Business Law Prof Blog

AALS 2025 - Section on Agency, Etc. - Calls for Papers

AALS Section on Agency, Partnerships, LLCs, and Unincorporated Associations

Calls for Papers

The AALS Section on Agency, Partnerships, LLCs, and Unincorporated Associations is pleased to announce two calls for papers, one for a panel presentation and one for a works-in progress session geared to workshopping the research and writing of junior faculty.

Panel Presentation:

Up to three paper presenters will be selected for the section's principal panel to be held during the AALS 2025 Annual Meeting in San Francisco, CA. The program is entitled Technology's Intersection with Agency, Partnerships, and Unincorporated Associations. Co-Sponsored by the Sections on Technology, Law and Legal Education and Transactional Law and Skills, the session is designed to explore research and teaching involving the interactions of principal/agent relationships, partnerships, and unincorporated business associations with artificial intelligence, blockchains, cybersecurity, and other technological developments.

Works-in-Progress Session:

The section seeks paper proposals from junior scholars for a works-in-progress program.  Submissions for this session may relate to any topic within the scope of the law governing agency, partnerships, LLCs, or unincorporated associations.

Submission Information: 

To respond to either or both calls for papers, please submit a substantial abstract (five or more pages) or draft of an unpublished paper to Joan Heminway at [email protected] before September 6, 2024.  Please remove the author's name and identifying information from the submission. Please include in the submission email your institution, your tenure status, and the number of years you have been in your current position, as well as a statement indicating whether the paper has been accepted for publication and, if not, when you anticipate submitting the article for publication. The subject line of the email should read: "Submission – Panel" or "Submission – WIP Program," as applicable.  Authors of selected papers will be notified in September. Presenters are responsible for paying their registration fee, hotel, and travel expenses.  Inquiries about the section's programs also should be directed to Joan Heminway at [email protected] or (865) 974-3813.

Of Directorships: Reconfiguring the Theory of the Firm

It always is a great pleasure to pass along and promote the work of a colleague.  And today, I get to post about the work of a UT Law colleague!  Many of you know Tomer Stein, who came to join us at UT Law back in the summer.  He is such an ideal colleague and, like many of us, has broad interests across business finance and governance.

This post supports a recent draft governance piece, the title of which is the same as this post--Of Directorships: Reconfiguring the Theory of the Firm.  You can find the draft here.  The abstract is included below.

This Article develops a novel account of directorships and then uses it to reconfigure the theory of the firm. This widely accepted theory holds that firms emerge to satisfy the economic need for carrying out vertically integrated business activities under a fiduciary contract that substitutes for the owners’ multiple agreements with contractors and suppliers. As per this theory, the fiduciary contract is inherently incomplete, yet often preferable: while it cannot address all future contingencies in the firm, it will effectively direct all unaccounted-for firm events by placing them under the owners’ purview as a matter of default, or residual right. Under this contractual mechanism, firm owners, such as corporate shareholders, acquire the status of residual claimants who have the power to decide on all contractually unenumerated contingencies.

This view of the firm is conceptually flawed and normatively mistaken. Firms do carry vertically integrated business activities managed by their fiduciaries, but those fiduciaries—agents, trustees, and directors—are not functional equivalents from either the legal or economic standpoint. Unlike agents and trustees who receive commands from principals and settlors, respectively, directors manage the firm’s business by exercising decisional autonomy. Conceptually, shareholders who hire directors do not run the firm’s business as residual claimants. Rather, it is the directors who manage the firm as residual obligors—all contractually unaccounted for contingencies are placed under the fiduciary’s purview as a matter of obligation. This feature makes directorship an attractive management mechanism that often outperforms other fiduciary mechanisms, and the residual-claimant structure that stands behind them, in a broad variety of contexts. By developing this critical insight, the Article proposes not only to reconfigure the prevalent theory of the firm, but also to redesign both federal and state laws in a way that will facilitate directorships not only in corporations, but also across several indispensable dimensions of our financial, communal, and familial organizations.

As someone who understands both the central role of the director in corporate governance and the incomplete and inaccurate principal/agent relationship between shareholders and directors, I have enthusiasm for this project!  But I also am intrigued by the thought that the ideas in the paper can be translated to non-business institutions and groups.

Read on, and enjoy!

Business Associations & Relationships on the Future Bar Exam: A Virtual Symposium (Part I)

The National Conference of Bar Examiners (NCBE) recently released content summaries of the material proposed to be tested on the future bar exam.  Labeled Content Scope Outlines (the "Outlines"), they are available here.  Among them, are content descriptions under the heading "Business Associations & Relationships," pp. 7-9 of the Outlines.  This post introduces a series of posts over the next week or two on those specific parts of the Outlines.  I will start the ball rolling by making four opening comments below, each focused on a general issue.

• Testing Guidance - The Outlines designate topics that will be "tested in a way that assumes examinees know the details of the relevant doctrine without consulting legal resources" and distinguishes them from ones that will be "tested in a way that assumes examinees have general familiarity with the topics for purposes of issue-spotting or working efficiently with legal resources provided during the exam."  I find this designation and separation helpful.
• High-Level Content Guidance - Given that Delaware corporate and limited liability company law  (a) are national standards and (b) include provisions that are different from those in the Model Business Corporation Act and the Uniform Limited Liability Company Act, respectively, I favor letting examinees know which sets of rules and norms apply to their exam responses.  The Outlines do not offer this information.
• Topic Annotations - At various points, the Outlines offer a short comment about the specific contents of a particular topic.  For example, they note that the topic "Vicarious liability of principal for acts of agent . . . includes distinctions between employees and independent contractors. This topic also includes delegable/nondelegable duties."  These statements are useful, although some of the annotations may still leave too much to the imagination.
• Terminology - The Outlines use "articles of incorporation" to describe a chartering document for a corporation.  Yet, Tennessee uses the term "charter" (arguably the generalist term) and Delaware uses the term "certificate of Incorporation."  I wonder if it would be better to merely use a generic or general descriptive term like "chartering document."  Similar issues exist with respect to limited liability company "articles of organization," "certificates of formation," and "operating or members agreements."  Along similar lines, I would like to see veil piercing referred to in just that way and not as "piercing the corporate veil" when it is used to describe the veil of limited liability in limited partnerships or limited liability companies.

These comments should be enough to get us started.  I will plan to say more in a subsequent post, if time permits.

Please note that comments on the scope and depth of the subjects to be tested are being solicited and are welcomed by the NCBE.  The comment period closes on April 18, 2022.  Comments can be submitted here.

More information about the NCBE's project on the next generation of the bar exam can be found here.

Should We Call it Moral Money?: Ownership Matters and Commitment Too

In my previous post on the "Study on Directors' Duties and Sustainable Corporate Governance" ("Study on Directors' Duties") that Ernst & Young prepared for the European Commission (Commission), I focused on the transformative power of corporate governance. I said that stakeholder capitalism would have a practical value if supported by corporate governance rules based on appropriate standards such as the ones provided by the Sustainable Development Goals (SDGs).

Some of my pointers for the Commission were the creation of a regulatory framework that enables the representation and protection of stakeholders, the representation of “stakewatchers,” that is, non-governmental organizations and other pressure groups through the attribution of voting and veto rights and their members’ nomination to the management board (similar to German co-determination). I also suggested expanding directors' fiduciary duties to include the protection of stakeholders’ interests, accountability of corporate managers, consultation rights, and additional disclosure requirements.

In my last guest post in this series dedicated to the Study on Directors’ Duties, I ask the following questions. Do investors have a moral duty to internalize externalities such as climate change and income inequality, for example? Do firm ownership and investor commitment matter? Should investors’ money be “moral” money? 

In their study Corporate Purpose in Public and Private Firms, Claudine Gartenberg and George Serafeim utilize Rebecca Henderson’s and Eric Van den Steen’s definition of corporate purpose, that is, “a concrete goal or objective for the firm that reaches beyond profit maximization.” In their paper, Gartenberg and Serafeim analyzed data from approximately 1.5 million employees across 1,108 established public and private companies in the US. In their words:

[W]e find that employee beliefs about their firm’s purpose is weaker in public companies. This difference is most pronounced within the salaried middle and hourly ranks, rather than senior executives. Among private firms, purpose is lower in private equity owned firms. Among public companies, purpose is lower for firms with high hedge fund ownership and higher for firms with long-term investors. We interpret our findings as evidence that higher owner commitment is associated with a stronger sense of purpose among employees within the firm.

With institutional investors on the rise, these findings are important because they redirect our attention from the board of directors’ short-termism discussion to shareholders' nature, composition, ownership, and long-term commitment. When it comes to owner commitment, Gartenberg and Serafeim say:

Owner commitment could lead to a stronger sense of purpose for multiple reasons. First, to the extent that commitment translates to an ability to think about the long-term and avoid short-term pressures, this would enable a firm to focus on its purpose rather than on solely short-term performance metrics. Second, committed owners may invest to gain and evaluate more soft information about firms, which in turn may allow managers to invest in productive but hard to verify projects that otherwise would not be approved by less committed owners (e.g., Grossman and Hart, 1986). Third, committed owners might mitigate free rider problems inside the firm, allowing employees to make firm-specific investments with greater confidence that they will not be subject to holdup by firm principals (Alchian and Demsetz 1972; Williamson 1985), which in turn could enhance the sense of purpose inside the organization. A similar argument could hold for customers, suppliers, and other stakeholders, who could see a strong sense of corporate purpose from owner commitment as a credible signal that enables the development of trust or ‘relational contracts’ (Gibbons and Henderson 2012; Gartenberg et al. 2019).

Gertenberg’s and Serafeim’s paper also discloses other findings. They found that firms are more likely to hire outside CEOs when less committed investors control the firms. Additionally, those firms are more likely to pay higher executive compensation levels, particularly relative to what they pay employees. Those firms also engage more frequently in mergers and acquisitions and other corporate restructuring processes. A simple explanation for this would be that such firms have higher agency costs since their ownership is more dispersed.

If we understand the company’s ownership structure, we know the purpose of the company. Therefore, there must be an underlying mechanism to better understand the company’s ownership structure because it will help us understand the company's purpose better. 

Besides, Gertenberg’s and Serafeim’s findings spell out that financial performance and corporate ownership positively impact corporate culture, employees' satisfaction, and employee work meaningfulness. Putting it differently, the corporate culture, employees' satisfaction, and employee work meaningfulness can be standards for evaluating the impact of corporate ownership, governance, and leadership.

Now that the focus is on investors, what can they do to change corporate behavior and consequently impact stakeholders like employees? They can be actively engaged through proxy voting. In their paper Shareholder Value(s): Index Fund ESG Activism and the New Millennial Corporate Governance, Barzuza, Curtis, and Webber explain that index funds often are considered ineffective stewards. The authors also explain how index funds have claimed an active role by challenging management and voting against directors to promote board diversity and sustainability.

Still, institutional investors manage their companies’ portfolios depending on the market, which is heavily impacted by systemic shocks we know will eventually occur. The Covid-19 pandemic has shown us how volatile markets are and our current economic model is.

Corporate laws of most European Union (EU) countries determine that the board of directors must act in the company's interest (e.g., Unternehmensinteresse in Germany, l'intérêt social in France, interesse sociale in Italy, etc.). Defining what the interest of the company is has shown to be a rather tricky endeavor. Gelter explains that, in all cases, one side of the debate claims that the company's interest is different from the interest of shareholders. In the US, the purpose of the company is commingled with the idea of shareholder wealth maximization.

To overcome the tension between prioritizing shareholders' wealth maximization and corporate purpose that considers shareholders' and stakeholders' interests, the Commission should take into account the following dimensions in developing policies in corporate law and corporate governance. 

1. Investors’ ownership and their impact on intangibles like employees’ satisfaction and employee work meaningfulness.
2. Governance structure and how it relates to the company’s ownership structure.
3. Governance structure and how it integrates stakeholders’ interests in the decision-making process.
4. Board diversity and recruitment.
5. Institutional investors’ financial resilience.

Finally, investors should demand CEOs and boards of directors show how they are changing the game and moving the needle toward a more sustainable and resilient conception of the corporation. Why? Because ownership matters and commitment too.

2021 AALS Annual Meeting - Section on Agency, Etc. Call for Papers

Call for Papers
AALS Section on Agency, Partnership, LLCs & Unincorporated Associations 

Entrepreneurship and the Entity 

January 5-9, 2021, AALS Annual Meeting 

The AALS Section on Agency, Partnership, LLCs & Unincorporated Associations will sponsor a panel on “Entrepreneurship and the Entity” at the 2021 AALS Annual Meeting in San Francisco, California. This panel will showcase scholarship on subjects relating to business law and entrepreneurship, including entity choice throughout a company’s evolution, financing alternatives, and how legal rules promote and discourage different kinds of entrepreneurship. Scholars are encouraged to interpret the subject of the Call for Papers broadly and creatively. 

SUBMISSION PROCEDURE: Scholars should send a summary of a work or a work-in-progress of no more than 600 words to Professor Sarah C. Haan at [email protected] on or before Friday, August 21, 2020. The summary should be a pdf or Word document that has been stripped of information identifying the author; only the cover email should connect the author to the submission. The subject line of the email should read: “Submission—[author name & title].” Papers will be selected through an anonymous review by the Section’s Executive Committee. 

SPECIAL NOTE: Interested parties are encouraged to submit even if they are not certain at this time that they will attend the AALS Annual Meeting in person. 

ELIGIBILITY: Scholars at AALS member law schools are eligible to submit. Pursuant to AALS rules, faculty at fee-paid non-member law schools, foreign faculty, adjunct and visiting faculty (without a full-time position at an AALS member law school), graduate students, fellows, and non-law school faculty are not eligible to submit. Please note that all program presenters are responsible for paying their own annual meeting registration fees and, for those attending the AALS Annual Meeting in person, travel expenses. 

Any inquiries about the Call for Papers should be submitted to: Professor Sarah C. Haan at [email protected]. 

LLCs Are Not Corporations, Spring Break Edition

It is Spring Break at WVU, so I am using this time to finish some paper edits and catch up on my email. Last week, I got an email about a recent case from the United States District Court for the Northern District of Illinois. It is a headache-inducing opinion that continues the trend of careless language related to limited liability companies (LLCs). 

The opinion is a civil procedure case (at this point) regarding whether service of process was effective for two defendants, one a corporation and the other an LLC.  The parties at issue, (collectively, “Defendants”) are: (1) Ditech Financial, LLC f/k/a Green Tree Servicing, LLC (“Ditech Financial”) and (2) Ditech Holding Corporation f/k/a Walter Investment Management Corp.’s (“Ditech Holding”). The court notes that it is unclear whether there is diversity jurisdiction, because

“the documents submitted by Defendants with their motion to dismiss suggest that there may be diversity of citizenship in this case. See [12-1, at 2 (stating Ditech Holding is a Maryland corporation with a principal office in Pennsylvania) ]; [12-1, at 2 (stating Ditech Financial is a Delaware limited liability corporation with a principal office in Pennsylvania) ].”

Clayborn v. Walter Investment Management Corp., No. 18-CV-3452, 2019 WL 1044331, at *8 (N.D. Ill. Mar. 5, 2019) (emphasis added).  

Why do courts insist on telling us the state of LLC formation and principal place of business, when that is irrelevant as to jurisdiction for an LLC?  Hmm. I supposed that fact that courts keeping calling LLCs “corporations” might have something to do with it.  The court does seem to know the rule for LLCs is different than the one for corporations, noting that “Plaintiff has not pled or provided the Court with any information regarding the citizenship of each member of Ditech Financial LLC. “ Id.

Despite this apparent knowledge, the court goes on to say:

Under Illinois law, “a private corporation may be served by (1) leaving a copy of the process with its registered agent or any officer or agent of the corporation found anywhere in the State; or (2) in any other manner now or hereafter permitted by law.” 75 ILCS 5/2-204. At least one court to consider the issue has concluded that Illinois state law does not allow service of a summons on a corporation via certified mail. Ward v. JP Morgan Chase Bank, 2013 WL 5676478, at *2 (S.D. Fla. Oct. 18, 2013); see also 24 Illinois Jurisprudence: Civil Procedure § 2:20; 13 Ill. Law and Prac. Corporations § 381. Plaintiff has not cited, nor has the Court located, any support for the proposition that a summons and complaint sent by certified mail constitutes one of the “other manner[s] now or hereafter permitted by law” to effectuate service. Consequently, the Court concludes that Plaintiff has not properly served Ditech Holding under Illinois law, and therefore cannot have served Ditech Financial.^{2 [see below]}

Id. Now the case gets more confusing.  Note that last line above: the court implies that proper service of the corporate parent may have been sufficient to serve the LLC, too. Footnote 2 of the opinion properly clarifies this, though the court then provides another baffling tidbit.

Footnote 2 provides:

Even if Plaintiff had properly served Ditech Holding, it would not have properly effectuated service upon Ditech Financial. Ditech Financial appears to be a limited liability company.[1]; [12]. Under Illinois law, service on a limited liability company is governed by section 1–50 of the Limited Liability Company Act. 805 ILCS 180/1–50; John Isfan Construction, Inc. v. Longwood Towers, LLC, 2 N.E.3d 510, 517–18 (Ill. App. Ct. 2016). Under section 1–50 of the Limited Liability Company Act, a plaintiff may only serve process upon a limited liability company by serving “the registered agent appointed by the limited liability company or upon the Secretary of State.” Pickens v. Aahmes Temple #132, LLC, 104 N.E.3d 507, 514 (Ill. App. Ct. 2018) (quoting 805 ILCS 180/1–50(a)). To properly serve Ditech Financial, Plaintiff would have had to deliver a copy of the summons and complaint to Ditech Financial’s registered agent in Illinois: CT Corporation System. [12, at 5.]

The court had already stated the Ditech Financial was an LLC, though it had called it a “limited liability corporation.” Is the court unclear about the entity type?  If entity type is in question, it would seem worthy of note in the body of the opinion. The court properly cites to the LLC Act, but it inconclusive as to whether Ditech Financial is, in fact, an LLC.    

To make matters worse, the court repeats, in footnote 3, its earlier mistake as to  what an LLC really is:

Service on a limited liability corporation, such as Ditech Financial, must be effectuated in the same manner as service on a corporation such as Ditech Holding. See, e.g., Grieb v. JNP Foods, Inc., 2016 WL 8716262, at *3 (E.D. Pa. May 13, 2016) (evaluating the effectiveness of service of process on a limited liability company under Pa. R. Civ. P. 424).

The court ultimately dismisses the claim without prejudice, which seems proper.  But the rest of this? Sigh. If you need me, I’ll be the one in back banging his head on the table.

Back to Basics: The Reciprocal Nature of Agency and Partnership Relationships

In Business Organizations, I am in the early part of teaching agency and partnership. In my last class, we discussed Cargill, which is a fairly typical case to open agency discussions.  I like Cargill, and I think it is a helpful teaching tool, but I think one needs to go beyond the case and facts to give a full picture of agency. 

Of note, the case deals only with "actual agency" -- for whatever reason, the plaintiffs did not argue "apparent agency" or estoppel in the alternative.  A. Gay Jenson Farms Co. v. Cargill, Inc., 309 N.W.2d 285, 290 n.6 (Minn. 1981) (“At trial, plaintiffs sought to establish actual agency by Cargill's course of dealing between 1973 and 1977 rather than 'apparent' agency or agency by estoppel, so that the only issue in this case is one of actual agency. ”). I think this explains a lot about how the case turns out.  That is, the court recognized that to find for the farmer, there had to be an actual agency relationship.  

I don't love this outcome because one of the hallmarks of an agency relationship is its reciprocal nature. That is, once we find an agency relationship, the principal is bound to the third party and the third party is bound to the principal. In contrast, in a case of estoppel, the principal may be bound (estopped from claiming there is not an agency relationship), but that finding only runs one way. The principal still cannot bind the third party.  

This is a problem for me in Cargill. That is, I don't see a scenario where a court would bind the farmers to Cargill on similar facts. (I know I am not the first to make this observation, but it seemed worth exploring a bit.) As such, I don't think it can rightly be deemed an agency relationship.  

Assume the facts from the case to show agency, but suppose instead Cargill was suing the farmers because the grain prices had increased dramatically and that the farmers had a contract with Warren (the purported agent) to deliver grain at $5/bushel.  However, spot prices were now $15/bushel.  Warren had not paid the farmers for a prior shipment and did not have the ability to pay now. If the contract is with Warren, the farmers should be able to now sell that grain in the market and take the extra $10/bushel for themselves.  However, if Cargill were really the principal on that contract, Cargill would have a right to buy it at $5/bushel.  I just don't see a court making such a ruling on these facts.  

For what it's worth, I do think there is an estoppel argument here, and I think the Cargill court had ample facts to support finding Cargill a guarantor through other actions (promises to pay, name on checks, etc.), some of which might support an apparent authority argument, too. But because I don't see this relationship as an agency relationship as a two-way street, I don't think it can be an "actual agency" relationship. 

Incidentally, I see this reciprocal nature test as proper for partnerships, too.  That is, unless a court, on similar facts, would be willing to find a partnership where it works to the detriment of the plaintiffs, one cannot find a partnership.  Think, for example, of another classic case, Martin v. Peyton, 246 N.Y. 213 (N.Y. 1927).  There, creditors of the financial firm KNK sued KNK, as well as Peyton, Perkins, and Freeman (PPF) who had loaned KNK money. The claim was that PPF was not a mere lender, but had instead become partners of KNK because of the amount of control and profit sharing included in the loan arrangement.  If PPF were deemed partners of KNK, of course, PPF would be liable to the KNK creditors.  Here, the court determines that no partnership exists.  

While a reasonably close call,  I think this is right.  I don't think, based on a similar set of facts, that a court would find for PPF if the dispute were such that finding a partnership between PPF and KNK would reduce the amount KNK would pay its investors. If it can't run both ways, the partnership cannot exist.  I appreciate that in some cases, there simply is not a good analog to test the reciprocal nature of the relationship.  But where it's possible, I think this is a good test to determine whether there really is an agency or partnership relationship or if, instead, what we really have is a sympathetic plaintiff.   

 

More on the SEC Roundtable on the Proxy Process

On November 15, the Securities and Exchange Commission (SEC) convened a Roundtable on the Proxy Process.  (See also here.)  I have not been following this as closely as co-blogger Ann Lipton has (see recent posts here and here), but friend-of-the-BLPB, Bernie Sharfman (Chairman of the Main Street Investors Coalition Advisory Council) has been active as a comment source.  Both contribute valuable ideas that I want to highlight here as the SEC continues to chew on the information it amassed in the roundtable process. 

Ann, as you may recall, has been focusing attention on the uncertain status of proxy advisors when it comes to liability for securities fraud.  In her most recent post, she observes that

There’s a real ambiguity about where, if it all, proxy advisors fit within the existing regulatory framework, and while I am not convinced there is a specific problem with how they operate or even necessarily a need for regulation, I think it can only be for the good if the SEC were to at least clarify the law, if for no other reason than that these entities play an important role in the securities ecosystem, and if we expect market pressure to discipline them, potential new entrants should have an idea of the regime to which they will be subject.

I remember having similar questions as to the possible fiduciary duties and securities fraud liability of funding portals under the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012 (a/k/a the CROWDFUND Act)--Title III of the Jumpstart Our Business Startups Act (a/k/a/, the JOBS Act).  I wrote about these ambiguities (and other concerns) in this paper, published before the SEC adopted Regulation CF.  I know Ann's right that we have clean-up to do when it comes to the status of securities intermediaries in various liability contexts (a topic co-blogger Ben Edwards also is passionate about--see, e.g., here and here).

Bernie has honed in on voting process issues relating to both proxy advisors (the standard for making voting recommendations and the use/rejection of the same) and mutual fund investment advisers (the disclosure of mutual fund adviser voting procedures and SEC's enforcement of the Proxy Voting Rule).  Specifically, in an October 12 letter to the SEC, Bernie sets forth three proposals on proxy advisor voting recommendations.  His bottom line?

Institutional investors have a fiduciary duty to vote. However, the use of uninformed and imprecise voting recommendations as provided by proxy advisors should not be their only option. They should always be in a position of making an informed vote, whether or not a proxy advisor can help in making them informed.

Earlier, in an October 8 letter to the SEC (Revised as of October 23, 2018), Bernie recommends mutual adviser disclosure of "the procedures they will use to deal with the temptation to use their voting power to retain or acquire more assets under management and to appease activists in their own shareholder base" and "the procedures they will use to identify the link between support for a shareholder proposal at a particular company and the enhancement of that company’s shareholder value."  He also recommends that the SEC "should clarify that voting inconsistent with these new policies and procedures or omission of such policies and procedures will be considered a breach of the Proxy Voting Rule" and engage in "diligent" enforcement of the Proxy Voting Rule.  I commend both letters to you.

Ann's and Bernie's proxy disclosure and voting commentary also reminds me of the importance of co-blogger Anne Tucker's work on the citizen shareholder (e.g., here).  It will be interesting to see what the SEC does with the information obtained through the proxy process roundtable and the related comment letters.  There certainly is much here to be explored and digested.

[Postscript, 12/4/2018: Bernie Sharfman notified me this morning of a third comment letter he has filed--on proxy advisor fiduciary duties.  It seems he may have a fourth letter in the works, too.  Look out for that. - JMH]

Are Uber "Driver-Partners" a Liability Time Bomb?

I am probably late to the game on this, but I just realized that Uber promotes their drivers as "driver-partners."  It's even in their ads. This seems unwise.  

Uber has a history linked to the question about whether their drivers are employees or independent contractors. But what about the question of whether Uber drivers are partners or independent contractors? That is big, potential liability conundrum.

Now, just because one says they are partners, that does not make it so, at least as to each other. The converse is also true -- saying expressly "this agreement does not form a partnership" does not necessarily mean a court won't find one. See, e.g., Martin v. Peyton, 158 N.E. 77 (NY 1927) ("Statements that no partnership is intended are not conclusive.").  But, as to third parties, at a minimum, affirmative statements that one is a partner, can create liability for those involved.  The Uniform Partnership Act (1914) § 16. Partner by Estoppel, provides:

(1) When a person, by words spoken or written or by conduct, represents himself, or consents to another representing him to any one, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any such person to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership, and if he has made such representation or consented to its being made in a public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made.

(a) When a partnership liability results, he is liable as though he were an actual member of the partnership.

(b) When no partnership liability results, he is liable jointly with the other persons, if any, so consenting to the contract or representation as to incur liability, otherwise separately.

Similarly, the Revised Uniform Partnership Act provides: 

SECTION 308. LIABILITY OF PURPORTED PARTNER.

(a) If a person, by words or conduct, purports to be a partner, or consents to being represented by another as a partner, in a partnership or with one or more persons not partners, the purported partner is liable to a person to whom the representation is made, if that person, relying on the representation, enters into a transaction with the actual or purported partnership. If the representation, either by the purported partner or by a person with the purported partner’s consent, is made in a public manner, the purported partner is liable to a person who relies upon the purported partnership even if the purported partner is not aware of being held out as a partner to the claimant. If partnership liability results, the purported partner is liable with respect to that liability as if the purported partner were a partner. If no partnership liability results, the purported partner is liable with respect to that liability jointly and severally with any other person consenting to the representation.

Now, can I come up with plenty of counterarguments and ways to make this liability less likely, and those are compelling arguments, too, in many settings. However, I cannot come up with such a good argument that would make it worth using "Driver-Partner" as my term.  How about "Driver-Teammate" or "Driver-Affiliate" or "Driver-Collaborator" or even "Driver-Member?" For me, the specificity of the term "partner," and the liability that can follow without formal action, would warrant avoiding its use.  But maybe that's just me.  

 

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

Call for Papers for

Section on Agency, Partnership, LLCs and Unincorporated Associations on

Respecting the Entity: The LLC Grows Up

at the 2019 AALS Annual Meeting

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

The program is tentatively scheduled to feature:

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

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

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

Submission Information:

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

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

Any inquiries about the Call for Papers should be submitted to: Joshua Fershee, West Virginia University College of Law, [email protected] or (304) 293-2868.

William Morris Endeavor and the Wahlberg/Williams Pay Disparity: A Role for Agency Law in Equality and Justice?

“Injustice anywhere is a threat to justice everywhere.”

Martin Luther King, Jr., Letter from Birmingham Jail, Alabama, 16 April 1963, in Atlantic Monthly August 1963

I had wanted to post a tribute to Dr. King here early on Monday.  However, after posting the Emory conference announcement, I moved on to other work, and that work filled up the available time in the day.  So, this late post including the quote above will have to suffice.

As I read meaningful quotes from Dr. King on social media and elsewhere all day on Monday, I found myself thinking of examples of inequality and injustice.  Many are compelling; many are meaningful.  Some are current events; and some of those involve business law questions.

For a number of days now (since before MLK Day) we have been showered with news stories relating to the compensation disparity between Mark Wahlberg and Michelle Williams for reshooting scenes from All the Money in the World in the wake of Kevin Spacey's replacement in the film resulting from allegations of sexual misconduct.  (See here, among other places.)  Most folks who follow Hollywood business issues know that gender discrimination is common.  My sister, a visual effects producer (her current movie is Downsizing, which I enjoyed and recommend), has suffered the effects.

But I found myself focusing on the role of William Morris Endeavor Entertainment LLC (WME), the talent agency that represented both Wahlberg and Williams.  Talent agents are regulated by guilds and unions as well as under California law (as represented here).  But they also have fiduciary duties.  Why did Wahlberg's contract not include a reshoot covenant (giving him the leverage to negotiate an outsized reshoot fee) while Williams's contract did?  Did WME fail to act in a manner consistent with any applicable duty of care--or maybe loyalty--as an experienced agent representing both actors--with knowledge of an overall gender pay gap?  Of course, there are many other possible explanations for the difference, and we are not privy to the terms of the two actors' talent contracts with WME (including any enforceable private ordering around agency law rules or confidentiality or privacy clauses).  But the related questions seem worth asking.  

Specifically, we might ask whether there is a question of WME's care, competence, or diligence under Section 8.08 of the Restatement (Third) of Agency.  And, among other things, Section 8.11 of the Restatement (Third) of Agency imposes a duty of candor on agents that may be applicable here.  And were there differences in the benefits that WME got out of each agreement that may have affected the firm's ability to act loyally for the principal's benefit under Section 8.01 of the Restatement (Third) of Agency?  We may never know.

Intermediation likely cannot cure the evils of inequality and injustice.  But where intermediaries are agents or otherwise owe fiduciary duties to their clients, those fiduciary duties may cause--or at least incentivize--the intermediaries to use their experience and knowledge to correct gender, racial, and other inequities where they exist.  This is something I will continue to ponder.

Loyalty to Whom (or What)?

Loyalty has been in the news lately.  The POTUS, according to some reports, asked former Federal Bureau of Investigation ("FBI") Director James Comey to pledge his loyalty.  Assuming the basic veracity of those reports, was the POTUS referring to loyalty to the country or to him personally?  Perhaps both and perhaps, as Peter Beinart avers in The Atlantic, the POTUS and others fail to recognize a distinction between the two.  Yet, identifying the object of a duty can be important.

I have observed that the duty of government officials is not well understood in the public realm. Donna Nagy's fine work on this issue in connection with the proposal of the Stop Trading on Congressional Knowledge ("STOCK") Act, later adopted by Congress, outlines a number of ways in which Congressmen and Senators, among others, may owe fiduciary duties to others.  If you have not yet been introduced to this scholarship, I highly recommend it.  If we believe that government officials are entrusted with information, among other things, in their capacity as public servants, they owe duties to the government and its citizens to use that information in authorized ways for the benefit of that government and those citizens.  In fact, Professor Nagy's congressional testimony as part of the hearings on the STOCK Act includes the following in this regard:

Given the Constitution's repeated reference to public offices being “of trust,” and Members’ oath of office to “faithfully discharge” their duties, I would predict that a court would be highly likely to find that Representatives and Senators owe fiduciary-like duties of trust and confidence to a host of parties who may be regarded as the source of material nonpublic congressional knowledge. Such duties of trust and confidence may be owed to, among others:

• the citizen-investors they serve;
• the United States;
• the general public;
• Congress, as well as the Senate or the House;
• other Members of Congress; and
• federal officials outside of Congress who rely on a Member’s loyalty and integrity.

There is precious little in federal statutes, regulations, and case law on the nature--no less the object--of any fiduciary the Director of the FBI may have.  The authorizing statute and regulations provide little illumination.  Federal court opinions give us little more.  See, e.g., Banks v. Francis, No. 2:15-CV-1400, 2015 WL 9694627, at *3 (W.D. Pa. Dec. 18, 2015), report and recommendation adopted, No. CV 15-1400, 2016 WL 110020 (W.D. Pa. Jan. 11, 2016) ("Plaintiff does not identify any specific, mandatory duty that the federal officials — Defendants Hornak, Brennan, and the FBI Director— violated; he merely refers to an overly broad duty to uphold the U.S. Constitution and to see justice done.").  Accordingly, any applicable fiduciary duty likely would arise out of agency or other common law.  Section 8.01 of the Restatement (Third) of Agency provides "An agent has a fiduciary duty to act loyally for the principal's benefit in all matters connect with the agency relationship."  

But who is the principal in any divined agency relationship involving the FBI Director?  

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First time this has happened in 16+ years of law teaching . . . .

Imagine this: Professor walks into Business Associations class Monday morning at 8:00 am having prepared to cover 14 pages of reading when she assigned only three (intending, when creating the syllabus, as she later recalled, to use the time to summarize, contrast, and compare agency law rules that will again come into play in partnership and other entity law--and to catch up, if need be).  OK.  The professor is me.  First lesson (which I thought I had learned many moons ago): always double-check the syllabus on what you've assigned.

 

So, what happened in class?  Well, the students didn't let on that the outline for the class plan that I scripted out on the whiteboard seemed to go beyond the reading.  But they might not have recognized that, since it was only an outline.  However, once I started covering the unassigned material, someone did alert me to my error.  Shocked (!), I told them that I had been too nice (weak response) and that--obviously--I had not checked the syllabus to confirm the day's reading assignment before scripting out the class plan and preparing for class.

 

I didn't then let the students go after learning of the mistake (having covered in summary fashion those three pages in about 15 minutes of class time). Instead, I constructed a hypothetical set of facts relating to a business conducted as a sole proprietorship from the facts of the partnership case on the syllabus for Wednesday (which I had prepared to cover for today) and asked the students to analyze contract and tort liability based on the hypothetical using the agency law rules we covered over the past four classes.  Detriment: people weren't prepared for this based on the prompts in the syllabus for today's class, and it took a while (and a board diagram) to establish the facts of the hypothetical with some (albeit far-from-perfect) clarity.  Benefit: many students learned that they don't yet know/understand agency law, and I got the opportunity to give the students a few pointers on how partnership law will be different from agency law.

 

Did I make the right choice?  I am following up with a post on the course TWEN site to capture the agency law rules we covered in class (to which the students did not have many salient citations).  What else can I do to take this lemon and turn it into lemonade?  All suggestions are welcomed.

From The Big Peach to Music City

This past week, I completed the second leg of my June Scholarship and Teaching Tour.  My time at "Method in the Madness: The Art and Science of Teaching Transactional Law and Skills" at Emory University School of Law last week was two days well spent.  I had a great time talking to attendees about my bylaw drafting module for our transaction simulation course, Representing Enterprises, and listening to others talk about their transactional law and skills teaching.  Great stuff.

This week's portion of my academic tour begins with a teaching whistle-stop at the Nashville School of Law on Friday, continues with attendance (with my husband) at a former student's wedding in Nashville on Saturday evening, and ends (my husband and I hope) with Sunday brunch out with our son (and his girlfriend if she is available).  Specifically, on Friday, I teach BARBRI for four hours in a live lecture.  The topics?  Well, I drew a short straw on that.  I teach agency, unincorporated business associations (including a bit about both extant limited liability statutes in Tennessee), and personal property--all in four hours.  Ugh.  Although I am paid for the lecture and my expenses are covered, I would not have taken (and would not continue to take) this gig if I didn't believe that I could be of some help to students.  These topics--especially agency and partnership law, but also personal property--often are tested on the bar exam.  So, on I press.

I also am completing work this week on the draft article that I will present in Chicago and Seattle on the last two stops of my tour.  I will say more about that article in next week's post.  In the mean time, let me know if you have any suggestions (or good jokes) on the law of agency, partnerships, LLCs, or personal property (e.g., tenancies, gifts, bailments, adverse possession, replevin) for my lecture on Friday . . . .  It's so hard to make these speed-lectures somewhat engaging for the students.  [sigh]

Title III Crowdfunding is LIVE!

OK.  I count 17 Form C filings (not including a few amended filings, two of which are noted below) on "Day 1" of U.S securities crowdfunding.  Not a bad showing for the first day out, in my view.

First in line? Bloomery Investment Holdings, LLC with an offering of LLC interests on StartEngine Capital LLC.  The firm filed its Form C a bit after 6:30 AM.   Early risers!  Eager beavers!  (Maybe too eager, since an amendment was filed less than two hours later--apparently because the attendant Form C .pdf was rejected in the initial filing.)  The firm's subsidiary is a moonshine-based liqueur producer.  At this writing, $11,700 of the target threshold funding of $300,000 (1000 units at $300 per unit) has been committed--$288,300 to go!  ($600 came in while I was typing this post.)  And it looks like the base of operations is in West Virginia, Josh!  Do you know these folks?  (Slogan: "Take a Shot on Us.")

StarEngine also is hosting another crowdfunded offering filed today.  The issuer on this offering, GameTree PBC (yes, Haskell, a public benefit corporation!), a social network for gamers based in Solana Beach, California.  GameTree is selling common stock at $2 per share and has set a threshold funding target of $100,000.  As of this writing, the firm had raised $8,360--$91,640 to go.  The Form C filing for this offering also was amended.  The reason? "Needed to re-upload campaign screen shots. First upload did not work."  So, it seems there may be some glitches--or at least propensities for operator error.

This is pure spectator sport for me right now.  I am interested to see that issuers are actually fling and that offerings are attracting some financing commitments.  But some of what I am reading is pretty funny stuff.  I don't have time to do a play-by-play on any of these filings (too busy a week this week).  I must admit that I am especially amused by this "financial risk factor" in the GameTree materials:

Management has no experience managing companies with publicly traded securities.

The legal issues related to public securities are Byzantine and myriad. While it is our intention to follow the law as we understand it and seek the advice necessary to follow best practices, we recognize that mistakes with negative financial results to investors can occur. Crowdfunding is a new method for raising capital and laws are quickly changing and evolving. Changes in securities law may void and/or alter equity arrangements with shareholders.

I just had to quote that one here . . . .  I nearly fell off my chair laughing.  And here is the GameTree risk factor on benefit corporation status, so Haskell can have something to look at and consider:

GameTree is a public benefit corporation and thus may engage in activities in pursuit of its public benefit at the expense of financial gain.

Unlike traditional corporations in which operations and business goals are tied exclusively to the pursuit of profit, GameTree may also take actions in alignment with its stated public benefit at the expense of profit maximization. It is still a for­profit corporation in distinction from a charitable non­profit which has a benefit as its sole purpose.

These disclosures are not what I would've drafted in either case.  But neither disclosure is inaccurate, in my view.  And each is relatively simple.  

It will be interesting to continue to look at some of the SEC filings and related online disclosures as time passes.  I hope to be able to devote additional time to that after I have finished grading exams and papers.  In the mean time, I would enjoy reading your reactions here.

Daniel Kleinberger: Delineating Delaware’s Implied Covenant of Good Faith & Fair Dealing (Contract Is King Micro-sympsium)

Guest post by Daniel Kleinberger:

Part I - Introduction

My postings this week will seek to delineate Delaware’s implied contractual covenant of good faith and fair dealing and the covenant’s role in Delaware entity law

An obligation of good faith and fair dealing is implied in every common law contract and is codified in the Uniform Commercial Code (“U.C.C”). The terminology differs:  Some jurisdictions refer to an “implied covenant;” others to an “implied contractual obligation;” still others to an “implied duty.”  But whatever the label, the concept is understood by the vast majority of U.S. lawyers as a matter of commercial rather than entity law.  And, to the vast majority of corporate lawyers, “good faith” does not mean contract law but rather conjures up an important aspect of a corporate director’s duty of loyalty.

Nonetheless, Delaware’s “implied contractual covenant of good faith and fair dealing” has an increasingly clear and important role in Delaware “entity law” – i.e., the law of unincorporated business organizations (primarily limited liability companies and limited partnerships) as well as the law of corporations.

Because to the uninitiated “good faith” can be frustratingly polysemous, this first blog “clears away the underbrush” by explaining what Delaware’s implied covenant’s “good faith” is not.

Part II – A Couple of Major “Nots”

1. Not the Looser Approach of the Uniform Commercial Code

The Uniform Commercial Code codifies the common law obligation of good faith and fair dealing for matters governed by the Code: “Every contract or duty within [the Uniform Commercial Code] imposes an obligation of good faith in its performance and enforcement.”  The Code defines “good faith” as “mean[ing] [except for letter of credit matters] honesty in fact and the observance of reasonable commercial standards of fair dealing.” An official comment elaborates: “Although ‘fair dealing’ is a broad term that must be defined in context, it is clear that it is concerned with the fairness of conduct rather than the care with which an act is performed.”

The UCC standard thus incorporates facts far beyond the words of the contract at issue and furthers a value (fairness) which in the entity context is usually the province of fiduciary duty.  The UCC  definition provides some constraint by referring to “reasonable commercial standards,” but “[d]etermining . . . unreasonableness inter se owners of an organization is a different task than doing so in a commercial context, where concepts like ‘usages of trade’ are available to inform the analysis.” ULLCA (2013) § 105(e), cmt.

The Delaware Supreme Court has flatly rejected the U.C.C. approach for Delaware unincorporated businesses.

2. Not the Corporate Good Faith of Disney, Stone v. Ritter, and Caremark

An obligation to act in good faith has long been part of a corporate director’s duty under Delaware law, but the concept became ever more important following the landmark case of Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).  In Van Gorkom, the Delaware Supreme Court held directors liable for gross negligence in approving a merger transaction, a holding that “shocked the corporate world.”

 Spurred by the Delaware corporate bar, the Delaware legislature promptly amended Delaware’s corporate statute.  The amendment permits Delaware  corporations to essentially opt out of the Van Gorkom rule.  The now famous Section 102(b)(7) authorizes a Delaware certificate of incorporation to:

eliminat[e] or limit[] the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty …, provided that such provision shall not eliminate or limit the liability of a director: (i) For any breach of the director's duty of loyalty to the corporation or its stockholders; [or] (ii) for acts or omissions not in good faith….

In effect, the provision authorizes exculpation from damages arising from claims of director negligence, but for some time the exception “for acts or omissions not in good faith” was controversial.  Where plaintiffs could not allege breach of the duty of loyalty, they sought to equate “not in good faith” with extreme negligence.

Notably, the meaning of “not in good faith” was pivotal in the lengthy and costly litigation arising from the Disney corporation’s termination of Michael Ovitz.  However, the Supreme Court’s decision in In re Walt Disney Co. Derivative Litig. left the issue murky.  Eventually, in Stone v. Ritter, the court made clear that in this context “good faith” is an aspect of the duty of loyalty.  The Court then equated a lack of this type of good faith with a director’s utter failure to attend to his or her oversight obligations (the so-called Caremark I duties).

Thus, a Delaware director’s fiduciary duty of good faith has nothing to do with the “good faith” of the Delaware implied covenant of good faith and fair dealing.

This posting is derived from Daniel S. Kleinberger, “Delaware’s Implied Contractual Covenant of Good Faith and “Sibling Rivalry” Among Equity Holders,” a paper presented at the 21st Century Commercial Law Forum: 15th International Symposium in Beijing, at Tsinghua University’s School of Law, November 1, 2015 (all footnotes and most citations omitted).

Shareholder Activists Can Add Value and Still Be Wrong

Last week, the Deal Professor, Steven Davidoff Solomon, wrote an article titled, The Boardroom Strikes Back. In it, he recalls that shareholder activists won a number of surprising victories last year, and more were predicted for this year. That prediction made sense, as activists were able to elect directors 73% of the time in 2014.  This year, though, despite some activist victories, boards are standing their grounds with more success.  

I have no problem with shareholders seeking to impose their will on the board of the companies in which they hold stock.  I don't see activist shareholder as an inherently bad thing.  I do, however, think  it's bad when boards succumb to the whims of activist shareholders just to make the problem go away.  Boards are well served to review serious requests of all shareholders, but the board should be deciding how best to direct the company. It's why we call them directors.  

As the Deal Professor notes, some heavy hitters are questioning the uptick in shareholder activism: 

Some of the big institutional investors are starting to question the shareholder activism boom. Laurence D. Fink, chief executive of BlackRock, the world’s biggest asset manager, with $4 trillion, recently issued a well-publicized letter that criticized some of the strategies pushed by hedge funds, like share buybacks and dividends, as a “short-termist phenomenon.” T. Rowe Price, which has $750 billion under management, has also criticized shareholder activists’ strategies. They carry a big voice.

I am on record being critical of boards letting short-term planning be their primary filter, because I think it can hurt long-term value in many instances.  I don't, however, think buybacks or dividends are inherently incorrect, either.  Whether the idea comes from an activist shareholder or the board doesn't really matter to me.  The board just needs to assess the idea and decide how to proceed.  

[Please click below to read more.]

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Wyoming S.C. Makes LLC Veil Piercing Easier, Says LLCs can have "Corporate Assets"

 The Supreme Court of Wyoming recently decided to pierce the limited liability veil of a single-member LLC.   Green Hunter Wind Energy, LLC (LLC), had a single member: Green Hunter Energy, Inc. (Corp). LLC entered into a services contract with Western Ecosystems Technology, Inc. (Western).  The court determined that veil piercing – thus allowing Western to recover LLC’s debts from Corp – was appropriate for several reasons. I think the court got this wrong.  The case can be accessed here (pdf).  

The court provides the following rule for piercing the veil of a limited liability company, providing three basic factors 1) fraud; 2) undercapitalization; and 3) “intermingling the business and finances of the company and the member to such an extent that there is no distinction between them.”  The court noted that the failure to following company formalities was recently dropped as a factor by changes to the state LLC statute.

Here’s where the court goes wrong: 

(1) As to undercapitalization, the court completely ignores the fact that Western freely contracted with the LLC with little to no cash.  If Western wanted the parent Corp to be a guarantor, it could have required that. If Western thought LLC was acting as an agent for Corp, Western should have claimed that.  It seems to me this is directly analogous to an actual parent-child relationship.  Western contracted with adult (but penniless) child.  Child didn't have money when the contract was signed or when the bill was submitted.  Western then calls parent and says, "Pay up." Western is free to call, but parent can say, “No.  You dealt with my kid, not me, and I didn't agree to this debt.”   

(2) There is a better argument this should be different if this were a tort suit where Western did not choose to engage with the LLC, but that's not the case here.  I don't see how Western can claim undercapitalization now when they had the opportunity to ask before the contract was formed.  Western is the least cost avoider here and assumed the risk of dealing with a lightly capitalized company.  It seems to me that should be part of the assessment.  Undercapitalization is, as the court notes, “a relative concept.” The court cites potential abuse of LLC laws if they were to adopt such a rule that motivates companies to ask for guarantees. instead adopting a rule that could incentivize companies like Western actively avoid ask ingfor guarantees. Why? Because if you ask for a guarantee and are refused, it could be used against you later.  But if you don’t ask, you may get to piece the veil and seek a windfall recovery by getting a post hoc guarantee that was not available via negotiation. 

The court’s rationale is as follows:

It makes good business sense for a contract creditor to try to obtain a guarantee  from the member or retainer from the limited liability company itself. But we are mindful of the reality of the marketplace that many businesses are not in a position—competitively or economically—to insist on guarantees. For that reason, we decline Appellant’s invitation to find piercing inappropriate in this case because Western did not protect itself from Appellant’s misuse of the LLC by attempting to obtain a guarantee or other form of security. To do so would invite abuse of entities, as is the case here. 

No way.  If you can’t “competitively or economically” secure a guarantee, then too bad.  If the legislature wants to create guarantees or minimum capitalization requirements for all entities, fine.  Otherwise, this is absurd. 

(3) Further, Court state that "the district court correctly concluded that the LLC 'failed to adequately capitalize the LLC, that LLC was undercapitalized at all times relevant to this suit and the LLC lacks corporate assets."  Wrong.  Again, if Western knew the finances of LLC at the time of contracting (as it could and should have), then it wasn’t undercapitalized.  LLC simply existed and Western did not seek to avoid the risk of dealing with such an entity. 

More important, though LLCs cannot have “corporate assets.” It’s a limited liability company, not a corporation.  Sheesh.  I’ll add this one to my list of courts getting LLC distinctions wrong.  (See, e.g., here, here, here, and here.) I would have loved to see the Supreme Court correct the district court on that, at least.  

(4) The court incorrectly suggests that the tax filings of the parent corporation and a subsidiary LLC can be a factor in the veil piercing analysis.  Sorry, but no.  For a single-member LLC, for federal tax purposes, the LLC will probably be a disregarded entity.  As such, the LLC will usually (if not always) look like part of the parent corporation. To even consider the tax filing necessarily makes one factor weigh toward piercing.  That’s wrong. 

Early in the opinion, the court notes, “Piercing seems to happen freakishly. Like lightning, it is rare, severe, and unprincipled.” (quoting Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. Chi. L. Rev. 89 (1985) (internal quotation marks omitted)).  In this case the court seems to be trying to make veil-piercing law in LLCs more predictable.   I’m concerned they are – they are making is more likely the veil piecing will occur, at least in the single-member LLC context.  To the extent we’re going to allow single-member LLCs, that’s unfortunate. 

Summer's Over: More On Teaching Business Organizations

At West Virginia University College of Law, we started classes yesterday, and I taught my first classes of the year: Energy Law in the morning and Business Organizations in the afternoon.  As I  do with a new year coming, I updated and revised my Business Organizations course for the fall.  Last year, I moved over to using Unicorporated Business Entities, of which I am a co-author.  I have my own corporations materials that I use to supplement the book so that I cover the full scope of agency, partnerships, LLCs, and corporations.  So far, it's worked  pretty well.  I spent several  years with  Klein, Ramseyer and Bainbridge's Business Associations, Cases and Materials on Agency, Partnerships, and Corporations (KRB), which is a great casebook, in its own right.

I did not make the change merely (or even mostly) because I am a co-author. I made the change because I like the structure we use in our book. I had been trying to work with KRB in my structure, but this book is designed to teach in with the organization I prefer, which is more topical than entity by entity.  I'll note that a little while ago, my co-blogger Steve Bradford asked, "Are We Teaching Business Associations Backwards?" Steve Bainbridge said, "No." He explained, 

I've tried that approach twice. Once, when I was very young, using photocopied materials I cut and pasted from casebook drafts the authors kindly allowed me to use. Once by jumping around Klein, Ramseyer, and Bainbridge. Both times it was a disaster. Students found it very confusing (and boy did my evaluations show it!). It actually took more time than the entity by entity approach, because I ended up having to do a lot of review (e.g., "you'll remember from 2 weeks ago when we discussed LLCs most recently that ...."). There actually isn't all that much topic overlap. Among corporations, for example, you've got the business judgment rule, derivative suits, "duty" of good faith, executive compensation, the special rules for close corporations, proxies, and so on, most of which either don't apply to LLCs etc.... or don't deserve duplicative treatment.

I have great respect for Prof. Bainbridge, and his writing has influenced me greatly, but (not surprisingly), I come out more closely aligned with my perception of Larry Ribstein on such issues, and with Jeff Lipshaw, who commented, 

I disagree about the lack of topic overlap, and suspect Larry Ribstein is raging about this in BA Heaven right now. . . .

This may reflect differences among student populations, but the traditional corporate law course, focusing primarily on public corporations, is less pertinent in many schools where students are unlikely to be doing that kind of work when they graduate. It's far more likely that they'll need to be able to explain to a client why the appropriate business form is a corporation or an LLC, and what the topical differences between them are.

I completely agree, and I would go another step to say that I find the duplication to be a valuable reinforcement mechanism that is worth (what I have seen as limited) extra time.  I am teaching a 4-credit course, though, which gives me time I never had in my prior institution's 3-credit version. 

One thing I am doing differently this year is my first assignment, which seeks to build on what I see as a need for students here. That is, I think many of them will need to be able to explain entity differences and help clients select the right option. 

I had my students fill out the form for a West Virginia Limited Liability Company (PDF here). I had a few goals.  First, I don't like to have students leave any of my classes without handling at least some of the forms or other documents they are likely to encounter in practice.  Second, I did it without any instruction this time (I have used similar forms later in the course) because I thought it would help me tee up an introduction to all this issues I want them thinking about with regard to entity choice.  (It did.) Finally, I like getting students to see the connection between the form and the statute. We can link though and see why the form requires certain issues, discuss waivable and nonwaivable provisions, and talk about things like entity purpose, freedom of contract, and the limits of limited liability.  

If nothing else, the change kept things fresh for me.  I welcome any comments and suggestions on any of this, and I wish everyone a great new academic year.  

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.