Ownership Piercing

In a new article, I build upon the paradox of ownership. My central thesis is that those who own are not always in control; therefore, those who control should be held accountable like the owners would if they were in control.

I am inspired by the theory of the firm, particularly, the model created by professors Sanford Grossman and Oliver Hart in their path-breaking article, The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration. Grossman and Hart posit that “we do not distinguish between ownership and control and virtually define ownership as the power … Read more

Introducing the Totally Unnecessary Benefit LLC

The rapid proliferation of state statutes authorizing so-called “benefit” corporations—starting with Maryland in 2010 and spreading to over 30 states by 2018—has been premised in large part on the assertion that conventional corporate law mandates shareholder primacy. Under this legal mandate, the board of directors of a for-profit corporation must manage the business solely for the benefit of its shareholders. With the aim of maximizing shareholder wealth as a board’s singular focus, concerns for other, non-shareholding stakeholders, the public, and the environment are irrelevant except to the extent such concerns implicate the corporation’s profits.

Citing conventional corporate law’s mandate of … Read more

Cahill Discusses Amendments to Delaware Limited Liability Company Act

Amendments to the Delaware Limited Liability Company Act (the “DLLCA”) previously introduced in April 2018 were signed into law on July 24, 2018[1]. The amendments enable a Delaware limited liability company (an “LLC”) to engage in several new forms of transactions including: the (1) division of an LLC into two or more separate LLCs, (2) formation of registered series of LLCs and statutory public benefit LLCs and (3) use of blockchain technology for maintenance of LLC records and for electronic transmissions.

I. Division of LLCs


Effective August 1, 2018, an LLC may divide itself, and its assets … Read more

Enterprise Without Entities

Scholars and practitioners of the law generally agree that any large enterprise must be run through a legal entity such as a corporation. Entities reduce transaction costs to coordinate an enterprise’s many patrons, limit liability for shareholders, and protect a business from untimely dissolution. The widespread consensus is it would be “effectively impossible” to obtain these benefits without entities, and therefore that legal entities are essential to economic life as we know it.

So it may be surprising to learn about a domain of mass-commerce in which legal entities are substantially absent.  In this domain, millions of people exchange trillions … Read more

How Do LLC Owners Contract Around Default Statutory Protections?

Limited liability companies, or LLCs, have quickly become the form of choice for new businesses.  Companies ranging from the well known, like Chrysler, to the more experimental, such as French fry vending machine makers, to local flooring installers all organize as LLCs.  One attraction is LLCs’ ability to replicate S-corporations’ robust limited liability protection and potential for single taxation of company profits.  Another attraction is the wide contractual freedom permitted among owners and managers to divide up ownership and management rights and responsibilities.  Most states impose few mandatory rules on this relationship.  For instance, Delaware, the leader in out of … Read more

Investor Rights in Non-Listed LLCs

In an earlier blog post, I argued that a combination of contractual rights and non-legal factors balances the interests of the controlling insiders and outside investors in publicly-traded limited liability companies (LLCs). Since most of these non-legal factors—the firm’s ownership structure, dividend policies, board composition and board practices, market forces, and the standardization of the governance structures—are specific for listed LLCs, the situation is different in non-listed LLCs. The members of private LLCs have only legal rights and, perhaps, a promise of continued cooperation to rely upon. At the same time, given the default nature of almost all provisions … Read more

The Governance of Publicly Traded LLCs

The limited liability company (LLC) is not only a widespread business form for non-listed firms but also is used by listed companies. There were twenty publicly traded US LLCs in September 2013—all formed in Delaware. Two more Delaware LLCs have joined their ranks since then (the number of IPOs by limited partnerships, another “uncorporate” business form, is greater—26 Delaware LPs went public during the last two years). Since Delaware rules on LLCs, with very few exceptions, are cast as defaults, the LLC operating agreement is the primary source of governance. This is in stark contrast to listed corporations that have … Read more