In the comments to my post last week on teaching fiduciary duty in Business Associations, Steve Diamond asked whether I had blogged about why we changed our four-credit-hour Business Associations course at The University of Tennessee College of Law to a three-credit-hour offering.  In response, I suggested I might blog about that this week.  So, here we are . . . .

Continue Reading Splitting Business Associations into Two Courses (3 + 2)

National Business Law Scholars Conference

Thursday & Friday, June 4-5, 2015
Seton Hall University School of Law, Newark, NJ

This is the sixth annual meeting of the NBLSC, a conference which annually draws together legal scholars from across the United States and around the world. We welcome all scholarly submissions relating to business law. Presentations should focus on research appropriate for publication in academic journals, law reviews, and should make a contribution to the existing scholarly literature. We will attempt to provide the opportunity for everyone to actively participate. Junior scholars and those considering entering the legal academy are especially encouraged to participate. For additional information, please email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu.

Call for Papers

To submit a presentation, email Professor Eric C. Chaffee at eric.chaffee@utoledo.edu with an abstract or paper by February 13, 2015. Please title the email “NBLSC Submission – {Name}.” If you would like to attend, but not present, email Professor Chaffee with an email entitled “NBLSC Attendance.” Please specify in your email whether you are willing to serve as a commentator or moderator. A conference schedule will be circulated in late April.

 Conference Organizers:

Barbara Black (The University of Cincinnati College of Law, Retired)
Eric C. Chaffee (The University of Toledo College of Law)
Steven M. Davidoff Solomon (The University of California Berkeley Law School)
Kristin N. Johnson (Seton Hall University School of Law)
Elizabeth Pollman (Loyola Law School, Los Angeles)
Margaret V. Sachs (University of Georgia Law)

More information is available here: http://law.shu.edu/events/national-business-law-conference/index.cfm. 

 

The end of the semester is here. And, once again, I’m giving my Business Associations students a single, end-of-semester exam that counts for almost all of their grade.

My on-line Accounting for Lawyers class is different. My Accounting students have multiple assignments due each week, and they get feedback from me on each assignment. Those weekly assignments count for 30% of their final grade.

I know what the educational research says: a single end-of-semester evaluation is not as effective in promoting learning as multiple evaluations throughout the semester. My experience with regular assessment in Accounting for Lawyers confirms that. Since I began teaching Accounting for Lawyers this way three years ago, the final exams have been much better. Students are clearly learning more, and they have been rewarded with higher grades than I gave before.

So why do many law professors continue to rely on a single, end-of-semester exam?

Student expectations are a major issue. I have tried multiple exams in the past, but my students didn’t like it. After the first year of law school, they’re used to the end-of-semester format; multiple assessments require them to change their study routines. Assessment throughout the semester also changes the classroom dynamic; once you’ve critically evaluated students, the interaction is never quite the same. It’s easier in my on-line Accounting course. An on-line course already violates law school norms, so students expect something different.

Workload is also an issue. Regular assignments are a tremendous amount of work, both for me and for my students. Grading the Accounting assignments and providing feedback takes a great deal of my time, even with only 16 students. My fall semester is spent because of it. There’s no way I could also do this for a much larger Business Associations class.

And, frankly, the students are forced to do substantially more work in my Accounting course than they would in an equivalent classroom course—although it helps that, in an on-line class, students can work on their own schedules. Students continue to sign up for the Accounting course, but what works for one course might not work if they were taking five or six similarly structured courses.

But the biggest problem is probably inertia. If you have done something one way for a long time, and the results have been satisfactory, there’s no serious momentum for change—especially if that change is going to involve substantially more work and require changes to the law school’s administrative structure. In that sense, the end-of-semester exam issue is just a microcosm of the broader issues in legal education today. Will we continue to march forward as before or will we make significant changes to the usual way of doing things?

Particularly in the context of benefit corporations, a lot of us have used this space to talk about whether corporate directors are in fact required to adhere to a shareholder-wealth-maximization norm.  The flipside of this inquiry is to ask what shareholder wealth maximization means from the shareholders’ viewpoint.

In his article Fictional Shareholders: For Whom are Corporate Managers Trustees, Revisited, Daniel Greenwood uses the term “fictional shareholders” to describe the mythical share-value-maximizing shareholder to whom corporate directors are theoretically beholden, who does not possess any interests, values, or priorities beyond shareholder wealth maximization.

One of the most striking examples of the “fictional shareholder” notion can be found in the D.C. Circuit’s opinion in Business Roundtable v. SEC, 647 F.3d 1144 (D.C. Cir. 2011), where the court rejected the SEC’s proxy access rule in part on the ground that some shareholders might put forth director-nominees for the “wrong” reasons – i.e., reasons specific to their idiosyncratic interests outside of their status as shareholders, unrelated to corporate wealth maximization.  See generally Grant M. Hayden and Matthew T. Bodie, The Bizarre Law and Economics of Business Roundtable v. SEC.

Of course, in real life, shareholders do in fact have interests other than increasing prices of the shares they own in an individual company.  They may care about shares they own in other companies, or care about things unrelated to shares entirely – like the environment in which they live, the wages they are paid for their jobs, the prices they pay for goods as consumers, and so forth.  These varied considerations may “maximize” their wealth overall, even if they do not maximize the value of shares in any specific company.

Which is why I found this article so interesting.  The AFL-CIO is objecting to Wall Street’s practice of paying out deferred compensation to executives who depart for government.  Deferred compensation packages are intended to encourage employees to remain with the company; the compensation is forfeited if the employee leaves for a competitor.  So why should it be accelerated for government?  (Copies of the letters sent by AFL-CIO can be found here.)

Andrew Ross-Sorkin, adorably, believes the practice encourages “public service” even if it doesn’t benefit shareholders.

I believe the practice – at least in the eyes of the firms that employ it – likely directly maximizes shareholder wealth in particular companies by maintaining close ties between Wall Street and regulators.  Not in crude sense that government regulators “go easy” on Wall Street firms because they wish to curry favor or repay a debt, but in the more subtle sense that firms believe that if they maintain lines of communication and friendly relationships between themselves and their regulators, they can persuade regulators to adopt Wall Street priorities and sensibilities.  And, of course, when Wall Street firms have close ties to regulators, they can use friendship and informal networking to obtain information and cooperation –  the case of Rohit Bansal  is simply an extreme example.  (Probably Mary Jo White is more typical – after she left public service to work at Debevoise, she was accused of using her government connections to assist John Mack in avoiding SEC penalties for insider trading.)

So AFL-CIO’s objection, to me, does not come from its status as an adviser to investment funds investor seeking the highest possible value for their shares.  It comes from its status as a union federation, with members who have interests outside of their status as shareholders. 

AFL-CIO tacitly acknowledges as much.  In its press release describing its objections, it writes, “Unless the position of these companies is that this is just a backdoor way to pay off a newly minted government official to act in Wall Street’s private interests rather than the public interest, it is very difficult to see how these policies promote long-term shareholder value.”

Which is another way of saying that if these employees do act to further Wall Street’s interests, then they do promote shareholder value.  

So that leads to the question – is it legitimate, for the AFL-CIO to object to these practices, even if they increase the value of the pension fund’s holdings?  Do corporate managers have any obligation to consider such objections, if they are not motivated by a desire to maximize wealth at a particular firm?

And what if the AFL-CIO did decide to call the banks’ bluff by filing a lawsuit claiming that compensation incentives to decamp for government service do not benefit shareholders?  Would the directors have to admit that they hope for benefits like regulatory forbearance, or could the directors claim that, a la Andrew Ross-Sorkin, such pay practices provide a public benefit and represent a mark of good corporate citizenship?

An early, brief look at some of the social enterprise data I have been collecting with Kate Cooney (Yale School of Management), Justin Koushyar (Emory University, PHD student) and Matthew Lee (INSEAD, Singapore Campus), is up on the Stanford Social Innovation Review (SSIR). 

The charts produced over at SSIR include the number of social enterprise statutes passed per year, total number of L3Cs and benefit corporations formed, and — the most difficult data to track down — the number of social enterprises formed by state.

We are still working to refine the state-by-state data, hope to continue to update it, and may use it for future empirical work. 

I watch a lot of Shark Tank episodes. Like most “reality shows,” Shark Tank is somewhat artificial. The show does not purport to be an accurate portrayal of how entrepreneurs typically raise capital, but I still think the show can be instructive. From time to time, mostly in my undergraduate classes, I show clips from the show that are available online.

Shark Tank
(creative commons image, no attribution requested)

After the break I share some of the lessons I think entrepreneurs (and lawyers advising entrepreneurs) can learn from Shark Tank. After this first list of lessons, I share a second list — things folks should not take from the show. 

Continue Reading Law, Entrepreneurship, and Shark Tank

I had planned to blog about the UN Forum on Business and Human Rights this week, but my head is overflowing with information about export credits, development financing, a possible international arbitration tribunal, remarks by the CEOs of Nestle and Unilever, and the polite rebuff to the remarks by the Ambassador of Qatar by a human rights activist in the plenary session. Next week, in between exam grading, I promise to blog about some of the new developments that will affect business lawyers and professors. FYI, I apparently was one of the top live tweeters of the Forum (#bizhumanrights #unforumwatch) and gained many valuable contacts and dozens of new followers. 

In the meantime, I recommend reading this great piece from the Legal Skills Prof Blog.  As I prepare to teach BA for the third time (which I hear is the charm), I plan to refine the techniques I already use and adopt others where appropriate. The link is below.

https://www.businesslawprofessors.com/legal_skills/2014/12/teaching-transactional-skills-in-business-aassociations/

Readers following the benefit corporation movement may be interested to learn that Twitter co-founder, Christopher Isaac “Biz” Stone, reported on NPR’s Marketplace on that he plans on making his new web app company, Jelly, a benefit corporation.  You can listen to the December 2nd interview (which is only 5 minutes) here, with the last 90 seconds devoted to the benefit corporation issue.

Okay, so limited liability is probably not going away, though it appears that some would have it that way. “Eroding” is probably a better term, but that’s less provocative.  

In a piece at Forbes.com Jay Adkisson has posted his take on the Greenhunter case  (pdf here), which I wrote about here. Mr. Adiksson is a knowledgeable person, and he knows his stuff, but he seems okay with the recent development of LLC veil piercing law in a way that I am not. For me, many recent cases similar to Greenhunter are off the mark, philosophically, economically, and equitably, in part because they run contrary to the legislation that created things like single-member LLCs.

One of my continuing problems with this case (as is often my problem with veil piercing cases), is that there are often other grounds for seeking payment other than veil piercing.  Conflating veil piercing with other theories makes veil piercing and other doctrines murkier. More important, they make planning hard.  Neither of these outcomes is productive.  

In Greehunter, Adkisson notes the court’s determination of the “circumstances favoring veil piercing.”  To begin:

+ There was a considerable overlap of the LLC’s and Greenhunter’s ownership, membership (which is really the same thing), and management. Plus, they used the same mailing address for invoices, and their accounting departments were the same folks.

Okay, first, a shared mailing address is a ridiculous test if we’re going to allow subisidiaries at all.  Sharing an address or even sharing an accounting department shouldn’t really matter for veil piercing.  This is really more of an enterprise liability-type issue, though the vertical nature of the entity relationship admittedly makes that harder.  However, because an LLC doesn’t have to follow formalities this is an absurd test.  These facts also don’t, in any way, harm the plaintiffs. Make an agency claim or some other type of guarantor/reliance argument if there is one.  

+ The LLC didn’t have any employees of its own, but instead relied upon Greenhunter’s employees to actually do things, including to pay creditors. 

So what?  Would this be true of a joint venture between partnerships?  How about if there were just two LLC members – two people who never worked as employees the entity? Should veil piercing be okay then?  No. If there is an agency claim, make that.  If there is a guarantor claim, make that one. But this is not enough.  

+ The LLC really didn’t have any revenue separate from Greenhunter, since the LLC simply passed through all the revenue to Greenhunter, and Greenhunter only kicked back enough money to the LLC to pay particular bills.

So the LLC would not have any money at all but for that which was put into it by the corporation.  This was the structure at the time of deal and the set up at all times. If the creditor plaintiff were concerned, they should have raised that issue (and taken appropriate measures) earlier. 

+ Although the LLC contracted with Western to procure services for the benefit of the wind farm, it was Greenhunter that claimed a $884,092 deduction for that project on its tax return.

This is how pass-through tax entities work. If pass-through taxation should not be allowed or single-member LLCs should not be allowed, then fine, but that’s a policy question to be raised with the legislature. 

+ Greenhunter manipulated the assets and liabilities of the LLC so that Greenhunter got all the rewards and benefits (including tax breaks), but the LLC was stuck with the losses and liabilities.

This implies something was improperly taken from the LLC, but that’s not really explained.  If there was an improper transfer of value out of the LLC that should have available for the creditors, then the corporation should have to put those funds (that value) back into the LLC for purposes of creditors.  That’s not veil piercing. If there’s not some kind of value that could be transferred back, then the claim doesn’t make sense. 

Mr. Adkisson continues:

If one looks a veil piercing law as fundamentally comprising two elements: (1) unity of ownership, and (2) the entity was used as a vehicle to commit some wrong, then the single-member LLC (and the sole shareholder corporation) starts out with one foot in the veil piercing grave.

This is exactly why single-member LLCs are fundamentally lousy asset protection vehicles, despite the gazillion ads appearing in sports pages and classifieds advertising “Form an LLC for Asset Protection!”

This doesn’t mean that single-member LLCs should never be used; to the contrary, they are frequently and properly used in a number of situations for reasons other than liability protection.

First, I suppose this would be right if the premise were accurate, but I don’t see it this way. I don’t think a “unity of ownership” is the first element for veil piercing.  The above explanation is thus incomplete, and if a court follows it, the court would be wrong because it would be skipping the actual first part of the veil-piercing test.  The Greenhunter case explains the proper test:

The veil of a limited liability company may be pierced under exceptional circumstances when: (1) the limited liability company is not only owned, influenced and governed by its members, but the required separateness has ceased to exist due to misuse of the limited liability company; and (2) the facts are such that an adherence to the fiction of its separate existence would, under the particular circumstances, lead to injustice, fundamental unfairness, or inequity. 

The Greenhunter court even quotes another recent Wyoming case in explaining the rule:

Before a corporation’s acts and obligations can be legally recognized as those of a particular person, and vice versa, it must be made to appear that the corporation is not only influenced and governed by that person, but that there is such a unity of interest and ownership that the individuality, or separateness, of such person and corporation has ceased, and that the facts are such that an adherence to the fiction of the separate existence of the corporation would, under the particular circumstances, sanction a fraud or promote injustice.

Ridgerunner, LLC v. Meisinger, 2013 WY 31, ¶ 14, 297 P.3d 110, 115 (Wyo. 2013) (quotation marks and citations omitted). 

Thus, it is more than a unity of ownership.  There needs to be no separate or individual nature for the entity to satisfy the first prong.  It’s not in any way a simple ownership test.  

Second, I agree that LLCs are hardly perfect for asset protection and I agree that LLCs or other separate entities can be useful for reasons other than liability protection.  Still, I find the idea that an LLC – a limited liability company – should be used for something other than “liability protection” to be an odd assertion.  One can more easily set up a general partnership or simply a division of an existing entity to accomplish goals of separateness, if that’s the only point.  Thus, one may choose an LLC for more than just limited liability purposes, but there’s no reason limited-liability protection wouldn’t be a reason to choose an LLC.

The outcome of this case is, frankly, far less concerning to me than the rationale being put forth both in the case and some of the following analysis.  I have to admit much of Mr. Adkisson’s analysis is consistent with how many courts see it. I just continue to believe we can do better in the development of veil piercing doctrine, and if we did, we’d see less need for it. 

Creditors working with limited liability entities need to treat those entities as such.  Ask the parent entity (or an owner) for a guarantee, get a statement of guaranteed funding, or seek some other type of reassurance.  

As for courts, if you plan to pierce the veil of an LLC, fine, but please justify the veil piercing using specific reasons through specific application of the facts to the law. It’s more than unity of ownership, and it’s more than an inability to pay. Steve Bainbridge once noted (citing Sea-Land Services, Inc. v. Pepper Source, 941 F.2d 519, 524 (7th Cir. 1991): 

As one court opined, “some ‘wrong’ beyond a creditor’s inability to collect” must be shown before the veil will be pierced.

At least, that’s supposed to be the rule.  I hope it still is.