Monday, March 3, 2014
Business law has a broad overlap with tax, accounting, and finance. Just how much belongs in a law school course is often a challenge to determine. We all have different comfort levels and views on the issue, but incorporating some level of financial literacy is essential. Fortunately, a more detailed discussion of what to include and how to include it is forthcoming. Here's the call:
Call For Papers
AALS Section on Agency, Partnerships LLCs, and Unincorporated Associations
Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax
2015 AALS Annual Meeting Washington, DC
Business planners and transactional lawyers know just how much the “number-crunching” disciplines overlap with business law. Even when the law does not require unincorporated business associations and closely held corporations to adopt generally accepted accounting principles, lawyers frequently deal with tax implications in choice of entity, the allocation of ownership interests, and the myriad other planning and dispute resolution circumstances in which accounting comes into play. In practice, unincorporated business association law (as contrasted with corporate law) has tended to be the domain of lawyers with tax and accounting orientation. Yet many law professors still struggle with the reality that their students (and sometimes the professors themselves) are not “numerate” enough to make these important connections. While recognizing the importance of numeracy, the basic course cannot in itself be devoted wholly to primers in accounting, tax, and finance.
The Executive Committee will devote the 2015 annual Section meeting in Washington to the critically important, but much-neglected, topic of effectively incorporating accounting, tax, and finance into courses in the law of business associations. In addition to featuring several invited speakers, we seek speakers (and papers) to address this subject. Within the broad topic, we seek papers dealing with any aspect of incorporating accounting, tax, and finance into the pedagogy of basic or advanced business law courses.
Any full-time faculty member of an AALS member school who has written an unpublished paper, is working on a paper, or who is interested in writing a paper in this area is invited to submit a 1 or 2-page proposal by May 1, 2014 (preferably by April 15, 2014). The Executive Committee will review all submissions and select two papers by May 15, 2014. A very polished draft must be submitted by November 1, 2014. The Executive Committee is exploring publication possibilities, but no commitment on that has been made. All submissions and inquiries should be directed to Jeff Lipshaw, Chair.
Jeffrey M. Lipshaw
Suffolk University Law School
Click here for contact info
Thursday, February 13, 2014
Last night I attended a forum organized by the Ladies Empowerment and Action Program (LEAP). The panel featured female entrepreneurs from the culinary industry. Some were chefs, some owned restarurnts, some sold products, and others blogged and educated the public, but their stories were remarkably similar. They told the audience of business students and budding entrepreneurs that they generally didn’t like partners, were wary of investors because they tended to exert too much control over their vision, and that they wished that they had better financial advisors who cared about them and understood their business.
One panelist, who had received $500,000 in capital from an investor, indicated that she was glad that she had been advised to enter into her contract as though she may end up in litigation. As a former litigator who now teaches both civil procedure and business associations, I both agree and disagree with that advice. As a naïve newbie litigator in a large New York firm, I used to joke with the corporate associates that the only reason I needed to understand how their deals were done was so that I could understand how to defend them went they fell apart and the litigation ensued. Now that I am older and wiser I try to focus my students on considering an exit strategy of course, but also on how to ask the right questions so that the parties never have to consider litigation.
Many of my students will likely advise small and midsized businesses as well as large corporations and that’s part of the reason that I stress the importance of a baseline level of understanding of finance and accounting. But how will we prepare them to counsel entrepreneurs who may not see the value in partners or understand how startup capital works? Perhaps that’s not the job of a lawyer but if the issue comes up, will our graduates know how to provide balanced arguments for their clients? How will we prepare our students to add value so that accountants don’t provide the (potentially wrong) legal advice to these entrepreneurs or so that their clients don’t just turn to LegalZoom, which reportedly sets up 20% of the LLCs in California? In essence, how do we teach our students to think like business people and lawyers?
Although clinics where students advise entrepreneurs or small businesses are expensive, and skills-based transactions courses aren’t as plentiful as they should be in law schools, these are good starts. I currently try to integrate drafting, negotiation and role-play into my classes when appropriate, but would welcome additional ideas that work.
Wednesday, February 12, 2014
The Grand Forks City Council Service/Safety Committee recommended Tuesday that the city deny a liquor license transfer for Rumors bar in Grand Forks.
The committee originally recommended the full council deny the license earlier this month because of the previous felony charges against Blake Bond, Jamestown, N.D., one of the partners in Sin City LLC, the applicant of the license.
The council then sent the issue back to the committee, but when representatives from Sin City failed to show up at Tuesday’s meeting, the committee voted to recommend denying the license again. . . . .
A quick note for the reporter, who wouldn't necessarily know this: LLCs don't have partners. They have members. So, the more accurate statement would be that Mr. Bond "is one of the members of Sin City, LLC." The North Dakota Limited Liability Company Act definitions provision explains that:
"Member" means a person, with or without voting rights, reflected in the required
records of a limited liability company as the owner of a membership interest in the
limited liability company.
As for the LLC members, here's a hint: it's probably best not to name your LLC "Sin City, LLC" when you want approval from the council's Safety Committee and need approval of the full council to get the liquor license you need for your bar. This is likely to be even less of a good idea when one of your LLC members apparently has prior felony convictions. It's also probably best to show up for the council meeting to make your case, too, if the council is willing to listen.
In this circumstance, it is entirely possible that Sin City, LLC, was formed (about a month ago) without the services of an attorney. I rather hope so. Although as lawyers we are not necessarily required to opine on entity names or other business decisions, sometimes being a good counselor requires suggesting to one's client the potential implications of such decisions. Here, for example, good counsel might have suggested that other naming options might be preferable.
Clients won't always listen, of course, but it's worth a shot (no pun intended).
Tuesday, February 4, 2014
I understand that I may be one of the few people who seems to actually care about such a thing, but it seems to me courts really should be careful about their descriptions of limited liability entities. I have written about this before (here, here, and here), but it continues to frustrate me.
One of the things that got me thinking about this again (but let's be honest, it seems I am always thinking about this) is a post over at The Conglomerate. There, Christine Hurt (who, to be clear, is a lot smarter and more knowledgeable than I) discusses the Illinois governor's interest in generating more jobs by shifting to "the $39 limited liability company." In her post, she makes a couple references to incorporation in the context of LLC formation. But, in fairness, that's a blog post, and I can't claim that I have always been as precise as I should be in my blog writing, either.
Courts, however, should be more careful. The U.S. Court of Appeals for the Ninth Circuit, for example, loves to call limited liability companies "limited liability corporations" in their cases. Take, for example, CarePartners, LLC v. Lashway, 545 F.3d 867 (9th Cir. 2008), the caption of which is: "CAREPARTNERS LLC, limited liability corporation under the Laws of the State of Washington doing business as Alderwood Assisted Living . . . ." That is wrong. Washington LLC law provides that an LLC is a limited liability company. Even more significant, Washington LLC law provides specifically that an LLC's name "[m]ust not contain any of the words or phrases: . . . 'corporation,' 'incorporated,' or the abbreviations 'corp.,' 'ltd.," or 'inc.,' . . . ." Wash. Stat. 25.15.010(d) (2014).
Tuesday, January 28, 2014
Last week, after a post here, I received a call from a Charleston (WV) reporter seeking some background on veil piercing as it relates to the company (Freedom Industries) linked to a chemical spill that left 300,000 people without clean drinking water. That conversation led to a rather long article, as newspapers go, on the concepts of veil piercing in West Virginia. The article did a rather good job of relaying the basics (with a few nits), and I hope it at least informs people a little bit about the process to follow on that front.
The article does reflect a little confusion over what I was trying to communicate about personal liability for the president of Freedom Industries. West Virginia law provides: (b)“Unless otherwise provided in the articles of incorporation, a shareholder of a corporation is not personally liable for the acts or debts of the corporation except that he may become personally liable by reason of his own acts or conduct.” W. Va. Code, § 31D-6-622 (emphasis added). I was trying (and I take responsibility for any lack of clarity) to reflect my view that it was conceptually possible that the company president could be found personally liable for the harm if there were activities undertaken in his personal (and not corporate) capacity, but that based on the facts currently available, that seemed unlikely to me.
West Virginia courts have long reinforced the separate nature of the corporation and the shareholder. Consistent with prevailing views, the state recognizes each corporation as a distinct, individual entity that is separate and distinct from other corporations and from their respective shareholders. “The law presumes that two separately incorporated businesses are separate entities and that corporations are separate from their shareholders.” S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 788, 320 S.E.2d 515, 523 (1984). In a proper case, courts will disregard the entity form—pierce the limited liability veil—where necessary to prevent injustice; however, courts take seriously this separate nature of corporations and shareholders, and “the corporate form will never be disregarded lightly.” Laya v. Erin Homes, Inc., 177 W. Va. 343, 347, 352 S.E.2d 93, 97 (1986) (quoting S. States Coop., Inc. v. Dailey, 167 W.Va. 920, 930, 280 S.E.2d 821, 827 (1981)); see also S. Elec. Supply Co. v. Raleigh County Nat. Bank., 173 W. Va. 780, 787, 320 S.E.2d 515, 522 (1984) (“The [veil piercing] doctrine is complicated, and it is applied gingerly.”). Thus, while veil piercing is not impossible, it is a significant hurdle.
I mentioned in a prior post that I thought enterprise liability (essentially collapsing various limited liability entities into one) was a more likely possible remedy for unpaid losses, though again it is by no means a given. Much more information about how the various entities involved in the whole situation operated and interacted with one another will need to be discovered before the real likelihood of such an outcome can be reasonably predicted.
Regardless of how that turns out, though, there is another issue worth noting, and that is the lack of government oversight. The classic case on veil piercing and enterprise liability, Walkovszky v. Carlton, explained that complaints about the inadequacy of corporate insurance and others assets are not a problem for the courts to solve. That court explained:
if the insurance coverage required by statute “is inadequate for the protection of the public, the remedy lies not with the courts but with the Legislature.” It may very well be sound policy to require that certain corporations must take out liability insurance which will afford adequate compensation to their potential tort victims. However, the responsibility for imposing conditions on the privilege of incorporation has been committed by the Constitution to the Legislature (N. Y. Const., art. X, §1) and it may not be fairly implied, from any statute, that the Legislature intended, without the slightest discussion or debate, to require of . . . [such] corporations that they carry . . . liability insurance over and above that mandated by [law].” Walkovszky v. Carlton, 18 N.Y.2d 414, 419-420(N.Y. 1966) (citations omitted).
I don’t know if a court will pierce the veil or apply an enterprise liability theory to expand the available assets for victims of the chemical spill. There is a lot to be determined before we’ll see an outcome. Still, it needs to be clear that where a company acts within the parameters of its grant of limited liability, seeking additional compensation from others after the fact is improper. (Again, whether the companies involved acted appropriately is an open question.)
If we’re uncomfortable with the cap on recovery for harms such as this, then randomly, haphazardly, and retroactively eliminating a state grant of limited liability protection is not the proper response. There are other ways to help protect the public, such as proper permitting, oversight and enforcement at chemical storage sites, and increased insurance and/or bonding requirements. State and federal legislatures should be discussing such options right now, and at least some discussions are occuring. It is, though, disheartening to read that even while discussing stronger standards for chemical storage tank operators, the West Virginia Senate Natural Resources Committee also voted to reduce water quality standards for aluminum in state water.
Saturday, January 25, 2014
Pearce & Hopkins on “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization”
John A. Pearce II & Jamie Patrick Hopkins have posted “Regulation of L3Cs for Social Entrepreneurship: A Prerequisite to Increased Utilization” on SSRN. Here is the abstract:
One new business model is the low-profit, limited liability company (L3C). The L3C was first introduced in Vermont in 2008 and has since been adopted by several other states. The L3C is designed to serve the for-profit and nonprofit needs of social enterprise within one organization. As such, it has been referred to as a "[f]or-profit with [a] nonprofit soul."
In an effort to efficiently introduce the L3C business model, states have designed L3C laws under existing LLC regulations. The flexibility provided by LLC laws allows an L3C to claim a primary social mission and avail itself of unique financing tools such as tranche investing. Specifically, the L3C statutes are devised to attract the program related investments (PRIs) of charitable foundations. Despite these successes, adoption of the L3C form has been slower than proponents expected.
A similar business initiative has found great success in the United Kingdom (U.K.), where numerous proponents supported legislation designed to create hybrid business models that would promote social entrepreneurship. As a result, the U.K. created the Community Interest Company (CIC) in 2006, allowing more than 4,500 companies to register as CICs that offer a double bottom line (or dual benefit) to investors.
While CICs and L3Cs were created with the same double bottom line in mind, CICs face strict government regulations that provide investors with additional protections. These regulations have indirectly contributed to the success of many CICs by increasing investor confidence in the success of these businesses. In the United States, the flexibility of LLC statutes may provide L3Cs with unique funding options, but the lack of government regulation leaves investor outcomes uncertain and inhibits L3Cs from being a better-utilized business model for social entrepreneurship.
Tuesday, January 21, 2014
Freedom Industries -- the company apparently responsible for contaminating the Elk River (and, along with it, 300,000 West Virginia residents’ drinking water) – has filed for Chapter 11 bankruptcy. The company wasted little time filing for reorganization, and the process already has some people on edge.
From a public relations perspective, this kind of cases does not serve the concepts of Business Organizations especially well. The use of limited liability vehicles is sanctioned by law, and such use has been credited with creating all kinds of opportunities for growth through pooled resources that would not otherwise occur without the grant of limited liability. I happen to think that’s true. (See, e.g., Corporate Moral Agency and the Role of the Corporation in Society, p. 176, By David Ronnegard)
Still, one of the issues is that figuring out who owned Freedom Industries took some sleuthing (reporter's findings here). It appears the structure is as follows:
Freedom Industries’ Chapter 11 documents list its sole owner as Chemstream Holdings, which is owned by J. Clifford Forrest. Forrest also owned the Pennsylvania company, Rosebud Mining, which is located at the same address Chemstream Holdings lists for its headquarters. The
Reports note that the chapter 11 filing also states that two entities have offered to lend up to $5 million to fund Freedom Industries’ reorganization. The two entities are VF Funding and Mountaineer Funding, the latter of which is a West Virginia LLC formed by its sole owner: J. Clifford Forrest.
The idea that the owner of the company that owns the company that owned the chemicals that harmed the water in West Virginia is now seeking to create a new company to loan money to the company that owned the chemicals is note sitting very well with many of those harmed by the chemical leak.
Some of those harmed by the chemical spill are objecting to the proposed reorganization structure. As reported here, West Virginia American Water (WVAW), the utility providing the tainted water (and the subject of it own lawsuits because of it), claims the water company will be “the largest creditor by far in this bankruptcy case.” As such, WVAW has asked (PDF here) the bankruptcy judge to slow down the reorganization so that the utility and other creditors an opportunity get a better sense of the ownership structure and how the creditors (and possible creditors) will be treated.
This case probably looks even worse because it keeps coming back to a single person, and not a group of investors. Again, one company – Chemstream Holdings, Inc. is owned by one person -- J. Clifford Forrest, who then is the sole owner of a company seeking to loan money to the embattled company.
Keeping with that theme, after a little sleuthing of my own, I found that although the initial reports were of VF Funding and Mounatineer Funding LLC offering to loan $5 million to Freedom Industries, it seems to have gotten even more convoluted. There is yet another company in the mix – WV Funding LLC (pdf), which was formed on January 17, 2014, and on the same date the entity filed to be the Debtor in Possession of Freedom Industries (pdf). WV Funding LLC was organized by same Wheeling attorney who formed Mountaineer Funding LLC for Forrest. The sole listed member of WV Funding LLC? Mountaineer Funding LLC (pdf). Related documents here.
All of this, at least at this point, seems permissible. Still, at some point, it really does start to look like someone is trying to pull a fast one. And even a staunch defender of the corporation and uncorporation has a hard time arguing otherwise. At a minimum, and even though there are good counterarguments (like Steve Bainbridge makes here in a different context), such behavior starts to make an expansive view of enterprise liability a lot more attractive.
Wednesday, January 15, 2014
Francis G.X. Pileggi and Kevin F. Brady at Delaware Corporate & Commercial Litigation Blog closely track Chancery and Supreme Court cases out of Delaware. Their annual Delaware round up, is always a top-notch, quick and dirty summary of the year. If you haven't kept up with the major cases, or want a quick reference when thinking about what developments to include in your classes this spring or next fall--then this list is for you.
Here are 2 additional cases that I have found noteworthy for some combination of scholarship, teaching and practice reasons:
1. Chevron forum selection clause enforceability
Chancellor Strine’s opinion in Boilermakers Local 154 Retirement Fund v. Chevron Corp.,et al, upheld the enforceability of a Delaware forum selection clause unilaterally adopted by corporate boards of directors of Defendants. Plaintiffs dismissed their appeal, and moved to dismiss their remaining claims in Chancery Court leaving intact Chancellor Strine strong support of forum selection clauses. Chevron was preceded Chevron was preceded by National Industries Group (Holding) v. Carlyle Investment Managements LLC and TC Group LLC, a 2013 Delaware Supreme Court opinion, which addressed the contractual enforceability of forum selection clauses.
2. Huatacu Upholding waiver of dissolution rights when not “reasonably practicable” to carry on the business of the LCC.
VC Glasscock reaffirmed Delaware’s commitment to contractual freedom in LLCs by upholding an express waiver of statutory dissolution rights for LLC members. The case enforced an LLC operating agreement that “rejected all default provisions, and expressly limited members’ rights to those provided in the LLC Agreement.” The Chancery Court found that dissolution rights, were waivable by LLC members, but that the members remained subject to the non-waivable duty of good faith and fair dealing. The Chancery Court also left open the possibility that members of an LLC may not divest the Court of all of its equitable authority to order dissolution, but where the parties presented no unusual facts giving rise to such equities, the waiver is enforceable.
Saturday, January 4, 2014
I am writing this while on a break at the AALS Annual Meeting, having just attended the panel discussion organized by the AALS Section on Agency, Partnership, LLCs, and Unincorporated Associations: Effective Methods for Teaching LLCs and Unincorporated Business Arrangements. The presentations were excellent, including one by BLPB co-blogger Anne Tucker. Here are a couple of items I took from Robert Rhee’s presentation that I thought might be of interest to our readers:
1. Robert J. Rhee, Case Study of the Bank of America and Merrill Lynch Merger
This is a case study of the Bank of America and Merrill Lynch merger. It is based on the article, Fiduciary Exemption for Public Necessity: Shareholder Profit, Public Good, and the Hobson’s Choice during a National Crisis, 17 Geo. Mason L. Rev. 661 (2010). The case study analyzes the controversial events occurring between the merger signing and closing. It reviews in depth the circumstances under the federal government threatened to fire the board and management of Bank of America unless it consummated the Merrill Lynch acquisition. Among other issues, this case study raises the questions: (1) what is the role of a private firm during a public crisis? (2) what are the responsibilities of the board? (3) what is the role of government and how should it treat private firms? This case study can be used in corporate ethics classes in business schools, or business associations classes in law schools.
2. Todd D. Rakoff, Martha Minow, A Case for Another Case Method, 60 Vand. L. Rev. 597, 602-03 (2007).
[W]hen we think of what students most need that they do not now get, we think: “legal imagination.” What they most crucially lack, in other words, is the ability to generate the multiple characterizations, multiple versions, multiple pathways, and multiple solutions, to which they could apply their very well honed analytic skills. And unless they acquire legal imagination somewhere other than in our appellate-case-method classrooms, they will be poorer lawyers than they should be.As a pedagogical matter, it seems to us that the place to start in creating these additional skills is the time frame by which materials are assigned. Appellate cases present the world as already structured in almost all dimensions, so that the few open issues can be decided crisply. Insofar as professors try to alter those frames, they must retrace steps that have already been taken. We need to start instead with a much more open-ended presentation of the world, and walk onward. We need (if the language of the VCR is not already hopelessly out-of-date) to shift from “rewind” to “play.” (Indeed, since we want to start with raw data, we might even say we are advocating using a “facts-forward” mode.)
Wednesday, December 11, 2013
With winter break nearly upon us this means grading, writing projects, and possibly some conference travel with the upcoming AALS annual meeting. I plan on putting together my AALS talk (on incorporating experiential exercises in teaching LLCs) next week, and have drawn inspiration from the following image:
The Business Law programs are on Saturday, January 4th and are listed below. If you would like to highlight other programs, please respond in the comments, and I will add to the list.
- 10:30 am - 12:15 pm Agency, Partnership, LLCs, and Unincorporated Associations
Effective Methods for Teaching LLCs and Unincorporated Business Arrangements
- The program will explore: The ... topic of effectively teaching LLCs.
- 2:00 pm - 3:45 pm Business Associations
The Value Proposition for Business Associations in Tomorrow’s Legal Education
- The panel will be exploring: How does business associations teaching and scholarship contribute to the U.S. program of legal education? How could or should it contribute? What role does the basic law school course on business associations play in an optimized law school curriculum? What course content, pedagogy, and teaching tools best support that role? How does business associations scholarship inform and support that role?
- 4:00 pm - 5:45 pm Transactional Law and Skills
Value Creation By Business Lawyers in the 21st Century
- On the thirtieth anniversary of the influential article by Professor Ronald Gilson’s “Value Creation by Business Lawyers” this program will re-examine Professor Gilson’s thesis, evaluate the impact of the article, and discuss the prospects for business lawyers creating value in the 21st Century. The panel will feature Professor Gilson, invited participants, and scholarly works selected from a call for papers.
This is my first year attending the AALS conference, and am going whole hog with plans to also attend the mid-year meeting in June, which will be a workshop on Blurring Boundaries in Financial and Corporate Law. The call for papers (expired) includes a program description and is available here: http://www.aals.org/mm2014/AALS_2014_MM_RFP.pdf
Tuesday, December 10, 2013
A recent study, Who Owns West Virginia? (full report pdf), gives a glimpse into the land ownership in the state. The report finds that much of the state’s private land is "owned by large, mainly absentee corporations, [but] the list of top owners – once dominated by energy, land holding and paper companies – now includes major timber management concerns."
As reported by Ken Ward Jr. in the Charleston Gazette, the report finds that "[n]one of the state's top 10 private landowners is headquartered in West Virginia." Although it is accurate that the top ten owners are not indivdual owners, I will note that not all of the top ten owners are "corporations." There is at least one master limited partnership and one limited liability company (LLC). That may not mean much in the sense of absentee ownership, but it is a doctrinal distinction I maintain is still important.
It's not shocking that these entity owners would be out of state, especially because that was true back in 1974, too, when the last study was done. There are relatively few large entities chartered or headquartered in West Virginia, and it appears that many of the state chartered companies that were around in 1974 have since been acquired by larger, out-of-state entities. Absentee ownership is hardly a new, or even modern, phenomenon in the state. The report notes: "By 1810, as much as 93 percent of land in present day West Virginia was held by absentee owners, more than any other state in the region and likely any other state in the Union." Much of the ownership is still based in the region, though, as many of the large companies holding West Virginia land are based in Virginia.
Although the purchase of West Virginia’s land by timber management companies is perhaps the most interesting finding by investigators for this report, researchers also found:
The top 25 private owners own 17.6 percent of the state’s approximately 13 million private acres.
In six counties, the top ten landowners own at least 50 percent of private land. Of the six, five are located in the southern coalfields – Wyoming, McDowell, Logan, Mingo and Boone. Wyoming County has the highest concentration of ownership of any county.
Not one of the state’s top ten private landowners is headquartered in West Virginia.
Many of the counties – including Harrison, Barbour, Mineral, Lincoln, and Putnam – that had high concentrations of absentee corporate ownership (over 50%) in Miller’s 1974 study did not in this analysis.
Only three corporations that were among the state’s top ten landowners in 1974 remained on that list in 2011. If the sale of MeadWestvaco properties to Plum Creek Timber is completed, only two of the 1974 top owners will still be on the list.
Nationally timberland management concerns control about half of the nation’s timberlands that had been managed by industrial timber companies until the 1980s.
Finally, another potentially important finding is different level of entity ownership by region as related to the minerals beneath the land -- coal and natural gas. The study found:
There are also large geographical disparities in the share of large private landowners in the state. All but one of the counties where the top ten landowners owned at least 50 percent of the private land is in the southern coalfield coalfields - Wyoming, McDowell, Logan, Mingo and Boone. In the Marcellus gas field counties of the northeast and north-central part of the state, the private land ownership is less concentrated and tends to be owned more by individuals than large out-of-state corporations.
The study looked only at surface ownership, and not mineral rights ownership, so it's hard to tell if this gives an accurate look at the level of entity ownership in the Marcellus Shale. Moreover, mineral estates may be owned by private individuals who have leased their rights to entities, so it may be that even more of the state's property rights are effectively controlled by entities. The report indicates more study would be useful here, and I concur.
The takeaway: This report has the potential to be a good starting point for considering how to move the state forward in trying times. As the study notes: "[S]tudying patterns of land ownership in West Virginia through the lens of the 2011 tax data can help us understand our history, make wise policies in the present and better map the future of the state."
I think that's right. To me, a big cavaet is to ensure that the report be used to react to what is and to plan for what could be, rather then getting bogged down in what was or could have been. If people spend their time lamenting that outside corporations own land in the state, they will be missing the opportunity to do something positive for the future, like figuring out what can be done to promote sustainable development in the state by working with the current landowners. I hope the focus is primarily on the latter. There have already been enough missed opportunities.
Tuesday, December 3, 2013
Here in West Virginia, it's exam time for our law students. For my Business Organizations students, tomorrow is the day. For students getting ready to take exams, and for any lawyers out there who might need a refresher, the Kentucky Supreme Court provides a good reminder that LLCs are separate from their owners, even if there is only one owner.
Here's a basic rundown of the case, Turner v. Andrew, 2011-SC-000614-DG, 2013 WL 6134372 (Ky. Nov. 21, 2013) (available here): In 2007, an employee of M&W Milling was driving a feed-truck owned by his employer. A movable auger mounted on the feed-truck swung into oncoming traffic and struck and seriously damaged a dump truck owned by Billy Andrew, the sole member of Billy Andrew, Jr. Trucking, LLC, which owned the damaged truck. Andrew filed suit against the employee and M & W Milling claiming personal property damage to the truck and the loss of income derived from the use of damaged truck. Notably, the LLC was not a named plaintiff in the lawsuit.
Hey issue spotters: check out the last line of the prior paragraph. (Also: a bit of an odd twist is the Andrew chose not to respond to discovery requests, though that was not critical to the issue of whether the LLC had to be named for Andrew to recover.)
A limited liability company is a “hybrid business entity having attributes of both a corporation and a partnership.” Patmon v. Hobbs, 280 S.W.3d 589, 593 (Ky.App.2009). As this Court stated in Spurlock v. Begley, 308 S.W.3d 657, 659 (Ky.2010), “limited liability companies are creatures of statute” controlled by Kentucky Revised Statutes (KRS) Chapter 275. KRS 275.010(2) states unequivocally that “a limited liability company is a legal entity distinct from its members.” Moreover, KRS 275.155, entitled “Proper parties to proceedings,” states:
A member of a limited liability company shall not be a proper party to a proceeding by or against a limited liability company, solely by reason of being a member of the limited liability company, except if the object of the proceeding is to enforce a member's right against or liability to the limited liability company or as otherwise provided in an operating agreement.
Not surprisingly, courts across the country addressing limited liability statutes similar to our own have uniformly recognized the separateness of a limited liability company from its members even where there is only one member.
Friday, November 8, 2013
The Economist has an interesting piece on how “[a] mutation in the way companies are financed and managed will change the distribution of the wealth they create.” You can read the entire article here. A brief excerpt follows.
The new popularity of the [Master Limited Partnership] is part of a larger shift in the way businesses structure themselves that is changing how American capitalism works…. Collectively, distorporations such as the MLPs have a valuation on American markets in excess of $1 trillion. They represent 9% of the number of listed companies and in 2012 they paid out 10% of the dividends; but they took in 28% of the equity raised…. [The] beneficiaries, though, are a select class. Quirks in various investment and tax laws block or limit investing in pass-through structures by ordinary mutual funds, including the benchmark broad index funds, and by many institutions. The result is confusion and the exclusion of a large swathe of Americans from owning the companies hungriest for the capital the markets can provide, and thus from getting the best returns on offer….
Another booming pass-through structure is that of the “business development company” (BDC). These firms raise public equity and debt much like a leveraged fund.… What they all share is an ability to do bank-like business—lending to companies which need money—without bank-like regulatory compliance costs….
Andrew Morriss, of the University of Alabama law school, sees the shift as an entrepreneurial response to a century’s worth of governmental distortions made through taxation and regulation. At the heart of those actions were the ideas set down in “The Modern Corporation and Private Property”, a landmark 1932 study by Adolf Berle and Gardiner Means. As Berle, a member of Franklin Roosevelt’s “brain trust”, would later write, the shift of “two-thirds of the industrial wealth of the country from individual ownership to ownership by the large, publicly financed corporations vitally changes the lives of property owners, the lives of workers and …almost necessarily involves a new form of economic organisation of society.” … Several minor retreats notwithstanding, the government’s role in the publicly listed company has expanded relentlessly ever since.
November 8, 2013 in Business Associations, Books, Corporate Governance, Corporations, Current Affairs, Financial Markets, LLCs, Partnership, Securities Regulation, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (0)
Friday, November 1, 2013
Grant M. Hayden & Matthew T. Bodie have posted “Larry from the Left: An Appreciation” on SSRN. Here is the abstract:
This essay approaches the scholarship of the late Professor Larry Ribstein from a progressive vantage point. It argues that Ribstein's revolutionary work upended the "nexus of contracts" theory in corporate law and provided a potential alternative to the regulatory state for those who believe in worker empowerment and anti-cronyism. Progressive corporate law scholars should look to Ribstein's scholarship not as a hurdle to overcome, but as a resource to be tapped for insights about constructing a more egalitarian and dynamic economy.
Sunday, October 20, 2013
Sarah C. Haan has posted “Opaque Transparency: Outside Spending and Disclosure by Privately-Held Business Entities in 2012 and Beyond” on SSRN. Here is a portion of the abstract:
In this Article, I analyze data on outside spending from the treasuries of for-profit business entities in the 2012 federal election – the very spending unleashed by Citizens United v. FEC. I find that the majority of reported outside spending came from privately-held, not publicly-held companies, including a significant proportion of unincorporated business entities such as LLCs, and that more than forty percent of spending by privately-held businesses was characterized by opaque transparency: Though fully disclosed under existing campaign finance disclosure laws, something about the origin of the money was obscured. This happened when political expenditures were spread among affiliated business-donors, typically donating similar amounts to the same recipient(s) on similar dates, and when for-profit business entities were used as shadow money conduits. I also argue that, due to differences between access-oriented and replacement-oriented electoral strategies, for-profit businesses engaged in outside spending in a federal election are likely to be experiencing insider expropriation. The expropriation of a business entity’s political voice by a controlling person is another potential way in which voters are misled in our current disclosure regime. In light of these spending patterns, and evidence of insider expropriation of the political voice of many privately-held business donors, I argue that privately-held business entities that engage in federal election-related spending should be compelled to reveal the individual(s) who control them.
Tuesday, October 15, 2013
Early this month, the United States District Court for the Middle District of Pennsylvania decided Gentex Corp. v. Abbott, Civ. A. No. 3:12-CV-02549, (M.D.Pa. 10-10-2013). The outcome of the case is not really objectionable (to me), but some of the language in the opinion is. As with many courts, this court conflates LLCs and corporations, which is just wrong. The court repeatedly applies “corporate” law principles to an LLC, without distinguishing the application. This is a common practice, and one that I think does a disservice to the evolution of the law applying to both corporations and LLCs.
I noted this in a Harvard Business Law Review Online article a while back:
Many courts thus seem to view LLCs as close cousins to corporations, and many even appear to view LLCs as subset or specialized types of corporations. A May 2011 search of Westlaw’s “ALLCASES” database provides 2,773 documents with the phrase “limited liability corporation,” yet most (if not all) such cases were actually referring to LLCs—limited liability companies. As such, it is not surprising that courts have often failed to treat LLCs as alternative entities unto themselves. It may be that some courts didn’t even appreciate that fact. (footnotes omitted).
To be clear, though, Pennsylvania law applies equitable concepts, such as piercing the corporate veil, to LLCs. Still, courts should not discuss LLCs as though they are the same as corporations or improper outcomes are likely to follow. When dealing with LLCs, the concept should be referred to as “piercing the LLC veil” or “piercing the veil of limited liability.” Instead, though, courts tend to discuss LLCs and corporations as equivalents, which is simply not accurate.
By way of example, the Gentex court states:
Helicopterhelmet.com's principal place of business is in South Carolina, while Helicopter Helmet, LLC is a Delaware corporation with its principal place of business also in South Carolina.
Gentex Corp. v. Abbott, 3:12-CV-02549, 2013 WL 5596307 (M.D. Pa. Oct. 10, 2013) (emphasis added). It is not! It is a Delaware LLC!
Further, the court says:
From the record, it does not appear that Helicopter Helmet LLC was anything less than a bona fide independent corporate entity, or that Plaintiff intends to allege as much.
Id. (emphasis added). Again – no. An LLC is NOT a corporate entity. It is as, Larry Ribstein liked to say, an uncorporation. In fact, I would argue that Pennsylvania law, in Title 15, is called Corporations and Unincorporated Associations for a reason. Chapter 89 of that title is called Limited Liability Companies.
In fairness to Judge Brann, who wrote the Gentex opinion, Pennsylvania courts have merged the concepts of LLC and corporate veil piercing in other cases, even when discussing the differences between the two. In Wamsley v. Ehmann, C.A. No. 1845 EDA 2009 (Pa. Super. Ct. Feb. 28, 2012), summarized nicely here, the court explained:
These factors [for determining whether to pierce the veil] include but are not limited to: (1) undercapitalization; (2) failure to adhere to corporate formalities; (3) substantial intermingling of corporate and personal affairs; and (4) use of the corporate form to perpetrate fraud. [citing Village at Camelback Property Owners Assn. Inc.] . . .
Certain corporate formalities may be relaxed or inapplicable to limited liability corporations and closely held companies. Advanced Telephone Systems, Inc., supra at 1272. An LLC does not need to adhere to the same type of formalities as a corporation. Id. (finding lack of financial statements, bank accounts, exclusive office space, and tax returns was not evidence of failure to adhere to corporate formalities because entity was LLC with limited scope). In fact, the appropriate formalities for an LLC “are few” and, depending on the purpose of the LLC, it may not need to be capitalized at all. Id. Moreover, not all corporate formalities are created equal. Id. at 1279. To justify piercing the corporate veil, the lack of formalities must lead to some serious misuse of the corporate form. Id.
Okay, got that? The rules that apply to corporations apply to LLCs. Except when they don’t because LLCs are sometimes different. To justify piercing the “corporate veil,” then, an LLC must have seriously misused the corporate form, even though an LLC is a distinct form from the corporation. This is not especially helpful, I am afraid.
Veil piercing is difficult enough to plan around, and the seemingly random nature of veil piercing is often noted (with some, such as Prof. Bainbridge, arguing that we should do away with it altogether). There has not been much of a move to abolish veil piercing, and there hasn't even been much progress to make the standards for veil piercing more clear. Still, given the prevalence of LLCs, it’s high time courts at least help LLC veil piercing law evolve into murky standards specifically designed for LLCs. That doesn’t seem like too much to ask.
Tuesday, September 17, 2013
Okay, so maybe I am overstating that a bit, but it’s only a bit. This is not exactly timely, as the following case was decided in the December 2012, but I was recently reviewing it as I taught these cases and helped update Unincorporated Business Entities (Ribstein, Lipshaw, Miller, and Fershee, 5th ed., LexisNexis). (semi-shameless plug). Despite the passage of time, this case has, apparently, gotten me riled up again. So here we go . . .
Synectic Ventures I, LLC v. EVI Corp., 294 P.3d 478 (Or. 2012): several investment funds organized as LLCs (the Synectic LLCs or LLCs). The LLCs made a loan to the defendant corporation, EVI Corp. The loan agreement was secured by EVI’s assets, and provided that EVI would pay back $3 million in loans, plus 8% interest by December 31, 2004. The loan agreement provided that if EVI obtained $1 million in additional financing by December 31, 2004, the loan amount would be converted into equity (i.e., EVI shares) and the security interest would be eliminated. If the money were not raised by the deadline, the LLCs could foreclose on EVI’s assets (mostly IP in medical devices).
To make things interesting, the LLCs appointed Berkman the manager of the LLCs (thus, they were manager-managed LLCs). “At all relevant times, Berkman—the managing member of plaintiffs—was also the chairman of the board and treasurer of defendant [EVI].” In mid-2003, the Synectic LLCs' members sought to have Berkman removed, and Berkman signed an agreement not to enter into new obligations for the LLCs without getting member approval.
Wednesday, March 30, 2011
Lewis Lazarus recently posted Directors Designated By Investors Owe Fiduciary Duties to the Company as a Whole and Not to the Designating Investor at the Delaware Business Litigation Report. In his article, he explained
[The Delaware] cases teach that directors designated by particular stockholders or investors owe duties generally to the company and all of its stockholders. Where the interests of the investor and the company and its common stockholders potentially diverge, the directors cannot favor the interests of the investor over those of the company and its common stockholders.
Professor Bainbridge weighs in (here), agreeing that the above is the general rule, but that in some cases that may not be best. He gives a few examples, such as a struggling company granting a union nominee a board position or a time when preferred shareholders can elect a board majority because no dividends were paid for a sufficient period of time. He then notes that a director's "sponsor might reasonably expect the directors not just to 'advocate' for the shareholder's position, but to vote for it and take other action." Professor Bainbridge concludes that he still doesn't "think the sponsor should be able to punish the directors for failing to" vote as the sponsor desired and that such cases should be viewed "contextually."
This all got me thinking about VGS, Inc. v. Castiel, 2000 WL 1277372 (Del. Ch.), which I recently covered in class. That case involved a manager-managed LLC, with a three-person Board of Managers. Castiel named himself and Quinn to the Board, and Sahagen added himself. Sahagen and Castiel got into a feud, and Quinn defected to Sahagen's side. Quinn and Sahagen then merged the LLC into VGS, Inc., without notice to Casteil, via written consent. (This case is also a great lesson into the perils of poor drafting.)
Despite the plain language of the LLC agreement, the court bails out Castiel (and his lawyers) finding that
As the majority unitholder, Castiel had the power to appoint, remove, and replace two of the three members of the Board of Managers. Castiel, therefore, had the power to prevent any Board decision with which he disagreed.
. . . .
Notice to Castiel would have immediately resulted in Quinn's removal from the board and a newly constituted majority which would thwart the effort to strip Castiel of control. Had he known in advance, Castiel surely would have attempted to replace Quinn with someone loyal to Castiel who would agree with his views.
This is not how we tend to react in the corporate context. Sponsors generally can't bind directors to a specific vote, and they don't usually require notice of a director's intended votes. Think Ringling Bros-Barnum & Bailey Combined Shows v. Ringling, 53 A.2d 441 (Del. Sup. Ct. 1947); McQuade v. Stoneham, 263 NY. 323 (1934); or even perhaps Ramos v. Estrada, 8 Cal. App. 4th 1070 (1992).
In VGS, it seems to me the court should have determined this action was improper (if it was) because Sahagan and Quinn were acting in a way that implicates a conflict of interest and that they were inappropriately taking something that wasn't theirs. That is, it was an act of fraud, self-dealing, or a conflict of interest. At least then Quinn and Sahagan could defend their decision-making process and the decision itself.
I have been working on a short piece arguing that the courts may be developing rules that respect LLCs as unique entities. Professors Ribstein and Bainbridge, among others, have long advocated that courts apply rules appropriate for LLCs rather than blindly adopting corporate or partnership rules, and I would advocate a similar position here. In VGS, however, my decision would place far more weight on the contract itself and respect the powers granted to the board. That is, I might allow Castiel the authority he sought and was granted in this case in the LLC context, even though that power is in conflict with general corporate law directors' rules. But, I would only grant the power if Castiel expressly acquired that power on the front end. Here, Castiel did not, and absent fraud or self-dealing, I think he should have lost.