Quarterly State Compliance Review

In Arkansas, Senate Bill 302 enacted the Revised Uniform Unincorporated Nonprofit Association Act, governing unincorporated nonprofit associations, which are defined as unincorporated organizations consisting of two or more members, joined under an agreement for one or more common, nonprofit purposes.

In California, Assembly Bill 361 authorized the formation and governance of benefit corporations ' which are corporations formed to pursue a general public benefit, which is defined as a “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.” Senate Bill 201 authorized the formation and governance of flexible purpose corporations, which are corporations that have a “special purpose” which may be a charitable activity or which may promote positive short-term or long-term effects on certain stakeholders, the community, society, or the environment. Assembly Bill 657 allowed corporations and LLCs to elect to receive their annual report renewal notices from the Secretary of State by e-mail and required foreign corporations to file their initial Statements of Information within 90 days (formerly, one year) after the corporation has qualified to do business in California. Assembly Bill 571 allowed a corporation to make distributions to shareholders if the corporation meets either a retained earnings test or a new balance sheet test, eliminated the requirement that a corporation notify shareholders in writing each time they make a distribution other than from retained earnings, and created a four-year statute of limitation for suits based on an obligation to return an improper distribution. Assembly Bill 1211 amended provisions of the nonprofit corporation law governing director voting, consents, and quorums and exempted certain corporations from having to obtain the consent of the Attorney General before taking certain actions. Assembly Bill 560 extended the time limit for architects to organize as LLPs from Jan. 1, 2012 to Jan. 1, 2019.

In Connecticut, House Bill 6565 provided that the Secretary of State may require corporations, LPs, LLCs, and LLPs to file annual reports electronically. In Mississippi, Senate Bill 2444 amended provisions of the nonprofit corporation law governing certificates of existence, notice, contents of the articles of incorporation, indemnification of directors, the elimination or limitation of directors' liability, and member meetings.

In New York, Senate Bill 2987 permitted incorporation under the Business Corporation Law of corporations practicing professional engineering, architecture, landscape architecture, and land surveying. And in Oregon, House Bill 2254 permitted the Secretary of State to waive the requirement that a corporation, LLC or LP apply for reinstatement within five years of dissolution, upon request and a showing that the entity remained active.

IN THE STATE COURTS

DE Supreme Court: Stockholder Not Entitled to Inspect Report of Internal Investigation

In Espinoza v. Hewlett-Packard Company, No. 208, 2011 (Del. Supr., decided Nov. 21, 2011), the plaintiff stockholder filed a suit under Sec. 220 of the General Corporation Law seeking to inspect a report prepared by a law firm retained by a corporation to investigate allegations of sexual harassment against its CEO. The Chancery Court denied the plaintiff relief, finding that the report was protected by the attorney-client privilege and work product doctrine.

On appeal, the Delaware Supreme Court affirmed, but on the alternative ground that the plaintiff had not met his burden under Sec. 220 to show that the report was essential to his stated purpose, which was to investigate possible corporate wrongdoing. The court noted that a document is essential if, at a minimum, it addresses the crux of the stockholder's purpose and if the information is unavailable from other sources. Here, the plaintiff's specific purpose was to investigate why the board of directors, after announcing the CEO's resignation and stating that he violated the corporation's standards of conduct, chose to enter into a separation agreement that paid the CEO over $30 million rather than firing him for cause. However, according to the court, the report did not discuss the “for-cause” issue, nor was there evidence that the report played any role in the board's decision. Furthermore, the corporation had already disclosed to the plaintiff documents that contained the information essential to the plaintiff's purpose.

DE Supreme Court Affirms Holding That Corporation Lacked Funds to Redeem Preferred Stock

In SV Investment Partners, LLC v. Thoughtworks, Inc., No. 107, 2011 (Del. Supr., decided Nov. 15, 2011), holders of preferred stock in a Delaware corporation demanded that the corporation redeem their shares. The corporation was required to redeem the stock for cash “out of any funds legally available therefore.” The board of directors used a formula for determining “funds legally available” that resulted in the board redeeming a small portion of the plaintiffs' shares. The plaintiffs filed suit in the Delaware Chancery Court for declaratory judgment as to the meaning of “funds legally available.” At the time the trial was held, the board had redeemed only $4.1 million of what the plaintiffs claimed was the corporation's $64-million obligation.

At trial, the plaintiffs argued that “funds legally available” meant statutory surplus. The Chancery Court rejected the plaintiffs' expert testimony and further held that there was insufficient evidence to prove that the corporation had sufficient legally available funds even if it accepted the plaintiffs' definition. The court therefore found for the defendants and the plaintiffs appealed.

The Delaware Supreme Court noted that a factual finding by the Chancery Court based on a weighing of expert opinion will be overturned only if arbitrary or lacking any supporting evidence. According to the court, neither circumstance was present here. The Chancery Court found the plaintiffs' expert testimony insufficient for several reasons, including that she did not consider the amount of funds the corporation could use for redemption while continuing as a going concern, the effect a redemption would have on the corporation's ability to achieve the projections she based her analysis on, or how the corporation might raise the funds. The Chancery Court also noted that there was no evidence that the corporation could obtain the funds for the redemptions. Thus, the court affirmed the holding that the plaintiffs did not carry their burden of proof that legally available funds were available to redeem their shares.

CA Appellate Court: Substantial Compliance
Doctrine Does Not Apply to Suit by Suspended Corporation

In Friends of Shingle Springs Interchange, Inc. v. County of El Dorado, C065068 (Cal. App. 3 Dist., decided Nov. 22, 2011), a corporation challenged a county's approval of a land use project, alleging violations of two state laws ' the Environmental Quality Act and the Planning and Zoning Law. At the time the petition was filed, the corporation's corporate powers were suspended because it failed to file its Annual Statement with the Secretary of State and pay franchise taxes. The corporation's first attempts at having its powers revived pursuant to the procedure set forth in the Corporations Code were rejected. By the time the corporation was restored to good standing, the statutes of limitations on both state laws had run out and the trial court held that the corporation's petition was time-barred.

The California Court of Appeal affirmed. The court noted that a suit filed by a corporation while its powers are suspended does not toll the statute of limitations. The corporation contended that it had substantially complied with the revivor provisions of the Corporations Code before the statute of limitations had run out, and that therefore its petition was not time-barred. However, according to the court, the substantial compliance doctrine cannot be used by a suspended corporation to defeat the short statute of limitations found in the Environmental Quality Act and Planning and Zoning Law. To hold otherwise would be inconsistent with the policy reason underlying the short limitations periods, which is to ensure finality and predictability in public land use planning decisions.

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 on Jan. 1, 2012. It also examines some recent decisions of interest, including two from the Delaware Supreme Court.

IN THE STATE LEGISLATURES

Legislation affecting corporations, LLCs and other types of business organizations went into effect in a number of states on Jan. 1, 2012. California's legislature was particularly active. Highlights from around the country include the following:

In Arkansas, Senate Bill 302 enacted the Revised Uniform Unincorporated Nonprofit Association Act, governing unincorporated nonprofit associations, which are defined as unincorporated organizations consisting of two or more members, joined under an agreement for one or more common, nonprofit purposes.

In California, Assembly Bill 361 authorized the formation and governance of benefit corporations ' which are corporations formed to pursue a general public benefit, which is defined as a “material positive impact on society and the environment, taken as a whole, as assessed against a third-party standard.” Senate Bill 201 authorized the formation and governance of flexible purpose corporations, which are corporations that have a “special purpose” which may be a charitable activity or which may promote positive short-term or long-term effects on certain stakeholders, the community, society, or the environment. Assembly Bill 657 allowed corporations and LLCs to elect to receive their annual report renewal notices from the Secretary of State by e-mail and required foreign corporations to file their initial Statements of Information within 90 days (formerly, one year) after the corporation has qualified to do business in California. Assembly Bill 571 allowed a corporation to make distributions to shareholders if the corporation meets either a retained earnings test or a new balance sheet test, eliminated the requirement that a corporation notify shareholders in writing each time they make a distribution other than from retained earnings, and created a four-year statute of limitation for suits based on an obligation to return an improper distribution. Assembly Bill 1211 amended provisions of the nonprofit corporation law governing director voting, consents, and quorums and exempted certain corporations from having to obtain the consent of the Attorney General before taking certain actions. Assembly Bill 560 extended the time limit for architects to organize as LLPs from Jan. 1, 2012 to Jan. 1, 2019.

In Connecticut, House Bill 6565 provided that the Secretary of State may require corporations, LPs, LLCs, and LLPs to file annual reports electronically. In Mississippi, Senate Bill 2444 amended provisions of the nonprofit corporation law governing certificates of existence, notice, contents of the articles of incorporation, indemnification of directors, the elimination or limitation of directors' liability, and member meetings.

In New York, Senate Bill 2987 permitted incorporation under the Business Corporation Law of corporations practicing professional engineering, architecture, landscape architecture, and land surveying. And in Oregon, House Bill 2254 permitted the Secretary of State to waive the requirement that a corporation, LLC or LP apply for reinstatement within five years of dissolution, upon request and a showing that the entity remained active.

IN THE STATE COURTS

DE Supreme Court: Stockholder Not Entitled to Inspect Report of Internal Investigation

In Espinoza v. Hewlett-Packard Company, No. 208, 2011 (Del. Supr., decided Nov. 21, 2011), the plaintiff stockholder filed a suit under Sec. 220 of the General Corporation Law seeking to inspect a report prepared by a law firm retained by a corporation to investigate allegations of sexual harassment against its CEO. The Chancery Court denied the plaintiff relief, finding that the report was protected by the attorney-client privilege and work product doctrine.

On appeal, the Delaware Supreme Court affirmed, but on the alternative ground that the plaintiff had not met his burden under Sec. 220 to show that the report was essential to his stated purpose, which was to investigate possible corporate wrongdoing. The court noted that a document is essential if, at a minimum, it addresses the crux of the stockholder's purpose and if the information is unavailable from other sources. Here, the plaintiff's specific purpose was to investigate why the board of directors, after announcing the CEO's resignation and stating that he violated the corporation's standards of conduct, chose to enter into a separation agreement that paid the CEO over $30 million rather than firing him for cause. However, according to the court, the report did not discuss the “for-cause” issue, nor was there evidence that the report played any role in the board's decision. Furthermore, the corporation had already disclosed to the plaintiff documents that contained the information essential to the plaintiff's purpose.

DE Supreme Court Affirms Holding That Corporation Lacked Funds to Redeem Preferred Stock

In SV Investment Partners, LLC v. Thoughtworks, Inc., No. 107, 2011 (Del. Supr., decided Nov. 15, 2011), holders of preferred stock in a Delaware corporation demanded that the corporation redeem their shares. The corporation was required to redeem the stock for cash “out of any funds legally available therefore.” The board of directors used a formula for determining “funds legally available” that resulted in the board redeeming a small portion of the plaintiffs' shares. The plaintiffs filed suit in the Delaware Chancery Court for declaratory judgment as to the meaning of “funds legally available.” At the time the trial was held, the board had redeemed only $4.1 million of what the plaintiffs claimed was the corporation's $64-million obligation.

At trial, the plaintiffs argued that “funds legally available” meant statutory surplus. The Chancery Court rejected the plaintiffs' expert testimony and further held that there was insufficient evidence to prove that the corporation had sufficient legally available funds even if it accepted the plaintiffs' definition. The court therefore found for the defendants and the plaintiffs appealed.

The Delaware Supreme Court noted that a factual finding by the Chancery Court based on a weighing of expert opinion will be overturned only if arbitrary or lacking any supporting evidence. According to the court, neither circumstance was present here. The Chancery Court found the plaintiffs' expert testimony insufficient for several reasons, including that she did not consider the amount of funds the corporation could use for redemption while continuing as a going concern, the effect a redemption would have on the corporation's ability to achieve the projections she based her analysis on, or how the corporation might raise the funds. The Chancery Court also noted that there was no evidence that the corporation could obtain the funds for the redemptions. Thus, the court affirmed the holding that the plaintiffs did not carry their burden of proof that legally available funds were available to redeem their shares.

CA Appellate Court: Substantial Compliance
Doctrine Does Not Apply to Suit by Suspended Corporation

In Friends of Shingle Springs Interchange, Inc. v. County of El Dorado, C065068 (Cal. App. 3 Dist., decided Nov. 22, 2011), a corporation challenged a county's approval of a land use project, alleging violations of two state laws ' the Environmental Quality Act and the Planning and Zoning Law. At the time the petition was filed, the corporation's corporate powers were suspended because it failed to file its Annual Statement with the Secretary of State and pay franchise taxes. The corporation's first attempts at having its powers revived pursuant to the procedure set forth in the Corporations Code were rejected. By the time the corporation was restored to good standing, the statutes of limitations on both state laws had run out and the trial court held that the corporation's petition was time-barred.

The California Court of Appeal affirmed. The court noted that a suit filed by a corporation while its powers are suspended does not toll the statute of limitations. The corporation contended that it had substantially complied with the revivor provisions of the Corporations Code before the statute of limitations had run out, and that therefore its petition was not time-barred. However, according to the court, the substantial compliance doctrine cannot be used by a suspended corporation to defeat the short statute of limitations found in the Environmental Quality Act and Planning and Zoning Law. To hold otherwise would be inconsistent with the policy reason underlying the short limitations periods, which is to ensure finality and predictability in public land use planning decisions.

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).