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Veil piercing continues its randomness. Back in April, in Hawai’i Supreme Court decision, Calipjo v. Purdy, 144 Hawai’i 266, 439 P.3d 218 (2019), the court determined that there was evidence to support a trial court jury’s decision to pierce the veil of an multiple entities and hold the sole member/shareholder of the entities liable.  (An appellate court had determined that there was insufficient evidence to support veil piercing.)

The decision may be sound, but the evidence for the decision makes the outcome seemingly inevitable. In determining there was evidence to support the jury’s decision, the court notes the plaintiff’s allegations were that “sole ownership and control is one of many factors that can establish alter ego and, therefore, evidence of Purdy’s ownership and control was pertinent to this claim.”  The court then explains, 

In this case, the jury was presented with evidence that Purdy exercised exclusive ownership and control over Regal Corp. and Regal LLC. Purdy testified that he was the sole shareholder, director, and officer of Regal Corp. and the sole member and manager of Regal LLC. This court has held that “sole ownership of all of the stock in a corporation by one individual” is one relevant factor to determine alter ego. Id. (quoting Associated

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Last week, I attended the American Law Institute (ALI) Annual Meeting in Washington, DC.  (I am back in The District this week for the Law and Society Association Annual Meeting.  More on that in a later post.)  Many important project drafts and projects were vetted at the ALI meeting.  As many readers know, however, the tentative draft of the Restatement of the Law, Consumer Contracts generated some significant debate in advance of and at the conference.  The membership approved part of the draft of the project at the meeting, but much still is to come.  

I want to briefly pick up a small thread here from the portions of the proposed Restatement discussed at the meeting that relates to some of the work I have done on crowdfunding.  Crowdfunding platforms, like most web-based service businesses, use standard form “terms of use” that the service provider and customer end-user may desire to enforce under contract law.  Unsurprisingly, many of the terms of use for websites of this kind (and crowdfunding platform sites are no exception to the rule) are protective of the interests of the service provider.  These terms include, for example, mandatory arbitration provisions and waivers of jury…

Christopher G. Bradley at University of Kentucky College of Law has posted his paper, Business Entities as Skeleton Keys.  The paper was also selected for the 2019 AALS Section on Agency, Partnership, LLCs and Unincorporated Associations program, Respecting the Entity: The LLC Grows Up.  

Chris notes the use of business entities to accomplish goals not attainable previously and the use of entities “to accomplish customized transactions and evade legal restrictions that would otherwise prevent them.”  His observations and insights are good ones, and his paper is definitely worth the read.  I can’t help but think that some of this is occurring more because of an increasing comfort with entities and a willingness to engage in creative transactions. We’re seeing in beyond the use of entities, too, with the rise of derivatives over the last 20 or so years, not to mention cryptocurrencies.  Anyway,  it’s a good paper and I recommend it. 

Here’s the abstract:

This Article identifies the increasingly important phenomenon of what I term “skeleton key business entities” and discusses the ramifications of their rise. Modern business entities, such as LLCs, are increasingly created and deployed to accomplish customized transactions and evade legal restrictions that would otherwise prevent them. Rather

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Our friend and colleague Dan Kleinberger sent the following request along to me a few days ago on behalf of the LLCs, Partnerships and Unincorporated Entities Committee of the Business Law Section of the American Bar Association:

At the Spring meeting of the ABA Business Law Section in Vancouver, on Thursday, March 28, 2019 from 2:30pm – 4:30pm, the LLCPUE Committee is sponsoring a panel entitled, “Lessons from the Trenches for Transactional Lawyers.” Here is a brief description:

Avoiding errors in transactional documents — insights from attorneys who have seen errors play out in litigation: two litigators (including one who defends attorney malpractice claims), a transactional lawyer who often plays clean up, and an expert witness who frequently testifies in cases arising from problematic language in deal documents.

If you have some examples of problematic language, favorite (or disfavored) cases, or “occasions of sin” to share in, the panel would be grateful. The presentation will not be merely war stories. Instead, the panelists will present various categories of errors and occasions for error, as well as practical suggestions for avoiding error. However, the more examples the panel has from which to work, the more useful the categorizations will be.

Redact…

Sometimes I think courts are just trolling me (and the rest of us who care about basic entity concepts). The following quotes (and my commentary) are related to the newly issued case, Estes v. Hayden, No. 2017-CA-001882-MR, 2018 WL 6600225, at *1 (Ky. Ct. App. Dec. 14, 2018): 

“Estes and Hayden were business partners in several limited liability corporations, one of which was Success Management Team, LLC (hereinafter “Success”).” Maybe they had some corporations and LLCs, but the case only references were to LLCs (limited liability companies).

But wait, it gets worse:  “Hayden was a minority shareholder in, and the parties had no operating agreement regarding, Success.”  Recall that Success is an LLC. There should not be shareholders in an LLC. Members owning membership interests, yes. Shareholders, no. 

Apparently, Success was anything but, with Hayden and Estes being sued multiple times related to residential home construction where fraudulent conduct was alleged. Hayden sued Estes to dissolve and wind down all the parties’ business entities claiming a pattern of fraudulent conduct by Estes. Ultimately, the two entered a settlement agreement related to (among other things) back taxes, including an escrow account, which was (naturally) insufficient to cover the tax liability.  This…

In Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715, 730 (Del. Ch. 2008) – a case I worked on as a judicial clerk – the court wrote, “[m]any commentators have noted that Delaware courts have never found a material adverse effect to have occurred in the context of a merger agreement.”

That statement is no longer true.

Today–in a 3 page opinion–the Delaware Supreme Court affirmed the 240+ page opinion by Vice Chancellor Travis Laster in Akorn, Inc. v. Fresenius Kabi, AG, et al., which held that Akorn triggered the Material Adverse Effect (“MAE”) clause of the merger agreement at issue.

As the Chancery Daily reports, and as is clear looking at the recent opinions, the Delaware Supreme Court opinion does not provide much reasoning for its decision to affirm, but the Court of Chancery opinion does provide plenty of guidance. In the first few pages, the Court of Chancery notes that Akorn experienced a “dramatic, unexpected, and company-specific downturn in…business that began in the quarter after signing.” The Court of Chancery also notes the importance of whistleblower letters and issues with Akron and the FDA. 

Also of interest, the court notes that this…

Last week I posted Can LLC Members Be Employees? It Depends (Because of Course It Does), where I concluded that “as far as I am concerned, LLC members can also be LLCs employees, even though the general answer is that they are not. ” I thought I would follow up today with an example of an LLC member who is also an employee.  

I am not teaching Business Associations until next semester, but it galls me a little that I did not note this case last week, as it is a case that I teach as part of the section on fiduciary duties in Delaware.  

The case is Fisk Ventures, LLC v. Segal and the relevant facts excerpted from the case are as follows: 
Genitrix, LLC, is a Delaware limited liability company formed to develop and market biomedical technology. Dr. Segal founded the Company in 1996 following his postdoctoral fellowship at the Whitehead Institute for Biomedical Research. Originally formed as a Maryland limited liability company, Genitrix was moved in 1997 to Delaware at the behest of Dr. H. Fisk Johnson, who invested heavily. 
Equity in Genitrix is divided into three classes of membership. In exchange for

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Tom Rutledge, at Kentucky Business Entity Law Blog, writes about a curious recent decision in which the Kentucky Court of Appeals overrule a trial court, holding that the law of piercing the veil required the LLC veil to be pierced. Tavadia v. Mitchell, No. 2017-CA-001358-MR, 2018 WL 5091048 (Ky. App. Oct. 19, 2018).

Here are the basics (Tom provides an even more detailed description):

Sheri Mitchell formed One Sustainable Method Recycling, LLC (OSM) in 2013. Mitchell initially a 99% owner and the acting CEO with one other member holding 1%. Mitchell soon asked Behram Tavadia to invest in the company, which he did.

He loaned OSM $40K at 6% interest from his business Tavadia Enterprises, Inc. (to be repaid $1,000 per month, plus 5% of annual OSM profits).  There was no personal guarantee from Mitchell.  OSM then received a $150,000 a business development from METCO, which Tavadia personally guaranteed and pledged certain bonds as security.

Two years (and no loan payments) later under the original $40,000 loan, Tavadia agreed to delay repayment. OSM and Tavadia the created a second loan for $250,000, refinancing the original $40,000 and a subsequent Tavadia $12,000 loan.  This loan provided Tavadia a 25% ownership interest…

This past Friday, Burr & Forman LLP and the Clayton Center for Entrepreneurial Law at the University of Tennessee College of Law (including its business law journal, Transactions: The Tennessee Journal of Business Law), cosponsored a conference entittled “Law and Business Tech: Cybersecurity, Blockchain and Electronic Transactions.”  This was, as you may recognize, the second business law conference UT Law sponsored in a week’s time (the first being the Business Law Prof Blog symposium, “Connecting the Threads II,” the week before).  It has been a busy time for business law faculty and students at UT Law!

(Parenthetically, I will note here that one of the attendees at Friday’s event, who also had been at the Business Law Prof blog symposium, came back to this past week’s conference because he was so jazzed up about Marcia’s presentation at the first event–which she mentions here and here.  Thanks, Marcia, for encouraging this interest in blockchain technology in our legal community!)

At Friday’s conference, I moderated and participated in a panel on “The Coming Second Wave of Digital and other Electronic Signatures in Commerce.”  The panelists included Ed Snow of Burr & Forman and Katy Blackwell from SIGNiX.  The panel walked through a history and course of conduct from handwritten signatures to electronic signatures to digital signatures, discussing the transitions from one to another (which are, as yet, incomplete).  Interesting questions emerged as among us as to, e.g., why banking/credit transactions and mergers/acquisitions tend to lag behind in the adoption of new signature technologies.  (Your thoughts are welcomed.)

At the end of the prepared program, my co-panelists asked me to speak about Tennessee’s adoption of a digital signature statute back in the spring.  This was another of the legislative review projects that I have undertaken as a member of the Tennessee Bar Association Business Section Executive Council.  We were given 24-48 hours to comment on a digital signature bill that had been introduced in the Tennessee General Assembly based on an Arizona statute adopted in 2017 (information available here).  Although I personally thought the bill/statutory revision was likely unnecessary and would have preferred to spend more time studying it before commenting on it, two of us on the Executive Council pooled comments on the draft bill, which also received comments from other quarters.  

The ostensible legislative policy was to ensure the enforceability of legally valid and binding transactions occurring in a distributed ledger environment.  Tennessee proponents of the bill wanted to support business in this environment, as I noted in commentary quoted in this article.  With that in mind, two issues were, in the short time we had, important.

I am teaching Sports Law this semester, which is always fun.  I like to highlight other areas of the law for my students so that they can see that Sports Law is really an amalgamation of other areas: contract law, labor law, antitrust law, and yes, business organizations.  I sometimes cruise the internet for examples to make my point that they really need to have a firm grounding the basics of many areas of law to be a good sports lawyer.  Today, I found a solid example, and not in a good way.  

I found a site providing advice about “How to Start a Sports Agency” at the site https://www.managerskills.org.  This is site is new to me.  Anyway, it starts off okay: 

Ask any successful sports agent: education is the foundation upon which you will build your business. The first step is to earn your bachelor’s degree from an appropriately accredited institution.

. . . .

Once you have obtained your bachelor’s degree, the next step will be to pursue your master’s degree. Alternately, you may choose to pursue a law degree.

While a law degree is not required, the skills you acquire during your studies will be

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