Reflections on Four Decades as a Business Associations Student

It was the spring semester of 1983 when I took the introductory Business Associations (“BA”) class at the University of Texas Law School. As a second-year student who knew nothing about business associations—and who was scared stiff of the professor, Robert W. Hamilton—I didn’t foresee spending most of the next 40 years in a career devoted to the subject, first in law practice, then in teaching. But that’s what happened.

In spring 2023, as I transition to emeritus law professor status at Drake University, I remain a BA student in many respects. I regularly consult with attorneys in my home state (Iowa) on business law matters, serve on the Iowa State Bar Association’s Business Law Section Council and its Legislative Committee, present CLEs, and maintain a treatise on business organizations. As I reflect on changes in the field over the past four decades, the details far exceed the scope permitted in a magazine column. This article instead covers several trends I’ve observed during my years as a BA student, providing, I hope, a forest perspective on some of the trees that comprise modern business entity law.

Increasing Statutory Complexity

In 1983, my study of statutory law in the BA course was largely confined to three acts: the Uniform Partnership Act (1914) (“UPA”), the Uniform Limited Partnership Act (1976) (“ULPA”), and the Model Business Corporation Act (“MBCA”). The latter had just been comprehensively redrafted for the first time since 1950, with my professor serving as Reporter. These same statutes still guided most states’ business associations laws when I began teaching BA at Drake in 1992.

Critically, each act was relatively short. The UPA ran 6,500 words, while the ULPA, including a minor 1985 revision, totaled just 4,000 words. The MBCA was a bit longer but still manageable. Given the relatively simple statutory architecture, in a four-credit BA course I could survey most provisions in each of the three acts, along with interpretative case law. I was also able to contrast parts of Delaware corporate law with the MBCA, and to introduce “baby business” and accounting concepts, as well as some securities law basics.

By the 2021–22 school year, my last year of full-time teaching, the instructor’s task in BA was considerably more challenging because the length and complexity of statutory business associations law had increased dramatically. At 32,000 words, the UPA (1997/2013) was five times as long as the original act. The ULPA (2001/2013) ran 35,000 words—eight times its original length. The Uniform Limited Liability Company Act (“ULLCA”), a newer and critical business entity statute, had grown from roughly 17,000 words in 1996 to 31,000 words in its latest version, ULLCA (2006/2013). Not to be outdone, the most recent version of the MBCA clocked in at roughly 62,000 words.

Although it’s tempting to conclude these modern business associations codes are needlessly prolix, several other trends I’ve observed over the past 40 years help explain the acts’ increased length and complexity.

Economic Perspectives Prevail

Brevity was an appealing feature of older business associations codes, but many provisions in those acts were prescriptive, allowing little or no variation from statutory norms. Scholars began to substitute economic analysis for social and regulatory conceptions of business associations as early as the 1930s, and by the 1980s these views were ascendant and increasingly influential with policymakers. A preference for private ordering over regulation has reshaped the direction of business associations statutes ever since.

Today, whether one organizes a partnership, a limited liability company (“LLC”), or a corporation, business associations codes provide only default rules for many internal matters. Owners of a business entity are thus generally free to tailor the entity’s governance template through partnership or operating agreements, corporate charter or bylaw provisions, and/or secondary contracts.

This emphasis on contractual freedom comes at a price, of course. Modern business entity codes are longer than their former counterparts, in part because they must spell out detailed boundaries for permitted governance variations, as well as “opt-out” or “opt-in” procedures for firms that want to use them.

Limits on Judicial Regulation

Statutory business associations law was also relatively simple in the early 1980s because judicial decisions filled many gaps. As an example, case law—not statutes—traditionally defined the scope of corporate director and officer fiduciary duties, attendant liability and damage risks, and the permissible boundaries for judicial review, like the business judgment rule. The same was true for litigation involving partners of general and limited partnerships.

Both fiduciary duties and the business judgment rule remain key precepts of modern business associations law. And judges remain involved in their development, though far more in Delaware than in other states. But concerns about perceived judicial overreach triggered changes starting in the mid-1980s, and governing codes began to incorporate nuanced yet complex statutory provisions that constrain the role courts play in business entity disputes.

For example, following statutory trends first launched in Delaware in 1986 and consistent with private ordering themes described earlier, the MBCA has, since 1990, allowed corporations to exculpate directors against damage claims for duty of care violations with an optional charter provision. Unincorporated entity acts have embraced similar innovations for partnerships and LLCs. In 1998, the MBCA added complex and lengthy provisions regulating the permissible scope of claims against directors for monetary damages, including grounds for suit and burdens of proof on both claims and defenses.

Current statutory innovations designed to reduce litigation risks for corporations and their fiduciaries include procedures for ratification of defective corporate actions, advance approval or waiver procedures for duty of loyalty claims, enhanced indemnification rights for fiduciaries, and limits on permissible litigation forums. As with other statutory governance options in modern business associations law, the enabling provisions are often both lengthy and complex.

Although most statutory innovations have reduced the potential for judicial involvement in business entity disputes, developments for closely held organizations go both ways. On the one hand, modern statutes authorizing specialized management arrangements and exit planning for privately held corporations have reduced the occasion for judicial challenges to such plans. On the other hand, new statutory oppression remedies in most jurisdictions now supplement or replace minority owner fiduciary protections derived from case law and are available for both closely held LLCs and corporations.

Entity Proliferation

The three acts I studied when taking BA in 1983—the UPA, the ULPA, and the MBCA—also described the primary entity options available to business lawyers and their clients at that time: partnerships, limited partnerships, and corporations, with the potential addition of “professional” or “Subchapter S” options for the latter. Available entity choices have since increased dramatically because of two near-simultaneous developments in the late 1980s.

The first was a 1988 revenue ruling authorizing pass-through taxation for owners (“members”) of an LLC—a novel entity then available in only two states—offering limited liability to all participants, along with flexible options for company management. The second was legislation allowing new limited liability versions of partnerships, a product of malpractice litigation against partners in Texas law firms and national accounting firms in the wake of the savings and loan crisis of 1988.

As a result of these developments, by the mid-1990s all states had amended their business entity codes to encompass these new options, including limited liability partnerships (“LLPs”), limited liability limited partnerships (“LLLPs”), and LLCs, as well as “professional” variations of new entities, like PLLPs and PLLCs. This expanded entity menu necessarily added to the complexity of statutory business associations law, including new provisions in partnership acts governing LLPs and LLLPs, additional freestanding codes (LLC acts), and, in recent years, supplemental legislation authorizing “series” LLCs.

As acceptance of these novel entity choices has grown over the past three decades—with the LLC the clear favorite for closely held firms—that growth has also fueled added complexity for business associations case law as long-established doctrines, like veil piercing and other exceptions to limited liability, and even traditional creditor remedies, like charging orders, are relitigated in new contexts. That trend will surely continue as benefit corporations, now available in 34 states, and other new entity options join the mix.

Technological and Transactional Flexibility

As in other legal fields, many changes in business associations laws over the past few decades were designed to accommodate technological innovations. In corporate law, for example, former requirements for filing paper documents now encompass electronic equivalents. Sanctioned notice processes have also evolved from paper to electronic systems. And these changes extend well beyond documents and recordkeeping. When I studied BA in 1983, statutes authorizing directors to meet through a conference telephone call—a then-recent innovation—seemed “as fur as they could go,” to paraphrase Oscar Hammerstein. But today’s corporation acts go much further, including authorization for fully remote shareholder meetings.

Modern business associations laws also offer considerable flexibility with respect to transactional formalities, including permissive rules for organic changes. For example, in the 1980s, a partnership that reorganized as a corporation might need to first dissolve or take other steps to transfer assets and liabilities to a newly formed corporate entity. Today that partnership could conduct a cross-entity merger or a single-step “conversion” to the corporate form. In the 1980s, if a corporation wanted to change its governing law, the company organized a new corporation in the foreign state and then merged into it. Today a corporation or unincorporated entity can typically conduct a “domestication” transaction that changes its governing jurisdiction in a single step.

Conclusion

Despite all the changes I’ve seen over the past 40 years, the agency law foundations on which business associations are constructed haven’t changed at all. Nor have the fundamental purposes of business associations law: to mediate conflicts that inevitably arise in the life of a business entity between owners and managers, between majority owners and minority owners, and between the entity and third parties.

At the moment, everything old is new again, at least in some quarters. Debates concerning the proper objectives of business associations—debates that began in the 1930s and seemed settled in recent years—now rage anew in fights over corporate missions that include environmental, social, and governance (“ESG”) considerations. As Yogi Berra famously said, “It’s tough to make predictions, especially about the future.” While I wait to see what happens, my mantra is the same as when I took my first BA class in spring 1983: Take good notes!