Legislature(2005 - 2006)

04/05/2005 05:40 PM EDU


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HB  92-UNIVERSITY OF ALASKA AND CORPORATIONS                                                                                  
                                                                                                                                
CHAIR NEUMAN announced  that the next order of  business would be                                                               
HOUSE BILL NO.  92 "An Act relating to the  purchase of interests                                                               
in corporations,  including limited  liability companies,  by the                                                               
University of Alaska."                                                                                                          
                                                                                                                                
The committee took an at-ease from 6:45 p.m. to 6:49 p.m.                                                                       
                                                                                                                                
6:49:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  MIKE KELLY,  Alaska  State Legislature,  sponsor,                                                               
said  that HB  92  would affect  the University  of  Alaska in  a                                                               
"positive way."   He explained  that this legislation  relates to                                                               
the  purchase of  interests  in  corporations, including  limited                                                               
liability corporations (LLC),  by the University of  Alaska.  The                                                               
University  of  Alaska  has  proven  to be  a  valuable  tool  in                                                               
Alaska's economic development.  In  order to allow the university                                                               
to continue  and expand  its vital  role, HB  92 proposes  a much                                                               
needed change  in Alaska's corporate  liability laws  intended to                                                               
protect the university from liability  arising from the "piercing                                                               
of the corporate veil concept."  He said:                                                                                       
                                                                                                                                
     The  "piercing  of the  corporate  veil"  concept is  a                                                                    
     judicial process  whereby the court will  disregard the                                                                    
     usual  immunity of  corporate  entities from  liability                                                                    
     for wrongful  corporate activities  perpetrating fraud.                                                                    
     The doctrine  which holds that the  corporate structure                                                                    
     with  its attendant  limited liability  of stockholders                                                                    
     may be disregarded and  personal liability imposed upon                                                                    
     stockholders, officers,  and directors  in the  case of                                                                    
     fraud or  other wrongful acts  done in the name  of the                                                                    
     corporation.  Generally ... we  believe this is a sound                                                                    
     policy  intended to  protect consumers  from fraudulent                                                                    
     corporate   abuses   and   encourage   good   corporate                                                                    
     citizenship.   However, in  the university  context the                                                                    
     application   of  this   theory   has  the   unintended                                                                    
     consequence  of discouraging  university investment  in                                                                    
     new  corporate  endeavors resulting  from  intellectual                                                                    
     property generated by faculty research ....                                                                                
                                                                                                                                
     The   university  cannot   support  various   types  of                                                                    
     economic  development  initiatives  or  associate  with                                                                    
     public  groups through  nonprofit corporations  without                                                                    
     the  fear  of  liability  under  the  piercing  of  the                                                                    
     corporate  veil  theory.     As  described  above,  the                                                                    
     university   could   become   liable   for   the   tort                                                                    
     obligations  of a  corporate entity  it  may start  up,                                                                    
     where  the entity  was  not  adequately capitalized  or                                                                    
     insured.     In   one  such   immediate  example,   the                                                                    
     university rejected  a 501(c)(3)  nonprofit corporation                                                                    
     to lead  the business  enterprise institute  because of                                                                    
     potential  corporate  veil  liability.   Likewise,  the                                                                    
     university  has  not  been  supportive  of  efforts  by                                                                    
     faculty members with intellectual  property to start up                                                                    
     corporations,  recognizing   that  if   liability  were                                                                    
     incurred  by  such  a corporation,  there  would  be  a                                                                    
     substantial risk  that such liability could  pass on to                                                                    
     the university ....                                                                                                        
                                                                                                                                
     Our  intent with  HB  92 is  to  specifically define  a                                                                    
     university/corporate  liability  structure intended  to                                                                    
     encourage   new   university  investment   in   limited                                                                    
     liability  and  nonprofit corporations  resulting  from                                                                    
     research-generated  intellectual property  or companies                                                                    
     created and managed on university lands.                                                                                   
                                                                                                                                
     The  University of  Alaska is  a valuable  component to                                                                    
     Alaska's  economic  engine and  this  bill  will go  to                                                                    
     great  lengths  to  expand   its  ability  to  increase                                                                    
     economic development in our state.                                                                                         
                                                                                                                                
REPRESENTATIVE KELLY highlighted that the legislation sets forth                                                                
that the University Board of Regents would have oversight of the                                                                
act of the university being involved in a corporation.                                                                          
                                                                                                                                
6:53:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  GATTO offered  a hypothetical  scenario regarding                                                               
the invention of  a device, and inquired as to  who would own the                                                               
patent  of  the invention  if  the  inventor  was employed  as  a                                                               
researcher of the university.                                                                                                   
                                                                                                                                
REPRESENTATIVE KELLY deferred to others  who are better suited to                                                               
answer.                                                                                                                         
                                                                                                                                
REPRESENTATIVE THOMAS inquired how  the university would generate                                                               
revenue to start-up or purchase companies.                                                                                      
                                                                                                                                
REPRESENTATIVE KELLY deferred to others  who are better suited to                                                               
answer.                                                                                                                         
                                                                                                                                
REPRESENTATIVE GARA  related his understanding that  Section 1(c)                                                               
says that should the university  purchase a corporation, it isn't                                                               
liable  for any  of  the  obligations of  that  corporation.   He                                                               
offered  a   hypothetical  situation  in  which   the  university                                                               
purchases  a business  that owes  payroll  and vendors.   If  the                                                               
university isn't  responsible for  prior [debt]  obligations, who                                                               
pays the [debt incurred], he asked.                                                                                             
                                                                                                                                
REPRESENTATIVE  KELLY  again  deferred  to  the  legal  expertise                                                               
waiting online.                                                                                                                 
                                                                                                                                
6:55:58 PM                                                                                                                    
                                                                                                                                
MARY  GREEN, Associate  General Council,  University of  Alaska -                                                               
Fairbanks, in  response to Representative Gatto's  question, said                                                               
the ownership of patent rights  depends upon whether the inventor                                                               
is  a  member  of  the  United  Academics  Union,  staff  of  the                                                               
university,    or  a  member  of  the  Alaska  Community  College                                                               
Federation  of  Teachers  (ACCFT).     A  member  of  the  United                                                               
Academics Union  who developed an  invention entirely  on his/her                                                               
own would  own the entire patent  and its proceeds.   However, if                                                               
the inventor was  paid by the university to do  the work or asked                                                               
specifically  [by   the  university]  to  do   the  project,  the                                                               
university  would own  all the  proceeds.   Ms. Green  noted that                                                               
what  is most  common is  university-supported research  in which                                                               
there is some  use of personnel or facilities  of the university,                                                               
in which  case the proceeds are  split.  She detailed  the three-                                                               
way  split.   If  the  inventor  isn't  a  member of  the  United                                                               
Academic  Union, the  federal patent  law controls  who owns  the                                                               
matter   whether  the   invention   is  university-sponsored   or                                                               
independent  work.     Most  of  the  inventions   in  which  the                                                               
university  would have  an interest  are university-supported  in                                                               
which some aspect of university property  or money is used in the                                                               
development of the  invention.  She then detailed  the split that                                                               
would occur under such a situation.                                                                                             
                                                                                                                                
REPRESENTATIVE GATTO asked  if there are any  situations in which                                                               
an  inventor refuses  to share  the proceeds  because he/she  has                                                               
used a minimal  amount of the university facilities  and has done                                                               
the majority of the work.                                                                                                       
                                                                                                                                
MS. GREEN replied, "Very rarely."                                                                                               
                                                                                                                                
REPRESENTATIVE GATTO  surmised that there are  "clearly" specific                                                               
protocols in place.                                                                                                             
                                                                                                                                
7:00:59 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  WILSON  asked  how  the  university  has  managed                                                               
without the specifications in this legislation for so long.                                                                     
                                                                                                                                
MS.  GREEN  replied that  the  university  has managed  by  being                                                               
"cautious" and  refusing to participate in  start-up corporations                                                               
with  faculty  members  or   with  certain  501(c)(3)  charitable                                                               
nonprofit corporations that  requested university involvement and                                                               
investment.                                                                                                                     
                                                                                                                                
REPRESENTATIVE  WILSON  inquired  as to  the  opportunities  that                                                               
would   become  available   to   the   university  through   this                                                               
legislation.                                                                                                                    
                                                                                                                                
MS. GREEN answered that primarily  this will allow the university                                                               
to participate with  faculty members in start-up  companies.  The                                                               
primary investment would be the  university's share of the patent                                                               
royalties.  In addition, it  would allow university participation                                                               
with charitable  organizations such  as research  groups composed                                                               
of other  universities and the  federal government that  form 501                                                               
(c)(3)  organizations.   She opined  that the  university is  not                                                               
going to  be involved in  investment in small  corporations, such                                                               
as  in   Representative  Gara's  aforementioned  example.     She                                                               
highlighted that the  university is in the  business of education                                                               
and promoting public interest by participating in such ventures.                                                                
                                                                                                                                
7:03:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE THOMAS  opined that start-up ventures  cost money.                                                               
He  alluded  to the  notion  that  start-up companies  are  risky                                                               
business and are based solely on  an individual's idea.  He asked                                                               
why the  university should be  able to pierce the  corporate veil                                                               
while other  entities cannot.   He also  asked if  the university                                                               
has addressed the high costs of start-ups.                                                                                      
                                                                                                                                
MS. GREEN  reiterated that the  university has not  been involved                                                               
in start-up  corporations, but this  legislation would  allow the                                                               
option  of involvement  in some  small start-up  proposals.   She                                                               
related, "The  money [the university]  put in ... [it  would] not                                                               
be  getting  out," and  the  university  is concerned  about  the                                                               
piercing of  the corporate  veil coming  back and  exhausting the                                                               
university's assets as  opposed to the money that  was devoted to                                                               
the start-up.                                                                                                                   
                                                                                                                                
REPRESENTATIVE   THOMAS   recalled  discussions   regarding   the                                                               
potential  liability for  the state,  which, after  a compromise,                                                               
was  eventually   capped  at  $500   per  day.     However,  this                                                               
legislation  asks the  legislature  to  waive the  aforementioned                                                               
compromise that protects  the state from liability.   He inquired                                                               
as to where the university would get the money to invest.                                                                       
                                                                                                                                
MS. GREEN answered  the university is not looking  at any general                                                               
fund  money.  Instead, the  university is looking at the value of                                                               
the university royalty interests, which  would be the primary and                                                               
start-up corporations,  and other  funds.   Other funds  would be                                                               
income  earned  by  the  foundation,   which  helps  support  the                                                               
university, or from research grants.                                                                                            
                                                                                                                                
REPRESENTATIVE THOMAS  opined that the  aforementioned investment                                                               
types   should    provide   sufficient   funding    without   the                                                               
legislature's additional help.   He questioned why the university                                                               
should receive  immunity while other Alaskan  corporations try to                                                               
establish the same thing [and do not receive immunity].                                                                         
                                                                                                                                
MS. GREEN  related her belief  that the university  is different.                                                               
She highlighted that there are  two public policy issues involved                                                               
in the piercing  of the corporate veil.  The  first issue regards                                                               
protection  of the  public from  underfunded corporations  and in                                                               
the university's case this is  more unlikely to occur.  Secondly,                                                               
through sponsorship of start-ups  with university faculty members                                                               
or through  public interest nonprofits,  the university  would be                                                               
able to  meet the public interest.   She opined that  the general                                                               
population  of corporations  doesn't  serve  the public  interest                                                               
like a university.                                                                                                              
                                                                                                                                
7:10:17 PM                                                                                                                    
                                                                                                                                
CHAIR NEUMAN  referred to  Section 1(c), and  inquired as  to the                                                               
circumstances  under  which  ["the president  of  the  university                                                               
signs  a  written agreement  on  behalf  of the  university  that                                                               
expressly  states   that  the  university   is  liable   for  the                                                               
obligations of the corporation and  the obligations for which the                                                               
university is  liable are identified in  the written agreement."]                                                               
could or would happen.                                                                                                          
                                                                                                                                
MS. GREEN  said, "I am  not sure that I  can predict that."   She                                                               
related  that she  doesn't think  that  it will  be invoked  very                                                               
frequently.                                                                                                                     
                                                                                                                                
CHAIR NEUMAN asked  if HB 92 would provide  additional revenue by                                                               
ownership of the corporations' intellectual property rights.                                                                    
                                                                                                                                
MS. GREEN answered:                                                                                                             
                                                                                                                                
     We certainly  hope so.   We  have some  promising deals                                                                    
     that we  might be able to  go into, but it  takes a lot                                                                    
     of  work and  a lot  of effort  to actually  make those                                                                    
     things turn money.  And  so, it's not something that we                                                                    
     are absolutely  counting on, but  it is  something that                                                                    
     we would  like to see.   As far as  universities across                                                                    
     the country  go, some are  very successful  in programs                                                                    
     like start-ups  with their faculty members,  others are                                                                    
     less so.  And we don't know where we would fit.                                                                            
                                                                                                                                
CHAIR NEUMAN  asked if the  aforementioned work and  effort would                                                               
be completed by the professor while  he/she is a paid employee of                                                               
the university.                                                                                                                 
                                                                                                                                
MS.  GREEN  related  that  is  not the  intent,  but  rather  the                                                               
professor would work  on the project on his/her  time rather than                                                               
on university time.                                                                                                             
                                                                                                                                
CHAIR NEUMAN asked if there  have been any circumstances in which                                                               
the university  incurred a  loss of  revenue because  it invested                                                               
substantial  research  money,  but didn't  own  the  intellectual                                                               
property rights to the research.                                                                                                
                                                                                                                                
MS. GREEN relayed that she  was unaware of any such circumstance.                                                               
However, there  are some patents  that are paying royalties.   In                                                               
further response  to Chair Neuman,  Ms. Green answered  that some                                                               
of the patents  are owned by the professor(s)  or the university,                                                               
while other patents are owned by both.                                                                                          
                                                                                                                                
CHAIR  NEUMAN asked  whether some  of the  aforementioned patents                                                               
came about  through research conducted while  the professors were                                                               
employed at the university.                                                                                                     
                                                                                                                                
MS.  GREEN echoed  earlier testimony  that the  ownership of  the                                                               
patent is  dependent upon how the  patent came about.   For those                                                               
developed while working for the  university, the university would                                                               
own  at  least  part  of  [the patent].    If  the  research  was                                                               
conducted independently,  the ownership  of the patent  would not                                                               
be  shared.   In  further  response to  Chair  Neuman, Ms.  Green                                                               
replied that in  the scenario of a  university employee inventing                                                               
something  independently,  the  university would  stand  to  lose                                                               
revenue.   However,  if the  inventor  was an  employee who  used                                                               
university time  and resources, then  the university  should gain                                                               
shared patent rights and revenue.                                                                                               
                                                                                                                                
REPRESENTATIVE  GARA   noted  that  he  likes   the  university's                                                               
involvement in advanced technological  developments.  He returned                                                               
to  his  concern  regarding  subsection   (c),  and  opined  that                                                               
regardless  of its  intent  it allows  the  university a  blanket                                                               
ability  to   purchase  corporations  and  "wipe   out"  previous                                                               
liabilities owed to  the community.  He asked  why the university                                                               
wouldn't  be  subject   to  the  same  liability   rules  as  any                                                               
shareholder would be under corporate law.                                                                                       
                                                                                                                                
MS. GREEN  related that  currently the  university is  treated as                                                               
"an  ordinary person"  and  as  such the  university  has such  a                                                               
conservative attitude  toward its  fiscal responsibility  that it                                                               
wouldn't  enter into  these  ventures.   Therefore,  in order  to                                                               
protect the university's assets, there  needs to be some piercing                                                               
of the corporate veil.  In the  example of a company with lots of                                                               
debt, Ms. Green  opined that the Board of  Regents wouldn't allow                                                               
the university to purchase it  because they're responsible to the                                                               
public.    She reiterated  that  the  university cannot  go  into                                                               
start-up  ventures,   cooperatives,  and   charitable  nonprofits                                                               
without protection  because the university has  assets upon which                                                               
Alaskans depend.                                                                                                                
                                                                                                                                
REPRESENTATIVE  GARA said  that he  is somewhat  comfortable with                                                               
the existing rules  of corporate law, and thus  he indicated that                                                               
the  university  should  be  treated  the  same  with  regard  to                                                               
corporate status.                                                                                                               
                                                                                                                                
7:19:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  THOMAS commented  that  investors usually  divest                                                               
when a company  changes its policy from a  "conservative" to high                                                               
risk, so  he questioned why  the university would choose  to make                                                               
such a change of position.                                                                                                      
                                                                                                                                
MS. GREEN  replied it would not  be a change in  the university's                                                               
overall investment  strategy.  The  university's intention  is to                                                               
start small and  help those who have "really  good ideas" without                                                               
risking the  assets of the  entire university.  Similar  to other                                                               
corporate stockholders,  what the  university invests will  be at                                                               
risk.   However, the  underlying assets  of the  university would                                                               
not be at risk, she clarified.                                                                                                  
                                                                                                                                
7:22:20 PM                                                                                                                    
                                                                                                                                
CHAIR NEUMAN  announced that due  to the number of  questions, HB
92 would be  held.  He said  he would like to  get the university                                                               
to answer the committee's questions in writing.                                                                                 
                                                                                                                                
7:23:06 PM                                                                                                                    
                                                                                                                                
CRAIG DORMAN,  Vice President of  Research and  Academic Affairs,                                                               
University  of  Alaska  - Fairbanks,  highlighted  AS  14.40.458,                                                               
subsection  (a),  which states  the  purpose  of  [HB 92]  is  to                                                               
advance the  mission of the  university pursuant to  the policies                                                               
of the Board  of Regents.  He said the  aforementioned section is                                                               
fundamental  to the  university's intentions,  and   details that                                                               
the purpose is not to invest  heavily in corporations in order to                                                               
generate "a  lot of  money."   This legislation  supports federal                                                               
law with  the intent of  receiving federal funds, which  is where                                                               
the vast  majority of research funding  is derived.  He  said the                                                               
intent of  this legislation is to  bring benefit to the  state as                                                               
well  as  the  university.    He related  his  belief  that  it's                                                               
"effective  and appropriate"  to  stimulate economic  development                                                               
through the  development of  spin-off corporations  and encourage                                                               
faculty in a much more intensive  manner than it has been able to                                                               
in  the past.   Additionally,  this legislation  pertains to  the                                                               
university's   participation    in   nonprofit    companies   and                                                               
corporations, particularly  501 (c)(3) organizations.   Currently                                                               
the  university  is  involved with  the  Alaska  Ocean  Observing                                                               
System.    In   fact,  the  university  is  in   the  process  of                                                               
establishing rules  and governance  processes whereby  it becomes                                                               
part of the national federation  of regional agencies and thus it                                                               
could  accrue significant  federal funding,  he noted.   Although                                                               
the university  wants to be  involved in such ventures,  there is                                                               
concern  with regard  to the  university  being seen  as a  "deep                                                               
pocket."   Therefore, the intent  [of HB  92] is to  avoid losing                                                               
the university's assets  by allowing it to  participate in start-                                                               
up ventures and charitable nonprofits.                                                                                          
                                                                                                                                
[HB 92 was held over.]                                                                                                          

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