ProfessorBainbridge.com

Group Company Liability

My former SJD student Martin Petrin is an outstanding young scholar. His latest article on group liability is typically insightful and helpful:

According to a universal bedrock principle of corporate law, corporations have separate legal personality and limited liability. These principles apply equally to corporate groups. Accordingly, a parent company is normally not liable for legal infractions and unpaid debts of its subsidiaries. In relation to torts and other misconduct committed by corporations, however, the bedrock principles of corporate law are increasingly subject to criticism, in particular where such claims cannot be brought by tort victims due to undercapitalization of subsidiaries, among other problems.

While the doctrine of veil piercing may allow for relief in certain scenarios, this practice has fallen out of favour with many courts and the legal requirements for doing so have become increasingly strict. Thus, courts have developed new approaches to holding parent companies liable such as holding the parent directly liable.

In view of these significant shifts, this article examines the law and policy considerations governing parent company and—more broadly—group liability. It argues that reform is necessary, which may be found in a model that involves combinations of voting equity ownership-based enterprise liability concepts with modified vicarious liability for corporations.

Petrin, Martin and Choudhury, Barnali, Group Company Liability (October 1, 2018). Eur Bus Org Law Rev (2018), Vol. 20, pp. 1–26; Faculty of Laws University College London Law Research Paper No. 1/2018. Available at SSRN: https://ssrn.com/abstract=3284380

Professor Bainbridge's Top Recommendations in Kitchen Gadgets

Regular readers know that cooking is my main hobby. Here are four items I use all the time and recommend very highly for the cook in your life:

“The New Authoritarianism: Trump, Populism, and the Tyranny of Experts”

This looks like a must read:

One of the inscrutable ironies of the last two years is that a New York real-estate mogul and reality TV star has forced so many academics and intellectuals to rethink and redefine some basic terms. Among them: authoritarianism, liberalism and conservatism. In “The New Authoritarianism: Trump, Populism, and the Tyranny of Experts” (Polity, 115 pages, $12.95) Salvatore Babones, an American-born professor of sociology and social policy at the University of Sydney, doesn’t defend Mr. Trump or his administration. But he does suggest the Trump phenomenon may galvanize a revival of democratic self-rule. Mr. Babones, whose ideological affiliations remain a mystery to me, does not fear, as many American liberals do, that Mr. Trump is an “authoritarian” president. He believes, rather, that the president’s populism is a protest against a different kind of authoritarianism: the rule of unelected “experts.” American liberals speak unctuously about “democracy” and “democratic values,” but they have consistently substituted expert opinion for democratic decision-making. Whatever else this president does or doesn’t do, Mr. Babones thinks, his presidency has challenged that tendency at every point, and our politics will be more democratic and better off as a consequence.

The Road to Hell is Paved with Good Intentions (How California Progressive Do-gooders ruined the State)

From William McGurn's WSJ column today:

... the crisis of good intentions is manifested most dramatically in the green movement, particularly in California. In a recent article for the Orange County Register, Chapman University’s Joel Kotkin and Marshall Toplansky write that “California is creating a feudalized society characterized by the ultra-rich, a diminishing middle class and a large, rising segment of the population that is in or near poverty.” California now has the highest overall poverty rate in the nation, they write, and suffers from a level of inequality “closer to that of Central American banana republics.”

Much of this is the fault of California’s green agenda, which chokes off economic growth and has been imposed more as a theological imperative than the result of any sober, cost-benefit analysis. As Mr. Kotkin frequently points out, the upward mobility of any family that isn’t part of Hollywood or Silicon Valley or doesn’t already own their own home is being killed by the state’s climate regime.

Though California hasn’t reached French levels of rebellion, its own protests are taking interesting forms. Earlier this year a coalition of more than 200 prominent civil-rights leaders filed suit against the California Air Resources Board. They argue California’s greenhouse gas policies are disproportionately raising housing, transportation and electricity costs for Latinos and African-Americans. The suit contests California’s claims that it has a “clean and green” economy is a “fiction.”

The climate regime, the suit notes, is imperious. Though Los Angeles and the Bay Area already rank among the worst in the nation for traffic congestion, the suit contends California’s climate leaders “have decided to intentionally increase traffic congestion” in the hope of getting more people to opt for public transport. In other words, California’s greens are willing to inconvenience the poor to get them to do what their feudal lords want them to do.

Tweet of the Day

New York Attorney General Overreaches in Climate-Change Complaint Against Exxon https://t.co/yKzPOUqEHO

— Professor Bainbridge (@ProfBainbridge) December 10, 2018

From the "You had one job. Just one." file

Never dictate the headline over the phone. (h/t @NeilMcMahon) pic.twitter.com/0kPUGxQ2sd

— Mark Harris (@MarkHarrisNYC) December 10, 2018

Not a hoax! From the Jamestown (NY) Post-Journal. pic.twitter.com/ETozVTfuQw

— Mark Harris (@MarkHarrisNYC) December 10, 2018

KPB on "Do Ineffective Internal Controls Expand A Shareholder's Right Of Inspection?"

Keith Paul Bishop reports:

Section 1601 of the California Corporations Code establishes a shareholder's right to inspect the "accounting books and records and minutes of proceedings of the shareholders and the board and committees of the board".  A shareholder's inspection, however, must be for a "purpose reasonably related" to the shareholder's interest as a shareholder. Id.  This is commonly referred to as a "proper purpose" requirement.

When a corporation provides its audited financial statements to its shareholders, can a shareholder have a proper purpose in seeking inspection of the underlying financial records?  Professor Harold Marsh Jr. theorized that in such cases, a shareholder would have to show that "there was some substantial reason to believe that the reports submitted to the shareholders were erroneous".  Marsh's California Corporation Law §15.09[B].  

In  Farnum v. Iris Biotechnologies, 2018 Cal. App. Unpub. LEXIS 8069, the California Court of Appeal took note of a corporation's disclosure in its Form 10-K that management had concluded that the corporation's internal controls over financial reporting were not effective.  Thus, the Court concluded that the company had recognized that its "audited financial statement" [sic] was "incomplete".  This is an odd statement in light of the fact that the company's Form 10-K included the requisite financial statements and an auditor's opinion.  Nonetheless, the case is an example of ineffective internal controls over financial reporting providing a basis for expanded shareholder inspection.  The opinion, however, is not precedential because the court did not certify it for publication or order it to be published.

More legal hurdles for outsourcing the board

Regular readers will recall that Todd henderson and my book Outsourcing the Board: How Board Service Providers Can Improve Corporate Governance asks "why does the law require governance to be delivered through individual board members? While tracing the development of boards from quasi-political bodies through the current 'monitoring' role, we find the reasons for this requirement to be wanting. Instead, we propose that corporations be permitted to hire other business associations - known as 'Board Service Providers' or BSPs - to provide governance services. Just as corporations hire law firms, accounting firms, and consulting firms, so too should they be permitted to hire governance firms, a small change that will dramatically increase board accountability and enable governance to be delivered more efficiently.

As we recognize, there are a number of existing legal barriers that would have to be overcome. Keith Paul Bishop just flagged a few more. (A link to our book would have been nice.)

Josh Fershee asks "Can LLC Members Be Employees? It Depends (Because of Course It Does)"

Josh writes:

Tom Rutledge posts the following over at the Kentucky Business Entity Law Blog:

LLC Members Are Not the LLC’s Employees

There is now pending before the Eighth Circuit Court of Appeals of a suit that may turn on whether the relevant question, namely whether an LLC member is an employee of the LLC, has already been determined by a state court. In that underlying judgment, the Circuit Court of Cole County, Missouri, issued a judgment dated October 9 18, 2017 in the case Joseph S. Vaughn Kaenel v. Warren, Case No.: 15 AC-CC 00472. That judgment provided in part:

As an equity partner of Armstrong Teasdale, LLP, [Kaenel] is not a covered employee protected by the Missouri Human Rights Act.

I am curious as to which case this is that is pending.  Tom knows his stuff and knows (and respects) the differences between entities, so I assume there is more to than appears here.  

For example, the fact that a state court determined that an LLP equity partner is not an employee does not inherently answer the question of whether an LLC member is an employee. It could, but it does not have to do so.  

This prompts two thoughts. First, although LLCs are not supposed to be a hybrid of the corporation and the partnership but rather their own unique entity, courts often treat them as such a hybrid and look to the corresponding law of corporations or partnerships by way of analogy. (I suspect that the Uniform Law Commissioner's adoption of the hub and spoke model of harmonizing unincorporated entity laws has accelerated this trend.) If so, I would expect courts in this content to look to the considerable body of law dealing with whether non equity partners are partners.

Second, while pondering this issue, a thought occurred; namely, maybe we should look to securities law. If the LLC membership is a security, then the members who work for the company should be employees. By definition they lack the control associated with ownership of the business (note that owning a security is not the same thing as owning the business; sere.g., shareholders).

What was Elizabeth Warren thinking? Her structure of the CFPB comes back to bite her.

On a party-line vote, the Senate approved Kathy Kraninger for a five-year term as the head of the Consumer Financial Protection Bureau. You will recall, of course, that many of us were critical of the structure of the CFPB, which Senator Warren in her infinite wisdom basically structured so as to be unaccountable to either the President or Congress. That particular decision has now come back to bite her in the proverbial Biblical beast of burden, as Bloomberg Law reports:

Consumer advocates and Democratic lawmakers fear that Kraninger will go farther than periodically skipping funding draws from the Fed. They worry that Kraninger will attempt to enact a proposed Trump administration fiscal 2019 budget that she helped write while she was at the Office of Management and Budget. As the CFPB’s director, Kraninger would be able to enact a proposed $147 million cut, about 23 percent of the the bureau’s budget, on her own and without any input from Congress.

The lesson is never to assume that your acolytes will be in charge permanently.

Social justice warrior CEOs should keep their mouths shut, absent board approval, as should conservative CEOs

Bloomberg reports:

In these polarizing times, chief executives are increasingly called on to take a stand on political and social issues. They shouldn’t, a Stanford University study suggests, at least not without the blessing of their boards.

Consumers remember more instances when they’ve boycotted in protest of a CEO’s politics than they recall products they’ve bought to show their support, according to the study. Even if consumer furor doesn’t have a massive or immediate financial impact, the controversy can damage the brand and distract executives from other, more important activities, said David Larcker, a professor at the Stanford University School of Business and a co-author of the research.

“From a board perspective, there really ought to be some discussion if the CEO is going to do something that’s going to attract a lot of attention,” said Larcker, who has studied CEO behavior for decades. “Even though that person is speaking for themselves, they’re identified with a company, and it can affect purchase behavior.”

 

Thanksgiving Dinner: Blood orange glazed duck with Ridge 1996 Monte Bello

The Duck

• 5½ pound Rohan duck
• ½ onion, roughly chopped
• 1 stalk celery, roughly chopped
• 2 oranges, quartered
• 1 tablespoon kosher salt
• ½ teaspoon freshly ground black pepper
• ½ teaspoon 5 spice powder

Preheat oven to 475°.

Trim excess skin from front and tail of duck. Remove and discard giblets etc. from the interior of the duck. Cut off and remove duck neck (which comes tucked into the cavity), reserve for future stock making. Rub duck inside and out with half of spice mix. Combine onion, celery, and orange pieces in a bowl and toss with the remaining spice mix. Stuff into duck and tie legs.

Put a rack into a roasting pan that has a lid. Set duck breast side up on rack.

Bring 2 cups of water to a boil (I like to use my electric kettle). Pour boiling water into pan until it almost touches the duck. Cover. Put roasting pan into oven and drop oven temperature to 325°. Roast for 40 minutes. Remove from oven and transfer duck to a cutting board or platter. Pour water and duck fat from pan into a fat separator. Be sure to save the fat to use for roasting potatoes or some similarly yummy purpose.

Return duck to pan breast side down, cover, and return to oven. Roast 40 minutes.

Raise oven temperature to 375°. Remove lid. Flip duck breast side up. Roast 15 minutes. Smear glaze all over duck. Roast 15 more minutes. Check temperature by inserting an instant read thermometer into the inner thigh near the breast. I like my duck at 160°.

Let duck rest 15 minutes, carve, and serve with orange sauce on the side.

Orange glaze and sauce

• ½ teaspoon 5 spice powder
• 3 tablespoons Grand Mariner
• 8 tablespoons Sarabeth's Blood Orange Marmalade

Combine spice, liquor, and marmalade in your All-Clad 1-Quart sauce pan and bring to a simmer over medium heat. When mixture has thickened set half aside to use as a glaze.

Add the following to the remaining mixture in the sauce pan:

• 1 tablespoon Grand Mariner
• 1 tablespoon Sarabeth's Blood Orange Marmalade
• 1 8 ounce can mandarin oranges with their juice
• 2 tablespoons sherry vinegar
• salt to taste

Bring to a simmer and let thicken slightly.

@RidgeVineyards 1996 Monte Bello. Like an old claret. Earth. Tobacco. Leather. Cedar. Prunes. Currants. One of the best aged California Cabernets I’ve ever had. Grade: 99 pic.twitter.com/jdY2ey1Hx7

— Professor Bainbridge (@ProfBainbridge) November 23, 2018