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Stefan J. Padfield

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Director of the NCPPR's Free Enterprise Project. Prior experience includes 15+ years as a law professor, two federal judicial clerkships, private practice at Cravath, Swaine & Moore, LLP, and 6 years enlisted active duty (US Army). Immigrant (naturalized).

If you are attending the AALS Annual Meeting, I hope to see you here (Zoom link details forthcoming):

For Whose Benefit Public Corporations? Perspectives on Shareholder and Stakeholder Primacy
Sponsored by the Section on Socio-Economics
Co-Sponsored by the Sections on Business Associations and Securities Regulation 
Friday, January 8, 2021, 1:15 – 2:30 pm
(Papers drawn from this program will be published in the University of the Pacific Law Review)

Program Description

On August 19, 2019, the Business Roundtable, a self-described “association of chief executive officers of America’s leading companies,” issued a statement seeking to redefine the purpose of the corporation by moving away from shareholder primacy and towards a “commitment to all stakeholders.” Since that time, corporate governance experts have continued to vigorously debate the merits of shareholder primacy and stakeholder primacy. Focusing on tensions and synergies among the financial and other socio-economic interests of the corporation and its fiduciaries, shareholders, and other stakeholders, this panel seeks to provide relevant perspectives on the current state of this debate.

Panelists

Robert Ashford (Syracuse)
Lucian Bebchuk (Harvard)
Margaret Blair (Vanderbilt)
June Carbone (Minnesota)
Joshua Fershée (Dean, Creighton)
Sergio Gramitto (Monash)
Stefan Padfield (Moderator, Akron)
Edward Rubin (Vanderbilt)
Marcia Narine Weldon (Miami)

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

…

In September of 2015, I did a Westlaw search, which returned 4575 cases referring to a “limited liability corporation,” rather than the proper “limited liability company” or LLC.   That search followed one that I had done on May 2011, and the 2015 search showed a jump of 1802 new cases.  Today’s search returned 5,211 such cases, an increase of 636 cases in five and a half years. That’s still more than 100 cases per year, but it’s a reduction of about half the rate we were seeing between 2011 and 2015.  (I concede this is not especially scientific, but it’s still instructive.) 

It appears, then, that we’re making progress, but two steps forward, one step back. Even Jeopardy — Jeopardy! — recently got this wrong.  I thank Professor Samantha Prince at Penn State Dickinson Law for bringing this to my attention, upsetting as it is.   

In addition, a recent tax court opinion followed suit: “All limited liability corporations, or LLCs, mentioned in this opinion are entities treated as partnerships for federal tax purposes.” …

For the one BLPB reader who doesn’t also check in on The CLS Blue Sky Blog:

Based on an analysis of public communications around earnings announcements, we find that managers are 34 to 43 percent more likely to cite stakeholder value maximization during periods following earnings announcements that fall short of market expectations. This finding is consistent with concerns that the inability to measure stakeholder value may reduce managers’ accountability for firm performance….

Managers seem to be aware that stakeholder-oriented goals may reduce their accountability for performance, but does the manager’s push for stakeholder objectives sway the board’s evaluation of an underperforming manager? We use CEO turnover-performance sensitivity, a measure used in numerous prior studies of CEO evaluation, to determine whether this behavior produces any observable benefit to the manager. Indeed, we find that it does; CEOs that cite stakeholder value maximization as an objective are less likely to see turnover following poor performance.

https://clsbluesky.law.columbia.edu/2020/11/25/is-stakeholder-value-an-excuse-for-underperfoming-managers/

The Securities and Exchange Commission today voted to propose rules that, on a temporary basis and subject to percentage limits (no more than 15% of annual compensation), dollar limits (no more than $75,000 in three years) and other conditions, would permit an issuer [to] provide equity compensation to certain “platform workers” who provide services available through the issuer’s technology-based platform or system.

The proposed rules reflect the significant evolution that has taken place in the composition and participation of the workforce since the Commission last substantively amended Rule 701 or Form S-8, particularly the development of the so-called “gig economy,” which has resulted in new work relationships.

https://www.sec.gov/news/press-release/2020-293

If one is going to ignore entity distinctions, I supposed one may as well go all in.  Following is from an opinion issued last week that involves Christeyns Laundry Technology, LLC (“Christeyns”), which is a limited liability company.  The opinion, though, asserts: 

Selective is a New Jersey corporation with its principal place of business in New Jersey. [Docket No. 1-1, ¶ 2.] Christeyns is a Limited Liability Corporation with two partners: Christeyns Holding, Inc., and Rudi Moors. [Docket No. 25, at 14, ¶ 7.] Christeyns Holding, Inc., is a Delaware corporation with its principal place of business in East Bridgewater, Massachusetts. [Id. at 14, ¶ 8.] Rudi Moors is a resident of South-Easton, Massachusetts. [Id. at 14, ¶ 9.] The remaining parties’ claims arise out of a common nucleus of operative fact.

SELECTIVE INSURANCE COMPANY OF AMERICA, Plaintiff, v. CHRISTEYNS LAUNDRY TECHNOLOGY, LLC, et al., Defendants. Additional Party Names: Clean Green Textile Servs., LLC, Lavatec Laundry Tech., Inc., Single Source Laundry Sol., No. CV1911723RMBAMD, 2020 WL 6194015, at *3 n.2 (D.N.J. Oct. 22, 2020) (emphasis added).

We have already established that an LLC is a limited liability company, and not a corporation. And while the opinion seems to track…

I was today years old when I learned that the California courts have a group of cases captioned the “Franchise Tax Board Limited Liability Corporation Tax Refund Cases.”  This is distressing.  

In that case, the court explains: “This coordinated litigation involves the remedies available to certain limited liability companies (LLCs) that paid a levy pursuant to section 17942 of the Revenue and Taxation Code which was later determined by this District to be unconstitutional.”  Fran. Tax Bd. Ltd. Liab. Corp. Tax Refund Cases, 235 Cal. Rptr. 3d 692, 697 (Cal. App. 1st Dist. 2018), reh’g denied (Aug. 6, 2018), review denied (Oct. 31, 2018) (emphasis added).  We can see clearly that rhe courts knows these are limited liability companies, and not limited liability corporations. Nonetheless, for eternity, when citied, these cases will refer to limited liability corporations. See, e..g, Union Band Wage & Hour Case v. Union Bank, B295835, 2020 WL 6018545, at *18 (Cal. App. 2d Dist. Oct. 9, 2020) (“Their reliance on Franchise Tax Board Limited Liability Corp. Tax Refund Cases (2018) 25 Cal.App.5th 369, 395-396 does not support their position.”). 

Another recent case makes a similar mistake, thought it seems to have gotten…

The dreaded “limited liability corporation” strikes again.  In today’s find, the United States District Court for the North District California makes a boo boo. In assessing whether a court had jurisdiction over an LLC (limited liability company), the court proceeded through the following:
 
As to the first element, the Court agrees that the Eastern District of Michigan would have subject matter jurisdiction pursuant to the Class Action Fairness Act, 28 U.S.C. § 1332(d)(2). The Class Action Fairness Act vests federal courts with original jurisdiction over class actions that meet the following prerequisites: (1) “the matter in controversy exceeds the sum or value of $5,000,000, exclusive of interest and costs”; (2) the parties meet minimal requirements for diversity such that “any member of a class of plaintiffs is a citizen of a State different from any defendant”; and (3) the class equals to or exceeds 100 individuals in the aggregate. 28 U.S.C. § 1332(d). Those requirements are satisfied here. … [A]t least one class member is a citizen of a different state from Defendant: Plaintiff Esquer is a citizen of California, id. ¶ 17, whereas Defendant is a Michigan limited liability company with its principal place of business in Michigan, id.

…

From In re Dell Techs. Inc. Class V Stockholders Litig., No. CV 2018-0816-JTL, 2020 WL 3096748, at *20–30 (Del. Ch. June 11, 2020) [Hat tip to Steve Bainbridge, who comments here.]:

Coercion is a multi-faceted concept in Delaware law. At least five strands of case law use the term ….

The first strand of coercion jurisprudence does not involve the conduct of fiduciaries. It rather addresses the ability of a non-fiduciary to offer a reward or impose a penalty as a means of inducing action in an arm’s-length setting. The seminal case is Katz v. Oak Industries, Inc., 508 A.2d 873 (Del. Ch. 1986)….

A second strand of jurisprudence involves a third party taking action that a fiduciary (typically the board of directors) believes could have a coercive effect on the fiduciary’s beneficiaries (typically stockholders). In that setting, the fiduciary has both the power and an affirmative duty to defend its beneficiaries from the coercive threat. See Unocal, 493 A.2d at 954….

A third strand of coercion jurisprudence examines whether a fiduciary has taken action to coerce its own beneficiaries. By doing so, the fiduciary acts disloyally and violates the standard of conduct expected of fiduciaries.

Back in March, Richard Epstein published a new book, “The Dubious Morality of Administrative Law.”  Today, a review of that book by Michael S. Greve was published in Law & Liberty (here).  The following excerpt from the review may be of interests to BLPB readers:

The book title, of course, invokes Lon L. Fuller’s famous account of The Morality of Law—in here-relevant part, an explication of the minimum conditions a legal system must satisfy, at least most of the time, to be called “legal” in a moral or rule-of-law sense…. Lon Fuller, Professor Epstein argues, omitted crucial rule-of-law conditions, especially the need for an impartial judge. At variance with Fuller, moreover, and on a Hayekian note, Professor Epstein argues that formal rule of law constraints work best in the context of a classical-liberal regime that rests on property rights, freedom of contract, and protection against uncompensated takings. Once those substantive commitments go by the boards, procedural rule-of-law requirements are bound to give way as well and, for that matter, may not be worth very much…. The APA says that the “administrative process” is an adequate substitute for regular legal procedures in an independent court and that…