Quarterly State Compliance Review

In Florida, House Bill 253, effective May 31, amended the LLC act to clarify that a charging order is the sole remedy available to enforce a judgment creditor's unsatisfied judgment against a member, and to provide an exception in the case of single member LLCs under certain circumstances. In Georgia, Senate Bill 64, effective July 1, provided that the fee for reinstating an administratively dissolved corporation or LLC will be $250.

In Hawaii, Senate Bill 1359, effective May 4, amended the nonprofit corporation act to allow members to take actions without a meeting by a written or electronically transmitted ballot and to authorize member meetings that are held by means of electronic communications technology. In Kentucky, Senate Bill 39, effective June 9, required foreign business entities that would otherwise be exempt from the qualification requirement to obtain a certificate of authority from the Secretary of State to be eligible for an award of certain state contracts.

In Maryland, House Bill 637, effective June 1, amended provisions of the LLC act dealing with, among other issues, the policy of the act, amendments to the operating agreement, actions by members by consent, rights of assignees, and charging orders. Also in Maryland, House Bill 115/Senate Bill 595, effective June 1, authorized the formation of a Benefit LLC, which is an LLC having as a purpose the creation of a general public benefit.

In Utah, Senate Bills 250 and 95, effective May 10, allowed directors and shareholders of Utah corporations, acting without a meeting, to deliver consents by electronic transmission. Vermont (Senate Bill 263) and Virginia (House Bill 2358) effective July 1, authorized the formation of Benefit Corporations. A Benefit Corporation is a for-profit corporation that has as a purpose the creation of a general public benefit. Also in Virginia, Senate Bill 1356, effective July 1, provided that no member of an LLC may bring a derivative action until a written demand is made and 90 days have expired (unless there is an earlier rejection or irreparable injury would result).

IN THE STATE COURTS

DE Chancery Court: Revlon Applies to Merger Where Stockholders Receive 50% Cash and 50% Stock

In In re Smurfit-Stone Container Corp. Shareholder Litigation, C.A. 6164 (decided May 20, 2011, revised May 24, 2011), the plaintiffs moved for a preliminary injunction, challenging a merger in which each of the target's stockholders would receive half the merger consideration in cash and the other half in stock. The plaintiffs argued that the merger constituted a “change of control” transaction under the Revlon line of cases, and that the target's board of directors breached their duties under Revlon by conducting an inadequate sales process and obtaining an inadequate price. The defendants argued that this was not a change in control transaction and challenged the contention that Revlon's heightened scrutiny applied.

The Delaware Chancery Court noted that this case provided cause for the court to address a question that had not yet been squarely addressed in Delaware law, namely, whether, and in what circumstances, Revlon applies when the merger consideration is split roughly evenly between cash and stock. The court pointed out that in a stock for stock transaction, where ownership shifts from one large unaffiliated group of public stockholders to another, and the target's stockholders' voting power is not diminished to minority status, Revlon does not apply. In such a case the stockholders are not foreclosed from an opportunity to obtain a control premium in a future change of control transaction. On the other hand, where the stockholders receive only cash, Revlon will apply as there is no tomorrow for the stockholders ' they are forever shut out from future profits and opportunities to obtain a control premium.

The court then noted that in previous cases, the Delaware Supreme Court has held that a 33% cashout did not trigger Revlon, while the chancery court has held that a 62% cashout did trigger Revlon.

The chancery court then concluded that Revlon was triggered in this case involving a 50% cashout. The court noted that there was no tomorrow for approximately 50% of each stockholder's investment in the target. The transaction constituted an endgame for a substantial part of the stockholder's investment. Even though the combined entity had no controlling stockholder and the stockholders were not relegated to minority status by the merger, half of their investment was liquidated.

Thus, the court held that Revlon applied. However, after analyzing the transaction, the court concluded that the board met its burden under Revlon of proving that it was adequately informed and acted reasonably and the court denied the plaintiffs' motion for a preliminary injunction.

CA Appellate Court: State Court Has Jurisdiction over Securities Class Action Not Involving a Covered Security

In Luther v. Countrywide Financial Corporation, B222889 (Cal. App. 2 Dist.) decided May 18, 2011, the plaintiffs brought an action in a California state court on behalf of all persons and entities who bought mortgage-backed securities from the defendants between 2005 and 2007. The complaint alleged violations of the Securities Act of 1933 and included no state law claims. The trial court dismissed the suit on the grounds that the state court had no jurisdiction under the 1933 Act as amended by the Securities Litigation Uniform Standards Act (SLUSA).

The California Court of Appeal reversed and held that the state court had jurisdiction. The court explained that the 1933 Act was amended by SLUSA to create an exception to the rule that state and federal courts have concurrent jurisdiction over claims under the Act. SLUSA grants the federal courts exclusive jurisdiction over “covered class actions.” There was no dispute that this action met the statutory definition of a “covered class action.” The issue was whether the 1933 Act as amended by SLUSA creates an exception for all covered class actions, or whether there is no exception for covered class actions not involving “covered securities.” This case did not involve a “covered security” because the securities were not traded nationally or listed on a national exchange.

As the court noted, resolving this issue required it to interpret the relevant statutory provision, 15 U.S.C. Sec. 77v. The court pointed out that Sec. 77v does not say that there is an exception to concurrent jurisdiction for all covered class actions. That section also refers to Sec. 77p, which the court noted mainly concerns removed actions and actions involving state claims and therefore does not describe this action. The court also rejected the defendants' arguments based on previous cases because they involved the removal of actions concerning covered securities and were based on the flawed argument that Congress' intent in enacting SLUSA was to give federal courts exclusive jurisdiction over all securities class actions.

NV Supreme Court Clarifies the Determination of Fair Value of Dissenter's Stock

In American Ethanol, Inc. v. Cordillera Fund, L.P., No. 54779 (Nevada Supreme Court), decided May 5, 2011, a dissenting stockholder brought an appraisal action pursuant to Nevada's dissenters' rights statute. After the trial court determined the fair value of the stockholder's shares, the corporation appealed.

The Nevada Supreme Court noted that while the dissenters' rights statute provides that stockholders are entitled to receive payment for “fair value” of their shares, it does not explicitly define “fair value.” Nor does the statute answer the question of which party bears the burden of proving fair value. The court then held that in determining fair value, the trial court should take a flexible approach. The trial court may rely on proof of value by any technique that is generally accepted in the financial community. In addition, the trial court should consider all relevant factors.

The Nevada supreme court then adopted the Delaware approach in determining who bears the burden of proof. This approach holds that both sides have the burden of proving their respective valuation positions by a preponderance of the evidence. However, final responsibility lies with the court, which must make its own independent value determination.

Sandra Feldman, a member of this newsletter's Board of Editors, is a publications and research attorney for CT Corporation, part of Wolters Kluwer Corporate Legal Services (www.ctlegalsolutions.com).

This edition of the Quarterly State Compliance Review looks at some legislation of interest to corporate lawyers that went into effect from May 1 through July 1, 2011. It also looks at recent decisions of interest from the courts of Delaware, California, and Nevada.

IN THE STATE LEGISLATURES

This has been a busy quarter for those who track changes to state business entity statutes, as a significant number of amendments went into effect. Below are some of the legislative highlights from around the country.

In Florida, House Bill 253, effective May 31, amended the LLC act to clarify that a charging order is the sole remedy available to enforce a judgment creditor's unsatisfied judgment against a member, and to provide an exception in the case of single member LLCs under certain circumstances. In Georgia, Senate Bill 64, effective July 1, provided that the fee for reinstating an administratively dissolved corporation or LLC will be $250.

In Hawaii, Senate Bill 1359, effective May 4, amended the nonprofit corporation act to allow members to take actions without a meeting by a written or electronically transmitted ballot and to authorize member meetings that are held by means of electronic communications technology. In Kentucky, Senate Bill 39, effective June 9, required foreign business entities that would otherwise be exempt from the qualification requirement to obtain a certificate of authority from the Secretary of State to be eligible for an award of certain state contracts.

In Maryland, House Bill 637, effective June 1, amended provisions of the LLC act dealing with, among other issues, the policy of the act, amendments to the operating agreement, actions by members by consent, rights of assignees, and charging orders. Also in Maryland, House Bill 115/Senate Bill 595, effective June 1, authorized the formation of a Benefit LLC, which is an LLC having as a purpose the creation of a general public benefit.

In Utah, Senate Bills 250 and 95, effective May 10, allowed directors and shareholders of Utah corporations, acting without a meeting, to deliver consents by electronic transmission. Vermont (Senate Bill 263) and Virginia (House Bill 2358) effective July 1, authorized the formation of Benefit Corporations. A Benefit Corporation is a for-profit corporation that has as a purpose the creation of a general public benefit. Also in Virginia, Senate Bill 1356, effective July 1, provided that no member of an LLC may bring a derivative action until a written demand is made and 90 days have expired (unless there is an earlier rejection or irreparable injury would result).

IN THE STATE COURTS

DE Chancery Court: Revlon Applies to Merger Where Stockholders Receive 50% Cash and 50% Stock

In In re Smurfit-Stone Container Corp. Shareholder Litigation, C.A. 6164 (decided May 20, 2011, revised May 24, 2011), the plaintiffs moved for a preliminary injunction, challenging a merger in which each of the target's stockholders would receive half the merger consideration in cash and the other half in stock. The plaintiffs argued that the merger constituted a “change of control” transaction under the Revlon line of cases, and that the target's board of directors breached their duties under Revlon by conducting an inadequate sales process and obtaining an inadequate price. The defendants argued that this was not a change in control transaction and challenged the contention that Revlon's heightened scrutiny applied.

The Delaware Chancery Court noted that this case provided cause for the court to address a question that had not yet been squarely addressed in Delaware law, namely, whether, and in what circumstances, Revlon applies when the merger consideration is split roughly evenly between cash and stock. The court pointed out that in a stock for stock transaction, where ownership shifts from one large unaffiliated group of public stockholders to another, and the target's stockholders' voting power is not diminished to minority status, Revlon does not apply. In such a case the stockholders are not foreclosed from an opportunity to obtain a control premium in a future change of control transaction. On the other hand, where the stockholders receive only cash, Revlon will apply as there is no tomorrow for the stockholders ' they are forever shut out from future profits and opportunities to obtain a control premium.

The court then noted that in previous cases, the Delaware Supreme Court has held that a 33% cashout did not trigger Revlon, while the chancery court has held that a 62% cashout did trigger Revlon.

The chancery court then concluded that Revlon was triggered in this case involving a 50% cashout. The court noted that there was no tomorrow for approximately 50% of each stockholder's investment in the target. The transaction constituted an endgame for a substantial part of the stockholder's investment. Even though the combined entity had no controlling stockholder and the stockholders were not relegated to minority status by the merger, half of their investment was liquidated.

Thus, the court held that Revlon applied. However, after analyzing the transaction, the court concluded that the board met its burden under Revlon of proving that it was adequately informed and acted reasonably and the court denied the plaintiffs' motion for a preliminary injunction.

CA Appellate Court: State Court Has Jurisdiction over Securities Class Action Not Involving a Covered Security

In Luther v. Countrywide Financial Corporation, B222889 (Cal. App. 2 Dist.) decided May 18, 2011, the plaintiffs brought an action in a California state court on behalf of all persons and entities who bought mortgage-backed securities from the defendants between 2005 and 2007. The complaint alleged violations of the Securities Act of 1933 and included no state law claims. The trial court dismissed the suit on the grounds that the state court had no jurisdiction under the 1933 Act as amended by the Securities Litigation Uniform Standards Act (SLUSA).

The California Court of Appeal reversed and held that the state court had jurisdiction. The court explained that the 1933 Act was amended by SLUSA to create an exception to the rule that state and federal courts have concurrent jurisdiction over claims under the Act. SLUSA grants the federal courts exclusive jurisdiction over “covered class actions.” There was no dispute that this action met the statutory definition of a “covered class action.” The issue was whether the 1933 Act as amended by SLUSA creates an exception for all covered class actions, or whether there is no exception for covered class actions not involving “covered securities.” This case did not involve a “covered security” because the securities were not traded nationally or listed on a national exchange.

As the court noted, resolving this issue required it to interpret the relevant statutory provision, 15 U.S.C. Sec. 77v. The court pointed out that Sec. 77v does not say that there is an exception to concurrent jurisdiction for all covered class actions. That section also refers to Sec. 77p, which the court noted mainly concerns removed actions and actions involving state claims and therefore does not describe this action. The court also rejected the defendants' arguments based on previous cases because they involved the removal of actions concerning covered securities and were based on the flawed argument that Congress' intent in enacting SLUSA was to give federal courts exclusive jurisdiction over all securities class actions.

NV Supreme Court Clarifies the Determination of Fair Value of Dissenter's Stock

In American Ethanol, Inc. v. Cordillera Fund, L.P., No. 54779 (Nevada Supreme Court), decided May 5, 2011, a dissenting stockholder brought an appraisal action pursuant to Nevada's dissenters' rights statute. After the trial court determined the fair value of the stockholder's shares, the corporation appealed.

The Nevada Supreme Court noted that while the dissenters' rights statute provides that stockholders are entitled to receive payment for “fair value” of their shares, it does not explicitly define “fair value.” Nor does the statute answer the question of which party bears the burden of proving fair value. The court then held that in determining fair value, the trial court should take a flexible approach. The trial court may rely on proof of value by any technique that is generally accepted in the financial community. In addition, the trial court should consider all relevant factors.

The Nevada supreme court then adopted the Delaware approach in determining who bears the burden of proof. This approach holds that both sides have the burden of proving their respective valuation positions by a preponderance of the evidence. However, final responsibility lies with the court, which must make its own independent value determination.

Sandra Feldman, a member of this newsletter's Board of Editors, is a publications and research attorney for CT Corporation, part of Wolters Kluwer Corporate Legal Services (www.ctlegalsolutions.com).