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?
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.
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)
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.
Wednesday, October 9, 2013
I am emerging from a rabbit hole of research that began approximately 3.5 hours ago. The question was inspired by teaching the 2002 Delaware Supreme Court case, Download Gotham 817_A.2d_160, in my unincorporated business associations class and students' drafting of fiduciary duty waivers in a limited partnership agreement. Many of you are already aware that Delaware allows for the complete elimination of general partners' fiduciary duties. I knew that Delware was an outlier in this area, but I wasn't certain by how much. So 3.5 hours and a 50 state (plus D.C.) survey later, I have a concrete answer. Only Delaware ( Download Delaware GP Fiduciary duty statute) and Alabama ( Download Alabama Statute) statutes allow for the complete elimination of fiduciary duties for general partners. The remaining 49 jurisdictions surveyed only allow for the expansion or restriction of fiduciary duties, but not the elimination. Of those 49 jurisdictions, 20 have a stand alone provisions that outline the fiduciary duties of general partners, and 29 statutes establish the minimum fiduciary duties for general partners by linkage to the traditional partnership statutes. Of the 29 jurisdictions that rely on linkage to traditional partnership statutes, 13 use a Uniform Partnership Act (1914) "accounting" style fiduciary duty provision and 16 use a revised Uniform Partnership Act (1997) enumerated fiduciary duties style provision.
My initial research table is available here: Download LP Fiduciary Duty waiver Chart.
My findings raise several questions. The first is a curiosity as to where else are Delaware statutes outliers and what does this say about the reach of Delaware law? The ubiquity of Delaware law is limited by the incentives for foreign entities to avail themselves of Delaware state laws, the challenge to Delaware's dominance is seen most clearly with closely-held firms.