Quarterly State Compliance Review

This edition of the Quarterly State Compliance Review looks at some of the significant legislative enactments and court decisions from the last 3 months, including two Delaware Chancery Court decisions dealing with the duty of disclosure.

IN THE STATE LEGISLATURES

California

One legislative enactment of interest is California Assembly Bill 1000. California requires domestic and foreign publicly traded corporations to disclose certain information in an annual filing. Previously, these disclosures had to be made when the corporation filed its initial or annual Statement of Information. However, A.B. 1000, effective Sept. 27, 2004, provided that the Corporate Disclosure Statement must now be filed separately from the Statement of Information, within 150 days after the end of the corporation's fiscal year. A.B. 1000 also made several changes to the information that must be disclosed, including removing the requirement to attach a copy of the most recent independent auditor's report and requiring disclosure of the compensation paid to the CEO if the CEO is not among the five most highly compensated executive officers and the name of the current auditor if different from the one who audited the last report.

Michigan

Corporations subject to Michigan's unclaimed property reporting requirement will be interested in Senate Bill 1340, which, effective Oct. 12, 2004, changed the time period for determining when any stock, share, or other intangible ownership interest in a business association is presumed abandoned. Pursuant to S.B. 1340, such an interest is to be presumed abandoned if it is owned by a person who for more than 3 years (previously 7 years) has not claimed a dividend, distribution or other sum payable as a result of the interest, or who has not communicated with the association regarding the sum payable, and the association did not know the location of the owner at the end of the period.

New York

Assembly Bill 7401, effective Nov. 22, 2004, amended Sec. 803 of the Business Corporation Law (BCL), which is the section governing amendments to the certificate of incorporation. Certain sections of the BCL were amended on Feb. 22, 1998 to reduce the shareholder vote required to approve certain actions, including a merger or dissolution, from two-thirds to a majority. However, corporations incorporated before Feb. 22, 1998 have to amend their certificate of incorporation to be subject to the majority vote requirement. Pursuant to A.B. 7401, an amendment to the certificate of incorporation for the purpose of reducing the requisite shareholder vote to take an action that, pursuant to the BCL requires a greater than majority vote, shall not be adopted except by a vote that is at least equal to that which would be required to take the action as provided in that section of the BCL. (Thus, for example, an amendment to reduce the vote necessary to approve a merger from two-thirds to a majority will have to be approved by at least a two-thirds vote. Previously, such an amendment could have been approved by a majority vote).

Virginia

Attorneys who organize or register corporations, limited liability companies, limited partnerships, or business trusts in Virginia will be interested in amendments that went into effect on Oct. 1, 2004, dealing with business entity names. Previously, the name of a corporation had to be distinguishable upon the state's records from the name of another corporation. Similarly, an LLC, LP or BT name had to be distinguishable from the name of another of that same type of business entity. However, House Bill 1753 amended the provisions of the business entity laws to prohibit the use of a corporation, LLC, LP or BT name that is not distinguishable from the name of any corporation, LLC, LP or BT. Thus, for example, the proposed name “ABC Corporation” would not be acceptable if the state's records include an active limited liability company called “ABC LLC.”

IN THE STATE COURTS

Delaware's Chancery Court Clarifies Duty to Disclose in Short-Form Merger

In Gilliland v. Motorola, Inc., C.A. No. 411-N (Del. Ch., October 8, 2004), the defendant, Motorola, Inc., launched a tender offer for the minority held common shares of Next Level Communications, Inc. Comprehensive disclosures were sent to Next Level's stockholders. After Motorola's holdings reached 90%, it acquired the remaining shares in a short-form merger. The remaining stockholders were sent a notice of merger that did not contain any financial information about Next Level. The plaintiff, a Next Level stockholder, filed suit alleging that Motorola, as controlling stockholder, violated its common law fiduciary duty of disclosure by not including in the notice any information as to Next Level's value.

The Delaware Chancery Court noted that in the context of a short-form merger, the majority stockholder has a common law duty to provide substantive, financial information relating to the value of the corporation that is material to the decision of whether or not to seek appraisal. The inquiry as to whether the amount of information that accompanies a notice of short-form merger is sufficient to satisfy that duty is highly contextual. In this case, Motorola and Next Level made substantial financial disclosures in documents filed and disseminated by them in connection with Motorola's tender offer. Thus, the potential for deception or misinformation in connection with the short-form merger was low and Motorola was under no duty to make voluminous disclosures in the notice. However, in this case Motorola made no financial disclosures at all. In cases such as this where adequate information is publicly available it is a simple exercise to identify the relevant disclosure documents and include them in the notice of short-form merger, or extract and disclose summary information from them and inform stockholders how to obtain more complete information. Because this minimum disclosure was not provided by Motorola, it did not satisfy its disclosure duty.

Delaware's Chancery Court Clarifies Duty to Disclose When Soliciting Consents

In Unanue v. Unanue, C.A. No. 204-N (Del. Ch., November 3, 2004), the plaintiffs were two of the three members of the board of Goya, Inc., a corporation wholly owned by members of the same family. The defendant, the chairman of the board, managed the corporation. The plaintiffs felt that the defendant had been acting in an autocratic and uncooperative manner. They sent written consents to the stockholders that contained a resolution removing the defendant from the board. They received consents representing 62% of the stock and removed the defendant from the board. They also filed a suit to confirm the validity of their action. The defendant contended that the plaintiffs violated their fiduciary duty of disclosure by not disclosing to the consenting stockholders any financial information about the corporation, or that they intended to remove the defendant and his son as officers, and by not presenting the defendant's side of the story.

The Delaware Chancery Court noted that Sec. 228 of the General Corporation Law, which permits action by consent, does not contain a disclosure requirement. In addition, the Delaware Supreme Court has cautioned against grafting equitable fiduciary duties onto clearly delineated statutory requirements. Nevertheless, the court held that even if the plaintiffs were under a duty to disclose, they did not violate that duty. The plaintiffs did not have to disclose financial information because the decision to remove the defendant from the board was not based on finances and the stockholders were aware of the corporation's financial condition. In addition, there was no proof that the plaintiffs intended to remove the defendant and his son as officers when they solicited the consents. Furthermore, the plaintiffs were under no duty to give the defendant the opportunity to present his side. Thus, the plaintiffs validly removed the defendant from the board of directors.

Florida Court Rules that Shareholder May Sue Transfer Agent

In Faro v. Corporate Stock Transfer, Inc., No.3D03-1683 (Fla. App., October 6, 2004), the plaintiff owned stock in a corporation that entered into a merger. As a result of the merger, the plaintiff was entitled to exchange his shares for shares in another corporation. The defendant acted as the transfer agent for the stock exchanges. The plaintiff submitted a stock certificate to the defendant for exchange but the defendant refused to acknowledge the plaintiff's ownership interest. The plaintiff filed a suit against the defendant which resulted in a writ of mandamus compelling the exchange for the stock. The plaintiff then moved to amend his complaint to seek damages from the defendant. The trial court denied the motion, holding that a transfer agent is not liable to a shareholder.

The Florida Court of Appeal reversed. The court based its decision on two sections of Florida's UCC law. One of the sections provides that if an issuer is under a duty to register a transfer of a security, the issuer is liable to a person for loss resulting from the refusal to register the transfer. The other section provides that a transfer agent has the same obligations to security holders as the issuer. The trial court held that these sections did not apply to the defendant. That holding, the Court of Appeal noted, had the effect of placing the defendant in the realm of the common law, under which a transfer agent could not be held liable to a stockholder for damages for wrongful refusal to transfer shares. However, according to the Court of Appeal, Florida's adoption of the UCC abrogated common law. Common law having been abrogated, a coextensive duty (with the issuer) has been placed upon the transfer agent, and the wrongful refusal by a transfer agent to register a requested transfer makes the agent liable to the damaged shareholder. Thus, the shareholder could seek damages in this case.

This edition of the Quarterly State Compliance Review looks at some of the significant legislative enactments and court decisions from the last 3 months, including two Delaware Chancery Court decisions dealing with the duty of disclosure.

IN THE STATE LEGISLATURES

California

One legislative enactment of interest is California Assembly Bill 1000. California requires domestic and foreign publicly traded corporations to disclose certain information in an annual filing. Previously, these disclosures had to be made when the corporation filed its initial or annual Statement of Information. However, A.B. 1000, effective Sept. 27, 2004, provided that the Corporate Disclosure Statement must now be filed separately from the Statement of Information, within 150 days after the end of the corporation's fiscal year. A.B. 1000 also made several changes to the information that must be disclosed, including removing the requirement to attach a copy of the most recent independent auditor's report and requiring disclosure of the compensation paid to the CEO if the CEO is not among the five most highly compensated executive officers and the name of the current auditor if different from the one who audited the last report.

Michigan

Corporations subject to Michigan's unclaimed property reporting requirement will be interested in Senate Bill 1340, which, effective Oct. 12, 2004, changed the time period for determining when any stock, share, or other intangible ownership interest in a business association is presumed abandoned. Pursuant to S.B. 1340, such an interest is to be presumed abandoned if it is owned by a person who for more than 3 years (previously 7 years) has not claimed a dividend, distribution or other sum payable as a result of the interest, or who has not communicated with the association regarding the sum payable, and the association did not know the location of the owner at the end of the period.

New York

Assembly Bill 7401, effective Nov. 22, 2004, amended Sec. 803 of the Business Corporation Law (BCL), which is the section governing amendments to the certificate of incorporation. Certain sections of the BCL were amended on Feb. 22, 1998 to reduce the shareholder vote required to approve certain actions, including a merger or dissolution, from two-thirds to a majority. However, corporations incorporated before Feb. 22, 1998 have to amend their certificate of incorporation to be subject to the majority vote requirement. Pursuant to A.B. 7401, an amendment to the certificate of incorporation for the purpose of reducing the requisite shareholder vote to take an action that, pursuant to the BCL requires a greater than majority vote, shall not be adopted except by a vote that is at least equal to that which would be required to take the action as provided in that section of the BCL. (Thus, for example, an amendment to reduce the vote necessary to approve a merger from two-thirds to a majority will have to be approved by at least a two-thirds vote. Previously, such an amendment could have been approved by a majority vote).

Virginia

Attorneys who organize or register corporations, limited liability companies, limited partnerships, or business trusts in Virginia will be interested in amendments that went into effect on Oct. 1, 2004, dealing with business entity names. Previously, the name of a corporation had to be distinguishable upon the state's records from the name of another corporation. Similarly, an LLC, LP or BT name had to be distinguishable from the name of another of that same type of business entity. However, House Bill 1753 amended the provisions of the business entity laws to prohibit the use of a corporation, LLC, LP or BT name that is not distinguishable from the name of any corporation, LLC, LP or BT. Thus, for example, the proposed name “ABC Corporation” would not be acceptable if the state's records include an active limited liability company called “ABC LLC.”

IN THE STATE COURTS

Delaware's Chancery Court Clarifies Duty to Disclose in Short-Form Merger

In Gilliland v. Motorola, Inc., C.A. No. 411-N (Del. Ch., October 8, 2004), the defendant, Motorola, Inc., launched a tender offer for the minority held common shares of Next Level Communications, Inc. Comprehensive disclosures were sent to Next Level's stockholders. After Motorola's holdings reached 90%, it acquired the remaining shares in a short-form merger. The remaining stockholders were sent a notice of merger that did not contain any financial information about Next Level. The plaintiff, a Next Level stockholder, filed suit alleging that Motorola, as controlling stockholder, violated its common law fiduciary duty of disclosure by not including in the notice any information as to Next Level's value.

The Delaware Chancery Court noted that in the context of a short-form merger, the majority stockholder has a common law duty to provide substantive, financial information relating to the value of the corporation that is material to the decision of whether or not to seek appraisal. The inquiry as to whether the amount of information that accompanies a notice of short-form merger is sufficient to satisfy that duty is highly contextual. In this case, Motorola and Next Level made substantial financial disclosures in documents filed and disseminated by them in connection with Motorola's tender offer. Thus, the potential for deception or misinformation in connection with the short-form merger was low and Motorola was under no duty to make voluminous disclosures in the notice. However, in this case Motorola made no financial disclosures at all. In cases such as this where adequate information is publicly available it is a simple exercise to identify the relevant disclosure documents and include them in the notice of short-form merger, or extract and disclose summary information from them and inform stockholders how to obtain more complete information. Because this minimum disclosure was not provided by Motorola, it did not satisfy its disclosure duty.

Delaware's Chancery Court Clarifies Duty to Disclose When Soliciting Consents

In Unanue v. Unanue, C.A. No. 204-N (Del. Ch., November 3, 2004), the plaintiffs were two of the three members of the board of Goya, Inc., a corporation wholly owned by members of the same family. The defendant, the chairman of the board, managed the corporation. The plaintiffs felt that the defendant had been acting in an autocratic and uncooperative manner. They sent written consents to the stockholders that contained a resolution removing the defendant from the board. They received consents representing 62% of the stock and removed the defendant from the board. They also filed a suit to confirm the validity of their action. The defendant contended that the plaintiffs violated their fiduciary duty of disclosure by not disclosing to the consenting stockholders any financial information about the corporation, or that they intended to remove the defendant and his son as officers, and by not presenting the defendant's side of the story.

The Delaware Chancery Court noted that Sec. 228 of the General Corporation Law, which permits action by consent, does not contain a disclosure requirement. In addition, the Delaware Supreme Court has cautioned against grafting equitable fiduciary duties onto clearly delineated statutory requirements. Nevertheless, the court held that even if the plaintiffs were under a duty to disclose, they did not violate that duty. The plaintiffs did not have to disclose financial information because the decision to remove the defendant from the board was not based on finances and the stockholders were aware of the corporation's financial condition. In addition, there was no proof that the plaintiffs intended to remove the defendant and his son as officers when they solicited the consents. Furthermore, the plaintiffs were under no duty to give the defendant the opportunity to present his side. Thus, the plaintiffs validly removed the defendant from the board of directors.

Florida Court Rules that Shareholder May Sue Transfer Agent

In Faro v. Corporate Stock Transfer, Inc., No.3D03-1683 (Fla. App., October 6, 2004), the plaintiff owned stock in a corporation that entered into a merger. As a result of the merger, the plaintiff was entitled to exchange his shares for shares in another corporation. The defendant acted as the transfer agent for the stock exchanges. The plaintiff submitted a stock certificate to the defendant for exchange but the defendant refused to acknowledge the plaintiff's ownership interest. The plaintiff filed a suit against the defendant which resulted in a writ of mandamus compelling the exchange for the stock. The plaintiff then moved to amend his complaint to seek damages from the defendant. The trial court denied the motion, holding that a transfer agent is not liable to a shareholder.

The Florida Court of Appeal reversed. The court based its decision on two sections of Florida's UCC law. One of the sections provides that if an issuer is under a duty to register a transfer of a security, the issuer is liable to a person for loss resulting from the refusal to register the transfer. The other section provides that a transfer agent has the same obligations to security holders as the issuer. The trial court held that these sections did not apply to the defendant. That holding, the Court of Appeal noted, had the effect of placing the defendant in the realm of the common law, under which a transfer agent could not be held liable to a stockholder for damages for wrongful refusal to transfer shares. However, according to the Court of Appeal, Florida's adoption of the UCC abrogated common law. Common law having been abrogated, a coextensive duty (with the issuer) has been placed upon the transfer agent, and the wrongful refusal by a transfer agent to register a requested transfer makes the agent liable to the damaged shareholder. Thus, the shareholder could seek damages in this case.