Tuesday, June 26, 2018

Call for Papers: Respecting the Entity: The LLC Grows Up (AALS 2019)

Call for Papers for

Section on Agency, Partnership, LLCs and Unincorporated Associations on

Respecting the Entity: The LLC Grows Up

at the 2019 AALS Annual Meeting

The AALS Section on Agency, Partnership, LLCs and Unincorporated Associations is pleased to announce a Call for Papers from which up to two additional presenters will be selected for the section’s program to be held during the AALS 2019 Annual Meeting in New Orleans on Respecting the Entity: The LLC Grows Up.  The program will explore the evolution of the limited liability company (LLC), including subjects such as the LLCs rise to prominence as a leading entity choice (including public LLCs and PLLCs), the role and impact of series LLCs, and differences in various LLC state law rights and obligations. The program will also consider ethics and professional responsibility and governance raised by the LLC. The Section is particularly seeking papers that discuss the role of the LLC as a unique entity (or why it is not).

The program is tentatively scheduled to feature:

  • Beth Miller, M. Stephen and Alyce A. Beard Professor of Business and Transactional Law, Baylor Law
  • Tom Rutledge, Member, Stoll Keenon Ogden PLLC, Louisville, KY

Our Section is proud to partner with the following co-sponsoring sections:

  • AALS Section on Business Associations
  • AALS Section on Transactional Law and Skills

Submission Information:

Please submit an abstract or draft of an unpublished paper to Joshua Fershee,Joshua.Fershee@mail.wvu.edu on or before August 1, 2018. Please remove the author’s name and identifying information from the paper that is submitted. Please include the author’s name and contact information in the submission email.

Papers will be selected after review by members of the Executive Committee of the Section. Authors of selected papers will be notified by August 25, 2018. The Call for Paper presenters will be responsible for paying their registration fee, hotel, and travel expenses.

Any inquiries about the Call for Papers should be submitted to: Joshua Fershee, West Virginia University College of Law, Joshua.Fershee@mail.wvu.edu or (304) 293-2868.

June 26, 2018 in Agency, Call for Papers, Conferences, Joshua P. Fershee, LLCs, Writing | Permalink | Comments (0)

Tuesday, June 12, 2018

A Private Ordering and Dual Class Share Structures in IPOs (and Beyond)

Bernie Sharfman's paper, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, was just published, and I think he has a point. In fact, as I read his argument, I think it is consistent with arguments I have made about the difference between restrictions or unconventional terms or practices that exist at purchase versus such changes that are added after one becomes a member or shareholder.  Here's the abstract: 

The shareholder empowerment movement (movement) has renewed its effort to eliminate, restrict or at the very least discourage the use of dual class share structures in initial public offerings (IPOs). This renewed effort was triggered by the recent Snap Inc. IPO that utilized non-voting stock. Such advocacy, if successful, would not be trivial, as many of our most valuable and dynamic companies, including Alphabet (Google) and Facebook, have gone public by offering shares with unequal voting rights.

Unless there are significant sunset provisions, a dual class share structure allows insiders to maintain voting control over a company even when, over time, there is both an ebbing of superior leadership skills and a significant decline in the insiders’ ownership of the company’s common stock. Yet, investors are willing to take that risk even to the point of investing in dual class shares where the shares have no voting rights and barely any sunset provisions, such as in the recent Snap Inc. IPO. Why they are willing to do so is a result of the wealth maximizing efficiency that results from the private ordering of corporate governance arrangements and the understanding that agency costs are not the only costs of governance that need to be minimized.

In this essay, Zohar Goshen and Richard Squire’s newly proposed “principal-cost theory,” “each firm’s optimal governance structure minimizes the sum of principal costs, produced when investors exercise control, and agent costs, produced when managers exercise control,” is used to argue that the use of dual class shares in IPOs is a value enhancing result of private ordering, making the movement’s renewed advocacy unwarranted.

The recommended citation is Bernard S. Sharfman, A Private Ordering Defense of a Company's Right to Use Dual Class Share Structures in IPOs, 63 Vill. L. Rev. 1 (2018).

I find his argument compelling, as I lean toward allowing contracting parties to enter into agreements as they so choose. I find this especially compelling at start-up or the IPO stage.  I might take a more skeptical view of changes made after start-up. That is, if dual-class shares are voted created after an IPO by the majority insiders, there is a stronger bait-and-switch argument. Even in that case, if the ability to create dual-class shares by majority vote was allowed by the charter/bylaws, it might be reasonable to allow such a change, but I also see a self-dealing argument to do such a thing post-IPO. At the outset, though, if insiders make clear that, to the extent that a dual-class share structure is self-dealing, the offer to potential purchasers is, essentially, "if you want in on this company, these are our terms." I can work with that. 

This is consistent with my view of other types of disclosure. For example, in my post: Embracing Freedom of Contract in the LLC: Linking the Lack of Duty of Loyalty to a Duty of Disclosure, I discussed the ability to waive the duty of loyalty in Delaware LLCs:

At formation . . . those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty.  This is part of the bargain, and any member who does not agree to the terms need not become a member.  Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated.

It was my view, and remains my view, that there some concerns about such changes after one becomes a member that warrant either restrictions or at least some level of clear disclosures of the possibility of such a change after the fact, though even in that case, perhaps self-dealing protections in the form of the obligations of good faith and fair dealing would be sufficient. 

Similarly, in my 2010 post, Philanthropy as a Business Model: Comparing Ford to craigslist, I explained: 

I see the problem for Henry Ford to say, in essence, that his shareholders should be happy with what they get and that workers and others are more his important to him than the shareholders. However, it would have been quite another thing for Ford to say, “I, along with my board, run this company the way I always have: with an eye toward long-term growth and stability. That means we reinvest many of our profits and take a cautious approach to dividends because the health of the company comes first. It is our belief that is in the best interest of Ford and of Ford’s shareholders.”

For Ford, there seemed to be something of a change in the business model (and how the business was operated with regard to dividends) once the Dodge Brothers started thinking about competing. All of a sudden, Ford became concerned about community first. For craigslist, at least with regard to the concept of serving the community, the company changed nothing. And, in fact, it seems apparent that craiglist’s view of community is one reason, if not the reason, it still has its “perch atop the pile.”

Thus, while it is true craigslist never needed to accept eBay’s money, eBay also knew exactly how craigslist was operated when they invested. If they wanted to ensure they could change that, it seems to me they should have made sure they bought a majority share.  

I understand some of the concern about dual-class shares and other mechanisms that facilitate insider control, but as long as the structure of the company is clear when the buyer is making the purchase decision, I'm okay with letting the market decide whether the structure is acceptable.  

June 12, 2018 in Corporate Finance, Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Securities Regulation | Permalink | Comments (1)

Tuesday, June 5, 2018

An LLC By Any Other Name, Is Still Not a Corporation

Earlier this week, Keith Paul Bishop observed on his blog, "Professor Joshua Fershee has been fighting the good fight on limited liability company nomenclature, but I fear that he is losing."   I am not willing to concede that I am losing (yet), but I have to concede that I am winning less often than I'd hoped.  

Bishop noted my "helpful checklist" from last week for those writing about LLCs, but he argues, "it may be time to give up the fight and bestow an entirely new name on LLCs that is less likely to be confused with corporations. I am still not ready to give up the fight, but it is an interesting thought, and there are some options.

One path I have proposed before that I think would help: Let Corps Be Corps: Follow-Up on Entity Tax Status.  In that post, I suggested that the IRS should just stop using state-law entity designations, and thus stop having “corporate” tax treatment. I explained:

My proposal is not abolishing corporate tax . . . .  Instead, the proposal is to have entities choose from options that are linked the Internal Revenue Code, and not to a particular entity. Thus, we would have (1) entity taxation, called C Tax, where an entity chooses to pay tax at the entity level, which would be typical C Corp taxation; (2) pass-through taxation, called K Tax, which is what we usually think of as partnership tax; and (3) we get rid of S corps, which can now be LLCs, anyway, which would allow an entity to choose S Tax

Federal requirements to be eligible for the various tax status options would remain, but the entity type itself would cease to be a consideration. And we'd have to change our language to reflect that. 

But maybe LLCs could be something else. A current problem is that "company" is a synonym for "corporation" in common usage. Thus, it is easy to see why a layperson would think a "limited liability company" is the same thing as a "limited liability corporation."  Of course, there are lots of words that have a broad meaning in common parlance, but a narrower meaning in the legal sense, so it is not inherently problematic to expect lawyers to be able to draw such a distinction. (For example, as a 1L, we learn that assault does not include physical contact, but in general usage, there would be the assumption of contact.) 

Still, what else could we use?  To start, if a change were in the works, I think the "c" needs to go. Otherwise, the assumption will remain that the "c" means "corporation."   Here's an initial list: 

  • LLA: Limited Liability Association
  • LLB: Limited Liability Business
  • LLE: Limited Liability Entity
  • LLG: Limited Liability Group
  • LLO: Limited Liability Operation
  • LLV: Limited Liability Vehicle

It would not need to be, necessarily, something that says "limited liability" as long as that is conveyed.  So perhaps:

  • EOA: Entity Assets Only
  • CLB: Capped Liability Business
  • NIL: No Individual Liability
  • LCI: Losses Capped (at) Investment 
  • ILL: Investment Limited Losses
  • WYSIWYG: What You See Is What You Get
  • AMY or TED:  Just a name. You can assign a name to anything. We could name our entity AMY or TED.  (I considered SUE, but that already has a legal meaning)

I remain committed to trying to educate people so we can keep the current regime and just get it right, but it is good to have options. I welcome alternative ideas or critiques of any of these.  

Long live the LLC! 

June 5, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (3)

Wednesday, May 30, 2018

An LLC Checklist Proposal

Today I will continue my quest seeking to get courts to appreciate the need to pay attention to detail as to LLCs. Sometimes courts misidentify LLCs as "limited liability corporations" (and not the correct "limited liability companies") because they don't know the difference. Other times it is because they copied the language from the pleadings. And other times it's just typing "corporation" when "company" was intended.  All such errors are understandable but should be fixed.  

Today, we get an unpublished court opinion from last week that clearly has the correct information available, yet the opinion goofs anyway. The opinion states:    

Every Limited Liability Corporation (LLC) in Delaware is required to have a registered agent to receive service of process for the corporation. Service directly upon the owners of the LLC is not legally necessary if the registered agent is properly served. 

JERZY WIRTH Pl., v. AVONDALE IQ., LLC, Def., CV N10J-03776, 2018 WL 2383578, at *2 (Del. Super. May 25, 2018). Corporations and LLCs need registered agents, but here we are dealing with an LLC.  The accompanying footnote gets it right, so this is simply an attention to detail problem.  The footnote reads: 

See 18 Del. C. § 10-105 (a) Service of legal process upon any domestic limited liability company or any series thereof established pursuant to § 18-215(b) of this title shall be made by delivering a copy personally to any manager of the limited liability company in the State of Delaware, or the registered agent of the limited liability company in the State of Delaware... (emphasis added/ See also Thompson v. Colonial Court Apartments, LLC, 2006 WL 3174767 (November 1, 2006, Cooch, RJ. (denying a motion to vacate a default judgment when service was properly made upon the registered agent and the defendant failed to file a responsive pleading).

Id. at *2 n.3. Sigh.  There's some punctuation that could be fixed in the footnote, too, but at least the content there is right, citing correctly to the LLC Act.  Getting the content is the most important issue, to be sure, but I think we can reasonably strive to get both right. 

To that end, here's a modest proposal for courts (and lawyers) writing about LLCs: 

  • Do a global search for "limited liability corporations." Unless you're talking about the early days of corporations, you almost certainly need to change do a global change to "limited liability companies." Start here, because this is almost always wrong. 
  • Consider (strongly) doing a global search for "corp" so you catch all versions of "corporation" and "corporate." If you're talking about an LLC, that should probably be replaced with "company" or "entity" or something similar (e.g., piercing the entity veil"). 
  • Similarly, if you're talking about multiple business forms, do your "corp" search and choose "entity" as your modifier (e.g., "entity governance," not "corporate governance").
  • Double check your entity statutes to make sure you're citing the right one. Too often LLC cases cite to the corporations statute because the case they are citing was about corporations.
  • Lastly, I'll also note to check whether corporate law should be applied at all to LLCs in that circumstance, although that goes to substance, not mechanics. 

 

May 30, 2018 in Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, May 15, 2018

LLC Members Sued Directly In Tort, But Court Prefers to Tell Us About Corporate Law

A recent Georgia case considers whether a "sole owner" of an LLC can be held liable for negligent actions of his or her LLC. Of course, once again, the limited liability company (LLC), is called by the court a "limited liability corporation," and the court proceeds to apply corporate law. Here's the relevant excerpt:
The Goldens contend that the trial court erred by denying their motion for summary judgment as to negligence claims asserted against them personally. They assert that corporate law insulates them from liability and that, while a member of an [sic] limited liability corporation may be liable for torts in which he individually participated, Ugo Mattera has pointed to no evidence that the Goldens specifically directed a particular negligent act or participated or cooperated therein. We agree with the Goldens that they were entitled to summary judgment on Ugo Mattera's negligence claim.
An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor, and an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein.
Jennings v. Smith, 226 Ga. App. 765, 766 (1), 487 S.E.2d 362 (1997) (citation omitted). Thus, if Baja Properties was negligent in constructing the house, an officer of the corporation could be held personally liable for the negligent construction if he specifically directed the manner in which the house was constructed or participated or cooperated in its negligent construction. See Cherry v. Ward, 204 Ga. App. 833, 834 (1) (a), 420 S.E.2d 763 (1992).
Baja Properties, LLC v. Mattera, 812 S.E.2d 358 (Ga. Ct. App. 2018) (emphasis added).  
 
In Georgia, the LLC law provides:
(a) A person who is a member, manager, agent, or employee of a limited liability company is not liable, solely by reason of being a member, manager, agent, or employee of the limited liability company, under a judgment, decree, or order of a court, or in any other manner, for a debt, obligation, or liability of the limited liability company, including liabilities and obligations of the limited liability company to any member or assignee, whether arising in contract, tort, or otherwise, or for the acts or omissions of any other member, manager, agent, or employee of the limited liability company, whether arising in contract, tort, or otherwise. 
Ga. Code Ann. § 14-11-303 (West).  The corporate law that is applied in this case could be reasonably extended to members or managers of LLCs, but if that is the court's intent, it should say so.  The role of an LLC manager is different than that of a corporate officer, though often analogous. The role of a member is less comparable, and both seem to be at issue in the case. It is true that under LLC law, generally, an individual connected to the entity can be held liable directly for his or her actions, and it would make sense for the court to extend this corporate law concept to LLCs. But the court should still be clear that it what it is doing, and say so expressly. Once again, too much to ask. 

May 15, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (4)

Tuesday, May 8, 2018

Delaware Courts Should Do Better On Entities & LLC Diversity Jurisdiction Is Wrong

If I have learned anything over the years, it is that I should not expect any court to be immune from messing up entities. Delaware, as a leader in business law and the chosen origin for so many entities, though, seems like a place that should be better than most with regard to understanding, distinguishing, and describing entities.  Sometimes they get things rights, as I argued here, and other times they don't.  A recent case is another place where they got something significant incorrect. 

The case starts off okay:

Plaintiffs brought this action under federal diversity jurisdiction, 28 U.S.C. § 1332(a)(1), asserting that complete diversity of citizenship exists among the parties. In Defendants’ Motion to Dismiss, however, they argue that complete diversity of the parties is lacking. Federal jurisdiction under § 1332(a)(1) requires complete diversity of citizenship, meaning that “no plaintiff can be a citizen of the same state as any of the defendants.” Midlantic Nat. Bank v. Hansen, 48 F.3d 693, 696 (3d Cir. 1995); Exxon Mobil Corp. v. Allapattah Servs., Inc., 545 U.S. 546, 553 (2005). 

Cliffs Nat. Res. Inc. v. Seneca Coal Res., LLC, No. CV 17-567, 2018 WL 2012900, at *1 (D. Del. Apr. 30, 2018).
 
But, the court continues (my comments below): 
A natural person is a citizen of “the state where he is domiciled,”1 and a corporation is a citizen of the state where it maintains its principal place of business, as well as the state where it is incorporated. Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 418 (3d Cir. 2010). For purposes of § 1332, the citizenship of a limited liability corporation2 (“LLC”) is determined “by the citizenship of each of its members.” Id. Plaintiff Cliffs Natural Resources Inc. is incorporated in Ohio, and Plaintiff CLF Pinnoak LLC is incorporated3 in Delaware and maintains its principal place of business in Ohio. Third Am. Compl. ¶¶ 3–4, ECF No. 162. In moving to dismiss this action for lack of jurisdiction, Defendants assert that Seneca Coal Resources, LLC, a Delaware corporation,4 includes members who are Ohio citizens, thus destroying complete diversity as required for § 1332.
1 Or she? Is it that hard to note that the statute applies, regardless of gender?  
No. A citizenship of a "limited liability company" is determined by the citizenship of its members. 
3 Nope, again.  An LLC is formed, not incorporated. 
4 And one more time, no. It's a Delaware LLC.  There's a whole act just for LLCs
 
This is a rather run of the mill goof, and it appears the court when on to assess the issues before it correctly, even refering to LLCs correctly later in the opinion. I share it in part because this reminded me of another thing that bugs me: I still hate this rule for diversity jurisdiction of LLCs.  I know I am not the first to have issues with this rule. 
 
I get the idea that diversity jurisdiction was extended to LLCs in the same way that it was for partnerships, but in today's world, it's dumb. Under traditional general partnership law, partners were all fully liable for the partnership, so it makes sense to have all partners be used to determine diversity jurisdiction.  But where any partner has limited liabilty, like members do for LLCs, it seems to me the entity should be the only consideration in determing citizenship for jurisdiction purposes. It works for corporations, even where a shareholder is also a manger (or CEO), so why not have the same for LLCs.  If there are individuals whose control of the entity is an issue, treat and LLC just like a corporation. Name individuals, too, if you think there is direct liability, just as you would with a corporation. For a corporation, if there is a shareholder, director, or officer (or any other invididual) who is a guarantor or is otherwise personally liable, jurisdiction arises from that potential liability.
 
Okay, so I admit I am being a little lax in my civil procedure descritpions, but you get the point.  We should hold shareholders to the same standards as member or limited partners (or not). If we want a liability test or a control test, lets use that.  Or maybe I have missed something. I often reinforce the idea that LLCs, partnerships, and corporations are different entities, so different rules are often appropriate. Still, for this issue, I think the distinction between LLCs and corporations in this instance is false (or at least poorly justified).   I am open to other views, but for now, that's where I am on it right now.  
 
Lastly, it's Election Day here in West Virginia and in many places around the country.  I found my candidate -- I encourage you to find yours and go vote. Make your voice heard. 
 

May 8, 2018 in Corporations, Delaware, Joshua P. Fershee, LLCs | Permalink | Comments (2)

Wednesday, May 2, 2018

Undisputed Facts: LLCs are Not Corporations & Lawyers and Courts Need to Be More Vigilant

Here's how this week's post came to be.  I thought: "I should probably write about something other than LLCs being mischaracterized by courts. Maybe I will add some thoughts about Joan's post about her thoughtful new essay, Let's Not Give Up on Traditional For-Profit Corporations for Sustainable Social Enterprise. But first, I'll read through the cases that call LLCs 'limited liability corporations.'"  And read them I did.  I was about to let it go, but then I read something that (as usual) made me cringe. It's from a 2012 opinion that apparently just showed up on Westlaw. Here it is:
II. UNDISPUTED FACTS.
 
. . . . The facts, viewed in the light most favorable to the Plaintiffs, are as follows. Plaintiff Edgar Lopez is a New Mexico resident. Compl. at 1, ¶ 1. Lopez owns and operates Plaintiff IMA, LLC, a New Mexico limited liability corporation that formerly managed the Perry Corners Shopping Center. . . . Lopez is the managing partner and the only surviving voting member of Hunt Partners, LLC, a Nevada corporation that has its principal place of business in New Mexico. . . . . Hunt Partners wholly owns, as the “sole equity member,” another LLC called “Perry Corners Shopping Center, LLC,” a Delaware Corporation with its principal place of business in New Mexico, which, in turn, owns as its only asset the Perry Corners Shopping Center, which is located in Georgia.
Lopez v. Killian, No. 10CV0882 JCH/GBW, 2012 WL 13080169, at *3 (D.N.M. Mar. 2, 2012) (emphasis added). 
 
Again, LLCs are not corporations.  They are limited liability companies.
 
More important, though, these "facts" are not undisputed.  I pulled the complaint.  The plaintiffs are Edgar Lopez and IMA, Inc., not IMA, LLC, as the opinion states.  As such, it is true that the IMA is a "limited liability corporation," which is a rather old timey way of referring to the modern corporation, but true.  I looked up (here) the entity information from the New Mexico Secretary of State's office, and it's clear that IMA, Inc., is a "Domestic Profit Corporation" under New Mexico's statute, Chapter 53: Corporations, articles 11 through 18.  I will note that article 19 of that chapter is "Limited Liability Companies." [Banging head on desk.] 
 
My initial thought here was to put sole responsibility on the court. "How could the court get this wrong in the facts section when it has the case caption correct with IMA, Inc.?" Odd, to be sure. But the complaint reveals the likely source of some of this information. Counsel for Lopez/IMA, Inc. states specifically: "2. Plaintiff IMA, Inc. is a New Mexico Limited Liability Company owned and managed by Edgar Lopez." [More banging of head.] (Side note: it appears unrelated, but filing counsel withdrew shortly after defendants' motion to dismiss was filed.)
 
Also, in the complaint,"Hunt Partners, LLC," is described as a "Nevada Limited Liability Company," which appears correct, but later in the complaint, the entity is described as follows: "Hunt Partners, LLC, i.e., the parent Nevada Corporation." The complaint further refers to the various LLCs as corporations in multiple places, and claims that the defendants do not "have the right to manage or control the corporation known as Perry Comers Shopping Center LLC." I would not have imagined this case would have a high likelihood of success based on this complaint. (Note: This case was ultimately dismissed for lack of prosecution.)  
 
I also pulled the defendants' motion to dismiss to see how they dealt with the entities.  That filing has it right.  The motion states clearly: "This case involves a Delaware Limited Liability Company known as Perry Corners Shopping Center, LLC (“Perry LLC”) that owns a shopping center in Georgia [sic]. Perry LLC is wholly owned by Hunt Partners, LLC, a Nevada Limited Liability Company (“Hunt LLC”)."  Kudos, counsel, on the entity treatment. (Missed a typo there, as I sometimes do, too, but I appreciate getting the substance right.)  
 
This is obviously not going to change overnight.  Attorneys, please try to be accurate in how you describe entities.  One of the issues in the case had to do with personal jurisdiction, and the rules for jurisdiction are quite different for corporation and LLCs.  The distinction is not only important for the sake of accuracy; it could be outcome determinative.  And courts, you're the last line of defense. It's still the court's job to get the law right, even if the parties have gotten it wrong.
 
Here's a thought for lawyers, clerks, and judges: where there is an entity involved, look the entity up.  It doesn't take too long, and it can help you be more accurate, it might save you time in the long run, and it's just not that hard. I know I am not alone in this mission to properly identify entities.  We can do this, but we really, really, need some help.  
 
 

May 2, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, April 24, 2018

The (WV) Code Police: The Scourge of the Misdefined LLC

As I am inclined to do with cases and statutes, I spent some time this week chasing down incorrect definitions of the LLC (correctly defined as a "limited liability company").  I did some perusing of the Code of my home state of West Virginia for incorrect uses of "limited liability corporation," where limited liability company was intended.  As I expected, there are multiple errors. Take, for example: 

§ 31D-11-1109. Conversion of a domestic corporation to a domestic limited liability company.

. . . .

(i) When a corporation has been converted to a limited liability corporation pursuant to this section, the limited liability company shall, . . . .

This part of the Code uses "limited liability company" correctly throughout this provision, except in this one spot.  This should be cleaned up, but it appears to be an error related to repeated use of corporation and company in the same statute (as opposed to a misunderstanding of the concept).

 The West Virginia Code has adopted the use of "limited liability corporation" in place of "limited liability company" in a couple definitions provisions, too, which could be a little more problematic. 

In the Motor Fuel Excise Tax portion of the Code, we have this, § 11-14C-2. Definitions:

     (66) "Person" means an individual, firm, cooperative, association, corporation, limited liability corporation, estate, guardian, executor, administrator, trust, business trust, syndicate, partnership, limited partnership, copartnership, organization, limited liability partnership, joint venture, receiver and trustee in bankruptcy. "Person" also means a club, society or other group or combination acting as a unit, a public body including, but not limited to, this state and any other state and an agency, commissioner, institution, political subdivision or instrumentality of this state or any other state and, also, an officer, employee or member of any of the foregoing who, as an officer, employee or member, is under a duty to perform or is responsible for the performance of an act prescribed by the provisions of this article.

Literally, anyway, LLCs are not defined as persons in this Code section.  I am confident that the intent here is quite clear, even if the execution is flawed, but still, this exhaustive list leaves out the West Virginia limited liability company created in WV Code § 31B, the Uniform Limited Liability Company Act.

 A similar error occurs in Code Chapter 16, Public Health. Code § 16-2D-2 provides:

(29) “Person” means an individual, trust, estate, partnership, limited liability corporation, committee, corporation, governing body, association and other organizations such as joint-stock companies and insurance companies, a state or a political subdivision or instrumentality thereof or any legal entity recognized by the state.

Here, at least, the catch-all "any legal entity" does include LLCs, but LLCs are still not listed specifically. 

This definition language is being repeated in draft legislation, as well, so the error is spreading.  See, e.g., House Bill 2873, Budget and Spending Transparency Act ("(c) "Entity" or "recipients" means any corporation, association, union, limited liability corporation, limited liability partnership, legal business entity including nonprofit organizations, grantee, contractor or any county, municipal or other local government entity . . ..") 

I am planning to spend some time this summer sending proposed fixes to some key legislators to see if we can get this corrected. Though I concede this is a small fix, it is also an easy fix, and I see no reason not to get it right.  Maybe if I do the legwork, it can get done. 

April 24, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Monday, April 23, 2018

AALS 2019 - Section on Business Associations Call for Papers

Call for Papers for the

Section on Business Associations Program on

Contractual Governance: the Role of Private Ordering

at the 2019 Association of American Law Schools Annual Meeting

The AALS Section on Business Associations is pleased to announce a Call for Papers from which up to two additional presenters will be selected for the section’s program to be held during the AALS 2019 Annual Meeting in New Orleans on Contractual Governance: the Role of Private Ordering.  The program will explore the use of contracts to define and modify the governance structure of business entities, whether through corporate charters and bylaws, LLC operating agreements, or other private equity agreements.  From venture capital preferred stock provisions, to shareholder involvement in approval procedures, to forum selection and arbitration, is the contract king in establishing the corporate governance contours of firms?  In addition to paper presenters, the program will feature prominent panelists, including SEC Commissioner Hester Peirce and Professor Jill E. Fisch of the University of Pennsylvania Law School.

Our Section is proud to partner with the following co-sponsoring sections: Agency, Partnership, LLC's and Unincorporated Associations; Contracts; Securities Regulation; and Transactional Law & Skills.

Submission Information:

Please submit an abstract or draft of an unpublished paper to Anne Tucker, amtucker@gsu.edu on or before August 1, 2018.  Please remove the author’s name and identifying information from the submission. Please include the author’s name and contact information in the submission email.

Papers will be selected after review by members of the Executive Committee of the Section. Authors of selected papers will be notified by August 25, 2018. The Call for Papers presenters will be responsible for paying their registration fee, hotel, and travel expenses.

Any inquiries about the Call for Papers should be submitted to: Anne Tucker, Georgia State University College of Law, amtucker@gsu.edu or (404) 413.9179.

+++++

[Editorial note: As some may recall, the BLPB hosted a micro-symposium on aspects of this issue in the limited liability company context in anticipation of a program held at the 2016 AALS annual meeting.  The initial post for that micro-symposium is here, and the wrap-up post is here.  This area--especially as writ broadly in this proposal--remains a fascinating topic for study and commentary.]

April 23, 2018 in Anne Tucker, Business Associations, Call for Papers, Conferences, Contracts, Corporate Finance, Corporate Governance, Corporations, Joan Heminway, LLCs, Nonprofits, Partnership | Permalink | Comments (0)

Tuesday, April 17, 2018

LLCs Are Not Corporations & You Can't Have A Parent-Subsidiary Relationship When There is Only One Entity

Oh boy. A 2010 case just came through on my "limited liability corporation" WESTLAW alert (that I get every day).  This one is a mess. Recall that LLCs are limited liability companies, which are a separate entity from partnership and corporations, despite often having some similar characteristics to each of those. 

CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation. Id. (describing the restructuring of OPRA following its incorporation). At the time this lawsuit was filed, however, there remains a question as to whether there were any formalities in place to separate OPRA from CBOE operations. In short, the parties dispute whether, at the time the suit was filed, OPRA operated independently or was operated jointly with CBOE.
*2 To this end, Realtime asserts that the lack of any corporate governance at OPRA [an LLC], such as Articles of Association or a partnership agreement, renders OPRA “simply a label with no formal business structure.” RESPONSE at 2, 4 (citing SEC RELEASE at 2) (“OPRA was not organized as an association pursuant to Articles of Association or as any other form of organization. Instead, OPRA simply served as the name used to describe a committee of registered national securities exchanges.”).
REALTIME DATA, LLC d/b/a/ IXO, Plaintiff, v. CME GROUP INC., ET AL., Defendants. Additional Party Names: Chicago Bd. Options Exch., Inc., No. 6:09-CV-327-LED-JDL, 2010 WL 11601868, at *1–2 (E.D. Tex. Aug. 27, 2010) (emphasis added).
 
Okay, so first, we should get the LLC name right. That's old news. Important, but old news. An LLC is still not a corporation.  Second, LLCs, as non-corporate entities, do not engage in corporate governance and have significantly fewer formal entity obligations. Third, LLCs do not have "partnership agreements," they generally have operating agreements. 
 
In addition, partnerships don't need formal "partnership agreements," either, though to be a partnership there is always the agreement of two or more people to operate a business as co-owners seeking profit.  The court explains that "CBOE, along with the six other exchanges, has an interest in OPRA but OPRA was not incorporated as a separate legal entity until January 1, 2010, when it incorporated as a limited liability corporation," and states that OPRA had been in operation since 1975, when it was established by "directive from the Securities and Exchange Commission (“SEC”) designating OPRA to facilitate the distribution of options pricing information." Id. This suggests that perhaps OPRA is a partnership formed by the CBOE and the other six exchanges.  That would make CBOE (and the other six exchanges) potentially liable for the actions of OPRA and any resulting damages.  No one seemed to make that claim. 
 
Instead, CBOE was pursued under some version of an alter ego or business enterprise claim, seeking to merge OPRA into CBOE.  The court explains further: 
CBOE fails to identify grounds for institutional independence from OPRA at the time this suit was filed, and Realtime presents sufficient evidence to impute OPRA's contacts [for obtaining personal jurisdiction] to CBOE.
*5 In applying the Texas long arm statute, courts in this Circuit have followed the rule established by the Supreme Court in 1925 that “so long as a parent and subsidiary maintain separate and distinct corporate entities, the presence of one in a forum state may not be attributed to the other.” Hargrave v. Fibreboard Corp., 710 F.2d 1154, 1159 (5th Cir. 1983) (citing Cannon Manufacturing Co. v. Cudahy Packing Co., 267 U.S. 333 (1925)). In this case, however, at the time the lawsuit was filed there were no clear legal boundaries to affirmatively identify a parent-subsidiary or sister-sister corporate relationship. . . .  It is undisputed that prior to January 1, 2010, OPRA did not seek the protections of incorporation, RESPONSE, EXH. 13, OPRA LLC AGREEMENT (Doc. No. 238-14), and based on the current record, Realtime has put on more than a minimal showing that OPRA was under the managerial and day-to-day control of CBOE. See, e.g., Oncology Therapeutics Network v. Virginia Hematology Oncology PLLC, No. C 05-3033-WDB, 2006 WL 334532 (Feb. 10, 2006 N.D. Cal.) (noting, in the context assessing whether two related entities formed a single enterprise, that “At this juncture, plaintiff merely has to allege a colorable claim. Plaintiff does not have to prove the claim.”). Therefore, the strict separateness required under Cannon need not be applied here because OPRA did not seek protections to formally divide its dealings from that of its counterpart CBOE.
Id. at *4–5  (emphasis added). Rather than working to find entity status here, I would think the better claim would the existence of a partnership, as noted above, or even a principal-agent relationship, where CBOE is the agent of OPRA or vice versa.  The court goes on: 
Instead, these facts make it appropriate to apply the single business enterprise doctrine. The single business enterprise doctrine applies when two or more business entities act as one. Nichols, 151 F. Supp.2d at 781–82 (citing Beneficial Personnel Serv. of Texas v. Rey, 927 S.W.2d 157, 165 (Tex. App.- El Paso 1996, pet. granted, judgm't vacated w.r.m., 938 S.W.2d 717 (Tex. 1997)). Under the doctrine, when corporations are not operated as separate entities, but integrate their resources to achieve a common business purpose, “each corporation may be held liable for debts incurred during the pursuit of the common business purpose.”Western Oil & Gas J.V., Inc., v. Griffiths, No. 300-cv-2770N, 2002 WL 32319043, at *5 (N.D. Tex. Oct. 28, 2002) (internal citations omitted). Being a part of a single business enterprise imposes partnership-style liability. Id. The facts presented here demonstrate that OPRA and CBOE operate as a single business entity, at least for the threshold inquiry of establishing jurisdiction.
Id. (footnotes omitted) (emphasis added). How does this doctrine apply when, at the time of filing, the court has already acknowledged that there were not even tow entities? If there is one entity, then CBOE is directly connected.  If OPRA is clearly some form of entity, the court should figure out which one it is (hint: it's likely a partnership).  If, as the court says, they are a single entity, then CBOE (as a clearly defined entity) is the only entity. The court acknowledges this reality but does not concern itself with it.   
Traditionally, courts have applied this doctrine when two corporations are acting as one. However, despite OPRA not having a defined corporate status at the time this suit was filed, there is demonstrable proof that CBOE was controlling OPRA's “business operations and affairs,” permitting the two entities to be fused for jurisdictional purposes.
Id. (emphasis added). This description suggests that CBOE might be the principal and OPRA might be the agent or that OPRA is simply part of CBOE. The facts seem to suggest a separateness that makes the latter a more difficult claim (at least the court is acting that way). An agency relationship, in at least some circumstances, can support indirect personal jurisdiction. See EBG Holdings LLC v. Vredezicht's Gravenhage 109 B.V., No. CIV.A. 3184-VCP, 2008 WL 4057745, at *10 (Del. Ch. Sept. 2, 2008) (stating that there are two "indirect bases under which a parent entity may be subject to jurisdiction through a subsidiary . . . the agency theory and the alter ego theory); but see Daimler AG v. Bauman, 571 U.S. 117, 139, 134 S. Ct. 746, 762, 187 L. Ed. 2d 624 (2014) (stating that due process did not permit the exercise of general jurisdiction over an international parent corporation in California).  
 
It seems to me that using an agency relationship to establish personal jurisdiction in the CBOE case should be somewhat easier than a parent-subsidiary case given the lack of a parent-subsidiary relationship and OPRA's lack of entity status. Instead, establishing the agency relationship should be sufficient. As a reminder, an agency relationship must

include: (1) the agent having the power to act on behalf of the principal with respect to third parties; (2) the agent doing something at the behest of the principal and for his benefit; and (3) the principal having the right to control the conduct of the agent). 

Fasciana v. Elec. Data Sys. Corp., 829 A.2d 160, 169 n.130 (Del. Ch. 2003) (citing J.E. Rhoads & Sons, Inc. v. Ammeraal, Inc., 1988 WL 32012, at *4 (Del. Super. Mar. 30, 1988)). 

Anyway, it appears the court may have been right to assert personal jurisdiction over CBOE, but I don't think the analysis was proper.  And that should matter, too. One day, the same analysis will lead to an incorrect outcome.  
 

April 17, 2018 in Corporate Governance, Corporations, Joshua P. Fershee, LLCs, Partnership | Permalink | Comments (0)

Tuesday, April 3, 2018

Some Courts Actually Get It: LLCs are Not Corporations

Keith Paul Bishop, at the California Corporate and Securities Blog, provides an example of a court that actually pays attention to entity type. As he says, "it is nice to see that some judges do recognize that LLCs are not corporations." It sure is.  In the case he cites, D.R. Mason Constr. Co. v. GBOD, LLC, 2018 U.S. Dist. LEXIS 41236, the court gets a lot right:

[A]lthough Plaintiff's Complaint does separately mention the term "shareholder," [*13]  the Court will not draw the inference that this term means Plaintiff was promised traditional "stock." This inference would not be reasonable in these circumstances because Plaintiff alleges in its Complaint that Defendant GBOD is a limited liability company, not a corporation. (Compl. ¶ 3.) Under California law, LLCs distribute "membership interests," not shares of stock. See Cal. Corp. Code § 17704.07. Consequently, Plaintiff's pleading indicates the financial instrument at issue is not traditional stock. Moreover, courts tasked with deciding whether LLC membership interests constitute a security under the Exchange Act generally evaluate whether such interests are "investment contracts," not "stocks."

It is nice to see a court that acknowledges the different entity types and frustrating that this is not the norm. As Bishop explains: 

Obviously, this case does not stand for the proposition that a membership interest never meets the definition of a "security" under the Exchange Act.  Nor does the case deal with the issue of whether a membership interest constitutes a security under state law.  It does demonstrate that some courts recognize the fact that LLCs are not corporations.

So, I sincerely hope people don't read to much into this. But I will acknowledge that some courts are getting it right.  And thank Bishop for helping further the cause.  

April 3, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (1)

Tuesday, March 20, 2018

At Least Mass. Court Knows LLCs Are Not Partnerships

My goodness. In a recent case, a Massachusetts court deals with issues related to Bling Entertainment, LLC, which is, as you would expect, a limited liability company.  It is NOT a partnership (as the court correctly notes), but ...

Yiming alleges Bling Defendants—as “managers, controlling members, and fellow members of Bling”—owed a duty of utmost good faith and loyalty to Yiming that they breached through their actions of fraud, self-dealing, embezzlement, and mismanagement. D. 16 ¶¶ 70-71. “It is well settled that partners owe each other a fiduciary duty of the utmost good faith and loyalty.” Karter v. Pleasant View Gardens, Inc., No. 16-11080-RWZ, 2017 U.S. Dist. LEXIS 50462, at *13 (D. Mass. Mar. 31, 2017) (quoting Meehan v. Shaughnessy, 404 Mass. 419, 433 (1989)). Bling is not a partnership, however, but is rather a limited liability corporation. D. 16 ¶ 10.
YIMING WANG, Plaintiff, v. XINYI LIU, YUANLONG HUANG, ZHAONAN WANG, BLING ENTERTAINMENT, LLC, SHENGXI TINA TIAN & MT LAW, LLC, Defendants., No. 16-CV-12581, 2018 WL 1320704, at *6 (D. Mass. Mar. 13, 2018).
 
Negative. Well, the first part is right.  Bling is an LLC, not a partnership. But it is not a corporation.  This is where some readers are probably thinking, "there he goes again being overly formalistic."  I am, of course, but here, it at least matters a little. Or could, and that's all that concerns me.  The court continued: 
Nevertheless, Yiming argues the same duty applies, which is correct if Bling were a closely held corporation. See, e.g., Demoulas v. Demoulas Super Mkts., 424 Mass. 501, 528-29 (1997) (explaining that in Massachusetts, close corporations shareholders owe one another the duty of utmost good faith and loyalty); Zimmerman v. Bogoff, 402 Mass. 650, 657 (1988). In Massachusetts, a closely held corporation is “typified by: (1) a small number of stockholders; (2) no ready market for corporate stock; and (3) substantial majority stockholder participation in the management, direction and operations of the corporation.”Demoulas, 424 Mass. at 529 n.34 (quoting Donahue v. Rodd Electrotype Co. of New Eng., Inc., 367 Mass. 578, 586 (1975)).
Id. You know what an LLC doesn't have?  Stockholders.  Or corporate stock. Or any stock for the matter.  The court had more to say: 
In this context, the duty of “utmost good faith and loyalty” applies to majority and minority shareholders alike. See Zimmerman, 402 Mass. at 657-58. Although Yiming did not affirmatively plead that Bling is a close corporation, he did plead that this duty applied to Bling Defendants. D. 16 ¶ 70. Bling Defendants did not contest that they owed a fiduciary duty to Yiming. See D. 26 at 8-9. Accordingly, the Court declines to dismiss this claim.
Id. But we have never established that an LLC owes fiduciary duties to anyone.  In Massachusetts, fiduciary duties apply for LLCs as we expect in all states, and the ability to modify or abrogate those duties are, unlike Delaware, limited (and perhaps very limited).  Nonetheless, it would be worth exploring that and explain the source of the duty.  The court never explores whether such duties apply to LLCs, and apparently the plaintiffs never even asserted that was the case.  
 
A quick look at Massachusetts law suggests the outcome here would likely be the same for LLCs, but still, can we please establish that?  If an issue warrants two paragraphs about partnerships and closely held corporations, one can spend a little time on the entity actually involved in the case.  I really don't feel like that's too much to expect. And yet my blog history very much suggests otherwise.  More work to do.  

March 20, 2018 in Corporations, Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, March 13, 2018

LLCs Are Not Corporations. Be Vigilant. Respect the Entity.

A recent Georgia case highlights a whole host of things that frustrate me with litigation related to limited liability companies (LLCs).  This one features an LLC making incorrect arguments and a court sanctioning that silliness. For example

Baja Properties argues that it is exempted from the rule set out in OCGA § 43-41-17 (b) by a provision in OCGA § 43-41-17 (h). Subsection (h) states, in part:
Nothing in this chapter shall preclude any person from constructing a building or structure on real property owned by such person which is intended upon completion for use or occupancy solely by that person and his or her family, firm, or corporation and its employees, and not for use by the general public and not offered for sale or lease. In so doing, such person may act as his or her own contractor personally providing direct supervision and management of all work not performed by licensed contractors.
Baja Properties, LLC v. Mattera, No. A17A1875, 2018 WL 1247432, at *2 (Ga. Ct. App. Mar. 9, 2018) (emphasis added).  Baja Properties is, naturally, an LLC, not a corporation.  
 
The Goldens, who are the members of the Baja LLC, go on to: 
 
contend that the trial court erred by denying their motion for summary judgment as to negligence claims asserted against them personally. They assert that corporate law insulates them from liability and that, while a member of an limited liability corporation [sic] may be liable for torts in which he individually participated, Ugo Mattera has pointed to no evidence that the Goldens specifically directed a particular negligent act or participated or cooperated therein. We agree with the Goldens that they were entitled to summary judgment on Ugo Mattera's negligence claim.
An officer of a corporation who takes part in the commission of a tort by the corporation is personally liable therefor, and an officer of a corporation who takes no part in the commission of a tort committed by the corporation is not personally liable unless he specifically directed the particular act to be done or participated or cooperated therein.
Jennings v. Smith, 226 Ga. App. 765, 766 (1), 487 S.E.2d 362 (1997) (citation omitted). Thus, if Baja Properties was negligent in constructing the house, an officer of the corporation could be held personally liable for the negligent construction if he specifically directed the manner in which the house was constructed or participated or cooperated in its negligent construction. See Cherry v. Ward, 204 Ga. App. 833, 834 (1) (a), 420 S.E.2d 763 (1992).
There is NO corporation involved in the dispute! 
 
It may be that Georgia law applies provides that "corporation" includes all entity types and that "officers" includes any person with some level of entity control.  I don't know.  And I don't need to look it up.  But the lawyers in the case and the court should because without explaining that is the case, the opinion is applying law that is not clearly relevant.  
 
It's time for courts to get this right, and it is time for lawyers to start noticing their mistakes and those of opposing counsel. Every time you reference an entity, look to see if you have it right.  When you see "corporation" make sure there is a corporation involved.  When you see LLC think "company," and make sure the term are consistent.  It requires vigilance,  but we can do this.  We just have to want to.  Let's do this! 

March 13, 2018 in Corporations, Joshua P. Fershee, Lawyering, LLCs | Permalink | Comments (0)

Tuesday, February 27, 2018

State Laws Committed to Confusing Business Entities, Courts Happy to Help

Another unforced error on the LLC front, again with a limited liability company being called a corporation.   

This time, it is a recent Texas appellate court case where the court states: “In its pleadings, AMV contends that it is presently a limited liability corporation known as ArcelorMittal Vinton LLC.”  Wallace v. ArcelorMittal Vinton, Inc., 536 S.W.3d 19, 21 n.1 (Tex. App. 2016), review denied (Mar. 31, 2017).  As is so often the case, that is not accurate. 

In its brief, the entity AMV simply stated, that it was a Defendant-Appellee as named in the suit, ArcelorMittal Vinton, Inc., was “n/k/a [now known as] ArcelorMittal Vinton LLC.” Carla WALLACE, Plaintiff-Appellant, v. ARCELORMITTAL VINTON, INC., Defendant-Appellee., 2015 WL 7687420 (Tex.App.-El Paso), 1.  AMV’s counsel never said it was a corporation.  The court did that on its own.

Sigh.  Even in Texas, LLCs are not corporations. I swear!  I looked at the statute.

And yet, a close look at the statute shows why this gets confusing for some people.  The Texas statute provides specific cross-references to certain business provisions (emphasis added):

Sec. 101.002.  APPLICABILITY OF OTHER LAWS. 

(a)  Subject to Section 101.114, Sections 21.223, 21.224, 21.225, and 21.226 apply to a limited liability company and the company's members, owners, assignees, affiliates, and subscribers.

(b)  For purposes of the application of Subsection (a):

(1)  a reference to "shares" includes "membership interests";

(2)  a reference to "holder," "owner," or "shareholder" includes a "member" and an "assignee";

(3)  a reference to "corporation" or "corporate" includes a "limited liability company";

(4)  a reference to "directors" includes "managers" of a manager-managed limited liability company and "members" of a member-managed limited liability company;

(5)  a reference to "bylaws" includes "company agreement"; and

(6)  the reference to "Sections 21.157-21.162" in Section 21.223(a)(1) refers to the provisions of Subchapter D of this chapter.

Added by Acts 2011, 82nd Leg., R.S., Ch. 25 (S.B. 323), Sec. 1, eff. September 1, 2011.

As Ham Porter would say, "You're killing me, Smalls." 

February 27, 2018 in Corporations, Joshua P. Fershee, Legislation, LLCs | Permalink | Comments (0)

Tuesday, February 13, 2018

These Reasons Social Benefit Entities Hurt Business and Philanthropy Will Blow Your Mind

I suspect click-bait headline tactics don't work for business law topics, but I guess now we will see. This post is really just to announce that I have a new paper out in Transactions: The Tennessee Journal of Business Law related to our First Annual (I hope) Business Law Prof Blog Conference co-blogger Joan Heminway discussed here. The paper, The End of Responsible Growth and Governance?: The Risks Posed by Social Enterprise Enabling Statutes and the Demise of Director Primacy, is now available here.

To be clear, my argument is not that I don't like social enterprise. My argument is that as well-intentioned as social enterprise entity types are, they are not likely to facilitate social enterprise, and they may actually get in the way of social-enterprise goals.  I have been blogging about this specifically since at least 2014 (and more generally before that), and last year I made this very argument on a much smaller scale.  Anyway, I hope you'll forgive the self-promotion and give the paper a look.  Here's the abstract: 

Social benefit entities, such as benefit corporations and low-profit limited liability companies (or L3Cs) were designed to support and encourage socially responsible business. Unfortunately, instead of helping, the emergence of social enterprise enabling statutes and the demise of director primacy run the risk of derailing large-scale socially responsible business decisions. This could have the parallel impacts of limiting business leader creativity and risk taking. In addition to reducing socially responsible business activities, this could also serve to limit economic growth. Now that many states have alternative social enterprise entity structures, there is an increased risk that traditional entities will be viewed (by both courts and directors) as pure profit vehicles, eliminating directors’ ability to make choices with the public benefit in mind, even where the public benefit is also good for business (at least in the long term). Narrowing directors’ decision making in this way limits the options for innovation, building goodwill, and maintaining an engaged workforce, all to the detriment of employees, society, and, yes, shareholders.

The potential harm from social benefit entities and eroding director primacy is not inevitable, and the challenges are not insurmountable. This essay is designed to highlight and explain these risks with the hope that identifying and explaining the risks will help courts avoid them. This essay first discusses the role and purpose of limited liability entities and explains the foundational concept of director primacy and the risks associated with eroding that norm. Next, the essay describes the emergence of social benefit entities and describes how the mere existence of such entities can serve to further erode director primacy and limit business leader discretion, leading to lost social benefit and reduced profit making. Finally, the essay makes a recommendation about how courts can help avoid these harms.

February 13, 2018 in Business Associations, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Joshua P. Fershee, Law and Economics, Lawyering, Legislation, LLCs, Management, Research/Scholarhip, Shareholders, Social Enterprise, Unincorporated Entities | Permalink | Comments (0)

Tuesday, February 6, 2018

LLCs Still Not Corporations, But What Are Managers?

A brand new Arizona case continues the trend of incorrectly discussing limited liability companies (LLCs) as limited liability corporations, but it does allow for an interesting look at how entities are sometimes treated (or not) in laws and regulations. Here’s the opening paragraph of the case:

Noah Sensibar appeals from the superior court's ruling affirming the Tucson City Court's finding that he had violated the Tucson City Code (TCC). He argues that the municipal ordinance in question is facially invalid because it conflicts with a state statute shielding members or agents of a limited liability corporation from personal liability. 

City of Tucson v. Noah Sensibar, No. 2 CA-CV 2017-0087, 2018 WL 703319 (Ariz. Ct. App. Feb. 5, 2018).

About three years ago, the City of Tucson alleged that Sensibar, as “the managing member and statutory agent of Blue Jay Real Estate LLC, an Arizona corporation, was responsible for building code violations.” Id. (emphasis added). Notwithstanding the incorrect characterization of the entity type, it looks like the court at least reasonable (though not clearly correct) to hold Sensibar individually liable.  Here’s why:

The Tuscon City Code states that “Any owner or responsible party who commits, causes, permits, facilitates or aids or abets any violation of any provision of this chapter . . . is responsible for a civil infraction and is subject to a civil sanction of not less than one hundred dollars ($100.00) nor more than two thousand five hundred dollars ($2,500.00).” Tucson Code Sec. 16-48(2) (Violations and penalties).

The Code Definitions in Sec. 16-3 provide the following:

Owner means, as applied to a building, structure, or land, any part owner, joint owner, tenant in common, joint tenant or tenant by the entirety of the whole or a part of such building, structure or land.

. . . .

Person means any natural person, firm, partnership, association, corporation, company or organization of any kind, but not the federal government, state, county, city or political subdivision of the state.

. . .  .

Responsible party means an occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land; and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.

As such, the Code seems to contemplate holding both entities and individuals liable. Still, Sensibar had an argument. The use of the term “manager” here causes some potential confusion because one can be a manager of an LLC, while the LLC might serve as the manager of the property. Thus, it could be that only the LLC should be liable.  Another plausible reading, though, is that “manager” meant the natural person doing the managing as is common in property situations.  Manager, like occupant, lessee, and lessor, is not defined in the Code, so it would seem the intended source of the definitions should be from a property perspective, not an entity perspective.

Similarly, the Code could mean a natural “person having control over a structure” can be liable.  If that’s the case, and the court seems to have gone down this road, the argument would be that Sensibar was being held liable directly for his role as manager or person in control of the property and not vicariously for violations of the LLC.  Given that occupants, lessors, and lessees, among others, can be held liable, it does appear that the Code could have intended to impose liability directly on multiple parties, including both individuals and entities. This would be sensible, in many contexts, though it would also be sensible to say explicitly, especially given that the term “person” clearly includes entities. 

A simple improvement might be to update the definition of “responsible party,” as follows:

Responsible party means an, whether as an individual or entity, any occupant, lessor, lessee, manager, licensee, or person having control over a structure or parcel of land and in any case where the demolition of a structure is proposed as a means of abatement, any lienholder whose lien is recorded in the official records of the Pima County Recorder's Office.

That would, at least, be consistent with the decision. Because if the court is holding Sensibar liable for merely being the manager of the LLC, and not as the manager of the property, the case is wrongly decided.  Too bad the notice of appeal was not timely filed – maybe we could have found out. 

UPDATE: Based on a good comment from Tom N., I did a little more research. As of an LLC filing in 2009, Noah Sensibar owned at least a 20% interest. (It may be 50% because there were two listed members, but it was at least 20%.) As such, this suggests that the LLC does not have funding to cover the fines or that express indemnification is lacking and the other member(s) won't agree to cover the costs from LLC funds. 

I will also note that a 2016 decision denying Sensibar's appeal stated, "The court also heard evidence that Sensibar, the managing partner of the LLC, was 'the person in charge' of the property."  City of Tucson v. Sensibar, No. 2 CA-CV 2016-0051, 2016 WL 5899737, at *1 (Ariz. Ct. App. Oct. 11, 2016). Seriously? He's an LLC manager.  That's all.  LLCs are not corporations OR partnerships. THEY ARE LLCS! 

February 6, 2018 in Corporations, Joshua P. Fershee, LLCs, Management | Permalink | Comments (3)

Tuesday, January 23, 2018

The Value of Careful Language in Assessing Businesses: A New Paper from Shu-Yi Oei

As regular readers know, I am particular about language and meaning, especially in the business-entity space related to limited liability companies (LLCs).  I think because of that, I was drawn to a new paper from Shu-Yi Oei (Boston College), The Trouble with Gig Talk: Choice of Narrative and the Worker Classification Fights, 81 Law & Contemp. Probs. ___ (2018).  The abstract: 

The term “sharing economy” is flawed, but are the alternatives any better? This Essay evaluates the uses of competing narratives to describe the business model employed by firms like Uber, Lyft, TaskRabbit, and GrubHub. It argues that while the term “sharing economy” may be a misnomer, terms such as “gig economy,” “1099 economy,” “peer-to- peer economy” or “platform economy” are just as problematic, possibly even more so. These latter terms are more effective in exploiting existing legal rules and ambiguities to generate desired regulatory outcomes, in particular the classification of workers as independent contractors. This is because they are plausible, speak to important regulatory grey areas, and find support in existing laws and ambiguities. They can therefore be deployed to tilt outcomes in directions desired by firms in this sector.

This Essay’s analysis suggests that narratives that are at least somewhat supportable under existing law may be potent in underappreciated ways. In contrast, clearly erroneous claims may sometimes turn out to be hyperbolic yet harmless. Thus, in evaluating the role of narrative in affecting regulatory outcomes, it is not only the obviously wrong framings that should concern us but also the less obviously wrong ones.

There are several interesting points in the piece, and find this part of the conclusion especially compelling: 

I cannot prove that the deployment of gig characterization is the only reason certain legal treatments and outcomes (such as independent contractor classification for workers) seem to be sticking, at least for the moment. My narrower point is that while gig and related characterizations appear innocuous and accurate relative to the sharing characterization, this set of descriptors may actually be doing more work in terms of advancing a desired regulatory outcome. The reasons they are able to do more work are that (1) gig characterization speaks to an important and material legal ambiguity, (2) the gig characterization is plausibly accurate, even if deeply contested, and (3) the proponents of gig characterization have been able to use procedural and other tools to shore up gig characterization and defeat its competitors. These observations may be generalized beyond the gig context: While the temptation is to focus on narratives and characterizations that are clearly wrong, this Essay suggests that we should also pay attention to more subtle narratives that are less clearly wrong, because such narratives may be doing more work by virtue of being “almost right.”

This last point is one that resonates with me on the LLC front, where people insist on comparing or analogizing LLCs to corporations.  There are times when such a comparison or analogy is "almost right," and it is in these circumstances that the perils of careless language can cause the most trouble because the same comparison or analogy can get made later when doing so is clearly wrong. 

January 23, 2018 in Employment Law, Jobs, Joshua P. Fershee, LLCs, Research/Scholarhip | Permalink | Comments (0)

Tuesday, January 16, 2018

A Look Back on LLCs: Ribstein Had It Right

I have had reason to look back on some foundational scholarship in LLCs recently, and one article really stood out for me. Larry Ribstein's The Deregulation of Limited Liability and the Death of Partnership. It's another snow day with kids, so I haven't had a lot of time to delve into the thoughts this raised for me, so I'll let Larry's words speak for themselves.  Keep in mind this is from 1992:  

The popularity of the partnership form of business1 indicates that an organizational form in which some owners can be held personally liable for the firm's debts is efficient for many firms. This could be because, for many firms, individual liability reduces the firm's credit costs more than it increases owners' risk-bearing, monitoring, or other costs. This Article, however, suggests an alternative explanation: the partnership form is attractive for many firms on the margin only because of the regulatory costs of limited liability, including double corporate taxation and limitations on organizational form.

Recent developments provide a valuable opportunity to test this explanation. Many lawyers and legislators have become interested in a new limited liability business form, the "limited liability company" (LLC), that lets firms adopt limited liability without many of the tax and other costs that once attended limited liability. If this Article's regulatory explanation of partnership is correct, the partnership form of business will greatly diminish in importance. After a transitional period, partnership will survive, if at all, as a residual form for firms that have no customized agreement.

January 16, 2018 in Joshua P. Fershee, LLCs | Permalink | Comments (0)

Tuesday, December 26, 2017

Feeling Like Charlie Brown at Christmas: More LLCs as a Corporations

No one will  be shocked that my last post of the year is about a court referring to a limited liability company (LLC) as a "limited liability corporation."  It's wrong to do so, and it's my thing to point out when it happens.  This case is especially striking (and perhaps upsetting) because of the context of the reference.  In this 2015 case that just showed up on Westlaw (or at least, in my alerts), "Plaintiff argues that because Defendants are all limited liability corporations they must identify and prove the citizenship of their various members and that they have failed to do so." Skywark v. Healthbridge Mgmt., LLC, No. 15-00058-BJR, 2015 WL 13621058, at *1 (W.D. Pa. July 22, 2015).  They mean LLCs, not corporations.  Okay, so far this is a pretty typical mistake.  But wait! 

In this case, the defendants did not allege the citizenship of the members of the defendants' LLCs in their initial Notice of Removal, so the plaintiffs claimed that a filed  amendment was more than “technically defective.” In claiming the amendment was "minor, the defendants rely cited  O'Boyle v. Braverman, No. 08-553, 2008 U.S. Dist. LEXIS 62180 (D.N.J. Aug. 12, 2008), which found that when a party mistakenly alleged the citizenship of an LLC as a corporation, the party could still amend the allegations to properly allege the citizenship of its LLC members. 2008 U.S. Dist. LEXIS 62180, at *7. O'Boyle, like the present court on Skywark found the proposed amendment to be technical in nature. 
 
On the one hand, this is probably correct in terms of justice seeking. On the other hand, if a court were to find that such a mistake was more than minor, perhaps lawyers would get this right in the first place, which they should do.
 
In assessing the situation, the court states: 
Plaintiff is correct that the citizenship of a limited liability corporation is determined by the citizenship of its members. Zambelli Fireworks Mfg. Co. v. Wood, 592 F.3d 412, 420 (3d Cir. 2010). Defendants have sought to fix any errors that may affect diversity jurisdiction by filing a declaration that identifies the members of their limited liability corporations and allegations of their citizenship. Plaintiff raises several arguments in response to Defendants' declaration and alleges that it is insufficient to prove diversity of citizenship.
Skywark v. Healthbridge Mgmt., LLC, No. 15-00058-BJR, 2015 WL 13621058, at *3 (W.D. Pa. July 22, 2015) (emphasis added). 
 
To quote Charlie Brown, AAUGH! 
 
Didn't the court just establish that the entire issue was the distinction between corporations and LLCs?  Sigh. The mistakes are frustrating, but to add to that such a clear lack of internal consistency when the issue has been identified is darn right irritating.  
 
As I often do, I feel I must acknowledge that we're all human and we make mistakes.  Goodness knows I have made (and continue to make) more than my fair share.  I don't mean to say anyone is a bad person for making such mistakes.  But I sure would appreciate it if they were a lot less common, too.  

If you celebrated, I hope you had a great Christmas. We sure did. Wishing you and yours peace, warmth, and love in this holiday season.  

December 26, 2017 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Tuesday, December 19, 2017

Washington Marijuana Law Has Entity Type Quirks (And LLCs Are Still Not Corporations)

A recent case in Washington state introduced me to some interesting facets of Washington's recreational marijuana law.  The case came to my attention because it is part of my daily search for cases (incorrectly) referring to limited liability companies (LLCs) as "limited liability corporations."  The case opens: 

In 2012, Washington voters approved Initiative Measure 502. LAWS OF 2013, ch. 3, codified as part of chapter 69.50 RCW. Initiative 502 legalizes the possession and sale of marijuana and creates a system for the distribution and sale of recreational marijuana. Under RCW 69.50.325(3)(a), a retail marijuana license shall be issued only in the name of the applicant. No retail marijuana license shall be issued to a limited liability corporation unless all members are qualified to obtain a license. RCW 69.50.331(1)(b)(iii). The true party of interest of a limited liability company is “[a]ll members and their spouses.”1 Under RCW 69.50.331(1)(a), the Washington State Liquor and Cannabis Board (WSLCB) considers prior criminal conduct of the applicant.2

LIBBY HAINES-MARCHEL & ROCK ISLAND CHRONICS, LLC, Dba CHRONICS, Appellants, v. WASHINGTON STATE LIQUOR & CANNABIS BOARD, an Agency of the State of Washington, Respondent., No. 75669-9-I, 2017 WL 6427358, at *1 (Wash. Ct. App. Dec. 18, 2017) (emphasis added).  
 
The reference to a limited liability corporation appears simply to be a misstatement, as the statute properly references limited liability companies as distinct from corporations. The legal regime does, though, have some interesting requirements from an entity law perspective. First, the law provides:
 
(b) No license of any kind may be issued to:
 
. . . .
 
(iii) A partnership, employee cooperative, association, nonprofit corporation, or corporation unless formed under the laws of this state, and unless all of the members thereof are qualified to obtain a license as provided in this section;
Wash. Rev. Code § 69.50.331 (b)(iii) (West). It makes some sense to restrict the business to in-state entities given the licensing restrictions that state has, although it is not clear to me that the state could not engage in the same level of oversight if an entity were, say, a California corporation or a West Virginia LLC. 
 
The state's licensing requirements, as stated in Washington Administrative Code 314-55-035 ("What persons or entities have to qualify for a marijuana license?") provide: "A marijuana license must be issued in the name(s) of the true party(ies) of interest." The code then lists what it means to be a  “true party of interest” for a variety of entities. 
True party of interest: Persons to be qualified
 
Sole proprietorship: Sole proprietor and spouse.
 
General partnership: All partners and spouses.
 
Limited partnership, limited liability partnership, or limited liability limited partnership: All general partners and their spouses and all limited partners and spouses.
 
Limited liability company: All members and their spouses and all managers and their spouses.
 
Privately held corporation: All corporate officers (or persons with equivalent title) and their spouses and all stockholders and their spouses.
 
Publicly held corporation: All corporate officers (or persons with equivalent title) and their spouses and all stockholders and their spouses.
Multilevel ownership structures: All persons and entities that make up the ownership structure (and their spouses).
Wash. Admin. Code 314-55-035. 

This is a pretty comprehensive list, but I note that the corporation requirements are missing some noticeable parties: directors. The code states, for both privately and publicly held corporations, that all "corporate officers (or persons with equivalent title)" and their spouses and all stockholders and their spouses must be qualified. Directors are not "equivalent" in title to officers. Officers, under Washington law, are described as follows:
 
(1) A corporation has the officers described in its bylaws or appointed by the board of directors in accordance with the bylaws.
(2) A duly appointed officer may appoint one or more officers or assistant officers if authorized by the bylaws or the board of directors.
(3) The bylaws or the board of directors shall delegate to one of the officers responsibility for preparing minutes of the directors' and shareholders' meetings and for authenticating records of the corporation.
(4) The same individual may simultaneously hold more than one office in a corporation.
Wash. Rev. Code § 23B.08.400. Directors have a different role. The statute provides:

Requirement for and duties of board of directors.

(1) Each corporation must have a board of directors, except that a corporation may dispense with or limit the authority of its board of directors by describing in its articles of incorporation, or in a shareholders' agreement authorized by RCW 23B.07.320, who will perform some or all of the duties of the board of directors.
(2) Subject to any limitation set forth in this title, the articles of incorporation, or a shareholders' agreement authorized by RCW 23B.07.320:
(a) All corporate powers shall be exercised by or under the authority of the corporation's board of directors; and
(b) The business and affairs of the corporation shall be managed under the direction of its board of directors, which shall have exclusive authority as to substantive decisions concerning management of the corporation's business.
Wash. Rev. Code § RCW 23B.08.010.
 
The Code, then, seems to provide that directors are, as a group, exempt from the spousal connection. The code separately provides:
 
(4) Persons who exercise control of business - The WSLCB will conduct an investigation of any person or entity who exercises any control over the applicant's business operations. This may include both a financial investigation and/or a criminal history background. 
Wash. Admin. Code 314-55-035.  This provision would clearly include directors, but also clearly excludes spouses. That distinction is fine, I suppose, but it is not at all clear to me why one would want to treat directors differently than LLC managers (and their spouses).  To the extent there is concern about spousal influence--to the level that the state would want to require qualification of spouses of shareholders in a publicly held entity--leaving this gap open for all corporate directors seems to be a rather big miss (or a deliberate exception).  Either way, it's an interesting quirk of an interesting new statute.   
 
 
 
 
 
 

December 19, 2017 in Corporations, Current Affairs, Entrepreneurship, Family Business, Joshua P. Fershee, Legislation, Licensing, LLCs, Management, Nonprofits, Partnership, Shareholders, Unincorporated Entities | Permalink | Comments (0)