Closely Held Business Entities (Including Shareholder
The Taming of Limited Liability Companies,
66 U. Colo. L. Rev. 921-946 (1995)
This perspective on Limited Liability Companies offers a framework
within which to view this new entity as well as more traditional legal
entities. Any business association provided by law answers three central
questions for business participants: What will be the liability of
the participants to outsiders? What taxes will be owed to the government?
What will be the governance relationship among co-venturers? The
answers to these three questions (shortened to liability, taxes, and governance
in the article) are remarkably similar for the LLC and the traditional
corporation using Subchapter S of the tax code and a shareholders' agreement.
The history of the development of the LLC suggests it was driven by particular
firms that could not get the desired combination of limited liability and
pass-through taxation under the older corporate system. Its history
also suggests that the governance features of the new entity have been
tax driven and will lead to governance problems similar to those that have
characterized close corporation law.
"The Private Company and Our Two Corporate
Laws" and "Close Corporations in the United States of America"
in The European Private Company (H. de Kluiver & W. Van Gerven,
editors) (Maklu 1995)
The Private Company chapter was a keynote address at a conference on
the European Private Company held at Maastricht the Netherlands in 1995.
Both chapters provide an American perspective to the harmonization of company
law in the European Union, and particularly the law as to private corporations,
which has not received as much cross-border attention as the law governing
The Shareholder's Cause of Action for Oppression,
48 Business Lawyer 699-745 (1993)
This is a cornerstone of Professor Thompson's framework for close corporations.
The first part of the article summarizes how close corporations do not
fit easily within the statutory structure of corporate law that has evolved
with public corporations in mind. The core of the article connects
two modern legal responses to the lack of fit just described. Three-fourths
of the states provide "oppression" statutes permitting judges to provide
relief from statutory norms of centralized control and entity permanence.
Courts increasingly use these statutes to provide buyouts when there has
been oppression. There has also been a movement toward permitting
direct (as opposed to derivative) recovery for shareholders when there
is a dispute among shareholders. This article defines these two parallel
developments as part of a shareholder's cause of action for oppression,
both designed to respond to the problems and needs of a close corporation
operating within a legal framework designed for a larger enterprise.
Corporate Dissolution and Shareholders' Reasonable
Expectations, 66 Wash. U.L.Q. 193-238 (1988)
In an issue that is a tribute to F. Hodge O'Neal, this article traces
the development of one of Professor O'Neal's key contributions to
American corporate law: the use of "reasonable expectations" as a basis
for judicial relief when shareholder disputes arise in close corporations.
This article seeks to add to that doctrine by suggesting specific considerations
that should guide a court's use of reasonable expectations and addressing
the alternative judicial remedies that can be applied if a court decides
to grant relief.
Limited Liability/Separate Corporate Entities
The Limits of Liability in the New Limited
Liability Entities, 32 Wake Forest L. Rev. 1-29 (1997)
This article provides a systematic introduction to how piercing the
veil in new forms of business associations might differ from the
traditional law as to piercing the corporate entity. The last two parts
of the article categorize the statutes in the various states providing
limited liability within a Limited Liability Company and a Limited Liability
Partnership. The statutory language offers a variety of phrasings,
which could suggest different degrees of insulation in different states
and different degrees of insulation from liability than that provided by
the corporation. After considering the history of the development
of LLCs and discussing analogous applications in corporate law, Professor
Thompson concludes that the protection available to participants in an
LLC should mimic the insulation provided by the corporate form and will
not differ dramatically from state to state.
The first part of the article, which discusses the corporate
law backdrop to this issue, provides additional data, beyond that included
in the Cornell article described below, which reports that piercing the
corporate veil has never occurred in a corporation with more than nine
shareholders and usually occurs as to shareholders who are also managers
of the entity.
Unpacking Limited Liability: Direct and Vicarious
Liability of Corporate Participants for Torts of the Enterprise, 47
Vand. L. Rev. 1-41 (1994)
Does corporate law (with its provision of limited liability to
shareholders) conflict with modern tort law principles that seek to prevent
actors externalizing the costs of their business? This article concludes
that corporate law does not thwart the risk-sharing or deterrent goals
of tort law. Shareholders are insulated from claims against the enterprise.
Piercing the corporate veil operates as an exception to this insulation,
using broad, undifferentiated reasoning that potentially exposes all shareholders
to liability. This article seeks to unpack the basis for liability and
distinguishes passive shareholders from those shareholders who are active
in the corporation's business. The corporate form has never provided a
shield for individuals to engage in tortious acts while clothed in a corporate
capacity (as distinguished from the same individual acting for the same
corporation in an action which leads to a contractual claim). Piercing
the veil claims often reflect liability based on direct participation of
managers/participants but described by judges using traditional piercing
terms for shareholders. The article acknowledges its is a "continuing
puzzle why courts remain so willing to provide limited liability to parent
corporations in tort cases" as that insulation is not supported by any
of the various theories advanced for limited liability.
Piercing the Corporate Veil: An Empirical Study,
76 Cornell L. Rev. 1036-1074 (1991)
Piercing the corporate veil is the most litigated issue in corporate
law. This seminal study of all reported piercing the veil cases through
1985 provides the first comprehensive data on judicial action in this area
and provides a means to evaluate various hypotheses advanced by courts
and commentators. The study found that courts pierce in about 40%
of all reported cases, but there are no significant differences over time,
between state and federal courts or because of the identity of plaintiffs.
The study found that piercing the corporate veil is limited to close corporations
and corporate groups; it does not occur in public corporations. (data
reported in the Wake Forest article described above permits an extension
of this result: piercing only occurs in corporate groups or in close corporations
with fewer than 10 shareholders).
The study examines 100 factors courts have used to explain when they
pierce the veil. Examples such as corporate informalities or inadequate
capitalization, sometimes portrayed as ubiquitous in piercing cases, appear
in less than 20% of successful piercing cases. More surprisingly,
the data shows that courts are more likely to pierce in contract cases
than tort cases. More than two-thirds of the tort cases involve corporate
groups. The article concludes that this surprising protection may
reflect the development of piercing law in a bargain context where courts
developed "suspect" reasons to depart from limited liability and these
suspect reasons do not translate well to torts involving corporate groups.
This discussion is continued in the Vanderbilt article described above.
United States Jurisdiction Over Foreign Subsidiaries:
Corporate and International Law Aspects, 15 Law & Pol'y Int'l Bus.
319-400 (1983). Reprinted in Corporate Counsel's Annual - 1984, 1005-1081
The law's recognition of a corporation as separate from its shareholders
not only provides limited liability discussed above, but can also be a
means to avoid government regulation. This article describes the
various situations in which the United States has sought to assert its
jurisdiction over corporations incorporated elsewhere which are owned by
United States citizens (including corporations.) Beginning with prohibitions
found in the Trading with the Enemies Acts from the two World Wars, the
article traces other examples in which the United States has sought to
broaden the reach of various boycotts ranging from Cuba and China to the
1980 Moscow Olympics and Angola. The corporate law doctrine of piercing
the corporate veil has little effect on the debate, which turns more on
the pure use of national power.
Mergers and Takeovers
Exit, Liquidity and Majority Rule: Appraisal's
Role in Corporate Law, 84 Georgetown L.J. 1-60 (1995)
This article traces the two lives of appraisal: its first incarnation
as a means of liquidity and exit given to minority shareholders when corporate
statutes permitted mergers and other fundamental corporate changes to be
accomplished by less than unanimous vote; and its current use as a check
on the price paid by majority shareholders when they have expelled minority
shareholders from the enterprise on terms set by the majority. The article's
survey and categorization of the 100 reported appraisal cases in the 10
years after the important appraisal case, Weinberger v. UOP, shows
that reported disputes about appraisal usually occur in a cash-out context.
Yet the specifics of the process (including valuation without any appreciation
or depreciation from the merger; elaborate procedural requirements, and
exclusions when there is a public market) all reflect the needs of the
traditional setting where the minority is choosing not to go along with
a business combination. These statutory terms are often the opposite
of the procedures that would be used when the minority is being forced
out of the enterprise on terms set by the majority. Without understanding
the two (and often conflicting) uses of appraisal and making appropriate
adjustments to the traditional appraisal standards courts should not make
appraisal an exclusive remedy for shareholders in a cash-out situation.
"Tender Offer Regulation and the Federalization
of State Corporate Law" in Public Policy Toward Takeovers (M. Weidenbaum
& K. Chilton, Eds.) (Transaction Books 1988)
Defining the Federal and State Realms of Tender
Offer Regulation, 64 Wash. U.L.Q. 1059-1102 (1987)
These two works each address efforts to address the appropriate role
of federal and state law in regulating corporate takeover. They define
the three sets of relationships that must be understood before the federalism
issue can be resolved: (1) the relationship between shareholders and managers
of a corporation that traditionally has been governed by state corporation
law; (2) the relationship between the shareholders of a target company
and the outsider who has made a tender offer seeking to acquire the shares
of the target from the shareholders (since 1968 this relationship has been
regulated by the federal Williams Act); and (3) the relationship between
the two parties competing for control of a target company-- the outside
bidder and the target management. This third set of relationships
has been subject to regulatory efforts by both state and federal laws and
raises the question of whether federal law has preempted state law.
Some federal courts and commentators read the Williams Act to mandate an
unfettered market for corporate control and to block state efforts to repel
takeovers. States seeking to stop hostile takeovers first sought to directly
regulate the hostile bid and were rebuffed for intruding into the federal
area. When state rewrote their laws and presented them as regulating
the relative roles of management and shareholders within one corporation,
they were more successful-- even though a necessary casualty was the federal
effort to preserve a market for corporate control against state interference.
Squeeze-Out Mergers and the 'New' Appraisal
Remedy, 62 Wash. U.L.Q. 415-434 (1984). Reprinted in 27 Corporate
Practice Commentator 193 (1985)
This article, written in the aftermath of Weinberger v. UOP
analyzes the appraisal era in the law of squeeze out mergers, as the Delaware
court pushed more shareholder disputes into an appraisal forum. The
relationship between appraisal and fiduciary duty is discussed, a question
also addressed in the Georgetown article above a decade later. This
article concludes that squeeze-out mergers in closely held corporations
are based on different assumptions than Weinberger, so that courts
seeking to follow Weinberger should not apply its principles to
closely held corporations.
"Simplicity and Certainty" in the Measure of
Recovery Under Rule 10b-5, 51 Business Lawyer 1177-1201 (1996)
This critique of the damages portion of the Private Securities Litigation
Reform Act of 1995 exposes the act's failure to deliver the "simplicity
and certainty" promised by the Conference Committee that managed the legislation.
The legislative history expresses concern about the lack of certainty in
measuring damages, but the legislation is written only as a cap that says
nothing about what the measure of damages should be, only what it cannot
exceed. The legislative history purports to want to limit damages
only to that caused by the fraud and exclude that caused by the market,
but even the cap sometimes permits the market change to be included and
sometimes does not. The articles suggests that a proper understanding
of securities damages turns on recognizing the necessary interconnection
of two changes that are reflected in a securities price over time where
there has been fraud. In that setting any change has at least two
components: (1) that due to the fraud and (2) that due to the change in
the market. Federal securities law sometimes permits a plaintiff
to recover both as when there has been a face to face transaction and the
defendant has benefited from the wrongful conduct. Section 11 of
the Securities Act of 1933 puts the burden on the defendant as to differentiating
the two components. The damage provisions of the new statute should
be understood against that background.
The Measure of Recovery Under Rule 10b-5: A
Restitution Alternative to Tort Damages, 37 Vand. L. Rev. 349-398 (1984).
Reprinted in Securities Law Review 1985, 213-262. Cited by the majority
and dissenting opinions in Randall v. Loftsgaarden, 478 U.S. 647
The measure of recovery under Rule 10b-5 of the Securities Exchange
Act of 1934 has long been confusing. In this article, Professor Thompson
provides a structure that connects the various measures from time to time
used by courts. To the traditional tort structure by which many commentators
and judges view Rule 10b-5, he offers a parallel structure based on the
long-established law of restitution (unjust enrichment). While recovery
under the two measures is often the same, it can be substantially
different when there is uncertainty about measurement or causation.
Professor Thompson notes the long history of acceptance of unjust enrichment
as a basis for obligations and defines when it would be appropriate in
Rule 10b-5 claims.
The Shrinking Definition of a Security: Why
Purchasing All of a Company's Stock is not a Federal Security Transaction,
57 N.Y.U. L. Rev. 225-279 (1982). Reprinted in Corporate Counsel's
Annual - 1983, 317-373
As the Supreme Court moved through its era of strict construction in
securities law it narrowed the definition of a security. One area
opened to dispute in that move was whether a purchaser of an entire business
could sue under the federal securities laws. This article shows how
the purchaser of an entire business differs from the archetypical purchaser
of individual securities that motivated securities act protection; protection
would be elsewhere in the law, not in the heightened protections of the
securities acts. The article seems to have favorably influenced some
appellate courts, but the Supreme Court ultimately came down decisively
on the other side of this issue holding that the sale of a business is