Legislature(2005 - 2006)CAPITOL 120

04/19/2005 01:00 PM JUDICIARY

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Heard & Held
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Heard & Held
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                                                               
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.                                                                     

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