Law professor Scott Pryor has some interesting and thoughtful comments on my essay on the Parable of the Talents. His conclusion seems especially apt; indeed, so much so that I'm going to quote it in the next draft.
Law professor Scott Pryor has some interesting and thoughtful comments on my essay on the Parable of the Talents. His conclusion seems especially apt; indeed, so much so that I'm going to quote it in the next draft.
My latest paper is now up on SSRN:
Abstract: On its surface, Jesus’ Parable of the Talents is a simple story with four key plot elements: (1) A master is leaving on a long trip and entrusts substantial assets to three servants to manage during his absence. (2) Two of the servants invested the assets profitably, earning substantial returns, but a third servant — frightened of his master’s reputation as a hard taskmaster — put the money away for safekeeping and failed even to earn interest on it. (3) The master returns and demands an accounting from the servants. (4) The two servants who invested wisely were rewarded, but the servant who failed to do so is punished.
Neither the master nor any of the servants make any appeal to legal standards, but it seems improbable that there was no background set of rules against which the story plays out. To the legal mind, the Parable thus raises some interesting questions: What was the relationship between the master and the servant? What were the servants’ duties? How do the likely answers to those questions map to modern relations, such as those of principal and agent? Curiously, however, there are almost no detailed analyses of these questions in Anglo-American legal scholarship.
This project seeks to fill that gap.
Number of Pages in PDF File: 23
Keywords: Fiduciary Duty, Agent, Principal, Servant, Master, Parable, Law and Religion, Law and Literature
JEL Classification: K22
Francis Pileggi recently observed that:
A recent Delaware Court of Chancery transcript ruling is notable for stating that there is no per se affirmative obligation, absent a request for stockholder action, in a closely held company, to produce financial statements. The court, held however, that under certain circumstance, for example in response to a demand under DGCL Section 220, it could raise a fiduciary duty question if no financial statement were prepared in order to keep the minority “in the dark.” The Ravenswood Investment Company, L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Transcript) (Del. Ch. Feb. 25, 2016).
This prompted Keith Paul Bishop to caution that:
In The Ravenswood Investment Company, L.P. v. Winmill & Co. Inc., C.A. No. 7048-VCN (Transcript) (Del. Ch. Feb. 25, 2016), former Vice Chancellor John W. Noble wrote:
That brings us to Delaware disclosure law which generally does not require disclosures to shareholders unless shareholder action is sought. Winmill seeks no such action. Thus, the failure to provide financial reporting, by itself, does not state a claim. Whether that is good policy or bad policy is not my task to resolve today.
The failure to provide the audited annual financial reports, without more, does not state a claim under Delaware law, especially because it appears that accounting records are maintained, bills are being paid, and one presumes tax returns are being filed.
That may be the law in Delaware, but many Delaware corporations maintain their executive offices in California or customarily hold meetings of their boards of directors in California. These corporations are subject to the annual report requirement in Section 1501 of the California Corporations Code. That statute requires the Board of Directors to cause an annual report to be sent to the shareholders not later than 120 days after the close of the fiscal year, unless in the case of a corporation with less than 100 holders of record of its shares (determined as provided in Section 605) this requirement is expressly waived in the bylaws. If no annual report for the last fiscal year has been sent to shareholders, the corporation must, upon the written request of any shareholder made more than 120 days after the close of that fiscal year, deliver or mail to the person making the request within 30 days thereafter the financial statements.
Even if a Delaware corporation does not maintain its executive office or customarily hold board meetings in California, it could be subject to the annual report requirement in Section 1501. Foreign corporations subject to Section 2115 of the Corporations Code are subject to Section 1501. Cal. Corp. Code § 2115(b).
Keith later elaborated by noting that:
The annual report requirement, however, does not apply if a corporation has fewer than 100 holders of records (as determined under Section 605 of the California Corporations Code) and expressly waives the annual report requirement in its bylaws. As a result, many California practitioners include such a waiver in their standard form of bylaws. However, I find that the option of waiving the annual report requirement is often overlooked in the case of foreign corporations. Although the title of this post refers to Delaware corporations, the statute can apply to any foreign corporation, as defined in Section 171 of the California Corporations Code.
All of which strikes me as sensible and good advice.
But I want to focus on VC Noble's observation that "the failure to provide financial reporting, by itself, does not state a claim. Whether that is good policy or bad policy is not my task to resolve today." In this post, I take up that task.
In my book Agency, Partnerships and LLCs, I discuss the legal rules governing disclosure within partnerships. This is a good place to start because close corporations are often referred to as "incorporated partnerships." Meiselman v. Meiselman, 309 N.C. 279, 288, 307 S.E.2d 551, 557 (1983) ("Indeed, the commentators all appear to agree that '[c]lose corporations are often little more than incorporated partnerships.'"). As a result, courts not infrequently "stress the ‘partnership’ nature of the close corporation and reason by analogy from the Partnership Law." Application of Surchin, 55 Misc. 2d 888, 890, 286 N.Y.S.2d 580, 582 (Sup. Ct. 1967). But while we may want to start here, we may not want to end up here.
In Day v. Sidley & Austin, 394 F. Supp. 986 (D.D.C. 1975), plaintiff was a senior partner in the defendant law firm and the managing partner of its Washington, DC, office. When Sidley & Austin merged with another DC law firm, Day was demoted (at least in his eyes) to co-chairman of the office. Day sued. Among other things, Day claimed that his fellow partners breached their fiduciary duties by not disclosing the effect the merger would have on internal firm governance. The court characterized Day’s claim as concerning non-disclosures relating to the internal structure of the firm, as to which the court held that no duty to disclose exists: “No court has recognized a fiduciary duty to disclose this type of information, the concealment of which does not produce any profit for the offending partners nor any financial loss for the partnership as a whole.” In other words, there is no freestanding duty of disclosure absent a conflict of interest. (There is some case law to the contrary, however. See, e.g., Appletree Square I Ltd. Partnership v. Investmark, Inc., 494 N.W.2d 889, 892 (Minn.App.1993) (“The relationship of partners is fiduciary and partners are held to high standards of integrity in their dealings with each other. … Parties in a fiduciary relationship must disclose material facts to each other.”).)
Day likely would be in a much better position today. UPA (1914) § 20 limited intra-partnership disclosure duties (other than access to the books) to situations in which a partner made demand for information of all things affecting the partnership. In contrast, UPA (1997) § 408(c)(1) imposes a duty to disclose, without demand, any information concerning the partnership’s business and affairs reasonably required for the proper exercise of the partner’s rights and duties. This includes “any information concerning the partnership’s … financial condition … which the partnership knows and is material to the proper exercise of the partner’s rights and duties,” which presumably includes financial statements. (Going back to Mr. Day, because Day had a right to vote on the merger, the partnership and its partners had a duty to disclose any information relating to the merger.)
I tend to think that a rule mandating disclosure is optimal in the partnership setting. I base my argument here on Michael P. Dooley, Enforcement of Insider Trading Restrictions, 66 VA. L. REV. 1, 64-66 (1980), which argued that if partners can withhold information from each other, then each has an incentive to drive the other out so as to take full advantage of the information. As each incurs costs to exclude the other, or to take precautions against being excluded, the value of the firm declines. Accordingly, a legal rule vesting the firm with a property right to the information and requiring disclosure is more efficient than forcing the partners to draft disclosure agreements and monitor one another’s behavior. Note that this rule does not discourage the production of new information; the partners still have incentives to produce information because they share in its value to the firm. As no one will withhold information, however, the firm’s productivity is maximized.
If we think of close corporations as incorporated partnerships, then mandatory disclosure would make sense in that context too. But therein lies the difficulty. Unlike the partnership setting, it is far less clear to me that mandatory disclosure makes sense in the public corporation context. See my article Mandatory Disclosure: A Behavioral Analysis. 68 University of Cincinnati Law Review 1023 (2000) (available at SSRN: http://ssrn.com/abstract=329880).
So should we treat close corporations like partnerships or like public corporations. As we saw above, courts have often opted for the former. In general, however, I have a strong presumption in favor of the latter. In my book Corporate Law, I critique the analogous question of whether the Massachusetts line of cases imposing partnership-like fiduciary duties on close corporations:
… while the partnership analogy is a useful one, we should not overstate it. Investors are heterogeneous and the best approach may be to offer them standard form contracts—off the rack rules—that provide significant choice. Corporate and partnership law differs in many respects. Courts will maximize investor welfare by letting investors choose the form best suited to their business. If investor choice is a virtue, in other words, Massachusetts’ decision to harmonize close corporation and partnership law was wrongheaded. A better approach would be to retain a real choice by not imposing higher fiduciary duties on close corporation shareholders. To be sure, in the past, some investors probably preferred partnership rules but felt it necessary to incorporate so as to get the benefit of limited liability. These days, such investors can form a limited liability company, which combines a more-or-less partnership-like governance structure with limited liability. Accordingly, the case for maintaining a clear distinction between partnership and corporate law has become even stronger.
So is this is a case for the general rule? Or for an exception? I think the former. Section 410 of the Uniform Limited Liability Company Act adopts the same rule as the partnership statute. Hence, if a rule of mandatory disclosure is optimal in the parties’ setting, they can get it by forming an LLC without giving up the benefit of limited liability. In turn, a clear rule against mandatory disclosure in the close corporation setting would force parties who want a corporation rather than an LLC to solve the issue by contract tailored to their needs.
In closing, I caution that if courts opt to impose such a duty, they ought to limit it to very basic financial information like a balance sheet and income statement. The last thing we want to do is to use state law fiduciary duties to replicate the overly burdensome and costly federal securities law disclosure regime. (Avoiding doing so strikes me as another reason for opting against a duty of affirmative disclosure in the close corporation setting.)
Joshua Fershee has long had a bee in his bonnet about courts and commentators who incorrectly refer to LLCs as corporations. His latest blast on this topic spots five examples ranging from sit coms (yes, really) to judicial opinions. Although I can't help tweaking him a bit, he is correct that much shoddy thinking and erroneous rulings have been occasioned by failing to treat LLCs as the sui generis entities that they are.
Joshua Fershee comments on Wyoming's new LLC provisions on piercing the "corporate" veil:
The additions are a response of a court decision from last year, Green Hunter Energy, Inc. v. Western Ecosystems Technology, Inc., No. S-14-0036, 2014 WL 5794332 (Wyoming Nov. 7, 2014), which is summarized nicely here. The first added section provides:
(c) for purposes of imposing liability on any member or manager of a limited liability company for the debts, obligations or other liabilities of the company, a court shall consider only the following factors no one (1) of which, except fraud, is sufficient to impose liability:(i) Fraud;(ii) Inadequate capitalization;(iii) Failure to observe company formalities as required by law; and(iv) Intermingling of assets, business operations and finances of the company and the members to such an extent that there is no distinction between them. ...
I do have a concern that some courts might miss that the need for "company formalities" as a potential factor for veil piercing is limited only to the formalities that are "required by law," which also means very few such formalities. "Company formalities" are not "corporate formalities," and I hope courts remember this.
I concur. First, much confusion has been occasioned by courts' repeated reference to the "corporate" veil when, of course, the LLC is not a corporation. In addition, LLCs were intended from the outset to be far less formal organizations than corporations, so it is critical that they be required to observe only such formalities as may be specifically required by statute. ("Law" is sadly ambiguous on that score.)
Of course, what we ought to do is to abolish LLC veil piercing altogether, as I have argued:
Courts are now routinely applying the corporate law doctrine of veil piercing to limited liability companies. This extension of a seriously flawed doctrine into a new arena is not required by statute and is unsupportable as a matter of policy. The standards by which veil piercing is effected are vague, leaving judges great discretion. The result has been uncertainty and lack of predictability, increasing transaction costs for small businesses. At the same time, however, there is no evidence that veil piercing has been rigorously applied to affect socially beneficial policy outcomes. Judges typically seem to be concerned more with the facts and equities of the specific case at bar than with the implications of personal shareholder liability for society at large.
A standard academic move treats veil piercing as a safety valve allowing courts to address cases in which the externalities associated with limited liability seem excessive. In doing so, veil piercing is called upon to achieve such lofty goals as leading LLC members to optimally internalize risk, while not deterring capital formation and economic growth, while promoting populist notions of economic democracy. The task is untenable. Veil piercing is rare, unprincipled, and arbitrary. Abolishing veil piercing would refocus judicial analysis on the appropriate question - did the defendant - LLC member do anything for which he or she should be held directly liable?
Abolishing LLC Veil Piercing (May 2004). UCLA School of Law, Law-Econ Research Paper No. 04-11. Available at SSRN: http://ssrn.com/abstract=551724
In principle, I agree with Josh Fershee's analysis of opting out of the fiduciary duty of loyalty in the LLC setting:
At formation, then, those creating an LLC would be allowed to do whatever they want to set their fiduciary duties, up to and including eliminating the consequences for breaches of the duty of loyalty. This is part of the bargain, and any member who does not agree to the terms need not become a member. Any member who joins the LLC after formation is then on notice (perhaps even with an affirmative disclosure requirement) that the duty of loyalty has been modified or eliminated. This is not especially concerning to me.
What would concern me more is a change in the duty of loyalty after one becomes a member. That is, if the majority of LLC members could later change the loyalty provision, then that seems problematic to me, as fiduciary duties are not just to protect the majority. As such, it seems to me more proper that changes to the duty of loyalty, when a member does not have any say in that change, is what should be restricted. Like in changing a partnership agreement, if everyone agrees, then there is not a problem. And if you accept the provision when you join, it is not a problem. But you shouldn't have a fiduciary duty removed or modified after the fact without your consent.
To the extent that we're talking about LLCs of the mom and pop variety, I agree. But what if the LLC has 50 members? Or an LLC that's publicly held with potentially thousands of investors? In such firms, unanimity rules create serious holdout problems. (Of course, you can get holdout issues in the smallest LLCs too, but as firms get larger the odds of a holdout go up and the social norms that prevent holding out weaken.)
Lucian Bebchuk nicely set up the issues in The Debate on Contractual Freedom in Corporate Law, 89 Colum. L. Rev. 1395, 1400-01 (1989):
Unlike initial charters, charter amendments cannot be viewed as contracts; consequently, one cannot rely on the presence of a contracting mechanism as the basis for upholding opt-out charter amendments. Furthermore, the amendment process is quite imperfect and cannot be relied on to preclude value-decreasing amendments. Although an amendment requires majority approval by the shareholders, voting shareholders do not have sufficient incentive to become informed. And although the amendment must be proposed by the board, the directors' decision might be shaped not only by the desire to maximize corporate value but also by the different interests of officers and dominant shareholders.
Rational and informed shareholders forming a corporation would recognize the desirability of an amendment procedure that permits charter changes without unanimous shareholder consent. But they also would recognize that allowing any given opt-out freedom might produce value-decreasing amendments and thus involve an expected cost. The expected cost of a given opting-out freedom, as well as its expected benefit, would vary substantially depending on the type of issue involved and the circumstances under which the opting out would be done. An analysis of these expected costs and benefits suggests that the optimal arrangement-the one that rational and informed shareholders would wish to govern their future relationship-is one that, while allowing much midstream opting out, also places significant limits on it.
The optimal arrangement thus involves an element of precommitment not to adopt in midstream, at least not in certain circumstances, opt-out provisions with respect to certain issues. This optimal arrangement is the one that the law should provide, at least in the absence of an explicit provision to the contrary in the initial charter. Even strong believers in free markets should accept this optimal arrangement as the default arrangement in the very common case in which such an explicit contrary provision is absent. Therefore, even supporters of a complete freedom to opt out in the initial charter, I suggest, should recognize that mandatory rules have a desirable role to play in midstream.
But what mandatory rule? How about the one formerly adopted by the MBCA with respect to midstream amendments to the articles of incorporation? I.e., a modified supermajority vote (perhaps a majority of the total number of members--not just those present and voting at the meeting--or, if they have unequal voting rights, a vote of the holders of a majority of the outstanding voting power) coupled with a buyout for dissenting members?
A friend sent along this email comment:
Grynberg v. Kinder Morgan Energy Partners, L.P. concludes that a Master Limited Partnership, which is a publicly traded type of firm used in the oil and gas business, should be treated for purposes of federal diversity jurisdiction as a collection of individual investors (and "aggregate") rather than as an entity. That may be consistent with legal doctrine in your field but it defies common sense. The court offers the following argument:
"Second, even if we consider the MLP’s characteristics, they do not support treating an MLP like a corporation for diversity jurisdiction. MLPs and corporations are publicly traded, centrally managed, and have freely transferable interests. But the similarities end there. MLPs are formed as unincorporated entities under state law, and Carden reaffirmed the dichotomy between corporations and unincorporated entities."
This certainly deserves the famous observation, "I understand everything but the therefore."
To which I responded: It may be that the common law is an ass, but until UPA (1997) changed the law in this area, partnerships were regarded by PARTNERSHIP LAW itself as an aggregate not an entity. Hence, partnerships have long been viewed as a collection of the partners for purposes of diversity. The rule has been extended to LLCs, by the way:
Notwithstanding LLCs' corporate traits, however, every circuit that has addressed the question treats them like partnerships for the purposes of diversity jurisdiction. See Gen. Tech. Applications, Inc. v. Exro Ltda, 388 F.3d 114, 120 (4th Cir.2004); GMAC Commercial Credit LLC v. Dillard Dep't Stores, Inc., 357 F.3d 827, 828–29 (8th Cir.2004); Rolling Greens MHP, L.P. v. Comcast SCH Holdings LLC, 374 F.3d 1020, 1022 (11th Cir.2004); Handelsman v. Bedford Village Assocs. Ltd. P'ship, 213 F.3d 48, 51 (2d Cir.2000); Cosgrove v. Bartolotta, 150 F.3d 729, 731 (7th Cir.1998). This treatment accords with the Supreme Court's consistent refusal to extend the corporate citizenship rule to non-corporate entities, including those that share some of the characteristics of corporations. Carden, 494 U.S. at 189, 110 S.Ct. 1015 (treating a limited partnership as having the citizenship of all its members); Great S. Fire Proof Hotel Co. v. Jones, 177 U.S. 449, 456–57, 20 S.Ct. 690, 44 L.Ed. 842 (1900) (refusing to extend the corporate citizenship rule to a “limited partnership association” although it possessed “some of the characteristics of a corporation”).
RUPA adopts the “entity” theory of partnership as opposed to the “aggregate” theory that the UPA espouse[d]. Under the aggregate theory, a partnership is characterized by the collection of its individual members, with the result being that if one of the partners dies or withdraws, the partnership ceases to exist. On the other hand, RUPA's entity theory allows for the partnership to continue even with the departure of a member because it views the partnership as “an entity distinct from its partners.”
Republic Properties Corp. v. Mission W. Properties, LP, 391 Md. 732, 744, 895 A.2d 1006, 1013 (2006). See UPA (1997) Section 201. Partnership as entity: "(a) A partnership is an entity distinct from its partners."
I got an email from Walter Olson of the Cato Institute, who passed along links to his work on the Kim Davis controversy. I thought they would be of interest to many of my readers, so I'm happy to pass it along:
The Kim Davis story has focused public attention on the issue of religious accommodation, especially in the workplace, and I have written four (!) new pieces on that subject two of them just out today.First, if you haven't seen it, here's my Cato post from last Friday on the Kim Davis case itself:
I've got two pieces out today taking off in various directions from the Kentucky controversy. The longer one, just out at Newsweek, is an extended critique of the misnamed First Amendment Defense Act (FADA), a social-conservative priority that purports to shield believers in traditional marriage from any government discrimination whatsoever. It has been endorsed by Ted Cruz, Marco Rubio, and (incredibly) the RNC. Examine its provisions closely and you'll find it's really bad:Also today at Politico Europe, my piece on why the EEOC case of a Muslim flight attendant who doesn't want to serve alcohol ("scruples about screwpulls") does not legally have much in common with the Kim Davis case."Here’s the thing: The EEOC has *already* sided with Muslim employees who wish to avoid handling alcohol....If Charee Stanley or a future counterpart someday wins the right to bob and weave through the passenger cabin, handing out only beverages that meet with her spiritual approval, she’ll have this record of Congressional posturing to thank."
Nate Oman offered up a thoughtful analysis of the Kim Davis controversy, which draws on "old fashioned agency law." When I first read it, I think it is pretty persuasive, but now I want to push the edge of the envelope a bit.
Here's the gist:
Kim Davis says that she has sincere religious objections to same-sex marriage, objections that keep her from issuing marriage licenses as county clerk. Superficially, this sounds like a claim for a religious accommodation. Agency law, however, explains why it is not. In refusing to issue marriage licenses, Kim Davis is acting as the agent of Rowan County. As an agent, her actions are the the actions of the county. Indeed, the county, like any other juridical person, can only act through its agents. The problem, however, is that Rowan County, as a legal person, has no religious beliefs. Indeed, the Establishment Clause would, on my view, prohibit the county from having religious beliefs. Rowan County cannot claim a religious exemption without a violent change in our basic constitutional structure. The county must comply with the Supreme Court's interpretation of 14th amendment and issue marriage licenses to same-sex couples. In refusing to issue marriage licenses, Davis was both purporting to act as the agent of Rowan County and exceeding the scope of her authority as an agent. She cannot do this. In acting as an agent, she is the fiduciary of the county and must exercise that authority only on behalf of the county. The county as a legal person simply cannot have the religious scruples that Davis has.Now consider a hypothetical employee in the Rowan County Clerk's office with religious objections to same-sex marriage who asks that she be excused from issuing licenses to same-sex couples, requesting that a colleague without such religious scruples prepare and issue those documents. This employee would also be an agent of Rowan county, and thus her actions could potentially become the actions of the county. Unlike Kim Davis, however, this hypothetical employee is not seeking to act as an agent or exercise any authority on behalf of the county. Rather, the hypothetical employee is seeking to disclaim authority. She is asking that in this case she not be treated as an agent of the county. This would be a request that the county accommodate her religious scruples, and it is very different than what Kim Davis is claiming.There are, of course, all sorts of arguments about whether or not my hypothetical county employee should be provided with such an accommodation and whether there is any mechanism under current law by which she might claim an accommodation. My point is only that her case is fundamentally different than the case of Kim Davis. Davis wishes to act as an agent of the county and exercise authority on its behalf. My hypothetical employee, on the other hand, is trying to avoid acting as an agent and is disclaiming authority. In short, it is the structure of agency law that illuminates the fundamental difference between religious accommodations and what Kim Davis is trying to do.
But consider another hypothetical. During the Holocaust the signature of Klaus--an agent of the German government--is required on transfer documents before the individuals in question can be sent to a concentration camp. Due to his religious scruples, Klaus refuses to sign. Isn't that exactly how Oman sets up the Davis case:
In refusing to [sign the papers], [Klaus] was both purporting to act as the agent of [the German government] and exceeding the scope of [his] authority as an agent. [His] cannot do this. In acting as an agent, [his] is the fiduciary of the county and must exercise that authority only on behalf of the [country]. The [country] as a legal person simply cannot have the religious scruples that [Klaus] has.
Now before you get on your high horse and start writing letters to the dean and chancellor of my university, let me be clear: I am NOT comparing same sex marriage and the Holocaust. Such a comparison would be ludicrous, offensive, and asinine. Which probably won't stop some lunatic left-wing blogger from claiming that's what I'm doing. But I ask you to try reading the whole post with an open mind.
I am simply trying to tee up the question of whether agency law in fact does the work Oman claims. Oman is basically saying that there is no conscientious objector exception to the agent's duty to obey the principal. And that is the point I want to explore. I chose the Klaus example precisely because it is the strongest case I can imagine for saying that there should be a conscientious objector exception to the agent's duty to obey the principal.
If Oman (or the reader) thinks Klaus should get a conscientious objector pass on violating agency law, then it seems to me he must show that Klaus' situation differs in kind and not just degree from Davis'.
One possible way of doing so would be to focus on the wording of the agent's duty to obey as set out in the Restatement (Third) of Agency:
An agent has a duty to comply with all lawful instructions received from the principal and persons designated by the principal concerning the agent's actions on behalf of the principal.
Oman might argue that the orders given Davis to issue same sex marriage licenses were lawful and that she therefore had a duty to obey them. If so, I would agree. The Supreme Court has ruled, government action denying same sex marriage is unconstitutional, and therefore the orders given Davis were lawful instructions she has a duty to obey.
But then Oman must argue that the instructions given Klaus were unlawful. Assume that the laws in question were validly adopted under German law. Does their presumed invalidity under international human rights law excuse Klaus? Assume the answer to that is no, so that the question of whether Klaus gets a conscientious objector pass on obeying a lawful order is fairly presented by the hypothetical.
I think the problem here is that I (at least) intuitively want to give Klaus a conscientious objector pass. But that gets me into the difference in king versus degree problem.
The way of avoiding the whole difference in kind versus degree problem would be to acknowledge that there is no conscientious objector exception to the agent's duty to obey a lawful order period. Even for evil laws like the one Klaus must enforce.
In that case, the answer is clear, if Klaus' religious scruples preclude him from obeying a lawful order he should resign. And so should Davis. The right thing for her to do is either to issue the licenses or quit.
(Like Oman, I pass on the question of whether the county should accommodate her scruples by having somebody else issue the licenses.)
Usha Rodrigues reminds us that my old friend Larry Ribstein used to blast Business Associations teachers who waited until the end of the semester to teach LLCs and other "uncorporations" but then explains why she still leaves LLCs to the end:
I don't leave LLCs til the end of the semester because I think they're unimportant. It's because the cases are so damn thin. It's still such a new form, I just don't see much there there. Most of them wind up being trial courts who read the statute in completely stupid ways. Blech.
So I teach corporations and partnerships emphasizing fiduciary duty, default vs. mandatory rules, and the importance of the code. In fact, one semester I confess that I would ask a question and then intone, "Look to the code!" so often I felt like a Tolkien refugee. By the time I get to the LLCs cases, which are pretty basic, the class is ready for my message: the LLC is a new form. When dealing with something new, judges look both to the organizational statutes and to the organizational forms they know as they shape the law. Plus the LLC is such an interesting mix between the corporate and partnership form, it just makes sense to get through them both before diving in.
I take a slightly different approach. I do agency, partnership, and corporate law through formation to limited liability. Then I digress to cover LLCs. Then I go back to finish corporate law. (See sample syllabus here.) Why? I agree with everything Usha says, but I frequently run out of classtime before I cover the entire syllabus. If I left LLCs to the end of the semester, there'd be a substantial risk that some semesters I'd never get to them.
OTOH, Joshua Fershee agrees with Larry:
I want students (and lawyers and courts) to treat LLCs as unique entities. Leaving them to the end of the course reinforces the idea that LLCs are hybrid entities the combine partnerships and corporations. I just don't think that's the right way to think about LLCs. ...
In my experience, teaching LLCs at the end of the course seemed to frame the LLC as an entity that is just pulling from partnership or corporate law. As such, it seemed the students were thinking that the real challenge for LLCs was figuring out whether to pull from partnership law or corporate law for an analogy. Part of the reason for that, I think, is that so many of the LLCs cases seem to think so, too. See, e.g., Flahive. As Usha would say, "Blech."
The LLC is prominent enough in today's world that I think it warrants a more prominent role in the introductory business organizations course. If we don't bring the LLCs more to the fore, we allow courts to continue to misconstrue the entity form, in part because we aren't giving students the tools they need to ensure courts understand the unique nature of the LLC.
I take his point. But I think you can solve that problem by repeatedly mentioning that courts err when they treat LLCs as mere hybrids.
Joshue Fershee reviews the frustration many of us share with judicial attempts to shoehorn LLCs into corporate law doctrines that don't fit.
in the Klein, Ramseyer & Bainbridge Business Associations casebook we include the Delaware (Strine) decision in Haley v. Talcott on dissolution.
Haley and Talcott each held a 50% interest in Matt and Greg Real Estate, LLC. The LLC owned the land on which a restaurant called the Redfin Seafood Grill was located. According to Chancellor Leo Strine, Talcott “owned” the restaurant and Haley managed it pursuant to an employment agreement between Talcott and Haley. The two had a falling out and Haley sued for judicial dissolution. Talcott claimed that Haley was limited to the exit provision in the LLC operating agreement.
The case presents a nice conflict between two bedrock principles of Delaware business association law: (1) Freedom of contract, which is especially strong in the LLC context. (2) The power of the Delaware courts to strike down as inequitable conduct authorized by statute (as most famously stated in Schnell v. Chris-Craft).
Then Chancellor Leo Strine nodded in passing to freedom of contract, but then granted a decree of dissolution despite the existence of an apparently exclusive contractual exit provision. His analysis proceeds as follows: (1) The barebones LLC dissolution provision may be interpreted by analogy to § 273 of the Delaware General Corporation Law. (2) Under § 273, a shareholder is entitled to dissolution on grounds of deadlock if three conditions are satisfied: (i) the corporation must have two 50% stockholders, (ii) those stockholders must be engaged in a joint venture, and (iii) they must be unable to agree upon whether to discontinue the business or how to dispose of its assets. (3) All three conditions are satisfied on these facts. (4) It would be inequitable to limit Haley to the contractual exit provision because doing so would leave him subject to the guarantee he had given on the mortgage on the property.
And now my friend Jayne Barnard sent along a footnote to the case:
Sussex County restaurateur Matt Haley may have been the only Delawarean to receive a prestigious James Beard Foundation Award, but he didn't care much about fancy foods. ...
Friends, colleagues and people whom Haley, 53, touched through his restaurants and much-honored global humanitarian work were stunned to hear of his death Tuesday night from injuries suffered in a motorcycle accident in India.
Haley was one of Delaware's most respected culinary ambassadors and philanthropists. He owned eight popular restaurants in the state's beach resort towns, had a total of 25 operations in at least four states, served on several boards and was a frequent speaker. ...
The Rehoboth Beach resident was recognized for his good deeds both in Delaware and across the world.
The article details Haley's many humanitarian and philanthropic efforts.
Via Edward McNally we learn of Grunstein v. Silva, C.A. 3932-VCN (September 5, 2014), which poses some great questions:
This case presents a number of perplexing factual questions. Why would sophisticated businessmen proceed jointly to acquire a billion dollar company without a written agreement defining their relationship? Why did the participants attempt to document certain aspects of their relationship and not others? How much weight should be accorded to the fact that they attempted to document their rights and obligations based upon their collaboration but ultimately never completed this task? Why did the lawyer transfer legal control of the transaction to the investor if they did not have a partnership agreement? And why did the financier spend months underwriting 275 facilities if he did not have an oral (or written) agreement with the investor to do the HUD financing?
The legal take home is the treatment of how to prove an oral partnership:
As with any contract, an “intention or desire to form a general partnership cannot bring the legal relationship into being . . . [where] [t]he parties were never able to reach a final accord on the essential elements” of a binding contract. The test for determining whether all material terms have been agreed upon is: “[w]hether a reasonable negotiator in the position of one asserting the existence of a contract would have concluded, in that setting, that the agreement reached constituted agreement on all of the terms that the parties themselves regarded as essential and thus that the agreement concluded the negotiations . . . .” Consistent with this objective test, the parties’ “overt manifestations of assent, rather than their subjective desires, control” when assessing whether they intended to be bound.
For better or worse, Delaware’s oral partnership law does not differentiate among the dollar amount involved, the number of terms, or the complexity of the agreement. Thus, an oral partnership agreement could be formed even if the partnership were worth billions of dollars and had dozens of material and complex terms. But as a practical matter, this type of oral agreement is unlikely for obvious reasons. Indeed, a reasonable negotiator could rationally assume that a complex partnership agreement involving an acquisition worth more than a billion dollars would necessarily have to be reduced to writing for all of the essential terms to be fully agreed upon. ...
Here, the evidence does not indicate that Silva or his counsel made an unequivocal statement that a written executed contract was a condition precedent to an agreement. They perhaps came close to making such a statement, but they never did. ...
Within the context of Delaware partnership law, there is substantial evidence showing that the parties had not agreed upon all the essential terms of the alleged partnership in August. If a partnership had been formed, why did the parties make several unsuccessful attempts to modify the original agreement? Why did Troutman propose inconsistent terms concerning control and funding of the initial deposit? Why did Fillmore’s counsel warn Grunstein that he was proceeding at his own risk? And why did Grunstein email Lerner to warn him that they were proceeding “on spec”? The Court’s inability to answer these questions satisfactorily prevents it from finding that a legally enforceable partnership agreement was formed in August. ...
From the perspective of a reasonable negotiator, [the] exchange of documents and proposals is indicative of a negotiation involving offers and counteroffers. ...
However, the events surrounding the Second Amendment present a slightly different picture in which the parties appear to have arrived at certain understandings. The record shows that the foursome had reached an agreement on the sharing of expenses. ...
Of course, an agreement to share expenses does not create a partnership. The $64 question is whether they agreed to share profits, although as is often the case the court also considers factors such as control, sharing of losses, and so on. Indeed, if anything, the court seems to underplay the extent to which sharing of profits creates a prima facie case of partnership, as where it opines that "Some of the critical elements of an enforceable partnership agreement include profits and losses, control, and ownership."
My bottom line? This seems like a case in which the parties would have been served to involve counsel and in which counsel should have advised them to consider a letter of intent to be followed by a written partnership agreement. Much trouble and expense might have been avoided had they done so.
Update: My friend, UCLAW colleague, and co-authir Bill Klein sent along these thoughts:
My guess is that this kind of disregard of the need for working out the terms of the deal is not all that rare, even for a project involving large sums of money. Two successful, up-from-nothing businessmen agree on a project. They are sure it will be a success; they are optimists by nature and their success confirms their thinking. They are excited about the project and want to move quickly. Lawyers, in their thinking, are pettifoggers who will only hold them up. By and large they hold lawyers in disdain, if not contempt. They proceed on the assumption that they can work out all the deal points. Then the project turns sour, their relationship turns sour, and the squabbling begins, along with the legal bills. Are they angry with themselves? Certainly not. They blame the legal system or the lawyers, or anyone else, and their dislike of lawyers intensifies. Maybe law schools should teach the psychology of clients.
From Joan Heminway.