Business Law Prof Blog

Friend-of-the-BLPB Tom Rutledge alerted me earlier today to a Thomson Reuters piece on the TripAdvisor reincorporation litigation that quotes not one but two of our blogger colleagues: Ann Lipton and Ben Edwards (in that order). Ann is quoted (after a mention and quotation of one of her recent, more entertaining tweets) on the Delaware judicial aspects of the case. Ben is quoted on the Nevada corporate law piece. So great to see these two offering their legal wisdom on this interesting claim.

Ann's tweet (perhaps predictably) offers a different "take" on Nevada law than Ben's press statements.

Ann: “I tell my students, Nevada is where you incorporate if you want to do frauds . . . .”

Ben: “The folks here are people acting in good faith, trying to do what’s right – not cynically racing to the bottom . . . .”

And then Ben gets the last word: “Nevada . . . has become a home for billionaires leaving Delaware in a huff.”

Beautiful.

April 24, 2023 in Ann Lipton, Business Associations, Corporate Governance, Current Affairs, Delaware, Joan Heminway, Litigation | Permalink | Comments (0)

Friday, November 18, 2022

Why the Judge Was Right to Rule Against DeSantis' Stop WOKE Act

As much as I love being a professor, it can be hard. I’m not talking about the grading, keeping the attention of the TikTok generation, or helping students with the rising mental health challenges.

I mean that it’s hard to know what to say in a classroom. On the one hand, you want to make sure that students learn and understand the importance of critical thinking and disagreeing without being disagreeable.

On the other hand, you worry about whether a factual statement taken out of context or your interpretation of an issue could land you in the cross hairs of cancel culture without the benefit of any debate or discussion.

I’m not an obvious person who should be worried about this. Although I learned from some of the original proponents of critical race theory in law school, that’s not my area of expertise. I teach about ESG, corporate law, and compliance issues.

But I think about this dilemma when I talk about corporate responsibility and corporate speech on hot button issues. I especially think about it when I teach business and human rights, where there are topics that may be too controversial to teach because some issues are too close to home and for many students and faculty members, it’s difficult to see the other side. So I sometimes self censor.

My colleagues who teach in public universities in Florida had even more reason to self censor because of the Stop WOKE act, which had eight topics related to race, gender, critical race theory and other matters that the State deemed “noxious” or problematic.

Yesterday, a federal court issued a 139-page opinion calling the law “dystopian.” The court noted that Justice Sotomayor could violate the law by guest lecturing in a law school and reading from her biography where she talks about how she benefitted from affirmative action. That’s absurd.

I had the chance to give my views to the Washington Post yesterday. This law never personally affected me but as the court noted, the university is the original marketplace of ideas. I told the reporter that one of my areas of expertise, ESG, is full of the kinds of issues that the government of the State of Florida has issues with. I told him that I was glad that I worked at a private university because academic freedom makes me more comfortable to raise issues. I noted that students need the ability to play devil's advocate and speak freely because there's no way to mold the next generation of thinkers and lawmakers without free speech. I explained that you can't write the laws if you're not willing to hear more than one point of view.

I hope that we get back to the days when professors don’t self censor, whether there’s a law in place or not. Of course there are some statements that are unacceptable and should never be taught in a classroom.

But I worry that some in this generation don’t know the difference between controversial and contemptible. That goes for my friends of all ideologies.

I worry that some students are missing out on so much because our society doesn’t know how to engage in civil discourse about weighty topics. So people either rant or stay silent.

In any event, my rant is over.

Today is a day for celebration.

Congratulations to my colleagues in public universities.

Reason has won out.

November 18, 2022 in Constitutional Law, CSR, Current Affairs, Human Rights, Law School, Lawyering, Legislation, Litigation, Marcia Narine Weldon, Teaching | Permalink | Comments (2)

Friday, March 4, 2022

Corporate & Securities Litigation Workshop: Call for Papers

The University of Illinois College of Law, in partnership with UCLA School of Law, University of Richmond School of Law, and Vanderbilt Law School, invites submissions for the Ninth Annual Workshop for Corporate & Securities Litigation. This workshop will be held on Friday, September 23 and Saturday, September 24, 2022 in Chicago, Illinois.

Overview

This annual workshop brings together scholars focused on corporate and securities litigation to present their scholarly works. Papers addressing any aspect of corporate and securities litigation or enforcement are eligible, including securities class actions, fiduciary duty litigation, and SEC enforcement actions. We welcome scholars working in a variety of methodologies, as well as both completed papers and works-in-progress.

Authors whose papers are selected will be invited to present their work at a workshop hosted by the University of Illinois College of Law. Participants will pay for their own travel, lodging, and other expenses.

Submissions

If you are interested in participating, please send the paper you would like to present or an abstract of the paper to [email protected] by Friday, May 13, 2022. Please include your name, current position, and contact information in the e-mail accompanying the submission. Authors of accepted papers will be notified in June.

Questions

Any questions concerning the workshop should be directed to the organizers: Verity Winship ([email protected]), Jessica Erickson ([email protected]), Jim Park ([email protected]), and Amanda Rose ([email protected]).

March 4, 2022 in Conferences, Corporate Finance, Corporate Governance, Joan Heminway, Litigation, Research/Scholarhip, Securities Regulation | Permalink | Comments (0)

Tuesday, October 26, 2021

LLC Magically Appears, Incorrectly Called a Corporation

As I have noted previously, LLCs (also known as limited liability companies) are generally required to be represented by counsel in court proceedings. This is unremarkable, as entities, like corporations and LLCs are deemed, by law, to be separate from their owners. They are often known as “fictional people.” Because they are not natural persons, they cannot (usually) represent themselves pro se and shareholder/member/owners cannot do so for them.

A recent case from the Eastern District of Wisconsin agrees with the well-established principal. Unfortunately, it also follows suit with a less productive prior practice, calling an LLC a limited liability corporation. An LLC, again, is a limited liability company, and it is a separate and distinct entity from a corporation, with its own statute and everything. Here’s an excerpt:

Leszczynski is representing himself in the case, which he has a statutory right to do. 28 U.S.C. § 1654 (“In all courts of the United States the parties may plead and conduct their own cases personally or by counsel as, by the rules of such courts, respectively, are permitted to manage and conduct causes therein.”). But even though he is president of Rustic Retreats Log Homes, Inc., Leszczynski cannot represent that corporate defendant. “Corporations unlike human beings are not permitted to litigate pro se.” In re IFC Credit Corp., 663 F.3d 315, 318 (7th Cir. 2011) (citations omitted). “A corporation is not permitted to litigate in federal court unless it is represented by a lawyer licensed to practice in that court.” United States v. Hagerman, 545 F.3d 579, 581 (7th Cir. 2008) (citations omitted). That is true even if the corporation is a limited liability corporation. Id. at 582. “[T]he right to conduct business in [the form of a limited liability corporation] carries with it obligations one of which is to hire a lawyer if you want to sue or defend on behalf of the entity.” Id. at 581-82.

Leszczynski may represent himself, but he may not represent Rustic Retreat Log Homes, LLC. The corporate entity must be represented by a lawyer admitted to practice in the federal court for the Eastern District of Wisconsin. The corporation cannot file any documents in federal court—including any answer or response to the complaint—unless it does so through an attorney licensed to practice in this court.

PIONEER LOG HOMES OF BRITISH COLUMBIA, LTD., Plaintiff, v. RUSTIC RETREATS LOG HOMES, INC., & JOHN LESZCZYNSKI, Defendants., No. 21-CV-1029-PP, 2021 WL 4902169, at *3–4 (E.D. Wis. Oct. 21, 2021).

So, this is generally pretty standard fare. Wrong, but standard, though this one has a rather interesting wrinkle. The court here notes that “corporate” defendants must be represented by a lawyer. It repeats other authority to support this, then attempts to draw a distinction between a corporation and an LLC, but incorrectly calling the LLC a limited liability corporation. Twice. But that, unfortunately, is not weird. It happens far to often.

What’s weird here is that the case caption refers to Rustic Retreat Log Homes, Inc., as does the earlier part of the opinion. Yet, down near the end, we have the vague LLC references, and an explicit reference to Rustic Retreat Log Homes, LLC. But where does it come from?

The “That is true even if the corporation is a limited liability corporation” language does suggest that perhaps there is another entity involved (an LLC in addition to the corporation), but this seems to be the only clue. Clearly, this mystery needed to be solved, so I pulled the complaint. In the complaint, it asserts, in paragraph 62, that “Leszczynski set up a successor company, Rustic Retreats WI, LLC, on June 25, 2021.” That’s the only LLC reference in the complaint. It seems likely, then that the court meant to say that both Rustic Retreat Log Homes, Inc. and Rustic Retreats WI, LLC needed to be represented by a lawyer in court. But the opinion still seems kind of weird, and kind of wrong, in explaining what seems to be a rather simple (and correct) proposition. Sigh.

October 26, 2021 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (1)

Friday, September 24, 2021

Ten Ethical Traps for Business Lawyers

I'm so excited to present later this morning at the University of Tennessee College of Law Connecting the Threads Conference today at 10:45 EST. Here's the abstract from my presentation. In future posts, I will dive more deeply into some of these issues. These aren't the only ethical traps, of course, but there's only so many things you can talk about in a 45-minute slot.

All lawyers strive to be ethical, but they don’t always know what they don’t know, and this ignorance can lead to ethical lapses or violations. This presentation will discuss ethical pitfalls related to conflicts of interest with individual and organizational clients; investing with clients; dealing with unsophisticated clients and opposing counsel; competence and new technologies; the ever-changing social media landscape; confidentiality; privilege issues for in-house counsel; and cross-border issues. Although any of the topics listed above could constitute an entire CLE session, this program will provide a high-level overview and review of the ethical issues that business lawyers face.

Specifically, this interactive session will discuss issues related to ABA Model Rules 1.5 (fees), 1.6 (confidentiality), 1.7 (conflicts of interest), 1.8 (prohibited transactions with a client), 1.10 (imputed conflicts of interest), 1.13 (organizational clients), 4.3 (dealing with an unrepresented person), 7.1 (communications about a lawyer’s services), 8.3 (reporting professional misconduct); and 8.4 (dishonesty, fraud, deceit).

Discussion topics will include:

Do lawyers have an ethical duty to take care of their wellbeing? Can a person with a substance use disorder or major mental health issue ethically represent their client? When can and should an impaired lawyer withdraw? When should a lawyer report a colleague?
What ethical obligations arise when serving on a nonprofit board of directors? Can a board member draft organizational documents or advise the organization? What potential conflicts of interest can occur?
What level of technology competence does an attorney need? What level of competence do attorneys need to advise on technology or emerging legal issues such as SPACs and cryptocurrencies? Is attending a CLE or law school course enough?
What duties do lawyers have to educate themselves and advise clients on controversial issues such as business and human rights or ESG? Is every business lawyer now an ESG lawyer?
What ethical rules apply when an in-house lawyer plays both a legal role and a business role in the same matter or organization? When can a lawyer representing a company provide legal advice to an employee?
With remote investigations, due diligence, hearings, and mediations here to stay, how have professional duties changed in the virtual world? What guidance can we get from ABA Formal Opinion 498 issued in March 2021? How do you protect confidential information and also supervise others remotely?
What social media practices run afoul of ethical rules and why? How have things changed with the explosion of lawyers on Instagram and TikTok?
What can and should a lawyer do when dealing with a businessperson on the other side of the deal who is not represented by counsel or who is represented by unsophisticated counsel?
When should lawyers barter with or take an equity stake in a client? How does a lawyer properly disclose potential conflicts?
What are potential gaps in attorney-client privilege protection when dealing with cross-border issues?

If you need some ethics CLE, please join in me and my co-bloggers, who will be discussing their scholarship. In case Joan Heminway's post from yesterday wasn't enough to entice you...

Professor Anderson’s topic is “Insider Trading in Response to Expressive Trading”, based upon his upcoming article for Transactions. He will also address the need for business lawyers to understand the rise in social-media-driven trading (SMD trading) and options available to issuers and their insiders when their stock is targeted by expressive traders.

Professor Baker’s topic is “Paying for Energy Peaks: Learning from Texas' February 2021 Power Crisis.” Professor Baker will provide an overview of the regulation of Texas’ electric power system and the severe outages in February 2021, explaining why Texas is on the forefront of challenges that will grow more prominent as the world transitions to cleaner energy. Next, it explains competing electric power business models and their regulation, including why many had long viewed Texas’ approach as commendable, and why the revealed problems will only grow more pressing. It concludes by suggesting benefits and challenges of these competing approaches and their accompanying regulation.

Professor Heminway’s topic is “Choice of Entity: The Fiscal Sponsorship Alternative to Nonprofit Incorporation.” Professor Heminway will discuss how for many small business projects that qualify for federal income tax treatment under Section 501(a) of the U.S. Internal Revenue Code of 1986, as amended, the time and expense of organizing, qualifying, and maintaining a tax-exempt nonprofit corporation may be daunting (or even prohibitive). Yet there would be advantages to entity formation and federal tax qualification that are not available (or not easily available) to unincorporated business projects. Professor Heminway addresses this conundrum by positing a third option—fiscal sponsorship—and articulating its contextual advantages.

Professor Moll’s topic is “An Empirical Analysis of Shareholder Oppression Disputes.” This panel will discuss how the doctrine of shareholder oppression protects minority shareholders in closely held corporations from the improper exercise of majority control, what factors motivate a court to find oppression liability, and what factors motivate a court to reject an oppression claim. Professor Moll will also examine how “oppression” has evolved from a statutory ground for involuntary dissolution to a statutory ground for a wide variety of relief.

Professor Murray’s topic is “Enforcing Benefit Corporation Reporting.” Professor Murray will begin his discussion by focusing on the increasing number of states that have included express punishments in their benefit corporation statutes for reporting failures. Part I summarizes and compares the statutory provisions adopted by various states regarding benefit reporting enforcement. Part II shares original compliance data for states with enforcement provisions and compares their rates to the states in the previous benefit reporting studies. Finally, Part III discusses the substance of the benefit reports and provides law and governance suggestions for improving social benefit.

All of this and more from the comfort of your own home. Hope to see you on Zoom today and next year in person at the beautiful UT campus.

September 24, 2021 in Colleen Baker, Compliance, Conferences, Contracts, Corporate Governance, Corporate Personality, Corporations, CSR, Current Affairs, Delaware, Ethics, Financial Markets, Haskell Murray, Human Rights, International Business, Joan Heminway, John Anderson, Law Reviews, Law School, Lawyering, Legislation, Litigation, M&A, Management, Marcia Narine Weldon, Nonprofits, Research/Scholarhip, Securities Regulation, Shareholders, Social Enterprise, Teaching, Unincorporated Entities, White Collar Crime | Permalink | Comments (0)

Wednesday, March 10, 2021

Gensler and Michalski's The Million Dollar Diversity Docket

By Colleen Baker

"I'm no civ-pro geek," I confessed today at a research presentation by OU College of Law colleagues Professors Steven Gensler and Roger Michalski on their recent article, The Million Dollar Diversity Docket. But I also shared having been immediately intrigued by their paper after reading its abstract. And I am even more so now after today's presentation. Diversity of citizenship jurisdiction is, of course, a tremendously important subject for both business lawyers and business litigation. So, even if like me, civil procedure generally isn't your thing, check out their fascinating project! Here's the article's Abstract:

What would happen if Congress raised the jurisdictional amount in the diversity jurisdiction statute? Given that it has been almost 25 years since the last increase, we are probably overdue for another one. But to what amount? And with what effect? What would happen if Congress raised the jurisdictional amount from the current $75,000 to $250,000 or, say, $1 million?

Using a novel hand-coded data set of pleadings in 2900 cases, we show that the jurisdictional amount is not a neutral throttle. Instead, different areas of law, different parts of the country, and different litigants are more affected by changes in the jurisdictional amount than others. Our findings thus provide new guidance for Congress to consider when evaluating proposed changes to the amount threshold.

We build from our data to explore different ways Congress could use the amount in controversy lever to adjust the diversity docket, ranging from traditional techniques like incremental inflation-adjustments to radical experiments with lotteries or replacing the amount in controversy minimum with a maximum. Our analysis of the options highlights the normative choices Congress makes when deciding which cases to bless and curse with a federal forum. Thus, our study also provides a new window into the longstanding debates about the existence and reach of diversity jurisdiction. We hope our empirical work will inform these debates and enable a new wave of scholarship on the basic functions and functioning of the federal diversity docket.

March 10, 2021 in Colleen Baker, Legislation, Litigation | Permalink | Comments (0)

Monday, March 1, 2021

Director Independence as a Double-Edged Sword

Friend of the BLPB Greg Shill's recent article, The Independent Board as Shield, is an engaging, provocative piece on board independence and the business judgment rule. The abstract provides a taste of his argument and principal related proposal.

The fiduciary duty of loyalty bars CEOs and other executives from managing companies for personal gain. In the modern public corporation, this restriction is reinforced by a pair of institutions: the independent board of directors and the business judgment rule. In isolation, each structure arguably promotes manager fidelity to shareholder interests—but together, they enable manager prioritization. This marks a particularly striking turn for the independent board. Its origin story and raison d’être lie in protecting shareholders from opportunism by managers, but it functions as a shield for managers instead.

Numerous defects in the design and practice of the independent board inhibit its ability to curb managerial excess. Nowhere is this more evident than in the context of transactions that enrich the CEO. When executive compensation and similar matters are approved by independent directors, they take on a new quality: they become insulated by the business judgment rule. This rule is commonly justified as giving legal effect to the comparative advantage of businesspeople in their domain—in determining the price of a product, for example—and it immunizes such decisions from court challenge. But independent directors can opt to extend the rule’s protection beyond this narrow class of duty of care cases to domains that squarely implicate the duty of loyalty. The result is a shield for conflicts of interest that defeats the major objective of the independent board and important goals of corporate law more generally.

This Article proposes to eliminate the independent board’s paradoxical shield quality by ending business judgment protection for claims implicating the duty of loyalty. Judges would apply the familiar entire fairness standard instead. The clearest rationale for this reform comes from the logic of the rule itself: comparative advantage. Judges, not businesspeople, are best situated to adjudicate conflicts of interest. More broadly, the Article’s analysis suggests that the pro-shareholder reputation of the independent board is overstated and may have inadvertently fostered a sense of complacency around board power.

Greg makes some thoughtful points about existing business judgment rule doctrine in this piece and formulates a novel approach to addressing contextual difficulties with board independence doctrine. A number of us had the privilege of hearing about and commenting on this project early on. Nice work (as I told him)!

March 1, 2021 in Corporate Governance, Corporations, Joan Heminway, Litigation, Management | Permalink | Comments (0)

Tuesday, February 2, 2021

Fershee Article: Oil & Gas Survey: West Virginia (2020)

Over the years, I have been contributor to the Texas A&M Journal of Property's annual oil and gas law survey. This year's article (available here) took a little longer to post than usual, but given all that's gone on in the past year, that's pretty much unavoidable. For those who wonder what oil and gas law as to do with business law, well, I humbly submit that access to energy is, in the modern world, the foundation upon which virtually all business is built.

I don't think that's overstating it, though it may be overstating the importance of this particular piece. Nonetheless, hopefully it will have value for some folks. The abstract for my Oil & Gas Survey: West Virginia (2020) follows:

This Article summarizes and discusses important recent developments in West Virginia’s oil and gas law as determined by recent West Virginia Supreme Court of Appeals cases. There were no substantial legislative changes in the covered period.

The discussed cases considered:

(1) whether hydraulic fracturing and horizontal drilling were allowed when an old lease could not have contemplated such methods were not permissible;

(2) proper interpretation of deed language;

(3) whether all oil and gas leases have implied rights of pooling;

(4) whether partial, but regular, tax payments precluded a tax sale; and

(5) whether the West Virginia Code allowed for a cap placed on operating expense deductions and if the cap can be described as both a percentage and dollar figure.

February 2, 2021 in Joshua P. Fershee, Litigation, Real Property | Permalink | Comments (0)

Friday, January 15, 2021

Attorney-Client Privilege in Business Networks

In my ongoing work for the Tennessee Bar Association, I was alerted to a recent Delaware Chancery Court decision of note. The decision is embodied in a December 22, 2020 letter to counsel written by Chancellor Andre G. Bouchard in the case captioned In re WeWork Litigation (Consol. Civil Action No. 2020-0258-AGB). It offers an illustration of the attorney-client privilege challenges that may exist in business associations that operate within networks consisting of affiliated or associated business firms.

The In re WeWork Litigation letter opinion involves a document production dispute. The controversy relates to communications engaged in by discovery custodians employed at Sprint, Inc. but working on behalf of SoftBank Group Corp. Specifically, the Sprint employees assisted SoftBank with document discovery relating to its involvement with The We Company (“WeWork”), a plaintiff in the case. (Sprint is not involved in any substantive way in the litigation. However, at times relevant to the chancellor's opinion, SoftBank owned 84% of Sprint.) The controversy centers around the conduct of Sprint CEO Michael Combes and a Sprint employee, Christina Sternberg. Each provided SoftBank’s chief operating officer with document discovery assistance. As Chancellor Bouchard aptly noted, these Sprint employees “wore multiple hats.” (This comment in the letter opinion reminded me of the U.S. Supreme Court opinion in United States v. Bestfoods, in which the court quotes from Lusk v. Foxmeyer Health Corp., 129 F.3d 773, 779 (5th Cir. 1997): "directors and officers holding positions with a parent and its subsidiary can and do ‘change hats’ to represent the two corporations separately, despite their common ownership.")

Of particular relevance to the dispute, Combes and Sternberg engaged in document production matters with SoftBank’s legal counsel and used their Sprint email accounts in that activity. In response to plaintiffs' discovery requests, SoftBank determined to withhold from production 89 documents that were conveyed to or from Combes’s and Sternberg’s Sprint email accounts. SoftBank's argument was that the communications were privileged. The chancellor’s opinion addresses a motion to compel production of those 89 documents.

Chancellor Bouchard granted the motion to compel production of the documents, finding that Combes and Sternberg did not have a reasonable expectation of privacy when using the Sprint email accounts. As a result, the documents could not constitute “confidential communications” under Delaware Rule of Evidence 502. Importantly, both Combes and Sternberg were afforded--and could have used--other email accounts (affiliated with WeWork or SoftBank, respectively) in their discovery work for SoftBank.

I noted in my summary of this opinion for the Tennessee Bar Association that the case "offers important cautions to businesses desiring to ensure that communications and transmitted documents can be kept in confidence." It is telling in this regard that proprietary email accounts were afforded to Combes and Sternberg to best ensure confidential treatment of their discovery communications, yet no attempt was made to monitor the relevant use of those email accounts as a matter of document control and discovery policy. Accordingly, I noted that it seems prudent, in light of Chancellor Bouchard’s decision, to suggest that business firms and their legal counsel review operative existing document custody and retention guidance (in the form of compliance policies and the like) to evaluate whether they include appropriate control mechanisms geared to best ensuring the confidential treatment of privileged communications and documents. As the facts of the In re WeWork Litigation opinion indicate, this may be especially important for businesses that operate within a networked system of firms.

January 15, 2021 in Business Associations, Compliance, Joan Heminway, Litigation | Permalink | Comments (0)

Tuesday, December 8, 2020

Court (Eventually) Gets Law Right -- The Entity? Not So Much

A recent federal court order gets the basics of entity law representation right, but it's pretty murky on exactly what entity is involved. The case involves a claim of trademark infringement in which the plaintiff, International Watchman, Inc., sued OnceWill, LLC. The order explains:

In OnceWill's Motion, OnceWill indicated that it “is a sole proprietorship consisting of proprietor Ryan Sood.” (Id.) OnceWill's Motion also showed that it was filed by Ryan Sood, acting pro se. (Id.) The Court granted OnceWill's Motion that same day.

Subsequently, also on November 12, 2020, Plaintiff filed its Motion, requesting that the Court strike OnceWill's Motion and reconsider its order granting the requested extension of time for OnceWill to respond to Plaintiff's Complaint. (Doc. No. 13.) Plaintiff asserts that OnceWill is a limited liability company (“LLC”), not a sole proprietorship as OnceWill represented. (Id. at 2.) In support of this assertion, Plaintiff provided a printout from the Washington Secretary of State's website showing that OnceWill is listed as an LLC. (Id.; Doc. No. 13-1.) As a result of OnceWill's status as an LLC, Plaintiff argues that OnceWill only can maintain litigation or appear in court through an attorney and cannot file pleadings or motions in Court on its own behalf pro se as it has attempted to do here.

INTERNATIONAL WATCHMAN, INC., Plaintiff, v. ONCEWILL LLC, et al., Defendants., No. 1:20-CV-02290, 2020 WL 7138650, at *1 (N.D. Ohio Dec. 7, 2020).

As I have noted previously, though some people don't like the idea, the need for an entity to be represented by counsel is generally understood to be required. The court corrects the initial misstep of allowing the LLC's apparently sole member to appear pro se for what he claimed was a sole proprietorship. If it's a properly created LLC, it is an LLC.

So, what, again is an LLC? I am glad I asked. An LLC is a "limited liability company," which is an entity distinct from a corporation. At least, that's what state law tells us. Some courts like to merge the two, as evidenced in this case.:

“The law is well-settled that a corporation may appear in federal courts only through licensed counsel and not through the pro se representation of an officer, agent, or shareholder.” Nat'l Labor Relations Bd. v. Consol. Food Servs., Inc., 81 F. App'x 13, 14 n.1 (6th Cir. 2003). “This rule also applies to limited liability corporations.” Barrette Outdoor Living, Inc. v. Michigan Resin Representatives, LLC, No. 11-13335, 2013 WL 1799858, at *7 (E.D. Mich. Apr. 5, 2013), report and recommendation adopted, 2013 WL 1800356 (E.D. Mich. Apr. 29, 2013); accord Perry v. Krieger Beard Servs., LLC, No. 3:17-cv-161, 2019 U.S. Dist. LEXIS 27311, at *2 (S.D. Ohio Feb. 21, 2019) (“[L]imited liability companies may not appear in this Court pro se and, thus, may only appear through a licensed attorney admitted to practice in this Court.”); Hilton I. Hale & Associates, LLC v. Gaebler, No. 2:10–CV–920, 2011 WL 308275, at *1 (S.D. Ohio Jan. 28, 2011) (“[A] limited liability corporation is another example of an artificial entity that should retain legal counsel before appearing in federal court.”).

Id. (emphasis added). In this instance, it is accurate that the representation rule that applies is the same for LLCs and corporations, but that does not make LLCs and corporations the same. Really!

It really does seem proper to me not to allow pro se representation of entities, even when they are owned and operated by a single person (though I have noted elsewhere that I would be okay with pro se representation for administrative matters, as long as allowed for by statute or rule). Note that here, Mr. Sood almost certainly does not want to be a "sole proprietorship" because if he were, he could be held personally liable for OnceWill's trademark infringement. (Of course, it is possible he might be, anyway, but one certainly would not want to make it easier to be held personally liable.) In fact, the plaintiffs here might have be wise to request amend their complaint to also name Mr. Sood, individually, to the lawsuit, in case the court did allow the pro se appearance. Appearing pro se, it seems to me, suggests personal liability.

Lastly, a comment on the last citation from the excerpted part of the order: What is an artificial entity? Are certain entities real? Like maybe general partnerships? But even those partners can be corporations and LLCs. Or are is this distinguishing natural persons from "artificial" entities? I imagine this is intended to be similar to the "fictional person" concept for the corporation, thus further justifying the requirement that an entity must be represented by an attorney. But if so, it would be good to be clear about that.

Oh well. Such is life.

December 8, 2020 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (2)

Monday, April 20, 2020

The Ins-and-Outs of Corporate Leniency Programs

Friend-of-the-BLPB Miriam Baer recently posted a draft of her forthcoming book chapter on corporate leniency programs to SSRN. The abstract follows.

Corporate leniency programs promise putative offenders reduced punishment and fewer regulatory interventions in exchange for the corporation’s credible and authentic commitment to remedy wrongdoing and promptly self-report future violations of law to the requisite authorities.

Because these programs have been devised with multiple goals in mind—i.e., deterring wrongdoing and punishing corporate executives, improving corporate cultural norms, and extending the government’s regulatory reach—it is all but impossible to gauge their “success” objectively. We know that corporations invest significant resources in compliance-related activity and that they do so in order to take advantage of the various benefits promised by leniency regimes. We cannot definitively say, however, how valuable this activity has been in reducing either the incidence or severity of harms associated with corporate misconduct.

Notwithstanding these blind spots, recent developments in the Department of Justice’s stance towards corporate offenders provides valuable insight on the structural design of a leniency program. Message framing, precision of benefit, and the scope and centralization of the entity that administers a leniency program play important roles in how well the program is received by its intended targets and how long it survives. If the program’s popularity and longevity says something about its success, then these design factors merit closer attention.

Using the Department of Justice’s Yates Memo and FCPA Pilot Program as demonstrative examples, this book chapter excavates the framing and design factors that influence a leniency program’s performance. Carrots seemingly work better than sticks; and centralization of authority appears to better facilitate relationships between government enforcers and corporate representatives.

But that is not the end of the story. To the outside world, flexible leniency programs can appear clubby, weak and under-effective. The very design elements that generate trust between corporate targets and government enforcers may simultaneously sow credibility problems with the greater public. This conundrum will remain a core issue for policymakers as they continue to implement, shape and tinker with corporate leniency programs.

That last paragraph rings true to me in so many ways. The remainder of the abstract also raises some great points that engage my interest. Looks like I am adding this to my summer reading list!

April 20, 2020 in Corporations, Joan Heminway, Litigation, White Collar Crime | Permalink | Comments (0)

Tuesday, March 3, 2020

It's Not Cool to Skip Completely the LLC Law. Not Cool.

Plain Bay alleges that it is a citizen of Florida for diversity purposes as it is a Florida limited liability company incorporated in Florida with its principal place of business in Florida and that Yates is a citizen of California for diversity purposes as he “is a citizen of the United States and a resident of the State of California[.]” . . . In order for this Court to properly exercise jurisdiction over a case, “the action must be between ‘citizens of different States.’ ” 28 U.S.C. § 1332(a)(1).

Plain Bay Sales, LLC v. Gallaher, 9:18-CV-80581-WM, 2020 WL 961847, at *2 (S.D. Fla. Feb. 28, 2020) (emphasis added).

Yates, though, was a UK citizen, who lived in Florida, and thus, "the Court concludes that, for diversity purposes, Yates should be considered a citizen of Florida." Id. The court eventually determines that Yates would destroy diversity, but Plain Bay removed him as a defendant, and as a dispensable party, diversity was restored.

Okay, but there is a problem here. Two really. First, Plain Bay was not "incorporated" anywhere. It was formed. It is an LLC, not a corporation. But more important, Plain Bay's citizenship has not been determined. The state of formation and principal place of business is irrelevant to LLC citizenship. “[A] limited liability company is a citizen of any state of which a member of the company is a citizen.” Rolling Greens MHP, L.P. v. Comcast SCH Holdings, L.L.C., 374 F.3d 1020, 1022 (11th Cir. 2004). Here, the court determined that the plaintiff LLC is an citizen of Florida without ever looking at the citizenship of any members. They may all be Florida residents, but WE DON'T KNOW.

Anyway, not even stating the law for determining citizenship of an LLC is not cool. Not cool at all.

March 3, 2020 in Corporations, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Tuesday, February 25, 2020

LLCs Are Not Corporations: A New Hero Emerges

The Honorable Aida M. Delgado-Colón made me smile today. As BLPB readers know, An LLC By Any Other Name, Is Still Not a Corporation. Finally, I received a notice of a court acknowledging this fact and requiring a party to refer to their legal entity correctly. Judge Delgado-Colón writes:

Pursuant to this Court’s sua sponte obligation to inquire into its own subject matter jurisdiction and noticing the unprecedented increase in foreclosure litigation in this District, the Court ordered plaintiff to clarify whether it is a corporation or a limited liability company (“LLC”).

REVERSE MORTGAGE FUNDING, LLC, Pl., v. THE ESTATE OF ANGEL RAFAEL ANTONINI-NAZARIO, et al, Defendants., CV 16-3092 (ADC), 2020 WL 881019, at *1 (D.P.R. Feb. 20, 2020).

The opinion continues:

Here, the Court cannot ascertain that diversity exists among the parties. Rule 11(b) of the Federal Rules of Civil Procedure holds attorneys responsible for “assur[ing] that all pleadings, motions and papers filed with the court are factually well-grounded, legally tenable and not interposed for any improper purpose.” Mariani v. Doctors Associates, Inc., 983 F.2d 5, 7 (1st Cir. 1993) (citing Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 393 (1990). Despite Rule 11’s mandate, the Court finds significant inconsistencies among plaintiff’s representations, which to this date remain unclear. As noted at ECF No. 53, plaintiff has repeatedly failed to explain why its alleged principal place of business is in New Jersey instead of Michigan. To make matters worse, plaintiff now claims to be a “limited liability corporation”¹ under Delaware law.

Id. at *2.

Because the court was "unable to determine that complete diversity exists between the parties," the Court dismissed "without prejudice the amended complaint for lack of subject matter jurisdiction." Id.

I might quibble with some parts of the opinion (mostly that I think it could make what the plaintiff should have done even more clear), but that's just quibbling. I am thrilled to see an opinion that held the responsible party accountable for their entity descriptions.

Thank you, Judge Delgado-Colón.

February 25, 2020 in Corporations, Delaware, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (2)

Tuesday, December 24, 2019

Did A Child Die to Make Your Smartphone, Tablet, Laptop, or Car?

Happy holidays! Billions of people around the world are celebrating Christmas or Hanukah right now. Perhaps you’re even reading this post on a brand new Apple Ipad, a Microsoft Surface, or a Dell Computer. Maybe you found this post via a Google search. If you use a product manufactured by any of those companies or drive a Tesla, then this post is for you. Last week, a nonprofit organization filed the first lawsuit against the world’s biggest tech companies alleging that they are complicit in child trafficking and deaths in the cobalt mines of the Democratic Republic of Congo. Dodd-Frank §1502 and the upcoming EU Conflict Minerals Regulation, which goes into effect in 2021, both require companies to disclose the efforts they have made to track and trace "conflict minerals" -- tin, tungsten, tantalum, and gold from the DRC and surrounding countries. DRC is one of the poorest nations in the world per capita but has an estimated $25 trillion in mineral reserves (including 65% of the world's cobalt). Armed militia use rape and violence as a weapon of war in part so that they control the mineral wealth. The EU and US regulators believe that consumers might make different purchasing decisions if they knew whether companies source their minerals ethically. The EU legislation, notably, does not limit the geography to the DRC, but instead focuses on conflict zones around the world.

If you’ve read my posts before, then you know that I have written repeatedly about the DRC and conflict minerals. After visiting DRC for a research trip in 2011, I wrote a law review article and co-filed an amicus brief during the §1502 litigation arguing that the law would not help people on the ground. I have also blogged here about legislation to end the rule, here about the EU's version of the rule, and here about the differences between the EU and US rule. Because of the law and pressure from activists and socially-responsible investors, companies, including the defendants, have filed disclosures, joined voluntary task forces to clean up supply chains, and responded to shareholder proposals regarding conflict minerals for years. I will have more on those initiatives in my next post. Interestingly, cobalt, the subject of the new litigation, is not a “conflict mineral” under either the U.S. or E.U. regulation, although, based on the rationale behind enacting Dodd-Frank §1502, perhaps it should have been. Nonetheless, in all of my research, I never came across any legislative history or materials discussing why cobalt was excluded.

The litigation makes some startling claims, but having been to the DRC, I’m not surprised. I’ve seen children who should have been in school, but could not afford to attend, digging for minerals with shovels and panning for gold in rivers. Although I was not allowed in the mines during my visit because of a massacre in the village the night before, I could still see child laborers on the side of the road mining. If you think mining is dangerous here in the U.S., imagine what it’s like in a poor country with a corrupt government dependent on income from multinationals.

The seventy-nine page class action Complaint was filed filed in federal court in the District of Columbia on behalf of thirteen children claiming: (1) a violation of the Trafficking Victims Protection Reauthorization Act of 2008; (2) unjust enrichment; (3) negligent supervision; and (4) intentional infliction of emotional distress. I’ve listed some excerpts from the Complaint below (hyperlinks added):

Defendants Apple, Alphabet, Dell, Microsoft, and Tesla are knowingly benefiting from and providing substantial support to this “artisanal” mining system in the DRC. Defendants know and have known for a significant period of time the reality that DRC’s cobalt mining sector is dependent upon children, with males performing the most hazardous work in the primitive cobalt mines, including tunnel digging. These boys are working under stone age conditions for paltry wages and at immense personal risk to provide cobalt that is essential to the so-called “high tech” sector, dominated by Defendants and other companies. For the avoidance of doubt, every smartphone, tablet, laptop, electric vehicle, or other device containing a lithium-ion rechargeable battery requires cobalt in order to recharge. Put simply, the hundreds of billions of dollars generated by the Defendants each year would not be possible without cobalt mined in the DRC….

Plaintiffs herein are representative of the child cobalt miners, some as young as six years of age, who work in exceedingly harsh, hazardous, and toxic conditions that are on the extreme end of “the worst forms of child labor” prohibited by ILO Convention No. 182. Some of the child miners are also trafficked. Plaintiffs and the other child miners producing cobalt for Defendants Apple, Alphabet, Dell, Microsoft, and Tesla typically earn 2-3 U.S. dollars per day and, remarkably, in many cases even less than that, as they perform backbreaking and hazardous work that will likely kill or maim them. Based on indisputable research, cobalt mined in the DRC is listed on the U.S. Department of Labor’s International Labor Affairs Bureau’s List of Goods Produced with Forced and Child Labor.

When I mentioned above that I wasn’t surprised about the allegations, I mean that I wasn’t surprised that the injuries and deaths occur based on what I saw during my visit to DRC. I am surprised that companies that must perform due diligence in their supply chains for conflict minerals don’t perform the same kind of due diligence in the cobalt mines. But maybe I shouldn't be surprised at all, given how many companies have stated that they cannot be sure of the origins of their minerals. In my next post, I will discuss what the companies say they are doing, what they are actually doing, and how the market has reacted to the litigation. What I do know for sure is that the Apple store at the mall nearest to me was so crowded that people could not get in. The mall also has a Tesla showroom and people were gearing up for test drives. Does that mean that consumers are not aware of the allegations? Or does that mean that they don’t care? I’ll discuss that in the next post as well.

Wishing you all a happy and healthy holiday season.

December 24, 2019 in Compliance, Corporate Personality, Corporations, CSR, Current Affairs, Ethics, Financial Markets, Human Rights, Litigation, Marcia Narine Weldon, Securities Regulation, Shareholders | Permalink | Comments (0)

Sunday, December 15, 2019

The Implied Covenant of Good Faith Means The Contract Makes Some Sense (If Only A Little)

Prof. Bainbridge recently posted, Here's the thing I don't understand about the implied covenant of good faith and fair dealing. He explains:

In Bandera Master Funds LP v. Boardwalk Pipeline Partners, LP, C.A. No. 2018-0372-JTL (Del. Ch. Oct. 7, 2019), the court reviews the Delaware law of the implied covenant:

“In order to plead successfully a breach of an implied covenant of good faith and fair dealing, the plaintiff must allege a specific implied contractual obligation, a breach of that obligation by the defendant, and resulting damage to the plaintiff.” Fitzgerald v. Cantor, 1998 WL 842316, at *1 (Del. Ch. Nov. 10, 1998). In describing the implied contractual obligation, the plaintiffs must allege facts suggesting “from what was expressly agreed upon that the parties who negotiated the express terms of the contract would have agreed to proscribe the act later complained of . . . had they thought to negotiate with respect to that matter.” Katz v. Oak Indus. Inc., 508 A.2d 873, 880 (Del. Ch. 1986). That is because “[t]he implied covenant seeks to enforce the parties’ contractual bargain by implying only those terms that the parties would have agreed to during their original negotiations if they had thought to address them.” El Paso, 113 A.3d at 184. Accordingly, “[t]he implied covenant is well-suited to imply contractual terms that are so obvious . . . that the drafter would not have needed to include the conditions as express terms in the agreement.” Dieckman, 155 A.3d at 361.

My question is simple: How do you know that the provision was left out because it was obvious? After all, if it was obvious, shouldn't the parties have put it in the contract? Put another way, how do you know the parties did think about it and decide to leave it out?

Agreed. And I think this concept of the implied covenant matters more than ever, now that Delaware allows the elimination of the duty of loyalty in LLCs (my thoughts on that here). Even in allowing parties to eliminate the duty of loyalty in an LLC, such agreements always retain the duty of good faith and fair dealing. The Delaware LLC Act provides (emphasis added):

§ 18-1101 Construction and application of chapter and limited liability company agreement.

. . .

(c) To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member’s or manager’s or other person’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.

So what does that mean? I am of the mind that the implied covenant of good faith and fair dealing means that: (1) you get the express terms of the agreement, and (2) the agreement cannot take away all possible reasons for the deal in the first place. As to the latter point, it means, quite simply, even without a duty of loyalty, there must be some reason for the contract to exist at all. So, you may not be entitled to a fair share of proceeds from the agreement, or even a significant share. But there must always be some value (or potential value) to have been gained by entering the agreement. At a minimum, it can't be an agreement to get nothing, no matter what.

As one example, a Delaware court explained that a plaintiff's claim was lacking when the

the incentive [gained by the defendant] complained of is obvious on the face of the OA [operating agreement]. The members, despite creating this incentive, eschewed fiduciary duties, and gave the Board sole discretion to approve the manner of the sale, subject to a single protection for the minority, that the sale be to an unaffiliated third party. . . . [T]he parties to the OA [thus considered] the conditions under which a contractually permissible sale could take place. They avoided the possibility of a self-dealing transaction but otherwise left to the [defendant] the ability to structure a deal favorable to their interests. Viewed in this way, there is no gap in the parties’ agreement to which the implied covenant may apply. The implied covenant, like the rest of our contracts jurisprudence, is meant to enforce the intent of the parties, and not to modify that expressed intent where remorse has set in.

Miller v HCP & Co., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018). (More commentary on this case here.)

Furthermore, the implied covenant

does not apply when the contract addresses the conduct at issue, but only when the contract is truly silent concerning the matter at hand. Even where the contract is silent, an interpreting court cannot use an implied covenant to re-write the agreement between the parties, and should be most chary about implying a contractual protection when the contract could easily have been drafted to expressly provide for it.

Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, 202 A.3d 482, 507 (Del. 2019) (footnotes omitted). For more on this case see the Delaware Corporate &Commercial Litigation Blog.

Parties have a lot of latitude, but I think the covenant of good faith and fair dealing means that there must be a reasonable effort to honor the express terms of the agreement and there must have been some reason to enter the contract. That's it. It's not a lot, but it still has teeth where someone takes all of the things.

December 15, 2019 in Contracts, Delaware, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Friday, July 26, 2019

Sex, Lies, and M&A

I'm at the tail end of teaching my summer transactional lawyering course. Throughout the semester, I've focused my students on the importance of representations, warranties, covenants, conditions, materiality, and knowledge qualifiers. Today I came across an article from Practical Law Company that discussed the use of #MeToo representations in mergers and acquisitions agreements, and I plan to use it as a teaching tool next semester. According to the article, which is behind a firewall so I can't link to it, thirty-nine public merger agreements this year have had such clauses. This doesn't surprise me. Last year I spoke on a webinar regarding #MeToo and touched on the the corporate governance implications and the rise of these so-called "Harvey Weinstein" clauses.

Generally, according to Practical Law Company, target companies in these agreements represent that: 1) no allegations of sexual harassment or sexual misconduct have been made against a group or class of employees at certain seniority levels; 2) no allegations have been made against independent contractors; and 3) the company has not entered into any settlement agreements related to these kinds of allegations. The target would list exceptions on a disclosure schedule, presumably redacting the name of the accuser to preserve privacy. These agreements often have a look back, typically between two and five years with five years being the most common. Interestingly, some agreements include a material adverse effect clause, which favor the target.

Here's an example of a representation related to "Labor Matters" from the June 9, 2019 agreement between Salesforce.com, Inc. and Tableau Software, Inc.

b) The Company and each Company Subsidiary are and have been since January 1, 2016 in compliance with all applicable Law respecting labor, employment, immigration, fair employment practices, terms and conditions of employment, workers' compensation, occupational safety, plant closings, mass layoffs, worker classification, sexual harassment, discrimination, exempt and non-exempt status, compensation and benefits, wages and hours and the Worker Adjustment and Retraining Notification Act of 1988, as amended, except where such non-compliance has not had, and would not reasonably be expected to have, individually or in the aggregate, a Company Material Adverse Effect.

c) To the Company's Knowledge, in the last five (5) years, (i) no allegations of sexual harassment have been made against any employee at the level of Vice President or above, and (ii) neither the Company nor any of the Company Subsidiaries have entered into any settlement agreements related to allegations of sexual harassment or misconduct by any employee at the level of Vice President or above.

The agreement has the following relevant definitions:

"Knowledge" will be deemed to be, as the case may be, the actual knowledge of (a) the individuals set forth on Section 1.1(a) of the Parent Disclosure Letter with respect to Parent or Purchaser or (b) the individuals set forth on Section 1.1(a) of the Company Disclosure Letter with respect to the Company, in each case after reasonable inquiry of those employees of such Party and its Subsidiaries who would reasonably be expected to have actual knowledge of the matter in question.

Even though I like the idea of these reps. in theory, I have some concerns. First, I hate to be nitpicky, but after two decades of practicing employment law on the defense side, I have some questions. What's the definition of "sexual misconduct"? What happens of the company handbook or policies do not define "sexual misconduct"? The Salesforce.com agreement did not define it. So how does the target know what to disclose? Next, how should an agreement define "sexual harassment"? What if the allegation would not pass muster under Title VII or even under a more flexible, more generous definition in an employee handbook? When I was in house and drafting policies, a lot of crude behavior could be "harassment" even if it wouldn't survive the pleading requirements for a motion to dismiss. Does a company have to disclose an allegation of harassment that's not legally cognizable? And what about the definition of "allegation"? The Salesforce.com agreement did not define this either. Is it an allegation that has been reported through proper channels? Does the target have to go back to all of the executives' current and former managers and HR personnel as a part of due diligence to make sure there were no allegations that were not investigated or reported through proper channels? What if there were rumors? What if there was a conclusively false allegation (it's rare, but I've seen it)? What if the allegation could not be proved through a thorough, best in class investigation? How does the target disclose that without impugning the reputation of the accused?

Second, I'm not sure why independent contractors would even be included in these representations because they're not the employees of the company. If an independent contractor harassed one of the target's employees, that independent contractor shouldn't even be an issue in a representation because s/he should not be on the premises. Moreover, the contractor, and not the target company, should be paying any settlement. I acknowledge that a company is responsible for protecting its employees from harassment, including from contractors and vendors. But a company that pays the settlement should ensure that the harasser/contractor can't come near the worksite or employees ever again. If that's the case, why the need for a representation about the contractors? Third, companies often settle for nuisance value or to avoid the cost of litigation even when the investigation results are inconclusive or sometimes before an investigation has ended. How does the company explain that in due diligence? How much detail does the target disclose? Finally, what happens if the company legally destroyed documents as part of an established and enforced document retention and destruction process? Does that excuse disclosure even if someone might have a vague memory of some unfounded allegation five years ago?

But maybe I protest too much. Given the definition of "knowledge" above, in-house and outside counsel for target companies will have to ask a lot more and a lot tougher questions. On the other hand, given the lack of clarity around some of the key terms such as "allegations," "harassment," and "misconduct," I expect there to be some litigation around these #MeToo representations in the future. I'll see if my Fall students can do a better job of crafting definitions than the BigLaw counsel did.

July 26, 2019 in Compliance, Contracts, Corporate Governance, Corporate Personality, Corporations, Current Affairs, Employment Law, Ethics, Law School, Lawyering, Litigation, M&A, Management, Marcia Narine Weldon, Teaching | Permalink | Comments (0)

Wednesday, July 24, 2019

LLCs (Still Not Corporations) Win Some, Lose Some in New Opinion

In 2010, an Illinois court reviewed Delaware business law making the following observations:

With respect to a limited liability corporation, Delaware law states that “[u]nless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members....” 6 Del.C. § 18–402. Thus, pursuant to Delaware law, directors are generally provided with authority for managing the corporation and members are generally provided with authority for managing the limited liability company. The bankruptcy court therefore properly found that a member of a LLC would be an analogous position to a director of a corporation under Delaware law.

Longview Aluminum, L.L.C. v. Brandt, 431 B.R. 193, 197 (N.D. Ill. 2010), aff'd sub nom. In re Longview Aluminum, L.L.C., 657 F.3d 507 (7th Cir. 2011).

Well, initially, it must be noted that an LLC is not a corporation at all. As the quoted Delaware law observes, it is a “limited liability company.” Corporations and LLCs are distinct entities.

I’ll also take issue with adopting the bankruptcy court’s finding “that a member of an LLC would be an analogous position to a director of a corporation under Delaware law.” I will concede that a member of an LLCmaybe an analogous position to a director of a corporation under Delaware law, but that is not inherently true.

The Longview Aluminumcourt had determined that, “under Delaware law, a corporation generally must ‘be managed by or under the direction of a board of directors . . . .’” 8 Del. Code § 141. While that’s technically accurate, it understates that general nature of Delaware directors. Note that the statue is mandatory in nature (“shall”), and then provides limited changes:

The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

8 Del. Code § 141(a).

Remember, the Longview Aluminumcourt stated that, “[w]ith respect to a limited liability corporation, Delaware law states that ‘[u]nless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members....’ 6 Del.C. § 18–402.” Id.

But Delaware LLC law provides:

“Unless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members in proportion to the then current percentage or other interest of members in the profits of the limited liability company owned by all of the members, the decision of members owning more than 50 percent of the said percentage or other interest in the profits controlling . . . .”

6 Del. Code § 18-402.

That’s different in structure than directors. Directors act as a body, usually with one vote per director. This default provision provides for a very different structure, providing that one member with over 50% of the interests is controlling. That’s not like a board at all. And furthermore, those members in charge of the entity may not have any fiduciary duties to the LLC. The Delaware LLC Act states:

“To the extent that, at law or in equity, a member or manager or other person has duties (including fiduciary duties) to a limited liability company or to another member or manager or to another person that is a party to or is otherwise bound by a limited liability company agreement, the member's or manager's or other person's duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement . . . .” 6 Del. C. § 18-1101(c).

Corporate directors have some version of fiduciary duties. Again, a notable difference. It appears that the Longview Aluminumcourt (affirming the bankruptcy court) may have been right to extend the corporate director concept to the LLC managers in that case because of the structure of the LLC’s operating agreement. But the court went on to imply that a member of a LLC is“an analogous position to a director of a corporation under Delaware law.” That very much overstates things.

Why discuss this 2010-11 case at length now? Because this section was cited last week:

“[I]n referencing a director, Section 101(31)(B) was intended to refer to the party that “managed” the debtor corporation.” Longview Aluminum, L.L.C. v. Brandt, 431 B.R. 193, 197 (N.D. Ill. 2010) (citing 11 U.S.C. § 101(31)(B)). “With respect to a limited liability corporation, Delaware law states that ‘[u]nless otherwise provided in a limited liability company agreement, the management of a limited liability company shall be vested in its members ....” Id. (quoting 6 Del.C. § 18–402).

In re Licking River Mining, LLC, No. 14-10201, 2019 WL 2295680, at *41 (Bankr. E.D. Ky. July 19, 2019), as amended (July 19, 2019).

Fortunately, other than failing to correct the mistake of calling an LLC a corporation, the Licking River Miningseems to have gotten the outcome right. The court determined that a 25% member interest lacked control because all LLC “decisions were to be made either by a majority of the LLC interests or by the entity's managing member.”Id.Good call, and hopefully this case will clarify (and correct) any negative implications from the Longview Aluminum case. But even if it does, it gives longer life to an incorrect reference to LLCs and increases the likelihood it will be cited repeatedly.

Win some, lose some, I guess.

July 24, 2019 in Corporations, Delaware, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (0)

Tuesday, July 9, 2019

Tennessee Court Subtly Affirms that LLCs Are Not Corporations

A recent Tennessee court decision subtly notes that limited liability companies (LLCs) are not, in fact corporations. In a recent Tennessee federal court opinion, Judge Richardson twice notes the incorrect listing of an LLC as a "limited liability corporation."

First, the opinion states:

The [Second Amended Complaint] alleges that Defendant Evans is a resident of Tennessee, Defendant #AE20, LLC is a California limited liability company, and Defendant Gore Capital, LLC is a Delaware limited liability “corporation.”³

³Gore Capital is in fact a limited liability company.

FERNANDO CAMPS, Pl., v. GORE CAPITAL, LLC, KARL JAMES, ANGELA EVANS, and #AE20, LLC, Defendants., 3:17-CV-1039, 2019 WL 2763902, at *1 and n.3 (M.D. Tenn. July 2, 2019) (emphasis in original).

Judge Richardson later notes, in footnote 11:

Plaintiff states that he was sent documents that listed Gore’s (not #AE20’s) principal place of business as being in Chattanooga, Tennessee, although the SAC lists Gore as a “Delaware limited liability corporation (sic)[.]”

Id. 2019 WL 2763902, at *6 n.11 (M.D. Tenn. July 2, 2019).

Given all the times I have complained about courts not correcting such mistakes, I figured I should give this opinion a well-deserved shout out for getting this right. Thank you.

July 9, 2019 in Business Associations, Corporations, Current Affairs, Joshua P. Fershee, Litigation, LLCs | Permalink | Comments (1)

Tuesday, July 2, 2019

If Sole Ownership of an Entity Means Alter Ego, then Veil Piercing Will Be Inevitable