Quarterly State Compliance Review

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 Review looks at some legislation of interest to corporate lawyers that went into effect during the last quarter, including amendments to Delaware's corporation, LLC and LP laws. It also looks at three recent decisions dealing with the inspection of books and records.

IN THE STATE LEGISLATURES

Delaware Amends Its GCL, LLC Act and LP Act

House Bill 375, effective Aug. 2, enacted amendments to Delaware's General Corporation Law. Highlights include the following: Sec. 145 was amended to clarify the differences in the rights to indemnification and advancement of expenses of current directors and officers and other persons. Secs. 242 and 251 were amended to provide that the decision to include either a copy or a summary of a proposed charter amendment or merger in the notice of a stockholder meeting does not have to be approved by a specific act of the board of directors.

The sections that permit service of process on a corporation by service on the Secretary of State were amended to provide that process may be served by means of electronic transmission pursuant to rules prescribed by the Secretary of State.

Secs. 274 and 275 were amended to provide that the certificate of dissolution must include the date of filing of the corporation's original certificate of incorporation. Sec. 278 was amended to confirm that the provisions of the GCL dealing with the winding up of a dissolved corporation apply to any corporation that has expired by its own limitation.

Sec. 371 was amended to provide that a qualifying foreign corporation must submit a certificate of existence dated not earlier than 6 months prior to the filing date. And a new Sec. 267 was added, permitting short form mergers between a noncorporate parent entity and one or more domestic corporation subsidiaries.

House Bill 341, effective Aug. 1, enacted various amendments dealing with nonstock corporations. A new Sec. 114 was added that sets forth which provisions of the GCL apply to nonstock corporations generally and which apply to nonprofit nonstock corporations specifically. H.B. 341 also deals with such issues as the requirement to have members, meetings, mergers, redomestications, and the revocation of dissolution.

House Bills 372 and 373, effective Aug. 2, amended the LLC and LP acts. The bills provide, among other things, that: 1) LLC and partnership agreements are not subject to any statute of frauds; 2) where process may be served against the LLC or LP upon the Secretary of State, that process may be served by means of electronic transmission; 3) an LLC or LP has the power and authority to grant, hold or exercise a power of attorney, including an irrevocable power of attorney; 4) members, managers and partners may apply to the Chancery Court to obtain any of the types of information the statutes require an LLC or LP to maintain; 5) foreign LLCs and LPs must file a certificate of existence dated not earlier than six months prior to the filing date in order to register; and 6) an LLC or partnership agreement that provides for the application of Delaware law shall be governed by and construed under Delaware law.

Amendments to Business Entity Laws of Other States

In Connecticut, House Bill 5530, effective Oct. 1, amended the corporation law to provide, among other things, that the board of directors may authorize one or more officers to designate the recipients of rights, options, warrants or other equity compensation awards that involve the issuance of shares and that a corporation may agree to submit a matter to a vote of its shareholders even if, after approving the matter, the board of directors determines it no longer recommends the matter. In Maryland, House Bill 1009, effective Oct. 1, provided that a for-profit corporation may elect to be a benefit corporation by amending or including in its charter a statement that it is a benefit corporation.

North Carolina (Senate Bill 308, effective Aug. 3) and Louisiana (House Bill 1421, effective Aug. 15) provided for the formation and operation of low-profit limited liability companies. And in Oklahoma, Senate Bill 1132, effective Sept. 1, provided that a publicly traded domestic corporation with 1,000 or more shareholders of record must have a board of directors that is divided into two or three classes.

IN THE STATE COURTS

DE Supreme Court Rules on Stockholder Inspections Where Corporation Has a 'Plurality Plus' Bylaw

In City of Westmoreland Police & Fire Retirement System v. Axcelis Technologies, Inc., No. 594, 2009 (Del. Supr. Aug. 11, 2010), a stockholder sought a court-ordered inspection under Sec. 220 of the corporation law. One of the stockholder's purposes was to determine whether the board complied with its fiduciary duties in refusing to accept the resignations of three directors, tendered pursuant to a “plurality plus” bylaw adopted by the board. That bylaw required any nominee for director in an uncontested election who failed to receive a majority of the votes cast to resign. The board then would decide whether or not to accept the resignations.

The Chancery Court dismissed the action, finding that the stockholder failed to meet its burden under Sec. 220. The stockholder appealed, arguing that the court should adopt the Blasius standard when reviewing a board's decision to reject directors' resignations where a plurality plus bylaw is triggered. Under Blasius, a board must demonstrate a compelling justification for measures that interfere with or frustrate a stockholder vote.

The Delaware Supreme Court affirmed the Chancery Court's decision. The court concluded that the plaintiff's Blasius argument lacked merit because it improperly attempted to shift to the corporation the plaintiff's burden to establish a proper purpose for an inspection.

However, the court did not stop there. It decided to provide further guidance to stockholders seeking an inspection of books and records when a board has adopted a plurality plus policy. The court stated that first the stockholder must establish a proper purpose. The court then stated that determining an individual's suitability to serve as a director is a proper purpose. Second, the stockholder must present some evidence to establish a credible basis from which the court can infer there are legitimate concerns about the director's suitability. According to the court, a showing that enough stockholders withheld their votes to trigger a plurality plus policy satisfies that requirement. Third, a plaintiff must prove that the information it seeks is necessary and essential to assessing the suitability. Finally, the court noted that access may be limited by the need to protect confidential board communications.

DE Supreme Court Holds That Limited Partnership Could Not Deny Access to Its List of Partners

In Parkcenter Global, L.P. v. Brown Investment Management, L.P., No. 288, 2010 (Del. Supr. Aug. 14, 2010), a limited partner in a hedge fund,
organized as a Delaware LP, sought a court order requiring the LP to provide it with its list of limited partners. The Chancery Court ordered the LP to produce the list and the LP appealed.

The Delaware Supreme Court affirmed. The court noted that the partnership agreement and the LP act allow the LP to establish reasonable standards to restrict access to information. The LP claimed that it had done so by sending limited partners an Annual Privacy notice that set forth its policy not to disclose non-public information. However, according to the court, that policy purported to completely deny a right to information granted to the limited partners in the partnership agreement, and went well beyond reasonably governing access to information.

The LP also argued that certain federal regulations to which it was subject pre-empted Delaware law and prohibited disclosure of the list. The court disagreed, noting that the regulations contained an exception permitting disclosure of non-public personal information when required by state law. Here, disclosure of the list was required by the Delaware LP act.

The court also rejected the LP's claim that it could deny access based on a provision of the partnership agreement allowing the general partner to keep confidential any information that it in good faith believed would harm the LP. According to the court the general partner did not demonstrate a good faith belief that providing the list would cause harm.

CA Appellate Court: Nonprofit Corporation Must Allow Inspection of Members' e-Mail Addresses

In Worldmark v. Wyndham Resort Development Corporation, C061019 (Cal. App. 3 Dist. Aug. 23, 2010), a member of a California nonprofit mutual benefit corporation with more than 260,000 members demanded to inspect and copy the corporation's membership records ' including the members' e-mail addresses ' for the purpose of distributing a petition to amend the bylaws. The trial court ordered the inspection and the corporation appealed, contending that there was no statutory authority requiring it to produce its members' e-mail addresses.

The California Court of Appeal affirmed. The court noted that the Corporations Code requires a nonprofit mutual benefit corporation to disclose its members' names and addresses. According to the court, the term “address” is broad enough to encompass e-mail addresses. The court noted that an e-mail address fits within the dictionary definition of an address ' which is the location at which a particular organization or person may be found or reached. The court also pointed out that various sections of the Corporations Code had been amended to provide for electronic communication to and from nonprofit mutual benefit corporations and their members. In addition, the court pointed out that the legislative purpose of the inspection section was to balance a member's legitimate right to contact membership, against the potential for abuse in allowing too free an access. The addition of e-mail addresses would do nothing to upset that balance, particularly because the statute allows the corporation to propose a reasonable alternative.

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.