Legislature(2005 - 2006)
04/05/2005 05:40 PM House EDU
| Audio | Topic |
|---|---|
| Start | |
| HB161 | |
| HB92 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
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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