The Michigan Business Law Journal Summer 2015

The Michigan Business Law JOURNAL CONTENTS Volume 35 Section Matters Issue 2 From the Desk of the Chairperson 1 Summer 2015 Officers and Council Members 2 Committees and Directorships 3 Columns Taking Care of Business Julia Dale 5 Tax Matters: It was the Best of Times, It Was the Worst of Times 7 Eric M. Nemeth Technology Corner: IT Project Managment: The Danger of Optimism Michael S. Khoury 9 In-House Insight: Leveraging Public Sector Skills Florence Affatato and Kim Yapchai 11 Articles Amendments to the Nonprofit Corporation Act—What Nonprofits Need to Know Jane Forbes and Eric Klein 13 Not All Nonprofits Are Created Equal—A Review of Federal and State Requirements Affecting Tax-Exempt Organizations Daryl L. Barton and Howard Bunsis 20 Director’s and Officer’s Responsibilities for Cybersecurity Michael S. Khoury and Jennifer Miller Oertel 26 Social Enterprise Structures in Tax-Exempt Public Charities Jennifer Miller Oertel and Daniel Soleimani 29 A New Breed of Corporate Decision-Making Francine Cullari 35 The Use of Bylaws to Shape Proceedings for Shareholder Claims Raymond W. Henney 40 Using Unique Registered Numbers to Facilitate Business Transactions: A Perspective From How Business Licenses Operate in China Fang Liu 51 Recent Cases Regarding Noncompetition Agreements Michael S. Callahan 56 Case Digests 59 Index of Articles 60

Published by THE BUSINESS LAW SECTION, State Bar of Michigan The editorial staff of the Michigan Business Law Journal welcomes suggested business law topics of general interest to the Section members, which may be the subject of future articles. Proposed business law topics may be submitted through the Publications Director, D. Richard McDonald, The Michigan Business Law Journal, 39577 Woodward Ave., Ste. 300, Bloomfield Hills, Michigan 48304, (248) 203-0859, [email protected], or through Daniel D. Kopka, ICLE, 1020 Greene Street, Ann Arbor, Michigan, 48109-1444, (734) 936- 3432, [email protected]. General guidelines for the preparation of articles for the Michigan Business Law Journal can be found on the Section's website at http://michbar.org/business/bizlawjournal.cfm.

Each issue of the Michigan Business Law Journal has a different primary, legal theme focused on articles related to one of the standing committees of the Business Law Section, although we welcome articles concerning any business law related topic for any issue. The primary theme of upcoming issues of the Michigan Business Law Journal and the related deadlines for submitting articles are as follows:

Issue Primary Theme/Committee Article Deadline Spring 2016 Commercial Litigation Committee November 30, 2015 Summer 2016 LLC & Partnership Committee March 31, 2016 Fall 2016 Financial Institutions Committee July 31, 2016 Spring 2017 Regulation of Securities Committee November 30, 2016

ADVERTISING

All advertising is on a pre-paid basis and is subject to editorial approval. The rates for camera-ready digital files are $400 for full-page, $200 for half-page, and $100 for quarter page. Requested positions are dependent upon space availability and cannot be guar- anteed. All communications relating to advertising should be directed to Publications Director, D. Richard McDonald, the Michigan Business Law Journal, 39577 Woodward Ave., Ste. 300, Bloomfield Hills, MI 48304, (248)203-0859.

MISSION STATEMENT

The mission of the Business Law Section is to foster the highest quality of professionalism and practice in business law and enhance the legislative and regulatory environment for conducting business in Michigan.

To fulfill this mission, the Section shall: (1) expand the resources of business lawyers by providing educational, networking, and mentoring opportunities; (2) review and promote improvements to Michigan's business legislation and regulations; and (3) provide a forum to facilitate service and commitment and to promote ethical conduct and collegiality within the practice.

The Michigan Business Law Journal (ISSN 0899-9651), is published three times per year by the Business Law Section, State Bar of Michigan, 306 Townsend St., Lansing, Michigan.

Volume XXII, Issue 1, and subsequent issues of the Journal are also available online by accessing http://www.michbar.org/business/bizlawjournal.cfm From the Desk of the Chairperson By James L. Carey

Endings…and New that). Good advice stands the test of time and comes in Beginnings many forms. And good people stand the test of time. And this is a big part of the reason why my year as With a title like that, you have proba- Chair of your Business Law Section has been so reward- bly already guessed where this note is ing. In the Business Law Section, I am surrounded by starting, and where it is likely to end. the types of lawyers I want to be. I am living out my ad- That’s right: “Every new beginning vice to my young mentee as he struggles to find his path comes from some other beginning’s in life. I am surrounding myself with the right people. end.” This quote is from Semisonic’s And you are too. You don’t need to be an officer of 1998 hit song “Closing Time.” But it is more historically the Section or a Council member to enjoy the benefits of attributed to Seneca the Elder, a Roman rhetorician and this outstanding group of fine business attorneys. There writer born about 54 B.C. Or sometimes attributed to his are fantastic learning opportunities, like our Business son, Seneca the Younger, a Roman philosopher, states- Law Institute coming up in September. There are quar- man, and dramatist. Seneca the Younger was forced to terly Council meetings open to all. There are substantive commit suicide for his alleged complicity in the Piso- legal committees devoted to improving the law. There nian conspiracy to assassinate Nero, even though many are amicus brief writing opportunities to aid the courts. historians consider him innocent of that crime. There are social events to rub elbows with peers or to And even though the beginning may be obvious, mentor law students. There are articles to be read, and and where we may end likely seems transparent, it is to be written, for your Michigan Business Law Journal. the journey that makes it worth it. For we know in the Whatever your commitment level and location, there action adventure movie, the hero will win, just as we ex- are fantastic things your Business Law Section can of- pect in the romantic comedy that the star-crossed lovers fer—and that you can offer to your Business Law Sec- will be together. But we love our movies not because of tion. where they end, but because of how they get there. To those who have been active in running the Busi- I recall a young person who ran afoul of the law. ness Law Section this last year, I say THANK YOU. Nothing as serious as Seneca the Younger’s murky in- Many years ago I looked into the Business Law Section volvement in a plot to assassinate his head of state, but out of curiosity. I got involved because of the people. a serious violation arising out of too much fun and too And I served as your Chair out of a deep respect for all little concern for consequences—or, as I said before, that we do together. youth. When you receive your next issue of the Michigan Now this young man decided to work hard to get Business Law Journal, you will have a new Chair. I only his life more firmly on the good path. But these types of hope that my brief service has been consistent with the battles are very rarely won alone. He, and we, need the outstanding leadership of the past. As Chair, I am cer- help of others. tainly responsible for any problems we have had. But The road ahead for him is hard. And that brings me I want to acknowledge the outstanding efforts of our to my point. My strong advice to this young person Section’s Officers, Administrator, Committee Chairs, would be to surround himself with the type of people he Directors, past Chairs, State Bar liaisons, and everyone would like to become. And to leave behind the people else who worked to keep this Section going. Your efforts who are likely to cause him to stray. have been outstanding, your successes have been con- Jim Rohn, the motivational speaker, has said, “You siderable, and my gratitude runs deep. God has blessed are the average of the five people you spend the most this section with your good works and I certainly appre- time with.” W. Clement Stone, American businessman ciate your dedication. and philanthropist who passed away in 2002, tells us, So as my year ends, a new beginning will emerge. I “You are a product of your environment. So choose the commend to you Douglas Toering, our Vice-Chair, who environment that will best develop you toward your ob- in our system is to prepare to be the next Chair (good jective. Analyze your life in terms of its environment. Lord willing and the creek don’t rise). I expect that you Are the things around you helping you toward suc- will be pleased with Doug as Chair, just as I have been cess—or are they holding you back?” And then there is blessed to have him serve with me. And to Doug I say, Ben Franklin’s wisdom from Poor Richard’s Almanac, “If if I may paraphrase Charles Wesley (English leader of you lie down with dogs, you get up with fleas.” The Lat- the Methodist movement): you have a charge to keep, to in (what good lawyer article doesn’t have some Latin?) serve the present age—a calling to fulfill; and may it all for Franklin’s advice is “qui cum canibus concumbunt cum your powers engage, to do our Master’s will! pulicibus surgent.” And this has also been attributed to Enjoy the articles of this issue, and continue to sur- Seneca (not clear whether it is the Younger, the Elder, round yourself with great people during all of your end- or neither, but ancient sayings are sometimes tricky like ings and new beginnings. 1 2014-2015 Officers and Council Members Business Law Section

Chairperson: JAMES L. CAREY, Carey Law Offices, PC 23781 Point o’ Woods Ct., South Lyon, MI 48178, (248)605-1103 Vice-Chairperson: DOUGLAS L. TOERING, Toering Law Firm, PLLC 888 W. Big Beaver, Ste. 750, Troy, MI 48084, (248)269-2020 Treasurer: JUDY B. CALTON, Honigman Miller Schwartz & Cohn LLP 660 Woodward Ave., Ste. 2290, Detroit, MI 48226, (313)465-7344 Secretary: MARK W. PETERS, Bodman PLC 201 W. Big Beaver, Ste. 500, Troy, MI 48084, (248)743-6043 TERM EXPIRES 2015: Grand Rapids, 49518 67908 JAMES L. CAREY—23781 Point o’ Woods Ct., 40758 MARGUERITE M. DONAHUE, 2000 Town Center, Ste. 1500 South Lyon, 48178 Southfield, MI 48075, (248)351-3567 63904 JULIA ANN DALE—7150 Harris Dr., Lansing, 48909 13039 LEE B. DURHAM, JR.—1021 Dawson Ct., Greensboro, GA 30642 37220 D. RICHARD MCDONALD—39577 Woodward Ave., Ste. 300 Bloomfield Hills, 48304 31764 DAVID FOLTYN—660 Woodward Ave, Ste. 2290, Detroit, 48226-3506 39141 THOMAS R. MORRIS—7115 Orchard Lake Rd., Ste. 500, West Bloomfield, 48322 13595 RICHARD B. FOSTER, JR.—4990 Country Dr., Okemos, 48864 54750 TANIA E. FULLER—300 Ottawa NW, Ste. 220, 48917 MARK W. PETERS— 201 W. Big Beaver, Ste. 500 Troy, 48084 Okemos, 49503 13795 CONNIE R. GALE—P.O. Box 327, Addison, 49220 TERM EXPIRES 2016: 13872 PAUL K. GASTON—2701 Gulf Shore Blvd. N, Apt. 102, 56136 KEVEN T. BLOCK—500 Woodward Ave., Ste. 2500, Naples, FL 34103 Detroit, 48226 14590 VERNE C. HAMPTON II—500 Woodward Ave., Ste. 4000, 38733 JUDY B. CALTON—660 Woodward Ave., Ste. 2290, Detroit, 48226 Detroit, 48226 37883 MARK R. HIGH—500 Woodward Ave., Ste. 4000, 38306 MARK E. KELLOGG—124 W. Allegan, Ste. 1000, Detroit, 48226-5403 Lansing, 48933 34413 MICHAEL S. KHOURY—27777 Franklin Rd., Ste. 2500, 41017 HON. CHRISTOPHER P. YATES—180 Ottawa Ave., NW, Southfield, 48034 Ste. 10200B, Grand Rapids, MI, 49503 31619 JUSTIN G. KLIMKO—150 W. Jefferson, Ste. 900, TERM EXPIRES 2017: Detroit, 48226-4430 RIC ARK 57914 MATTHEW P. ALLEN—840 W. Long Lake Rd., Ste. 200, 45207 E I. L —500 Woodward Ave., Ste. 2500, Troy, 48098 Detroit, 48226-5499 37093 TRACY T. LARSEN—171 Monroe Ave., NW, Ste. 1000, 58525 MARIA SCHWALLER CAREW—101 W. Big Beaver, Ste. 1400, Grand Rapids, 49503 Troy, 48084 47172 EDWIN J. LUKAS—1901 St. Antoine St., Ste. 2500, 68496 JENNIFER ERIN CONSIGLIO—41000 Woodward Ave., Detroit, 48226 Bloomfield Hills, 48304 17009 HUGH H. MAKENS—111 Lyon St. NW, Ste. 900, 34523 SHANE B. HANSEN— 111 Lyon Street NW, Ste. 900, Grand Rapids, 49503 Grand Rapids, 49503 17270 CHARLES E. MCCALLUM—111 Lyon St. NW, Ste. 900, 70952 GAIL HAEFNER STRAITH—280 W. Maple Rd., Ste. 300, Grand Rapids, 49503 Birmingham, 48009 38485 DANIEL H. MINKUS—151 S. Old Woodward Ave., Ste. 200, 34329 DOUGLAS L. TOERING—888 W. Big Beaver, Ste. 750, Birmingham, 48009 Troy, 48084 32241 ALEKSANDRA A. MIZIOLEK—39550 Orchard Hill Place Dr., EX-OFFICIO: Novi, 48375 38729 DIANE L. AKERS—1901 St. Antoine St., 6th Fl., 18009 CYRIL MOSCOW—660 Woodward Ave., Ste. 2290, Detroit, 48226 Detroit, 48226 29101 JEFFREY S. AMMON—250 Monroe NW, Ste. 800, 18771 RONALD R. PENTECOST—124 W. Allegan St., Ste. 1000, Grand Rapids, 49503-2250 Lansing, 48933 30866 G. ANN BAKER—P.O. Box 30054, Lansing, 48909-7554 19816 DONALD F. RYMAN—313 W. Front St., Buchanan, 49107 33620 HARVEY W. BERMAN—201 S. Division St., 20039 ROBERT E. W. SCHNOOR—6062 Parview Dr. SE, Ann Arbor, 48104 Grand Rapids, 49546 10814 BRUCE D. BIRGBAUER—150 W. Jefferson, Ste. 2500, Detroit, 20096 LAURENCE S. SCHULTZ—2600 W. Big Beaver Rd., Ste. 550, 48226-4415 Troy, 48084 10958 IRVING I. BOIGON—15211 Dartmouth St., Oak Park, 48237 20741 LAWRENCE K. SNIDER—410 S. Michigan Ave., Ste. 712, 11103 CONRAD A. BRADSHAW—111 Lyon Street NW, Ste. 900, Chicago, IL 60605 Grand Rapids, 49503 31856 JOHN R. TRENTACOSTA—500 Woodward Ave., Ste. 2700, 11325 JAMES C. BRUNO—150 W. Jefferson, Ste. 900, Detroit, 48226 Detroit, 48226 40894 JEFFREY J. VAN WINKLE—200 Ottawa Ave. NW, Ste. 500, 34209 JAMES R. CAMBRIDGE—500 Woodward Ave., Ste. 2500, Grand Rapids, 49503 Detroit, 48226 59983 ROBERT T. WILSON—41000 Woodward Ave., 11632 THOMAS D. CARNEY—820 Angelica Circle, Bloomfield Hills, MI 48304 Cary, NC, 27518 COMMISSIONER LIAISON: 41838 TIMOTHY R. DAMSCHRODER—201 S. Division St., 55501 JENNIFER M. GRIECO 401 S. Old Woodward Ave., Ann Arbor, 48104-1387 — Birmingham, 48009 25723 ALEX J. DEYONKER—850 76th St., 2 2014-2015 Committees and Directorships Business Law Section

Committees

Commercial Litigation Financial Institutions Nonprofit Corporations Chairperson: Douglas L. Toering Co-Chair: Amy Durant Toering Law Firm, PLLC Bodman PLC Co-Chair: Jane Forbes 888 W. Big Beaver, Ste. 750 201 S. Division St., Ste. 400 Dykema Troy, MI 48084 Ann Arbor, MI 48104 400 Renaissance Center Phone: (248) 269-2020 Phone: (734) 930-2492 Detroit, MI 48243-1668 E-mail: [email protected] E-mail: [email protected] Phone: (313) 568-6792 E-mail: [email protected] Corporate Laws Co-Chair: D.J. Culkar Co-Chair: Jennifer M. Oertel Chairperson: Justin G. Klimko Comerica Inc. Jaffe Raitt Heuer & Weiss PC Butzel Long 1717 Main St., Ste. 2100 27777 Franklin Rd., Ste. 2500 150 W. Jefferson, Ste. 900 Dallas, TX 75201 Southfield, MI 48034 Detroit, MI 48226-4430 Phone: (214) 462-4401 Phone: (248) 727-1626 Phone: (313) 225-7037 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Regulation of Securities Debtor/Creditor Rights In-House Counsel Chairperson: Patrick J. Haddad Co-Chair: Judy B. Calton Chairperson: Bharat C. Gandhi Kerr, Russell and Weber, PLC Honigman Miller Schwartz & Cohn LLP 3327 Lone Pine Rd. 500 Woodward Ave., Ste. 2500 660 Woodward Ave., Ste. 2290 West Bloomfield, MI 48323 Detroit, MI 48226 Detroit, MI 48226 E-mail: [email protected] Phone: (313) 961-0200 Phone: (313) 465-7344 E-mail: [email protected] E-mail: [email protected] Law Schools Chairperson: Mark E. Kellogg Co-Chair: Judith Greenstone Miller Fraser Trebilcock Davis & Dunlap Uniform Commercial Code Jaffe Raitt Heuer & Weiss, PC PC Chairperson: Darrell W. Pierce 27777 Franklin Rd., Ste. 2500 124 W. Allegan St., Ste. 1000 Dykema Gossett PLLC Southfield, MI 48034-8214 Lansing, MI 48933 2723 S State St Ste 400 Phone (248) 727-1429 Phone: (517) 482-5800 Ann Arbor, MI 48104 E-mail: [email protected] E-mail: [email protected] Phone: (734) 214-7634 E-mail: [email protected] LLC & Partnership Chairperson: Daniel H. Minkus Clark Hill PLC 151 S. Old Woodward Ave., Ste. 200 Birmingham, MI 48009 Phone: (248) 988-5849 E-mail: [email protected]

3 Directorships Communication and Development Legislative Review Small Business Forum Kevin T. Block Eric I. Lark Douglas L. Toering Kerr, Russell and Weber, PLC Kerr, Russell and Weber, PLC Toering Law Firm, PLLC 500 Woodward Ave., Ste. 2500 500 Woodward Ave., Ste. 2500 888 W. Big Beaver Rd., Ste. 750 Detroit, MI 48226 Detroit, MI 48226-5499 Troy, MI 48084 Phone: (313) 961-0200 Phone: (313) 961-0200 Phone: (248) 269-2020 [email protected] E-mail: [email protected] E-mail: [email protected]

Jennifer E. Consiglio Nominating Publications Butzel Long PC Tania E. (Dee Dee) Fuller D. Richard McDonald 41000 Woodward Ave., Fuller Law & Counseling, PC Dykema Stoneridge West 300 Ottawa NW, Ste. 220 39577 Woodward Ave., Ste. 300 Bloomfield Hills, MI 48304 Grand Rapids, MI 49503 Bloomfield Hills, MI 48304 Phone (248) 593-3023 Phone (616) 454-0022 Phone: (248) 203-0859 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Julia A. Dale Programs Technology LARA Bureau of Commericial Tania E. (Dee Dee) Fuller Jeffrey J. Van Winkle Services, Corporation Division Fuller Law & Counseling, PC Clark Hill, PLC PO Box 30054 300 Ottawa NW, Ste. 220 200 Ottawa St., NW, Ste. 500 Lansing, MI 48909 Grand Rapids, MI 49503 Grand Rapids, MI 49503 Phone (517) 241-6463 Phone (616) 454-0022 Phone: (616) 608-1113 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Mark R. High Eric I. Lark Liaisons Dickinson Wright, PLLC Kerr, Russell and Weber, PLC 500 Woodward Ave., Ste. 4000 500 Woodward Ave., Ste. 2500 Detroit, MI 48226-5499 ICLE Liaison Detroit, MI 48226-5403 Marguerite M. Donahue Phone (313) 223-3500 Phone (313) 961-0200 E-mail: [email protected] Seyburn Kahn Ginn Bess & Serlin PC E-mail: [email protected] 2000 Town Center, Ste. 1500 Edwin J. Lukas Christopher C. Maeso Southfield, MI 48075 Bodman PLC Dickinson Wright, PLLC Phone: (248) 351-3567 1901 St. Antoine St., 6th Fl., 38525 Woodward Ave., Ste. 200 E-mail: [email protected] Detroit, MI 48226 Bloomfield Hills, MI 48304 Phone (313) 393-7523 Phone (248) 433-7501 Probate & Estate Planning Section E-mail: [email protected] E-mail: cmaeso@dickinsonwright. Liaison com John R. Dresser Justin Peruski Dresser, Dresser, Haas Honigman Miller Schwartz & Daniel H. Minkus & Caywood PC Cohn, LLP Clark Hill, PLC 112 S. Monroe St. 660 Woodward Ave., Ste. 2290, 151 S. Old Woodward, Ste. 200 Sturgis, MI 49091 Detroit, MI 48226-3506 Birmingham, MI 48009 Phone: (269) 651-3281 Phone (313) 465-7696 Phone: (248) 988-5849 E-mail: [email protected] E-mail: [email protected] E-mail: [email protected] Gail Haefner Straith Mark W. Peters Gail H. Straith, PLLC Bodman PLC 280 W. Maple Rd., Ste. 300 201 W. Big Beaver Rd., Ste. 500 Birmingham, MI 48009 Troy, MI 48084 Phone (248) 220-1965 Phone: (248) 743-6043 E-mail: [email protected] E-mail: [email protected]

4 TAKING CARE OF BUSINESS By Julia Dale

Organizational Change tional licenses from the Corporations, the State of Michigan. He has man- At the beginning of 2015, Department Securities and Commercial Licensing aged a county communicable disease of Licensing and Regulatory Affairs Bureau. clinic, worked in the policy unit at the (LARA) Director Mike Zimmer Michigan Department of Community Bureau of Professional announced continued efforts to rein- Health and managed the Michigan vent the state’s regulatory environ- Licensing Certificate of Need program. He is a ment through a departmental restruc- Kim Gaedeke has been named bureau graduate of the University of Michi- turing to unify LARA’s licensing sys- director for the new Bureau of Profes- gan. tems. The restructuring will focus on sional Licensing (BPL). In addition to BCHS will be responsible for the the functional commonality among her time serving as the acting direc- regulation of facilities currently regu- licensing platforms and licensed pro- tor for the Bureau of Health Care Ser- lated by BHCS. In addition, the Office fessions currently housed in various vices, Ms. Gaedeke has also served as of Child and Adult Licensing (OCAL) bureaus. The department oversees the interim director of the Division of will be housed in the new BCHS. The the licensing and regulation of more Nursing Home Monitoring (NHM). offices of BCHS will be located on the than 1.2 million individuals and enti- As a LARA assistant deputy direc- west side of the 1st floor of the Ot- ties in Michigan on an annual basis. tor, she helped implement the new tawa Building in downtown Lansing. The improved licensing structure will Autism Coverage Reimbursement BCHS: make the delivery of services more Fund and coordinated with the for- • Office of Child and Adult Li- efficient for Michigan consumers mer Bureau of Health Systems and censing and businesses. The reorganization Bureau of Health Professionals on • Non-Long Term Care Licens- of LARA’s licensing resources is not legislative issues. Ms. Gaedeke also ing expected to affect overall department served as a gubernatorial appointee • Long Term Care Licensing on the Autism Council. She is a grad- staffing levels for the next fiscal year. Corporations, Securities, Further, under Governor Snyder’s uate of Western Michigan University. Executive Order 2015-4, the Office of The new BPL will be responsible and Commercial Licensing Child and Adult licensing (OCAL) for the licensing and regulatory com- Bureau joined LARA April 10, 2015. The pliance of occupational and health Al Schefke remains the bureau direc- governor’s executive order transfers care professions. All health profes- tor for the Corporations, Securities OCAL and the Adult Foster Care sional licenses currently housed in and Commercial Licensing (CSCL) Licensing Advisory Council from BHCS will move to BPL. Also, as men- Bureau. Aside from the transfer of the the Department of Human Services tioned above, all of the individual oc- individual occupational licenses, all to LARA. OCAL ensures the protec- cupational licenses currently housed of CSCL’s other regulatory systems tion of children and vulnerable adults in the Corporations, Securities and will remain intact at the Woodlake who are receiving care from licensed Commercial Licensing (CSCL) Bu- Circle location in Okemos. agencies and facilities by enforcing reau will move to BPL. The offices of CSCL: rules and laws such as the Child Care BPL will be located on the 3rd floor • Corporations Division Organizations Act and the Adult Fos- of the Ottawa Building in downtown • Securities Licensing, Inves- ter Care Facility Licensing Act. OCAL Lansing. tigations, Product Registra- conducts onsite inspections to deter- BPL: tion, Living Care & Examina- mine compliance with state law and • Licensing Division tions licensing rules, provides technical as- • MAPS/Pharmacy Section • Audit & Examination Divi- sistance and consultation to improve • Legal Affairs sion the quality of service, and investi- • Allegations/Complaints • Ski & Amusement Inspection gates complaints alleging violations • Regulatory and Compliance Program of licensing rules or law. Division • Schools & Non-Occupational The first of the structural changes • Michigan Medical Marihua- Unit (Unarmed Combat, Pro- is the division of the regulatory re- na Registry Program fessional Employer Orga- sponsibilities and staff of the cur- nizations, Security Guards, rent Bureau of Health Care Services Bureau of Community and etc.) (BHCS) amongst two new bureaus Health Systems and the subsequent elimination of Larry Horvath has been named Timeline and Tentative Office BHCS. The new bureaus are: the Bu- bureau director for the new Bureau Moves reau of Professional Licensing and of Community and Health Systems The leadership teams for the new the Bureau of Community and Health (BCHS). Mr. Horvath has more than bureaus will be confirmed by June Systems. 25 years of government service, and the two new bureaus will then The second of the structural including 10 years with local county be finalized. Again, once the organi- changes is the removal of all occupa- government and the last 15 years with zation of BPL and BCHS is complete,

5 6 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015 all of the regulatory responsibilities Julia Dale is the Dep- of the Bureau of Health Care Ser- uty Bureau Director vices (BHCS) will be divided among of the Corporations, the two new bureaus and BHCS will Securities & Commer- be eliminated. These organizational cial Licensing Bureau changes will make for a stronger and within the Depart- more efficient regulatory system. ment of Licensing and Regulatory Affairs. She has previ- There are a number of office ously served as the Director of the moves impacting different bureaus Corporations Division for the State within LARA; some are addressed of Michigan. Julia is a member of in the details related to the reorga- the State Bar of Michigan; and nization and others are in conjunc- serves on the Business Law Sec- tion with plans to consolidate and tion Council. She is also a member improve state building occupancy in of the International Association of the greater Lansing area. The Depart- Commercial Administrators where ment of Technology, Management she serves as the Chair of the and Budget (DTMB) has provided a Business Organization Section. move schedule as outlined below: • BHCS Licensing Division from Ottawa Building 1st floor to Ottawa Building 3rd floor – July 24, 2015 tobe- come BPL. • CSCL Occupational Licens- ing Staff from Woodlake Circle to Ottawa Building 3rd floor – July 24, 2015 to become BPL. • Bureau of Construction Codes from Woodlake Circle to Ottawa Building 1st floor – July 31, 2015. • CSCL Securities Staff from Jolly Road location to Wood- lake Circle – August 10, 2015. • MIOSHA from the General Office Building 2nd floor to the Mason Building, 2nd floor – September 28, 2015. • Workers’ Compensation Agency from the General Office Building 1st floor to Woodlake Circle 1st floor – TBD. • Funds Administration from the General Office Building 1st floor to Woodlake Circle 1st Floor – TBD. As LARA works through these organizational changes to make a stronger and more efficient regulatory system, we cannot thank the public and business community enough for their patience. If you have any questions about the reorganization, you may contact me directly at (517) 241-6463. TAX MATTERS By Eric M. Nemeth It Was the Best of Times, It Was the Worst of Times

This memorable line from Charles or ourselves from every part of the Additionally, clients with dual cit- Dickens’ A Tale of Two Cities, pub- globe. Surrender such a citizenship? izenships and foreign property hold- lished in 1859, could possibly describe For some folks, such an option ings face very difficult estate plan- the seemingly current state of affairs may make sense. A classic example ning issues. The rules on inheritance regarding U.S. citizenship. The gov- is what I refer to as the “accidental can, and do, vary significantly from ernment estimates that there are as American.” Perhaps a person was one country to the next. many as 11 million undocumented born here while his or her parents Lastly, a person surrendering citi- immigrants in the United States and were students in the U.S and then re- zenship runs the risk of being denied millions more in the process of apply- turned to their “home” country. After entry when planning to visit the Unit- ing for Green Cards, citizenship, being raised and educated abroad, ed States. Does the person maintain or visas. At the same time, a record this person may have had little or no significant U.S. family or business number, albeit small in comparison, contact with the U.S. but may find connections? If so, the possibility of are surrendering their U.S. citizen- himself or herself subject to signifi- denied entry must be considered. ship. In 2014, 3,415 people gave up cant taxes and compliance fees due We live in an amazingly compli- their U.S. citizenship and in the first solely to birth. Presuming this per- cated time as our world gets smaller. quarter of 2015, 1,335. The cause of son lives in a stable and safe country As Americans with our large and most of this action seems to be the such as Canada, Australia, Japan, or somewhat historically isolated coun- U.S. tax system. Western Europe, he or she may be a try that is separated by two great Unlike any other country in the candidate for such a discussion. Here oceans, dual citizenships, foreign ac- Organization for Economic Coopera- in Michigan, we know there are thou- counts, and overseas jobs at one time tion and Development, the U.S. taxes sands of dual U.S. Canadian citizens seemed exotic and glamorous to so its citizens and Green Card holders because their parents had different many. Globalization has changed on their worldwide income in addi- citizenships. Can they really afford that picture forever. Look at one of tion to strict financial information two citizenships with the reporting the dozens of international airports reporting laws (FBAR and related requirements? Additionally, since the in the United States on any day of the forms). Now, it also appears the For- U.S. taxes worldwide income, a per- week. Folks are on the move in record eign Account Tax Compliance Act son may be in perfect tax compliance numbers. Further, having parents of (FATCA) has discouraged some for- in their home country only to find varied and multiple citizenship is no eign institutions from wanting to do that they owe significant U.S. taxes. longer so rare. It seems our “paper- basic banking and investment activi- Foreign tax credits, if available, must work” has yet to catch-up. For some ties with U.S. taxpayers. The result be evaluated by the applicable coun- clients there is much to think about, is that millions of Americans living try treaty resulting in more profes- beginning with the seemingly simple overseas, including dual citizens, face sional fees. question of citizenship. onerous and expensive tax and infor- Additionally, U.S. citizenship for Hot off the presses. The Surface mational filing fees each year even if someone with family overseas or Transportation and Veterans Care they have minimal income. overseas holdings means having to Choice Improvement Act of 2015 (Pub The stated goals of the vari- ask those relatives if they have put L No 114-41, 129 Stat 443) contained ous informational reporting laws their name on investment property or important practical tax reporting are worthwhile...to trace and catch financial accounts as you have report- changes. Starting next year, the due money launderers, terrorists, and tax ing requirements. An awkward con- dates for partnership, corporation, evaders. Not unlike a spam filter, the versation to say the least. FBAR, FinCEN 114, and the annual tighter the filter, the more unintended Surrendering U.S. citizenship is a return to report transactions with for- legitimate e-mail gets quarantined. serious matter. A person surrender- eign trusts and receipt of certain for- Tax reporting and enforcement is no ing citizenship may face an exit tax. eign gifts have changed dramatically. different. This tax is calculated on worldwide Apropos of this column, the FBAR is You may have clients that have property valued over $2 million uti- now due April 15 rather than June 30, asked about surrendering their U.S. lizing a hypothetical sale with tax cal- however, a six-month extension to citizenship. At first blush, this seems culated above the exemption amount. file is now available. More to follow like a shocking question. In the Cold The certification test, as a precursor, in my next column. War, the U.S. was (and perhaps still requires five years of tax compliance is) the last refuge of safety. Indeed, under all U.S. tax laws. Therefore, we are a country built on massive citizenship planning requires U.S. tax immigration of either our ancestors and full information compliance. 7 8 MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Eric M. Nemeth of Varnum LLP in Novi, Michigan practices in the areas of civil and criminal tax con- troversies, litigating matters in the various federal courts and administra- tively. Before joining Varnum, he served as a senior trial attorney for the Office of Chief Counsel of the Internal Revenue Service and as a special assistant U.S. attorney for the U.S. Department of Jus- tice, as well as a judge advocate general for the U.S. Army Reserve. TECHNOLOGY CORNER By Michael S. Khoury IT Project Management: The Danger of Optimism

Business software systems such as There Will Be Problems • If there are problems with financial and manufacturing enter- Similar to my admonitions about data services, document them prise applications can be complex security (the question is not if you will early and often. These prob- for a business to implement. There be breached, but when), there is no lems should be addressed will typically be transitions from such thing as a software implemen- at project meetings, and the older systems, conversions of data, tation that does not have problems. responses of the service pro- planning for a roll-out, and special The manner in which the client and vider should be specifically development activities that must take the service provider address ongo- documented as well. • Constantly follow up on place. Most software vendors have ing problems may be the difference promises made, quality is- “preferred” implementation partners between a successful implementation sues, and resource commit- who are sometimes resellers of the or a lawsuit near the end of the pro- ments. software but will usually be the ser- cess. Plan for this inevitable event. • Evaluate your own staffing. vice providers for implementation of Are some problems internal? the business systems. This column “We Will Take Care of This” Do you need an independent Once the company and service ven- addresses some issues in this process evaluation? dor start the process to plan for and and the risks to consider. • Don’t pay the vendor in full begin implementation of the new until the project is complete. Quality business software system, it is diffi- If the vendor has been paid, cult to stop. Business units expect to Despite the fact that a service pro- how are you going to justify have updated systems according to vider may be “recommended” or later that the services were promised timelines. Project manage- “certified” to install complex busi- deficient in quality? Instead, ment personnel within the company ness software systems, make sure you need to address an alter- are all working toward a specific your client understands that this is native right away, whether not an endorsement of quality by the goal, and the service provider should through holdbacks, deferred software vendor. For software ven- be the trusted partner in this process. billings, or some other solu- dors such as Microsoft, there are hun- So what happens when you start tion that can give you lever- dreds of software vendors for differ- seeing problems with the service pro- age. ent types of applications. For others vider? The typical approach is for the • Don’t box yourself into a cor- there may be thousands. You should business to raise issues and concerns ner. This is much easier said during project management and sta- not neglect due diligence in selecting than done. If your service tus meetings. The service provider a vendor. provider is the only source will invariably make promises to fix of services and getting rid Proposals vs. Reality those problems. Everybody has a of the provider jeopardizes vested interest in making this hap- From the time of the initial discussion your business, your choices pen. This is where the danger lies. through the signing of the agreement are limited. Always consider Depending on how the contract for services, the service provider options. is structured, the business may have often has its “A” team of profession- • Sometimes you just have to limited time periods in order to eval- als. When it comes time to actually do cut your losses. As difficult uate and accept or reject deliverables the work, however, relatively inex- and disruptive as it may be, from the service provider. If there if a service provider can- perienced resources are sometimes are problems, these typically get put not perform, don’t be opti- deployed. This is a common problem off instead of being addressed. The mistic about their ability to that should be addressed as part of longer problems are put off, the more improve. Generally, things the contract negotiations. If you are likely they will build. Many of us don’t get better. Sometimes relying on a specific set of resources, have seen situations where we are you just have to terminate get commitments from the vendor not called until a problem is so acute the service agreement for about specific people. that threats of service cessation or ter- breach (assuming you have Resource commitments need to be mination for breach are being thrown that right in the agreement) in addition to the quality representa- about. At that point, it is a no-win and work toward a transitions regarding the skills and experi- situation for everyone. tion. ence of the resources being deployed. While software systems gener- No amount of comfort with a team What Can You Do? ally improve over time, the process will serve the client when things start While every situation is different, of implementation has yet to become to go wrong. here are some suggestions: ubiquitous or straightforward. Evalu- 9 10 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015 ating your options and being realistic Michael S. Khoury of about what is happening is an impor- Jaffe Raitt Heuer & tant aspect of oversight. Weiss, PC, Ann Arbor and Southfield, practices in the areas of information technology, electronic commerce, intellectual property, and commercial and corporate law. IN-HOUSE INSIGHT By Florence Affatato and Kim Yapchai Leveraging Public Sector Skills

Have you ever wondered what it company to get a sense of its particu- lic was also a goal shared by PSLLC. would be like to transition from the lar priorities and challenges. PSLLC is a fiduciary, which makes it public sector to an in-house counsel At PSLLC, this process helped her legally obligated to look out for its cli- role or vice versa? Florence Affatato understand how to apply securities ents’ best interests. Working for such recently shared just such a journey regulations; how agreements need an organization has shown Affatato with me and provided some valuable to be drafted; what can and cannot that being responsive, fair, ethical, insights. Currently, she is the com- be negotiated; and the goals of each and diligent as well as being a solid pliance manager and legal counsel agreement or project. team member and having a strong at Portfolio Solutions, LLC (PSLLC), She found that strong research work ethic all transfer from the public located in Troy, MI. Portfolio Solu- skills to collect and analyze data and sector to the private sector. tions is one of the largest investment to synthesize complex information Additionally, customer satisfac- management firms in the country. were essential. Knowledge of legal tion is the top priority of both. And, Before joining the private sector, issues and, to some extent, political in a customer-focused business, Af- she worked for 20 years at a large forces were also important. fatato found that a proactive, service- U.S.-government agency where her Communication is another es- oriented attitude was necessary to day-to-day duties and responsibili- sential skill. One cannot successfully succeed. ties focused on everything from up- work with a government organiza- Ultimately, Affatato believes that holding the law to protecting U.S. tion without understanding what public and private sectors share fun- citizens. Today, Affatato is on the op- they expect. Fortunately, Affatato’s damental principles that allow work- posite end of the spectrum. Her job experience in a federal agency has ers who have the right skills to suc- is to ensure her firm follows govern- helped her translate the requirements ceed in both. ment rules and regulations, yet isn’t of many state and federal regulations Affatato finds her private work impeded by the law from meeting its into relatable policies and procedures both satisfying and challenging. business objectives. She found that that can be easily understood and in- While her day-to-day job duties do transitioning from the public sector to corporated into the daily activities of not contribute to the large-scale ef- the private sector comes with a steep all of her colleagues. forts of the U.S. government’s pro- learning curve. However, certain As a federal investigator, due tection of U.S. citizens, her work at skills she developed in the public sec- diligence was essential in collecting PSLLC contributes to the company’s tor helped make the switch a success. important facts. Affatato also found outstanding job of putting its client’s Before deciding to transfer from a that good negotiation skills are es- interests first and working to protect government agency to a private com- sential when one negotiates complex their financial futures. pany, she took inventory of her skills. service contracts. Combined with In addition to working at PSLLC, Interrogation, research, and anal- her risk management experience, she Affatato still contributes to the public ysis were all skills applicable to her strives to help the firm identify areas sector. She has volunteered for Chris- new role. As the sole attorney for of greatest concern and uses her legal tian Legal Aid of Southwest Michigan PSLLC, she is responsible for man- triage skills to help the firm advance and enjoyed serving as a Co-Chair of aging the firm’s regulatory and legal its business objectives by mitigating the In-House Counsel Committee of matters. She executes the firm’s regu- these risks. the Business Law Section. Finally, Af- latory compliance program, ensuring Even with many applicable skills, fatato cannot overestimate the value that all laws, rules, and regulations Affatato found that an in-house posi- of networking when transitioning to are followed. Additionally, she serves tion brought new challenges and op- a new work environment. She found as the in-house legal counsel where portunities for growth. The pace in the support from the Business Law she focuses on contract matters. the private sector is fast, with dead- Section was invaluable in helping her As the in-house counsel of any lines and demands popping up each achieve this goal. business, one of the most important day. Market forces impact PSLLC, If you are an in-house counsel that elements is thoroughly understand- and in its mission to improve existing would like to get involved with the ing the company and its industry, services to maintain a competitive In-House Counsel Committee and and then assessing exactly how you edge, each client’s needs and con- meet attorneys like Affatato, join our can assist the company in achieving cerns are important. This is different LinkedIn group, “Michigan In-House its goals. For Affatato, continuously from public sector work, which typi- Counsel Network,” or visit http:// learning the business of investment cally focuses on providing large-scale connect.michbar.org/businesslaw/ management is vital to her role. benefits to the entire public. The most efficient way of doing Still, there are similarities between events/activities. this, according to Affatato, is to spend the two sectors. Affatato found that time within each department of the serving the best interests of the pub- 11 12 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Florence Affatato, the compliance manager and legal counsel at Portfolio Solutions, LLC, is a former co- chair of the In-House Counsel committee.

Kim Yapchai is Senior Chief Compli- ance Officer at Whirl- pool Corporation in Benton Harbor. She is past chair of the In- House Counsel Com- mittee.

. Amendments to the Nonprofit Corporation Act—What Nonprofits Need to Know

By Jane Forbes and Eric Klein

Introduction of their voluntary service to community or- Effective January 15, 2015, Governor Snyder ganizations. Finally, despite the fact that signed Senate Bill 623 into law as 2014 PA more than 30 years have elapsed since the 557, making significant amendments to the Nonprofit Corporation Act was adopted, Michigan Nonprofit Corporation Act.1 Sen- there have been very few appellate decisions ate Bill 623 had two overall objectives. One interpreting its provisions. Having similar was to bring the Nonprofit Corporation Act language in the two statutes makes decisions up to date by incorporating many of the under the Business Corporation Act more changes that have been made to the Business reliable for those advising nonprofit corpora- Corporation Act2 since the Nonprofit Corpo- tions. ration Act was first enacted in 1982. The sec- Since 1982, there have been both ma- ond goal was to add provisions specifically authorizing existing practices of nonprofit jor and minor amendments to the Business corporations and to facilitate their opera- Corporation Act. While there have also been tions. amendments to the Nonprofit Corporation Act, there had not been, until recently, com- The Nonprofit Corporation Act and prehensive revisions incorporating changes the Business Corporation Act made in the Business Corporation Act. The Nonprofit Corporation Act was the first comprehensive statute governing nonprof- Characteristics of Nonprofit it corporations ever adopted in Michigan. Corporations Before 1982, some nonprofit corporations The variety of nonprofit organizations pres- were created under short statutes appli- ents special challenges in developing appro- cable only to organizations created for very priate corporation laws. While many non- specific purposes, such as the operation of profit corporations are being administered churches of a single denomination. Most nonprofit corporations, however, were gov- on kitchen tables, nonprofit hospitals are erned by sections of the general corporation among the largest employers in many Michi- laws covering broader classes of nonprofit gan communities, are highly regulated, and corporations, such as membership organiza- are often financed by publicly traded debt tions and cooperatives, and also by portions securities. As a result, it cannot be assumed of those laws applicable to business corpora- that nonprofit corporations are always “sim- tions. Many of these statutes still exist, either pler” or less “businesslike” than corpora- wholly or in part. tions for profit. The Nonprofit Corporation Act is mod- eled directly on the Business Corporation Purposes Act, both in its structure and in much of its Michigan nonprofit corporations exist for a language. There are advantages in having wide range of corporate purposes. Charities, uniformity between the two statutes. Many such as schools, hospitals, churches, and cul- subjects, such as indemnification of officers tural institutions, make up the largest group, and directors, involve issues in which the needs and concerns of business corporations but nonprofit organizations also include and nonprofit corporations are similar. Also, trade and professional associations serving there are many Michigan lawyers who have the common business interests of their mem- a good working knowledge of the Business bers, political and advocacy groups, social Corporation Act but who advise nonprofit clubs, condominium associations, agricul- corporations only intermittently or as part tural organizations, and even public utilities. 13 14 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Member and Shareholder “Equity” as editorial or technical changes, there are a Individuals controlling and managing tax- number that are more substantive. The fol- exempt charities are strictly prohibited from lowing changes address issues unique to receiving dividends or any other distribu- nonprofit organizations. tions of corporate property under federal tax Membership Voting laws and under state laws governing charitable assets. On the other hand, members of Some nonprofit corporations have large mem- social clubs and cooperatives are allowed to berships that are geographically dispersed or receive distributions on dissolution and can that, for other reasons, are unlikely to attend be viewed as having significant proprietary formal membership meetings held at a single interests in the assets and activities of the place and time. For this reason, some of these corporation. Also, even in the case of chari- organizations elect board members and con- ties, distributions to parent organizations duct other business through ballots mailed and affiliates with similar purposes are often to members or stockholders. Other organiza- appropriate. tions, especially clubs, set up polling places at which members can cast ballots during Corporate Structure specified periods. Nonprofit corporations also vary in their Voting electronically, by mail, or at polls may be a sensible method to secure wide- The variety organizational structures. In addition to stock corporations, the Nonprofit Corpora- spread participation by members or stock- of nonprofit tion Act currently allows for membership holders, but these procedures were not spe- corporations and directorship corporations cifically authorized by the Nonprofit Corpo- organizations ration Act. While it was possible to comply (without any members or shareholders), a fully with the Nonprofit Corporation Act presents fact that accounts for many of the differences by characterizing the ballots as proxies or as special between that statute and the Business Cor- written consent resolutions, many organi- poration Act. Some nonprofit corporations challenges in zations may not have observed all the tech- have large memberships that may include nicalities necessary to be in full compliance developing individuals living in other states or outside with the statute. The newly added Sections the United States. On the other hand, con- appropriate 408 and 409 of the Nonprofit Corporation trol of some private foundations is limited to Act allow nonprofit corporations to estab- corporation members of a single family, who may wish lish procedures in their articles or bylaws to transfer those rights to succeeding genera- laws. permitting members or shareholders to elect tions in much the same way as owners of a directors and to take other actions by written family business. ballot sent in electronically or by mail.3 The Health systems, religious bodies, and amendments also address related practical other nonprofit organizations may also be issues, such as procedures for placing items operated through parent organizations with on the ballots, record dates, and deadlines for multiple layers of nonprofit or for-profit sub- receiving ballots. sidiaries. The allocation of decision-making powers, the control of property, and other Board Liability relationships among those organizations can The questions of individual liability on the be complex. Many health care organizations part of board members, officers, and volun- also participate in joint ventures for the oper- teers is a major concern of those serving non- ation of facilities and specialized equipment. profit corporations. The Nonprofit Corpora- Even in cases in which all the joint venture tion Act previously allowed corporations to owners and the venture itself are tax-exempt limit liability of directors to the corporation charities, the parties may have concerns and its members or shareholders for neg- about capitalization, control, management, ligence in carrying out their duties. Such and their ability to realize a return on their limitations on liability provided narrower investment that may not be greatly different protections for those serving on the boards of from those of investors in a private business nonprofit corporations than those available venture. to directors of business corporations. This was because protection under the Nonprofit Changes to the Nonprofit Corporation Act was limited to “volunteer Corporation Act directors” and because there was an excep- While many of the amendments to the Non- tion requiring that liability continue for acts profit Corporation Act can be characterized constituting “gross negligence.” The amend- AMENDMENTS TO THE NONPROFIT CORPORATION ACT 15 ments to the Nonprofit Corporation Act con- ness issued on behalf of an organization in form the language in Section 209 to that in the another state (from which it has received no Business Corporation Act, eliminating both direct benefit). The amendments to Section the requirement that directors be volunteers 261(1)(i) add language that empowers Michi- and the gross negligence exception.4 Officers gan nonprofit corporations to enter joint will, however, still need to be volunteers to indebtedness and give such guarantees.10 be protected under the amended statute. The amendments are intended to recognize Nonprofit corporations that currently the importance of these types of transactions have language in their articles of incorpora- and to assist attorneys providing opinions tion eliminating the liability of a volunteer regarding the legality of such transactions. director or volunteer officer filed before January 15, 2015, will not need to amend Stock Corporations and Membership Voting their articles of incorporation to adopt these Rights changes.5 It should also be noted that the Unlike many states, Michigan has histori- parts of the Nonprofit Corporation Act gov- cally permitted nonprofit corporations to erning assumption of the liabilities of board issue stock. While stock corporations appear members and officers to third parties would to be more “proprietary” than member- continue to be available only to “volunteers.” ship corporations, the principal difference between nonprofit corporations formed on While many Corporate Practice of Medicine and Other a stock basis and membership corporations Professions under the Nonprofit Corporation Act previ- of the In the past, there had been active debate ously was that shareholders ordinarily had amendments about the question of whether nonprofit one vote for every share held, while mem- corporations were empowered to employ bers usually had no more than one vote each. to the members of the “learned professions,” par- However, the amended Nonprofit Corpora- Nonprofit ticularly physicians. This debate stemmed, in tion Act permits membership corporations to Corporation part, from substantive issues of health care include provisions in their articles of incorpo- policy and, in part, from technical readings ration or bylaws allowing a member to cast Act can be of the Nonprofit Corporation Act. The Michi- more than one vote, reducing the differences characterized gan Attorney General issued a ruling in 1993 between stock and membership corporations finding that nonprofit corporations have this even more.11 By facilitating variations in vot- as editorial right under existing law.6 The amendments ing rights without requiring a nonprofit cor- or technical to the Nonprofit Corporation Act explicitly poration be organized on a stock basis, the changes, provide that nonprofit corporations are now amendment will likely reduce the number of permitted to provide services “in a learned situations in which stock corporations will be there are a profession” and to employ and enter into needed. number that arrangements with duly licensed individu- are more als to furnish those services on behalf of the Access to Corporate Information corporation.7 Any person who renders such Participation in nonprofit corporations can substantive. services on behalf of a nonprofit corporation involve rights of free association and pri- will retain liability for negligent or wrong- vacy that are not usually applicable to own- ful acts committed by him or her or by any ership of stock in business corporations. In individual under his or her direct supervi- some cases, restriction on member or share- sion and control.8 Nonetheless, the nonprofit holder access to corporate information may corporation that employs a duly licensed or be appropriate to protect those interests. For authorized individual may indemnify him or example, it is possible to become a member her for any resulting liabilities and expenses.9 of some nonprofit corporations by making a relatively small donation. If members have “Master Indenture” Financings access to corporate information, individu- Health systems often finance their activities als who may be hostile to the goals of the through tax-exempt or taxable bonds issued organization could find out the identity and under “master trust indentures” or similar addresses of other members and use such arrangements that obligate all participating information in a manner detrimental to the entities in the corporate group to pay all obli- purposes of the organization. The amended gations issued under the master indenture. Nonprofit Corporation Act allows a nonprof- These arrangements may require a Michigan it corporation to limit member and share- nonprofit corporation to discharge indebted- holder access to the corporation’s stock led- 16 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

ger, list of shareholders or members, lists of tributable to members or shareholders upon donors or donations, or its other books and dissolution is not to be considered in estab- records.12 Nonetheless, a corporation that lishing the value of shares or memberships. limits shareholder or member access to the information above must still provide a rea- Executive and Non-Executive Committees sonable way for shareholders or members to The Nonprofit Corporation Act previous- communicate with all other shareholders or ly required that all members of “commit- members concerning the election of directors tees” be directors. This requirement had and other affairs of the corporation.13 been a source of confusion and concern for This was the only portion of the amended nonprofit corporations, as many have com- Nonprofit Corporation Act that was actively mittees that function as part of the corpora- debated in the Michigan legislature. The pri- tion’s day-to-day operations but that did not mary concern was that the limitations placed go so far as acting in place of the board of on access to corporate information would bar directors. The amended Nonprofit Corpora- access to information regarding donations to tion Act identifies committees composed of Section 501(c)(4) and other political organiza- directors that exercise powers of the board tions. Nonetheless, the amended Nonprofit as “executive committees,” while adding a Corporation Act is unlikely to affect many new provision authorizing “non-executive” committees acting under the direction of the The diversity political organizations either because they are directorship corporations without mem- board that may have members who are not of nonprofit directors, officers, members, or shareholders bers or because their members include only 16 directors or other corporate insiders. of the corporation. A “non-executive” com- corporations mittee may not, however, execute the power creates Damages in Derivative Actions or authority of the board in the management difficulties The diversity of nonprofit corporations cre- of the business and affairs of the corporation. in devising ates difficulties in devising appropriate Churches and Fraternal Organizations remedies for derivative actions. On the one The amended Nonprofit Corporation Act appropriate hand, tax-exempt corporations organized permits a nonprofit organization that can for charitable purposes are prohibited under remedies for be incorporated under another statute to be state and federal law from distributing their formed under the Nonprofit Corporation Act derivative assets to shareholders and members, both as provided that the other statute does not pro- dividends and on dissolution. Therefore, the actions. hibit doing so.17 This change has significant payment of monetary damages to members practical consequences given that Michigan or shareholders of charitable corporations has many older statutes permitting incor- (other than as reimbursement for costs) is poration of specific types of nonprofit cor- ordinarily inappropriate. On the other hand, porations, including churches of particular members or shareholders of other kinds denominations and fraternal organizations. of nonprofit organizations, such as social Some of these statutes include limitations clubs or cooperatives, are usually entitled to that may not be appropriate in all situations. receive a pro-rata share of the assets of the For example, “ecclesiastical corporations” corporation upon dissolution. This means formed under unrepealed portions of the that they may have substantial proprietary 1931 General Corporation Act are automati- interests in their memberships or shares. cally membership corporations. While some While the Nonprofit Corporation Act pre- churches are controlled by their congrega- viously provided for derivative suits, it did tions, other churches are often controlled by not specify the remedies available in such other individuals or entities, either wholly or actions or clearly indicate whether or not a in part. By allowing churches to incorporate member or shareholder bringing such an ac- directly under the Nonprofit Corporation tion may ever receive monetary damages. Act, Michigan will no longer be in a position The amended Nonprofit Corporation Act in- of dictating a particular form of organization, cludes provisions similar to Section 489 of the and churches will have greater flexibility in Business Corporation Act14 that allow a court their structure. to order the purchase of shares or memberships or to award damages.15 The amended Foreign Corporations language provides, however, that any prop- The amended Nonprofit Corporation Act erty held by the corporation for charitable adds a new subsection to Section 1012 pro- purposes or property that would not be dis- viding that a foreign corporation having its AMENDMENTS TO THE NONPROFIT CORPORATION ACT 17 principal office outside Michigan may solicit tion Act adds a new section to the statute donations in Michigan without having to permitting nonprofit corporations to merge obtain authority to do business in Michi- with limited liability companies and other gan.18 It should be noted, however, that this business entities that are not corporations.20 provision does not exempt foreign corpora- This is an important development because it tions from other applicable laws, such as is not unusual for Michigan nonprofit corpo- those regulating charitable solicitations. rations to be the sole members of limited liability companies that hold title to property Mergers and Dissolutions or engage in other activities on behalf of the Consolidations. Most of the new language nonprofit corporations. In addition, non- in the amended Nonprofit Corporation Act profit corporations acquire interests in lim- dealing with mergers and dissolutions is ited liability companies in connection with similar to revisions previously made to the the purchase of property or other business Business Corporation Act, including the interests. Thus, it is important that nonprofit deletion of “consolidations” as a distinct corporations be able to enter into mergers type of transaction. Nonprofit corporations with limited liability companies and similar previously used consolidations, transactions entities in order to “merge out” unneeded in which two or more corporations merge subsidiary organizations and to participate to form a new corporation, in situations in in other transactions. Most of which it was important that neither organiza- Voting on Mergers, Dissolution, etc. tion be perceived as “taking over” the other. the new The Nonprofit Corporation Act previously Nonetheless, nonprofit corporations will still required approval of mergers, sales of all or language in be able to enter into a transaction similar to a substantially all assets, and dissolution by a consolidation by creating a new corporation the amended vote of a majority of the total shares or mem- and merging the participating corporations bers entitled to vote. For some nonprofit cor- Nonprofit into the new corporation. porations with large memberships, that vot- Corporation Conversion to Limited Liability Compa- ing requirement effectively prevented those ny and Other Forms of Business Organiza- Act dealing transactions from taking place. The amend- tions. The Nonprofit Corporation Act previ- ments to the Nonprofit Corporation Act con- with ously did not permit a nonprofit corporation tain language in Sections 703a, 753, and 804 to convert directly to certain forms of busi- mergers and allowing organizations that have more than ness organizations, including limited liability dissolutions 20 shareholders or members entitled to vote companies. Instead, a two-step process was is similar required whereby, for example, the nonprofit at a meeting to approve mergers, assets sales, corporation converted into a business corpo- and dissolutions by a majority of the mem- to revisions ration, which then converted into a limited bers or shares actually voting at the meet- 21 previously liability company. The amended Nonprofit ing. Corporation Act now permits nonprofit cor- Distributions in Connection with Merg- made to the porations to directly convert to limited liabil- ers. Unlike shareholders of Michigan busi- Business ity companies and other forms of business ness corporations, members and sharehold- Corporation organizations.19 In addition, limited liability ers of nonprofit corporations did not previ- companies and other forms of business or- ously have the automatic right to dissent Act[.] ganizations can now directly convert to non- from mergers and other transactions and to profit corporations. The amendments do not, receive payment for the value of their inter- however, grant members or shareholders of ests. In fact, there was no explicit reference at a converting nonprofit corporation a right of all in the previous version of the Nonprofit dissent or an automatic right to receive the Corporation Act to payments to members fair market value of their membership or or shareholders in connection with mergers. shares. Based on recent amendments to the While the amended Nonprofit Corporation Dissolution of Charitable Purpose Corpora- Act does not provide for automatic dissent- tions Act, as discussed below, a charity’s fil- ers’ rights, it does permit payments in con- ing of a certificate of conversion under the nection with mergers, in situations in which amended Nonprofit Corporation Act will or- those payments are consistent with the gen- dinarily require the approval of the Michigan eral statutory limitations on distributions by Attorney General. nonprofit corporations and are in conformity Mergers with LLCs and Other Business with any limitations in the articles of the ac- Entities. The amended Nonprofit Corpora- quired corporation. 18 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Related Legislation bility Company Act27 to specifically authorize limited liability companies to participate Dissolution of Charitable Purpose in mergers with and conversions to nonprofit Corporations Act corporations.28 Effective January 15, 2015, Governor Snyder Conclusion also signed Senate Bill 624 into law as 2014 PA 558, amending the Dissolution of Chari- In light of the numerous changes made to table Purpose Corporations Act22 to provide the Nonprofit Corporation Act and related the Michigan Attorney General with author- legislation, nonprofit corporations and their ity to oversee the dissolution, merger, or con- counsel should now take the time to review version of nonprofit corporations. This is an their governing documents and operations to expansion of the previous version of the act, determine whether changes are necessary or which only explicitly covered the dissolution simply beneficial. of nonprofit corporations. As amended, a nonprofit corporation may not do any of the following, unless it NOTES is organized for religious purposes, with- 1. 1982 PA 162. out giving prior written notice to the Attor- 2. 1972 PA 284. ney General: (1) merge with another entity, 3. MCL 450.2408 and 450.2409. whether nonprofit or for-profit; (2) amend 4. MCL 450.2209(1)(c). or restate its articles of incorporation to be- 5. MCL 450.2209(2). come a for-profit corporation governed by 6. OAG, 1993, No. 6,770 (September 17, 1993). the Business Corporation Act; (3) convert a 7. MCL 450.2261(6). However, the practice of law nonprofit corporation into another form of by corporations is governed by a separate statute and is 23 not affected by the amendments. See MCL 450.681. business organization; or (4) dissolve. Once 8. MCL 450.2261(7). notified, the Attorney General may request 9. Id. that the nonprofit corporation first submit an 10. MCL 450.2261(1)(i). accounting of the corporation’s assets.24 The 11. MCL 450.2304(3). amended statute gives the Attorney Gen- 12. MCL 450.2487(7). eral the authority to require the dissolution 13. MCL 450.2487(8). of a nonprofit corporation be accomplished 14. MCL 450.1489. through a proceeding in a Michigan circuit 15. MCL 450.2489(1). 25 16. MCL 450.2527. court. 17. MCL 450.2251(1). Senate Bill 624 also amends the Dissolu- 18. MCL 450.3012(1)(g). tion of Charitable Purpose Corporations Act 19. MCL 450.2745. to prohibit the Department of Licensing and 20. MCL 450.2736a. Regulatory Affairs from accepting a filing 21. MCL 450.2703a, 450.2753, and 450.2804. that would effectuate one of the foregoing 22. 1965 PA 169. actions (including an amendment to the ar- 23. MCL 450.251(1). ticles of incorporation that would change the 24. MCL 450.251(4). 25. MCL 450.251(5). corporation’s term of existence to a specific 26. MCL 450.252(1). date) unless it is accompanied by an order 27. 1993 PA 23. of a circuit court dissolving the corporation, 28. MCL 450.4705a. the written consent of the Attorney General, or an affidavit stating that the Attorney Gen- eral failed to respond to a request for consent within 120 days of providing notice.26 Given the Attorney General’s additional oversight authority, nonprofit corporations will need to allow for additional time to obtain the req- uisite approval before they are able to final- ize these corporate actions.

Limited Liability Company Act Effective January 15, 2015, Governor Snyder also signed Senate Bill 929 into law as 2014 PA 559, amending the Michigan Limited Lia- AMENDMENTS TO THE NONPROFIT CORPORATION ACT 19

Jane Forbes is retired from Dykema. She serves as Co-Chair of the Nonprofit Corporations Committee of the Business Law Section of the State Bar of Michigan.

Eric S. Klein is a Senior Attorney in the Bloomfield Hills, Michigan office of Dykema. Mr. Klein focuses his practice on the health care sector with respect to corporate and regulatory issues. In particular, Mr. Klein’s practice focuses on compliance and reimbursement issues as well as health facility acquisitions and other changes of ownership, including related licensure and Medicare/Medicaid certification matters. Mr. Klein also advises clients on structuring professional practices and transactions to achieve client business objectives while addressing anti-kick- back, Stark, and other legal restrictions. Not All Nonprofits Are Created Equal—A Review of Federal and State Requirements Affecting Tax- Exempt Organizations

By Daryl L. Barton and Howard Bunsis

Nonprofits are very important to the econom- are in the 501(c)(5) category, business leagues ic and social fabric in Michigan. According are covered by 501(c)(6), and political organi- to the Economic Benefits of Michigan’s Non- zations are formed as 527 entities.3 profit Sector report (May 2014), nonprofits in The majority of nonprofit organizations Michigan number more than 42,000, employ in Michigan are formed as 501(c)(3)s. An or- directly more than 438,000 people, pay their ganization may qualify for this status under employees over $4.9 billion per quarter, hold the IRS code if it is organized and operated assets of nearly $217 billion, receive more exclusively for one or more of the follow- than $69 billion in revenue, and spend more ing purposes: religious, charitable, scientific, than $80 billion each year.1 testing for public safety, literary, educational, Clearly nonprofits play an important role fostering national or international amateur in providing stability to allow communities sports competition (with some exceptions), to weather setbacks and then foster economic or the prevention of cruelty to children or growth. The formation of the nonprofit can animals. To qualify, the organization must affect the success of the nonprofit in reaching be a corporation, community chest, fund, ar- its objectives. An attorney advising a poten- ticles of association, or foundation. A trust is tial nonprofit group plays an important role a fund or foundation and will qualify.4 Char- in the nonprofit’s success. itable contributions to a 501(c)(3) are tax- To properly advise a client on the forma- deductible. Contributions or fees given to a tion of a non-profit, one has to start with a 501(c)(3) may also be deducted as a business thorough understanding of the intentions expense. For a 501(c)(3), substantially related of the client regarding the mission, goals, fi- income and, in limited situations, investment nancial plans, and administration of the non- income are exempt from federal income tax.5 profit. One must understand the Federal IRS Nonprofit 501(c)(3) organizations are tax forms of nonprofits and also state legisla- prohibited from directly or indirectly tion affecting nonprofits. Not all IRS 501(c)s participating in, or intervening in, any are created equal. Most clients are familiar political campaign on behalf (or in opposition with the concept of a 501(c)(3) charitable non- to) any candidate for elective public office. profit but are not aware of the other forms Violating this prohibition may result in denial of 501(c)s. There are twenty-nine variations or revocation of tax-exempt status and the of 501(c)s, plus six 501s(d,e,f,k,n,q), a 521(a), imposition of certain excise taxes. However, and also 527 nonprofit organizations. 501(c)(3) organizations may initiate and promote non-partisan educational activities Sorting out the 501(c)s: such as voter registration, voter education 501(c)s can be divided into two main branch- guides, and presenting public forums, es: Noncharitable Organizations and Charita- provided there is no evidence of bias that ble Organizations. Charitable Organizations (a) would favor one candidate over another; in turn fall into either the Public Charity cate- (b) oppose a candidate in some manner; or gory or the Private Foundation category. For (c) have the effect of favoring a candidate purposes of this article, the discussion will or group of candidates.6 In general, a 501(c) focus on the attributes of 501(c)(3-6) and 527 (3) organization may not engage in activities nonprofits. Charitable and religious organi- attempting to influence legislation if this zations are covered by 501(c)(3)s; social wel- forms a substantial part of its activities. An fare organizations fall into 501(c)(4), labor, organization will be regarded as attempting agricultural, and horticultural organizations to influence legislation if it contacts, or urges 20 NOT ALL NONPROFITS ARE CREATED EQUAL 21

Number of Tax-Exempt Organizations, Nonexempt Charitable Trusts, and Nonexempt Split-Interest Trusts, Fiscal-Year 2014.2

Type Number % of Total

‐

[1] Includes private foundations. Not all organizations described in section 501(c)(3) must apply for recognition of tax-exempt status, including churches, interchurch organizations of local units of a church, integrated auxiliaries of a church, conventions or associations of churches, and organizations (other than private foundations as described in section 509(a)) that have normal gross receipts in each taxable year of not more than $5,000. In addition, organizations may be recognized as tax exempt under section 501(c)(3) without filing an application if they are included in a group exemption letter given to an affiliated parent organization.

[2] Includes teachers’ retirement funds (section 501(c)(11)); corporations to finance crop operations (section 501(c)(16)); employee-funded pension trusts (section 501(c)(18)); black lung trusts (section 501(c)(21)); veterans’ associations founded prior to 1880 (section 501(c)(23)); trusts described in section 4049 of the Employee Retirement Income Security Act of 1974 (ERISA) (section 501(c)(24)); State-sponsored high- risk health insurance organizations (section 501(c)(26)); State-sponsored workers’ compensation reinsurance organizations (section 501(c)(27)); the National Railroad Retirement Investment Trust (section 501(c)(28)); and qualified health insurance issuers (section 501(c)(29)). Tax-exempt status for legal services organizations (section 501(c)(20)) was revoked effective June 20, 1992.

22 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

the public to contact, members or employees gage in legislative advocacy and public ad- of a legislative body for the purpose vocacy and to a limited extent in political of proposing, supporting, or opposing election advocacy.12 legislation, or if the organization advocates Another form of a federally recognized for the adoption or rejection of legislation. nonprofit entity is a 527 political organiza- Organizations may conduct educational tion. According to the IRS, a political orga- meetings, prepare and distribute educational materials, or otherwise consider public policy nization is a party, committee, association, issues in an educational manner.7 fund, or other organization (whether or not A 501(c)(4) nonprofit is reserved for civic incorporated) organized and operated for leagues and social welfare organizations. If the purpose of directly or indirectly accept- the organization is not organized for profit ing contributions or making expenditures, or and will be operated primarily to promote both, for a recognized exempt function under social welfare to benefit the community then the IRS Code.13 Exempt functions of political forming a 501(c)(4) organization is an op- organizations include influencing or attempt- tion.8 Members of a labor, agricultural, or ing to influence the selection, nomination, horticultural organization may apply to be election, or appointment of an individual to recognized as a 501(c)(5) organization.9 As- The majority sociations formed as a nonprofit business a federal, state, or local public office or office of nonprofit league, a chamber of commerce, a real estate in a political organization. This includes the board, or board of trade may apply to be rec- election of presidential or vice-presidential organizations ognized as a 501(c)(6) tax exempt organiza- electors. Activities that directly or indirectly in Michigan tion.10 relate to or support exempt functions are rec- are formed as Charitable contributions to a 501(c)(4,5, ognized as exempt.14 or 6) organization are not tax-deductible, but The following chart is a quick summary 501(c)(3)s. contributions or fees given to a 501(c)(4,5,or of the activities allowed for 501(c)s and 527 6) may be deducted as a business expense.11 organizations discussed above: For 501(c)(4,5, or 6) organizations, substantially related income and investment income are exempt from federal income tax. Un- like the 501(c)(3), organizations formed as a 501(c)(4,5, or 6) organizational entity may en- Common Tax Law Restrictions on Activities of Exempt Organizations15

501(c)(3) 501(c)(4) 501(c)(5) 501(c)(6) 527

Receive tax-deductible charitable contributions YES NO NO NO NO

Receive contributions or fees deductible as a YES YES YES YES NO business expense

Substantially related income exempt from YES YES YES YES YES federal income tax

Investment income exempt from federal YES YES YES NO income tax Limited

Engage in legislative advocacy Limited YES YES YES Limited

Engage in candidate election advocacy NO Limited Limited Limited YES

Engage in public advocacy not related to YES YES YES YES legislation or election of YES candidates

NOT ALL NONPROFITS ARE CREATED EQUAL 23

State Law Concerns for life; erects or maintains public Obtaining the status of a nonprofit orga- buildings or works, or otherwise les- nization under the federal tax code does sons the burden of government. not automatically mean the organization 5. It may charge for its services as long is tax-exempt under state law. Litigation in as the charges are not more than Michigan courts involving nonprofit orga- what is needed for successful main- nizations has arisen over disputes with local tenance. taxing authorities. The cases have dealt with 6. It need not meet any monetary the interpretation of the General Property threshold of charity to merit the Tax Act (GPTA)16 and its application of the charitable institution exemption; exemption given for charitable institutions.17 rather, if the overall nature of the in- The leading case on this issue is Wexford stitution is charitable, it is a “chari- Med Group v City of Cadillac.18 There was no table institution” regardless of how dispute that Wexford Medical Group was a much money it devotes to charitable 20 nonprofit 501(c)(3) organization. However, activities in a particular year. under the GPTA, the organization needed to McLaren Reg’l Med Ctr v City of Owosso21 be a “charitable institution” to qualify for ad was a companion case with Wexford and valorem tax exemption. The Supreme Court upon entering the decision in Wexford, the of Michigan was faced with a lack of statuto- case was remanded for reconsideration to Obtaining ry definition of what constituted a charitable the Michigan Court of Appeals. The appeals institution. After reviewing prior Michigan court had to consider whether McLaren the status of decisions, the court retained the definition of Medical Management (MMM) met the three a nonprofit charitable institution it had set forth in Retire- basic elements to qualify for tax exemption organization ment Homes of the Detroit Annual Conference under MCL 211.7o: of the United Methodist Church, Inc, v Sylvan 1. The real estate must be owned and under the Township,19 namely: occupied by the exemption claimant; federal tax [Charity]…[is] a gift, to be applied 2. The exemption claimant must be a consistently with existing laws, for nonprofit charitable institution; and code does not the benefit of an indefinite number of 3. The exemption exists only when the automatically persons, either by bringing their minds buildings and other property thereon mean the or hearts under the influence of edu- are occupied by the claimant solely cation or religion, by relieving their for the purposes for which it was in- organization bodies from disease, suffering or con- corporated. is tax-exempt straint, by assisting them to establish After applying the six factor test from themselves for life, or by erecting or Wexford, the court held that both MMM and under state maintaining public buildings or works McLaren Regional Medical Center (MRMC) law. or otherwise lessoning the burdens of qualified as charitable institutions and met government. the second criteria listed above. The prop- Based on the above definition, the court then erty in question was purchased by MRMC set out six factors to be used when determin- and, although there was a memorandum of ing whether an organization is a “charitable understanding purporting to transfer owner- institution” under MCL 211.7o: ship to MMM, no transfer took place. How- 1. It must be a nonprofit institution. ever, the exemption in MCL 211.7o applies 2. It must be organized chiefly, if not if both the owner and the lessee are both solely, for charity. charitable institutions. Although MMM did 3. It does not offer its charity on a dis- not own the disputed property, it still quali- criminatory basis by choosing who, fied for tax exemption under MCL 211.7o(3). among the group it purports to There was no dispute as to the occupancy of serve, deserves the services. Rather the buildings under the third criteria above, it serves any person who needs the and the tax exemption was granted. particular type of charity being of- Subsequent to the Wexford and McLar- fered. en opinions, there have been several other 4. It brings people’s minds or hearts un- cases involving taxation issues. The follow- der the influence of education or re- ing three cases are unpublished opinions, ligion; relieves people’s bodies from but the nature of the arguments in the cases disease, suffering, or constraint; as- are germane to the issues presented in de- sists people to establish themselves termining nonprofit charitable institution 24 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

tax exemptions. In Mercy Servs for the Aging scholarship recipient is through a highly se- v City of Rochester Hills,22 the trial court held lective application process. The court noted that the annual service fees charged to Mercy that although Telluride does not discrimi- Services in lieu of a tax were illegal. Mercy nate on the basis of any protected class, it had been paying the illegal fees since the does discriminate by choosing who, among late 1980s. Mercy sought reimbursement for the groups it purports to serve, will receive fees paid between 2002 and 2007 based on an its charity. The case was affirmed in favor of unjust enrichment claim (the statute of limi- the City of Ann Arbor. tations for unjust enrichment claims is six years).23 The court found in favor of Mercy Conclusion and remanded and ordered the trial court to In summary, when representing a nonprofit award the disputed fees plus costs. entity, it is important to be aware of the vari- In Camp Retreats Found, Inc v Township of ous forms of federal nonprofit organizations, Marathon,24 the issue was whether Camp Re- the requirements for income exemption, and treats was a recreational facility or a chari- at the state level, the requirements for tax table institution. Camp Retreats, a 501(c) exemption for personal and real property. (2) nonprofit is a wholly-owned subsidiary Although, the reading of IRS Publication 557 of Tawheed Institute, a 501(c)(3) nonprofit. is not the most thrilling of things to do, it is Camp Retreats purchased the property in highly advisable that one do so if one repre- Although, the question with funds supplied by the Ta- sents nonprofit organizations. In addition, a reading of IRS wheed Institute. The Michigan Court of Ap- wealth of information pertinent to nonprofits in Michigan can be found at the Michigan Publication peals reviewed the requirement under MCL 211.7o that the property must be owned and Nonprofit Association’s website: www.mna- 557 is not the occupied by the exemption claimant and not- online.org. most thrilling ed that the presence of a full-time caretaker of things to on the property “minimally” satisfied the occupancy requirement. The Tax Tribunal had NOTES do, it is highly ruled that the nature of Camp Retreats was 1. Economic Benefits of Michigan’s Nonprofit Sec- advisable “recreational” rather than charitable. Part tor (May 2014) prepared for the Michigan Nonprofit of the Tax Tribunal’s argument was that the Association and the Council of Michigan Foundations by Public Sector Consultants: www.mnaonline.org, www. that one do property was not made open to the public. michiganfoundations.org , www.pscinc.com. so if one However, Camp Retreats programs were 2. IRS Data Book, 2014; Table 25. Number of Tax- open to anyone who chose to attend, and, Exempt Organizations, Nonexempt Charitable Trusts, and represents Nonexempt Split-Interest Trusts, Fiscal Year 2014. at times, the facilities were rented to other 3. Tax Exempt Status for Your Organization; IRS nonprofit outside groups. The court held that the Tax Publication 557 (REV February 2015, Cat. No. 46573C), organizations. Tribunal misinterpreted the law by requiring page 68. (Organization Reference chart). that in order to qualify for the tax exemp- 4. Id. p 21. 5. Id. p 22. tion as a charity, the property had to remain 6. http://www.irs.gov/Charities-&-Non-Profits/ open to the public including trespassers. The Charitable-Organizations/The-Restriction-of- case was reversed and remanded in favor of Political-Campaign-Intervention-by-Section- Camp Retreats. 501%28c%29%283%29-Tax-Exempt-Organizations. 7. http://www.irs.gov/Charities-%26-Non-Profits/ The primary focus in Telluride Ass’n, Inc, Lobbying. v City of Ann Arbor25 was the third Wexford 8. Tax Exempt Status for Your Organization; IRS factor—the nonprofit charitable institution Publication 557 (REV February 2015, Cat. No. 46573C), page 47. “does not offer its charity on a discriminatory 9. Id. p 48. basis by choosing who, among the group it 10. Id. p 49. purports to serve, deserves the services.” Tel- 11. http://www.irs.gov/Charities-&-Non- luride is a nonprofit corporation organized Profits/Other-Non-Profits/Donations-to-Section- 501%28c%29%284%29-Organizations and http:// under New York law with a branch operat- www.irs.gov/Charities-&-Non-Profits/Other-Non- ing on the University of Michigan campus. Profits/Tax-Treatment-of-Donations-to-Section- The Michigan branch of Telluride (MBTA) 501%28c%29%285%29-Organizations and http://www. irs.gov/Charities-&-Non-Profits/Other-Non-Profits/ operates a self-governing scholarship house Tax-treatment-of-donations-501%28c%29%286%29- in Ann Arbor. Scholarship recipients are giv- organizations. en free room and board in the house for up 12. Tax Exempt Status for Your Organization; IRS to five years. The MBTA is a project-driven Publication 557 (REV February 2015, Cat. No. 46573C), page 48. organization and places a special emphasis 13. http://www.irs.gov/Charities-&-Non-Profits/ on public service. The process for being a Political-Organizations/Exemption-Requirements-Polit- NOT ALL NONPROFITS ARE CREATED EQUAL 25 ical-Organizations. Daryl Barton is a tenured 14. http://www.irs.gov/Charities-&-Non-Profi ts/ faculty member at Eastern Political-Organizations/Exempt-Function-Political- Michigan University. She Organization. currently teaches courses in 15. http://www.irs.gov/Charities-&-Non-Profi ts/ Common-Tax-Law-Restrictions-on-Activities-of-Ex- Business Law and Environ- empt-Organizations. mental Law. She has served 16. General Property Tax Act, MCL 211.1, et seq. on various nonprofi t organi- 17. MCL 211.7o. zation boards including the Huron River 18. 474 Mich 192, 713 NW 2d 734 (2006). Watershed Council and the Ann Arbor Y. 19. 416 Mich 340, 348-349, 330NW 2d 682 (1982). She has been active in District and Council 20. 474 Mich 192, 206, 713 NW 2d 734 (2006). committees for the Great Sauk Trail Coun- 21. 275 Mich App 401, 738 NW 2d 777 (2007). cil, BSA. She has recently volunteered at 22. No 292569, 2010 Mich App LEXIS 2044 (Oct Alpha House, a housing facility for home- 21, 2010)(unpublished). less families in Washtenaw County. 23. MCL 600.5815. Her practice focuses on small business 24. No 304179, 2012 Mich App LEXIS 938 (May consulting and landlord-tenant issues. 15, 2012)(unpublished). 25. Nos 304735, 305239, 2013 Mich App LEXIS 1231 (July 16, 2013)(unpublished).

Howard Bunsis is a tenured faculty member at East- ern Michigan University. He currently teaches courses in Accounting for Non-Prof- its, Intermediate Account- ing, and Tax Accounting. He is the national treasurer for the Ameri- can Association of University Professors. Director’s and Officer’s Responsiblities for Cybersecurity

By Michael S. Khoury and Jennifer Miller Oertel

Scene from the annual board meeting of a other tools are used to ensure that the risks nonprofit: related to employment are addressed. Finan- cial controls are in place to protect against CEO: Next on the agenda is our vice improper spending, embezzlement, or mis- president who is in charge of human use of funds. What about information tech- resources, purchasing, and informa- nology and data security? tion technology. It is not atypical from the director’s stand- point that information technology is only ad- Director 1: Before you get to your dressed as a line item in the organization’s report, can I ask a question? budget. The amount is always bigger than anyone in the organization would like, even VP: Of course. though it is probably substantially less than that proposed by the manager in charge. Oversight often occurs by a person wearing Director 1: I keep hearing all of this many hats. Faced with limited resources, stuff about Internet attacks. Are we managers usually focus on operational sta- secure? bility first because that is needed for comple- tion of the work. Information governance Director 2: Yeah, I just got a letter and cybersecurity have been taking a back saying that my personal and financial seat, but the issues are now coming to a head. information is now for sale in Russia or Compliance, in general, and information something. security in particular, are not responsibilities that can be delegated (or relegated) to Director 1: Do we have anything to the IT department. Senior management and worry about? directors are responsible for assessing and overseeing what is being done and to ensure VP: You don’t have to worry about compliance and security. Information secu- anything. We are in a great position rity is becoming one of the highest risk areas and are well protected. in any organization, and directors should not be lulled into a false sense of security because This scenario is not farfetched. Most non- they either consider the organization below profits have directors who are volunteers or the radar of the bad guys, or they have been are affiliated with the cause promoted by given general assurances that everything is their organization. These organizations do fine. not have large budgets for staffing, secu- Any organization that believes it to be rity consultants, or other protections. In the completely secure resides in the state of de- above scenario, are the directors protected in lusion. Every organization, network, and their role as directors? Not really. computer provides an opportunity for direct or automated attacks from anywhere in the D&O Responsibilities world. A firewall and anti-virus software are Everyone understands that the directors and crucial elements but alone are insufficient officers of an organization have the responsi- to protect the organization. Below are some bility of oversight. Operation of the organi- suggestions and tips. zation should always be consistent with the charter, bylaws, or other foundational docu- Physical Security ments. Directors also have the obligation to Not all compromises of information come assess, reduce, or mitigate risks to the orga- through the Internet. The physical security nization. On the employment side, employee of the organization is an important place manuals, confidentiality agreements, and to start. Are doors locked? Are computers 26 DIRECTOR’S AND OFFICER’S RESPONSIBILITIES FOR CYBERSECURITY 27 secured? Do people with access to sensitive ware gets into the larger organizations, and information leave their computers logged in it is no different within the nonprofit. Train- and turned on at night? Consider those who ing of personnel is critical irrespective of the work remotely. Do they have access to sensi- size of the organization. tive information and take it out of the office? Are processes in place to address the physi- Cyber-Risk Program cal security of these assets that are external to Once the directors and officers understand your organization? that a strong cyber-risk program is necessary to protect the organization and its assets, it Information Governance must become a normal part of doing business This phrase gets used a lot, but the concept for any size of organization. It is also impor- can be very easy to understand. Where is tant to remember that the directors and offi- information in your organization stored? cers cannot outsource compliance and their Who has access to this information? For sen- fiduciary responsibility. Third parties can be sitive information (donors, recipients, finan- contracted to provide services, but it is ulti- cial records, etc.), is access limited to those mately the responsibility of the directors and that have a need to know? officers to ensure that risk management prac- Once that is addressed, you should con- tices are in place. sider how the data is stored. Is the most sensi- As part of that strategy, there must be a Every tive information encrypted on your servers? layering of protections, starting with physi- If you are using cloud providers, how is se- cal and logical security, information gover- organization, curity within that organization maintained? nance, firewalls and anti-virus protection, network, and Has your organization even addressed secu- patch management, and ultimately proactive rity of the cloud provider? reviews of the organization’s effectiveness. computer Basic Security Practices The secondary piece is an incident response provides an plan that can be implemented if there is a While network and anti-virus software opportunity compromise of information. Who has re- applications cannot be the answer to your sponsibility for what? Who needs to be no- for direct or concerns alone, they are critical elements. tified? How do you assess the problem and One important issue is what is known as automated minimize damage after the fact? “patch management.” These are those regu- attacks from lar (sometimes annoying) updates to your Assessment software systems. They often contain critical anywhere in Even assuming that you have good security security fixes needed to protect your envi- the world. practices and tools in place, understanding ronment, and failure to install these fixes can put your organization at risk. “Known secu- whether your controls and protections will rity issues” means the issues are very well actually discourage attacks is an important known and not just by those working for element, especially for larger organizations. the software vendor. Security issues are well Remember we are saying “discourage” known throughout the hacker community because you cannot prevent attacks, and and by those who develop that software to there is no such thing as a completely secure penetrate your network. environment. Do not neglect the risks that exist from A great example of the problems faced insider threats. These can be the curious em- by organizations was brought to our atten- ployee who has to click on a tempting link tion by Thomas J. DeMayo, who is a direc- in a phishing e-mail or the employee who tor of the IT Audit and Consulting practice at ignores policies and leaves your systems vul- O’Connor Davies, LLP. DeMayo recounted a nerable. The more dangerous threat may be situation in which his firm performed a cy- from insiders who purposely seek to hurt the bersecurity review of a billion dollar founda- organization. Your internal security and in- tion. They found that the foundation lacked formation governance practices may be your numerous basic security controls. Within first and perhaps only line of defense. minutes the assessment team was able to If the directors of your organization work take over the phone system and had full ac- in industry or large organizations, they are cess to the surveillance system in the home of already familiar with protocols and policies the chairman of the board of directors. He re- that seek to limit or discourage employees ports that this was the result of poor network from clicking on links or opening documents design and the failure to change default ven- from unknown persons. This is how mal- dor passwords. 28 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Similar problems can exist when organi- Michael S. Khoury of Jaffe zations use websites or cloud providers. If an Raitt Heuer & Weiss, PC, organization allows access to its sensitive in- Ann Arbor and Southfield, formation (think donors, grant management, practices in the areas of orpersonnel), security at all levels is impor- information technology, elec- tant. Inquiry into these issues and oversight tronic commerce, intellectu- are all responsibilities of the officers and di- al property, and commercial rectors of the organization. and corporate law. Conclusion Every organization needs to understand the risks of weak cybersecurity practices. While attacks certainly occur more often at larger organizations or entities (statistics often track Jennifer M. Oertel is a part- attacks in the millions per month), every ner with Jaffe Raitt Heuer organization has vulnerability, and the direc- & Weiss, PC, and the coor- tors and officers have the responsibility to dinator of the firm’s Not-for- assess and minimize risks. Profit Practice Group where she represents large family foundations, public charities, and social enterprise funds located across the nation. She also works in the areas of corporate law and finance. Social Enterprise Structures in Tax- Exempt Public Charities

By Jennifer Miller Oertel and Daniel Soleimani

In virtually all arenas of the social sector, one be more capitalistic. According to Social En- can see the gap between the need for funding terprise Alliance (“SEA”), a national charity and the philanthropic resources available. whose mission is to aid the field of social en- The buzzwords of “social enterprise” and terprise to reach its full potential as a force for “impact investing” and the relatively recent positive social change in service to the com- surge in popularity of the sector they rep- mon good, “Social enterprises are business- resent are seen by many as a way to bridge es whose primary purpose is the common the gap between the billions of philanthropic good. They use the methods and disciplines dollars available worldwide and the trillions of business and the power of the marketplace of dollars of social need by using a portion to advance their social, environmental and of the trillions of dollars of investable assets human justice agendas.” This definition goes to make investments intentionally aimed at on to define three characteristics that distin- creating social impact as well as a financial guish a social enterprise from other types of return.1 businesses: This article will introduce the topic of so- • A social enterprise directly addresses cial enterprise and discuss the various choic- an intractable social need and serves es to be made in structuring social enterprise the common good, either through its activities in public charities. Attorneys are products and services or through the often the ones who get the call from a client number of disadvantaged people it who has heard about a new “hybrid” busi- employs; ness entity type or who wants to know how • The commercial activity of a social to structure a business that contains aspects enterprise is a strong revenue driver, of aiming to make a profit together with an whether a significant earned income intent to create social good, and the attor- stream within a nonprofit’s mixed neys’ unique role on the front lines of this revenue portfolio, or a for-profit en- communication calls them to be appropri- terprise; and ately knowledgeable about this arena. • The common good is the primary The field has not agreed upon one defi- purpose of a social enterprise, liter- nition of social enterprise. In fact, Salesforce. ally “baked into” the organization’s com, named Forbes’ Most Innovative Com- DNA, and trumping all others.4 pany of 2011, began using the term “social The authors note that some commenta- enterprise” to describe “how social and tors in the U.S. further distinguish types of mobile cloud technologies are empowering social enterprises to include those in which companies to connect with customers, part- financial gain may trump social mission, al- ners, and employees in entirely new ways,” though social mission must be integral to the standing in contrast to the well-developed business concept, not just an unintended by- notion of social enterprise as a form of doing product.5 business that pursues a social mission at the Attorney Marc J. Lane, in his book Social same time as financial gain.2 Enterprise: Empowering Mission-Driven Entre- In the United Kingdom, it is well accepted preneurs, summed it up well: “Without re- that, “a social enterprise may not make dis- gard to the way in which a social enterprise tributions of profits to individuals but rather is defined…one common thread that runs all assets must be maintained in community through all the definitions presented—a sig- trust for the benefit of the community.” In nificant commitment to better the lives of Canada, it is widely accepted that a social en- others…’social enterprise’ will refer to any terprise is “owned at least in part by a non- business model that, to a significant degree, profit organization.”3 A thread that is com- has a mission-driven motive.”6 mon to the most popular definitions used in The following are examples of enterprises the United States, not surprisingly, tends to that define themselves as social enterprises. 29 30 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

First, a janitorial cleaning company operated pact investing” in relation to activities such by a public charity agency serving those with as pay-for-success (”PFS”) models, social developmental disabilities that trains and impact bonds (“SIBs”), program related in- employs its clients to work as janitors. While vestments (“PRIs”), and the myriad of social the service itself is not aimed at solving a enterprise business plan contests. According social issue (any more than that of a purely to SEA, “As social needs continue to spike in commercial janitorial company), the business light of shrinking government budgets, em- practice of training and employing people ployment rolls, and social safety nets, social with barriers to employment does serve such enterprise is emerging as a self-sustaining, a purpose. Another example is a medical de- market-based, business-like and highly effec- vice company aimed at creating affordable tive method of meeting social needs.”10 technologies in the developing world, given However, there are notable critics of the that according to some estimates, only 10 field. Phil Buchanan, President of the Center percent of all medical research is devoted to for Effective Philanthropy, is one such out- conditions that account for 90 percent of the spoken detractor. In his posting for Harvard global disease burdens (given the much less Business Review, “What Capitalism Can’t lucrative nature of such activities).7 Fix,” he stated, “My view is that pretending There is some debate about whether companies and markets hold all the answers There is some any commercial activity run by a charity is actually puts at risk our ability to deal with deemed a social enterprise. While the profits our most pressing societal problems—and debate about go back to support the mission of the non- to help our most vulnerable citizens.”11 Mr. whether any profit (or “for-impact”)8 organization, this Buchanan’s concern relates to the dispar- commercial type of activity does not necessarily fit within agement of the nonprofit sector that has some experts’ definition of social enterprise sometimes been correlated with touting the activity run unless the very core of the business is aimed benefits of social enterprise and goes on to by a charity at solving a social or environmental ill. In its cite research indicating a decline in quality is deemed early days, the social enterprise movement when non-profit hospitals converted to for- was identified mainly with charities that profit structures.12 Another anonymous de- a social used business models and earned income tractor has stated, “You can’t cure the social enterprise. strategies to create sustainable revenues in ills caused by capitalism by throwing more order to support their charitable mission. capitalism at those ills.” Some of these de- Today, it is widely accepted in the United tractors are concerned that proponents of States9 that social enterprise also encompass- social enterprise and impact investing want es for-profits whose driving purpose is to to do away with the philanthropic sector al- create social and/or environmental impact. together, yet the overwhelming sentiment of The social mission of social enterprises is a those in the field is that social enterprise and primary and fundamental driver, while or- impact investing are just one more tool— ganizational form, whether for-profit or for- together with philanthropic grants, chari- impact, as will be discussed later in this ar- table agencies, and government support—to ticle, is a strategic question of what will best bridge the widening gap between available advance that mission. resources and the tremendous amount of so- Despite the definition to which one as- cial and environmental need that exists. cribes, social enterprise is emerging as the There are also those, skeptical of the busi- “missing middle” sector between the tra- ness community, who fear that commercial ditional worlds of government, nonprofits, activities will take a charity’s focus off mis- and business. According to Michael Tidwell, sion, despite arguments that charities may Dean of the College of Business at Eastern better execute their missions with the addi- Michigan University and founder of the uni- tional funds produced (and which may be se- versity’s Center for Advancing Social Enter- cured more easily than traditional fundrais- prise, “The nation’s ‘social sector’ has expe- ing methods). According to Susan Gordon, rienced explosive growth since the 1990’s. Managing Director of Advisory Services of With over $3 trillion in assets and $1 trillion Mission Throttle, a Michigan-based advi- in revenue, social enterprises play an im- sory practice founded by Phillip Wm. Fisher portant economic development role because that empowers organizations that provide they account for almost 10% of the nation’s key social or environmental services or so- wages and salaries.” Readers may have heard lutions with the necessary business acumen of social enterprise and its corollary, “ im- to achieve financial stability and, therefore, SOCIAL ENTERPRISE STRUCTURES IN TAX-EXEMPT PUBLIC CHARITIES 31 deliver greater community impact, “Gov- sion? Can the charity get its board of direc- ernment funding and philanthropic dona- tors to back the idea? tions are critical, but unsustainable methods Further, in the charitable sector, there to fund the services provided by non-profit is somewhat of a mistrust of commercial organizations. Impact investing provides the activities. Some deem them “beneath” the option to accelerate positive change by tap- lofty goals of charity. Commercial competi- ping into a much larger pool of capital cur- tors complain that charities are not on a level rently invested in conventional portfolios. playing field because they do not pay taxes— Devoting just a fraction of those investable a common misconception since, as will be ex- assets to social enterprise has the potential to plored shortly, charities do pay taxes on their make a marked difference in our community commercial activities. Other competitors and to propel social change.” may worry, and perhaps rightly so, that con- No matter what one’s definition of social sumers would prefer to purchase products enterprise, nor one’s opinion as to whether and services from a business that will utilize it is positive or negative, there is growing at least a portion of its profits to create posi- consumer sentiment to support businesses tive social or environmental change. that aim to have a positive impact on societal Another consideration is with whom the ills or the environment.13 Edelman looked at commercial activities may be competitive. how consumers around the world interact Certainly a charity would want to think long No matter with brands that promote a social purpose and hard before conducting commercial ac- what one’s and found that in 2012 consumers consider- tivities that would be competitive with the ably redoubled their focus on buying from business of a major funder or supporter of definition societally engaged brands. “Between 2008 the charity. of social and 2010, approximately 42% of Internet us- Headline risk is another concern. If repu- ers said that when quality and price were tation is everything, then charities must con- enterprise, the same, brands that had a social purpose sider the headline risks associated with their nor one’s were more likely to trigger a purchase. In commercial activities—if they fail to comply opinion as 2012, that figure bumped up 11 percent- with a deadline, if they are somehow neg- age points to 53%.”14 Additionally, a recent ligent and damages are caused to vendors to whether poll conducted by Good.Must.grow of 1,015 or consumers. What if the products or ser- it is positive Americans, showed that “nearly 30% of con- vices wind up being used for, or identified or negative, sumers said they plan to increase the amount with, a purpose that the public would deem of goods and/or services they buy from unworthy of a charity? In all cases, the first there is socially responsible companies in the com- and foremost concern must be with protect- growing ing year. This is up from 18% who reported ing the charity, its mission, client population buying more from such companies in 2012 served, brand, and donor base. consumer compared to 2011.”15 It is apparent that this Charities should also assure that they sentiment trend will remain on an upswing as Millen- have execution of their charitable mission, to support nial consumers—the generation expected to operations, and internal controls down pat inherit as much as $41 trillion from the Baby before venturing into the social enterprise businesses Boomers16—are looking to support brands territory. Henry Ford said, “Failure is sim- that aim that make them feel like part of a solution ply the opportunity to begin again, this time to have a rather than part of a problem.17 more intelligently,” but that is rarely much Because the overwhelming amount of so- balm to the ego of those who have tried and positive cial enterprise activities to-date are affiliated, failed—or to their board members or major impact on at least in part, with charities, the remainder donors in the rather risk averse philanthropic societal of this article will address the issues to con- sector. Commercial activities require a dif- sider when structuring commercial activities ferent mindset and skillset than traditional ills or the in public charities. charitable activities, with attendant legal ex- environment. Among the non-legal issues to consider posure, risks, and capacity needs. when charities are discussing whether to The two main legal issues to consider pursue commercial activities are the chari- when assessing the optimal structure for ty’s brand and how the commercial activities commercial activities of charities are the will be viewed by the charity’s clients and desirability of isolating the charity from the funders. Do the commercial activities align legal risk involved in the activities and tax (or at least, not clash) with the charity’s mis- matters. 32 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Setting aside tax aspects for the moment, comparable to commercial activities; one must consider whether the commercial and activities are something that could be fully 3. The trade or business is not covered by insurance or whether they are substantially related to furthering risky enough that the charity should be iso- the exempt purposes of the lated from the potential liability—not only organization. from tort and employment risks but also Therefore, while the provision of foster from creditors. care services generates income in satisfaction Tax considerations are critical to structur- of parts 1 and 2 of the test, it is substantially ing commercial activities in charities. Public related to the charity’s mission, fails part 3 of charities must be organized and operated the test, and does not, in and of itself, gen- exclusively for the exempt purposes set forth erate UBTI. The IRS’ most basic illustration in IRC 501(c)(3). These exempt purposes are of the difference between UBTI-generating charitable, religious, educational, scientific, activities and activities related to charitable literary, testing for public safety, fostering purposes is that of a farmer growing crops to national or international amateur sports support those in need. In the first example, competition, and preventing cruelty to chil- the farmer sells the crops at market and con- 18 dren or animals. The term “charitable” is tributes all of the profits to feeding those in [W]hile an used in its generally accepted legal sense and need. This generates UBTI because the farm- includes relief of the poor, the distressed, or insubstantial er competes with other commercial growers the underprivileged; advancement of reli- in selling the produce at market, even though amount of gion; advancement of education or science; the farmer’s use of the profits is for charitable erecting or maintaining public buildings, purposes. The second example has the farm- commercial monuments, or works; lessening the burdens er giving all of the produce directly to those of government; lessening neighborhood ten- activities of in need (or charities that feed those in need). sions; eliminating prejudice and discrimi- a charity Because the farmer is not conducting any nation; defending human and civil rights commercial activity, the IRS views this activ- will not risk secured by law; and combating community ity as charitable, despite that the end result of deterioration and juvenile delinquency.19 the charity’s both activities vis a vis serving those in need “Exclusively” has been interpreted to is roughly identical. tax-exempt mean “primarily.”20 Therefore, while an in- UBTI is an extremely complicated subject, status, too substantial amount of commercial activities the details of which are beyond the scope of of a charity will not risk the charity’s tax-ex- much will this article, and there are a myriad of excep- empt status, too much will cause the charity cause the to fail the test of being organized substan- tions to UBTI contained in the Internal Rev- charity to tially for exempt purposes. While the IRS enue Code and its attendant regulations, as well as a number of surprising tax court deci- fail the test does not give us a bright line test by which to gauge whether such activities are more than sions and IRS administrative rulings on the of being insubstantial, common opinion is that rev- subject. It is important to note that certain organized enues from a charity’s commercial activities activities, such as management (even charter (those that generate UBTI, defined below) school management) and consulting activi- substantially should not exceed 25 percent of their total ties (even consulting other nonprofits), are for exempt gross revenues. especially scrutinized by the IRS. Also, while it may seem at face value that any commer- purposes. Activity that is carried on and is not related to the charity’s purposes may produce cial activity used for training people with unrelated business taxable income (“UBTI”). barriers to employment must be charitable in For an activity to generate UBTI, it must meet nature, the IRS limits such programs only to all of the following: what is necessary for training purposes—ac- 1. The income is from a trade or tivities beyond that generate UBTI. business. This means that it is carried For purposes of this article, the reader on for the production of income from should take away that the second consid- the sale of goods or the performance eration in structuring revenue generating of services; activities in charities (after assessing risk 2. The trade or business is regularly of liability exposure) is a determination of carried on. This depends upon the whether UBTI is generated, and that a spe- frequency, continuity, and manner cialist in tax-exempt law should be consulted in which the activity is carried on, with respect to that part of the analysis. SOCIAL ENTERPRISE STRUCTURES IN TAX-EXEMPT PUBLIC CHARITIES 33

Charities have four main choices in en- based financing, by which “investors” may tity structure for their commercial activities: receive a portion of the income or revenue either conduct the activities as a program of stream created by their investment. In any the charity, or to form a nonprofit subsid- case, however, the overall restrictions appli- iary, pass-through subsidiary, or corporate cable to charities must be kept in mind. subsidiary. There are various hybrid entity For simplicity, and to avoid the chance choices that fit within each of the corporate that more than an insubstantial amount of entity forms. UBTI is generated without someone within As previously noted, if the activities do the charity being alerted to “check the box,” not generate a significant amount of UBTI many charities create a wholly owned C- nor legal exposure, then they may be con- corporation subsidiary. If the subsidiary is ducted within the charity itself (if acceptable formed as a C-corporation (or a benefit cor- to the charity’s board of directors). The char- poration, flexible purpose corporation, or ity will pay tax at the corporate rate on only one of the other rather new hybrid corporate those activities that are deemed by the IRS to entity forms designed to combine profit-mo- generate UBTI. tive with social enterprise), the activities of If liability exposure is a concern, then the the corporate subsidiary are not imputed to charity may form a pass-through subsid- the parent. The subsidiary conducts commer- iary, such as a limited liability company or cial activities, pays taxes on the net income If liability a low-profit limited liability company (L3C) generated by those activities at the corpo- through which to conduct the activities. In rate rate, and then it may pay dividends to exposure is a a pass-through structure such as this, the the charitable parent. While the dividends concern, then activities of the LLC (or L3C) will be attrib- are not tax-deductible to the for-profit sub- uted to the charity. The IRS finally made the sidiary, they do not (in most cases) generate the charity pronouncement of what many practitioners UBTI for the charitable parent. may form a believed for years, in that a charitable con- Some cautions to be aware of in this struc- pass-through tribution to an LLC that is a wholly owned ture include the IRS’ rules on consolidating subsidiary of a charity is tax-deductible as controlled subsidiaries.22 To avoid that the subsidiary, a contribution directly to the charity.21 In IRS treats the charity parent and its subsid- such as this pass-through structure, if the amount iary as one entity, the following safeguards of UBTI rises to a level of concern, then the are recommended: a limited charity may take advantage of the “check the • Less than 50 percent of the subsid- liability box” rules under the Internal Revenue Code iary’s board should overlap with company and choose to treat the LLC (or L3C) as a cor- that of the nonprofit parent; poration, thus isolating the charity from the • Transactions between the subsidiary or a low- UBTI generated. and the charity parent must be arm’s profit limited If desired, a nonprofit subsidiary may be length (what would be typical be- liability formed through which to conduct the activi- tween two unrelated parties); ties. This may be chosen if the activities vary • The subsidiary should be managed company significantly from the parent charity’s mis- by a person independent of the char- (L3C) through sion, or if the parent charity’s board is not ity parent; and comfortable conducting the activities within • The subsidiary must have an inde- which to the parent, but the activities are not expect- pendent business purpose. conduct the ed to generate more than an insubstantial It is also useful to note that while in most activities. amount of UBTI. To be tax-exempt, however, cases rent, royalties, and interest paid to a the entity must secure its own IRS Determi- charity do not generate UBTI (with some ex- nation Letter of tax-exempt status by filing ceptions), those payments from a more than of a Form 1023 (or 1023EZ), Application for 50 percent-owned subsidiary become UBTI Tax Exemption. Simply forming a nonprofit to the charity parent. In many scenarios, organization at the state level will create a however, these situations can be structured taxable nonprofit entity. One downside of such that UBTI is minimized or avoided al- structuring social enterprise activities within together. the charity or a nonprofit subsidiary is that It is also important to consider the fact one may not accept equity investments into a that rather detailed information about con- charity, although loans may be sought from trolled subsidiaries (including salaries paid impact investors, and the field is develop- to certain employees) must be disclosed on ing other investment types, such as royalty- the charity parent’s publicly available Form 34 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

990 tax return. Thus, even though the con- alliance.org/what-is-social-enterprise. trolled subsidiary is a tax-paying entity, 11. https://hbr.org/2013/01/what-capitalism-cant- fix/. much more information is reported about it 12. http://www.nytimes.com/2013/01/09/busi- than is reported about for-profit businesses ness/health-care-and-pursuit-of-profit-make-a-poor- that are not controlled by charities—and that mix.html?_r=3&. information is made publicly available due 13. http://www.forbes.com/sites/ theyec/2014/05/09/why-purpose-not-cash-is-king-in- to the public disclosure requirements appli- the-food-industry/. cable to public charities. 14. http://www.edelman.com/insights. In conclusion, more than ever, charities 15. http://www.fastcoexist.com/3022143/creating- are exploring ways by which to generate rev- the-committed-consumer-social-enterprises-next-big- mission. enue streams that will go above and beyond 16. John J. Havens and Paul G. Schervish, “Why the charitable contributions in helping to ensure $41 Trillion Wealth Transfer Estimate is Still Valid: A sustainability and greater achievement of Review of Challenges and Questions,” Boston College Social Welfare Research Institute, 2003, cited in From mission. Whether one is a proponent or the Margins to the Mainstream, Assessment of the Im- detractor of the notion of charities perform- pact Investment Sector and Opportunities to Engage ing commercial activities, it cannot be disput- Mainstream Investors, report by the World Economic ed that most charities are being asked to do Forum’s Mainstreaming Impact Investing Initiative, in collaborate with Deloitte Touche Tohmatsu, September more with less, and social enterprise is one 2013, http://www3.weforum.org/docs/WEF_II_From- way by which to attempt to close that gap. MarginsMainstream_Report_2013.pdf [p 5]. 17. Id. 18. IRC 501(c)(3). 19. Id. NOTES 20. Treas Reg 1.501(c)(3)-(c)(1). 1. Mapping global capital markets 2011, McKinsey 21. IRS Notice 2012-52. Global Institute, August 2011: https://www.mckinsey. 22. See, for example, 1986 IRS EO CPE Publica- com/insights/global_capital_markets/mapping_global_ tion “For-Profit Subsidiary Structures in Charities” and capital_markets_2011. GCM 29866, IRC Section 501 (12/30/91). 2. Jim Schorr and Kevin Lynch, Preserving the Meaning of Social Enterprise, http://www.ssireview. org/blog/entry/preserving_the_meaning_of_social_en- terprise (-14-2010). 3. BC Centre for Social Enterprise, http://www. centreforsocialenterprise.com/what.html.. 4. http://www.centreforsocialenterprise.com/what. html . 5. The Power of Impact Investing: Putting Markets to Work for Profit and Global Good, Judith Rodin, President of the Rockefeller Foundation, and Margot Jennifer M. Oertel is a part- Brandenburg. ner with Jaffe Raitt Heuer 6. Social Enterprise, Empowering Mission-Driven & Weiss, PC, and the coor- Entrepreneurs, Marc J. Lane, (ABA publisher), 2011 (p dinator of the firm’s Not-for- 7). Profit Practice Group where 7. Bill and Melinda Gates Foundation. http://www. gatesfoundation.org/What-We-Do/Global-Health/ she represents large family Discovery-and-Translational-Sciences. foundations, public chari- 8. According to Douglas Bitonti Stewart, Execu- ties, and social enterprise funds located tive Director of the Max M. and Marjorie S. Fisher across the nation. She also works in the Foundation, “The ‘nonprofit’ sector is the only sector areas of corporate law and finance. described by what it is not. Nobody wakes up in the morning to avoid profit in our sector. I much prefer the term ‘social-impact’ as a replacement. I and a growing number of leaders feel ‘social-impact’ is a more appropriate name for the sector as its chief aim is to make an impact in our world; not to simply breakeven. We wake in the morning to make an impact on our society’s most pressing issues. The term also places the sector within Daniel Soleimani is an asso- the context of its sister sector; for-profit, for-impact.” ciate with Jaffe Raitt Heuer https://www.ncfp.org/blog/2013/may-on-the-ground- & Weiss, PC, in the firm’s report-from-the-center-for-effective-philanthropy-con- Tax and Estate Planning ference-in-detroit.html. groups, specializing in tax 9. “Social Enterprise in Any Town, by John Pearce, 2003. Published by the Calouste Gulbenkian Founda- planning for businesses tion, UK; www.centralbooks.co.uk.” In Canada, it is and individuals, as well as widely believed that a social enterprise is, “owned at least estate planning. in part by a non-profit organization.” BC Centre for Social Enterprise, http://www.centreforsocialenterprise. com/what.html. 10. Social Enterprise Alliance, https://www.se- A New Breed of Corporate Decision- Making

By Francine Cullari

Introduction officers are permitted to take into account Many states have adopted corporate social any or all stakeholders of the corporation. In responsibility “constituency” and “benefit fulfilling fiduciary duties, the managers will corporation” statutes. This article defines not run afoul of the business judgment rule and describes constituency and benefit leg- under a constituency statute. Both primary islation, which typically takes the form of and secondary stakeholders may be consid- amendments to a state’s corporation act and ered when managers take corporate action.5 presents the proposed advantages and criti- The states have some differing provisions cisms of the adoption and enforcement of regarding the definition of stakeholders, opt- such laws. out clauses, permissive versus mandatory provisions, and other matters. No statute dic- Constituency Statutes tates the importance of one stakeholder over another, although a few do prohibit any one History stakeholder from being paramount in the The first constituency law was passed in consideration of managers. All the statutes Pennsylvania in 1983. Since that time, 41 include employees and customers as stake- 1 states have adopted similar acts. The stat- holders while some add suppliers, the com- utes were passed in response to the takeover munity, and the state and federal economies. wave of the 1980s and to a Delaware case, Most of the laws allow the corporation to 2 Revlon v MacAndrews, which established consider the long-term interests of the com- what became known as the “Revlon duties.” pany in addressing various stakeholder is- In Revlon, which involved a hostile tender sues. In a few states the statutes apply only in to Revlon by Pantry Pride, the Delaware the context of a potential change in control.6 Supreme Court held that Revlon’s directors had breached their fiduciary duty to the Benefit Corporation Statutes company’s shareholders. Revlon directors stopped the tender by adopting a “poison History pill” that provided that the offer for their The District of Columbia and 30 states have own shares would be in exchange for debt. adopted benefit corporation (B-corp) legisla- When Pantry Pride increased its offer price, tion and another nine are considering enact- Revlon approached and negotiated a lever- ment.7 The impetus for benefit corporations aged buyout by Forstmann Little. The deriv- was likely the lack of enthusiasm for constit- ative suit arose when the Revlon directors uency statutes and the recent popularity of sold to Forstmann after Pantry Pride publicly the for-profit social entrepreneur, a “person announced it would top any bid.3 who uses business to solve social issues.”8 Although Delaware had a longstanding caselaw principle that directors could con- Over 200 for-profit businesses have convert- sider the interests of other groups as long as ed to benefit corporations in recent years. In “there are rationally related benefits accruing 2012, one of the most notable was clothing to the stockholders,” the court stated that the manufacturer Patagonia, the first to convert 9 principle does not apply in a takeover situa- under California law. tion. A company must sell to the highest bid- Legislation was proposed in 2011 (SB 359, der as “concern for nonstockholder interests 360, HB 4615, and 4616) and 2013 (HB 4526, is inappropriate” when a company is being 4527) in Michigan, but it did not progress to sold, now referred to as the Revlon duties.4 enactment. The Michigan proposals would have amended 1972 PA 284, the Business Provisions Corporation Act10 by adding chapter 9A. The The thrust of the constituency laws that fol- bills contain virtually all of the provisions of lowed Revlon is that corporate directors and the model legislation. 35 36 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Provisions laws on the voting rights of any class or se- Benefit corporation statutes vary somewhat ries.15 There are special rules in the case of from state-to-state depending on each state’s corporate mergers.16 business entity statutory scheme, legislative In a special annual report, a designated concerns, attorneys, the business communi- “benefit director” must advise shareholders ty, and stakeholders. The basic provisions for whether the benefit corporation acted in ac- each state are consistent across jurisdictions. cordance with its general public benefit pur- A benefit corporation is legally required to: pose and any specific public benefit purpose • have a corporate purpose to create a in all material respects during the period material positive impact on society covered by the report; whether the directors and the environment, and officers considered shareholders; em- • redefine fiduciary duty to require ployees of the corporation, subsidiaries, and consideration of the interests of suppliers; customers; communities where workers, the community, and the the corporation, subsidiaries and suppliers environment, and are located; societal factors; the environment; • publicly report annually on its over- the long and short-term interests of the cor- all social and environmental perfor- poration; and the ability of the corporation to mance using a comprehensive, cred- accomplish its benefit purposes. If the benefit Benefit ible, independent, and transparent director determines that the corporation or third-party standard.11 its directors or officers failed to act in accor- corporation Model legislation from the Benefit Corp dance with the purposes and stakeholders, statutes vary Information Center makes it clear that benefit he or she must describe the failures.17 corporation statutory language adds to exist- The traditional “business judgment rule” somewhat ing corporate laws, and both statutes apply is incorporated into the model legislation, from state- simultaneously to traditional corporations protecting directors who make a business to-state which opt to become benefit corporations. judgment in good faith if the director (1) is The more specific benefit language governs not interested in the subject of the business depending on over the traditional language in the event of judgment, (2) is informed with respect to the each state’s a conflict.12 subject of the business judgment to the extent The model provides a mandatory public the director reasonably believes to be appro- business purpose of “creating general public benefit.” priate under the circumstances, and (3) ra- entity In addition, the law allows specific purposes tionally believes that the business judgment statutory such as: is in the best interests of the benefit corpora- • provide low-income or underserved tion.18 scheme, individuals or communities with Standing to sue is typically specified in legislative beneficial products or services, the statutes. One criticism (see next section) • promote economic opportunity for of benefit corporation statutes is that stake- concerns, individuals or communities beyond holders other than shareholders do not have attorneys, the creation of jobs in the ordinary standing to sue the corporation for its failures the business course of business, to benefit them. The model legislation allows • preserve the environment, legal actions brought by the corporation it- community, • improve human health, self (against directors and officers), a deriva- and • promote the arts, sciences, or ad- tive lawsuit by (1) shareholders who held at stakeholders. vancement of knowledge, least two percent of the outstanding shares • increase the flow of capital to entities in a particular class or series at the time of with a public benefit purpose, the unlawful act, (2) a director, (3) a person • accomplish any other particular ben- or persons that owned at least five percent of efit for society or the environment.13 the outstanding equity interests in an entity To exercise an election to become a ben- of which the benefit corporation was a sub- efit corporation, or to revert to non-benefit sidiary at the time of the unlawful act, or (4) status, a corporation must have a provision by other persons identified in the articles or to that effect into its articles of incorpora- bylaws.19 tion14 were adopted by the “minimum status vote.” The minimum status vote requires a Constituency and Benefit Corporation two-thirds (2/3) vote of shareholders of ev- Statutes: Issues ery class or series regardless of a limitation Issue 1: Standing. While constituency statutes stated in the articles of incorporation or by- appear to give some comfort to stakeholders A NEW BREED OF CORPORATE DECISION-MAKING 37 other than shareholders, a potential problem a change in the end itself, to the reduc- is that those named and unnamed stakehold- tion of profits, or to the non-distribu- ers are not given standing to file lawsuits tion of profits among stockholders in against the corporation or managers if the order to devote them to other purpos- stakeholders’ concerns are not given ade- es. quate consideration. Arguably, shareholders Some scholars maintain that there is no themselves could bring derivative actions need for constituency or benefit corporation to protect other stakeholders, but it would statutes, arguing that the above language is likely be at the expense of their own return dicta.23 Nevertheless, for almost 100 years, it on investment. Perhaps because the laws are has been taught as the law and cited in cases not clear, provide no effective enforcement as recently as a Delaware case, eBay Domestic capability, and many other corporate anti- Holdings, Inc v Newmark.24 In this case, eBay takeover devices are now used,20 the caselaw sued the owner of craigslist for shareholder on point is non-existent. The benefit statutes oppression, after acquiring a 28.4 percent seek to correct the problem by listing those ownership share of the company. In its de- with standing (see above paragraph) but tailed analysis, the Chancery Court held that: those with standing are quite limited, unless When director decisions are reviewed the corporation itself expands the list of those under the business judgment rule, who can bring legal action. this Court will not question rational Arguably, Issue 2: Shareholder Protection. Opponents judgments about how promoting non- of benefit-corporation laws say they are un- stockholder interests—be it through shareholders necessary because investors can already making a charitable contribution, pay- themselves spend their personal earnings on good ing employees higher salaries and causes, and they will have more of those benefits, or more general norms like could bring earnings if the company sticks to maximiz- promoting like promoting a particular derivative ing profits.21 They argue that corporations corporate culture—ultimately promote actions to have the sole goal of maximizing return on stockholder value…(h)aving chosen a investment. for-profit corporate form, the craigslist protect other Since 1919, following a Michigan case, directors are bound by the fiduciary stakeholders, Dodge v Ford Motor Co,22 courts and scholars duties and standards that accompany have generally accepted the view that the that form (emphasis added). Those stan- but it would responsibility of corporate managers is to dards include acting to promote the value likely be at maximize profit for owners. After five years of the corporation for the benefit of its the expense of multi-million dollar annual dividends, stockholders (emphasis added). The “Inc.” Henry Ford announced that the Ford Motor after the company name has to mean of their own Co. would retain profits to pay for the new at least that. return on River Rouge plant to expand its production Thus, proponents of codifying consider- capacity, to double employee salaries, and to ation of non-shareholder interests accept that investment. reduce product prices. The Dodge brothers, shareholder prominence is the law, unless who owned a ten percent share in Ford, sued there is some intervention by the legislature. to force dividend distribution and stop the Issue 3: Employee Protection. Employees Rouge River construction project. The court argue they need more statutory protection found that the plan did not call for and was than they have under labor and employment not intended to produce a more profitable laws. Corporate decisions may affect them business immediately, but a less profitable even more than shareholders. While many one, and that the apparent immediate effect direct concerns about terms and conditions would be to diminish the value of shares and of employment are addressed by the Na- the returns to shareholders. In granting a tional Labor Relations Act (Wagner Act) of dividend, but denying the requested injunc- 1935,25 many other corporate decisions may tion, the Michigan Supreme Court held that: affect the very existence of their jobs. A business corporation is organized Issue 4: Accountability. If managers owe and carried on primarily for the profit a duty to many stakeholders, the fiduciary of the stockholders. The powers of the duty to any one and all groups is diluted. directors are to be employed for that The new business forms may strip away end. The discretion of directors is to some corporate accountability to sharehold- be exercised in the choice of means to ers. Courts will have a hard time aggregating attain that end, and does not extend to conflicting interests and, hence, will go along 38 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

with the managers’ defense.26 Further, some ownership stakes. Rather than fearing statutes do not have a requirement for an in- litigation, the founder of a for-profit dependent director to monitor the achieve- social enterprise may instead worry ment of goals. about locking in a dual mission legacy, Issue 5: Public Perception. Companies that about sufficient access to capital, or opt in to a constituency or benefit corpora- both. Although dual-class stock struc- tion statute might use their status as a mar- tures, partnership agreements, share- keting device to project an image of greedi- holder agreements in closely held cor- ness onto competitors who opt-out. A com- porations, and operating agreements pany not under one of the statutes might be in LLCs can all be used to limit own- deemed a company that does not care about ers’ ability to “undo” a dual mission, the community, even if it contributes gen- investors initially committed to the erously to community projects. Companies dual mission might change their minds may be pressured to reorganize when do- if the entity becomes sufficiently suc- ing so may not be suited to their business. cessful and amend the “undo” provi- Conversion may be accomplished for reputa- sions.29 tional purposes when the goals of improving climate change, water scarcity, poverty, and Conclusion other pressing problems need sustainable, Constituency states appear to be under- responsible business as the norm. utilized, vague, and ineffective. By contrast, Issue 6: Audits. Another concern arises benefit corporation statutes are being used from a third-party certification from a group by over 200 corporations to date. The socially known as B Corporation that would audit conscious businessperson and many young how socially or environmentally benefi- entrepreneurs will be looking for clear pro- cial a company’s business practices are and tections as they consider more than finan- charge them an annual fee of $500–$25,000 cial return on investment for their corporate (depending on annual sales) for the certifica- efforts. tion. Some see this recognition as a conflict of interest since a fee is paid. Further, a benefit director selected by the corporation may also NOTES be seen as having a conflict, as the director is selected by the very directors and officers 1. Standley, Nathan E. 2011, “Lessons Learned from whom he or she will have to evaluate. the Capitulation of the Constituency Statute,” 4 Elon L Rev 212 (No 4, 2011). Alternative Business Forms to 2. Revlon, Inc v MacAndrews & Forbes Holdings, Inc, 506 A2d 173 (Del 1986). Meet Benefit Objectives 3. Creative Commons, “Liability of Directors and The discussion above touches on whether Officers,”The Law, Corporate Finance, and Management (vol. the traditional form of corporation legally 1.0), section 16.4, http://2012books.lardbucket.org/ books/the-law-corporate-finance-and-management/ allows for a dual mission: consideration of index.html, accessed Feb 17, 2015. shareholders and stakeholders other than 4. Creative Commons (under license in which the shareholders. As for other common forms of publisher declined the use of the author’s name). “Li- ability of Directors and Officers,”Business and the Legal organization, limited liability company law Environment, vol. 1.0, 2012books.lardbucket.org/books/ appears flexible enough to allow adoption business-and-the-legal-environment/, accessed Feb 17, of both profit and social purposes. Partner- 2015. ship statutes requiring a “business purpose” 5. In business literature, “primary” or “market” or “Tier 1” stakeholders include shareholders, employees, may create barriers to social enterprises in suppliers, creditors, customers, distributors, wholesalers, that form.27 But even if the legal obstacles are and retailers. “Secondary” or “ non-market” or “Tier 2” lower for other forms of organization, other stakeholders include “outsiders’ such as business support groups, communities affected by corporate actions, problems arise. A for-profit enterprise wants media, governments (e.g., economies), future genera- to draw market-rate investors, where its dual tions (e.g., environmental concerns), activist groups and mission will be squarely put at risk.28 First, a the general public. 6. McDonnell, Brett H. “Corporate Constituency sufficient pool of investors with preferences Statutes and Employee Governance,” 3 William Mitchell aligning to the founders’ will may not exist. L Rev 1231 (Vol 30.4). Consensus favoring a dual mission 7. Adopted: Arizona, Arkansas, California, Colora- can easily break down and market- do, Connecticut, Delaware, Florida, Hawaii, Idaho, Illi- nois, Indiana, Louisiana, Maryland, Massachusetts, Min- rate investors may refuse to invest or nesota, Montana, Nebraska, Nevada, New Hampshire, quickly or detrimentally sell off their New Jersey, New York, Oregon, Pennsylvania, Rhode A NEW BREED OF CORPORATE DECISION-MAKING 39

Island, South Carolina, Tennessee, Utah, Vermont, Vir- Francine Cullari practices ginia, Washington, DC, and West Virginia. Introduced: law in Grand Blanc, Michi- Alaska, Iowa, Kentucky, Maine, New Mexico, North Carolina, North Dakoa, Oklahoma, Wisconsin. Benefit gan and teaches Business Corporation Information Center, www.benefitcorp.net/ Law, International Busi- state-by-state-legislative-status, accessed June 15, 2015. ness Law, and Labor and 8. Coster, Helwn (2011). “Forbes List of the Employment Relations Law Top 30 Social Entrepreneurs”, Forbes.com, Novem- at the University of Michi- ber 30 @http://www.forbes.com/sites/helen- coster/2011/11/30/forbes-list-of-the-30-social-entre- gan—Flint. She chairs the SBM Publica- preneurs/, accessed October 30, 2013). tions and Website Advisory Committees. 9. B Lab. “Patagonia Registers as First California Benefit Corporation,”CSR Wire, www.csrwire.com/… 65-Patagonia...Benefit-Corporation, accessed November 15, 2013. 10. MCL 450.1101-.2098. 11. Id. 12. Clark, Bill. Drinker, Biddle, & Reath LLP. “Model Legislation,” Sec. 101 (c), Benefit Corp Information Center, benefitcorp.net/for-attorneys/model-legislation, accessed December 5, 2013. 13. Id. at Sec. 102, “Specific Public Benefit.” 14. Id. at Sec. 104 (b). 15. Id. at Sec. 102, “Minimum Status Vote.” 16. Id. at Sec. 104 (b). 17. Id. at Sec. 301 (a). 18. Id. at Sec. 301 (e). 19. Id. at Sec. 305 (c). 20. There are no fewer than 35 takeover defenses, including back-end, bankmail, crown jewel, flip-in, flip-over, golden parachute, gray knight, greenmail, jonestown, killer bees, leveraged recapitalization, lobster trap, lock-up provision, macaroni, nancy reagan, non- voting stock, pac-man, pension parachute, people pill, poison pill, poison put, safe harbor, scorched earth, shark repellent, staggered board of directors, standstill agreement, suicide pill, targeted repurchase, top-ups, treasury stock, trigger, voting plans, white knight, white squire, and whitemail. 21. Loten, Angus. 2013. “Can Firms Aim to do Good if It Hurts Profit?”Wall Street Journal, Apr 10, 2013, http://online.wsj.com/news/articles/SB1000142 4127887324010704578414830487038240, accessed No- vember 20, 2013. 22. Dodge v Ford Motor Co, 204 Mich 459, 170 NW 668 (1919). 23. Stout, Lynn A., “Why We Should Stop Teach- ing Dodge v. Ford,” UCLA School of Law Research Paper No. 07-11, http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1013744, accessed August 22, 2013. 24. eBay Domestic Holdings, Inc v Newmark, 16 A3d 1 (Del Ch 2010). 25. National Labor Relations Act of 1935 (49 Stat. 449) 29 USC 151–169. 26. McDonnell, op. cit., p. 1235. 27. Brakman Reiser, Dana. “Benefit Corporations— A Sustainable Form of Organization?” The Wake Forest Law Review, Oct 3, 2011, http://wakeforestlawreview. com/2011/10/benefit-corporations-a-sustainable-form- of-organization/, accessed Feb 17, 2015. 28. Id. 29. Id. The Use of Bylaws to Shape Proceedings for Shareholder Claims

By Raymond W. Henney*

Introduction laws that impose fee-shifting, require exclu- For the past several years, there has been a sive forum selection, or mandate arbitration substantial increase in shareholder lawsuits of shareholder claims. However, Michigan challenging significant transactions involv- courts seem likely to uphold such bylaws ing public companies. Indeed, virtually given the operative provisions of the Michi- every major transaction by a public company gan Business Corporation Act, various ex- is met with a shareholder suit that frequently isting Michigan precedents, and Michigan’s has questionable merit and settles for virtu- tendency to follow Delaware law. ally no real value for shareholders. Instead, these lawsuits seemingly benefit only the The Proliferation of Shareholder lawyers who file the actions. Various corpo- Suits rations have sought methods to address this Much has been written about the dramatic development. One such approach has been increase of shareholders suits, brought either director-approved bylaws that seek to pro- derivatively or as a class action, challenging cedurally shape claims brought against the significant corporate transactions. Of par- corporation or its directors by its current or ticular concern to commentators and board- former shareholders. Courts from various rooms are claims challenging a merger or a states have approveded director-approved similar corporate transaction. Those lawsuits bylaws that (a) require that claims against typically accuse the corporation and its direc- the corporation or its directors be brought in tors of breach of fiduciary duties by alleging a particular state or federal court, (b) provide that the directors agreed to an unsatisfac- that shareholder plaintiffs bear all expenses tory price or issued purported inadequate of any action, including the corporation’s disclosures in the proxy materials for the costs and reasonable attorney fees in the shareholder vote to approve the transaction.1 event the shareholders do not prevail, and (c) Shareholder actions challenging a merger mandate that shareholder claims be resolved have become “pervasive,” with “multiple in arbitration. teams of plaintiffs fil[ing] lawsuits challeng- Recent Delaware state court decisions ing virtually every public company merg- have upheld bylaws that provide for exclu- er.”2 However, it is not simply the frequency sive forum selection and, with respect to of these lawsuits that is alarming, but the fact non-stock corporations, fee-shifting. In reac- that the vast majority of these actions result tion to these decisions, however, Delaware in little or no value to shareholders. amended its corporate laws to prohibit by- Available statistics indicate that in recent laws that impose fee-shifting on sharehold- years more than 90 percent of public com- ers who do not prevail in connection with an pany mergers attract at least one shareholder intra-corporate claim. The enactment further suit and that many attract several lawsuits authorizes bylaws that require that all intra- in multiple jurisdictions.3 Indeed, in 2012, 93 corporate claims be brought exclusively in percent of the announced transactions over Delaware courts or that may select the courts $100 million and 96 percent of deals over of other states provided that the bylaw does $500 million were challenged by shareholder not prohibit bringing claims in Delaware lawsuits.4 In 2013, 97.5 percent of the trans- courts. Additionally, other courts have en- actions over $100 million were the subject forced director approved bylaws requiring of such suits, which included an average arbitration of shareholder claims against the of seven separate lawsuits for each transac- corporation or its directors. tion.5 Cornerstone Research reports that in To date, no Michigan court has deter- 2014, shareholders challenged 93 percent of mined the validity of director approved by- the merger transactions valued at more than *Mr. Henney wishes to acknowledge the valuable comments and assistance of Cy Moscow, Honigman Miller Schwartz and Cohn LLP (Partner) and Rian C. Dawson, Honigman Miller Schwartz and Cohn LLP (Summer Associate). 40 THE USE OF BYLAWS TO SHAPE PROCEEDINGS FOR SHAREHOLDER CLAIMS 41

$100 million.6 Virtually all of these lawsuits alistically, courts frequently are awarding were filed by lawyers retained on a contin- plaintiffs’ lawyers fees for an illusory cor- gent fee and who represented one or more porate benefit.19 Under current conditions, of the shareholders who sought to bring the there appears to be a “proliferation of low claim as a class action or derivatively.7 In- value settlements” that result in “overpay- deed, studies of current patterns in deriva- ment” to plaintiffs’ lawyers and “systematic tive litigation indicate that those actions are under compensation” to shareholders.20 As often filed by repeat plaintiff law firms on be- one commentator observed, “deterrence of half of shareholders with insignificant own- potential corporate wrongdoers [can hardly ership.8 Given the representative nature of be] served by a system that thrives on a high these lawsuits, they are typically controlled volume of low value settlements.”21 Simply, by the plaintiffs’ lawyers and not the named “bad actors are not plausibly deterred by a plaintiffs.9 Moreover, the plaintiffs’ lawyers litigation system that exposes the corpora- nearly always have a much greater economic tion to little more than payment of attorneys’ interest in the outcome of the action due to fees.”22 Thus, the problem being addressed the contingent fee arrangement, creating a by the director approved bylaws that are the situation “where the attorney conducts (and subject of this article is not that corporations concludes) the litigation in ways that may simply want to minimize risk; corporations depart from [the] plaintiff[‘s] interests.”10 seemingly have that mechanism now as they [V]irtually Typically, these shareholder lawsuits are can obtain broad releases in exchange for not commenced shortly after the announcement much more than paying for the fees of share- every major of a board’s approval of a transaction and holder counsel. Instead, by adopting these transaction are settled before the closing of the transac- bylaws, directors are seeking some kind of tion.11 Such actions have a tendency to settle modification of the current unsatisfactory by a public for non-pecuniary relief.12 In fact, less than 2 circumstance of intra-corporation claim liti- company is percent result in a meaningful financial ben- gation. met with a efit for shareholders, while the vast majority of these cases are resolved in settlements in Director-Approved Bylaws shareholder which the shareholders as a class or deriva- Addressing Shareholder Lawsuit suit that tively provide broad releases to the corpora- Proceedings frequently has tion and its directors in exchange for a minor As stated above, in response to the perceived change to corporate governance or supple- difficulties of the current environment for questionable mental disclosure for a shareholder vote.13 shareholder lawsuits, the boards of vari- merit and Supplemental disclosures are by far the most ous corporations have approved different common remedy obtained by shareholders bylaws intended to procedurally shape law- settles for in these cases.14 Studies have found, howev- suits brought by shareholders against the virtually no er, that these supplemental disclosures are of corporation or its directors. Three such pro- real value for little or no benefit to shareholders.15 On the visions are prominent and have been upheld other hand, plaintiffs’ counsel is entitled to, by courts. shareholders. and frequently is awarded, substantial attor- First, in reaction to the practice of filing ney fees. Under Delaware and many other shareholder suits in multiple locations or state corporate laws, courts order that the courts other than the courts where the cor- defendant corporation pay the attorney fees poration is headquartered or incorporated,23 of the plaintiff shareholder either under the various corporations adopted bylaws that “corporate benefit” doctrine or under class require shareholder suits against the corpo- action procedures.16 ration or its directors to be brought in the This pattern of shareholder lawsuits and courts of designated states. The prominent their resolutions has been termed by various rationale for these forum selection bylaws is commenters as a “crisis in shareholder litiga- to avoid the cost of defending similar claims tion.”17 The negative practical consequences in multiple courts and the potential for in- of this “crisis” include (a) the development consistent outcomes. For example, various of a “tax” on corporate transactions in the corporations that are incorporated in Dela- form of paying plaintiffs’ lawyers,18 and (b) ware have adopted bylaws mandating the the obtainment by corporations and direc- Court of Chancery for the State of Delaware tors of broad releases that can insulate them to be the sole and exclusive forum for all from meaningful claims, while shareholders shareholder lawsuits that are (i) derivative do not receive any significant benefit. Re- actions; (ii) asserting a claim of breach of a 42 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

fiduciary duty by a director, officer orem- validity of such bylaws. However, applying ployee of the corporation; (iii) alleging a reasoning similar to courts that have upheld claim arising pursuant to any provision of exclusive forum selection and fee shifting the Delaware General Corporation Law, the bylaws, two Maryland courts and a federal certificate of incorporation or the bylaws of court located in Massachusetts that applied the corporation; or (iv) asserting a claim gov- Maryland law have upheld the validity of erned by the internal affairs doctrine.24 Many bylaws for real estate investment trusts (RE- of these bylaws, however, permit the corpo- ITs) that require arbitration of claims.34 ration to consent in writing to an alternative As discussed below, corporations may be forum or recognize that the forum selected is reluctant to attempt to adopt the fee-shifting not applicable should the selected court not or arbitration provisions given regulatory have personal jurisdiction over an indispens- and shareholder opposition. When adopted, able party named as a defendant.25 Courts however, these bylaws have been upheld have repeatedly affirmed the validity of such by courts largely based upon the reasoning bylaws,26 including bylaws that limit the per- of Delaware courts. The pertinent Delaware missible forum to only the state in which the decisions are examined in the next section of corporation is headquartered.27 this article. For the stated purpose of discouraging [C]orporations frivolous shareholder lawsuits, some corpo- Delaware Decisions Upholding may be rations have adopted more aggressive by- Director-Approved Bylaws laws that shift to a plaintiff shareholder the Various decisions issued by Delaware state reluctant to fees and costs a corporation incurs in defend- courts have upheld director-approved attempt to ing an action should the shareholder not pre- bylaws that have selected exclusive forums vail.28 Many of these bylaws have provided for shareholder actions and required fee adopt the that in the event the plaintiff shareholder shifting for unsuccessful litigants. These fee-shifting “does not obtain a judgment on the merits decisions have been influential to other state or arbitration that substantially achieves in substance and courts that have considered the appropriate- amount, the full recovery sought,” the share- ness of similar director approved bylaws. provisions holders “shall be obligated jointly and sever- The core premise of the Delaware decisions given ally to reimburse” the corporation or director is that bylaws are part of a greater contrac- “the greatest amount permitted by law of all tual relationship between corporations and regulatory fees, costs and expenses of every kind and their shareholders and that shareholders are and description (including but not limited to, all bound by the unilateral adoption of bylaws shareholder reasonable attorney’s fees and other litiga- by directors, so long as director-adopted tion expenses).”29 Note that these provisions, bylaws are permitted by the corporation’s opposition. unlike the fee-shifting provisions of the fed- certificate. Given that Michigan courts often eral securities laws,30 do not require that the look to Delaware authority in absence of shareholder claim be clearly meritless or friv- clear Michigan law concerning public cor- olous, but rather that the shareholder simply porations,35 Michigan courts seem likely to does not achieve in substance and amount follow these Delaware decisions just as other “the full recovery sought.” Fee-shifting by- state courts have done. Accordingly, those laws also have been upheld as a permissible decisions deserve examination. exercise of corporate governance by directors The seminal Delaware case is Boilermak- of non-stock corporations.31 ers Local 154 Retirement Fund v Chevron Corp.36 Finally, based on the rationale of avoid- Chevron concerned director approved by- ing (a) the trend of shareholder lawsuits that laws of Chevron, Inc. and Federal Express, mainly benefit plaintiffs’ lawyers and (b) de- Inc., requiring that the Delaware Chancery fending similar claims in multiple jurisdic- Court be the exclusive forum for shareholder tions, some corporations have adopted by- claims concerning those corporations’ in- laws that mandate arbitration of shareholder ternal affairs. In determining the validity of claims against the corporation or its direc- those bylaws, Chevron considered Section tors.32 Corresponding with United States Su- 109(b) of the Delaware General Corpora- preme Court precedent,33 these bylaws addition Law (“DGCL”),37 which provides that tionally prohibit the bringing of class claims bylaws “may contain any provision, not in- in either court or arbitration. As of the date of consistent with law or with the certificate of publication of this article in Summer 2015, no incorporation, relating to the business of the Delaware or Michigan court has ruled on the corporation, the conduct of its affairs, and its THE USE OF BYLAWS TO SHAPE PROCEEDINGS FOR SHAREHOLDER CLAIMS 43 rights or powers or the right or powers of its to be part of the contract between stockholders, directors, officers or employ- themselves and the corporation.47 ees.”38 The Chevron court first noted that the Because bylaws are part of a larger contract forum selection bylaws address the “rights” between the corporation and its sharehold- of shareholders concerning the internal af- ers, Chevron found that bylaws “are inter- fairs of the corporations and “easily meets” preted using contractual principles.”48 Those the requirements of Section 109(b).39 Specifi- principles favor the enforcement of forum cally, the court stated that “because the fo- selection provisions because they are pre- rum selection bylaws address internal affairs sumed enforceable under Delaware law.49 claims, the subject matter of the actions the Chevron noted, however, that forum section bylaws govern relates quintessentially to bylaws can be “situationally” unenforce- ‘the corporation’s business, the conduct of able depending on the circumstances of their its affairs, and the rights of its stockholders adoption.50 (qua stockholders).’”40 The court rejected the Following Chevron, in City of Providence v shareholder plaintiffs’ argument that the by- First Citizens Bancshares, Inc,51 the Chancery laws were improper because they concerned Court affirmed a director-approved forum a subject matter not traditionally addressed selection bylaw that was adopted in conjunc- by bylaws. According to Chervon, the Dela- tion with the announcement of the directors’ ware Supreme Court has “long ago rejected approval of a merger. The bylaw selected Various the position that board action should be in- North Carolina, where the corporation was validated…because it involves a novel use located, as the exclusive forum for share- decisions of statutory authority.”41 Moreover, Chevron holders to bring actions against the corpora- issued by noted that Delaware law respects and enforc- tion or its directors for derivative claims, for es forum selection provisions, so the bylaws breach of fiduciary duty claims, for viola- Delaware are not inconsistent with the law pursuant to tions of the DGCL, or for claims concerning state courts Section 109(b).42 the corporation’s internal affairs. Quoting have upheld Chevron further rejected the shareholder Chevron, the court began its analysis by indi- plaintiffs’ challenge that the bylaws were cating that the DGCL provided for a statu- director- unenforceable because they were adopted tory framework that considers the “bylaws approved unilaterally by the boards of the corporations of a Delaware corporation [to] constitute part bylaws that and not specifically consented to by share- of a binding broader contract among direc- holders.43 The court found that Delaware tors, officers, and stockholders.”52 Relying on have selected law had long held that “bylaws constitute a Chevron, the court noted that when a corpo- exclusive binding part of the contract between a Dela- ration’s charter permits directors to amend ware corporation and its stockholders.”44 the bylaws, shareholders are on notice that forums for According to the court, shareholders are on the board can unilaterally amend them.53 The shareholder notice that Delaware law permits a board to City of Providence Court found that under the actions and “unilaterally” adopt bylaws addressing sub- circumstances, the board of a Delaware cor- jects authorized under Section 109(b) and poration may designate an exclusive forum required fee that shareholders “buy into” and, therefore for the resolution of intra-corporate disputes shifting for assent to, a “statutory and contractual re- other than Delaware, such as the state of cor- gime…[that] explicitly allows the board” to poration’s headquarters.54 unsuccessful modify bylaws.45 The Chevron court noted Relying in part on the reasoning in Chev- litigants. that the unilateral authority of the directors ron, the Delaware Supreme Court upheld a to adopted bylaws is limited by the require- fee-shifting bylaw of a non-stock corporation ments of Section 109(b), the corporation’s in ATP Tour, Inc v Deutscher Tennis Bund.55 certificate, shareholders’ right to adopt and The bylaw had been unilaterally adopted amend bylaws, and shareholders’ right to by ATP’s directors and shifted attorney fees elect directors.46 The court formulated this and costs to unsuccessful plaintiffs in intra- relationship as follows: corporate litigation. The case came before Thus, a corporation’s bylaws are the Delaware Supreme Court on certification part of an inherently flexible contract from the federal court, seeking clarification between the stockholders and the cor- of Delaware law. As the Chancery Court in poration under which the stockholders Chevron, the Delaware Supreme Court be- have powerful rights they can use to gan its assessment of the permissibility of protect themselves if they do not want fee-shifting bylaws under Delaware law by board-adopted forum selection bylaws examining Section 109(b) of the DGCL.56 The 44 THE MICHIGAN BUSINESS LAW JOURNAL —SUMMER 2015

ATP court found that fee-shifting provisions eliminated in a cash-out transaction because are facially valid under Delaware contract they were not a party to that “flexible con- law.57 The court reasoned that because by- tract” when the bylaw was adopted.68 While laws are “contracts among a corporation’s the Chancery Court in Strougo did not reach shareholders, a fee-shifting provision con- the issue of whether such bylaws are permis- tained in a nonstock corporation’s validly- sible for corporations that issue shares, there enacted bylaw would fall within the con- is a prevailing view that the ATP decision tractual exception to the American Rule [that would apply to such corporations.69 each party bears their own costs].”58 The Del- aware Supreme Court did warn that whether Michigan Law Likely to Follow a specific fee shifting provision is enforceable Delaware Decisions depended upon the manner and circum- Michigan courts have long looked to Dela- stances in which it was adopted.59 However, ware precedent when Michigan law con- the court rejected the argument that the in- cerning public corporations is unsettled.70 tention to deter litigation would be an im- Given the similarities of the Michigan Busi- proper purpose causing the invalidation of a ness Corporation Act to the DGCL and the fee shifting bylaw because those provisions, absence of Michigan authority addressing “by their nature, deter litigation.”60 Finally, this issue, Michigan courts seem likely to fol- Michigan the Delaware Supreme Court held that the low Delaware decisions and uphold director bylaw provision was applicable to members approved bylaws of Michigan corporations courts have who joined the entity prior to the adoption of that seek to procedurally shape shareholder long looked the bylaw provided the entities charter con- claims, provided the circumstances of adop- to Delaware fers upon directors the authority to adopt by- tion of the bylaws do not cause them to be laws.61 Quoting from Chevron, the court held unreasonable or overbearing. precedent that under such circumstances, “stockhold- There are five basic elements of the Dela- when ers will be bound by bylaws adopted unilat- ware decisions upholding forum selection erally by their boards.”62 and fee-shifting bylaws. The first question Michigan law The Delaware Chancery Court, in Strougo is whether the corporation’s charter permits concerning v Hollander,63 held that a fee-shifting pro- directors to adopt bylaws and whether the public vision that was adopted after the plaintiff bylaw is otherwise consistent with the char- shares had been cashed out of the stock-issu- ter.71 The second issue is whether the bylaw corporations ing corporation was not enforceable against satisfies the requirement of Section 109(b) of is unsettled. that plaintiff. The court found that changes the DGCL that the bylaw “relates to the busi- in bylaws made when the plaintiff is no lon- ness of the corporation, the conduct of its af- ger a shareholder of the corporation are not fairs, and its right of powers or the rights or binding on the plaintiff “for the same reason powers of shareholders, directors, officers or that a non-party to a contract is not bound employees.”72 Next, the Delaware courts con- by the terms of a contract.”64 Additionally, sider the requirement of Section 109(b) that according to the court, Section 109(b) of the the bylaw is “not inconsistent with law.”73 DGCL “does not authorize the adoption of Fourth, the Delaware decisions require that bylaws to regulate the rights or powers of the bylaw apply to shareholders who were former stockholders whose interest in the shareholders at the time the bylaw was ad- corporation already have been eliminated.”65 opted or became shareholders after it was Quoting other Delaware decisions, Strou- adopted.74 Finally, the Delaware courts de- go asserted that “[c]orporate charters and termine whether the bylaw is “situationally” bylaws are contracts among a corporation’s unenforceable – i.e., that facially valid bylaws shareholders [and that the] rules that gov- “are not used in an unreasonable manner in ern the interpretation of statutes, contracts, particular circumstances.”75 and other written instruments apply to the Michigan law should be consistent with interpretation of corporate charters and by- each of these elements with respect to the laws.”66 The court noted that while bylaws adoption of such bylaws as forum selection, are an “inherently flexible contract,” a “fun- fee-shifting, or mandatory arbitration. First, damental principle of Delaware contract law just as the Delaware counterpart, the section is that only parties to a contract are bound of the Michigan Corporation Act concerning by that contract.”67 Strougo found that the fee- adoption of bylaws, Section 231,76 authorizes shifting bylaw could not be applicable to for- directors to amend, repeal, or adopt new by- mer shareholders whose equity interest was laws unless the articles of incorporation re- THE USE OF BYLAWS TO SHAPE PROCEEDINGS FOR SHAREHOLDER CLAIMS 45 serve those powers to the shareholders. Fur- forum selection and fee-shifting bylaws, the ther, as Delaware’s Section 109(b), Section Delaware decisions looked to whether Dela- 231 requires bylaws to not be “inconsistent” ware law recognized the validity of forum with the articles.77 selection and fee-shifting provisions in con- The second element, the permissible scope tracts and other commercial arrangements.83 of the bylaw, also should be viewed in the Under Michigan law, courts favor enforcing same manner under Delaware and Michigan contractual forum selection clauses.84 Indeed, law, but the respective statutes are not identi- by statute, Michigan courts are required cal. Section 109(b) states that bylaws should to entertain an action if the parties agree in relate “to the business of the corporation, the writing that the controversy shall be brought conduct of its affairs, and its right of powers in a Michigan court.85 Similarly, Michigan or rights or powers of shareholders.”78 Sec- courts have recognized the validity of fee- tion 231 of the Michigan Corporation Act shifting provisions in contracts.86 Thus, a provides that bylaws “may contain any pro- bylaw providing for fee-shifting would not vision for the regulation and management of be “inconsistent” with Michigan law per se. the affairs of the corporation.”79 Arguably, Finally, arbitration provisions also are fa- Delaware’s Section 109(b) seemingly affords vored and enforceable under Michigan law.87 a greater scope of permissible matters for by- Consequently, a bylaw requiring arbitration laws as it specifically references the authority of disputes is not unenforceable because [T]he to affect the “powers or rights” of sharehold- Michigan courts refuse to enforce agree- ers. Indeed, there is language in Chevron sup- ments requiring arbitration. In other words, language of porting the position that such a particular- a bylaw requiring arbitration of shareholder the Michigan ized reference is the critical authorization for intra-corporate claims should not be viewed statute is bylaws that procedurally affect shareholder as “inconsistent” with Michigan law. claims.80 However, ultimately, Chevron relies The fourth element of the Delaware deci- practically upon the same “management of the affairs sions is the holding that director-approved understood of the corporation” language that is in both bylaws are enforceable against shareholders the Delaware and Michigan statutes. Chevron who are shareholders at the time the bylaw is to authorize held: adopted or who become shareholders there- bylaws that They [the forum selection provisions] after.88 The basis for that determination is the affect the also plainly relate to the conduct of longstanding view that bylaws constitute a the corporation by channeling inter- flexible contract between the shareholders, rights and nal affairs cases into the court of the the corporation, and the directors.89 Under duties of state of incorporation, providing for Michigan law, bylaws also are considered in the opportunity to have internal affairs the contracts between a corporation and its shareholders. cases resolved authoritatively by our shareholders.90 Accordingly, the reasoning of Supreme Court if any party wishes the Delaware courts should be persuasive in to appeal. That is, because the forum interpreting Michigan law and result in di- selection bylaws address internal rector-adopted bylaws being held applicable affairs claims, the subject matter of to shareholders who either were sharehold- the actions the bylaws govern relates ers at the time that the bylaws were adopted quintessentially to “the corporation’s or who became shareholders thereafter. business, the conduct of its affairs, and Finally, Delaware courts examine wheth- the rights of its stockholders.”81 er the circumstances under which such by- Moreover, the language of the Michigan stat- laws are enacted make their enforcement in- ute is practically understood to authorize equitable or unreasonable.91 Similarly, Mich- bylaws that affect the rights and duties of igan courts also have struck down bylaws shareholders.82 Accordingly, it would appear that they found to be unreasonably adopted that as long as the bylaw relates to a claim under the circumstances.92 arising out of the internal affairs of the cor- Consequently, based on the likelihood poration, it is authorized under Section 231 that Michigan courts will uphold bylaw proof the Michigan Act. visions as the Delaware courts have so ruled, The third consideration of the Delaware directors of Michigan public corporations decisions is whether the bylaw is “not in- can be somewhat confident about adopting consistent with law” as required by Section forum selection and fee-shifting bylaws con- 109(b) of the DGCL. Michigan’s Section 231 cerning shareholder claims against the corpo- has the same requirement. In upholding the ration or its director that concern the internal 46 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

affairs of the corporation.93 Additionally, as frivolous shareholder litigation, but virtually other courts have found, the reasoning of the all shareholder actions.98 The Delaware State Delaware courts also supports the validity of Bar Corporate Law Council (the “Council”), bylaws mandating arbitration of such claims who sponsored the amendments, shared this provided the provisions contain appropriate concern because fee-shifting has the practi- procedural safeguards.94 cal effect of saddling shareholders with the risk of having to pay for the defendants’ en- Delaware Statutory Amendments tire costs of litigation, while only being able to Prohibit Bylaws That Require to recover their proportional share of any Fee Shifting and Have As potential recovery.99 The Council found this Exclusive Forums States Other particularly troubling because they viewed Than Delaware class and derivative actions “as important Delaware recently amended the DGCL to protections for stockholders and critical to prohibit corporations from having a fee- reducing investment risk and the cost of cap- shifting provision in their certificate of incor- ital.”100 The Council feared that if ATP-type poration or bylaws. The legislation also per- fee provisions became widespread, “the ef- mits certificates of incorporation and bylaws fects on stockholder litigation would be se- to restrict shareholder litigation against the vere.”101 The curtailment of such litigation, Delaware corporation exclusively to the courts of Dela- according to the Council, would cause an ware; such provisions, however, may not acute decline in the development of corpo- recently prohibit such claims from being brought in rate common law, particularly fiduciary duty amended Delaware courts. These amendments obvi- law, and the critical function of the Delaware the DGCL ously address the Delaware decisions in courts of “[g]ap filling through judicial deci- APT, Chevron, and City of Providence. One sions.”102 Further, the Council asserted that to prohibit of the stated reasons for this legislation is the absence of shareholder litigation would corporations to protect the important role of the courts in eliminate the “only method for policing from having developing and enforcing necessary director misconduct.”103 Thus, while the Delaware and officer fiduciary duties. However, the legislators recognized that fee-shifting by- a fee-shifting amendments also can be criticized as pro- laws were adopted to discourage meritless provision tectionist acts designed to avoid significant and costly shareholder litigation, in passing decrease of litigation in Delaware. There in their the amendments, they concluded that such appears to be merit in both positions. provisions went too far and would cause the certificate of suppression of justified shareholder claims Prohibiting Fee Shifting and encourage corporate misconduct.104 incorporation Section 102 of Title 8 of the Delaware Code or bylaws. was amended to add a new subsection, Sec- Permitting Forum Selection Bylaws tion 102(f), that would prohibit certificates of The new legislation also amends Title 8 of the incorporation from containing “any provi- Delaware Code by adding a new section, Sec- sion that would impose liability on a stock- tion 115, which permits certificates of incor- holder for the attorneys’ fees or expenses of poration and bylaws to require, “consistent the corporation or any other party in connec- with applicable jurisdictional requirements, tion with an intra-corporate claim.”95 The leg- that any or all intracorporate claims shall be islation additionally amends Section 109(b) of Title 8 to insert the same prohibition with brought solely and exclusively in any or all 105 respect to the permissible contents of bylaws. of the courts in this State.” This amend- Under the proposed amendments, “intracor- ment was unnecessary given the holdings in porate claims” are defined as claims, “includ- Chevron and City of Providence, which upheld ing claims in the right of the corporation, (i) exclusive forum selection bylaws. However, that are based upon a violation of a duty by a the legislation also provides that “no provi- current or former director or officer or stock- sion of the certificate of incorporation or the holder in such capacity, or (ii) as to which bylaws may prohibit bringing such claims this title confers jurisdiction upon the Court in the courts of this State.” That provision, of Chancery.”96 which appears to be the motivation behind The stated purpose of these sections is to legislation addressing forum selection, over- overturn the holding in ATP.97 ATP has returns the holding in City of Providence by pro- ceived considerable criticism as a draconian hibiting a Delaware corporation that is not measure that would not simply discourage located in Delaware from selecting the courts THE USE OF BYLAWS TO SHAPE PROCEEDINGS FOR SHAREHOLDER CLAIMS 47 of the state of its headquarters as the exclu- constitute a “binding contract” between the sive forum. corporation and its shareholders.112 Accord- According to the proponents of this pro- ingly, bylaws likely will be (and should be vision, the proposal enhances the means to viewed) as a contract under the FAA.113 avoid the cost and uncertainty of a “multi- Based upon federal pre-emption, the United forum litigation problem.”106 With respect to States Supreme Court repeatedly has struck prohibiting excluding Delaware courts as a down state laws that interfere with an agree- selected forum, the Council’s stated justifica- ment to arbitrate or treat an arbitration tion is that “if a Delaware corporation wants agreement differently than other contractual to specify a venue for intracorporate actions, provisions. As articulated by the Supreme the choice of Delaware incorporation and re- Court, this prohibition applies to state laws sulting implicit choice of Delaware corpora- that dictate the forum for resolving disputes tion law should result in a preference for Del- so as to invalidate contractual provisions aware courts to resolve disputes.”107 While it requiring arbitration of claims.114 Therefore, is true that various corporations may have the requirement of the Delaware statute that a preference for Delaware courts, the legisla- forum selection bylaws cannot exclude Dela- tion, however, mandates that Delaware courts ware courts is subject to a serious challenge be either the exclusive court or among the under the FAA because it prohibits contracts to resolve disputes exclusively in arbitration. selected courts, even if another appropriate Another jurisdiction would be more cost effective for the corporation. This provision can be char- Conclusion serious acterized as a protectionist measure to ensure Michigan corporations, especially those with concern of the Delaware courts and Delaware law firms are publicly traded securities, should consider not excluded from intra-corporate litigation. adopting bylaws that shape proceedings for prohibition Indeed, that a meaningful justification is lack- shareholders lawsuits concerning intra-cor- from porate affairs as those measures can result ing is evidence by the comments of Delaware in corporate cost and resource savings. Cer- excluding Supreme Court Chief Justice Leo E. Strine Jr., tainly, bylaw provisions designating Michi- who rationalized the mandate of Delaware Delaware gan courts or, if located in another state, court selection by indicating that the “con- the courts of the state where the corpora- courts cern is that if you let corporate management tion headquarters is located as the exclusive select a forum like their state of headquarters, from forum forum to resolve such claims will avoid the political and other considerations could be a predicament of multiple shareholder law- selection driving factor in the litigation.”108 According suits filed in different states concerning the bylaws is that to Chief Justice Strine, such a situation could same corporate action. Other bylaws, such as be adverse to the cost-benefit ratio of litiga- it may be pre- fee-shifting and exclusive arbitration, while tion because meritorious lawsuits, where somewhat effective in curtailing abusive empted by management should be held accountable, shareholder lawsuits, may face considerable will not be brought because of the perceived the Federal 109 shareholder disapproval and adverse prac- hostile forum. Does the Chief Justice really tical consequences, such as the SEC policy Arbitration mean to assert that the courts of other states against accelerating registration statements Act (the are so corrupt that meritorious shareholder for corporations that have adopted arbitra- “FAA”). litigation to remedy corporate abuses are tion provisions in their charter or bylaws.115 so frequently brushed aside that it actually Ultimately, the courts have the most effective would discourage litigation? And does this methods for reducing abusive shareholder seemingly unverifiable presumption of Chief lawsuits by modifying the corporate benefit Justice Strine really justify prohibiting cor- doctrine to require that shareholders receive porations from avoiding the cost of having meaningful relief and otherwise controlling to defend litigation in courts far from where fees.116 Additionally, Michigan arguably is a they are headquartered and where all mate- more favorable state of incorporation than rial events that are the likely subject matter of Delaware because Michigan law should 110 intra-corporate litigation occurred? permit a corporation, through its charter or Another serious concern of the prohibi- bylaws, to (a) select the courts of the state of tion from excluding Delaware courts from its headquarters as the exclusive forum for forum selection bylaws is that it may be pre- resolving inter-corporate claims, (b) provide empted by the Federal Arbitration Act (the for reasonable fee-shifting, and (c) require “FAA”).111 As set forth in Section IV, supra, arbitration of intra-corporate claims. Delaware courts have long held that bylaws 48 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

NOTES that achieve little, if anything, for stockholders while giving away overbroad liability releases for corporate defendants and paying both plaintiffs’ and defendants’ 1. Sean J. Griffith,Correcting Corporate Benefit: How to lawyers.”). Fix Shareholder Litigation by Shifting the Doctrine on Fees, 56 22. Griffith,supra note 1, at 26. BC . REV 1, 14 (2015). 2. Jill E. Fisch, Sean J. Griffith & Steven Davidoff 23. E.g., Boilermakers Local 154 Retirement Fund v Chev- Solomon, Confronting the Peppercorn Settlement in Merger ron Corp, 73 A3d 934, 943–44 (Del Ch 2013). Litigation: An Empirical Analysis and a Proposal for Reform, 24. E.g., North v McNamara, 47 F Supp 3d 635 (SD 93 Tex L Rev 557, 558 (2015). Ohio 2014); In re MetroPCS Communications, Inc, 391 3. Griffith,supra note 1, at 11. SW3d 329 (Tex App 2013). 4. Fisch, Griffith & Solomon,supra note 2, at 559. 25. E.g., North, 47 F Supp 3d at 635. 5. Id. 26. E.g, Chevron, 73 A3d at 950–51 (Del Ch 2013); North, 47 F Supp 3d at 643–45; In re MetroPCS Commu- 6. Cornerstone Research, Cornerstone Research Points to nications, Inc., 391 SW3d at 341; Groen v Safeway Inc, No Shift in M&A Litigation, at 1 (Feb. 25, 2015) (available at RG14716641 (Cal Super Ct, May 14, 2014); Miller v Beam https://cornerstone.com/Publications/Press-Releases/ Inc, No. 2014 CH 00932 (Ill Ch Ct, Mar 5, 2014); Genoud New-Report-by-Cornerstone-Research-Points-to-Shifts- v Edgen Group, Inc, No 625,244 (La Dist Ct, Jan 17, 2014); in-M-and-A-Litigation). HEMG Inc v Aspen Univ, No 650457/13, 2013 NY Misc 7. Griffith,supra note 1, at 6; Eric S. Klinger-Wilen- LEXIS 5199 (NY Sup Ct, Nov 4, 2013). Contra Robert v sky & Daniel D. Matthews, Corporate Governance: Proposed Triquint Semiconductor, Inc, 2014 WL 4147465 (Or Cir, Aug Amendments to the Delaware General Corporation Law, 29 14, 2014) (finding unenforceable a forum selection by- Insights, 12 (Apr 2015). law because it was adopted when the directors approved 8. S. Griffith,supra note 1, at 9; Jessica Erickson, the merger); Galaviz v Berg, 763 F Supp 2d 1170 (ND Cal Corporate Governance in the Courtroom: An Empirical Analy- 2011) (invalidating an exclusive forum selection bylaw sis, 51 Wm & Mary L Rev 1749, 1754–68 (2010). based upon its conclusion that such a provision must be 9. S. Griffith,supra note 1, at 7. in the corporation’s charter). 10. Id. 27. City of Providence v First Citizens BancShares, Inc, 99 11. Fisch, Griffith & Solomon,supra note 2, at 565; A3d 229, 234–37 (Del Ch 2014). Griffith,supra note 1, at 15. 28. Claudia H. Allen, Fee-Shifting Bylaws: Where Are 12. Griffith,supra note 1, at 7. We Now?, Corporate Law & Accountability Report 13. Id. at 10; see Fisch, Griffith & Solomon,supra (Bloomberg BNA), Jan. 16, 2015. note 2, at 559 & n.7 (shareholders received only supple- 29. Id.; e.g., Strougo v Hollander, 111 A3d 590, 593 (Del mental disclosures in 75–88% of settlements between Ch 2015). 2009 through 2012); Erickson, supra note 8, at 1802–03. 30. The Private Securities Litigation Reform Act of 14. Fisch, Griffith & Solomon,supra note 2, at 559 1995 § 21(D)(c)(3), 15 USC 78u-4(c). & n.7. 31. E.g., ATP Tour, Inc v Deutcher Tennis Bund, 91 15. Id. at 561, 585. A23d 554, 559–60 (Del 2014) (upholding fee-shifting 16. S. Griffith,supra note 1, at 2, 15–16, 20–21; bylaw for non-stock corporation). Fisch, Griffith & Solomon,supra note 2, at 567 (“[T] 32. Examples of such provisions can be found in he courts have determined that plaintiffs’ lawyers in Claudia H. Allen, Bylaws Mandating Arbitration of Stock- shareholder litigation can have their fees paid directly by holder Disputes?, 39 Del J Corp L 751, 802–08 (2015). the defendant corporation if the litigation results in a 33. See American Express Co v Italian Colors Restaurant, ‘corporate benefit.”). __US__, 133 S Ct 2304 (2013). 17. S. Griffith,supra note 1, at 25; Mark Wolinsky & 34. Katz v CommonWealth REIT, No 24-C-13-001299 Ben Schireson, Deal Litigation Run Amok: Diagnosis and (Cir Ct Balt, Feb 19, 2014); Corvex Mgmt LP v Common- Prescription, 47 Rev Sec & Commodities Reg, no. 1, Jan. Wealth REIT, No 24-C-13-001111, 2013 MD Cir Ct 8, 2014. Defendants acquiesce in the settlement of these LEXIS 3 (Feb 19, 2013); Delaware County Employees Ret usually baseless lawsuits to avoid the risk of an injunc- Fund v CommonWealth REIT, No 13-10405-DJC, 2014 US tion and to obtain broad releases of claims applicable to Dist LEXIS 40107 (D Mass, Mar 26, 2014). all shareholders. Thus, for a relatively small fee to share- 35. E.g., Glancy v Taubman Ctrs, Inc, 373 F3d 656, 674 holders’ counsel, the defendants gain immunity from n16 (6th Cir 2004); In re Consumer Powers Co Derivative virtually all possible claims. Litig, 132 FRD 455, 461 (ED Mich 1990); Russ v Federal 18. Fisch, Griffith & Solomon,supra note 2, at 559 Mogul Corp, 112 Mich App 449, 455 n 1, 316 NW2d 454 & n.9, 561. (1982). See Stephen H. Shulman, Cyril Moscow & Margo 19. Id. at 561 (because settlement caused supple- Rogers Lesser, Michigan Corporation Law and Practice mental disclosures do not appear to have any benefit to § 1.4 (2016 Supp.). shareholders, “the basis upon which courts are awarding 36. 73 A3d 934 (Del Ch 2013). fees to plaintiffs’ counsel disappears”). 37. Del Code Ann tit. 8, § 109(b). 20. Griffith,supra note 1, at 25; see Fisch, Griffith & 38. Boilermakers Local 154 Retirement Fund v Chevron Solomon, supra note 2, at 567. Corp, 73 A3d 934, 950–51 (Del Ch 2013). 21. Griffith,supra note 1, at 2; see Fisch, Griffith & 39. Id. at 939. Solomon, supra note 2, at 559 (“The dynamic, in which 40. Id. at 951 (parenthetical in original). every deal is challenged but only the lawyers get paid, has led to widespread skepticism concerning the value 41. Id. at 953. of public company merger litigation among both aca- 42. Id. at 954–55. demic and professional commentators.”); Wolinsky & 43. Id. at 954–58. Schireson, supra note 17, at 1–2 (“[T]he system is bro- 44. Id. at 955. ken…shareholder plaintiffs are imposing a dead weight 45. Id. at 955–56. on society and an unwarranted burden on corporate 46. Id. at 956–57. America and the courts.”); Mark Lebovitch & Jeroen van Kwawegen, Of Babies and Bathwater: Deterring Frivolous 47. Id. at 957. Stockholder Suits Without Closing the Courthouse Doors to Le- 48. Id. gitimate Claims, 40 Del J Corp L 1, 3–4 (2015)(“[T]he real 49. Id. problem is the percentage of these stockholder lawsuits 50. Id. at 959. THE USE OF BYLAWS TO SHAPE PROCEEDINGS FOR SHAREHOLDER CLAIMS 49

51. 99 A3d 229 (Del Ch 2014). (2007) (“Michigan public policy favors arbitration to 52. Id. at 233. resolve disputes.”); Kauffman v Chicago Corp, 187 Mich 53. Id. at 233–34. App 284, 290–92, 466 NW2d 726 (1991). 54. Id. at 234–36. 88. See, supra, notes 43–48, 53 & 61. 55. 91 A3d 554 (Del 2014). 89. Id. 56. Id. at 557–58. 90. See Allied Supermarkets, Inc v Grocer’s Dairy Co, 45 57. at 558. Mich App 310, 315, 206 NW2d 490 (1973) (“The by- Id. laws of a corporation, so long as adopted in conformity 58. Id. with state law, constitute a binding contract between 59. Id. at 558–59. the corporation and its shareholders.”); Ward v Idsinga, 60. Id. at 560. No 302731, 2013 Mich App LEXIS 1427 at *3 (Aug 15, 61. Id. 2013) (unpublished) (citing Cole v Southern Michigan Fruit 62. Id. Ass’n, 260 Mich 617, 621–22, 245 NW 534 (1932)); Shul- 63. 111 A3d 590 (Del Ch 2015) man, Moscow & Lesser, supra, note 35, at § 2.8. 64. Id. 592. 91. See, supra, notes 50, 54 & 60. 65. Id. 92. Shulman, Moscow & Lesser, supra note 35, at § 2.8. 66. Id. at 597. 93. Of course, directors should be mindful that by- 67. Id. laws that are drafted similar to the bylaws upheld by the 68. Id. Strougo does try to reconcile its decision with Delaware cases are more likely to be upheld by Michigan Chevron regarding the applicability of bylaws adopted courts. after the shareholder’s equity interest is eliminated by 94. See Shulman, Moscow & Lesser, supra note 35 at indicating that the language in Chevron should be under- § 2.8. For an informative discussion regarding the con- stood as dicta. Id. at 598. tents of arbitration provisions, see Allen, supra note 32, 69. Delaware General Assembly, Senate Bill 75, Ex- at 798–808. planation of the Delaware State Bar Corporation Law Council 95. SB 75, 148th Assemb. (Del 2015) (introduced Legislative Proposal, at 2. Apr. 29, 2015, passed Jun. 11, 2015) (“An Act to Amend 70. Id. Title 8 of the Delaware Code Relating to the General 71. Id. Corporation Law”). 72. See Boilermakers Local 154 Retirement Fund v Chev- 96. See id. ron Corp, 73 A3d 934, 950–51 (Del Ch 2013). 97. Explanation of Council, supra note 69, at 1. 73. Id. 98. Griffith,supra note 1, at 3 & n.13, 28–31; Lebo- 74. See Strougo v Hollander, 111 A3d 590, 597 (Del Ch vitch, supra note 21, at 5, 13–15; J. Robert Brown, Jr., 2015). Shifting Back the Focus: Fee Shifting Bylaws and a Need to 75. Id. Return to Legislative Intent, at14 (University of Denver, 76. MCL 450.1231. Strum College of Law, Legal Research Paper Series, 77. Id. Working Paper No. 14-65), available at http://papers. ssrn.com/sol3/papers.cfm?abstract_id=2547094. 78. Del Code Ann tit. 8 § 109(b). 99. Explanation of Council, supra note 97, at 3-4. 79. MCL 450.1231. 100. Id. at 2. 80. See Boilermakers Local 154 Retirement Fund v Chevron Corp, 73 A3d 934, 950–51 (Del Ch 2013) (“As 101. Id. at 3-4. a matter of easy linguistics, the forum selection bylaws 102. Id. at 4-5. address the ‘rights’ of the stockholders, because they 103. Id. at 6. regulate where stockholders can exercise their right to 104. Id. at 3-6, 8. bring certain internal affairs claims… .”). 105. Initially, Section 115 makes clear that it is not 81. Id at 951. intended to confer jurisdiction upon the selected courts, 82. See Shulman, Moscow & Lesser, supra note 35, only to permit a corporation to choose a venue. A at § 2.8. bylaw enacted under Section 115 would be applied on 83. See ATP Tour, Inc v Deutcher Tennis Bund, 91 A3d a case-by-case basis as the courts would need to deter- 554, 558 (Del 2014); Chevron, 73 A3d at 954–55. mine whether jurisdiction existed in order to enforce the 84. See e.g., Turcheck v Amerifund Fin, Inc, 272 Mich forum selection provision. App 341, 346, 725 NW2d 684 (2006) (“It is undisputed 106. Explanation of Council, supra note 69, at 9. that Michigan public policy favors the enforcement of 107. Id. contractual forum-selection clauses and choice of law 108. Chief Justine Leo E. Strine, Address to the Coun- provisions.”). cil of Institutional Investors, Spring 2015 Conference (Mar 85. MCL 600.745(a). For a forum selection provi- 30, 2015) as reported by Securities Regulation & Report sion to be enforceable, the Michigan statute requires (BNA), Vol 47, No 14, at 723( Apr 6, 2015). only that (a) the court has the power to hear the action, 109. Strine, Address to Council of Institutional Investors, (b) Michigan is a “reasonably convenient place” for the supra note 108, at 723. These pro-shareholder rights trial of the action, and (c) the agreement is not obtained comments from an official of a state that historically by “misrepresentation, duress, the abuse of economic had been known as a pro-business bastion somewhat power, or other unconscionable means.” Accordingly, a demonstrates the growing influence of activist share- bylaw of a Michigan corporation selecting the courts of holders. Michigan for intracorporation claims should satisfy the 110. In fact, Justice Strine’s comments seem to be requirements of section 745(2). a particularly hollow justification as the well-developed 86. See e.g., Peabody v DiMeglio (DiMeglio Estate), 306 law concerning forum nonconveniens generally would Mich App 397, 409, 856 NW2d 245 (2014) (“a contract result in intra-corporate claims being transferred to the provision providing for attorney fees is a valid exception court where the corporation is headquartered given that to the American rule regarding attorney fees.”); Grace the events that are the subject matter of the lawsuit nor- v Grace, 253 Mich App 357, 370–71, 655 NW2d 595 mally would have taken place there and the majority of (2002). the material witnesses likely will be located there. See 28 87. See e.g., Rooyakker & Sitz, PLLC v Plante & USC 1404; 1 Mich Pl & Pr § 2.49 (2d ed.). Moran, PLLC, 276 Mich App 146, 155, 742 NW2d 409 111. 9 USC 1 et seq. 50 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

112. E.g., Strougo v Hollander, 111 A3d 590, 597 (Del Raymond W. Henney is Ch 2015) ( “Corporate charters and bylaws are contracts Co-Chair of the Securi- among a corporation’s shareholders [and the] rules that govern the interpretation of statutes, contracts, and ties and Corporate Gover- other written instruments apply to the interpretation nance Litigation Practice of corporate charters and bylaws.”); City of Providence v Group of Honigman Miller First Citizens BancShares, Inc, 99 A3d 229, 233–34 (Del Schwartz and Cohn LLP, Ch 2014) (“Bylaws of a Delaware corporation constitute Detroit, Michigan. He liti- part of a binding broader contract among directors, officers, and stockholders.”);Boilermakers Local 154 Retire- gates a wide variety of securities cases, ment Fund v Chevron Corp, 73 A3d 934, 957 (Del Ch 2013) including representing major corpora- (“Bylaws constitute a binding part of the contract be- tions in class-action shareholder suits, tween a Delaware corporation and its stockholders.”); see individuals and entities before the Secu- also Lawrence A. Hamermesh, Consent in Corporate Law, rities and Exchange Commission, and Bus L, Winter 2014/2015, at 161, 163 (“For a hundred brokerage firms in customer disputes years or more, courts in Delaware and elsewhere have indicated that when you buy stock, you are entering into and before regulatory organizations. a contract, to which you, the corporation, and the other stockholders are parties.”). 113. Allen, supra note 32 at 773–75. While beyond the scope of this article, it should be noted that some commentators (wrongly) disagree with the premise that bylaws should be considered contracts for the purposes of the FAA. See Ann M. Lipton, Manufactured Consent: The Problem of Arbitration Clauses in Corporate Charters and Bylaws, (forthcoming 104 Geo L J) (2015). However, the argument against the application of the FAA ignores the clear language of Delaware courts and United States Su- preme Court precedent and would require some kind of heighten consent to arbitration, which is squarely con- trary to the prevailing law. Indeed, that argument cannot co-exist with even the Delaware decisions upholding forum selection and fee-shifting bylaws. 114. See e.g., AT&T Mobility LLC v Concepcion, __US__, 131 S Ct 1740, 1745–46, 1749 (2011); Preston v Ferrer, __US__, 128 S Ct 978, 981 (2008) (invalidating under the FAA a state statute requiring that certain claims first be determined in state administrative proceedings). 115. Allen, supra note 32, at 779–81, 788–94. 116. For example, commentators have suggested that the Delaware legislature should consider reforming the corporate benefit rule for awarding attorney fees to shareholders’ counsel or eliminate breach of fiduciary duty claims based upon disclosures in deference to federal and state securities laws that regulate the same matters. See Griffith,supra note 1, at 1; Fisch, Griffith & Solomon, supra note 2, at 557. Indeed, after the submis- sion of this article, but before its publication, Delaware Chancery Court Judge Travis Laster in Acevedo v Aeroflex Holding Corp, No 7930-VCL (July 8, 2015 bench opinion) refused to approve a settlement of a derivative action and the award of attorneys fees to plaintiff’s counsel because (1) the only benefit to shareholders was supplemental disclosures and (2) plaintiff essentially admitted that the defendants acted appropriately. Using Unique Registered Numbers to Facilitate Business Transactions: A Perspective From How Business Licenses Operate In China

By Fang Liu

Introduction registration authority will issue a new busi- 11 In China, once a company is legally estab- ness license to replace the old one. lished, the registration authority issues a Generally, a company is issued two cop- business license to the company. The busi- ies of its business license: the original copy 12 ness license is a one-page printed instrument and the duplicate copy. The duplicate copy and lists a company’s basic information: contains the items listed on the original copy 13 the company’s registered number,1 name,2 and has the same effect as the original copy. legal representative,3 domicile,4 registered Additionally, the duplicate copy also shows capital,5 actual paid-up capital,6 type of com- “whether the company passed the annual pany,7 business scope,8 establishment date,9 examination of government agencies, which and duration of operation.10 In addition, the indicates to some extent whether the com- 14 business license is affixed with the registra- pany is in good standing.” In practice, the tion authority’s seal and indicates the issu- original copy is prominently displayed in 15 ance date. When an item listed on the busi- the company’s place of business, while the ness license changes, a company needs to go duplicate copy operates like a company’s ID through the required filing process, and the and is widely used in business activities.16

The Original Copy of the Business License for a Company17 (Sample)

51 52 THE MICHIGAN BUSINESS LAW JOURNAL —SUMMER 2015

The Duplicate Copy of the Business License for a Company (Sample)

In China, the State Administration for Industry & Commerce From a regulatory perspective, business the same throughout a business entity’s licenses can help governments supervise duration, even if the business entity changes (SAIC) governs companies and regulate the market. From its name, domicile, business scope, etc.24 And company the market’s perspective, business licenses it will not be re-issued to any newly estab- registration provide market participants readily accessi- lished entity even if the original entity has ble information about a company and reduce ceased to exist.25 for the entire transaction costs from the start. Because the According to the Coding Rules, a regis- country. information listed on a business license sum- tered number is composed of fifteen digits.26 marizes what is in the company’s filing with The first six digits indicate the registration the registration authority,18 businesspersons authority,27 and these digits correspond to often look at a company’s business license The Administrative Division Code of China.28 and ask for a photocopy before they enter The next eight digits are the numbers allo- into a negotiation or transaction.19 cated to business entities established under This article will focus on the “unique reg- that particular registration authority.29 The istered number” listed on a business license last digit is the check digit,30 which is used and explain why the “unique registered for error detection.31 number” should be used in the United States For example, if a company’s registered to minimize business transaction costs. number is “110105 18765432 6,” the “110105” corresponds to the administrative code of The Unique Registered Number System in the ChaoYang District of Beijing. It indicates China that the Beijing registration authority—the In China, the State Administration for Indus- ChaoYang District Branch—has issued the try & Commerce (SAIC) governs company company’s initial business license. The num- registration for the entire country.20 The ber “18765432” is the number assigned to this SAIC began requiring the unique registered particular company. The number “6” is the number in 1989.21 In April 2007, it issued the check digit. According to the Coding Rules, current Coding Rules of Registration Number no other business entity will ever have the of Administration for Industry and Commerce same registered number.32 (hereinafter “Coding Rules”).22 According The registered number under the Cod- to the Coding Rules, every business entity ing Rules can provide further information. If obtains a registered number when it is estab- the first number of the eight-digit part is “0,” lished, and the number is unique in the coun- “1,” “2,” or “3,” the business entity is a do- try.23 Also, the registered number remains mestically funded enterprise.33 If it is “4” or USING UNIQUE REGISTERED NUMBERS TO FACILITATE BUSINESS TRANSACTIONS 53

“5,” the business entity is a foreign-invested the debtor’s name after the initial filing can enterprise.34 And if it is “6,” “7,” “8,” or “9,” still mislead subsequent creditors.48 Under the business entity is an individual industrial UCC 9-507(c), if the search under the debtor’s and commercial household.35 current name cannot disclose the financing Since the Coding Rules were issued in statement, the financing statement becomes April 2007, they have been implemented “not effective to perfect a security interest in 36 throughout mainland China. According to collateral acquired by the debtor more than the statistics issued by the SAIC on January four months” after the change of the name.49 37 5, 2011, there were 10,820,865 domestically The four-month grace period under the UCC funded enterprises and 9,087,728 (83.98%) 9-507(c) requires the creditor who has a secu- of them had been issued business licenses rity interest in the debtor’s after-acquired col- with fifteen-digit registered numbers (either lateral50 to track the debtor’s change of name at establishment or at annual inspection). and to make an amended filing.51 In addition, In Shanghai, all 789,983 of the domestically within the four-month grace period, a subse- funded enterprises (100%) have been issued quent creditor could be tricked into lending business licenses with fifteen-digit registered money to the debtor because a search under numbers. In Beijing, 559,490 enterprises out of 643,381 (86.96%) have obtained business the debtor’s current name would not discov- licenses with fifteen-digit registered num- er the financing statement under the debtor’s A unique bers.38 old name. A company may change its name, domi- registered Why the Unique Registered Number System cile, business scope, etc., but the unique reg- number can istered number will remain the same.52 The Should be Adopted in the United States help market In the United States, a company’s name does unique registered number clarifies a com- 53 not contain the name of a state where it is pany’s identity. It reduces the confusion participants incorporated.39 Companies coming from dif- caused by a company’s changing its name, identify a ferent states are likely to have the same or a company’s name being incorrectly spelled, similar names. In addition, a company may or companies from different places having company experience many changes in its duration. A the same or similar names. A unique number and track its unique registered number can help market also provides a way to search a company’s changes. A participants identify a company and track its public filing.54 If a debtor had a unique reg- changes. A good example can be found in the istered number throughout the country, and good example field of secured transactions.40 if the Article 9 filing office could provide a can be found Article 9 of the Uniform Commercial search index by using unique registered in the field Code (UCC) is a vehicle to inform interest- numbers, it would be much easier for credi- ed parties that a debtor might have granted tors to pinpoint a debtor, and subsequent of secured 41 a security interest in certain property. To creditors could easily find a financing state- transactions. create an effective security interest, the UCC ment filed under either the debtor’s old name Article 9 requires parties to file a sufficient or its current name.55 42 financing statement in the filing office. A Implementing the unique registered num- sufficient financing statement must include ber would probably require a federal regula- (1) the name of the debtor, (2) the name of tory program. However, in the United States, the creditor, and (3) a description of the col- the “federal government may not compel the lateral.43 However, any error in the debtor’s States to enact or administer a federal regula- name will be presumed seriously mislead- tory program.”56 With this background, there ing and may cause an ineffective filing.44 For example, in In re Tyringham Holdings, Inc,45 a are several ways to reach this goal: the feder- financing statement involved $310,925 worth al government could exercise its tax power to of property.46 Because the creditor incorrectly adopt the unique number system, or to use its listed the debtor’s name as “Tyringham Hold- spending power to encourage states to adopt 57 ing” rather than “Tyringham Holdings, Inc.,” such a system. Alternatively, each state the court held that the filing was ineffective could require that the companies registered because an official search under the debtor’s within its jurisdiction use a unique registered name could not reveal the creditor’s financ- number, and if that number is connected to ing statement.47 the state’s abbreviation (e.g., DE 5678 or NY Even if the debtor’s name is correctly 9012), the unique registered number can still stated in a financing statement, a change of be recognized throughout the country. 54 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

Conclusion total amount of capital contribution subscribed by all the shareholders and that the registered capital of a joint A unique registered number can clarify stock company is the total amount of share capital sub- a company’s identity and avoid confusion scribed by all the sponsors, or the actual total paid-up share capital if the company is established through share caused by similar names or when a company offers). changes its name. In particular, a unique reg- 6. See Company Law, art. 26, 80 (stating that actual istered number system can simplify a UCC paid-up capital is the amount of capital that sharehold- Article 9 filing and help creditors to track a ers have paid to the company). 7. Company Law, art. 2 (stating that there are two debtor and discover financing statements major types of companies: limited liability companies filed under both the debtor’s old name and and joint stock companies). new name. If the unique registered number 8. See Company Law, art. 12 (requiring the business can be adopted as a search index in Article scope of a company to be specified in itsarticles of association, and where any item shall be subject to approval of 9 filings, then subsequent filing due to debt- special laws or administrative regulations, the approval or’s name changes will become unnecessary shall be obtained pursuant to such law or regulations for and thus significantly reduce creditors’ time that item). 9. See Company Law, art. 7 (stating that the date of and costs on keeping track of debtor’s name issuance of a business license for a company is the date change. If the unique registered number of establishment of the company). system can help reduce the transaction cost, 10. See Company Law, art. 180 (stating that the dura- then why does the United States not make tion of operation indicates when a company’s existence will terminate). use of if? 11. Company Law, art. 7. 12. Regulations on the Company Registration Ad- ministration, supra note 2, art. 63. 13. Id. NOTES 14. Daniel F. Roules & Changshun Chen, Overview 1. See Gongshang Xingzheng Zhucehao Bianzhi of Legal Issues in China’s Medical Device Sector 3 J Health & Guize De Tongzhi [Notice of the Coding Rules of Life Sc. L 76, 78 (2010). Registration Number of Administration for Industry 15. Id. and Commerce] (hereinafter “Notice of the Cod- 16. See Tao Jingzhou & Owen Nee, Mergers and Ac- ing Rules”) (promulgated by the St. Admin. for In- quisitions in China, WL BLC-MA § 3:8 (2011) (“In any dustry & Commerce, Mar. 39, 2007, effective July 1, due diligence exercise, one begins with the constituent 2007) (China) (stating that a company only has one documents of the company… . As one would ask for registered number in its duration, even it changes the Certificate of Incorporation and By-laws of a [U.S.] its name or domicile), available at http://hk.lexiscn. corporation, in China, one must ask to see the Busi- com/law/law-chinese-1-248190.html?keyword=&t_ ness License and Articles of association.”); see also How kw=&eng=0&access=content_detail&lang=cn. to Verify Your Chinese Buyers, Partners, or Suppliers, Import 2. See Gongsi Dengji Guanli Tiaoli [Regulations on Export Business (June 10, 2010), http://importexport- the Company Registration Administration] art. 11 (stat- business.blogspot.com/2010/06/how-to-verify-your- ing that a company can only have one name at one time) chinese-buyers.html. (promulgated by St. Council, June 24, 1994, revised 17. See Richard Hoffmann, Examining a Chinese Dec. 18, 2005, effective Jan. 1, 2006 ) (China), available at Company Business License, China Briefing (Dec. 8, 2009), http://hk.lexiscn.com/law/administrative-regulations- http://www.china-briefing.com/news/2009/12/08/ of-the-peoples-republic-of-china-on-company-registra- examining-a-chinese-company-business-license.html. tion-revised.html?eng=0. 18. See Company Law, art. 7, 199. 3. Qiye Faren Dengji Guanli Tiaoli Shixing Xize 19. See Daniel F. Roules & Changshun Chen, Over- [Detailed Implementation Rules for the Administrative view of Legal Issues in China’s Medical Device Sector 3 J. Regulations on the Registration of Enterprise Legal HEALTH & LIFE SCI. L. 76, 78 (2010) (“Obtaining a copy Persons] art. 25 (promulgated by the St. Admin. for of the current business license of the target company is Industry & Commerce, Nov. 3, 1988; revised Dec. 25, imperative in any due diligence investigation.”). 1996, Dec. 1, 2000; effective Dec. 1, 2000) (China), available at http://hk.lexiscn.com/law/law-chinese-1-1885. 20. Regulations on the Company Registration Ad- html?keyword=&t_kw=&eng=0&access=content_ ministration, art. 5. detail&lang=cn; see also Minshi Susong Fa [Civil Proce- 21. Guanyu (Qiye Faren Yingye Zhizhao) Zhucehao dure Law] art. 38 (stating that the legal representative is He (Yingye Zhizhao)Zihao Tongyi Bianma Shiyong the responsible person who acts on behalf of the legal De Tongzhi [Notice about the registered number person) (promulgated by Nat’l People’s Cong., Apr. 9, on the business license] (issued by the St. Admin. 1991; revised Oct. 28, 2007, Aug. 31, 2012; effective for Industry & Commerce, Apr. 24, 1989, repealed Aug. 31, 2012) (China), available at http://hk.lexiscn. June 30, 2004) (China), available at http://hk.lexiscn. com/law/civil-procedure-law-of-the-peoples-republic- com/law/law-chinese-1-1904.html?keyword=&t_ of-china-revised-in-2012.html?eng=0. kw=&eng=0&access=content_detail&lang=cn. 4. See Gongsi Fa [Company Law] art. 10 (stating that 22. Gongshang Xingzheng Guanli Shichang Zhuti a company’s domicile is its principal place of business) Zhucehao Bianzhi Guize [Coding Rules of Registration (promulgated by the Standing Comm. Nat’l People’s Number of Administration for Industry and Com- Cong., Dec. 29, 1993; revised Dec. 25, 1999, Aug. 28, merce] (hereinafter “Coding Rules”) (issued by the St. 2004, Oct. 27, 2005; Dec. 28, 2013; effective Mar. 1, Admin. for Industry & Commerce No. 79, 2007), avail- 2014) (China), available at http://hk.lexiscn.com/law/ able at http://hk.lexiscn.com/law/law-chinese-1-248190. company-law-of-the-peoples-republic-of-china-revised- html?keyword=&t_kw=&eng=0&access=content_ in-2013.html. detail&lang=cn. 5. See Company Law, art. 26, 80 (stating that the 23. Coding Rules, § 5.1. registered capital of a limited liability company is the 24. Coding Rules, § 5.3. USING UNIQUE REGISTERED NUMBERS TO FACILITATE BUSINESS TRANSACTIONS 55

25. Coding Rules, § 5.4. Fang Liu is an associate 26. Coding Rules, § 4.2. with Dickinson Wright PLLC 27. See id. (stating that the number “100000” indi- in Ann Arbor, Michigan. She cates the State Administration for Industry and Com- graduated from Peking Uni- merce). 28. Quhua Daima He Chengxiang Huafen Daima versity School of Law with [Codes for the Administrative Division of the People’s an LL.B. degree in 1999. Ms. Republic of China] (issued by the National Bureau of Liu was a corporate attorney Statistics of China, 2010), available at http://www.stats. with nine years of legal experience in China gov.cn/tjbz/cxfldm/2010/index.html. before she came to the United States. Ms. 29. Coding Rules, § 4.3. Liu received her J.D. degree, magna cum 30. Coding Rules, § 4.4. laude, from Western Michigan University 31. Check Digit, Wikipedia.org, http://en.wikipedia. org/wiki/Check_digit (“A check digit is a form of re- Cooley Law School and an LL.M. degree dundancy check used for error detection, the decimal with a business-law certificate from Uni- equivalent of a binary checksum. It consists of a single versity of California, Berkeley, School of digit computed from the other digits in the message.”). Law. Ms. Liu is licensed in Michigan, New 32. Coding Rules, § 5.1. York, District of Columbia, and California. 33. Coding Rules, § 4.3(1). 34. Coding Rules, § 4.3(2); see also supra note 66, 67, 68, 69 (introducing the foreign-invested enterprises). 35. Coding Rules, § 4.3(3). 36. See Guanyu Neizi Qiye Zhucehao Guifan Qin- gkuang de Tongbao (Report on Implementation of the Registration Number Over Domestically Funded Enter- prises) (issued by the St. Admin. for Industry & Com- merce, Jan.13, 2011), available at http://www.saic.gov.cn/ qyj/nbtb_1/201101/t20110113_103472.html. 37. Id. 38. Id. 39. See Del. Gen. Corp. Law § 102; see also Model Bus. Corp. Act § 4.01. 40. Black’s Law Dictionary, supra note 42, at 1475 (stating that secured transaction is “[a] business arrangement by which a buyer or borrower gives collateral to the seller or lender to guarantee payment of an obligation”). 41. William H. Lawrence, Understanding Secured Transactions, 138 (4th ed. 2007). 42. UCC 9-501(a), 9-502(a). 43. UCC 9-502(a). 44. Id. at 139. 45. In re Tyringham Holdings, Inc, 354 BR 363, 368 (Bankr ED Va 2006). 46. Id. 47. Id. at 368. 48. Lawrence, Supra note 41, at 140. 49. UCC 9-507(c). 50. UCC 9-204(a). 51. Lawrence, Supra note 41, at 142. 52. See Notice of the Coding Rules, supra note 1, art. 3(6). 53. Id. 54. See Coding Rules, supra note 22, at § 1. 55. Even if the debtor is an individual rather than an organization, it is still not a problem in China because every citizen who is 16 or older is required to apply for a resident identity card, and a citizen under the age of 16 may apply for a resident identity card. And a citizen’s identity number is a unique and permanent identity number. See Jumin Shenfenzheng Fa [Law on Resident Identity Cards] art. 2, 3 (promulgated by the Standing Comm. Nat’l People’s Cong., June 28, 2003; revised Oct. 29, 2011; effective Jan. 1, 2004) (China), available at http://hk.lexiscn.com/law/law-chinese-1-1385425. html?keyword=&t_kw=&eng=0&access=content_ detail&lang=cn. 56. New York v United States, 505 US 144, 188 (1992). 57. Id. at 167. Recent Cases Regarding Noncompetition Agreements

By Michael S. Callahan

Introduction the facts and trial court rulings of the case Noncompetition agreements continue to be before it. permissible under Michigan law. However, The trial court ruled that while the dura- two recent Michigan Court of Appeals cases, tion and geographical scope elements were Huron Technology Corp v Sparling1 and Asker reasonable, the language referencing “any v Nasir2 provide some insight into how nar- products or service competitive with a prod- rowly a court can interpret a noncompetition uct or service offered by the Company” was agreement. an unreasonably broad prohibition on the 3 The starting point for construing a non- line of business. The trial court also ruled competition agreement under Michigan law that the noncompetition agreement did not is MCL 445.774a(1), the statute (in effect since protect the former employer’s reasonable 1985) that authorizes noncompetition agree- competitive business interests. However, the ments: court of appeals did not explicitly address An employer may obtain from an this ruling. employee an agreement or covenant The court of appeals upheld the trial which protects an employer’s reason- court’s dismissal, explaining that a former able competitive business interests employee may be prohibited from working and expressly prohibits an employee for a business that, considered in its entirety, from engaging in employment or was in competition with the new employer. a line of business after termination “But in this case, the non-compete agree- of employment if the agreement or ment “prohibits defendant (former employ- covenant is reasonable as to its dura- ee) from working for a business that offers tion, geographical area, and the type a single product or service that is “competi- of employment or line of business. tive” with any products or services offered To the extent any such agreement or by plaintiff (former employer), regardless of covenant is found to be unreasonable whether the business (of new employer) is in any respect, a court may limit the in actual competition with plaintiff. …The agreement to render it reasonable in non-compete agreement therefore prohibits light of the circumstances in which it defendant from working for any business was made and specifically enforce the that is in remote competition with plaintiff, agreement as limited. which is unreasonably restrictive.”4 The two cases discussed below focus on After upholding the trial court’s ruling different portions of this statutory language; that the line of business restriction was un- the first case addresses the meaning or scope reasonable, the court of appeals pointed out of “line of business,” and the second case that the trial court erred in failing to impose deals with “reasonable competitive business a reasonable line of business restriction, but interest.” that this error was harmless because the trial court also ruled that plaintiff’s former em- Line of Business ployer and defendant’s new employer were In Huron Technology Corp, the Michigan not competitors. Any reasonable restriction Court of Appeals clearly indicated that for could only restrict defendant from working a noncompetition agreement to be enforce- with a competitor in plaintiff’s line of busi- able, it may only protect the employer’s rea- ness, so even a reasonable line of business re- sonable competitive business interests and striction would not prevent defendant from must be reasonable in duration, geographi- working for the new employer. cal scope, and line of business. The court of An unanswered issue from the Huron appeals reviewed the caselaw explaining the Technology case is how much of a product (or meaning of the phrase “reasonable competi- service) overlap must there be to find that tive business interest” and then focused on two entities are in competition with each 56 RECENT CASES REGARDING NONCOMPETITION AGREEMENTS 57 other. In the Huron Technology case, the plain- then went to work for plaintiff until June tiff’s former employer’s business was charac- 2012). The fact that plaintiff and its affiliate terized as “highly modified conveyors that are separate entities may help rationalize that create dangerous conditions for operators” plaintiff’s line of business was genuinely dis- or “custom conveyors,” while the business tinct and different from that of the new em- of the new employer “manufactures more ployer, but one can understand why plaintiff standardized conveyors and refuses to get filed suit against a former employee with ap- involved in high risk projects” or “standard proximately 26 years’ experience who went conveyors.”5 Without knowing very much to work for a third party that appeared to be about the conveyor industry, one could plau- in the same line of business as the company sibly see that any given customer might pick for which the former employee worked from either plaintiff’s or new employer’s prod- 1986 through 2008. ucts but not both for a given project, so that even though the products offered are not the Reasonable Competitive Business same, clearly there is competition going on Interest in terms of securing orders from customers. The second recent case to shed light on non- The similarity of products offered only inten- competition agreements is Asmi v Nasir. This sifies what is arguably already a very com- consolidated case involved a number of petitive scenario. If a customer has to select commercial disputes between three doctors In many cases, one vendor over another for a given project, and their related professional corporations. then the level or degree of product similarly Included among the issues was the enforce- the reasonable between the vendors is not nearly as impor- ability of a noncompetition agreement competitive tant as the fact that both vendors call on the against one of the doctors that prohibited the business same market segments. Apparently the trial doctor (Dr. Raza) from practicing medicine court in Huron Technology was satisfied that within ten miles for two years following his interest the former employer and new employer employment by a professional corporation. will be called on separate market segments and con- There was no dispute that these restrictions cluded that they were not competitors. One were reasonable (at least in the abstract) and apparent, can only speculate as to why the court of zp- that Dr. Raza violated both the duration and but in all peals dealt at length with finding the line of geographic scope restrictions. Apparently events, you business restriction was unreasonable only there was no issue regarding the line of busi- to indicate that a reasonable line of business ness, e.g. practice of medicine. The trial court must be sure restriction would have no impact; if the new dismissed the claim against Dr. Raza because to separately employer is not a competitor of the former the former employer did not have a “rea- employer, then presumably any noncompeti- sonable competitive business interest.” The address it tion agreement does not come into play, re- former employer argued that it had a reason- whenever you gardless of whether it is or is not reasonable. able competitive business interest in continu- are dealing It is worth noting that the court of appeals ing to solicit and obtain referrals to its office did not rely on the small number of overlap- from primary care doctors. The Michigan with ping products in upholding the trial court’s Court of Appeals ruled the former employ- noncompetition finding that the former employer and new er’s restrictions did not protect the stated employer were not competitors; the court of reasonable competitive business interest agreements. appeals ruled only that the trial court’s find- because the restrictions bore no relevance to ing was not clearly erroneous, and then used soliciting/obtaining referrals from primary that ruling as basis to find harmless error by care doctors. The former employer’s actions the trial court for not revising the line of busi- of replacing Dr. Raza and seeking new refer- ness restriction to be reasonable. rals would (or could) take place regardless Further complicating the Huron Technol- of what Dr. Raza did post-departure. Stated ogy case is the fact that the former employee, differently, Dr. Raza’s practicing medicine before working for the plaintiff, worked for within ten miles and two years of leaving the an affiliate of the plaintiff , and it appeared former employer did not impact it because that this affiliate was in fact engaged in the the former employer relied on referrals for same line of business as the new employer, to business, and Dr. Raza’s actions did not pre- wit, specialized or custom conveyor projects. vent or restrict the former employer from The court of appeals opinion indicated that pursuit of such referrals. The court of appeals the defendant worked for this affiliate from opinion does not mention existing patient 1986 to December 2008 or January 2009 (and files because apparently the former employ- 58 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

er did not rely on patient files as a rationale Michael S. Callahan serves for its reasonable competitive business inter- as general counsel for Stiles est; it appears that referring primary care Machinery, Inc., in Grand doctors, not patients, were the “customers” Rapids, Michigan. His prac- under the facts of this case. The facts in Asmi tice covers all aspects of may infer that the departing doctor did not closely held businesses. take any patient files to his new employer, thus leaving the former employer with a relatively weak rationale regarding its reasonable competitive business interest, but if the departing doctor did not in fact take any patient files to his new employer, the former employer had arguably already achieved the intended result of the noncompetition agreement. Perhaps the former employer should have sought restrictions that prevented former employees from seeking referrals from the pool or source of primary care doctors accessed by the former employer. In any event, the lesson to be gleaned is that a court will separately examine the requirement of a reasonable competitive business interest apart from the reasonableness analysis of duration, geographical scope, and line of business in reviewing the enforceability of a noncompetition agreement. In many cases, the reasonable competitive business interest will be apparent, but in all events, you must be sure to separately address it whenever you are dealing with noncompetition agreements.

NOTES

1. No 31633, 2014 Mich App LEXIS 1675 (Sept 11, 2014) (unpublished). 2. No 316208,316233,316234, 317002, 2014 Mich App LEXIS 2126 (Nov 4, 2014) (unpublished). 3. 2014 Mich App LEXIS 1675 at *3. 4. Id. at *4. 5. Id. at *9. Case Digests

Sales Contract for Automobile—Recovery of Down Payment

Jay Chevrolet, Inc v Dedvukaj, No 319187, 2015 Mich App LEXIS 1143 (June 6, 2015) A car dealer had standing to seek payment of a down payment that allegedly had not been made by the purchaser. While the retail installment sales contract (RISC) for the vehicle was assigned to a third-party entity, the language of the contract indicated that the RISC related only to the payment of the amount financed and not the down payment. The court of appeals affirmed the lower courts’ findings and judgment that there was an oral contract for payment of the down payment and that defendant had breached that agreement. Although the RISC did contain a clause providing for the award of attorney fees in certain circumstances, the promise to pay the down payment was a contract separate from the RISC and there was no indica- tion that this contract contained an attorney fee provision. The court held that the general rule barring attorney fees applied in the absence of an agreement to pay them. Summer Resort Association—Recovery of Attorney Fees

Great Lakes Shores, Inc v Bartley, No 320913, 2015 Mich App LEXIS 987 (July 2, 2015) In an action by a nonprofit corporation that administered a summer resort to recover unpaid dues and assessments, the corporation was entitled by its bylaws to recover attorney fees in addition to the dues and assessments. Uniform Securities Act—Registration as Broker-Dealer, Agent, or Investment Advisor

Pransky v Falcon Group, Inc, No 319266, 319613, 2015 Mich App LEXIS 1292 (June 18, 2015) In an action concerning the validity of a consulting agreement for the development of a spa, the court of appeals affirmed the determination that defendant could perform its obligations under the consulting agreement without having to be registered as a broker-dealer, agent, or investment advisor under the Uniform Securities Act. The trial court also did not err when it held that the consulting agreement required defendant to perform services as a finder and that finders do not have to be registered under the Uniform Securities Act. Because defendant could perform its obligations under the consulting agreement without being registered, the consulting agreement was not on its face illegal, and the trial court properly dismissed plaintiff’s claims based on the illegality of the consulting agreement.

59 Index of Articles (vol 16 and succe eding issues) foreclosure, bankruptcy forum to resolve disputes Adequate assurance of performance demand, 23 No 1, 30 No 1, p. 17 p. 10; 29 No 3, p. 14 franchisors, using bankruptcy forum to resolve dis- Administrative expense claims under BACPA 2005, 26 putes, 16 No 4, p. 14 No 3, p. 36 fraudulent transfers and In re Tousa, reasonably equiv- ADR alent value, 33 No 1, p. 31 appeals of arbitrability, effect on lower courts, 26 in-house counsel’s survival guide for troubled times, No 2, p. 37 22 No 1, p. 33 arbitration, pursuit of investors’ claims, 16 No 2, p. 5 intellectual property, protecting in bankruptcy cases, commercial dispute resolution, new horizons, 22 22 No 3, p. 14 No 2, p. 17 landlord-tenant issues, 26 No 3, p. 32 mediation 17 No 1, p. 15; 26 No 3, p. 49 litigation roadmap, 28 No 1, p. 34 “real time” conflict solutions 28 No 2, p. 31 mortgage avoidance cases, 26 No 3, p. 27 Advertising injury clause, insurance coverage, 24 No 3, ordinary course of business, 23 No 2, p. 40; 26 No 1, p. 26 p. 57 Affordable Care Act, business of medicine for independ- overview of Bankruptcy Reform Act of 1994, 16 No 4, ent practitioner, 33 No 2, p. 46 p. 1 Agriculture partners and partnership claims, equitable subordin- Farm Security and Rural Investment Act of 2002, 22 ation, 16 No 1, p. 6 No 3, p. 30 prepayment penalty provisions in Michigan, enforce- succession planning for agribusinesses, 24 No 3, ability in bankruptcy and out, 16 No 4, p. 7 p. 9 prepayment premiums in and out of bankruptcy, American Taxpayer Relief Act of 2012, 33 No 1, p. 7 23 No 3, p. 29 Annuity suitability requirements, 27 No 2, p. 15 priority for creditors providing goods to debtors in Antiterrorism technology, federal SAFETY Act, 24 ordinary course of business, 28 No 1, p. 18 No 3, p. 34 proof of claim, whether and how to file, 30 No 1, p. 10 Antitrust compliance program for in-house counsel, 22 reclamation and administrative offense claims, 26 No 1, p. 42 No 3, p. 36 Assignments for benefit of creditors, 19 No 3, p. 32 Stern v Marshall and bankruptcy court authority, 33 Assumed names of LLCs, 28 No 3, p. 5 No 1, p. 12 Attorney-client privilege, tax matters, 24 No 3, p. 7; 26 tax tips for bankruptcy practitioners, 27 No 2, p. 30 No 3, p. 9. See also E-mail trust fund statutes and discharge of trustee debts, Automotive acquisitions, current risks, 33 No 2, p. 36 28 No 1, p. 11 Automotive suppliers UCC 2-702, use in bankruptcy, 29 No 3, p. 9 disputes in automotive industry, lessons learned, Banks. See Financial institutions 26 No 2, p. 11 Bitcoin and the future of currency, 34 No 2, p. 25 dual-source requirements contracts, 32 No 3, p. 19 Builders Trust Fund Act debts, conversion as basis for extending credit in era of contractual termination for nondischargeability, 33 No 1, p. 25 convenience, 26 No 1, p. 49 Business claims, intersection of statute and common law, requirements contracts, enforceability, 28 No 2, p. 18 27 No 1, p. 29 Bankruptcy. See also preferences Business continuity planning, 28 No 1, p. 9 after-acquired property and proceeds in bankruptcy, Business Court in Michigan, 25 No 3, p. 9; 32 No 3, p. 26; 28 No 1, p. 28 33 No 2, p. 11 Bankruptcy Abuse Prevention and Consumer Protec- Business identity theft, 34 No 3, p. 36 tion Act of 2005, 25 No 3, p. 27; 26 No 3, p. 18 Business-income-loss claims, 27 No 1, p. 24 Bankruptcy Court Rules, amendments to Rule 3001 Business judgment rule and 3002.1, 33 No 1, p. 18 corporate scandals and business judgment rule, 25 composition agreements, alternatives to bankruptcy, No 3, p. 19 28 No 3, p. 43 Disney derivative litigation, 25 No 2, p. 22 cross-border insolvencies, 26, No 3, p. 10 Certificated goods, frontier with UCC, 24 No 2, p. 23 default interest, 23 No 2, p. 47 CFIUS annual report, 33 No 2, p. 40 dividends and other corporate distributions as avoid- Charitable Solicitations Act, proposed revisions, able transfers, 16 No 4, p. 22 26 No 1, p. 14 expert witnesses, avoiding traps for the unwary, Charities. See Nonprofit corporations or organizations 34 No 2, p. 18 China, doing business in, 34 No 2, p. 13 60 INDEX OF ARTICLES 61

Chiropractors and professional service corporations, Business Corporation Act amendments, 21 No 1, p. 28; 24 No 3, p. 5 29 No 1, pp. 5, 10; 33 No 2, p. 18 Choice of entity corporate governance, 28 No 3, p. 9; 31 No 3, p. 29 2003 tax act considerations, 23 No 3, p. 8 correcting incomplete corporate records, 29 No 3, p. 31 frequently asked questions, 25 No 2, p. 27 deadlocks in closely held corporations, planning ideas getting it right the first time, 26 No 1, p. 8 to resolve, 22 No 1, p. 14 Circular 230 and tax disclaimers, 25 No 2, p. 7 Delaware and Michigan incorporation, choosing Class Action Fairness Act of 2005, 25 No 3, p. 15 between, 22 No 1, p. 21; 34 No 3, p. 13 Click-wrap agreements under UCC, mutual assent, 26 Delaware corporate case law update (2005), 25 No 2, No 2, p. 17 p. 49 COBRA changes under 2009 Stimulus Act, 29 No 2, p. 31 derivatives transactions, explanation of products Commercial finance lease agreements, 26 No 2, p. 21 involved and pertinent legal compliance conside- Commercial impracticability, issues to consider, 29 No 1, rations, 16 No 3, p. 11 p.16 director and officer liability insurance fundamentals, Commercial litigation. See also ADR 31 No 3, p. 17 business court in Michigan, 25 No 3, p. 9 dissenter’s rights: a look at a share valuation, 16 No Class Action Fairness Act of 2005, 25 No 3, p. 15 common-interest or joint defense agreements, 32 No 1, 3, p. 20 p. 11 dissolution, corporate existence after, 32 No 3, p. 5 diversity jurisdiction and LLCs, 32 No 1, p. 21 dividends and other corporate distributions as avoid- document production, 28 No 2, p. 13 able transfers, 16 No 4, p. 22 economic duress, proving in Michigan, 26 No 2, drag-along rights under Michigan Business Corpora- p. 25 tion Act, 28 No 3, p. 20 electronic discovery, 22 No 2, p. 25; 27 No 2, p. 9; 27 employment policies for the Internet, why, when, and No 3, p. 37 how, 19 No 2, p. 14 future lost profits for new businesses, proving in post- foreign corporations, internal affairs doctrine, 27 Daubert era, 26 No 2, p. 29 No 1, p. 48 Competitor communications, avoiding sting of the un- insolvency, directors’ and officers’ fiduciary duties to bridled tongue, 18 No 1, p. 18 creditors when company is insolvent or in vicin- Composition agreements, alternatives to bankruptcy, 28 ity of insolvency, 22 No 2, p. 12 No 3, p. 43 interested directors, advising re selected problems in Computers. See Technology Corner. sale of corporation, 16 No 3, p. 4 Confidentiality agreements, preliminary injunctions of minority shareholder oppression suits, 25 No 2, threatened breaches, 16 No 1, p. 17 p. 16 Contracts. See also Automotive suppliers opportunity doctrine in Michigan, proposed legisla- agreements to agree, drafting tips, 32 No 1, p. 25 tive reform, 28 No. 3, p. 15 doctrine of culpa in contrahendo and its applicability to professional service providers and Miller v Allstate Ins international transactions, 24 No 2, p. 36 Co, 28 No 3, p. 26 drafting, 28 No 2, p. 24 proposed amendments to Business Corporation Act dual-source requirements contracts, automotive sup- (2005), 25 No 2, p. 11 pliers, 32 No 3, p. 19 S corporations, 25 No 3, p. 7; 29 No 3, p. 7; 31 No 2, p. 7 electronic contracting, 28 No 2, p. 11; 31 No 2, p. 9 Sarbanes-Oxley Act of 2002, 22 No 3, p. 10 exclusivity and requirements contracts, automotive Section 488 revisited, opportunities for flexible gover- suppliers, 32 No 1, p. 44 nance, 31 No 3, p. 10 indefinite duration contracts, risks and strategies, 32 shareholder standing and direct versus derivative No 3, p. 13 letters of intent, best practices, 25 No 3, p. 44 dilemma, 18 No 1, p. 1 liquidated damages and limitation of remedies clauses tax matters, 27 No 1, p. 8 16 No 1, p. 11 technical amendments to Michigan Business Corpora- setoff rights, drafting contracts to preserve, 19 No 1, tion Act (1993), 16 No 3, p. 1 p. 1 tort liability for corporate officers, 26 No 3, p. 7 Conversions of entities, 31 No 1, p. 7; 32 No 2, p. 6 Creditors’ rights. See also Bankruptcy; Entireties property; Copyrights, tax treatment of protected property, 32 No 3, Judgment lien statute p. 37 assignments for benefit of creditors, 19 No 3, p. 32 Corporate counsel. See In-house counsel Builders Trust Fund Act debts, conversion as basis for Corporations. See also Business judgment rule; Nonprofit nondischargeability, 33 No 1, p. 55 corporations; Securities claims in nonbankruptcy litigation, 19 No 3, p. 14 62 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

cross-border secured lending transactions in United crowdfunding, 34 No 1, p. 5 States and Canada, representing the lender in, dissolution of nonprofit corporation, 33 No 3, p. 5 16 No 4, p. 38 educational corporations or institutions, 24 No 1, debtor exemptions, history and future, 30 No 2, p. 57; p. 5; 24 No 3, p. 5 31 No 2, p. 14 electronic seals, 34 No 1, p. 5 decedent’s estates, eroding creditors’ rights to collect entity conversions, 31 No 1, p. 7 debts from, 19 No 3, p. 54 expedited filing, 25 No 3, p. 6; 26 No 1, p. 5 fiduciary duties of directors and officers to creditors fee changes for authorized shares 25 No 3, p. 6; when company is insolvent or in vicinity of 26 No 1, p. 5 insolvency, 22 No 2, p. 12 finding the proper agency, 25 No 2, p. 5 garnishment, growing menace for Michigan employ- intrastate offering exemption, 34 No 2, p. 5 ers, 31 No 2, p. 17 LLC Act amendments (2002), 23 No 2, p. 5 judgment lien statute, advisability of legislation, 23 low profit LLCs, 29 No 1, p. 6; 29 No 2, p. 5 No 2, pp. 11, 24 medical marijuana, 31 No 2, p. 5; 31 No 3, p. 5 necessaries doctrine, Michigan’s road to abrogation, mold lien act amendments, 22 No 2, p. 5 19 No 3, p. 50 names for business entities, 23 No 1, p. 5; 25 nonresidential real property leases, obtaining exten- No 1, p. 5 sions of time to assume or reject, 19 No 3, p. 7 nonprofit corporations amendments, 28 No 2, p. 7; 28 prepayment penalty provisions in Michigan, enforce- No 3, p. 5; 33 No 3, p. 5 ability in bankruptcy and out, 16 No 4, p. 7 professional corporations, 22 No 1, p. 5; 27 No 2, out-of-court workouts, 19 No 3, p. 9 p. 6; 33 No 1, p. 5 personal property entireties exemption, applicability Regulatory Boards and Commissions Ethics Act, 34 to modern investment devices, 22 No 3, p. 24 No 3, p. 5 receiverships, 19 No 3, p. 16 service of process on business entities and other trust chattel mortgages, 19 No 3, p. 1. parties, 30 No 1, p. 5 Criminal law and matters, white collar-crime investiga- special entity acts, 25 No 3, p. 5 tion and prosecution, 27 No 1, p. 37 summer resort associations, 24 No 3, p. 6; 35 No 1, p. 5 Cross-border insolvencies, 26 No 3, p. 10 tort liability for corporate officers, 26 No 3, p. 7 Cross-cultural negotiations, 27 No 2, p. 39 uniform and model acts, 24 No 2, p. 5 Crowdfunding, 34 No 1, p. 5; 34 No 3, p. 28 viewing entity documents, 24 No 3, p. 5 Cybercourt for online lawsuits, 21 No 1, p. 54 what’s in a name, 32 No 1, p. 5 Cyberinsurance, 32 No 3, p. 9 Digital signatures, 19 No 2, p. 20 Cybersecurity risks and disclosure, 32 No 2, p. 10; 35 No Disaster preparations for law firms, 21 No 1, p. 7 1, p. 9 Discovery of electronic information in commercial litiga- Cybersquatting and domain name trademark actions, tion, 22 No 2, p. 25; 28 No 2, p. 13 22 No 2, p. 9 Dissenter’s rights: A look at a share valuation, 16 No 3, Data breach legislation, 27, No 1, p. 9; 31 No 3, p. 9 p. 20 Deadlocks in closely held corporations, planning idea to Dissolution of Michigan LLC when members deadlock, resolve, 22 No 1, p. 14 25 No 3, p. 38 Defamation claims for businesses, intersection of statute Diversity jurisdiction and LLCs, 32 No 1, p. 21 and common law, 27 No 1, p. 29 Dodd-Frank Wall Street Reform and Consumer Protection Delaware and Michigan incorporation, choosing between Act and the Consumer Financial Protection 22 No 1, p. 21; 34 No 3, p. 13 Bureau, 30 No 3, p. 13 Delaware corporate case law update (2005), 25 No 2, Domain names, 21 No 1, p. 48; 22 No 2, p. 9 p. 49 Drag-along rights under Michigan Business Corporation Derivatives transactions, explanation of products in- Act, 28 No 3, p. 20 volved and pertinent legal compliance consider- Economic duress, proving in Michigan, 26 No 2, p. 25 ations, 16 No 3, p. 11 E-mail Did You Know? encryption and attorney-client privilege, 19 No 2, acupuncture, 26 No 2, p. 7 p. 26 assumed names of LLCs, 28 No 3, p. 5 monitoring of e-mail and privacy issues in private sec- Business Corporation Act 2009 amendments, 29 No 1, tor workplace, 22 No 2, p. 22 p. 5 unencrypted Internet e-mail and attorney-client privi- chiropractors and professional service corporations, lege, 19 No 2, p. 9 24 No 3, p. 5 Educational corporations, 24 No 1, p. 5; 24 No 3, p. 5 Corporate Division information, 33 No 2, p. 5 Emergency Financial Manager Law and impact on credi- corporate existence after dissolution, 32 No 3, p. 5 tors, 32 No. 1, p. 52 INDEX OF ARTICLES 63

Employment. See also Noncompetition agreements troubled banks mean trouble for bank directors, “honest beliefe” defense, 28 No 2, p. 51 30 No 3, p. 22 ICE audit campaign, 30 No 2, p. 63 Force majeure and commercial impracticability, issues to Internet policies: why, when, and how, 19 No 2, p. 14 consider, 29 No 1, p. 16 monitoring of e-mail and privacy issues in private sec- Foreclosure, use of receiver or bankruptcy as alternative tor workplace, 22 No 2, p. 22 to, 30 No 1, p. 17 sexual harassment, employer liability for harassment Foreign corporations, internal affairs doctrine, 27 No 1, of employees by third parties, 18 No 1, p. 12 p. 48 social networking, management of legal risks, Foreign defendants, serving in Michigan courts, 30 No 1, 30 No 2, p. 44 p. 49 Empowerment zones, business lawyer’s guide to, 17 Foreign trade zones, 24 No 3, p. 40 No 1, p. 3 Forum selection clauses, enforceability of international Entireties property clauses, 30 No 3, p. 40 exemption for personal property, applicability to mod- Franchino v Franchino, minority shareholder oppression ern investment devices, 22 No 3, p. 24 suits, 25 No 2, p. 16 federal tax liens, 22 No 2, p. 7; 23 No 2, p. 28 Franchises LLC interests, 23 No 2, p. 33 bankruptcy forum to resolve disputes, 16 No 4, p. 14 Estate tax uncertainty in 2010, 30 No 1, p. 8 Gramm-Leach-Bliley’s privacy requirements, applica- Ethics, disaster preparations, 21 No 1, p. 7 bility to non-financial institutions, 20 No 1, p. 13 Exclusivity and requirements contracts, automotive supp- less-than-total breach of franchise agreement by fran- liers, 32 No 1, p. 44 chisor, loss or change in format, 16 No. 1, p. 1 Exemptions from securities registration, client interview new Banking Code for new business of banking, 20 flow chart, 29 No 3, p. 39 No 1, p. 9 Export controls and export administration, 24 No 1, p. 32 Petroleum Marketing Practices Act, oil franchisor– Farm Security and Rural Investment Act of 2002, 22 No 3, franchisee relationship, 18 No 1, p. 6 p. 30 revised UCC Article 9, impact on commercial lending, Federal goverment 21 No 1, p. 20 acquisition of federal government contractor, avoiding Fraudulent transfers, reasonably equivalent value, 33 No pitfalls, 32 No 3, p. 30 1, p. 31 selling goods and services with reduced risk through Gaming in Michigan, primer on charitable gaming, 26 commercial item contracting, 31 No 1, p. 41 No 1, p. 21 Fiduciary duties Garnishment, growing menace for Michigan employers, insolvent company or in vicinity of insolvency, duties 31 No 2, p. 17 of offices and directors to creditors, 22 No 2, “Go Shop” provisions in acquisition agreements, 27 p. 12 LLC members, duties and standards of conduct, 24 No 3, p. 18 No 3, p. 18 HITECH Act and HIPAA privacy and security issues, 29 Film tax credit and secured transactions, 29 No 3, p. 21 No 2, p. 9 Financial institutions I.D. cards, security vs privacy, 27 No 3, p. 11 cross-border secured lending transactions in United Identity theft, 31 No 1, p. 11; 34 No 3, p. 36 States and Canada, representing the lender in, Immigration 26 No 4, p. 38 E-verify program and its application to federal con- disparate impact and its effect on financial services, 33 tractors, 29 No 1, p. 36 No 3, p. 22 ICE employer audit campaign, 30 No 2, p. 63 Dodd-Frank Wall Street Reform and Consumer Prote- tax criminal prosecution, employer I-9 compliance, 28 ction Act and the Consumer Financial Protection Bureau, No 3, p. 34 30 No 3, p. 13 Indemnification clauses, 32 No 1, p. 31 federal legislation giving additional powers to banks Independent contractors, tax issues, 28 No 2, p. 9 and bank holding companies, 20 No 1, p. 1 India, mergers and acquisitions, 28 No 2, p. 43 good faith approach to lender liability, 33 No 3, p. 29 Information security, 23 No 2, p. 8; 23 No 3, p. 10 insolvent counterparty, strategies for dealing with, 33 In-house counsel No 3, p. 11 antitrust compliance program, 22 No 1, p. 42 loan modification procedures and exclusive statutory pension funding basics, 25 No 1, p. 17 remedy, 33 No 3, p. 17 risk management, 25 No 1, p. 10 mapping fall from troubled company to bank fraud, small legal department but big job, 35 No 1, p. 11 33 No 1, p. 42 survival guide for troubled times, 22 No 1, p. 33 64 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

transitioning from law firm to in-house, 34 No 2, p. 11 Landlord-tenant issues under BACPA 2005, 26 No 3, transforming a career from legal office to business p. 32 office, 34 No 3, p. 11 Law firms, benefits and risks of equity arrangements with Insolvency, directors’ and officers’ fiduciary duties to clients, 22 No 1, p. 25 creditors when company is insolvent or in vicinity Lawyers and the economy, greasing the gears of of insolvency, 22 No 2, p. 12 commerce, 32 No 2, p. 46 Installment contracts under UCC 2-612, perfect tender Leases rule, 23 No 1, p. 20 commercial finance lease agreements, 26 No 2, Insurance p. 21 business courts, coverage disputes, and early expert obtaining extensions of time to assume or reject, 19 evalution, 32 No 3, p. 26 No 3, p. 7 business-income-loss claims, 27 No 1, p. 24 Letters of credit in international transactions, 25 No 1, cyberinsurance, 32 No 3, p. 9 p. 24 risk management for in-house counsel, 25 No 1, Letters of intent, best practices, 25 No 3, p. 44 p. 10 Liens. See also Judgment lien statute scope of advertising injury clause, 24 No 3, p. 26 how to find notices of state and federal tax liens, 24 Intellectual property No 1, p. 10 bankruptcy cases, 22 No 3, p. 14 mold lien act, 22 No 2, p. 5; 26 No 3, p. 44 domain name trademark actions, 22 No 2, p. 9 special tools lien act, 23 No 1, p. 26; 26 No 3, p. 44 IP license rights in mergers & acquisitions, 33 No 2, p. 9 Life insurance, critical planning decisions for split-dollar RICO and theft of trade secrets, 31 No 2, p. 23 arrangements, 23 No 3, p. 41 Interested directors, advising re selected problems in sale Limited liability companies (LLCs) of corporation, 16 No 3, p. 4 2002 LLC Act amendments (PA 686), 23 No 1, p. 34; 23 No 2, p. 5 International Trade Commission, preventing importation 2010 LLC Act Amendments, 31 No 2, p. 10 of goods, 32 No 1, p. 39 anti-assignment provisions in operating agreements, International transactions impact of UCC 9-406 and 9-408, 24 No 1, p. 21 applicability of doctrine of culpa in contrahendo, 24 buy-sell provisions of operating agreements, 19 No No 2, p. 36 4, p. 60 documentary letters of credit, 25 No 1, p. 24 diversity jurisdiction and LLCs, 32 No 1, p. 21 foreign trade zones, 24 No 3, p. 40 entireties property, 23 No 2, p. 33 forum selection clauses, enforceability, 30 No 3, p. 40 family property and estate planning, operating agree- Internal affairs doctrine, foreign corporations, 27 No 1, ments for, 19 No 4, p. 49 p. 48 fiduciary duties and standards of conduct of members Internet. See also E-mail; Privacy; Technology Corner 24 No 3, p. 18 corporate employment policies: why, when, and how, joint venture, operating agreements for, 19 No 4, p. 34 19 No 2, p. 14 limitations on transfer of membership interests, cybercourt for online lawsuits, 21 No 1, p. 54 31 No 1, p. 31 data breach notification act, 27, No 1, p. 9 low profit LLCs, 29 No 1, p. 6; 29 No 2, pp. 6, 27 digital signatures, 19 No 2, p. 20 manufacturing business, operating agreements for, domain names, 21 No 1, p. 48; 22 No 2, p. 9 19 No 4, p. 2 jurisdiction and doing business online, 29 No 1, p. 23 meaning of operating agreement, 30 No 2, p. 2 Michigan Internet Privacy Protection Act, 33 No 1, p. 10 minority member oppression, 27 No 1, p. 11 proxy materials, Internet delivery, 27 No 3, p. 13 piercing the veil of a Michigan LLC, 23 No 3, p. 18 public records, using technology for, 19 No 2, p. 1 real property, operating agreements for holding and sales tax agreement, 23 No 1, p. 8 managing, 19 No 4, p. 16 year 2000 problem, tax aspects, 19 No 2, p. 4 securities, interest in LLC as, 16 No 2, p. 19 Investing by law firms in clients, benefits and risks, 22 self-employment tax for LLC members, 23 No 3, No 1, p. 25 p. 13 Joint enterprises, recognition by Michigan courts, 23 series LLCs, 27 No 1, p. 19 No 3, p. 23 single, 29 No 1, p. 33; 30 No 2, p. 20 Judgment lien statute Liquidated damages and limitation of remedies clauses, advisability of legislation, 23 No 2, pp. 11, 24 16 No 1, p. 11 new collection tool for creditors, 24 No 3, p. 31 Litigation. See Commercial litigation shortcomings of judgment lien statute, 31 No 1, p. 48 Lost profits for new businesses in post-Daubert era, 26 Judicial dissolution of Michigan LLC when members No 2, p. 29 deadlock, 25 No 3, p. 38 Low profit LLCs, 29 No 1, p. 6; 29 No 2, p. 27 INDEX OF ARTICLES 65

Malware grows up: Be very afraid, 25 No 3, p. 8 shuffle up and deal: a primer on charitable gaming in Material adverse effect clauses, Delaware court’s pro- Michigan, 26 No, p. 21 seller attitude towards, 29 No 1, p. 28 tax exemptions, 26 No 1, p. 33 Mediation instead of litigation for resolution of valuation trustees, nonprofit corporations serving as, 17 No 2, disputes, 17 No 1, p. 15 p. 9 Medical marijuana, 31 No 2, p. 5 Uniform Prudent Management of Institutional Funds Mergers and acquisitions Act, 29 No 2, p. 17 automotive acquisitions, 33 No 2, p. 36 volunteers and volunteer directors, protection of, 17 disclosure of confidential information, 29 No 2, p. 39 No 2, p. 6 federal government contractor, avoiding pitfalls when youth camp programs, assessment of risks for acquiring, 32 No 3, p. 30 nonprofits, 32 No 2, p. 31 India, framework and issuess, 28 No 2, p. 43 Offshore outsourcing of information technology services, multiples as key to value or distraction, 23 No 1, p. 31 24 No 1, p. 8; 24 No 2, p. 9 personal goodwill in sales of closely-held businesses, Open source software, 25 No 2, p. 9; 29 No 2, p. 49 33 No 3, p. 37 Optioning the long-term value of a company, effect on Michigan Business Tax, 28 No 1, p. 40; 29 No 1, p. 40 shareholders, 27 No 3, p. 33 Minority oppression Ordinary course of business, bankruptcy, 23 No 2, p. 40; LLCs, minority members, 27 No 1, p. 11 26 No 1, p. 57 shareholder suits, 25 No 2, p. 16 Partnerships Mold lien act, 22 No 2, p. 5, 26 No 3, p. 44 bankruptcy, equitable subordination of partners and Mortgage avoidance cases in Michigan’s bankruptcy partnership claims, 16 No 1, p. 6 courts, 26 No 3, p. 27 interest in partnership as security under Article 9, Naked licenses, trademark abandonment, 32 No 1, p. 35 19 No 1, p. 24 Names for business entities, 23 No 2, p. 5; 25 No 1, p. 5 unintended partnerships, 33 No 2, p. 24 Necessaries doctrine, Michigan’s road to abrogation, 19 Pension funding basics for in-house counsel, 25 No 1, No 3, p. 50 p. 17 Negotiations, cross-cultural, 27 No 2, p. 39 Perfect tender rule, installment contracts under UCC 2- Noncompetition agreements 612, 23 No 1, p. 20 enforceability, reasonableness, and court’s discretion Personal property entireties exemption, applicability to to “blue pencil”, 31 No 3, p. 38 modern investment devices, 22 No 3, p. 24 geographical restrictions in Information Age, 19 No 2, Petroleum Marketing Practices Act, oil franchisor– p. 17 franchisee relationship, 18 No 1, p. 6 preliminary injunctions of threatened breaches, 16 Physicians, business of medicine under the Affordable No 1, p. 17 Care Act, 33 No 2, p. 46 protecting competitive business interests, 30 No 2, p. Piercing the veil of a Michigan LLC, 23 No 3, p. 18 40 Preferences Nonprofit corporations or organizations defending against preference claims, 29 No 3, p. 26 amendments to act, 28 No 2, p. 7 earmarking defense, gradual demise in Sixth Circuit, avoiding pitfalls in nonprofit practice, 32 No 2, p. 12. 30 No 1, p. 25 Charitable Solicitations Act, proposed revisions, 26 minimizing manufacturer’s exposure by asserting No 1, p. 14 PMSI and special tools liens, 30 No 1, p. 41 compensating executives, 24 No 2, p. 31 ordinary terms defense, 30 No 1, p. 34 intermediate sanctions, slippery slope to termination, Preliminarily enjoining threatened breaches of non- 26 No 1, p. 27 competition and confidentiality agreements, 16 IRS Form 990 changes—nonprofit governance in a fish No 1, p. 17 bowl, 29 No 2, p. 11 Prepayment penalty provisions in Michigan, enforceabil- lobbying expenses, businesses, associations, and non- ity in bankruptcy and out, 16 No 4, p. 7 deductibility of, 17 No 2, p. 14 Prepayment premiums in and out of bankruptcy, 23 low profit LLCs, 29 No 1, p. 6, 29 No 2, pp. 6, 27 No 3, p. 29 political activity by nonprofits, 32 No 2, p. 19 Privacy proposed amendments to Michigan Nonprofit Corpo- drafting privacy policies, 21 No 1, p. 59 ration Act, 17 No 2, p. 1; 23 No 2, p. 70; 26, No 1, Gramm-Leach-Bliley requirements, applicability to p. 9 non-financial institutions, 20 No 1, p. 13 protecting charitable assets, new model act, 32 No 2, monitoring of e-mail and privacy issues in private p. 25 sector workplace, 22 No 2, p. 22 Sarbanes-Oxley Act of 2002, impact on nonprofit enti- securities industry, application of privacy laws to, ties, 23 No 2, p. 62 27 No 3, p. 25 66 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

workplace, clarification by US Supreme Court, limited liability company interests as securities, 16 30 No 2, p. 11 No 2, p. 19 Professional corporations, 22 No 1, p. 5; 27 No 2, p. 6; 33 overview of Michigan securities regulation, No 1, p. 5; 33 No 2, p. 18 31 No 1, p. 12 Professional service providers and Miller v Allstate Ins Plain English movement of SEC, FINRA, and OFIR, Co, 28 No 3, p. 26 31 No 1, p. 19 Proof of claim, whether and how to file, 30 No 1, p. 10 privacy laws and regulations, application to employ- Public debt securities, restructuring, 22 No 1, p. 36 ment relationships in securities industry, Public records, using technology for, 19 No 2, p. 1 27 No 3, p. 25 Receiverships, 19 No 3, p. 16; 28 No 2, p. 36; 20 No 1, public debt securities, restructuring, 22 No 1, p. 36 p. 17 real-time disclosure, SEC, 24 No 2, p. 20 Appointment, 35 No 1, pp. 19, 30, 32 Sarbanes-Oxley Act of 2002, public issuers in distress, Flexibility of receiverships vs. certainty of bankruptcy, 23 No 2, p. 55 35 No 1, p. 32 SEC small business initiatives, 16 No 2, p. 8 Forms, 35 No 1, p. 13 SEC whistleblower program, what employers need to Overview, 35 No 1, p. 13 know, 34 No 1, p. 13 Payment of receiver, 35 No 1, p. 24 secondary liability and “selling away,” 30 No 2, p. 49 Qualifications under MCR 2.622, 35 No 1, p. 27 short selling regulation, alternative uptick rule, Statutory and court rule requirements for appointment, 30 No 3, p. 32 35 No 1, p. 30 simplifying securities regulation of M&A brokers, 34 View from the bench, 35 No 1, p. 37 No 1, p. 21 Retirement plan assets to fund start-up company, 30 Sixth Circuit opinions concerning securities, 31 No 3, No 2, p. 34 p. 29 RICO and theft of trade secrets, 31 No 2, p. 23 small business regulatory initiatives, progress or puff- Risk management for in-house counsel, 25 No 1, p. 10 ery, 16 No 2, p. 1 ROBS transaction to fund start-up company, 30 No 2, small corporate offering registration, 16 No 2, p. 13 p. 34 Uniform Securities Act, technical compliance is S corporations required, 17 No 1, p. 1 audit targets, 25 No 3, p. 7 venture capital financing, terms of convertible pre- losses, how to deal with, 29 No 3, p. 34 ferred stock, 21 No 1, p.9 synthetic equity, avoiding tax traps when planning for what constitutes a security, possible answers, 16 No 2, key employees, 35 No 1, p. 64 p. 27 SAFETY Act and antiterrorism technology, 24 No 3, p. 34 Self-employment tax for LLC members, 23 No 3, p. 13 Sarbanes-Oxley Act of 2002, 22 No 3, p. 10 nonprofit entities, 23 No 2, p. 62 Service of process public issuers in distress, 23 No 2, p. 55 business entities and other parties, 30 No 1, p. 5 relief for smaller public companies, 26 No 1, p. 42 foreign defendants, 30 No 1, p. 49 Securities Sexual harassment, employer liability for harassment of abandoned public and private offerings, simplifying employees by third parties, 18 No 1, p. 12 Rule 155, 21 No 1, p. 18 Shareholders arbitration, pursuit of investors’ claims, 16 No 2, p. 5 dissenter’s rights: a look at a share valuation, 16 No 3, p. 20 basics of securities law for start-up businesses, 24 No 2, p. 13 Madugala v Taub, clarification by Michigan Supreme crowdfunding for small businesses in Michigan, 34 No Court, 34 No 3, p. 20 3, p. 28 minority shareholder oppression suits, 25 No 2, p. 16 disclosure of confidential information, 29 No 2, p. 39 oppression and direct/derivative distinction, 27 No 2, exemptions from registration, client interview flow p. 18 chart, 29 No 3, p. 39 optioning the long-term value of a company, effect on going public is not merely the S-1 registration state- shareholders, 27 No 3, p. 33 ment, 34 No 1, p. 28 recent cases addressing oppression, 31 No 3, p. 25; 34 intrastate offering exemption, 34 No 2, p. 5 No 3, p. 23 “Go Shop” provisions in acquisition agreements, standing and direct versus derivative dilemma, 18 27 No 3, p. 18 No 1, p. 1 investment securities, revised UCC Article 8, 19 No 1, Short selling regulation, alternative uptick rule, 30 No 3, p. 30 p. 1 investor claims against securities brokers under Michi- Shrink-wrap agreements under UCC, mutual assent, gan law, 28 No 3, p. 50 26 No 2, p. 17 Internet delivery of proxy materials, 27 No 3, p. 13 Single-member LLCs, 29 No 1, p. 33; 30 No 2, p. 20 INDEX OF ARTICLES 67

Small Business Administration business designations and offshore accounts, 32 No 1, p. 7 government contracting, 24 No 1, p. 29 payroll taxes—don’t take that loan, 29 No 2, p. 7 Social networking, management of legal risks, 30 No 2, preparer rules, 28 No 1, p. 7 p. 44 property and transfer tax considerations for business Software licensing watchdogs, 25 No 1, p. 8 entities, 30 No 2, p. 27 Special tools lien act, 23 No 1, p. 26 reclassification of property by State Tax Commission Split-dollar life insurance arrangements, critical planning threatens loss of tax incentives, 30 No 3, p. 28 decisions, 23 No 3, p. 41 refund procedures for state taxes, 34 No 1, p. 32 Subordination agreements under Michigan law, 24 No 1, S corporations, 25 No 3, p. 7; 29 No 3, p. 7; 31 No 2, p. 7 p. 17 self-employment tax for LLC members, 23 No 3, p. 13 Succession planning for agribusinesses, 24 No 3, p. 9 sunset for tax cuts (2010), 30 No 2, p. 9 Summer resort associations, 24 No 3, p. 6; 35 No 1, p. 5 Swiss bank accounts disclosures, 29 No 1, p. 7; 34 No Taxation and tax matters 2, p. 9 2001 Tax Act highlights, 22 No 1, p. 7 Tax Increase Prevention and Reconciliation Act of 2004 Tax Acts: What you need to tell your clients, 25 2005, 26 No 2, p. 8 No 1, p. 30 year 2000 problem, 19 No 2, p. 4 2009 tax rate increase, 28 No 3, p. 7 zappers, automated sales suppression devices, 2012 year-end tax planning, 32 No 3, p. 7 32 No 2, p. 8 aggressive transactions, tax consequences, 27 No 3, Technology Corner. See also Internet p. 9 business continuity planning, 28 No 1, p. 9 American Taxpayer Relief Act of 2012, 33 No 1, p. 7 business in cyberspace, 24 No 3, p. 8; 31 No 2, p. 9 attorney-client privilege, 24 No 3, p. 7; 26 No 3, p. 9 computer equipment, end-of-life decisions, 26 No 2, audit procedures for state taxes, 34 No 1, p. 32 p. 9 avoiding gift and estate tax traps, 23 No 1, p. 7 contracts, liability, 31 No 2, p. 9 bankruptcy, tax tips, 27 No 2, p. 30 cyberinsurance, 32 No 3, p. 9 budget cuts at IRS, practical impacts, 35 No 1, p. 7 cybersecurity, 34 No 1, p. 10; 35 No 1, p. 9 C corporations, less taxing ideas, 27 No 1, p. 8 cybersquatting and domain name trademark actions, cash deposits and suspicious activity reports, 33 No 3, 22 No 2, p. 9 p. 8 data breach legislation, 27, No 1, p. 9; 31 No 3, p. 9 charitable property tax exemptions, 26 No 1, p. 33 developing policies—the forest and the trees, 33 No 3, choice of entity, 23 No 3, p. 8; 26 No 1, p. 8 p. 10 Circular 230 and tax disclaimers, 25 No 2, p. 7 electronic contracting, best practices, 28 No 2, p. 11 clearance procedure for state taxes, 34 No 1, p. 32 electronic discovery, 27 No 2, p. 9 copyright-protected property, tax treatment of, 32 No 3, p. 37 escrows of technology, relevance, 30 No 3, p. 10 corporate income tax, 31 No 3,p. 7; 32 No 3, p. 6 European Union changes, effect on American business, disclosure requirements for uncertain tax positions, 32 No 1, p. 9 30 No 3, p. 34 HITECH Act and HIPAA privacy and security issues, enforcement priorities, 34 No 1, p. 8 29 No 2, p. 9 estate tax planning after 2010 Tax Act, 31 No 1, p. 9 I.D. cards, security vs privacy, 27 No 3, p. 11 estate tax uncertainty in 2010, 30 No 1, p. 8 identity theft protection act amendments, 31 No 1, p. 11 federal tax liens, 22 No 2, p. 7; 23 No 2, p. 28; 27 No 2, information security, 23 No 2, p. 8; 23 No 3, p. 10; p. 11 29 No 1, p. 9 goodwill in sale of closely-held businesses, 33 No 3, insider threats to critical infrastructures, 28 No 3, p. 8; p. 37 29 No 3, p. 8 how to find notices of state and federal tax liens, 24 No 1, p. 10 Internet Privacy Protection Act, 33 No 1, p. 10 identity thefts and other scams, 34 No 3, p. 7 IP license rights in context of mergers and acquisitions, immigration and tax criminal prosecution, employer I- 33 No 2, p. 9 9 compliance, 28 No 3, p. 34 Is It All Good? 22 No 2, p. 29 independent contractors, 28 No 2, p. 9 malware, 25 No 3, p. 8 Internet sales tax agreement, 23 No 1, p. 8 offshore outsourcing of information technology serv- IRS priorities, 24 No 1, p. 7; 24 No 2, p. 7 ices, 24 No 1, p. 8; 24 No 2, p. 9 late filing, practical solutions, 33 No 2, p. 7 open source software, 25 No 2, p. 9; 29 No 2, p. 59 Michigan Business Tax, 28 No 1, p. 40; 29 No 1, p. 40; paperless office, 22 No 2, p. 35 30 No 2, p. 27 privacy in the workplace, 30 No 2, p. 11 nonprofit organizations, intermediate sanctions, 26 SEC guidelines on cybersecurity risks and disclosure, No 1, p. 27 32 No 2, p. 10 68 THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015

software licensing watchdogs, 25 No 1, p. 8 Venture capital trademark and business names, 34 No 3, p. 9 early stage markets in Michigan, 25 No 2, p. 34 UCITA, 23 No 1, p. 8 financing, terms of convertible preferred stock, 21 Terrorism, federal SAFETY Act and antiterrorism tech- No 1, p. 9 nology, 24 No 3, p. 34 White collar-crime investigation and prosecution, 27 Third-party beneficiaries in construction litigation, 27 No 1, p. 37 No 2, p. 25 Year 2000 problem, tax aspects, 19 No 2, p. 4 Tools, special tools lien act, 23 No 1, p. 26; 26 No 3, p. 44 Youth camp programs, assessment of risks for nonprofits, Trade secrets 32 No 2, p. 31 International Trade Commission, misappropriated Zappers, automated sales suppression devices, 32 No 2, trade secrets, 32 No 1, p. 39 p. 8 RICO, 31 No 2, p. 23 Trademark abandonments, naked licenses, 32 No 1, p. 55 Transfer tax considerations for business entities, 30 No 2, p. 20 Trust chattel mortgages, 19 No 3, p. 1 UCITA, 23 No 1, p. 8 Uniform Commercial Code anti-assignment provisions in LLC operating agreements, impact of UCC 9-406 and 9-408, 24 No 1, p.21 bankruptcy, use of UCC 2-702 in, 29 No 3, p. 9 certificated goods, frontier with UCC, 24 No 2, p. 23 commercial lending, impact of revised Article 9, 21 No 1, p. 20 compromising obligations of co-obligors under a note, unanswered questions under revised UCC Arti- cle 3, 16 No 4, p. 30 demand for adequate assurance of performance, 23 No 1, p. 10; 29 No 3, p. 14 federal tax lien searches, consequences of Spearing Tool, 27 No 2, p. 11 film tax credit and secured transactions, 29 No 3, p. 21 forged facsimile signatures, allocating loss under UCC Articles 3 and 4, 19 No 1, p. 7 full satisfaction checks under UCC 3-311, 19 No 1, p. 16 installment contracts under UCC 2-612, perfect tender rule, 23 No 1, p. 20 investment securities, revised Article 8, 19 No 1, p. 30 notice requirement when supplier provides defective goods, 23 No 1, p. 16 “only if” naming of debtor under MCL 440.9503, 33 No 1, p. 38 partnership interest as security under Article 9, 19 No 1, p. 24 sales of collateral on default under Article 9, 19 No 1, p. 20 setoff rights, drafting contracts to preserve, 19 No 1, p. 1 shrink-wrap and clink-wrap agreements, mutual assent, 26 No 2, p. 17 Uniform Prudent Management of Insitutional Funds Act, 29 No 2, p. 17 Valuation disputes, mediation instead of litigation for resolution of, 17 No 1, p. 15 ICLE Resources for Business Lawyers

Books Michigan Business Formbook, Third Edition cosponsored by Edited by Mark A. Kleist, Robert A. Hudson, and Daniel D. Kopka The State Bar Draft like an expert with business forms for all major areas of business practice. This book in- of Michigan cludes organizational forms for all major types of business entities and valuable drafting notes and detailed commentary from the authors. The University of Michigan Law School Print Book: $195.00 Online Book/0-4 Lawyers: $135.00 Online Book/5-29 L awyers: $225.00 Product #: 2011551140 Wayne State Univer- sity Law School Michigan Business Torts, Second Edition By Edward H. Pappas, Thomas G. McNeill, and Daniel D. Quick Western Michigan Quickly answer questions about any business tort; draft confidentiality agreements and employee University Cooley Law policies to avoid problems before they arise; obtain results without litigation through effective de- School mand letters loaded with substantive legal arguments; prepare the best complaint, answer, discovery request, or brief in support of summary disposition with black letter statements of law. University of Detroit Mercy School of Law Print Book: $145. 00 Online Book/0-4 Lawyers: $135.00 Online Book/5-29 L awyers: $225.00 Product #: 2003555640 Michigan State Univer- sity College of Law Seminars

27t h Annual Business Law Insitute Cosponsored by the Business Law Section of the State Bar of Michigan. Get the latest updates, strategies and practical tools you need to succeed in the demanding world of business law. Stay ahead of today’s business trends and get expert advice on topics like avoiding oppression claims in shareholder agreements, addi ng value to your deal with proper tax structuring, and much more. The education provider of the Date: September 25, 2015 Location: Amway Grand Plaza Hotel, Grand Rapids Seminar #: 2015CI1110 State Bar of General fee: $3 45 ICLE Premium Partners: $2 95 Michigan ICLE Basic Partners: $2 95 New Lawyers: $195 Section Members: $315 1020 Greene Street Business Entity Update 2015 Ann Arbor, MI 48109-1444 Stay ahead of the latest updates and trends in law to effectively advise your small and midsize business clients. Presented by Jim Carey and Jeff Van Winkle. Phone On-Demand Webcast Toll-Free (877) 229-4350 General fee: $95 Seminar #: 2015CT1126 or (734) 764-0533 Section Members: $85 ICLE Partners: Free New Lawyers: $4 5 Fax Toll-Free (877) 229-4351 Navigating the World of Noncompetes or (734) 763-2412 Bernie Fuhs, Rick Gaffin, and Dan Quick share what works, what is likely to produce litigation, and how to assess whether your client will really benefit from noncompetition agreements.

On-Demand Webcast www.icle.org General fee: $95 Seminar #: 2015CT1133 (877) 229-4350 ICLE Partners: Free New Lawyers: $45 27TH ANNUAL Business Law institute SEPTEMBER 25, 2015 | GRAND RAPIDS

The Place to Be for Business Lawyers

COSPONSOR REGISTER TODAY Cosponsored by the Business Law www.icle.org/business Section of the State Bar of Michigan 877-229-4350

6GK 5GW THE MICHIGAN BUSINESS LAW JOURNAL — SUMMER 2015 71 Notes

SUBSCRIPTION INFORMATION

Any member of the State Bar of Michigan may become a member of the Section and receive the Michigan Business Law Journal by sending a membership request and annual dues of $30 to the Business Law Section, State Bar of Michigan, 306 Townsend Street, Lansing, Michigan 48933-2012.

Any person who is not eligible to become a member of the State Bar of Michigan, and any institution, may obtain an annual subscription to the Michigan Business Law Journal by sending a request and a $30 annual fee to the Business Law Section, State Bar of Michigan, 306 Townsend Street, Lansing, Michigan 48933-2012.

CHANGING YOUR ADDRESS?

Changes in address may be sent to:

Membership Services Department State Bar of Michigan 306 Townsend Street Lansing, Michigan 48933-2012

The State Bar maintains the mailing list for the Michigan Business Law Journal, all Section newsletters, as well as the Michigan Bar Journal. As soon as you inform the State Bar of your new address, Bar personnel will amend the mailing list, and you will continue to receive your copies of the Michigan Business Law Journal and all other State Bar publications and announcements without interruption.

CITATION FORM

The Michigan Business Law Journal should be cited as MI Bus LJ.

DISCLAIMER

The opinions expressed herein are those of the authors and do not necessarily reflect those of the Business Law Section. PRSRT STD U.S. POSTAGE PAID SAGINAW, MI PERMIT NO. 269

BUSINESS LAW SECTION State Bar of Michigan 306 Townsend Street Lansing, Michigan 48933-2012

D. RichaRD McDonalD Publications Director

Published in cooperation with The InsTITuTe of ConTInuIng LegaL eduCaTIon Daniel D. KopKa Senior Publications Attorney chRistine Mathews Copy and Production Editor

SECTION CALENDAR

Council Meetings DATE TIME LOCATION

September 25, 2015* Amway Grand Plaza, Grand Rapids, MI

December 5, 2015 10:00 a.m. Butzel Long, Bloomfield Hills, MI

Seminars

Business Law Institute DATES LOCATION

September 25, 2015 Amway Grand Plaza, Grand Rapids, MI

*Annual Meeting