Thursday, November 13, 2014

What do lawyers and judges need to know about LLCs?

Understandably, business law professors get upset when people who should know better- judges for example- mischaracterize LLCs. I say we should be even more angry at the law clerks drafting the opinions. Many judges had no exposure to LLCs in law school but clerks graduating today certainly have. 
 
Given the ubiquity of LLCs now, I was surprised to learn that among the many outstanding CALI (Computer-Aided Legal Instruction) lessons, there are none on LLCs. (Hat tip to co-blogger Steve Bradford- my students love him now). I have volunteered to work on at least one and maybe more in the coming months. I canvassed some colleagues for their must-haves for these LLC lessons. In no particular order, here's the current list:
 

1) Difference between LLCs, corporations and partnerships 

2) Del. and ULLCA coverage of fiduciary duties, and especially the issue of contractual waiver and default 

3) Ease of formation
 
4) Expense of formation
 
5) Ease of maintenance    
 
6) Expense of maintenance
 
7) Restrictions re. business purpose or activity
 
8) Continuity of life/limitations on existence
 
9) Label for/characteristics (incl. transferability) of ownership interests
 
10) Restrictions re. owners (number, type, or other)
 
11) Authority to bind/create liability for the firm
 
12) Personal liability of owners to outsiders
 
13) Form of management/rights to manage
 
14) Existence/characteristics of monitoring managers/board of directors
 
15) Other (additional governance rules, rights, obligations, etc.)
 
16) Entitlement to income and assets
 
17) Liability for taxes and other governmental obligations
 
18) How investors can get money OUT of an LLC
 

19) No right to distributions, and no right to vote for distributions if manager-managed

20) No right to salary or employment

21)  Taxable liability for LLC membership

22) Exit rights—voluntary withdrawals vs. restricted withdrawals, and whether or not that comes with the ability to force the return of an investment or a new status as a creditor of the LLC

23) Liability for improper distributions

24) Veil piercing, particularly given the lack of corporate formalities

I would love some feedback from practitioners as well. What do law students and practicing lawyers need to know about LLCs? What's missing from this list? What should I get rid of? Please feel free to comment below or to email your thoughts to mnarine@stu.edu

 

 

 

November 13, 2014 in Business Associations, C. Steven Bradford, Corporate Personality, Corporations, Delaware, Law School, LLCs, Marcia Narine, Partnership, Teaching, Unincorporated Entities | Permalink | Comments (1)

Monday, October 27, 2014

Wrestling with Securities Regulation Policy and Morrison

On Friday, I participated in the 2014 Workshop for Corporate & Securities Litigation sponsored by the University of Richmond School of Law and the University of Illinois College of Law and held on the University of Richmond's campus.  Thanks to Jessica Erickson and Verity Winship for hosting an amazing group of scholars presenting impressive, interesting papers.  I attended the workshop to test an idea for a paper tentatively entitled: "Policy and International Securities Fraud Actions: A Matter of Investor and (or) Market Protection?"

The paper would address an important issue in U.S. federal securities law: the extraterritorial reach of the general anti-fraud protections in Section 10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 adopted by the U.S. Securities and Exchange Commission under Section 10(b). In a world where securities transactions often cross borders—sometimes in non-transparent ways—securities regulators, issuers, investors, and intermediaries, as well as legal counsel and the judiciary, all need clarity on this matter in order to plan and engage in transactions, advocacy, and dispute resolution. Until four years ago, the rules in this area (fashioned more as a matter of  jurisdiction than extraterritorial reach) were clear, but their use often generated unpredictable results.

In Morrison v. Nat’l Austl. Bank Ltd., 130 S. Ct. 2869 (2010), the U.S. Supreme Court held that “Section 10(b) reaches the use of a manipulative or deceptive device or contrivance only in connection with the purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” This was a non-obvious analytical result (at least to me) that has generated significant criticism, debate, and discussion. The Court's struggle—and that of those who disagree with the holding or the Court's reasoning or both—has been to determine the purpose(s) of Section 10(b) as a federal securities law liability statute and assess the extraterritorial reach of Section 10(b) in light of that purpose or those purposes. This project extends my earlier work (originally written for and published as part of a French colloquium in 2012) and involves the engagement of a deep analysis of long-standing, albeit imperfectly articulated, federal securities regulation policy in the context of cross-border fraud and misstatement liability.

This will be a big undertaking, if I commit to a comprehensive approach.  I got a lot of good feedback on my overall concept for the project--enough that I am rethinking the project in significant ways.  One possible idea is to approach the underlying general policy articulation first, as a separate project, before undertaking the formidable task of rationalizing that policy at the intersection of the academic literature on class action litigation, Section 10(b) and Rule 10b-5, and cross-border markets and cross-listings.  The two-stage approach has significant appeal to me.  I start from the notion that investor protection and the maintenance of market integrity under federal securities regulation both serve the foundational goal of promoting capital formation.  But that is contestable . . . .

What are your thoughts regarding the most coherent articulation of the policies underlying Section 10(b) and Rule 10b-5 multinational securities regulation and the appropriateness of the Morrison test for extraterritoriality in light of that articulation?

October 27, 2014 in Financial Markets, International Business, Joan Heminway, Securities Regulation, Unincorporated Entities | Permalink | Comments (0)

Monday, September 29, 2014

More on LLCs as Non-Signatories of Operating Agreements . . .

In recent blog posts, two of my favorite bloggers, Keith Paul Bishop and Steve Bainbridge, have highlighted for our attention Delaware and California statutes providing (differently in each case) that an LLC and, at least in Delaware, its managers and members, are bound by the LLC's operating agreement even if they do not sign that agreement.  Bishop notes in his post that the California "RULLCA creates an odd situation in which LLCs are bound by contracts that they did not execute and to which they seemingly are not parties."  In his post Bainbridge cites to the Bishop post and another post by Francis Pileggi.  Certainly, they all have a point.  For students of contract law, the conclusion that a non-party is bound by a contract does not seem to be an obvious result . . . .

The flap in the blogosphere has its genesis in a recent Delaware Chancery Court decision, Seaport Village Ltd. v. Seaport Village Operating Company, LLC, et al. C.A. No. 8841-VCL.  The limited liability company defendant in that case raised as its only defense that it was not a party to the limited liability company agreement and therefore was not bound.  Unsurprisingly in light of applicable Delaware law, Chancellor Laster found the defense wanting as a matter of law.

This issue has more history than my brother bloggers point out, some of which is included in the brief Seaport Village opinion.  I probably don't have all the details, but set forth below is some additional background information that may be useful in thinking about the binding nature of LLC operating agreements.  Others may care to fill in any missing information by leaving comments to this post.

Continue reading

September 29, 2014 in Business Associations, Current Affairs, Delaware, Joan Heminway, LLCs, Unincorporated Entities | Permalink | Comments (2)

Sunday, September 14, 2014

Hobby Lobby Redux: 7 Corporate Law/Theory Quotes

This coming Tuesday, I am scheduled to provide a brief overview of the corporate law/theory aspects of Hobby Lobby as part of the University of Akron’s Supreme Court Roundup.  What follows are the seven key quotes from the opinion that I plan to focus on (time permitting) in order to highlight what I see as the key relevant issues raised by the opinion. Comments are appreciated.

Issue 1: Did corporate theory play a role in Hobby Lobby?

While I believe the majority made a pitch for applying a pragmatic, anti-theoretical approach (“When rights, whether constitutional or statutory, are extended to corporations, the purpose is to protect the rights of … people.” Burwell v. Hobby Lobby Stores, Inc., 134 S. Ct. 2751, 2768 (2014)), the following quote strikes me as conveying an underlying aggregate view of corporations:

In holding that Conestoga, as a “secular, for-profit corporation,” lacks RFRA protection, the Third Circuit wrote as follows: “General business corporations do not, separate and apart from the actions or belief systems of their individual owners or employees, exercise religion. They do not pray, worship, observe sacraments or take other religiously-motivated actions separate and apart from the intention and direction of their individual actors.” 724 F.3d, at 385 (emphasis added). All of this is true—but quite beside the point. Corporations, “separate and apart from” the human beings who own, run, and are employed by them, cannot do anything at all.

134 S. Ct. at 2768.

 

Continue reading

September 14, 2014 in Business Associations, Constitutional Law, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Religion, Social Enterprise, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (2)

Friday, September 12, 2014

Delaware Judges and Law Review Articles

In 2007, J. W. Verret (George Mason) and then Chief Justice Myron Steele authored an article entitled Delaware's Guidance: Ensuring Equity for the Modern Witenagemot, which discussed "some of the extrajudicial activities in which members of the Delaware judiciary engage to minimize the systemic indeterminacy resulting from the resolution of economic disputes by a court of equity."

One of these extrajudicial activities is authoring or co-authoring law review articles.  In this post, I am not going to weigh in on whether Delaware judges should be authoring law review articles, but rather, I simply note that there are two recent law review articles and one recent book chapter by Delaware judges that warrant our attention. 

Vice Chancellor Travis Laster - Evidence-Based Corporate Law.

John Maynard Keynes is said to have observed, "When the facts change, I change my mind. What do you do, sir?" In Delaware's Choice, Professor Subramanian argues that the facts underlying the constitutionality of Section 203 have changed. Assuming his facts are correct, and the Professor says that no one has challenged his account to date, then they have implications for more than Section 203. They potentially extend to Delaware's jurisprudence regarding a board's ability to maintain a stockholder rights plan, which becomes a preclusive defense if a bidder cannot wage a proxy contest for control of the target board with a realistic possibility of success. Professor Subramanian's facts may call for rethinking not only the constitutionality of Section 203, but also the extent of a board's ability to maintain a rights plan.

Chief Justice Leo E. Strine, Jr. and Nicholas Walter (Yale), Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United.

One important aspect of Citizens United has been overlooked: the tension between the conservative majority’s view of for-profit corporations, and the theory of for-profit corporations embraced by conservative thinkers. This article explores the tension between these conservative schools of thought and shows that Citizens United may unwittingly strengthen the arguments of conservative corporate theory’s principal rival.

 

Citizens United posits that stockholders of for-profit corporations can constrain corporate political spending and that corporations can legitimately engage in political spending. Conservative corporate theory is premised on the contrary assumptions that stockholders are poorly-positioned to monitor corporate managers for even their fidelity to a profit maximization principle, and that corporate managers have no legitimate ability to reconcile stockholders’ diverse political views. Because stockholders invest in for-profit corporations for financial gain, and not to express political or moral values, conservative corporate theory argues that corporate managers should focus solely on stockholder wealth maximization and non-stockholder constituencies and society should rely upon government regulation to protect against corporate overreaching. Conservative corporate theory’s recognition that corporations lack legitimacy in this area has been strengthened by market developments that Citizens United slighted: that most humans invest in the equity markets through mutual funds under section 401(k) plans, cannot exit these investments as a practical matter, and lack any rational ability to influence how corporations spend in the political process.

Because Citizens United unleashes corporate wealth to influence who gets elected to regulate corporate conduct and because conservative corporate theory holds that such spending may only be motivated by a desire to increase corporate profits, the result is that corporations are likely to engage in political spending solely to elect or defeat candidates who favor industry-friendly regulatory policies, even though human investors have far broader concerns, including a desire to be protected from externalities generated by corporate profit-seeking. Citizens United thus undercuts conservative corporate theory’s reliance upon regulation as an answer to corporate externality risk, and strengthens the argument of its rival theory that corporate managers must consider the best interests of employees, consumers, communities, the environment, and society — and not just stockholders — when making business decisions.

Chief Justice Leo E. Strine, Jr. and Vice Chancellor Travis Laster, The Siren Song of Unlimited Contractual Freedom

One frequently cited distinction between alternative entities — such as limited liability companies and limited partnerships — and their corporate counterparts is the greater contractual freedom accorded alternative entities. Consistent with this vision, discussions of alternative entities tend to conjure up images of arms-length bargaining similar to what occurs between sophisticated parties negotiating a commercial agreement, such as a joint venture, with the parties successfully tailoring the contract to the unique features of their relationship.

As judges who collectively have over 20 years of experience deciding disputes involving alternative entities, we use this chapter to surface some questions regarding the extent to which this common understanding of alternative entities is sound. Based on the cases we have decided and our reading of many other cases decided by our judicial colleagues, we do not discern evidence of arms-length bargaining between sponsors and investors in the governing instruments of alternative entities. Furthermore, it seems that when investors try to evaluate contract terms, the expansive contractual freedom authorized by the alternative entity statutes hampers rather than helps. A lack of standardization prevails in the alternative entity arena, imposing material transaction costs on investors with corresponding effects for the cost of capital borne by sponsors, without generating offsetting benefits. Because contractual drafting is a difficult task, it is also not clear that even alternative entity managers are always well served by situational deviations from predictable defaults.

In light of these problems, it seems to us that a sensible set of standard fiduciary defaults might benefit all constituents of alternative entities. In this chapter, we propose a framework that would not threaten the two key benefits that motivated the rise of LPs and LLCs as alternatives to corporations: (i) the elimination of double taxation at the entity level and (ii) the ability to contract out of the corporate opportunity doctrine. For managers, this framework would provide more predictable rules of governance and a more reliable roadmap to fulfilling their duties in conflict-of-interest situations. The result arguably would be both fairer and more efficient than the current patchwork yielded by the unilateral drafting efforts of entity sponsors.

September 12, 2014 in Business Associations, Constitutional Law, Corporate Governance, Haskell Murray, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (0)

Tuesday, August 12, 2014

Kinder Morgan: MLPs, C-Corps & Dividends, Oh My!

Kinder Morgan, a leading U.S. energy company, has proposed consolidating its Master Limited Partnerships (MLPs) under its parent company. If it happens, it would be the second largest energy merger in history (the Exxon and Mobil merger in 1998, estimated to be $110.1 billion in 2014 dollars, is still the top dog). 

Motley Fool details the deal this way:

Terms of the deal
The $71 billion deal is composed of $40 billion in Kinder Morgan Inc shares, $4 billion in cash, $27 billion in assumed debt. 

Existing shareholders of Kinder Morgan's MLPs will receive the following premiums for their units (based on friday's closing price):

  • Kinder Morgan Energy Partners: 12%
  • Kinder Morgan Management: 16.5%
  • El Paso Pipeline Partners: 15.4%
Existing unit holders of Kinder Morgan Energy Partners and El Paso Pipeline Partners are allowed to choose to receive payment in both cash and Kinder Morgan Inc shares or all cash. 
As I understand it, the exiting holders of the partnerships would have to pay taxes on the merger (this is partnership to a C-corp), but please, consult your tax professional.  
 
The goal here is said to be to increase dividend potential and use the C-corp structure to maximize opportunities that the MLP structure is now apparently less effective in generating.
 
I, for one, like that this company is seeking to generate income from real products, invest in new infrastructure, and pay dividends.  I'm no financial planner or investment consultant, but I like the idea of companies that offer dividend value rather than value to shareholders solely through increase share price. It seems to me it leads to better long term planning.  I am also intrgigued by the part of Richard Kinder story where he ended up not leading Enron.  As Forbes explained in 2012,
The most important man in the American Energy Boom wears brown slacks and a checkered shirt and sits in a modest corner office with unexceptional views of downtown Houston and some forgettable art on the wall. You would expect to at least see a big map showing pipelines stretching from coast to coast. Nope. “We don’t have sports tickets, we don’t have corporate jets,” growls Richard Kinder, 68, CEO of Kinder Morgan, America’s third-largest energy firm. “We don’t have stadiums named after us.”
I will be watching to see if this deal goes through, and I think the chance to have a big study in consolidating partnerships with a C-Corp could be a great teaching moment. Stay tuned! 
 
 

August 12, 2014 in Business Associations, Corporate Finance, Corporate Governance, Corporations, Current Affairs, Financial Markets, Joshua P. Fershee, M&A, Partnership, Teaching, Unincorporated Entities | Permalink | Comments (0) | TrackBack (0)

Tuesday, April 15, 2014

AALS Call for Papers--Incorporating Numbers in Business Law Classes

 Bringing Numbers into Basic and Advanced Business Associations Courses: How and Why to Teach Accounting, Finance, and Tax

2015 AALS Annual Meeting--Agency, Patnerships, LLCs & Unincorporated Assoc. Section

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.  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 (jlipshaw@suffolk.edu)

April 15, 2014 in Business Associations, Corporations, Teaching, Unincorporated Entities | Permalink | Comments (0)

Tuesday, March 25, 2014

Last Minute Hobby Lobby Thoughts & Why Reverse Veil Piercing Isn’t the Answer

With oral arguments today in the Hobby Lobby case, I thought I’d pile on a few last thoughts:

(1) As I explained here, entities should be able to take on a racial, religious, or gender identity in discrimination claims.  I would add that I feel similarly about sexual orientation, but (though I think it should be) that is still not generally federally protected. To the extent the law otherwise provides a remedy, I’d extend it to the entity. 

(2) It is reasonable to inquire, why is discrimination different than religious practice?  For me, I just don’t think religious exercise by an entity is the same as extending discrimination protection to an entity.  There is something about the affirmative exercise of religion that I don’t think extends well to an entity.   That is, discrimination happens to a person or an entity. Religious practice is an affirmative act that is different.  Basically, reification of the entity to the point of religious practice crosses a line that I think is unnecessary and improper because discrimination protection should be sufficient.

As a follow up to that, I also think it's a reasonable question to ask: Why is religion different than speech? To me it is different because entities must speak, but entities don’t have to practice religion.  The entity needs speech to conduct business. A public entity speaks in its public filings.  Speech is not just something an entity could do. It is something it must do.  Religion, at the entity level is not necessary. 

(3) Reverse piercing is not as good a solution as it might appear.  Professor Bainbridge suggests that reverse veil piercing is one way in which the religion of the shareholders could be used to justify extending a religious identity to the Hobby Lobby entity, thus allowing the entity to object to certain provisions of the federal healthcare mandate.  His argument is, as usual, reasonable and plausible. Still, as explained above, I don't think this is necessary. 

More important, though, I don’t like expanding the use of any form of veil piercing. Veil piercing is supposed to be used (at least in my view) solely as a heightened level of fraud protection.  It is already used too often and too haphazardly, and further degradation of the line between the entity and others is a dangerous proposition, regardless of the purpose.  That is, as people (and courts) get more comfortable with disregarding the entity, they are more likely to disregard the entity.  As a general proposition, I think that’s a bad outcome. That alone is reason enough for me to hope the Court will pass on reverse veil piercing as a potential remedy. 

March 25, 2014 in Business Associations, Agency, Joshua P. Fershee, LLCs, Religion, Unincorporated Entities | Permalink | Comments (0) | TrackBack (0)

Thursday, March 6, 2014

If It's Good Enough For Justice Kennedy....

Some law professors may remember when Justices Roberts and Kennedy opined on the value legal scholarship. Justice Roberts indicated in an interview that law professors spend too much time writing long law review articles about “obscure” topics.  Justice Kennedy discussed the value he derives from reading blog posts by professors who write about certs granted and opinions issued. I have no doubt that most law students don’t look at law review articles unless they absolutely have to and I know that when I was a practicing lawyer both as outside counsel and as in house counsel, I almost never relied upon them. If I was dealing with a cutting-edge issue, I looked to bar journals, blog posts and case law unless I had to review legislative history.

As a new academic, I enjoy reading law review articles regularly and I read blog posts all the time. I know that outside counsel  read blogs too, in part because now they’re also blogging and because sometimes counsel will email me to ask about a blog post. I encourage my students to follow bloggers and to learn the skill because one day they may need to blog for their own firms or for their employers.

Blogging provides a number of benefits for me. First, I can get ideas out in minutes rather than months via the student-edited law review process. This allows me to get feedback on works/ideas in progress. Second, it forces me to read other people’s scholarship or musings on topics that are outside of my research areas. Third, reading blogs often provides me with current and sophisticated material for my business associations and civil procedure courses. At times I assign posts from bloggers that are debating a hot topic (Hobby Lobby for example). When we discuss the Basic v. Levinson case I can look to the many blog posts discussing the Halliburton case to provide current perspective. 

But as I quickly learned, not everyone in the academy is a fan of blogging. Most schools do not count it as scholarship, although some consider it service. Anyone who considers blogging should understand her school’s culture. For me the benefits outweigh the detriment. Like Justice Kennedy, I’m a fan of professors who blog.  In no particular order, here are the mostly non-law firm blogs I check somewhat regularly (apologies in advance if I left some out): 

http://www.theconglomerate.org/  (thanks again for giving me first opportunity to blog a few months into my academic career!)

http://socentlaw.com/

http://www.fcpaprofessor.com/

http://law.wvu.edu/the_business_of_human_rights (currently on a short hiatus)

http://www.professorbainbridge.com/

http://lawprofessors.typepad.com/civpro/

http://prawfsblawg.blogs.com/prawfsblawg/

http://taxprof.typepad.com/

http://lawprofessors.typepad.com/securities/

http://www.thecorporatecounsel.net/blog/index.html

http://blogs.law.harvard.edu/corpgov/

http://www.delawarelitigation.com/

http://www.dandodiary.com/

 http://lawprofessors.typepad.com/whitecollarcrime_blog/

http://lawprofessors.typepad.com/mergers/

http://lawprofessors.typepad.com/laborprof_blog/

http://www.thefacultylounge.org/

http://opiniojuris.org/

I would welcome any suggestions of must-reads.

 

 

 

 

 

 

 

 

 

 

 

 

 

March 6, 2014 in Business Associations, Corporate Governance, Corporations, Current Affairs, Entrepreneurship, M&A, Marcia Narine, Securities Regulation, Social Enterprise, Teaching, Unincorporated Entities, Weblogs | Permalink | Comments (2)

Monday, March 3, 2014

Call for Papers: How and Why to Teach Accounting, Finance, and Tax

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
Associate Professor
Suffolk University Law School
Click here for contact info

March 3, 2014 in Agency, Conferences, Joshua P. Fershee, LLCs, Partnership, Teaching, Unincorporated Entities | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 4, 2014

Courts Should Get the Doctrinal Distinction Between LLCs and Corporations

Right? 

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).  

A quick search of Westlaw provides ten more cases using the term "limited liability corporation" in reference to an LLC since January 23, 2014.  Maybe it doesn't matter much in most cases, but in cases dealing with new issues under LLC law, it sure can (see, e.g., here).   And until courts start getting more precise, from time to time I'll keep reporting on their lack of precision. 

 

February 4, 2014 in Business Associations, Corporations, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (7) | TrackBack (0)

Tuesday, January 28, 2014

Veil Piercing Not the Only, or Best, Response to Man-Made Disasters

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.

January 28, 2014 in Business Associations, Corporations, Current Affairs, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (0)

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.

January 25, 2014 in Business Associations, Corporate Governance, Financial Markets, LLCs, Social Enterprise, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (0)

Tuesday, January 21, 2014

WV Chemical Spill: Can you over do entity formation? (Hint: Yes.)

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. 

January 21, 2014 in Business Associations, Corporations, Entrepreneurship, Ethics, Joshua P. Fershee, LLCs, Unincorporated Entities | Permalink | Comments (2)

Wednesday, January 15, 2014

Delaware 2013 Corporate Law Round Up

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.

-Anne Tucker

January 15, 2014 in Business Associations, Anne Tucker, Corporate Governance, Corporations, LLCs, Teaching, Unincorporated Entities | Permalink | Comments (1)

Friday, December 13, 2013

Call for Papers: National Business Law Scholars Conference

The National Business Law Scholars Conference (NBLSC) will be held on Thursday, June 19th and Friday, June 20th at Loyola Law School, Los Angeles. This is the fifth annual meeting of the NBLSC, a conference which annually draws together dozens of legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Presentations should focus on research appropriate for publication in academic journals, especially law reviews, and should make a contribution to the existing scholarly literature. We will attempt to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate.

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by April 4, 2014. Please title the email “NBLSC Submission – {Name}”. If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a commentator or moderator. A conference schedule will be circulated in late May.  More information is available here:  http://lls.edu/resources/events/listofevents/eventtitle,81539,en.html

 

Conference Organizers

Barbara Black (The University of Cincinnati College of Law)
Eric C. Chaffee (The University of Toledo College of Law)
Steven M. Davidoff (The Ohio State University Moritz College of Law)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia Law)

 

December 13, 2013 in Business Associations, Anne Tucker, Corporate Governance, Corporations, Financial Markets, M&A, Securities Regulation, Unincorporated Entities | Permalink | Comments (0)

Wednesday, December 11, 2013

AALS as an excuse to share a comic on conference presentations...

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:

Conference 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.

 

  • 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 

-Anne Tucker

 

 

December 11, 2013 in Business Associations, Anne Tucker, LLCs, Teaching, Unincorporated Entities | Permalink | Comments (0)

Tuesday, December 10, 2013

Report Finds Large Entity (Not Just Corporate) Land Ownership in West Virginia

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. 

Other highlights:

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. 

December 10, 2013 in Corporations, Joshua P. Fershee, LLCs, Partnership, Unincorporated Entities | Permalink | Comments (0) | TrackBack (0)

Friday, November 8, 2013

The Economist on “Rise of the distorporation”

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

Haan on Outside Spending and Disclosure by Privately-Held Business Entities

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.

October 20, 2013 in Business Associations, Constitutional Law, Corporate Governance, Corporations, LLCs, Stefan J. Padfield, Unincorporated Entities | Permalink | Comments (0)