Legislature(2005 - 2006)
04/22/2005 02:44 PM JUD
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* first hearing in first committee of referral
= bill was previously heard/scheduled
= 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, explained: 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 actions." 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 corporations. 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 bill. 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 closed. 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 university. 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 intent. REPRESENTATIVE GARA objected for the purpose of discussion. He asked Ms. Green to clarify the reference to "mere instrumentality." 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.