Quarterly State Compliance Review

This edition of the Quarterly State Compliance Review looks at some legislation of interest to corporate lawyers that went into effect from Aug. 1 through Oct. 1, including amendments to Delaware's corporation and LLC laws. It also looks at two recent decisions of interest from the Delaware Chancery Court.

IN THE STATE LEGISLATURES

This was another busy quarter for those who track changes to state business entity statutes, as a large number of amendments went into effect. Below are a few highlights from around the country.

Delaware Amends Its General Corporation Law, LLC Act and LP Act

House Bill 19, effective Aug. 1, enacted amendments to Delaware's General Corporation Law. A new Section 112 was added permitting a corporation to adopt a bylaw requiring it, to the extent and subject to such procedures or conditions as may be provided in the bylaws, to include in its proxy solicitation materials individuals nominated by a stockholder for election as a director. A new Section 113 was added permitting a corporation to adopt a bylaw requiring it to reimburse a stockholder's proxy solicitation expenses, subject to such procedures or conditions as may be provided in the bylaws.

Section 145 was amended to provide that a right to indemnification or advancement of expenses arising under a charter or bylaw provision shall not be eliminated or impaired by an amendment to the provision occurring after the act or omission to which indemnification or advancement is related, unless explicitly authorized by the provision.

Section 213 was amended to permit the board of directors to fix separate record dates to determine the stockholders entitled to notice of a meeting and to vote at a meeting. In addition, Section 225 was amended to authorize the Chancery Court to remove directors who were convicted of a felony in connection with their duties to the corporation, or who had been judged to have breached the duty of loyalty.

Delaware's LLC Act and LP Act were amended by Senate Bill 82 and House Bill 142 respectively, effective Aug. 1. The bills, among other things: 1) clarified the Chancery Court's broad subject matter jurisdiction over actions to interpret, apply or enforce the Acts' provisions; 2) permitted a change of registered office or registered agent to be effected in a certificate of merger; 3) provided that an LLC or partnership agreement may be amended or adopted by an agreement of merger or consolidation, notwithstanding any provision of the LLC or partnership agreement specifically dealing with the amendment to or adoption of a new agreement; and 4) clarified that the doctrine of independent legal significance applies to LLCs and LPs.

In addition, House Bill 267, effective Aug. 1, increased most of the fees imposed by the Secretary of State on corporations and LLCs for filing documents and ordering certified copies and good-standing certificates.

Amendments to Business Entity Laws of Other States

In Arizona, House Bill 2199, effective Sept. 30, required the publication of a copy of a domestic corporation's articles of dissolution and a foreign corporation's application for withdrawal within 60 days after the Corporation Commission approved the filing, and eliminated the 90-day time limit that a corporation had to file a permissive affidavit evidencing publication of documents.

In Connecticut, Senate Bill 963, effective Oct. 1, authorized a public corporation to adopt a bylaw that allows its directors to be elected by a plurality vote, but where a director who does not receive more votes for than against election may only serve for 90 days. Connecticut House Bill 6640, effective Oct. 1, increased the penalty that the Secretary of the State can impose on foreign corporations and other business entities that conduct business in the state without having qualified to do so.

In Florida, Senate Bill 2330, effective Oct. 1, permitted a corporation having shares on a national securities exchange to adopt a bylaw requiring directors to be elected by a greater than a plurality vote, and provided that a director's resignation may be effective upon a date determined upon the subsequent happening of an event. In Illinois, House Bill 2335, effective Aug. 25, required certain professional LLCs to obtain a certificate of registration from the Department of Financial and Professional Regulation.

In Maryland, House Bill 378/Senate Bill 626, effective Oct. 1, repealed the requirement that bylaws be kept at a corporation's principal office, allowed a corporation to eliminate a fractional interest in shares by rounding up to a full share, and required a corporation to comply with a stockholder's request to inspect certain documents within seven days after the request is made.

In Missouri, Senate Bill 217, effective Aug. 28, authorized shareholders and proxyholders to participate in a meeting and vote by means of remote communication, and Senate Bill 294, also effective Aug. 28, provided that a nonprofit corporate name reservation may not exceed a period of 180 days.

In Nebraska, Legislative Bill 528, effective Aug. 30, authorized electronic transmission to be used by a corporation to provide notice to a shareholder and by a shareholder to appoint a proxy. In Nevada, Senate Bill 350, effective Oct. 1, authorized the formation of restricted LLCs and LPs ' which are LLCs and LPs that may restrict distributions in order to obtain greater valuation discounts for transfers of interests. The bill also increased the fine imposed on foreign corporations and other business entities that transact business in the state without qualifying to do so.

In New York, Assembly Bill 8863, effective Oct. 1, required corporations that have done business in New York City and incurred liability for certain City taxes to obtain the consent of the New York City Commissioner of Finance before dissolving with the Secretary of State. In North Dakota, House Bill 1298, effective Aug. 1, enacted the North Dakota Nonprofit LLC Act and repealed a provision allowing the Secretary of State to extend the annual report filing deadline of a corporation or LLC.

In Texas, Senate Bill 1442, effective Sept. 1, authorized the formation of series LLCs, set forth provisions for the continuance of an entity after conversion, prohibited the issuance of bearer ownership certificates, and required a certificate of reinstatement to be accompanied by a tax clearance letter from the comptroller.

IN THE STATE COURTS

Delaware Chancery Court Holds That Parent Had Standing to Sue CEO of Parent and Subsidiary

In Case Financial, Inc. v. Alden, C.A. No. 1184, decided Aug. 21, 2009, a corporation brought a suit in the Delaware Chancery Court against an individual who had been the CEO of the corporation and its wholly owned subsidiary. The corporation alleged, among other claims, that the CEO breached his fiduciary duties to the corporation. The CEO claimed the corporation lacked standing to pursue the fiduciary duty claim directly because some of the wrongful conduct allegedly occurred at the subsidiary.

The corporation urged the Chancery Court to pierce its veil, find that the parent and subsidiary were the same and that it therefore had standing. However, the court found no basis for piercing the veil. The court noted that there was no evidence that the subsidiary was inadequately capitalized or insolvent or that the parent siphoned its funds or operated the subsidiary as a fa'ade. In addition, there was evidence that the subsidiary followed some corporate formalities.

However, although the court would not pierce the corporation's veil, the court did rule that the corporation had standing to assert a direct claim for breach of fiduciary duty. The court noted that the CEO, as a director and officer, owed the corporation a duty not to intentionally or knowingly participate in conduct that would injure the corporation. The corporation can pursue a direct claim for breach of that duty regardless of whether the entirety of the damage was sustained directly by the corporation or derivatively through its subsidiary.

DE Chancery Court Holds That Laches Does Not Create a Time Bar to an Indemnification Claim

In O'Brien v. IAC/Interactive Corp. f/k/a USA Networks, Inc., C.A. No. 3892, decided Aug. 14, 2009, the plaintiff, a former CEO of a corporation, filed suit in a Florida trial court seeking indemnification of his costs in defending himself against a breach of fiduciary duty claim. The trial court ruled that the plaintiff was not entitled to indemnification. Fourteen months later an appellate court reversed. The corporation then filed for bankruptcy. The plaintiff then brought an action in the Delaware Chancery Court seeking indemnification and advancement of attorney's fees against the defendant ' a former parent of the corporation that had assumed its indemnification obligations. The defendant moved for summary judgment on the grounds that the statute of limitations had run and the suit was time barred.

The Chancery Court noted that statutes of limitations that are exceeded always operate to bar actions at law. However, they are not controlling in equity. Actions in equity are only time barred by the doctrine of laches. Furthermore, laches may not bar an action that would be untimely under the statute of limitations if the plaintiff's delay in filing a claim did not prejudice the defendant and was not unreasonable based on the unusual conditions of the action. The court then found that such unusual conditions existed here. As the court noted, for 14 months, from the time the Florida trial court rejected his request for indemnification until the appellate court reversed, the plaintiff was in a “veritable holding pattern” and could not be faulted for not pressing his claim against the defendant. In addition, the defendant could not claim any prejudice considering it controlled the corporation's litigation strategy against the plaintiff and likely knew about the corporation's impending bankruptcy. Thus, the court found the plaintiff's claims timely.

Sandra Feldman, a member of this newsletter's Board of Editors, is a publications and research attorney for New York-based CT (www.ctlegalsolutions.com), a Wolters Kluwer business.

This edition of the Quarterly State Compliance Review looks at some legislation of interest to corporate lawyers that went into effect from Aug. 1 through Oct. 1, including amendments to Delaware's corporation and LLC laws. It also looks at two recent decisions of interest from the Delaware Chancery Court.

IN THE STATE LEGISLATURES

This was another busy quarter for those who track changes to state business entity statutes, as a large number of amendments went into effect. Below are a few highlights from around the country.

Delaware Amends Its General Corporation Law, LLC Act and LP Act

House Bill 19, effective Aug. 1, enacted amendments to Delaware's General Corporation Law. A new Section 112 was added permitting a corporation to adopt a bylaw requiring it, to the extent and subject to such procedures or conditions as may be provided in the bylaws, to include in its proxy solicitation materials individuals nominated by a stockholder for election as a director. A new Section 113 was added permitting a corporation to adopt a bylaw requiring it to reimburse a stockholder's proxy solicitation expenses, subject to such procedures or conditions as may be provided in the bylaws.

Section 145 was amended to provide that a right to indemnification or advancement of expenses arising under a charter or bylaw provision shall not be eliminated or impaired by an amendment to the provision occurring after the act or omission to which indemnification or advancement is related, unless explicitly authorized by the provision.

Section 213 was amended to permit the board of directors to fix separate record dates to determine the stockholders entitled to notice of a meeting and to vote at a meeting. In addition, Section 225 was amended to authorize the Chancery Court to remove directors who were convicted of a felony in connection with their duties to the corporation, or who had been judged to have breached the duty of loyalty.

Delaware's LLC Act and LP Act were amended by Senate Bill 82 and House Bill 142 respectively, effective Aug. 1. The bills, among other things: 1) clarified the Chancery Court's broad subject matter jurisdiction over actions to interpret, apply or enforce the Acts' provisions; 2) permitted a change of registered office or registered agent to be effected in a certificate of merger; 3) provided that an LLC or partnership agreement may be amended or adopted by an agreement of merger or consolidation, notwithstanding any provision of the LLC or partnership agreement specifically dealing with the amendment to or adoption of a new agreement; and 4) clarified that the doctrine of independent legal significance applies to LLCs and LPs.

In addition, House Bill 267, effective Aug. 1, increased most of the fees imposed by the Secretary of State on corporations and LLCs for filing documents and ordering certified copies and good-standing certificates.

Amendments to Business Entity Laws of Other States

In Arizona, House Bill 2199, effective Sept. 30, required the publication of a copy of a domestic corporation's articles of dissolution and a foreign corporation's application for withdrawal within 60 days after the Corporation Commission approved the filing, and eliminated the 90-day time limit that a corporation had to file a permissive affidavit evidencing publication of documents.

In Connecticut, Senate Bill 963, effective Oct. 1, authorized a public corporation to adopt a bylaw that allows its directors to be elected by a plurality vote, but where a director who does not receive more votes for than against election may only serve for 90 days. Connecticut House Bill 6640, effective Oct. 1, increased the penalty that the Secretary of the State can impose on foreign corporations and other business entities that conduct business in the state without having qualified to do so.

In Florida, Senate Bill 2330, effective Oct. 1, permitted a corporation having shares on a national securities exchange to adopt a bylaw requiring directors to be elected by a greater than a plurality vote, and provided that a director's resignation may be effective upon a date determined upon the subsequent happening of an event. In Illinois, House Bill 2335, effective Aug. 25, required certain professional LLCs to obtain a certificate of registration from the Department of Financial and Professional Regulation.

In Maryland, House Bill 378/Senate Bill 626, effective Oct. 1, repealed the requirement that bylaws be kept at a corporation's principal office, allowed a corporation to eliminate a fractional interest in shares by rounding up to a full share, and required a corporation to comply with a stockholder's request to inspect certain documents within seven days after the request is made.

In Missouri, Senate Bill 217, effective Aug. 28, authorized shareholders and proxyholders to participate in a meeting and vote by means of remote communication, and Senate Bill 294, also effective Aug. 28, provided that a nonprofit corporate name reservation may not exceed a period of 180 days.

In Nebraska, Legislative Bill 528, effective Aug. 30, authorized electronic transmission to be used by a corporation to provide notice to a shareholder and by a shareholder to appoint a proxy. In Nevada, Senate Bill 350, effective Oct. 1, authorized the formation of restricted LLCs and LPs ' which are LLCs and LPs that may restrict distributions in order to obtain greater valuation discounts for transfers of interests. The bill also increased the fine imposed on foreign corporations and other business entities that transact business in the state without qualifying to do so.

In New York, Assembly Bill 8863, effective Oct. 1, required corporations that have done business in New York City and incurred liability for certain City taxes to obtain the consent of the New York City Commissioner of Finance before dissolving with the Secretary of State. In North Dakota, House Bill 1298, effective Aug. 1, enacted the North Dakota Nonprofit LLC Act and repealed a provision allowing the Secretary of State to extend the annual report filing deadline of a corporation or LLC.

In Texas, Senate Bill 1442, effective Sept. 1, authorized the formation of series LLCs, set forth provisions for the continuance of an entity after conversion, prohibited the issuance of bearer ownership certificates, and required a certificate of reinstatement to be accompanied by a tax clearance letter from the comptroller.

IN THE STATE COURTS

Delaware Chancery Court Holds That Parent Had Standing to Sue CEO of Parent and Subsidiary

In Case Financial, Inc. v. Alden, C.A. No. 1184, decided Aug. 21, 2009, a corporation brought a suit in the Delaware Chancery Court against an individual who had been the CEO of the corporation and its wholly owned subsidiary. The corporation alleged, among other claims, that the CEO breached his fiduciary duties to the corporation. The CEO claimed the corporation lacked standing to pursue the fiduciary duty claim directly because some of the wrongful conduct allegedly occurred at the subsidiary.

The corporation urged the Chancery Court to pierce its veil, find that the parent and subsidiary were the same and that it therefore had standing. However, the court found no basis for piercing the veil. The court noted that there was no evidence that the subsidiary was inadequately capitalized or insolvent or that the parent siphoned its funds or operated the subsidiary as a fa'ade. In addition, there was evidence that the subsidiary followed some corporate formalities.

However, although the court would not pierce the corporation's veil, the court did rule that the corporation had standing to assert a direct claim for breach of fiduciary duty. The court noted that the CEO, as a director and officer, owed the corporation a duty not to intentionally or knowingly participate in conduct that would injure the corporation. The corporation can pursue a direct claim for breach of that duty regardless of whether the entirety of the damage was sustained directly by the corporation or derivatively through its subsidiary.

DE Chancery Court Holds That Laches Does Not Create a Time Bar to an Indemnification Claim

In O'Brien v. IAC/Interactive Corp. f/k/a USA Networks, Inc., C.A. No. 3892, decided Aug. 14, 2009, the plaintiff, a former CEO of a corporation, filed suit in a Florida trial court seeking indemnification of his costs in defending himself against a breach of fiduciary duty claim. The trial court ruled that the plaintiff was not entitled to indemnification. Fourteen months later an appellate court reversed. The corporation then filed for bankruptcy. The plaintiff then brought an action in the Delaware Chancery Court seeking indemnification and advancement of attorney's fees against the defendant ' a former parent of the corporation that had assumed its indemnification obligations. The defendant moved for summary judgment on the grounds that the statute of limitations had run and the suit was time barred.

The Chancery Court noted that statutes of limitations that are exceeded always operate to bar actions at law. However, they are not controlling in equity. Actions in equity are only time barred by the doctrine of laches. Furthermore, laches may not bar an action that would be untimely under the statute of limitations if the plaintiff's delay in filing a claim did not prejudice the defendant and was not unreasonable based on the unusual conditions of the action. The court then found that such unusual conditions existed here. As the court noted, for 14 months, from the time the Florida trial court rejected his request for indemnification until the appellate court reversed, the plaintiff was in a “veritable holding pattern” and could not be faulted for not pressing his claim against the defendant. In addition, the defendant could not claim any prejudice considering it controlled the corporation's litigation strategy against the plaintiff and likely knew about the corporation's impending bankruptcy. Thus, the court found the plaintiff's claims timely.

Sandra Feldman, a member of this newsletter's Board of Editors, is a publications and research attorney for New York-based CT (www.ctlegalsolutions.com), a Wolters Kluwer business.