said. "But the jury hasn't seen that side of him. And don't forget he's embraced by many people, including many powerful people; he's not universally viewed as arrogant or in a negative light. What's important here is what assessment is the jury going to have?
Had Blankenship testified, we'd have a better sense of what the jury might think of him, because we'd at least have his testimony to assess. We'd know at least part of what the jury knows. But he didn't. No witnesses for the defense, and no insight for those watching.
It should be an interesting few days.
Friday, November 13, 2015
Just a quick report from the 2015 ABA LLC Institute, an annual event held in the fall in Washington, DC that attracts anally compulsive (and I do mean that in the most positive way possible) business lawyers (academics and practitioners) interested in limited liability companies (LLCs) and other alternative business entities. The agenda for this year's program is full of nifty stuff and great presenters (present company excepted). Co-blogger Josh Fershee would love the LLC Institute. No one here confuses the LLC with the corporation! (I will just link to one of Josh's fabulous posts on that topic as a reference point.)
For this year's institute, I chaired a panel on dissolution in the LLC and also participated in a panel that explored just what an LLC operating agreement really is. I was wowed in each case by my co-paneleists. Because the norm at this conference is to interrupt the panelists and comment on their presentations as they speak, the discourse was engaged and lively.
I will save my comments on the operating agreement panel for next week's micro-symposium. Today, I want to briefly cover highlights from the dissolution panel. Specifically, we focused a lot of attention on the evolution of dissolution events under the uniform and prototype LLC acts and various state LLC statutes since the adoption of the federal income tax "check the box" rules. There's more in and related to that topic than you might think . . . .
Tuesday, November 10, 2015
Missouri’s president recently resigned amid protests about how his institution responded to racist and other deplorable acts on his campus. A graduate student staged a hunger strike, and players from the Missouri football team threatened to sit out their next game if the president did not resign.
Some have worried that the threat sets bad precedent, in that they think now a president can be forced to resign based on the racist acts of someone beyond his or her control. I don’t buy that, but more on that later. Others are upset that it took the football team to make the protests have legs. I don’t buy this one, either, though I give this one more credence.
As someone working in an academic environment, I will say that I would be sympathetic if the resignation really happened because of things that were out of the control of the university president. That is, if he were really being held accountable for what was said by an idiot racist student, I'd be supportive of him and think it was wrong he was being forced out. Based on what I have seen, though, the criticisms were valid about the institution's response to the racists acts, and specifically the president’s response, to issues of racism on campus.
I have seen administrations respond well and respond poorly to such events, and how they respond does a lot for how people feel about their institution. My read on this is that this president did not seem to care about an institutional response, when he did respond it was dismissive, and when he came under fire, he lashed back.
One of this things that struck me was that the football coach publicly supported his players. To me, it seems that when high-level folks step out front like that, it's likely the problems were recognized deeply and across boundaries.
Beyond that, personally, I had little patience with the president, based on reports of his responses. The one that sealed the deal for me was his description of “systematic oppression,” which goes as follows: "Systematic oppression is because you don’t believe that you have the equal opportunity for success.” Um, no, that's exactly wrong.
As such, I don’t think this was an issue where the president of a university was being held accountable for the racist behavior of some students. Unfortunately, that kind of behavior unavoidable, but worth trying to avoid. How we respond the racist behavior of others, though, is within our control, and we’re accountable for how we respond.
Furthermore, I don’t think it was just the potential $1 million loss a forfeit of a football game was the sole reason this resignation happened. I do think it accelerated the process, but I also get the sense this was a problem across the campus. I think the football players astutely noted that the time was right to join the movement, and knew they had support. Notoriously conservative football coaches (and I don’t mean politically) don’t jump out in front of things like this very often, at least not if they have a question about which way the wind is blowing. This seems more to me like a case where the lack of an adequate response -- meaning mostly that the administration was not showing they cared or noticed the problems -- was recognized by a critical mass as problematic. And things moved forward quickly.
I am responding only to my perception of reports, and maybe I am getting this wrong, but I get the sense the outcome here was right. And I think it is more complex than the fact that the football players complained, so change happened. That undercuts the work of the initial protestor, who did motivate change, and it underestimates how deep the lack of support for the administration seemed to go. And, sorry, it was more than financial, even if that was part of the story.
Frankly, I worry more about the gendered aspect of this, as colleges and universities are notoriously bad in how they handle Title IX violations, and I don’t know of many (read: any) protests like this leading to successful change on that front. But maybe, just maybe, we’re on the cusp of something like that. In a proper case, I sure wouldn’t mind if a football team took the lead on that, too.
Tuesday, November 3, 2015
The Georgia Attorney General's (AG) office is trying to make the case that the Georgia Pipeline Act does not allow any entity other than a corporation to use the statute's eminent domain power. Palmetto Pipeline is seeking a certificate for authorization to use that power, provided in GA Code § 22-3-82 (2014):
(a) Subject to the provisions and restrictions of this article, pipeline companies are granted the right to acquire property or interests in property by eminent domain for the construction, reconstruction, operation, and maintenance of pipelines in this state . . . .
The state AG has argued that a pipeline company must be a corporation, and thus a limited liability company (LLC) cannot use the statutory power. The AG is right. In the Pipeline Act's definitions section, it provides, at GA Code § 22-3-81 (2014),
As used in this article:
. . . .
(2) "Pipeline company" means a corporation organized under the laws of this state or which is organized under the laws of another state and is authorized to do business in this state and which is specifically authorized by its charter or articles of incorporation to construct and operate pipelines for the transportation of petroleum and petroleum products.
Palmetto Pipeline LLC is a Delaware LLC, formed by Kinder Morgan for purposes of developing the pipeline. According to news reports:
"Kinder Morgan will also be responding to the Department’s motion to dismiss, which mistakenly asserts that a limited liability company does not have the legal rights of a corporation,” [spokeswoman Melissa Ruiz wrote in an email]. “Kinder Morgan continues to strongly believe that the Palmetto Pipeline is good for consumers in the state of Georgia and the Southeast region, and we are committed to bringing this project to market.”
Sorry, Charlie, although it may be good for consumers, the statute is clear on this one. In fact, Georgia utility law provides a good example of how to write a statue that expands the scope to other entities when desired. The public utility law relating to natural gas in the state, at GA Code § 46-4-20 (2014), provides:
As used in this article, the term "person" means any corporation, whether public or private; company; individual; firm; partnership; or association.
Further, the act states:
(a) No person shall construct or operate in intrastate commerce within this state any pipeline or distribution system, or any extension thereof, for the transportation, distribution, or sale of natural or manufactured gas without first obtaining from the commission a certificate that the public convenience and necessity require such construction or operation.
Unfortunately for Palmetto/Kinder Morgan, the eminent domain act has its own definitions and says "pipeline company" and not "person." One might try to argue that the eminent domain statute somehow improperly restricts the rights of individuals and other entities by limiting the authority to corporations, and thus invalidate the law or provision, but I don't see that getting much traction. The eminent domain law states in the legislative findings that
there are certain problems and characteristics indigenous to such pipelines which require the enactment and implementation of special procedures and restrictions on petroleum pipelines and related facilities as a condition of the grant of the power of eminent domain to petroleum pipeline companies.
GA Code § 22-3-80 (2014). Given the history of utility regulation and oversight, including approval of capital structures by utility commissions, it is likely that a court would uphold the power to limit the types of entities that can be used by a regulated entity like a pipeline company.
I don't mean to suggest here that the legislature should not allow pipeline companies to choose LLCs as their entity of choice. I leave that question for another time. But I am saying that that the Georgia legislature did not allow pipeline companies to be anything other than corporations, which means an LLC cannot be a pipeline company that can use eminent domain power in Georgia. Here's hoping the court agrees.
Hat tip and thanks to my best source for such cases and news items, Tom Rutledge at Kentucky Business Entity Law Blog.
Tuesday, October 27, 2015
So, my rants about the problem of courts (and others) conflating LLCs and corporations are not new. Unfortunately for the proper evolution of the law, but good fodder for my posts, I continue to get examples. We now have a new one that raises the bar a bit.
A recent case from the United States District Court for the Western District of Pennsylvania continues the trend. The beauty, if one can call it that, of the case is that there are failures to recognize the difference between LLCs and corporations at multiple levels.
First, though, let’s recap what LLCs are. LLCs are limited liability companies, and they are creatures of statute. See, e.g., 6 Del. C. § 18-101, et seq. As such, they are not corporations, which are creatures of other statutes. Cf., e.g., 8 Del. Code § 101, et. seq. In contrast, LLCs, like corporations and other associations, can be people. See, e.g., Dictionary Act, 1 U.S. Code § 1 (“[The wor[d] 'person' . . . include[s] corporations, companies, associations, firms, partnerships, societies, and joint stock companies, as well as individuals.").
Back to our newest example, which I think of as a strikeout. The case was filed by the Pennsylvania General Energy Company, LLC, (PGE), which challenged the “constitutionality, validity and enforceability of an ordinance adopted by Grant Township that established a so-called Community Bill of Rights.” Penn. Gen. Energy Co., LLC, v. Grant Township, C.A. No. 14-209ERIE, at 1 (Oct. 14, 2015, W. Dist. Pa.), available here. As Judge Baxter explains, “The Ordinance lays out the framers' beliefs that corporations should not have more rights than the people of its community and that the people have the right to regulate all activities pursuant to a right of local self government.” Id. at 2-3.
The framers are our first group that does not appear to know that corporations are not the same as LLCs. Strike one. Here’s the ordinance (emphasis added):
Section 3 - Statements of Law -Prohibitions Necessary to Secure the Bill of Rights
(a) It shall be unlawful within Grant Township for any corporation or government to engage in the depositing of waste from oil and gas extraction.
(b) No permit, license, privilege, charter, or other authority issued by any state or federal entity which would violate the prohibitions of this Ordinance or any rights secured by this Ordinance, the Pennsylvania Constitution, the United States Constitution, or other laws, shall be deemed valid within Grant Township.
So, unless the city has some definition or the other basis to say that an LLC is a corporation (which I did not see), this Bill of Rights does not apply to LLCs, partnerships, or other unincorporated entities.
As such, the plaintiff’s first argument, I think, should have been that the statute does not cover us as an LLC at all. The complaint (here) shows only an argument that LLCs are people -- the argument that PGE was not a corporation was not made. In fact, the complaint says LLCs are corporations. "The Community Bill of Rights Ordinance purports to strip corporations, such as PGE, of their status as natural persons and declares that corporations do not possess any other legal rights, privileges, power, or protections." Complaint ¶ 99. Strike two.
Finally, Judge Baxter, in what is mostly a reasonable opinion, skips right to equating LLCs and corporations, too. She explains,
Defendant provides no precedential statute or constitutional provision authorizing its action other than its assertion that Plaintiff has no rights -- from contracting to do business in Grant Township to bringing a lawsuit to complain about an ordinance -- because it is not a person. This view is contrary to over one hundred years of Supreme Court precedent that establishes that corporations are considered "persons" under the United States Constitution.
Id. at 7-8. An arguably true statement of the law that is wholly irrelevant because plaintiff is not a corporation. Plaintiff is an LLC, and the this is not transitive. That is, just because both LLCs and corporations can be persons, it does not mean that, therefore, LLCs are corporations. Strike three.
All in all, if the Grant Township ordinance has included all entities (or limited the options only to natural persons), then most, if not all, of Judge Baxter’s opinion would be correct. As it is, it’s just wrong. Absent some other analysis, the ordinance at issue did not apply to the plaintiff at all. I, for one, hope Judge Baxter amends the opinion or the case is appealed so that the court can get it right. The language here could set a terrible precedent.
Who am I kidding? It just continues the long line of other terrible precedent. But it should still be fixed.