Archives For uncorporations

Should domestic relationships be modeled on corporations, partnerships or other business associations?  This idea may seem attractive.  As I have argued, both business and family relationships can be viewed as standard forms, which are useful for filling gaps in long-term contractual relationships.  Borrowing contract-type thinking from business associations also could help break through the norm-driven rigidity of family law.  Thus, I have argued (here, and in Chapter 8 of The Law Market) for using business associations as a model for a choice-of-law approach to same sex marriage.

My writing got me an invitation to the very interesting “Love or Money” conference at Washington University, which explored “the false dichotomy in life and law between activities initiated for affective reasons, such as love or altruistic impulses, and those undertaken for profit.” 

But I probably disappointed the organizers by insisting on some “dichotomy” — that is, a separation between the statutory standard forms used for “love” (intimate relationships) and for “money” (business associations).  My point is that merging the two, while it may have political advantages, could muddy both legal areas.  This is based on my theory of the functions of these standard forms articulated in several papers, and most completely in my book, Rise of the Uncorporation

My paper from that long-ago conference, Incorporating the Hendricksons, has finally been published.  (Of course the title refers to much missed Big Love). Here’s the abstract:

The family is evolving rapidly, but not fast enough for some people. Several commentators suggest freeing family law of its traditional constraints by applying the contractual business association model. Business models, though superficially similar to domestic relationships, ultimately are unhelpful or counter-productive to defining the family. This Article discusses the essential differences between business and domestic partnerships and the potential havoc from trying to merge the two.

One nice result of the conference and paper is that I finally got to use this title for a blog post.

Yesterday’s WSJ reported that hedge funds are facing possible investor redemption demands:

As the year comes to a close, some investors say they are reviewing how their managers have performed through the recent volatility and are making decisions about whether to cash out of underperforming funds. Investors who want out before the end of the year in most cases need to give 45 or 60 days’ notice of their redemptions, setting up a critical period for managers who have suffered significant losses. * * *

Those funds’ managers “will be punished, and rightfully so,” said Vidak Radonjic of the Beryl Consulting Group LLC, which advises investors on hedge funds. * * *

“If they are having a bad year in that returns are down but can explain it in a way that convinces us they haven’t lost their discipline, then we might give them a pass,” said Sam Katzman, the chief investment officer of Constellation Wealth Advisors, which invests in hedge funds and has $4.5 billion under management. Constellation is likely to redeem from some managers who have underperformed this year, he said.

It might be a good idea if poorly performing corporations faced the same discipline. One might argue that it beats the vagaries and gaps in the business judgment rule and shareholder voting.

In fact, one did.

Steve Bainbridge invites my opinion of Delaware lawyer Edward McNally’s view that alternative entities “may not protect investors.” By “alternative entities” he is referring to limited liability companies and limited partnerships, despite his own recognition that they “have become the preferred form of entity for new businesses” (so why aren’t corporations “alternative entities”)? He uses as the text for his sermon VC Noble’s recent opinion in Brinckerhoff v. Enbridge Energy Co. involving the interpretation of a broad fiduciary duty waiver.

McNally says that “the lack of a uniform governance structure in these alternative entities may cause problems” when there are outside investors. He argues that broad fiduciary waivers may result in investors not being adequately paid for the risks they’re taking because “it seems doubtful that those risks can ever be adequately anticipated.” By contrast

corporate entities with much more standardized governance norms with greater investor protection have long flourished and raised capital. The corporate governance form benefits from its predictability and presumably raised capital effectively without the added risk of unpredictable governance provisions. Thus, the theoretical justification for letting alternative entities be governed loosely [that investors are paid for the risks they take] may not be valid.

Moreover, he says, the parties may not know for sure whether the waiver is effective.  He cites the following example:

Years ago, we had a case where a master limited partnership’s 60-page operating agreement attempted in great detail to spell out how to handle conflict of interest transactions involving its general partner. After consulting a national legal expert on limited partnerships, the general partner bought limited partnership interests following what it thought was the correct process. It was promptly sued, lost and paid millions of dollars in damages. The court held it followed the wrong process, and in doing so had breached its duty to the partnership. Complexity has its own risks.

He concludes that this is why “few alternative entities have been used as a vehicle to issue publicly traded securities, such as limited partnerships or membership interests.”

McNally repeatedly refers to the entity involved in Brinckerhoff as an “LLP.”  These are the initials for a “limited liability partnership,” which is a form of general partnership.  However, the entity in the case is a limited partnership, or “LP.”   He also confuses the “good faith” duty, a fiduciary duty which the agreement in Brinckerhoff added, with the “implied contractual covenant of good faith and fair dealing,” a non-waivable rule of contractual interpretation under Delaware law.

Apart from these technical glitches, I question McNally’s reasoning.  As to his claim of unpredictability, as I have discussed at some length, Delaware alternative entities are actually a way to avoid the more serious indeterminacy problem in corporate law. McNally’s illustration of uncorporate unpredictability is unpersuasive.  Maybe the general partner’s legal advisor was wrong, or the court erred.  Both can also happen in corporate practice. Anyway, he says this happened “years ago.”  Delaware uncorporate jurisprudence has developed rapidly in recent years, as the Brinckerhoff case itself illustrates.

Now let’s examine the case.  A pipeline partnership found itself mid-project at the nadir of the finaical crisis.  Its controller offered to invest.  A special committee negotiated a deal and hired legal and financial advisors to evaluate it.  They determined that it met the agreement’s “arms length” value standard for deals with affiliates. The court held this was not bad faith. The court noted (n. 39):

Although on some level the [agreement] may appear problematic for the simple reason that the controller of a limited partnership’s general partner is engaging in a transaction with the limited partnership, the LPA anticipates such transactions. Moreover, if the Court were to determine that [plaintiff] could state a claim that Enbridge [the defendant controlling party] acted in bad faith even though Enbridge negotiated the JVA with an independent special committee, then what would Enbridge have to do to be able to dispose of bad faith claims on a motion to dismiss? Would Enbridge be required, in analogy to In re John Q. Hammons Hotels Inc. S’holder Litig., 2009 WL 3165613 (Del. Ch. Oct. 2, 2009), to negotiate a transaction with an independent committee and have the transaction approved by a majority of the public unit holders? Requiring Enbridge to put in place those “robust procedural protections,” in order to be able to dispose of a bad faith claim on a motion to dismiss, would seem to rewrite the LPA when the Delaware General Assembly has explicitly stated that “[i]t is the policy of [Delaware’s Limited Partnership Act] … to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.” 6 Del. C. § 17–1101(c).

The court interestingly compares the determinacy of the partnership agreement with the indeterminacy the parties avoided by not being a corporation.

As I have discussed elsewhere (e.g., here and here) the parties to uncorporations may quite reasonably trade off exit and managerial incentives for control and fiduciary duties.  The courts should enforce these contracts and the Delaware courts do.  It follows that McNally’s broader point that uncorporate entities are generally unsuitable for outside investors is flat wrong.

McNally raises the separate question of why there are only a relative few publicly held alternative entities.  One reason may be that the exit tradeoff I referred to may not work in publicly held firms.  Most such firms need the corporate feature of “capital lock in” which precludes buyout and dissolution provisions.

Bottom line:  Lawyers need to understand that “alternative” entities are an important transactional tool for clients.  Protestations that uncorporate law is too new or unpredictable, which were common 20 years ago, simply don’t wash today.

As I discussed last May, corporations are hoarding cash.  According to today’s WSJ, they’re still hoarding cash.

Mira Ganor writes, in Agency Costs in the Era of Economic Crisis, that it could be about CEO compensation. Here’s the abstract:

This Article reports results of an empirical study that suggests that the current economic crisis has changed managerial behavior in the US in a way that may impede economic recovery. The study finds a strong, statistically significant and economically meaningful, positive correlation between the CEO total annual compensation and corporate cash holdings during the economic crisis, in the years 2008-2010. This correlation did not exist in comparable magnitudes in prior years. The finding supports the criticism against current managerial compensation practices and suggests that high CEO compensation increases managerial risk aversion in times of crisis and contributes to the growing money hoarding practices that worsen an economic slowdown. One possible explanation for the empirical findings is that during the last economic crisis, managerial risk seeking transformed into risk aversion that stalls economic recovery. The study has implications for the discussion on managerial pay arrangements and the implementation of the Dodd-Frank Act concerning say-on-pay

Whatever the cause, as I wrote last May there is a possible solution for cash hoarding (and possibly a better way to deal with agency costs generally), at least for some types of firms:

As I’ve pointed out in numerous articles (e.g.) and in my Rise of the Uncorporation, the uncorporation replaces often-ineffective corporate-type disciplines like fiduciary duties and shareholder voting with financial discipline centered on debt and distributions, which restricts the amount of cash managers have to play with.

And the underuse of the uncorporate form itself comes down to another problem:  the corporate tax.

My paper, Energy Infrastructure Investment and the Rise of the Uncorporation has been published in the current issue of the Journal of Applied Corporate Finance.  It includes a useful summary of my views of uncorporations applied to larger firms.  As of now it’s behind a pay wall.  Here’s the abstract:

While most large U.S. businesses have long been organized as corporations, a significant portion of our economy, including major parts of our energy infrastructure, are organized as other types of legal entities. These “uncorporations” include such business forms as Master Limited Partnerships (MLPs) and Limited Liability Companies (LLCs). Many practitioners have dismissed these alternative entities as merely tax devices and only peripherally important to mainstream business. But this view misses important features of the uncorporation that make it an important alternative in dealing with the “agency” costs that arise in public companies from separating managerial control from equity ownership. Corporate governance relies heavily on agents such as auditors, class action lawyers, judges, and independent directors to protect shareholders from managerial self‐interest. The obvious costs and defects of relying on these governance mechanisms have generally been seen as a reasonable price to pay for the benefits of the corporate form. But this conclusion depends on the availability and effectiveness of the alternative mechanisms for addressing agency costs. Uncorporations provide such an alternative by tying managers’ economic well‐being so closely to that of their firms that corporate monitoring devices become less necessary. Uncorporate governance mechanisms include managerial compensation that is based largely (if not entirely) on the firm’s profits or cash distributions, and restrictions on managers’ control of corporate cash through liquidation rights and requirements for cash distributions. Business people and policy makers should evaluate the potential benefits of uncorporations before concluding that the costs of corporate governance are an inevitable price of separating ownership and control in modern firms

John Steele Gordon, writing in the WSJ, peels the corporate veil away from Warren Buffett’s tax situation:

Warren Buffett recently claimed that he had paid only $6.9 million in taxes last year. But Berkshire Hathaway, of which Mr. Buffett owns 30%, paid $5.6 billion in corporate income taxes. Were Berkshire Hathaway a Subchapter S corporation and exempt from corporate income taxes, Mr. Buffett’s personal tax bill would have been 231 times higher, at $1.6 billion.

Gordon describes our two tax systems — corporate and personal tax — as an “original sin.” According to Gordon, the system lets the rich play tax games by arbitraging differences between corporate and personal rates. It also creates a “field day for demagogues and the misguided to claim that the rich are not paying their ‘fair share'” by ignoring the effect of the so-called “corporate” tax on the real people who own corporations.

Actually, the mischief goes deeper than Gordon suggests.  First, the corporate tax has helped entrench in the popular mind the idea that the merely legal creation of the corporation is actually flesh and blood.  This fuels the post-Citizens-United rhetoric on the evils of “corporate” speech as being somehow magically different from all other political activity by associations.

Second, the corporate tax has been a great engine of agency costs.  As discussed in my Rise of the Uncorporation, business associations such as LLCs and partnerships can mitigate corporate managers’ misuse of the owners’ money by replacing cumbersome corporate-type monitoring with obligations to distribute excess cash.  If more firms were uncorporations, we would not see the enormous cash hordes of today’s firms.  Lacking investment opportunities, they (e.g. Berkshire Hathaway?) would return the cash to their owners. But the “second” tax on distributions gives managers (Warren Buffett?) a powerful argument against distributing cash.  In fact, Steven Bank has adduced strong evidence that the corporate tax originated in 1936 as part of a deal promoted not by populists but by corporate managers (Bank, Corporate Managers, Agency Costs, and the Rise of Double Taxation, 44 Wm. & Mary L. Rev. 167 (2002)).

Third, the tax manipulations run deeper than Gordon suggests.  The difference between corporate and personal taxation helps maintain the sharp separation in the U.S. between the corporation and the uncorporation.  Only certain types of firms — those engaging in “passive” types of business such as resource management — can be both publicly held and free of corporate taxation.  Yet many other types of firms could benefit from uncorporate governance.  As a result, as discussed in my book, “uncorporate” governance must operate indirectly, through entities such as hedge and private equity funds.  Abolition of the “corporate” tax would encourage the use of more direct mechanisms for loosening managers’ reins over firms’ cash in a wide variety of firms.

In short, the corporate tax obfuscates analysis of business forms and helps inflate agency costs.  It’s not just unfair, as Gordon suggests.  It’s stupid.

Last year I wrote here about Roni LLC v Arfa, which I cited as an example of the “troubling lawlessness of NY LLC law.”

As discussed in my blog post, the court in that case, after holding that the parties’ arms-length pre-formation business relationship did not support a fiduciary relationship, nevertheless denied defendants’ motion to dismiss based on “plaintiffs’ allegations that the promoter defendants planned the business venture, organized the LLCs, and solicited plaintiffs to invest in them.” The court applied old corporate cases holding that “both before and after a corporation comes into existence, its promoter acts as the fiduciary of that corporation and its present and anticipated shareholders.”

I criticized the court’s holding as misapplying NY LLC law, concluding:

[T]he court’s reasoning using hoary old corporate promoter cases to create a pre-formation fiduciary duty to disclose in LLC cases promises to make a mess out of NY LLC law. It also creates significant problems for business people who now have a fiduciary duty, with uncertain disclosure duties, imposed on what the court itself recognized is basically an arms’ length market relationship. It’s not even clear how parties can contract out of this duty, since the whole problem is that they do not yet have a contract.

It seems the only way NY business people involved in business formation can avoid this problem is simply to avoid New York.

My blog post ended up being cited in the appellants’ brief on appeal, which prompted a response in the respondents’ brief (see n. 25).

I was then moved to write an amicus brief in connection with the appeal, which the NY Court of Appeals has now accepted for filing. To complete the picture, here’s the appellants’ reply.

I understand the case will be heard in November and decided a couple of months thereafter.  It will be interesting to see what the Court of Appeals makes of all this.

One is not a partnership

Larry Ribstein —  6 September 2011

Bob Hillman and Don Weidner have a nice little paper in the form of a dialog about what you have when a partner withdraws leaving only one “partner”: Partners Without Partners: The Legal Status of Single Person Partnerships.  Here’s part of the abstract:

Although we have differing views on whether a single person partnership is possible under RUPA, we conclude on common ground that the buyout is appropriate. We also unite in a call for statutory clarification.

Gary Rosin, commenting on the paper, states his position more succinctly, quoting Springsteen: “When you’re alone you’re alone.  When you’re alone you ain’t nothing but alone.”

The basic problem is that the partnership statutes define a partnership as two or more persons, but don’t specify whether withdrawal of the penultimate partner triggers dissolution of the entity or, instead, a buyout plus continuation by the sole remaining partner.

In my view the answer is clear.

In a two-member partnership, the firm necessarily dissolves and is not continued on dissociation of one of the members because the remaining firm would not have the requisite two members to be a partnership.

Bromberg & Ribstein, §7.03(c), n. 13a. Although you can’t get that from the statute, it is a necessary implication of the definition of partnership.

If you insist that the fact that the statute doesn’t define this as a dissolution event, or that the partnership “entity” still exists notwithstanding withdrawal, then here’s some policy for you.  The function of the partnership statute is to serve as a standard form for a particular type of relationship — i.e, among two or more members.  As I point out in my Rise of the Uncorporation (p. 158, fn omitted),

The idea of multiple owners is inherent in the partnership standard form and coherent with partnership’s other provisions. Among other things, partnerships are based on contracts, which seemingly require two or more people: they are associations involving sharing of financial and management rights among the members, and the important partnership concepts of dissociation   and dissolution necessarily imply a relationship from which to dissociate. Moreover, multiple owners distinguish partnership from another standard form—that of agency, which is based on a single party (the principal) getting all of the benefit (i.e., profit) and having all of the control.

I go on to discuss whether people should be permitted to contract for one-member partnerships, which I view as a more complex issue.  But the cases discussed by Hillman and Weidner don’t involve contracts.

H & W are concerned about whether this approach would frustrate buyout rights that would otherwise exist.  Maybe, but this is just a default rule.  The parties can contract for any kind of buyout they want, as long as they don’t end up with a sole proprietorship.  If they don’t contract, they can’t back into a buyout by trying to define a partnership as something it isn’t.

Anyway, the uncertainty costs of the H & W approach exceed the benefits.  Allowing a buyout and survival of the partnership leads to a host of problems, some of which they discuss.  For example, what if the partnership is an LLP — would the liability protection continue for events after the penultimate partner’s dissociation even if it’s a one-member entity and therefore not a partnership (and so technically ineligible to be an LLP)?

This issue and the H & W article raise two broader concerns. First, the problem here is a symptom of uniform lawmaking, which I’ve discussed elsewhere (e.g.). H & W point out (p. 8) that problems with partnership dissolution persist despite “more than a century” of partnership law drafting dominated by the uniform lawmaking process.  This is no wonder given the perversity of the process discussed in my article with Kobayashi linked immediately above.  Weidner’s recollections as RUPA reporter (see p. 9) only confirm the twists and turns of the process and the ad hoc way decisions are sometimes made.  Moreover, even a perfect process necessarily will have glitches or develop problems over time.  Yet uniform lawmaking is designed to lock in a single solution and to eschew the interstate competition that has helped develop LLC and corporate law.

Second, do we really need all of this complexity?  As noted above and in Gary Rosin’s post, part of the problem is the continuing pall cast by the vague and uncertain “entity” concept.  Simply viewing a partnership as a contract subject to a various rules, some of which are default rules provided for in the standard form, provides simpler and more direct answers.  The “entity” concept turns the contract into a mess of a legal construct.  Since the parties can’t be sure how a court will analyze the situation, they may not even be able to settle the issue by contract. The two-member partnership becomes another victim of lawyer-driven over-complexity.

Anyway, all we need to know for now is in Bromberg & Ribstein:  when a partner withdraws from a two member partnership he leaves one owner.  One owner is not a partnership, and can’t become one via a buyout. Hence the partnership dissolves.  If you don’t like that solution, contract around it.

On Friday the Delaware Supreme Court decided the important case of CML V, LLC v. Bax (see Francis Pileggi’s helpful summary).

The court, per CJ Steele, held that a creditor lacks standing to sue an insolvent LLC derivatively.  The court reasoned that when the Delaware LLC Act says in §18-1002 that a plaintiff in an LLC derivative suit “must be a member or an assignee of a limited liability company,” it really and unambiguously means that he “must be a member or an assignee of a limited liability company.” Not a creditor.

Plaintiff argued that the Delaware statute refers only to member/assignee suits authorized by §18-1001 and does not preclude all creditor derivative suits.  This argument, draws force from N. Am. Catholic Educ. Programming Found., Inc. v. Gheewalla, 930 A.2d 92, 101 (Del. 2007), which said that creditors of an insolvent corporation could sue derivatively under similarly phrased §327 of the DGCL. Plaintiff also insisted that it would be absurd to distinguish between LLCs and corporations.

CJ Steele responded that while the DGCL is limited to a shareholder-instituted derivative suit, Delaware §18-1002 refers to “a derivative suit.”  Also, while §18-1001 says that a a member or assignee “may” bring a derivative suit, §18-1001 says the plaintiff “must” be a member or an assignee, thereby calling attention to mandatory nature of §18-1002.

As to the plaintiff’s absurdity argument, here’s the opinion gets interesting (footnotes omitted):

[T]he General Assembly is free to elect a statutory limitation on derivative standing for LLCs that is different than that for corporations, and thereby preclude creditors from attaining standing. The General Assembly is well suited to make that policy choice and we must honor that choice. In this respect, it is hardly absurd for the General Assembly to design a system promoting maximum business entity diversity. Ultimately, LLCs and corporations are different; investors can choose to invest in an LLC, which offers one bundle of rights, or in a corporation, which offers an entirely separate bundle of rights.

Moreover, in the LLC context specifically, the General Assembly has espoused its clear intent to allow interested parties to define the contours of their relationships with each other to the maximum extent possible. It is, therefore, logical for the General Assembly to limit LLC derivative standing and exclude creditors because the structure of LLCs affords creditors significant contractual flexibility to protect their unique, distinct interests. because there’s no difference in this respect between LLCs and corporations.

So this opinion reinforces developing Delaware law highlighting the LLC’s nature as a contractual entity, in contrast to the regulatory nature of the corporation.  Indeed, as I point out in my Rise of the Uncorporation (p. 6):

Uncorporations are characterized by their reliance on contracts. This is an aspect of uncorporations’ partnership heritage, as partnerships are contracts among the owners. * * * In contrast, corporate law is mainly couched in mandatory terms. * * * [T]he corporation’s special regulatory nature emerged from its historical roots. The corporation initially was a vehicle for government enterprises, monopolies, or franchises.

The CML opinion also carefully responded to plaintiff’s argument that this holding strips the Chancery Court of equitable jurisdiction to deal with injustice, in violation of the Delaware constitution. The court reasoned that the constitution freezes equity’s jurisdiction as of 1792, a time when LLCs didn’t exist.  The court went on to explain (footnotes omitted):

[T]he General Assembly passed the LLC Act as a broad enactment in derogation of the common law, and it acknowledged as much. Consequently, when adjudicating the rights, remedies, and obligations associated with Delaware LLCs, courts must look to the LLC Act because it is only the statute that creates those rights, remedies, and obligations.

Although the LLC statute provides that equity supplements its express provision, this refers only to rights and remedies the statute doesn’t address. On the other hand,

if the General Assembly has defined a right, remedy, or obligation with respect to an LLC, courts cannot interpret the common law to override the express provisions the General Assembly adopted.

The court points out that the creditor plaintiff’s exclusive redress in this situation is to contract for protection, and notes a variety of contractual terms that could have addressed the problem in this case.

This is a significant opinion because of its bluntness.  The basic point is that the legislature has decreed that LLCs are about contracts, so LLCs, unlike corporations, are freed from the sort of mandatory interference by Chancery that the constitution provides for corporations. In short, LLCs can opt out of litigation; corporations can’t.

This is wholly consistent with the central point of my Uncorporation and Delaware Indeterminacy, which surveys in detail Delaware uncorporation law and contrasts it with Delaware corporate law.

It’s also consistent with CJ Steele’s 2007 article, Judicial Scrutiny of Fiduciary Duties in Delaware Limited Partnerships and Limited Liability Companies.  There he criticized his predecessor’s opinion in the Gotham case, which suggested that fiduciary duties are unwaivable, noting:

The supreme court apparently found it difficult to abandon the view that judicial oversight of disputes within the governance structure of limited liability unincorporated entities must invariably be from the perspective of a set of freestanding non-waivable equitable principles, drawn from the common law of corporate governance.

The Delaware legislature later fixed the Gotham court’s mistake, and CJ Steele has made clear ever since that the legislature meant what it said.  In this case he settles the potential constitutional impediment.

Interestingly, the Supreme Court’s reasoning in this case eschewed the more elaborate reasoning of VC Laster in this case, analyzed here. Although the Vice Chancellor reached the same result, he included an extensive analysis of how the LLC act differs from the corporate act in protecting creditors, thereby making the creditor derivative suit unnecessary. CJ Steele implies that it doesn’t matter whether the LLC Act includes effective substitute remedies.  It’s enough that the legislature has spoken and left creditors to their contracts.

Finally, it’s worth concluding the same way I did in my earlier post on this case by contrasting the clear and predictable approach in the Delaware courts with the

chaotic and unprincipled case law on LLCs in the supposedly commercially sophisticated New York, which I’ve discussed in several posts, as noted here. Among other sins, New York courts constructed an LLC derivative remedy out of nothing, and then had to make up the rest of LLC derivative suit law out of a whole cloth. In CML, VC Laster combined scholarly analysis and business sophistication in an opinion that gives contracting parties and later courts plenty of guidance.”

CJ Steele makes it even clearer:  There is no derivative remedy for LLCs in Delaware other than that provided for in the statute. Moreover, the parties to LLCs must look to their contracts.  If they want a court to fill in the blanks for them, they should have been a corporation, or an LLC in some other state.

Uncorporate Kodak!

Larry Ribstein —  11 August 2011

There are reports in the press that corporations are sitting on a huge cash pile — $1.2 trillion.  Apple has over 70 billion.  Today’s WSJ discusses Kodak (remember film?) which is burning through money it’s collected in patent litigation in a so far futile effort to compete in selling computer printers.

Since the government can’t throw around much more cash, maybe part of the solution to our economic woes is to encourage firms like Apple and Kodak to become uncorporations — i.e., limited partnerships or LLCs — whose dividends are not subject to the corporate “double” tax.  They can’t do this now because they aren’t in the small category of firms (e.g., pipelines) that can be publicly held and taxed like partnerships.  A simple change in the tax laws would solve this.  For more on all this, see my Rise of the Uncorporation.

If these firms were uncorporations they would be subject to agreements that require cash distributions and liquidation at some point.  The owners would not tolerate being taxed on earnings that’s not either working for them or being distributed to them. When the firms’ rate of return on retained earnings fell enough (consider the negative interest rate being paid on corporate cash sitting around in bank accounts) they would have to distribute it.

Consider what would happen if mature firms like Kodak (and, yes, maybe even Apple) could uncorporate.  Retained earnings would go back to the shareholders who would either invest it in or spend it on young and adolescent growth companies — the Apples and Kodaks of the future.  The government might lose some tax revenues, but there also would be a way to construct this system so that it’s revenue neutral.  In any event, the decisions would be made by the owners of the cash, not by politicians and bureaucrats who haven’t been doing such a good job lately.

Think about it.

Don Clarke has written a nice piece on “the past and future of comparative corporate governance.”  Here’s part of the abstract:

Recent years have seen the rise of comparative corporate governance (CCG) as an increasingly mainstream approach within the world of corporate governance studies. This is a function partly of an increasing international orientation on the part of legal scholars and partly of an increasingly empirical turn in corporate law scholarship generally. Different practices in other jurisdictions present at least the possibility of natural experiments that attempt to find causal relationships between particular features of a corporate governance regime and real-world outcomes. This body of research has become particular relevant as we enter the second decade of the twenty-first century. The financial crisis has called into question many of our traditional ways of thinking about corporate governance and the relationship between business enterprises and the state. Are there other countries that do it better?

 This article discusses what is unique about CCG as an approach to corporate governance studies. It begins by examining the concepts of corporate governance and comparative corporate governance, making the point that comparative corporate governance has in general been focused on agency problems between shareholders and managers but need not be so. It then looks at methodological issues in comparative corporate governance, critiquing in particular economic Darwinist theories and the failure of theories of international competition in corporate governance to incorporate the notion of comparative advantage. Finally, it reviews major lessons learned from this body of work and suggests direction for future research. Among other things, it calls for more comparative research into alternative business entities dubbed “uncorporations” by Larry Ribstein and into corporate governance in increasingly important economies such as China and India.

I agree with Professor Clarke about the value of comparative law in general and comparative corporate law in particular.  Indeed, comparative law was one of the things I noted in my Practicing Theory article that legal academia should be doing more of to meet the challenges of the changing legal profession.

And I obviously agree with Clarke’s highlighting comparative uncorporate law as an area of future research.  That area hasn’t been entirely neglected. Chapter 4 of my Rise of the Uncorporation discusses some research focusing on the UK and Europe, noting particularly Guinnane et al and McCahery & Vermeulen. But there’s room for way more.  The current obsession with “corporate” law does not come close to reflecting the relative importance of other business forms.

The paper, with Kobayashi, is Law As A Byproduct: Theories Of Private Law Production.  Here’s the abstract:

Public lawmakers lack incentives to engage in a socially optimal amount of legal innovation. Private lawmaking is a potential solution to this problem. However, private lawmaking faces a dilemma: In order to be effective privately produced laws need to be publicly enacted, but under current law enactment eliminates the intellectual property rights that are essential to motivate private lawmakers. Because of this dilemma, much private lawmaking is done as a byproduct of other activities. The mixed incentives entailed in this “byproduct” approach make it a second-best response to the problems of public lawmaking. Potential solutions involve finding a better balance between public access and private rights.

The paper treats the creation of law as a form of intellectual property.  The central problem the paper identifies is the weakness of intellectual property protection of law.  This forces private lawmaking into the second-best world of “byproduct” lawmaking, where private lawmaking is essentially a form of lobbying.  This particularly includes the practicing bar’s significant role in lawmaking, and uniform laws.  The paper draws illustrations of byproduct laws from the development of the limited liability company, including the “L3C” spinoff.  We conclude with suggestions of how to fix intellectual property law to bring private lawmaking closer to a first-best world.

This paper is a natural outgrowth of several strands of my work alone and with others, including on LLCs and uncorporations, jurisdictional competition, lawyers as lawmakers, uniform laws, the “information revolution’s” effect on the law industry, and law teaching.