Legislature(2005 - 2006)

04/22/2005 02:44 PM JUD

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
HB 92 - UNIVERSITY OF ALASKA AND CORPORATIONS                                                                                 
2:53:20 PM                                                                                                                    
CHAIR McGUIRE 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."  [Before the committee was CSHB 92(EDU).]                                                                
CHAIR McGUIRE noted that at  the bill's last hearing, the sponsor                                                               
had explained the bill and public testimony had been closed.                                                                    
REPRESENTATIVE  GARA said  that he  still doesn't  know what  the                                                               
concept of "piercing  the corporate veil" entails  and would like                                                               
further  explanation  regarding  why  the  university  should  be                                                               
exempted from that concept.                                                                                                     
CHAIR  McGUIRE mentioned  that the  sponsor's staff  has provided                                                               
members with  a copy,  from Westlaw,  of a portion  of a  book by                                                             
Stephen  B. Presser  entitled Piercing  the  Corporate Veil  that                                                             
specifically addresses the concept as it pertains to Alaska.                                                                    
2:55:21 PM                                                                                                                    
HEATH HILYARD,  Staff to Representative Mike  Kelly, Alaska State                                                               
Legislature, sponsor,  offered on behalf of  Representative Kelly                                                               
that  perhaps  Ms.  Green  could  better  address  Representative                                                               
Gara's query.                                                                                                                   
2:55:54 PM                                                                                                                    
MARY E.  GREEN, Associate General Counsel,  University of Alaska,                                                               
     What the  policy of [piercing]  the corporate  veil was                                                                    
     designed to  do was to  eliminate what is  normally the                                                                    
     rule  that a  shareholder's  assets are  free from  the                                                                    
     debts  of  the  corporation.     And  it  was  designed                                                                    
     basically  to take  those cases  where  there had  been                                                                    
     fraud, or  [where] a corporation  sets up a  fraud kind                                                                    
     of  corporation  just   to  protect  the  corporation's                                                                    
     assets, or [where]  someone does the same  thing.  That                                                                    
     was the original basis for the  rule.  The rule in most                                                                    
     parts  of  the  country   has  a  number  of  different                                                                    
     provisions. ...  Generally what  it has  is that  ... a                                                                    
     plaintiff is  allowed to pierce the  corporate veil and                                                                    
     reach  the assets  of the  shareholder  if the  subject                                                                    
     corporation had  been a mere instrumentality,  if there                                                                    
     had  been an  attempt to  perpetrate fraud,  accomplish                                                                    
     injustice or a violation of the law.                                                                                       
     In  Alaska, it's  much easier  to pierce  the corporate                                                                    
     veil because the [Alaska] Supreme  Court has adopted [a                                                                    
     rule specifying that] only one  of those ... [criteria]                                                                    
     needs  to be  met.  ...  It either  has  to  be a  mere                                                                    
     instrumentality  of the  shareholder, or  there has  to                                                                    
     have been  wrongful conduct.   One  of the  things that                                                                    
     the ...  [aforementioned portion of the  book, Piercing                                                                  
     the Corporate  Veil] points out  about the  Alaska rule                                                                  
     is that  ... [Alaska]  is among  the easiest  states in                                                                    
     the union  [in which]  to pierce [the]  corporate veil.                                                                    
     Secondly,  the  [aforementioned  portion of  the  book]                                                                    
     also points  out, toward  the end,  that it  looks like                                                                    
     the [Alaska] Supreme  Court is going to  an even easier                                                                    
     way to  pierce the corporate  veil - relying  solely on                                                                    
     undercapitalization of the corporation.                                                                                    
MS. GREEN continued:                                                                                                            
     If that  happens, certainly  ... any  shareholder [who]                                                                    
     invests in a small corporation  that doesn't have a lot                                                                    
     of  assets  is  at  risk  to  end  up  paying  for  the                                                                    
     liabilities of  the corporation.  Usually  what happens                                                                    
     in small  corporations is that  the creditors  of small                                                                    
     corporations,  because they  know that  the corporation                                                                    
     is normally  free to contract  and that they  can't get                                                                    
     assets  [of] the  shareholders, ...  require guarantees                                                                    
     from the  primary people, and  so then  the shareholder                                                                    
     would  be,  in  fact,  liable, [but]  with  a  personal                                                                    
     guarantee. ...                                                                                                             
     What  this bill  would do  would  make it  so that  the                                                                    
     university [would] ... be free,  of course, to contract                                                                    
     just like any  other person, to guarantee  the debts if                                                                    
     it was  appropriate - if  not, the  university's assets                                                                    
     would be protected  by what is a  very easy application                                                                    
     [of] piercing the corporate veil.  ... As a university,                                                                    
     we  need to  protect the  public's assets  in this  ...                                                                    
     vast  university,  and  that's the  reason  that  we're                                                                    
     seeking this [change to statute].                                                                                          
CHAIR  McGUIRE   noted  that   Black's  Law   Dictionary  defines                                                             
corporate  veil as,  "the legal  assumption  that the  acts of  a                                                               
corporation are not the actions  of its shareholders, so that the                                                               
shareholders  are exempt  from  liability  for the  corporation's                                                               
2:59:54 PM                                                                                                                    
REPRESENTATIVE   GRUENBERG   shared   his  concern   that   small                                                               
businesses who  act as  suppliers to the  university may  be left                                                               
"holding the bag."                                                                                                              
MS.  GREEN  replied   that  this  is  an   obvious  problem,  but                                                               
commented, "That's  true in every  small corporation."   She said                                                               
that small suppliers can get  a personal guarantee from the major                                                               
people  who are  running the  corporation in  order to  avoid the                                                               
normal rule that shareholders aren't  liable.  She commented that                                                               
this  bill  would  not  change that  protection  that  the  small                                                               
business  owner has  to  choose  not to  extend  credit to  small                                                               
REPRESENTATIVE  GRUENBERG  remarked  that  the  [Alaska]  Supreme                                                               
Court  has considered  this issue  on several  occasions and  has                                                               
enacted a  rule that's  an expansion of  the common  law "because                                                               
the court realizes that in  Alaska we're dealing with some fairly                                                               
unsophisticated  people and  we're dealing  with, in  many cases,                                                               
small  people who  ... never  heard of  the corporate  veil [and]                                                               
don't  know much  about this."   He  concluded that  the [Alaska]                                                               
Supreme  Court has  essentially  said that  [a supplier]  doesn't                                                               
have to get  personal guarantees, and if  the corporation doesn't                                                               
pay  its bill,  the  supplier will  be  able to  go  to court  to                                                               
collect that money.   He said:  "Here we're  letting probably the                                                               
biggest shareholder in  the whole state, the  ... university, off                                                               
the hook.   The state is in the least  equitable position to want                                                               
this break.   Nobody else gets this break in  dealing with small,                                                               
undercapitalized corporations.  Why should the State of Alaska?"                                                                
CHAIR McGUIRE  offered her  belief that  issues must  be weighed,                                                               
and  in  this   instance,  the  greater  good   of  allowing  the                                                               
university to  invest in small  businesses that might  make great                                                               
technological  advances outweighs  [other  considerations].   She                                                               
commented that  this is one way  for new small businesses  to get                                                               
some capital,  which is very hard  to get in Alaska.   She opined                                                               
that the  university isn't going  to invest  if it is  exposed to                                                               
tremendous liability.  She continued:                                                                                           
     We're not saying that we  would allow the university to                                                                    
     be  an integral,  active  player committing  wrongdoing                                                                    
     and  then  shielding them  from  that  wrong. ...  What                                                                    
     we're saying is that we're going  to allow them to be a                                                                    
     passive investor  to provide  some of the  capital seed                                                                    
     money to grow  these companies, but we're  not going to                                                                    
     hold  them,  the entire  of  the  University of  Alaska                                                                    
     budget and  subsequently the State of  Alaska's general                                                                    
     fund, on the hook for it.                                                                                                  
3:06:45 PM                                                                                                                    
REPRESENTATIVE GRUENBERG said that the  way that Chair McGuire is                                                               
interpreting  the  bill  is  more  palatable  than  it  would  be                                                               
otherwise.  However, he noted, the  way the bill is drafted it is                                                               
different.   He turned to  page 1, line  10, which says  that the                                                               
corporation is  "not considered  to be a  part of  the university                                                               
for any  purpose," which he surmised  is a much broader  grant of                                                               
immunity than Chair McGuire has stated.                                                                                         
CHAIR McGUIRE  noted that perhaps  amendments could  address that                                                               
issue at a  later point, and reiterated her  understanding of the                                                               
REPRESENTATIVE COGHILL  commented, "Just  the fact that  they are                                                               
going to  put the full  weight of the  university behind it  as a                                                               
project in  allowing expertise  to go in  brings huge  ... 'blue-                                                               
sky' capital to  these projects, and might even be  a part of the                                                               
responsibility. ..."                                                                                                            
CHAIR  McGUIRE reiterated  that  public testimony  on  HB 92  was                                                               
3:09:33 PM                                                                                                                    
REPRESENTATIVE  GARA, mentioning  that  he would  be offering  an                                                               
amendment to address  his concern, explained that  his concern is                                                               
that  current  corporate law  says  that  the shareholder,  which                                                               
would  be the  university in  this case,  is not  liable for  the                                                               
debts  or  the injuries  caused  by  the corporation  unless  the                                                               
shareholder  has committed  fraud  or is  engaged  in a  wrongful                                                               
conduct.   He opined that  by passing this bill,  the legislature                                                               
would  be saying  that the  university  can engage  in fraud  and                                                               
wrongful  conduct   without  having  its  assets   touched.    He                                                               
commented, "It's  a very  weird way  to encourage  development at                                                               
the  university,"  adding that  he  understands  the problem  but                                                               
doesn't think that this bill is the right solution.                                                                             
REPRESENTATIVE  GARA said  he  would like  to  make a  conceptual                                                               
amendment  that clarifies  that  this bill  would  not allow  the                                                               
university  to  escape  liability  if  it  engages  in  fraud  or                                                               
wrongful conduct.                                                                                                               
MS.  GREEN replied  that such  a change  would be  fine with  the                                                               
REPRESENTATIVE GARA  made a motion to  adopt Conceptual Amendment                                                               
1, to  retain the parts of  the corporate veil rule  that prevent                                                               
an  entity from  engaging in  fraud or  wrongful conduct.   There                                                               
being no objection, Conceptual Amendment 1 was adopted.                                                                         
REPRESENTATIVE  GRUENBERG  noted  that Ms.  Green  was  concerned                                                               
about the  university's exposure  based only  on the  theory that                                                               
the small nonprofit  business would be a  mere instrumentality of                                                               
the university.   He pondered whether he could craft  the bill to                                                               
say that.                                                                                                                       
MS. GREEN  said she  doesn't think that  would be  needed because                                                               
the [Alaska] Supreme Court has said  that there are only two ways                                                               
to  pierce the  corporate veil;  one  is from  fraud or  wrongful                                                               
conduct and the other is through a mere instrumentality rule.                                                                   
CHAIR McGUIRE remarked:                                                                                                         
     The [conceptual  amendment] is  in.   There'll be  a CS                                                                    
     that comes  back, and  what we  can do  ... is  have it                                                                    
     attached  with a  legal memo  that basically  certifies                                                                    
     that  this   amendment  completes  our  goal   in  this                                                                    
     committee  of  keeping  mere instrumentalities  in  and                                                                    
     wrongful conduct out.                                                                                                      
REPRESENTATIVE GRUENBERG agreed that that would be fine.                                                                        
REPRESENTATIVE  ANDERSON   moved  to  report  CSHB   92(EDU),  as                                                               
amended, out  of committee  with individual  recommendations, the                                                               
accompanying  zero  fiscal  note,  and  the  attached  letter  of                                                               
REPRESENTATIVE GARA objected  for the purpose of  discussion.  He                                                               
asked   Ms.   Green   to   clarify   the   reference   to   "mere                                                               
3:15:13 PM                                                                                                                    
MS. GREEN explained that there are  five to eleven factors in the                                                               
"mere instrumentality" portion.  She explained:                                                                                 
     One is  that a parent owns  all or most of  the capital                                                                    
     stock.     Two   is   that  the   parent  and   subsidy                                                                    
     corporations have common directors.   Three is that the                                                                    
     corporation finances the subsidy.  ... Four is that the                                                                    
     parent  subscribes  to all  the  capital  stock of  the                                                                    
     subsidiary or  otherwise causes its incorporation.   We                                                                    
     would   probably  cause   the   incorporation  of   any                                                                    
     corporation  we   were  doing.    The   subsidiary  has                                                                    
     inadequate  capital, which  is  likely  in these  small                                                                    
     startups, or  within public policy nonprofits.   Parent                                                                    
     pays the salaries  and other expenses or  losses of the                                                                    
     subsidiary.  ... The  subsidiary  has substantially  no                                                                    
     business except  with the parent  and no  assets except                                                                    
     those conveyed to it by the parent.                                                                                        
     Chances are  the startup  that we  had would  have some                                                                    
     assets from  the inventor as  well.  And  not following                                                                    
     corporate form:  the parent using  the property  as its                                                                    
     own and the directors of  the subsidiary are not acting                                                                    
     independently in  the interest of the  subsidiary.  But                                                                    
     the  problem is  that you  don't  have to  have all  of                                                                    
     those  things met  to be  ruled a  mere instrumentality                                                                    
     and  thus  have  the  corporate   veil  pierced.    The                                                                    
     [Alaska] Supreme  Court has said  that you can  have as                                                                    
     little as two,  and has suggested that  even having low                                                                    
     capitalization is enough.                                                                                                  
REPRESENTATIVE  GARA removed  his  objection and  asked that  Ms.                                                               
Green fax  that list to  the committee.   He noted that  he still                                                               
had some  concern about the bill,  saying, "I'm not so  sure this                                                               
is good policy to let people avoid responsibility this way."                                                                    
REPRESENTATIVE GRUENBERG  turned the  committee's attention  to a                                                               
memorandum to  Representative Mike  Kelly from  Legislative Legal                                                               
Services  dated January  13, 2005,  and pointed  out one  section                                                               
that read in part:                                                                                                              
     With regard to nonprofit corporations, did you have in                                                                     
     mind corporations from other states ...?                                                                                   
REPRESENTATIVE  GRUENBERG, remarking  that nonprofits  from other                                                               
states  might be  governed by  the other  state's laws,  asked if                                                               
perhaps the bill  should be limited to  investments in nonprofits                                                               
within the State of Alaska.                                                                                                     
MS.  GREEN replied:    "Certainly  the conflicts-of-law  question                                                               
would arise  in a deal with  ... out-of-state entities.   We will                                                               
have these. ... What we will  insist on before we enter into such                                                               
an agreement  is that the  law of Alaska  applies so that  we are                                                               
protected."   She remarked that  the only out-of-state  deals the                                                               
university will  be making are  those that promote  education and                                                               
research, rather than those that pertain to "startups."                                                                         
3:19:51 PM                                                                                                                    
CHAIR McGUIRE,  noting that there  was no longer an  objection to                                                               
the motion  to report CSHB  92(EDU), as amended,  from committee,                                                               
stated that  CSHB 92(JUD) was  reported from the  House Judiciary                                                               
Standing Committee.                                                                                                             

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