Partnership

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Here we go again. The Oregon Federal District Court has a rule with an incorrect reference to LLCs on the books: 

In diversity actions, any party that is a limited liability corporation (L.L.C.), a limited liability partnership (L.L.P.), or a partnership must, in the disclosure statement required by Fed. R. Civ. P. 7.1, list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens. If any owner/member/partner of the L.L.C., L.L.P., or partnership is another L.L.C., L.L.P., or partnership, then the disclosure statement must also list those states from which the owners/members/partners of the L.L.C., L.L.P., or partnership are citizens.
U.S. Dist. Ct. Rules D. Or., Civ LR 7.1-1 (emphasis added). This rules is designed to assist with earlier disclosure to assist in determining diversity jurisdiction and other related issues. As the Practice Tip explains, 
The certification requirements of LR 7.1-1 are broader than those established in Fed. R. Civ. P. 7.1. The Ninth Circuit has held that, “[L]ike a partnership, an LLC is a citizen of every state of which its owners/members/partners are citizens.” Johnson v. Columbia Properties Anchorage, LP, 437 F.3d 894, 899 (9th Cir. 2006). Early state citizenship disclosure will help address jurisdictional

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Today is my annual check-up on the use of “limited liability corporation” in place of the correct “limited liability company.”  I did a similar review last year about this time, and revisiting the same search led to remarkable consistency. This is disappointing in that I am hoping for improvement, but at least it is not getting notably worse. 

Since January 1, 2016, Westlaw reports the following using the phrase “limited liability corporation”:

  • Cases: 363 (last year was 381)
  • Trial Court Orders: 99 (last year was 93)
  • Administrative Decisions & Guidance: 172 (last year was 169)
  • Secondary Sources: 1116 (last year was 1071)
  • Proposed & Enacted Legislation: 148 (last year was 169)

As was the case last year, I am most distressed by the legislative uses of the phrase, because codifying the use of “limited liability corporation” makes this situation far murkier than a court making the mistake in a particular application. 

New York, for example, passed the following legislation:

Section 1. Subject to the provisions of this act, the commissioner of parks and recreation of the city of New York is hereby authorized to enter into an agreement with the Kids’ Powerhouse Discovery Center Limited Liability Corporation for the maintenance

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General Electric (GE)  and Baker Hughes (BHI) announced on Monday, October 31st, a proposed merger to combine their oil and gas operations.  GE and Baker Hughes will form a partnership, which will own a publicly-traded company.   GE shareholders will own 62.5% of the “new” partnership, while Baker Hughes shareholders will own 37.5% and receive a one-time cash dividend of $17.50 per share.  The new company will have 9 board of director seats:  5 from GE and 4 from Baker Hughes.  GE CEO Jeff Immelt will be the chairman of the new company and Lorenzo Simonelli,  CEO of GE Oil & Gas, will be CEO. Baker Hughes CEO Martin Craighead will be vice chairman.

Reuters is describing the business synergies between the two companies as leveraging GE’s oilfield equipment manufacturing (“supplying blowout preventers, pumps and compressors used in exploration and production”) and data process services with Baker Hughes’ expertise in ” horizontal drilling, chemicals used to frack and other services key to oil production.”

Baker Hughes had previously proposed a merger with Halliburton (HAL), which failed in May, 2016, after the Justice Department filed an antitrust suit to block the merger. Early analysis suggests that the proposed GE & Baker Hughes will pass regulatory scrutiny because of the limited business overlap of GE and Baker Hughes.

As I plan to tell my corporations students later today: this is real life!  A high-profile, late-semester merger of two public companies is a wonderful gift.  The proposed GE/Baker Hughes merger illustrates, in real life, concepts we have been discussing (or will be soon) like partnerships, the proxy process, special shareholder meetings, SEC filings, abstain or disclose rules, and, of course, mergers.

On Monday, Doug Moll posted a great question about RUPA 404(e), which also got some great comments. I started to write a reply comment, but it got so long, I though it worked better as a separate post.  Doug asks the following (whole post here):

Under the “cabining in” language of RUPA (1997), the action has to fit within § 404(b) to be considered a breach of the duty of loyalty.  Section 404(b)(1) prevents the “appropriation of a partnership opportunity.”  When a partner attempts to block the partnership from taking an opportunity to protect the partner’s own related business, can it be argued that the partner is, at least indirectly, seeking to appropriate the opportunity for himself?

Alternatively, might the partner’s vote violate the § 404(b)(3) obligation to “refrain from competing with the partnership”?

Here’s where I come out it: 

As I think about it, I am with Frank Snyder’s comment that “a partner is entitled to pursue her own interests in voting her partnership interest, unless there’s some agreement to the contrary.”  I also think, though, that § 404(e) sanctions self-interested votes, subject to “the obligation of good faith and fair dealing” required under § 404(d).  

So, I…

What does it mean to opt out of fiduciary duties?  In follow-up to my co-blogger Joan Heminway’s post, Limited Partnership Law: Should Tennessee Follow Delaware’s Lead On Fiduciary Duty Private Ordering?, I will go a step further and say all states should follow Delaware’s lead on private ordering for non-publicly traded unincorporated business associations. 

Here’s why:  At formation, I think all duties between promoters of an unincorporated business association (i.e., not a corporation) are always, to some degree, defined at formation. This is different than the majority of other agency relationships where the expectations of the relationship are more ingrained and less negotiated (think employee-employer relationship).  

As such, I’d make fiduciary duties a fundamental right by statute that can be dropped (expressly) by those forming the entity.  I’d put an additional limit on the ability to drop fiduciary duties: the duties can only be dropped after formation if expressly stated in formation documents (or agreed unanimously later). That is, if you didn’t opt out at formation, tell all those who could potentially join the entity how you can change fiduciary duties later. This helps limit some (though not all) freeze-out options, and I think it would encourage investors to check the entity documents …

I originally was going to write about overconfidence today.  But I will reserve that post for a later date.  Instead, for today, I am sharing with you a Tennessee legislative drafting issue on which my voice (together with the voices of others) has been solicited and asking for your views and comments.

A committee of the Tennessee Bar Association has been working on proposed revisions to the Tennessee Revised Uniform Limited Partnership Act.  Several thorny issues remain for consideration and final decision making, among them, whether Tennessee law, like Delaware limited partnership and limited liability company law, should allow for the elimination of general partner fiduciary duties.  The committee soon will be voting on this issue, and we are circulating among us our current views (having earlier debated the matter in telephone conference calls).  I took a shot at writing down my views for the group and circulated them last night.  I am including the main substantive part of what I wrote here, minus some typos that I caught after the message was sent (and please forgive the disfluencies in places), and requesting comments from you:

Imagine this: Professor walks into Business Associations class Monday morning at 8:00 am having prepared to cover 14 pages of reading when she assigned only three (intending, when creating the syllabus, as she later recalled, to use the time to summarize, contrast, and compare agency law rules that will again come into play in partnership and other entity law–and to catch up, if need be).  OK.  The professor is me.  First lesson (which I thought I had learned many moons ago): always double-check the syllabus on what you’ve assigned.
 
So, what happened in class?  Well, the students didn’t let on that the outline for the class plan that I scripted out on the whiteboard seemed to go beyond the reading.  But they might not have recognized that, since it was only an outline.  However, once I started covering the unassigned material, someone did alert me to my error.  Shocked (!), I told them that I had been too nice (weak response) and that–obviously–I had not checked the syllabus to confirm the day’s reading assignment before scripting out the class plan and preparing for class.
 
I didn’t then let the students go after learning of the mistake (having covered

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Just in case you haven’t gotten the message yet:  Delaware law means fiduciary duty freedom of contract for alternative entities.  In May 2016, the Delaware Chancery Court upheld a waiver of fiduciary duties in a master limited partnership.  In Employees Retirement System of the City of St. Louis v. TC Pipelines GP, Inc., Vice Chancellor Glasscock upheld challenges to an interested transaction (sale of a pipeline asset to an affiliated entity) that was reviewed, according to the partnership agreement, by a special committee and found to be fair and reasonable.  The waiver has been described as “ironclad” to give you a sense of how straight forward this decision was. No close call here.  

Vice Chancellor Glasscock’s letter opinion starts:

Delaware alternative entity law is explicitly contractual;1 it allows parties to eschew a corporate-style suite of fiduciary duties and rights, and instead to provide for modified versions of such duties and rights—or none at all—by contract. This custom approach can be value enhancing, but only if the parties are held to their bargain. Where equity holders in such entities have provided for such a custom menu of rights and duties by unambiguous contract language, that language must control judicial review of

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

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

California is the back on my short list for the state’s inability to successfully differentiate between corporations and limited liability companies (LLCs).  Last week, an “unpublished/noncitable” decision that was published on Westlaw provided a good example.

The opinion states: 

A corporation—including a limited liability corporation—may be served by effecting service on its agent for service of process. (Code Civ. Proc., § 416.10, subd. (a); see also Corp.Code, § 17701.16, subd. (a) [allowing service on limited liability corporations under Code Civ. Proc., § 413.10 et seq.].)7
*12 One of the ways a limited liability corporation can be served is by substituted service. (1 Weil & Brown, Cal. Practice Guide: Civil Procedure Before Trial (The Rutter Group 2015) ¶ 4:172, p. 4–26.) This requires that a copy of the summons and complaint be left at the office of the person to be served (or, in some cases, at the mailing address of the person to be served), in the presence of a person who is apparently in charge, “and by thereafter mailing a copy of the summons and complaint by first-class mail, postage prepaid to the person to be served at the place where a copy of the

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