Category Archives: corporations

Futurama: Future Stock

This guest post was written by Craig Messing, an attorney from New York, who contacted us with this excellent idea for a post.  If you are a legal professional (e.g. an attorney, judge, or law professor) or a comic book professional (e.g. an author, editor, or illustrator) and  you have an idea for a post that would be a good fit for Law and the Multiverse, feel free to contact us!  

Introduction

Future Stock is the 21st episode of the third season of Futurama.  While somewhat outside this blog’s normal purview of comic-related media (even if there are Futurama comics), the episode touches on some unique, obscure, and even speculative issues of corporate governance and probate law.  As most of the series takes place in “New New York,” we will assume New York law applies, albeit 1000 years into the future.  It should go without saying, but spoilers to follow.

I. Background

In the episode, a shareholder meeting of Planet Express leads to an “80′s guy” (referred to throughout the episode only as “That Guy”) being named chairman of the corporation.  This eventually leads to That Guy trying to sell the company and gut it for profit, and a shareholder vote over the sale.  That Guy wins the shareholder vote, but then dies (fairly gruesomely) before the transaction is concluded.  Control of his shares passes to Fry, as vice-chairman of Planet Express, who votes down the sale.  (This ignores the fact that the vote had already been cast and approved by both companies, and thus should be binding, even after That Guy’s death.)  The issues here are multiple, but we will look at two.  First, we will examine what recourse the other shareholders of Planet Express might have had to block the sale, and the likelihood of success of those efforts.  Second, we will look at whether control of That Guy’s shares should have passed to Fry, and the potential consequences if they had not.

II. Oppressed Shareholders

In the episode, That Guy purchases 51 percent of the voting rights from Zoidberg (“The shares were worthless, and he kept asking for toilet paper!”), and imposes his will on the other shareholders, all of whom vote against the sale.  The remaining shareholders are outraged, but are powerless to affect the situation.  At face value, this would seem to be textbook shareholder oppression, in which the majority shareholder(s) imposes his will, to the detriment of the other minority shareholders.  Oppression can be especially prevalent in close corporations, where there are only a limited number of shareholders – as appears to be the case with Planet Express.  (Note: after the sale is completed, all outstanding shares of Planet Express are said to be purchased “at the current market price.”  But as a close corporation, there would not be a “market” price.  This is likely an oversight of convenience by the writers, however.) 

Oppressed minority shareholders may sue to prevent the oppressive actions of majority shareholder(s).  However, New York courts have defined “oppression” as “conduct that substantially defeats the reasonable expectations held by minority shareholders in committing their capital to the particular enterprise,” and held that oppression exists “only when the majority conduct substantially defeats expectations that, objectively viewed, were both reasonable under the circumstances and were central to the petitioner’s decision to join the venture.”  In re Matter of Kemp & Beatley, Inc., 473 N.E.2d 1173, 1179 (N.Y. 1984) (internal quotations omitted).   In other words, shareholder oppression will be found only if a “reasonable person” in the shareholders’ situation would be unhappy.

In this case, a “reasonable” Planet Express shareholder would likely be ecstatic at the results of the sale.  In the initial shareholder meeting, where That Guy is named chairman of Planet Express, the company’s dismal financial state is firmly established: a pie chart is shown, illustrating the company’s revenues; a minority of the pie accounts for revenue from business operations, while the majority is made up by “an eight-dollar bank error in our favor.”  After the vote on the sale is finalized, however, the market (“purchase”) price of Planet Express is given as $107.  It would be very difficult to argue that a “reasonable” minority shareholder would disapprove of a transaction that so drastically increased shareholder value, and thus the oppression argument would likely fail.

III. Descendability, Intestacy, and Escheat

Almost immediately after the vote approving the sale, That Guy dies, Fry takes control of his voting shares as vice-chairman, and negates the sale.  However, the corporation could only assert control of these shares if there was some sort of repurchase agreement with Planet Express, under which it could buy back the shares upon That Guy’s death.  Further, even if such an agreement did exist, That Guy’s shares would be either retired or turned into treasury stock; in either case, the shares would no longer have any voting rights, and if the sale of Planet Express had not already been finalized, the minority shareholder votes against the deal would carry the day without Fry’s last-minute heroics.  However, there is no mention of such an agreement in the episode, and thus there is no reason why That Guy’s shares couldn’t pass under his will, or failing that, under the law of intestacy … except that, again, there is no mention of That Guy having a will, nor any heirs, – nor is there any indication of That Guy having a family in the 1980s that might have propagated and survived into the year 3000.

More importantly, New York law might not allow for such distant relations to inherit through intestacy, even if they did exist.  Article 4 of the New York Estates, Powers and Trusts Law (EPT) governs intestate estates, and section 4-1.1 of the EPT enumerates the various classes of individuals who can take under New York law, allowing only for the decedent’s spouse, issue, parents, “issue of parents” (i.e. brothers and sisters of the decedent), grandparents (as well as “the issue of grandparents,” i.e. aunts and uncles), and “great-grandchildren of grandparents” (i.e. nieces and nephews) to take.  There is no provision for an individual outside of that closed list to take under intestacy, and as such, even if an heir does exist, it would be a very distant relation, well outside the purview of the EPT.  Apparently, New York has yet to account for time-travel and cryogenics (both of which appear to be fairly common in the future) in its probate code.  Quite the oversight.

Presuming that New New York law has not yet corrected this oversight, then That Guy’s apparent lack of both a will and eligible intestate heirs would cause the doctrine of escheat to come into effect.  Under escheat, a state acts as a sort of heir of last resort, and may take property if no other heir can be ascertained, or if property is abandoned.  See, e.g. N.Y. ABP § 102 (“It is hereby declared to be the policy of the state … to utilize escheated lands and unclaimed property for the benefit of all the people of the state, and this chapter shall be liberally construed to accomplish such purpose”).  It is not unheard of for a state to take corporate stock under escheat; in fact, such an action was expressly upheld in Standard Oil Co. v. New Jersey, 341 U.S. 428 (1951).

Escheat in New York is governed by the New York Abandoned Property Law; escheat of securities is specifically addressed in Article 5.  However, for a security to be “abandoned” – which was an implicit requirement under the Standard Oil case –  payments due to the security holder have been unclaimed by, and no written communication received from, the rightful holder, for a period of three years.  N.Y. ABP § 501(2)(a).  Only after the security has been found to be abandoned is it to be delivered to the state.  N.Y. ABP § 502.  Therefore, for purposes of the sale of Planet Express, it would seem that the 51 percent shares owned by That Guy would be in limbo for a three year period, while eligible heirs were searched for (likely in vain).  During this time, as they could not be voted, the minority shareholders would have been able to defeat the merger of their own accord.

IV. Escheat of a Majority Stake, and the Public Policy of the Future

Unfortunately, even THIS is not the end of the matter, because if escheat is exercised in this case, it would effectively transfer a majority interest in a private corporation to the state of New New York, as That Guy controlled 51 percent of Planet Express’s stock.  While seizure and nationalization of private businesses by the federal government is not unheard of, seizure is usually predicated on great turmoil, such as a World War – though even war is not always sufficient cause for nationalization, see Youngstown Sheet & Tube Co. v. Sawyer, 343 U.S. 579 (1952), which held that President Truman’s attempted nationalization of the steel industry during the Korean War, by executive order, was authorized neither by the Constitution, nor by Congress, and was thus illegal – but no such circumstance is present here.  There is precedent of the nationalization of a private business due to severe financial hardship (most recently General Motors), and it is undisputed that there were severe hardships facing Planet Express; however, it would be very difficult to argue (despite the many dealings the company has had with the President of Earth), that Planet Express was such a vital cog in the economy as compared with GM.

For fairly obvious reasons – it is rare for any individual to die both intestate and without any heirs to take under intestacy, and it is borderline inconceivable that an individual who is intellectually capable of obtaining majority control of a company would also die intestate – there is no precedent for a state obtaining a majority share of a company via escheat.  As such, any analysis here will be speculative.  However, I believe that the guidance of the Supreme Court in Youngstown Sheet & Tube, and Standard Oil v. New Jersey, allows us a fairly clear indication as to the public policy rationale that might guide a New New York court in rendering a decision in this matter.  Youngstown provides that nationalization (or, in a more general sense, public takeover of a private business) can occur only when expressly provided for, either by the Constitution or under the law, and Standard Oil allows for corporate stock to be taken by the state under escheat, but provides only for the delivery of the securities, and for the payment of moneys due the holder of the securities.  Similarly, Article 5 of the ABP appears more concerned with obtaining payments due under the securities than with voting rights, and in fact no mention is made in the law of the state’s exercise of voting rights.  Moreover, much like the federal government under Youngstown, it would appear that a state can only take control of a private company under specific conditions provided for under the law, such as a state banking regulator taking control of a struggling bank.  Therefore, I believe that New New York would be able to take possession of That Guy’s 51 percent stake in Planet Express under escheat, but only for purposes of taking any dividends due (or, in the event the sale did go through, its share of the proceeds from the sale).  However, as no law expressly allows the exercise of voting control on securities taken under escheat, an attempt to do so would be illegal.

V. Conclusion

While “Future Stock” does not address the option of minority shareholders to enjoin a majority action, the episode does address the reasonableness standard fairly well.  When the minority shareholders realize how much their shares have appreciated due to the impending sale, each of them (except Fry) immediately voice happiness over their being overruled, thus acting “reasonably” and defeating any notion of an oppression suit.  The episode handles the issue of That Guy’s estate (namely his 51 percent stake in Planet Express) less well.  The episode ignores both the securities and estates law on point, instead assuming that control of the shares would pass from chairman to vice-chairman.  Even if the shares were repurchased by Planet Express, regardless of how the corporation chose to treat them, they would not be voting shares unless and until they were re-issued by the corporation.  And if they passed into That Guy’s estate … as discussed at length above, that opens up a considerable can of worms, to say the least.

That said, while this particular episode might not have handled the law exceptionally well, there are at least two instances from Futurama’s current run where the show has addressed novel legal implications of its futuristic setting, in a serious, thought-provoking manner.  And besides, Futurama is a spectacular show.  You should watch it.  The hypnotoad commands youAll glory to the hypnotoad.

The Money Pit

The Money Pit is a 1986 film directed by Richard Benjamin and starring Tom Hanks and Shelley Long. Hanks plays Walter Fielding, a young New York entertainment lawyer, who with his girlfriend Anna (Long) are forced to find a new place to live on short notice when Anna’s ex-husband returns from Europe, tossing them out of his apartment, where they had been living. They discover what appears to be a lucky break in the form of a stately old mansion which is being forcibly sold to pay for legal fees.

Walter is himself in fairly hot water when the movie begins. Sometime prior to the events of the film, his father, a former partner in what seems to have been a father-and-son law practice, absconded with $2.9 million in client funds. It’s not clear precisely how this was done, but the substance of it seems to be that he made off with the firm’s trust account. Walter is left paying the bill.

To secure the sale of the house, Walter borrows $200,000 from a client. The client happens to be a minor and a stupidly successful pop star, so he can afford it.

So the questions here are (1) whether Walter really would be left to pay his father’s debts, and (2) whether it’s legal and ethical to borrow money from a client under those circumstances. Continue reading

Nelson & Murdock Becomes Just Nelson

Today’s post is about the latest issue of Daredevil.  (If you aren’t following Mark Waid’s run on Daredevil, you should be.  If you want to catch up, the first six issues and issues 7-10.1 are available in trade paperback.)  After an unannounced nine day leave of absence from the firm on Daredevil business, Matt Murdock returns to find his law partner Foggy Nelson kicking him to the curb, at least for the time being.  So how does a law firm dissolve, and what are the consequences for Nelson and Murdock as newly independent attorneys?

I. Dissolving a Partnership

Since the sign on the door just says (or rather said) Nelson & Murdock, it’s likely that the firm is organized as an ordinary partnership, as opposed to a limited liability partnership or a professional corporation.  Typically those kinds of businesses are legally required to indicate their status (e.g. “Nelson & Murdock, LLP” or “Nelson & Murdock, P.C.”).  It is possible that Nelson & Murdock is an LLP or PC that registered “Nelson & Murdock” as a fictitious name (called an assumed name in New York), but that’s needlessly complicated.

In any case, there are a couple of different ways that the partnership could be dissolved.  If the partnership was a “partnership at will” (i.e. a partnership that was established for no specific purpose and no particular duration), then any partner can dissolve it at any time.  See, e.g., Dunay v. Ladenburg, Thalmann & Co, Inc., 170 A.D.2d 335 (1991).  If that were the case here, then Foggy could certainly take his ball and go home, so to speak.  All that is required is that Foggy’s actions “must manifest an unequivocal election to dissolve the partnership.”  In this case, Foggy says “You need to leave. … I’ve delegated your workload, I’m taking your name off the door, and I’m demanding a break. … We’re through.”  That seems pretty unequivocal to me.

However, it seems unlikely that two competent attorneys would form a partnership without a partnership agreement.  And if the firm were actually an LLP or PC then there would definitely be a partnership agreement or corporate charter.

A partnership agreement can specify, among many other things, how, why, and when the partnership can be dissolved.  In this case, Matt had been completely out of communication for nine days, unannounced, and there was evidence that he had unresolved issues with depression.  Being unresponsive to clients is both unethical (see New York Rules 1.3 and 1.4) and can be the basis for a malpractice action.  If mental health issues interfere with a lawyer’s ability to perform his or her job competently, then that’s also a problem.  New York Rule 1.1.  It’s highly likely that this would meet the standard for dissolving the partnership under the partnership agreement.  Since Matt was the one ‘in the wrong,’ it’s not surprising that Foggy would keep the office and (apparently) the clients.

Once the partnership was dissolved, it would technically remain in existence long enough to wind up its affairs.  N.Y. Partnership Law § 61.  This would give the firm time to, for example, disburse the partnership assets to the partners, transfer clients to Nelson’s new firm, etc.

II. Consequences

Foggy appears to be keeping the firm’s clients, either by the terms of the partnership agreement or by default, since Matt is in no state to represent them at the moment.  But after Matt gets cleaned up, could he approach his former clients?

As a general rule, non-competition and non-solicitation agreements either cannot be enforced against attorneys or can be enforced only very narrowly.  New York Rule 5.6; Graubard Mollen v. Moskovitz, 149 Misc.2d 481 (Sup. Ct. 1990).  In fact, it would be unethical for Murdock or Nelson to offer or accept an agreement that restricted their right to practice after terminating the partnership.  This is very different in other fields, where noncompetes are common.  The courts have decided that choosing a lawyer is special in that regard.  So Murdock would likely be free to set up his own firm and even to attempt to solicit his former clients to come over to the new firm.

III. Conclusion

It will be interesting to see where Waid takes this.  Is this the end of Nelson & Murdock?  Will we see the two on opposite sides of the courtroom in the future?  Exciting stuff!

The Dark Knight Rises I: Corporate Shenanigans

The latest and presumably last installment in Christopher Nolan’s epic Dark Knight Trilogy, beginning with Batman Begins, continuing through The Dark Knight and now culminating in The Dark Knight Rises, came out on Friday. The reviews are generally positive, but as always, we’re more interested in how the film handles the legal side of things.

Unfortunately… there are some problems.  Major spoilers follow.

Continue reading

The Dark Knight: Embezzlement

On Friday we talked about legal ethics in The Dark Knight. Now we’re going to take a look at an issue with consequences beyond the movie’s version of Batman. Specifically: does being the CEO or majority shareholder of a corporation give you the right to use corporate assets for personal projects? In the movie, Bruce Wayne (majority shareholder) goes to Lucius Fox (CEO) whenever he needs another cool toy, and Coleman Reese’s discoveries suggest that he’s not just buying them from the company but is actually using corporate resources to develop and manufacture his stuff. Is this okay?

I. Wayne Enterprises in The Dark Knight

In the Christopher Nolan movies, Wayne Enterprises is portrayed as a publicly traded company. It’s got a board of directors. It’s got institutional and private shareholders. Bruce Wayne has a controlling interest and therefore gets to call a lot of the shots, but the corporation is not, in fact, his personal plaything.

Though you wouldn’t know it from the way he treats it. Turns out that Fox has probably committed what amounts to embezzlement, i.e., the fraudulent conversion of the property of another over which one had lawful possession. It’s also often a felony, particularly when it involves large amounts of money.

Here’s the deal. Fox, as the CEO of Wayne Enterprises, has lawful possession of all of Wayne Enterprises’ assets by dint of the fact that he has lawful control over those assets.  Note that possession is separate from ownership; Fox controls the assets but he does not own them.  Generally speaking, the CEO of any given company is just that: the chief executive officer.  He or she has complete and inherent authority to commit corporate assets to any lawful purpose for the benefit of the corporation, except as limited by the corporate charter. For example, if Lucius decides one day that Wayne Enterprises isn’t going to sell X-type widgets anymore, he can sell off or shut down that division of the company overnight, unless the Wayne Enterprises charter requires a more complex procedure, such as a vote by the board of directors.

But if he’s acting against the orders of the board or without the board’s permission, he exposes himself to a charge of embezzlement. CEOs of major corporations have disputes about business strategy with their respective boards of directors all the time, and while it frequently leads to people getting fired (either the CEO or the board, depending on who does better with the shareholders), it isn’t generally criminal. But using corporate assets for personal purposes is something else entirely. Coleman Reese discovers that the R&D department is “burning through cash” on a project purported to be “cell phones for the Army.” If such a contract had actually existed, Fox could commit the company to it. But it doesn’t. It’s a pretext for fitting out Bruce Wayne with a really cool if ethically and legally problematic surveillance system. Fox doesn’t have the authority to divert corporate assets for those sorts of personal projects. So he is fraudulently converting the property of the company over which he has lawful possession to his own use, namely, giving it to Wayne.

Why? Because the fact that Bruce Wayne is the majority shareholder doesn’t actually give him an ownership interest in any corporate assets in particular. He can’t walk up and say “Hey, I own half of the company, so I get to use the corporate jet half the time.” That’s not how that works. The business owns its assets, and an interest in the company does not transfer to an interest in the company’s assets as such. The distinction gets a bit blurrier in closely-held corporations, particularly when there is only one owner—as is frequently the case in small businesses—but the mingling of corporate and personal assets is a pretty big no-no in the area of corporate law, and one of the things that courts look to when they consider piercing the corporate veil. We actually talked about that here.

Wayne himself wouldn’t be guilty of embezzlement, as he never had lawful possession of the property, but he would be guilty of conspiracy to commit embezzlement—as would Fox—which is almost as bad. Conspiracy is distinct from the underlying crime, and one can be guilty of conspiracy even if one does not or could not commit the underlying crime. Even if Fox turned him down, Wayne would still be guilty of solicitation for even asking. Also, being in possession of the goods probably counts as receiving stolen property. This is just bad all around.

II. Billionaire industrialists generally

Note that things would be different if Bruce Wayne were using his own assets to fund his projects. Wayne is independently wealthy, and much of this income is presumably in the form of dividends on his Wayne Enterprises stock. This is money he can use for absolutely anything he wants (within the ordinary bounds of the law, of course). Compare this to the way Tony Stark is portrayed in Iron Man. Stark, too, is the CEO of a company he mostly owns, in this case Stark Industries. But Stark develops the Iron Man technology entirely on his own and doesn’t use corporate assets to develop or manufacture it. He has a lab and fabrication equipment in his mansion. He may then have Stark Industries use some of this technology for other purposes, e.g., developing the Arc reactor for commercial and industrial power generation, but as far as the movie goes, no corporate assets are devoted to his activities as Iron Man.

This is entirely okay, at least as far as corporate law is concerned. Stark is free to use his own fortune in any way he wants. So is Bruce Wayne. So in a sense, the way the comic books portray Batman is actually a bit more realistic than the way the movies do. In the comic books, Wayne has a situation far closer to Stark’s position in the movies, i.e., the billionaire industrialist who has a superhero alter ego but who mostly uses his own inventions, manufactured by himself, financed by his personal fortune. Ironically, in the comic books, Stark is generally portrayed as mixing his corporate and Iron Man activities in much the same way as Bruce Wayne does in the movies. Quite the reversal.

III. Alternatives

Still, Wayne is a very rich man. Why couldn’t Wayne simply buy anything he needed from Wayne Enterprises? Fox is certainly capable of authorizing such a transaction. Wayne could even enter into a contract with Wayne Enterprises wherein the latter could be paid by Wayne personally to develop and manufacture Batman gear for Wayne’s use. That would be okay. If done right it could even result in a profit for the company. The problem is that for such a setup to be legally okay, some bits would need to be public, or at least known to the board of directors and its accountants and auditors.  It would be very hard to keep something like that secret.

Similarly, why couldn’t Fox arrange things such that Wayne simply received his Batman gear as part of some kind of compensation package? Two reasons. For one thing, Wayne isn’t portrayed as an employee of the company in The Dark Knight. He’s a shareholder, but not an employee or officer. So there isn’t really any obvious way he could get any compensation apart from regular dividends. And setting up some kind of cushy straw position wouldn’t necessarily work either. The Batman gear is presumably ludicrously expensive. Receiving that as compensation would almost certainly make Wayne one of the most highly-compensated people in the company. Not only would the board of directors need to approve that, but it would probably need to be filed with the SEC. So the choice would either be completely blowing the secrecy angle or violating a lot of laws about corporate filings, executive compensation, and taxes. Again, no good.

And obfuscating things to try to disguise Wayne’s Batman activities is also no good, as it would involve falsifying all sorts of official corporate documents. Part of the Sarbanes-Oxley Act, a corporate reform law passed in 2002, imposes personal, individual responsibility for corporate filings upon both executives and directors, so as soon as anyone figures out that there’s funny business going on—and if there’s one thing about the movie that is accurate, it’s that a halfway-decent auditor will figure things out eventually—Fox and Wayne are going to be in huge trouble.

IV. Conclusion

So really, as far as corporate law goes, the version of Batman/Bruce Wayne depicted in The Dark Knight trilogy is actually quite problematic. Fox is likely guilty of embezzlement, and Wayne would be guilty of conspiracy and receiving stolen property. Further, the most obvious ways of “fixing” the problem are themselves problematic, mostly because they’d make Wayne’s identity as Batman that much closer to public knowledge. Tony Stark has a much better way of going about this: use one’s personal fortune, founded upon but distinct from the corporation, to finance his toys (though he also has the benefit of not worrying about a secret identity). Considering that this is generally how it’s depicted in the comic books, and that in those stories Batman frequently invents most of his own gear, the way things are written in The Dark Night trilogy is surprisingly bad, if unintentional, or puts Wayne in a very grey area, if it’s intentional.

Superhero Corporations II: Piercing the Corporate Veil

So a couple of days ago we talked about superhero corporations and respondeat superior. This time we’re taking a look at the opposite situation, where corporate actions can result in personal liability for the owners of a corporation.

I. Basic Doctrine

This is significantly less common than respondeat superior liability, as the whole point of corporate entities is limited liability. Corporations were invented to permit investors in trade missions to limit their liability to the money they had actually invested—ships were lost pretty frequently, so this was a big deal. Without the joint stock company, the Age of Exploration just wouldn’t have happened. These let the risk of investment be spread not only among multiple investors, but across multiple voyages. So while a particular ship may go down with all hands, but not only can the creditors not proceed directly against the investors for anything owed, but the debtors can use the profits of another voyage they’ve funded to make good the debt. Everybody’s happy.

The basic point here is that while it’s pretty easy for a company to be liable for the actions of its employees, it’s very difficult for an executive or owner to be personally liable for the actions of the corporation. When that happens, it’s called “piercing the corporate veil”. In US law, there are a series of factors that courts look at to determine whether the veil should be pierced. This isn’t a checklist, and it’s not the kind of thing where if you have more than half of the factors you win. Even a single factor can result in piercing if it’s bad enough, particularly when we’re talking about undercapitalization, i.e. when the investor hasn’t actually put enough money into the corporate entity to cover its debts. The courts do recognize that the point of corporations is to limit liability, but they aren’t very happy with people who create corporations solely for that purpose, particularly when the risk to be avoided is less just the ups and downs of business than avoidance of a known debt. The law lets you limit your liability for business purposes, but it won’t let you play games.

II. Superheroes and Piercing the Corporate Veil

So then, might it be that actions of various superhero corporations could result in personal liability for the superheroes that own them? Again, this is a fact-intensive analysis. But going with the examples above, we can again see something of a spectrum.

Remember, now we’re talking about something the corporation does, not something that the superheroes do as a result of their connection to the corporation. Products liability is perhaps the most obvious example, but it can come up with contracts, too. Basically, we’re now thinking about a situation in which the corporation, as a corporation, has gotten itself into trouble, completely independent of any superhero activities.

First, Batman. Here it seems very unlikely that the actions of Wayne Industries could result in personal liability for Wayne himself. Again, we’re talking about a multinational conglomerate with legitimate business operations in multiple continents, most of which have absolutely nothing to do with Wayne personally. The corporation is certainly well capitalized, and Wayne doesn’t appear to be doing much in the way of co-mingling of funds, though he may be guilty of siphoning away corporate assets for personal purposes as part of his Batman sideline. Still, the facts would probably have to be related to Batman in particular for that last one to matter, in which case Wayne would be personally liable anyway.

Tony Stark seems to be in almost the same position. Here we’ve got a major corporation, and though his identity as Iron Man is well-known, Stark Industries appears to be a healthy, well-run defense contractor with little in the way of corporate irregularities. Piercing again seems unlikely.

But just as with respondeat superior, the Fantastic Four seem a lot more susceptible to this. Fantastic Four, Inc. exists almost solely to let them operate as superheroes, and it doesn’t do all that much aside from licensing Reed’s patents and manufacturing goods based on them. There’s also a sense that personal and corporate assets may not be kept very distinct, in that while both Wayne and Stark are said to be independently wealthy apart from their role in the corporation, the FF’s money seems to be entirely based on the corporation. Wayne and Stark both own mansions, boats, sports cars, etc., and frequently show off their personal wealth. The FF live a lot more modestly and while they really don’t seem to worry about money, a lot of their material comfort really does seem to be linked directly to their corporate activities. So if FF Inc. is sued for products liability, this isn’t going to look good. It’s entirely possible that Reed and potentially the rest of the family could be on the hook personally.

III. Conclusion

Piercing the corporate veil is strongly disfavored by the courts, and plaintiffs really need to show that the corporate investors/owners are trying to pull off some kind of manifest injustice before the courts are going to put the investors/owners on the hook personally. But it can happen, particularly in situations like the Fantastic Four where the corporation is basically just a front for personal activities.  With Wayne and Stark, by contrast, it’s unlikely to happen unless Wayne or Stark personally ordered or oversaw something seriously illegal.

Superhero Corporations I: Vicarious Liability

There are several superhero characters that also happen to be executives of major corporations. Batman, as Bruce Wayne, is the head of Wayne Industries. Tony Stark runs Stark Industries. Reed Richards is in charge of the Fantastic Four’s corporate activities. The list goes on.

A question we haven’t talked about much yet is whether the activities of our heroes can cause liability for their respective corporations and vice versa. There are distinct issues here. The first is “respondeat superior” a Latin phrase meaning “Let the master answer” which is a species of vicarious liability, and “piercing the corporate veil“. The former can create liability for employers as a result of the actions of employees. The latter can create personal liability for executives and owners of a corporation for actions of the corporation. As one can see, these might be issues for our heroes. This time, we’re going to take a look at respondeat superior.

I. Basic doctrine

The basic concept here is that if an employee does something wrong while in the service of his employer, the employer is responsible even if the employer did not directly authorize the action. The most common example is if an employee is driving at the behest of his employer and gets in an accident. If the employee is still within the “course and scope” of his employment, the employer will be liable.

This may at first seem a little unfair, as what we’ve got here truly is “vicarious liability,” i.e. one person being liable for the actions of another. But there are two main justifications for the doctrine. First, if an employee is acting on behalf of his employer and screws something up, it seems a little unfair to let the employer off without any consequences. The employer certainly stood to benefit by having the employee make the trip, so it only stands to reason that they should also bear the risk of that trip. Second, a person acting on behalf of his employer has the potential to get in far, far more trouble than acting on their own. Returning to the driving example again, an eighteen-wheeler can cause vastly more damage than even a big SUV, but most people don’t use eighteen-wheelers to commute. There’s just no cause for an individual to use one of those things in most circumstances, as almost nothing a private individual might want to do requires moving that much stuff around. But businesses can and do need that kind of hauling capacity and so regularly put those vehicles on the road. The risk there is not just to other drivers, but to the owner of whatever stuff is in the trailer. Same goes for moving things around a warehouse: it’s entirely possible for a single trip with a forklift to be worth more than the employee operating it will make this year and next. So the other reason for making employers responsible for the torts of their employees is that employers (or their insurers) are the only ones likely to be able to afford to pay for said torts.

This is true even with insurance, by the way. Most personal auto carriers don’t even sell policies with limits in excess of $300,000 per person, but $1 million is pretty much the default commercial auto liability limit. And it goes up from there. Commercial excess policies with $25 million limits are pretty commonplace, but personal umbrella policies rarely go beyond $1 million.

One last thing to understand here is the distinction between corporate and personal assets. Take Tony Stark as an example. He’s the single largest shareholder in Stark Industries, so he “owns” a significant chunk of the company. But that isn’t the same thing as owning corporate assets. Stark has an interest in the company and as a shareholder has the right to vote on corporate actions. But he does not have any interest in corporate assets as such. This is part of how corporations work. So when we talk about respondeat superior, we mean that a plaintiff can sue Tony directly and potentially get his stock in the company, as those are his personal assets, but also sue the company directly, and have access to corporate assets. So depending on the size of the verdict, it’s theoretically possible for a plaintiff to wind up both owning a company and being owed a big check from the company. This isn’t likely to happen to any of the characters we’re talking about, as Wayne Industries etc. are all worth billions, but it’s not that uncommon an occurrence in small businesses with few assets.

II. Respondeat superior and superheroes

With that basic explanation of the doctrine, let’s turn our attention to whether superhero executives can create liability for their corporations. The answer here is going to be highly fact specific, turning mostly on whether or not the superhero was acting on behalf of the corporation at the time. Fortunately, our superheroes form something of a spectrum illustrating almost the entire spread of possibilities here.

On one end, we’ve got Batman. Yes, Bruce Wayne is the president and largest shareholder, and yes, he uses corporate assets to be Batman. But his activities as Batman are almost completely distinct from Wayne Industries wider corporate activities. It’s a multinational conglomerate with its fingers in almost everything, and only a tiny fraction of its resources are being redirected to Wayne for his Batman activities. More to the point, Wayne goes to some lengths to hide this from the other shareholders, who would probably vote against this sort of thing if they knew about it. Wayne Industries as such does not really stand to gain anything by Batman’s activities either, aside from the general benefit to everyone that is law and order. So in Batman’s case, it seems unlikely that what he does could subject Wayne Industries to liability, as nothing he does really seems to be within the course and scope of whatever employment he might have there.

In the middle is Iron Man. Tony Stark is the largest shareholder of Stark Industries (or something like that), and people know that he’s also Iron Man. But again, Stark Industries does a lot of things which have nothing to do with Iron Man, and Tony’s employment with the company—when he even is employed—doesn’t seem to have anything to do with being Iron Man. Granted, until he went public with his identity, Iron Man did do a lot to serve Stark Industries’ interests, e.g. protecting corporate assets, but once Stark went public, unless Stark Industries explicitly puts Iron Man on the payroll as such or explicitly puts serving as Iron Man in Tony’s job description, the case for vicarious liability is murky at best. It’s possible that it could be there, especially if Iron Man is acting in the company’s interest, but it isn’t a slam dunk case most of the time.

On the other end of the spectrum is Reed Richards and the rest of the Fantastic Four. Fantastic Four, Inc. is the corporate entity that they use to sell things based on Reed’s patents and to generally fund their activities. But that’s about it. Not only is FF, Inc.’s business pretty much entirely about the Fantastic Four, but it’s mission is pretty explicitly to let them do what it is that they do. Vicarious liability should be pretty easy to establish here.

III. Conclusion

So, as we see, respondeat superior is something that at least some superheroes are going to have to worry about. Next time we’ll take a look at the flip side and piercing the corporate veil.

Castle: “Head Case”

This week’s Castle introduces the issue of cryonics, i.e. the practice of “preserving” human remains in liquid nitrogen under the theory that identity and personality are simply a product of cellular structures. The thinking is that a person who is “dead” by standard definitions may someday be revivable under the right circumstances.  Although this episode didn’t have much to do with superheroes, we got some questions from readers about it. Spoilers inside. Continue reading

Torchwood: Miracle Day Episode 4

By this point in the series, it’s pretty clear that the writers are deliberately trying to play with the “legal” consequences of the premise. And you know what? Good for them. Of course, it would have been better if they’d asked someone who knew something about the legal system before they went with it, because things aren’t getting any better on that front. Continue reading

Superhero Organizations and Business Entities

One question that has come up a number of times is what kind of business entity would be best for superhero organizations like the Avengers or the Justice League. This was a bit too much for a mailbag, so here’s a full-length post on the subject.

To discuss this adequately we’ll have to take a brief look at the different kinds of business entities and their pros and cons.

Continue reading