Legislature(2005 - 2006)CAPITOL 120
04/19/2005 01:00 PM JUDICIARY
Download Mp3. <- Right click and save file as
* first hearing in first committee of referral
= bill was previously heard/scheduled
= bill was previously heard/scheduled
HB 92 - UNIVERSITY OF ALASKA AND CORPORATIONS 1:27:50 PM CHAIR McGUIRE announced that the first order of business would be committee substitute HOUSE BILL NO. 92, "An Act relating to the purchase of interests in corporations, including limited liability companies, by the University of Alaska." [Before the committee was CSHB 92(EDU).] 1:28:12 PM REPRESENTATIVE MIKE KELLY, Alaska State Legislature, sponsor, explained that the University of Alaska has proven to be a valuable tool in Alaska's economic development. With the goal of allowing the university to continue to expand its vital role, this legislation proposes a much needed change in Alaska's corporate liability laws, and is 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. They can then impose personal liability on stockholders, officers, and directors of the corporation in the case of fraud or other wrongful acts done in the name of the corporation. While this is generally a sound policy, in the university context the application of this theory has the unintended consequences 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 ... [with] the fear of liability under the piercing the corporate veil theory, which is quite liberal in Alaska. ... In one such immediate example, the university rejected a 501(c)(3) nonprofit corporation, which would have lead the business enterprise institute, because of a potential corporate veil liability. Likewise, the university has not been supportive of faculty members with intellectual property ... [for] start up corporations, recognizing that if liability were incurred by such a corporation, there would be a substantial risk that such liability could pass to the university ..., [that it] could become liable for the tort obligations of a corporate entity it may start up, where the entity was not adequately capitalized or insured. ... 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. ... REPRESENTATIVE KELLY relayed that there are three different approaches utilized by universities to "spin-off" companies. The "hands-off" approach entails the faculty member developing the business plan, acquiring venture capital, and paying start up costs; the "hands-on" approach entails the university's involvement in reviewing the faculty member's business plan, helping acquire venture capital, and perhaps providing funding for the venture; and the "up to your neck" approach entails the university putting together the business management team or providing a "business incubator," substantial funding, and other start-up support. All three approaches would fall under the purview of the University of Alaska Board of Regents. REPRESENTATIVE KELLY said universities that handle "start-ups" thoughtfully and well attract high energy, innovative faculty, who in turn attract top-notch students. Students then often tend to settle near the communities where they attended school. Start-ups can provide training, "get grounds" for students and valuable collaborators for university faculty, as well as provide economic development opportunities. He relayed that the president of the University [of Alaska] has increased funding for research, and that it's the president's strong desire to export that business to the community. 1:32:52 PM ROGER BRUNNER, General Counsel, University of Alaska, offered that he was available to answer questions. REPRESENTATIVE GARA acknowledged that additional funding for the university is needed. He related his belief, however, that the "nub" of potential problems with this legislation resides on page 1, line 14, which states that if the university obtains a nonprofit corporation as part of an effort to obtain economic activity or some other university purpose, the university becomes part owner and therefore is not liable for the obligations of the company, unless the university president signs an agreement saying it is liable. REPRESENTATIVE GARA said he has two concerns: the first is regarding the purchase of a nonprofit that owes money throughout the community, because the university will not be liable to pay those obligations; second, after the university purchases an interest in the nonprofit and the university garners debt throughout the community, the university is still not liable. Thus, the university could get all the benefits of a corporation but not be obligated to pay the bills or incurred liability. He noted that presumably in nonprofit corporations there are other owners, so perhaps this legislation could include some provision to ensure that those owners could not shirk their responsibilities to the community. The aforementioned owners could use [bonds or insurance] in order to be held accountable for the [debt incurred]. REPRESENTATIVE KELLY concurred [that the aforementioned option] does protect the university for incurred liability but it risks changing the corporate structure that signifies it's a limited liability arrangement. 1:36:41 PM MR. BRUNNER relayed his understanding that the aforementioned question is, how is it fair for the university to profit from a nonprofit corporation without being liable for its debts. He highlighted that nonprofit corporations are not allowed to profit. Both the Alaska statutes and the Internal Revenue Service (IRS) Code prohibit nonprofit corporations from distributing their assets to members. He also offered his belief that it's fair for the university to not be held liable for the debts of a nonprofit because it's prohibited from profiting and, therefore, the concern is unwarranted. In response to a question, he said the university would be putting up money to help the operation get off the ground, and noted that the state has done something similar in setting up the Alaska Railroad Corporation and the Alaska Energy Corporation. CHAIR McGUIRE surmised that the university would be similar to a silent partner or a passive capital investor. MR. BRUNNER said HB 92 would allow the university to [invest in] other entities and the state would be protected because if the corporation fails it won't be possible to go against the state general fund (GF) to collect debt. REPRESENTATIVE GARA clarified that his concern centers around whether it is fair for the university to receive the "benefit" of being a part owner of a venture and not have the obligations the nonprofit incurred. He added that most nonprofits aren't generally given the right to not pay back debt incurred. He said he is concerned about protecting the vendors and contractors that a nonprofit owes. MR. BRUNNER offered that corporate structures allow things to start up and encourage further development by offering the protections of a corporation. This legislation protects the university by offering limited liability status for investment [purposes]. He offered that corporate liability, in Alaska, has become "broad in the courts" and this legislation ensures that the university will receive the same treatment as other corporations. CHAIR McGUIRE noted that funding for things like the Alaska Science and Technology Fund, and this leaves entrepreneurs with great ideas without capital funds to invest. This legislation says that it's fair not to pierce the corporate veil beyond the amount of money that is invested, and therefore the public policy issue of "unfairness" is outweighed by the greater public good of allowing for investment, she said. 1:43:41 PM REPRESENTATIVE GARA said that if the university wants to be treated like any other owner of a corporation, then any other corporate law would apply; however, this legislation is seeking the exemption that the university isn't liable to pay debt that other owners of corporations would have to pay. What, he asked, is unfair about the current corporate veil rule, which applies to any other corporate owner, that the university wants to be exempted from. MR. BRUNNER opined that the main difference is the size of the "pocketbook," in that it is the university budget on the line. "Piece the corporate veil and we can't afford that risk; [if we had a] smaller pocketbook, one, we wouldn't be worried about so much money and, two, we wouldn't have to worry because the plaintiff wouldn't come after us," he added. It's the size of the budget that requires the state to set up different corporations that disclaim liability - so the GF is not on the hook; otherwise, every time money owed isn't paid, the state would get sued. 1:45:56 PM REPRESENTATIVE GARA opined that in order to make an exception to the corporate veil rule, [the committee] has to understand what the rule is. He reiterated his understanding of what the current rule is and why is it unfair. REPRESENTATIVE GRUENBERG referred to the handout entitled in part, "SPIN-OFF COMPANY MODELS FOR UNIVERSITIES:", which states, "Typically universities that regularly enter into start-ups or have ownership in other corporations use a research foundation/corporation as the intermediary." He asked if the aforementioned [intermediaries] serve as the vehicle for insulating the university. MR. BRUNNER said, "I don't know." REPRESENTATIVE GRUENBERG asked that since this legislation insulates the state from creditors or tort liability, could it also provide protection in a vendor situation. CHAIR McGUIRE relayed that CSHB 92(EDU) would be held over.