Closely Held Business Entities (Including Shareholder Disputes)

• The Taming of Limited Liability Companies, 66 U. Colo. L. Rev. 921-946 (1995)

 
This perspective on Limited Liability Companies offers a framework within which to view this new entity as well as more traditional legal entities. Any business association provided by law answers three central questions for business participants:  What will be the liability of the participants to outsiders?  What taxes will be owed to the government?  What will be the governance relationship among co-venturers?  The answers to these three questions (shortened to liability, taxes, and governance in the article) are remarkably similar for the LLC and the traditional corporation using Subchapter S of the tax code and a shareholders' agreement.  The history of the development of the LLC suggests it was driven by particular firms that could not get the desired combination of limited liability and pass-through taxation under the older corporate system.  Its history also suggests that the governance features of the new entity have been tax driven and will lead to governance problems similar to those that have characterized close corporation law.
• "The Private Company and Our Two Corporate Laws" and "Close Corporations in the United States of America" in The European Private Company  (H. de Kluiver & W. Van Gerven, editors) (Maklu 1995)

 
The Private Company chapter was a keynote address at a conference on the European Private Company held at Maastricht the Netherlands in 1995.  Both chapters provide an American perspective to the harmonization of company law in the European Union, and particularly the law as to private corporations, which has not received as much cross-border attention as the law governing larger corporations.
• The Shareholder's Cause of Action for Oppression, 48 Business Lawyer 699-745 (1993)

 
This is a cornerstone of Professor Thompson's framework for close corporations.  The first part of the article summarizes how close corporations do not fit easily within the statutory structure of corporate law that has evolved with public corporations in mind.  The core of the article connects two modern legal responses to the lack of fit just described.  Three-fourths of the states provide "oppression" statutes permitting judges to provide relief from statutory norms of centralized control and entity permanence.  Courts increasingly use these statutes to provide buyouts when there has been oppression.  There has also been a movement toward permitting direct (as opposed to derivative) recovery for shareholders when there is a dispute among shareholders.  This article defines these two parallel developments as part of a shareholder's cause of action for oppression, both designed to respond to the problems and needs of a close corporation operating within a legal framework designed for a larger enterprise.
 
• Corporate Dissolution and Shareholders' Reasonable Expectations, 66 Wash. U.L.Q. 193-238 (1988)

 
In an issue that is a tribute to F. Hodge O'Neal, this article traces the development of one of Professor O'Neal's  key contributions to American corporate law: the use of "reasonable expectations" as a basis for judicial relief when shareholder disputes arise in close corporations.  This article seeks to add to that doctrine by suggesting specific considerations that should guide a court's use of reasonable expectations and addressing the alternative judicial remedies that can be applied if a court decides to grant relief.

Limited Liability/Separate Corporate Entities

• The Limits of Liability in the New Limited Liability Entities, 32 Wake Forest L. Rev. 1-29 (1997)

 
This article provides a systematic introduction to how piercing the veil  in new forms of business associations might differ from the traditional law as to piercing the corporate entity. The last two parts of the article categorize the statutes in the various states providing limited liability within a Limited Liability Company and a Limited Liability Partnership.  The statutory language offers a variety of phrasings, which could suggest different degrees of insulation in different states and different degrees of insulation from liability than that provided by the corporation.  After considering the history of the development of LLCs and discussing analogous applications in corporate law, Professor Thompson concludes that the protection available to participants in an LLC should mimic the insulation provided by the corporate form and will not differ dramatically from state to state.

 The first part of the  article, which discusses the corporate law backdrop to this issue, provides additional data, beyond that included in the Cornell article described below, which reports that piercing the corporate veil has never occurred in a corporation with more than nine shareholders and usually occurs as to shareholders who are also managers of the entity.
 

• Unpacking Limited Liability: Direct and Vicarious Liability of Corporate Participants for Torts of the Enterprise, 47 Vand. L. Rev. 1-41 (1994)

 
 Does corporate law (with its provision of limited liability to shareholders) conflict with modern tort law principles that seek to prevent actors externalizing the costs of their business?  This article concludes that corporate law does not thwart the risk-sharing or deterrent goals of tort law.  Shareholders are insulated from claims against the enterprise.  Piercing the corporate veil operates as an exception to this insulation, using broad, undifferentiated reasoning that potentially exposes all shareholders to liability. This article seeks to unpack the basis for liability and distinguishes passive shareholders from those shareholders who are active in the corporation's business. The corporate form has never provided a shield for individuals to engage in tortious acts while clothed in a corporate capacity (as distinguished from the same individual acting for the same corporation in an action which leads to a contractual claim).  Piercing the veil claims often reflect liability based on direct participation of managers/participants but described by judges using traditional piercing terms for shareholders.  The article acknowledges its is a "continuing puzzle why courts remain so willing to provide limited liability to parent corporations in tort cases" as that insulation is not supported by any of the various theories advanced for limited liability.

 
• Piercing the Corporate Veil: An Empirical Study, 76 Cornell L. Rev. 1036-1074 (1991)

 
Piercing the corporate veil is the most litigated issue in corporate law.  This seminal study of all reported piercing the veil cases through 1985 provides the first comprehensive data on judicial action in this area and provides a means to evaluate various hypotheses advanced by courts and commentators.  The study found that courts pierce in about 40% of all reported cases, but there are no significant differences over time, between state and federal courts or because of the identity of plaintiffs.  The study found that piercing the corporate veil is limited to close corporations and corporate groups; it does not occur in public corporations.  (data reported in the Wake Forest article described above permits an extension of this result: piercing only occurs in corporate groups or in close corporations with fewer than 10 shareholders).

The study examines 100 factors courts have used to explain when they pierce the veil.  Examples such as corporate informalities or inadequate capitalization, sometimes portrayed as ubiquitous in piercing cases, appear in less than 20% of successful piercing cases.  More surprisingly, the data shows that courts are more likely to pierce in contract cases  than tort cases.  More than two-thirds of the tort cases involve corporate groups.  The article concludes that this surprising protection may reflect the development of piercing law in a bargain context where courts developed "suspect" reasons to depart from limited liability and these suspect reasons do not translate well to torts involving corporate groups.  This discussion is continued in the Vanderbilt article described above.

• United States Jurisdiction Over Foreign Subsidiaries: Corporate and International Law Aspects, 15 Law & Pol'y Int'l Bus. 319-400 (1983). Reprinted in Corporate Counsel's Annual - 1984, 1005-1081

 
The law's recognition of a corporation as separate from its shareholders not only provides limited liability discussed above, but can also be a means to avoid government regulation.  This article describes the various situations in which the United States has sought to assert its jurisdiction over corporations incorporated elsewhere which are owned by United States citizens (including corporations.)  Beginning with prohibitions found in the Trading with the Enemies Acts from the two World Wars, the article traces other examples in which the United States has sought to broaden the reach of various boycotts ranging from Cuba and China to the 1980 Moscow Olympics and Angola.  The corporate law doctrine of piercing the corporate veil has little effect on the debate, which turns more on the pure use of national power.

Mergers and Takeovers

• Exit, Liquidity and Majority Rule: Appraisal's Role in Corporate Law, 84 Georgetown L.J. 1-60 (1995)

 
This article traces the two lives of appraisal: its first incarnation as a means of liquidity and exit given to minority shareholders when corporate statutes permitted mergers and other fundamental corporate changes to be accomplished by less than unanimous vote; and its current use as a check on the price paid by majority shareholders when they have expelled minority shareholders from the enterprise on terms set by the majority. The article's survey and categorization of the 100 reported appraisal cases in the 10 years after the important appraisal case, Weinberger v. UOP, shows that reported disputes about appraisal usually occur in a cash-out context.  Yet the specifics of the process (including valuation without any appreciation or depreciation from the merger; elaborate procedural requirements, and exclusions when there is a public market) all reflect the needs of the traditional setting where the minority is choosing not to go along with a business combination.  These statutory terms are often the opposite of the procedures that would be used when the minority is being forced out of the enterprise on terms set by the majority.  Without understanding the two (and often conflicting) uses of appraisal and making appropriate adjustments to the traditional appraisal standards courts should not make appraisal an exclusive remedy for shareholders in a cash-out situation.
• "Tender Offer Regulation and the Federalization of State Corporate Law" in Public Policy Toward Takeovers (M. Weidenbaum & K. Chilton, Eds.) (Transaction Books 1988)
• Defining the Federal and State Realms of Tender Offer Regulation, 64 Wash. U.L.Q. 1059-1102 (1987)

 
These two works each address efforts to address the appropriate role of federal and state law in regulating corporate takeover.  They define the three sets of relationships that must be understood before the federalism issue can be resolved: (1) the relationship between shareholders and managers of a corporation that traditionally has been governed by state corporation law; (2) the relationship between the shareholders of a target company and the outsider who has made a tender offer seeking to acquire the shares of the target from the shareholders (since 1968 this relationship has been regulated by the federal Williams Act); and (3) the relationship between the two parties competing for control of a target company-- the outside bidder and the target management.  This third set of relationships has been subject to regulatory efforts by both state and federal laws and raises the question of whether federal law has preempted state law.  Some federal courts and commentators read the Williams Act to mandate an unfettered market for corporate control and to block state efforts to repel takeovers. States seeking to stop hostile takeovers first sought to directly regulate the hostile bid and were rebuffed for intruding into the federal area.  When state rewrote their laws and presented them as regulating the relative roles of management and shareholders within one corporation, they were more successful-- even though a necessary casualty was the federal effort to preserve a market for corporate control against state interference.
• Squeeze-Out Mergers and the 'New' Appraisal Remedy, 62 Wash. U.L.Q. 415-434 (1984).  Reprinted in 27 Corporate Practice Commentator 193 (1985)
 
This article, written in the aftermath of Weinberger v. UOP analyzes the appraisal era in the law of squeeze out mergers, as the Delaware court pushed more shareholder disputes into an appraisal forum.  The relationship between appraisal and fiduciary duty is discussed, a question also addressed in the Georgetown article above a decade later.  This article concludes that squeeze-out mergers in closely held corporations are based on different assumptions than Weinberger, so that courts seeking to follow Weinberger should not apply its principles to closely held corporations.

 Securities

• "Simplicity and Certainty" in the Measure of Recovery Under Rule 10b-5, 51 Business Lawyer 1177-1201 (1996)

 
This critique of the damages portion of the Private Securities Litigation Reform Act of 1995 exposes the act's failure to deliver the "simplicity and certainty" promised by the Conference Committee that managed the legislation.  The legislative history expresses concern about the lack of certainty in measuring damages, but the legislation is written only as a cap that says nothing about what the measure of damages should be, only what it cannot exceed.  The legislative history purports to want to limit damages only to that caused by the fraud and exclude that caused by the market, but even the cap sometimes permits the market change to be included and sometimes does not.  The articles suggests that a proper understanding of securities damages turns on recognizing the necessary interconnection of two changes that are reflected in a securities price over time where there has been fraud.  In that setting any change has at least two components: (1) that due to the fraud and (2) that due to the change in the market.  Federal securities law sometimes permits a plaintiff to recover both as when there has been a face to face transaction and the defendant has benefited from the wrongful conduct.  Section 11 of the Securities Act of 1933 puts the burden on the defendant as to differentiating the two components.  The damage provisions of the new statute should be understood against that background.
• The Measure of Recovery Under Rule 10b-5: A Restitution Alternative to Tort Damages, 37 Vand. L. Rev. 349-398 (1984).  Reprinted in Securities Law Review 1985, 213-262.  Cited by the majority and dissenting opinions in Randall v. Loftsgaarden, 478 U.S. 647 (1986)

 
The measure of recovery under Rule 10b-5 of the Securities Exchange Act of 1934 has long been confusing.  In this article, Professor Thompson provides a structure that connects the various measures from time to time used by courts.  To the traditional tort structure by which many commentators and judges view Rule 10b-5, he offers a parallel structure based on the long-established law of restitution (unjust enrichment).  While recovery under the two measures is often the same,  it can be substantially different when there is uncertainty about measurement or causation.  Professor Thompson notes the long history of acceptance of unjust enrichment as a basis for obligations and defines when it would be appropriate in Rule 10b-5 claims.
• The Shrinking Definition of a Security: Why Purchasing All of a Company's Stock is not a Federal Security Transaction, 57 N.Y.U. L. Rev. 225-279 (1982).  Reprinted in Corporate Counsel's Annual - 1983, 317-373

 
As the Supreme Court moved through its era of strict construction in securities law it narrowed the definition of a security.  One area opened to dispute in that move was whether a purchaser of an entire business could sue under the federal securities laws.  This article shows how the purchaser of an entire business differs from the archetypical purchaser of individual securities that motivated securities act protection; protection would be elsewhere in the law, not in the heightened protections of the securities acts.  The article seems to have favorably influenced some appellate courts, but the Supreme Court ultimately came down decisively on the other side of this issue holding that the sale of a business is covered.

Business Associations

• Shareholders as Grown-Ups: Voting, Selling, and Limits on the Board's Power to 'Just Say No,' 67 U. Cinn. L.Rev. 999 (1999).

 
With the return of a hot takeover market amidst a shareholder population in which institutional shareholders have a dominant role there has been renewed discussion of the role of shareholders in corporate decision-making and for takeovers in particular.  This article takes the author's suggested structure as to what shareholders do:  (they vote, sell or sue, all in limited doses) and examines the contrasting lines of Delaware law as to permissible limits on director action to limit shareholder selling (see Unocal & Unitrin) and permissible limits on director actions to limit shareholder voting (see Blasius).  The article examines reasons that might explain a difference in the two contexts and argues for a unified approach that would preserve space for shareholder decision-making.
•  Preemption and Federalism in Corporate Governance: Protecting Shareholder Rights to Vote, Sell, and Sue, forthcoming in 62 L. & Contemp. Probs. No. 3 (1999)
The long running debate over the relative roles of federal and state law in regulating corporations which has been relatively quiet in recent years while tilting in favor of state regulation, may have taken a new turn.  This article suggests that in one segment of corporate law, the role of shareholders, a distinct federal trend is visible.  The article discusses: 1) federal preemption in the 1998 Uniform Standards Act of 1998, 2) federal law which has expanded the place of shareholder voting, and 3) state disclosure law deferring to federal disclosure rules.  The discussion occurs within the author's suggested structure for approaching corporate law based on the three types of rights for shareholders:  they vote, sell or sue, all in limited doses.  The article concludes with an examination of whether there is a hierarchy among these three functions in what law can do as compared to markets or private ordering, and what federal and state lawmakers have chosen to have law do.
• Insider Trading, Investor Harm, and Executive Compensation, 50 Case West. Res. L.Rev. 291 (1999)
 This article examines the three central challenges to insider trading set forth in Henry Manne's 1967 book:  1) that there is no coherent theory explaining insider trading; 2) that there is no significant injury to corporate investors from insider trading; 3) that insider trading constitutes the most appropriate device for compensating executives.  As to the first, the author observes that federal regulations have passed through three distinct movements that do not necessarily connect to one another the current focus on agency law and the broader principles used by the Supreme Court in O'Hagan probably have no more staying power than the theories that defined previous movements.  Investor harm has been difficult to show.  A coherent  theory in this area may turn on principles from behavioral economics and cognitive psychology.  Executive compensation, the most controversial of Manne's original assertions, is an even weaker argument today because of the broadening array of alternative forms of executive compensation and their relative advantage balancing incentives for executives and policing management behavior.
• Value Creation by Lawyers Within Relational Contracts and in Noisy Environments, 74 Oregon L. Rev. 315-325 (1995)
In prior work, Ronald Gilson  provided a model as to how transactional lawyers create values for their client.  This contribution to a Symposium on Business Lawyering and Value Creation for Clients extends that value-creation model in two ways.  Part I applies the model in a relational contract setting such as Silicon Valley or Japan  as opposed to discrete contracting among strangers that is the focus of standard financial theory.  Part II discusses value creation in a positive feedback economy  as opposed to strict reliance on rational actor theory that characterizes traditional financial economics.
• Foreword--Evolving Business Associations: Understanding the Role of Law, 70 Wash. U.L.Q. 265-75 (1992) (Foreword to the F. Hodge O'Neal Conference on Corporate Law & Finance)
Two topics that were themes at the F. Hodge O'Neal Symposium on Corporate Law and Finance are discussed in this introduction to the symposium.  Both are illustrations of how corporate forms are evolving from the Berle and Means stylized model of large enterprises with many passive shareholders each owning a small portion of the total ownership interest. One of these illustrations, the close corporation, is long-standing.  This symposium discusses this question from a game theory perspective and debating the relative role of courts and legislatures in developing the law for close corporations.  The other illustration is more recent, going private and leveraged buyouts, and is discussed here in terms of the relative ability of markets and law to address evolving business structures.
• The Law's Limits on Contracts in a Corporation, 15 J. Corp. L. 377-415 (1990).  Reprinted in 33 Corporate Practice Commentator 1 (1991)

 
The debate over whether corporate law rules should be mandatory or contractual is discussed here within a framework that focuses on the "nexus of constraints" that surrounds the shareholder-manager relationship in a corporation.  Law, both ex ante statutory law, and  settling up by judges after the fact, is an alternative to markets (products, capital, management services, and corporate control) and private ordering (bonding, monitoring, dispute resolution etc.) Thus, there will be a different need for law in various contexts depending on the nexus of constraints.  Parts III and IV of the article discuss opting out in closely held corporations and public corporations pointing out distinctive differences in the two contexts that leads to skepticism about some opting-out in close corporations.

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