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What do "best efforts" and variants mean? A proposed set of definitions.

Friend of the blog Francis Pileggi's post from last year on  The Williams Companies, Inc. v. Energy Transfer Equity, L.P., prompted a mild rant on my part about lawyers using "best efforts" and its variants without understanding its meaning. Francis now reports on a Supreme Court decision in that case, which produced a 4-1 split, with CJ Leo Strine dissenting. Oddly, neither opinion cites my blog. Most curious.

Anyway, Francis observes:

The legal meaning of the phrase “commercially reasonable efforts” does not enjoy clarity in the law. Lawyers and jurists alike should be excused if they view the law on this topic as not entirely self-evident.  The split decision of the Delaware Supreme Court in the case styled The Williams Companies, Inc. v. Energy Transfer Equity, L.P., Del. Supr., No. 330, 2016 (Mar. 23, 2017), proves the point.

Very well put. I especially liked his understated observation that these clauses do "not enjoy clarity in the law"! That's both very deft and very true. It's one of those turns of phrase one wishes one had thought of.

The Williams decision does not create much in the way of clarity. Consider this key passage, which is as close to a definition as the Court provides:

Hexion, with which we agree, recognized that covenants like the ones involved here impose obligations to take all reasonable steps to solve problems and consummate the transaction.

Section 5.03 of the Agreement in this case states:

[The parties] shall use [their] reasonable best efforts to, and shall cause their respective Affiliates to use reasonable best efforts to, take, or cause to be taken, all actions, and to do, or cause to be done, and to assist and cooperate with the other parties in doing, all things necessary, proper, or advisable to consummate and make effect, in the most expeditious manner practicable, the [merger] . . .

This language not only prohibited the parties from preventing the merger, but obligated the parties to take all reasonable actions to complete the merger.

So a contract requiring reasonable best efforts obligates the parties to take "all reasonable actions." That's not helpful. Isn't a basic rule of lexicography that one is supposed to avoid circular definitions; i.e., a definition of a word being defined as part of the definition? If the court had adopted such a rule, it might have enjoyed the resulting clarity.

I'm also a little vexed by Strine's dissent. He cites a treatise for the following proposition:

LOU R. KLING & EILEEN T. NUGENT, NEGOTIATED ACQUISITIONS OF COMPANIES, SUBSIDIARIES AND DIVISIONS §13.06 (2001) (observing that “best efforts” standards can potentially lead to the party making the promise having to take extreme measures to fulfill it and that “commercially reasonable efforts” is a strong, but slightly more limited, alternative).

That's not how I read the case law. In my M&A class, I use the following slide to state the law, expressly rebutting the Kling & Nugent treatise:

In my forthcoming Mergers and Acquisitions casebook (coauthored with my friend and UCLA law colleague Iman Anabtawi), we explain that:

Although practitioners generally believe that efforts standards differ, there is no general agreement in case law as to whether the various clauses in fact reflect different standards.^[1] Courts often use the same analysis in determining whether an efforts clause has been breached, regardless of the specific level of effort prescribed in the agreement.^[2] Specifically, courts frequently consider the facts and circumstances of the case and require that the parties act diligently, reasonably, and in good faith in complying with an efforts clause.^[3] [NB: There's that circular definition problem again, but it's not my fault, it's what courts say.]

[1]In re IBP, Inc. S’holders Litig., 789 A.2d 14 (Del. Ch. 2001).

[2]See Triple-A Baseball Club Assocs., 832 F.2d at 225 (“We have been unable to find any case in which a court found...that a party acted in good faith but did not use its best efforts.”); Bloor v. Falstaff Brewing Corp., 601 F.2d 609, 614 (2d Cir. 1979) (best efforts imposes an obligation to act with good faith in light of one’s own capabilities); W. Geophysical Co. of Am. v. Bolt Assocs., Inc., 584 F.2d 1164, 1171 (2d Cir. 1978) (stating that an obligation to use best efforts can be met by “active exploitation in good faith”).

[3]See, e.g., Triple-A Baseball Club v. Northeastern Baseball, 832 F.2d 214 (1st Cir. 1987); In re Chateaugay Corp. v. LTV Aerospace and Defense Co., 198 B.R. 848 (S.D.N.Y. 1996)

So let's try again. I propose that we draw a basic distinction between "best efforts" and "reasonable efforts," with the former being regarded as more onerous. To be sure, as we've seen, many "courts use the term ‘reasonable efforts' interchangeably with ‘best efforts.'" Soroof Trading Dev. Co. v. GE Fuel Cell Sys., LLC, 842 F. Supp. 2d 502, 511 (S.D.N.Y. 2012). But as a matter of plain English "best" does imply something more onerous than "reasonable." 

Everything else (with one exception) should be regarded as mere surplusage. To be sure, there is a canon of construction creating a presumption that every word should be given meaning and not dismissed as surplusage. See Willner v. Manpower Inc., 35 F. Supp. 3d 1116, 1131 (N.D. Cal. 2014) (referencing "the canon of statutory construction requiring that 'a construction making some words surplusage is to be avoided'”). But applying that canon in this context is inconsistent with the goal of enjoying clarity. In addition, refusing to give the multiple variants independent meaning will encourage lawyers who want to use constructions such as "commercially reasonable good faith best efforts" or some such nonsense to define the term in the agreement.

Having established those basic principles, we then operationalize them with the following definitions:

1. "Best efforts" imposes an affirmative obligation to maximize "the contractual benefits of the person to whom the duty is owed, even if the benefits to the one owing the duty have been depleted.” See In re Heard, 6 Bankr. 876, 884 (Bankr.W.D.Ky.1980). Put another way, best efforts should require “that the party put its muscles to work to perform with full energy and fairness the relevant express promises and reasonable implications therefrom.” In re Cambridge Biotech Corp., 186 F.3d 1356, 1375 (Fed.Cir.1999).
2. Unless the term is given specific definition in the pertinent agreement, adding additional verbiage such as "reasonable best efforts," "commercially reasonable best efforts," and the like does not change the meaning of best efforts. Such qualifiers are mere surplusage. But see # 4 below re "commercially ...."
3. "Reasonable efforts" imposes a duty to act in good faith toward the other party. It does not require the party owing the duty to sacrifice the benefits it gains from the contract.
4. "Commercially reasonable efforts" should only be used where there is an accepted trade usage defining the scope of the effort obligation. See Jeffrey M. Dressler, Good Faith Rejection of Goods in A Falling Market, 42 Conn. L. Rev. 611, 627 (2009) (observing that “'commercially reasonable standards of fair dealing in trade” is meant to be an objective measure of conformity based on trade usage, course of dealing, and course of performance'"). 
   •  If the party claiming a breach of the efforts clause is unable to prove the existence of such a trade usage, then the word "commercially" should be regarded as mere surplusage and the duty again should be one of acting in good faith.
5. Unless the term is given specific definition in the pertinent agreement, adding or substituting other verbiage such as "good-faith reasonable efforts" or "good faith efforts" or "reasonably diligent efforts" or "diligent" efforts and the like shall be regarded as mere surplusage. The obligation remains merely one of acting in good faith.

The Dystopian Reasons for Separating Corporate Law and Social Welfare

I am a great admirer of Bill Bratton's work in corporate law, which is always learned, informed, and provocative. His latest essay, The Separation of Corporate Law and Social Welfare, available at SSRN: https://ssrn.com/abstract=2927150, is no exception. As the abstract explains:

A half century ago, corporate legal theory pursued an institutional vision in which corporations and the law that creates them protect people from the ravages of volatile free markets. That vision was challenged on the ground during the 1980s, when corporate legal institutions and market forces came to blows over questions concerning hostile takeovers. By 1990, it seemed like the institutions had won. But a different picture has emerged as the years have gone by. It is now clear that the market side really won the battle of the 1980s, succeeding in entering a wedge between corporate law and social welfare. The distance between the welfarist enterprise of a half century ago and the concerns that motivate today’s corporate legal theory has been widening ever since. This Essay examines the widening gulf. It compares the vision of the corporation and of the role it plays in society that prevailed during the immediate post-war era, before the fulcrum years of the 1980s, with the very different vision we have today, and traces the path we took from there to here. It will close with a brief prediction regarding corporate law’s future.

There's a longer summary of the piece on the CLS blog. Or, of course, you could just go read the whole thing.

Yet, I confess that I'm not convinced. Oddly, Bill doesn't discuss what I think remains the definitive work on this issue, which is Gordon Smith's essay The Dystopian Potential of Corporate Law, available at SSRN: https://ssrn.com/abstract=976742. As Gordon's abstract explained:

 

The community of corporate law scholars in the United States is fragmented. One group, heavily influenced by economic analysis of corporations, is exploring the merits of increasing shareholder power vis-a-vis directors. Another group, animated by concern for social justice, is challenging the traditional, shareholder-centric view of corporate law, arguing instead for a model of stakeholder governance. The current disagreement within corporate law is as fundamental as in any area of law, and the debate is more heated than at any time since the New Deal. 

This paper is part of a debate on the audacious question, Can Corporate Law Save the World? In the first part of the debate, Professor Kent Greenfield builds on his book, THE FAILURE OF CORPORATE LAW: FUNDAMENTAL FLAWS AND PROGRESSIVE POSSIBILITIES, offering a provocative critique of the status quo and arguing that corporate law matters to issues like the environment, human rights, and the labor question. 

In response, Professor Smith contends that corporate law does not matter in the way Professor Greenfield claims. Corporate law is the set of rules that defines the decision making structure of corporations, and reformers like Professor Greenfield have only two options for changing corporate decision making: changing the decision maker or changing the decision rule. More specifically, he focuses on board composition and shareholder primacy. Professor Smith argues that changes in corporate law cannot eradicate poverty or materially change existing distributions of wealth, except by impairing the creation of wealth. Changes in corporate law will not clean the environment. And changes in corporate law will not solve the labor question. Indeed, the only changes in corporate law that will have a substantial effect on such issues are changes that make the world worse, not better.

Even though there is much to admire in Bratton's essay, I remain convinced that Gordon's essay was the (not a, but the) drop the mic moment in this debate.

Having said that, I'd love to see a debate between Bratton and Smith in which they directly joined issue. it'd be a heavyweight rumble well worth the price of admission.

Are we watching the demise of the American public corporation?

I've spent my professional life studying the American public corporation, but for a while I've been worried that the next generation of corporate law scholars may have to find other subjects of study. See, e.g., Corporate Governance and U.S. Capital Market Competitiveness (October 22, 2010). UCLA School of Law, Law-Econ Research Paper No. 10-13. Available at SSRN: https://ssrn.com/abstract=1696303

A new paper by Kathleen Kahle and René Stulz appears to confirm many of my worst fears. They've summarized the paper at the Harvard blog:

In Is the American Public Corporation in Trouble?, we examine the evolution of U.S. public corporations over the last forty years by comparing snapshots in 1975, 1995, and 2015. During this time, public firms experience striking changes. Not only are there fewer public corporations today than forty years ago, but these corporations are very different. They are older and larger. They are in different industries. Their asset structure has changed, as they have fewer physical assets and more intangible assets, which has resulted in changes in the way they finance themselves. They are less profitable, especially if they are small. Total payouts to shareholders are higher, but these payouts now often are in the form of repurchases rather than of dividends. ...

The firms that remain public are survivors. Few firms want to join their club.  A small number of firms account for most of the market capitalization, most of the net income, most of the cash, and most of the payouts of public firms. At the industry level, revenues are more concentrated, so there are fewer public firms competing for customers. A large fraction of firms are unprofitable every year, especially at the end of our sample period. The increase in unprofitable firms indicates that many public firms are fragile and helps explain the high level of delists. Accounting standards do not reflect the importance of intangible assets for these firms. Such a bias may make it harder for executives to invest for the long run.

As a whole, public firms appear to lack ambition, proper incentives, or opportunities. They are returning capital to investors and hoarding cash rather than raising funds to invest more.

The complete paper is available for download here.

Addressing the high costs of being public imposed by litigation and regulation is not a complete solution, but as my paper argued, it is an essential place to start.

My diploma from STEP at ND

Five more courses to go for my Certificate in Catholic Doctrine:

WLF on the SEC's Conflict Minerals Rule

From the Washington Legal Foundation:

On March 17, 2017 WLF filed comments with SEC in response to Acting Chairman Piwowar’s January 31 request for input on the Conflict Minerals Rule. WLF seeks repeal of the rule, which implements § 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, because the rule is having the exact opposite effect of what it intended. The rule curbs demand for “conflict minerals” like tin, tantalum, and tungsten in order to reduce violence in the Democratic Republic of Congo mining communities where these minerals originate. But the high costs of rule compliance (and low certainty about which mines are conflict free) have led companies to avoid all mines in the DRC region, even those not controlled by militias. The drop in demand has increased the probability of looting by 176% and raised infant mortality rates at least 143%. Poverty and unemployment have spiked, forcing some parents to remove children from school. Many unemployed miners have even joined the militias for work.

3/17/2017: Download the Comments

Press Release: WLF Criticizes SEC’s Conflict Minerals Rule for Costing Lives in Africa—and Not Reducing Violence

 

Recommended reading.

A little self-promotion

"Corporate Directors in the United Kingdom" by @ProfBainbridge @UCLA - https://t.co/6kYjR4KISb #corpgov #directors #UK

— OBLB (@OxfordBLB) March 24, 2017

Fiduciary Duties: The Prescriptive versus Proscriptive Debate

A new article by Kelvin Low addresses the titular debate:

Of all the duties a law student encounters in the study of law, few will prove as bewildering as fiduciary duties. Whilst their core is supposed to be “relatively clear”,1 the wider content of fiduciary obligations continue to elude us. Whilst we know that fiduciaries are expected to avoid unauthorised profits and conflicts of interests, whether any fiduciary duties exist beyond this core remains controversial. Beyond a few established categories of fiduciary relationships such as trustee and beneficiary, 2 director and company,3 agent and principal,4 partners, 5 and solicitor and client,6 it remains a mystery as to when fiduciary duties arise. This is problematic because “[i]t is not because a person is a ‘fiduciary’ … that a rule applies to him. It is because a particular rule applies to him that he is a fiduciary … for its purposes.” 7 Whilst the latter problem of who is a fiduciary is a very real one, the former problem surrounding its content is by far the more acute of the two. Until we know what fiduciary duties the law subjects fiduciaries to, it should not be surprising that the courts will remain circumspect in determining who is a fiduciary outside the established categories.

The most contentious dispute surrounding the content of the fiduciary obligation in recent years lies in its proscriptive or prescriptive nature. Despite case law suggesting that the fiduciary obligation may be prescriptive,8 some courts9 and commentators10 fiercely defend the exclusively proscriptive nature of fiduciary duties. This article proposes that fiduciary duties operate at two levels. The most commonly encountered fiduciary duties are the proscriptive duties preventing conflicts and unauthorised profits. These duties are prophylactic in nature, operate at a subsidiary level and are sometimes said to be better characterised as disabilities.11 At the primary level, the search for peculiarly fiduciary duties is an exercise in futility as fiduciary accountability is invariably and inextricably associated with duties of a nominate or even particular character that apply differently to various categories of fiduciaries. Rather, if at all desirable, it is perhaps more sensible to distinguish fiduciary breaches from non-fiduciary breaches of these complex duties. It is fiduciary accountability at the primary level that the subsidiary proscriptive duties seek to support rather than any non-fiduciary form of accountability. In this sense, at the primary level, fiduciary accountability can be prescriptive. However, in its prescriptive form, as it is inextricably embedded within a complex and compound nominate duty, it is pointless to search for an independent prescriptive fiduciary duty.

Low, Kelvin, Fiduciary Duties: The Case for Prescription (2016). Trust Law International, Vol 30, (3-25), 2016; Singapore Management University School of Law ResearchPaper No. 6/2017. Available at SSRN: https://ssrn.com/abstract=2928472

I addressed that debate in my article, The Parable of the Talents (August 15, 2016). UCLA School of Law, Law-Econ Research Paper No. 16-10. Available at SSRN: https://ssrn.com/abstract=2787452, in which I come down on the prescriptive side.

 

WLF on the SEC's Pay-Ratio Rule Implementation

From the Washington Legal Foundation:

On March 24, 2017, WLF filed formal comments with the U.S. Securities and Exchange Commission in response to acting Chairman Michael S. Piwowar’s request for input on the implementation of the Pay-Ratio Disclosure Rule. SEC adopted the rule in August 2015, as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. In the interest of ensuring that SEC focuses on the integrity of financial markets, WLF maintained that SEC should avoid enforcing regulations that have no relation to the agency’s purpose. WLF also cautioned that the agency must carefully consider First Amendment protections provided to commercial speakers. WLF’s comments pointed out that the U.S. Supreme Court has long recognized the right of individuals and companies to choose to speak—or not to speak. WLF contended that SEC’s effort to compel commercial speakers to voice messages with which they disagree blatantly violates the First Amendment.

3/24/2017: Download the Comments

Recommended reading.

Are religious hospitals entitled to free exercise protections?

The Becket Fund has an update on an important trio of religious liberty cases pending before the Supreme Court:

Advocate Healthcare Newtork v. Stapleton 
St. Peter’s Healthcare v. Kaplan 
Dignity Health v. Rollins

Status: U.S. Supreme Court granted review, to hear case Spring 2017

Faith-based hospitals draw inspiration from their religious heritage. Driven by their faith to provide compassionate care, these hospitals treat people of all faiths and backgrounds, and their wellness services go beyond just providing medical care. For example, Saint Peter’s Family Health Center also serves juvenile victims of abuse, economically disadvantaged families and mentally disabled or violence-prone youth. And Catholic Health Initiatives provides millions annually to benefit programs and services for the poor, such as free clinics.

These faith-driven hospitals also provide generous benefits to their employees, including pensions through the hospitals’ comprehensive church pension plans. Yet their beliefs and the charitable work they do are being threatened for no reason: a group of plaintiffs’ lawyers are targeting these hospitals for a payoff, dragging them to court and demanding that they pay their attorney fees. Their argument? That hospital ministries are not religious enough to have a tax-exempt church pension plan under The Employee Retirement Income Security Act (ERISA). However, it is not the job of lawyers to decide that hospitals can’t be part of a church, and the IRS has rightly viewed these ministries as part of a larger church for over 30 years.

The legal campaign against faith-based hospitals began in 2013. In 2016 three of the cases were appealed to the Supreme Court, while almost a hundred more are waiting in lower courts across the country. On August 15, 2016, Becket filed a friend-of-the-court brief at the Supreme Court supporting the hospitals and their right to freely exercise their religious-based mission to provide compassionate and excellent healthcare according to their faith. 

These cases aren't just about pension plans. It could have serious implications for issues like hiring, which is precisely why a set of virulently anti-Catholic lawyers around the country have been pursuing them.

Review of Stephen Presser's "Law Professors"

Mark Pulliam has a thoughtful review of Stephen presser's interesting new book that uses a series of biographical sketches of law professors (some of whom want on to bigger and better things, such as Barack Obama) to muse about the evolution of American legal thought:

Law Professors is an exceptionally fine book—written in a sprightly style, well-illustrated, logically organized, and containing (as befits a scholarly tome) a detailed index. Displaying an easy but encyclopedic mastery of legal history, Presser covers American law from its English common law roots to the present, using as his pedagogical tool chapter-length sketches of influential legal figures (all of whom served at some point as law professors). He chronologically profiles in this manner 20 individuals, from Sir William Blackstone to former President Barack Obama. ...

He does point out in the present volume that the legal academy has been, and remains, very influential in our society and that the “law professoriate,” as he calls it, has become “highly politicized.” The law professors who have entered politics and have gone to the top—one thinks of a certain ex-president, and a certain Massachusetts Senator who’s expected to someday run for that office—are decidedly on the Left. This is no surprise given that legal faculties are overwhelmingly comprised of liberal Democrats, and the legal scholarship they produce tends, in Presser’s words, “to undermine or radically alter our most basic constitutional and political beliefs.”

I'm part way through it and am loving it. Highly recommended.

Another problem with number crunching as a basis for public policy

I'm seeing a lot of empirical studies these days that purport to find positive correlations between corporate performance (variously measured) and progressive approved corporate "social responsibility" measures (diversity, sustainability, etc....).

It's well known, of course, that it's hard to publish studies that find no result.

But I wonder to whether there isn't a political bias here. Given the substantial tilt to the left in academia, one suspects that a lot of these number crunchers go into the problem with a preconceived notion of the "right" result and mine their data until they find one. One also suspects that editors of journals, sharing those same biases, are more likely to publish results that confirm their own policy preferences.

The problem with number crunching as a basis for public policy

A recent CLS blog post by Martijn Cremers, Saura Masconale and Simone M. Sepe illustrates a recurring problem with empirical legal scholarship: First, it can only provide answers if the question involves something you can count. Second, how you count that something maters a lot.

In the past 20 years, many corporate law scholars have come to the view that governance arrangements protecting incumbents from removal are what really matter for firm value, arguing that such arrangements help entrench managers and harm shareholders. A major factor supporting this view has been the rise of empirical studies using corporate governance indices to measure a firm’s governance quality. Providing seemingly objective evidence that protecting incumbents from removal reduces firm value, these studies have encouraged the idea that good corporate governance is equivalent to stronger shareholder rights.

In our recent article, we challenge this idea, presenting new empirical evidence that calls into question prior studies that rely on corporate governance indices and developing a novel theoretical account of what really matters in corporate governance.

In revisiting the results of these studies, we focus on the entrenchment index or E-Index, introduced in 2009 by Lucian Bebchuk, Alma Cohen, and Allen Ferrell (BCF). The E-Index provides evidence that six entrenchment provisions matter the most for firm value: staggered boards, poison pills, golden parachutes, supermajority requirements for charter amendments, supermajority requirements for bylaw amendments, and supermajority requirements for mergers. As of March 2017, over 300 empirical studies have used the E-Index as a measure of governance quality, suggesting that this index has become a standard reference to define entrenchment and, hence, “bad” governance. Yet, in estimating the association between the E-Index (and each of its six constituent components) and firm value, BCF only relied on a 12-year period (from 1990 to 2002). We rely on a much more comprehensive dataset over a much longer period (from 1978 to 2008), allowing for a more robust statistical analysis of the association between corporate governance and firm value.

Our empirical findings call into question the kitchen sink approach to incumbent protection from removal adopted by the E-index.

But doesn't it also call into question the whole exercise? What if a data set running from 1960 to 2010 produced still different results? Bah, humbug. 

Written consents and record dates under Delaware corporate law

Keith Paul Bishop notes a proposed amendment to the DGCL on how written consents are handled. In a later post, he elaborates his argument that the proposal does not save the basic problem.

Why not just abolish LLC veil piercing?

Joshua Fershee reports on yet another case in which a court treats an LLC as a corporation for veil piercing purposes:

The case is ACKISON SURVEYING, LLC, Plaintiff, v. FOCUS FIBER SOLUTIONS, LLC, et al., Defendants., No. 2:15-CV-2044, 2017 WL 958620, at *1 (S.D. Ohio Mar. 13, 2017).  Here are the parties: the defendant is FTE Networks, Inc. (FTE), which filed a motion to dismiss claiming a failure to state a claim. FTE is the parent company of another defendant, Focus Fiber Solutions, LLC (Focus). The plaintiff, Ackison Surveying, LLC (Ackison) filed  a number of claims against Focus, added an alter ego/veil piercing claim against FTE. Thus, Ackison is, among other things, seeking to pierce the veil of an LLC (Focus). ...

... the S.D. Ohio court states that a threshold question of whether an LLC's veil can be pierced includes an assessment of the following factors: 

(1) grossly inadequate capitalization,

(2) failure to observe corporate formalities,

(3) insolvency of the debtor corporation at the time the debt is incurred,

(4) [the parent] holding [itself] out as personally liable for certain corporate obligations,

(5) diversion of funds or other property of the company property [ ],

(6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the [parent company].

ACKISON SURVEYING, LLC, Plaintiff, v. FOCUS FIBER SOLUTIONS, LLC, et al., Defendants., No. 2:15-CV-2044, 2017 WL 958620, at *3 (S.D. Ohio Mar. 13, 2017) (alterations in original). 

 

The opinion ultimately find that the complaint made only legal conclusions and failed to provide any facts to support the allegations of the LLC as an alter ego of its parent corporation, and further determined that a proposed amended claim was equally lacking.  As such, the court dismissed FTE from the case.  This conclusion appears correct, but it still suggests that, in another case, one could support a veil piercing claim against an LLC by showing that the LLC's "failure to observe corporate formalities," formalities it may have no legal obligation to follow.

 

This remains my crusade. When courts get cases like this, they should (at a minimum) provide a clear veil piercing law for LLCs that accounts for the differences between LLCs and corporations.  

There is, of course, a much simpler solution: Just get rid of LLC veil piercing altogether, which has been my Quixotic crusade these many years:

Abstract

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? 

Keywords: corporation, limited liability, limited liability company

Bainbridge, Stephen M., Abolishing LLC Veil Piercing (May 2004). UCLA School of Law, Law-Econ Research Paper No. 04-11. Available at SSRN: https://ssrn.com/abstract=551724 or http://dx.doi.org/10.2139/ssrn.551724

New Article: Corporate Directors in the United Kingdom

I have posted to SSRN a new paper, Corporate Directors in the United Kingdom (March 17, 2017). UCLA School of Law, Law-Econ Research Paper No. 17-04. Available at SSRN: https://ssrn.com/abstract=2935388

In the United States, state corporation law uniformly provides that only natural persons may serve as directors of corporations. Corporations, limited liability companies, and other entities otherwise recognized in the law as legal persons are prohibited from so serving. In contrast, the United Kingdom allowed legal entities to serve as directors of a company. In 2015, however, legislation came into force adopting a general prohibition of these so-called corporate directors, albeit while contemplating some exemptions. This article argues that there are legitimate reasons companies may wish to appoint corporate directors. It also argues that the transparency and accountability concerns that motivated the legislation are overstated. The requisite enhancement of transparency and accountability can be achieved without a sweeping ban. Accordingly, this article proposes that Parliament either repeal the ban or, at least, authorize liberal exemptions. 

Keywords: board of directors, directors, corporate directors, United Kingdom, natural persons, legal persons

The paper is now circulating to law reviews. (Hint, hint.)