Quarterly State Compliance Review

House Bill 342, effective Aug. 1, enacted various amendments to the General Corporation Law, including requiring certain certificates of merger, consolidation and conversion to include the type of entity of each constituent, repealing a provision allowing a foreign corporation to withdraw by filing a certificate of dissolution from the home jurisdiction, and providing that the forwarding address for service of process set forth in a certificate of transfer may not be that of the corporation's registered agent without the written consent of the registered agent being filed.

House Bills 338, 340, and 339, effective Aug. 1, amended the Delaware LLC, LP and partnership laws to restrict the use of the word “bank” or any variation thereof in a name; to provide that an LLC agreement or a partnership agreement may be made effective as of the effective time of filing the certificate of formation or certificate of limited partnership; to require certificates of merger, consolidation and conversion to include the type of entity of each constituent; to provide that the forwarding address for service of process set forth in a certificate of transfer may not be that of the entity's registered agent without the registered agent's written consent being filed; and to provide that no obligation of a member or manager to another member or manager, or obligation of a partner to a partnership or LP is subject to the defense of usury.

The LLC law was also amended to provide that a manager of a Series LLC may apply to the Chancery Court to dissolve a series and appoint a liquidating trustee, and to repeal a provision that allowed a manager's personal representative or assignee to apply to the Chancery Court to wind up the LLC's affairs and appoint a liquidating trustee.

Amendments to the Business Entity Laws of Other States

In Connecticut, House Bill 5073, effective Oct. 1, amended the corporation law to provide that the bylaws may require, under certain conditions, a corporation soliciting proxies to include in its proxy materials individuals nominated by shareholders, and to reimburse the expenses incurred by shareholders in soliciting proxies. The bill also amended sections dealing with indemnification, voting groups, and appraisal rights. In Illinois, Senate Bill 1127, effective Aug. 2, amended the corporation law to provide that a right to indemnification and advancement of expenses arising under a charter or bylaw provision may not be eliminated by an amendment to that provision after the act that is the subject of the action for which indemnification is sought unless explicitly authorized in the provision.

In Louisiana, House Bill 1178, effective Aug. 1, authorized formation of a benefit corporation. In Maryland, House Bill 777 and Senate Bill 855, effective Oct. 1, amended provisions of the LLC law dealing with, among other things, the applicability of default provisions, voting, proxies, meetings, inspection of records, assignment of interests, withdrawal of members and charging orders. And in North Carolina, House Bill 572, effective Oct. 1, required nonprofit corporations receiving more than $5,000 of public funding in a year to publicly disclose their financial statements and to require those statements to contain certain details about the funds.

IN THE STATE COURTS

DE Supreme Court Affirms Award

In Americas Mining Corporation v. Theriault, No. 29, 2012 (Del. Supr.), decided Aug. 27, 2012, a corporation's controlling stockholder proposed that the corporation acquire his interest in another company for $3 billion. The board of directors formed a Special Committee, which recommended approval of the acquisition. The corporation's minority stockholders filed a derivative suit alleging that the controlling stockholder and board of directors breached their fiduciary duty of loyalty by acquiring the company for much more than it was worth. The Chancery Court, employing an entire fairness review, found that neither the process nor price were fair, and awarded the plaintiffs $2 billion in damages and $300 million in attorneys' fees. The defendants appealed.

The Delaware Supreme Court affirmed. The court agreed with the Chancery Court that the burden of proving entire fairness stayed with the defendants because the Special Committee was neither well-functioning nor informed, and it agreed that the process undertaken and price paid by the corporation were not entirely fair. According to the court, the Special Committee's mindset was affected by the controlling stockholder. The committee failed to consider any options other than the controlling stockholder's bid, and failed to pursue a financial analysis that would have supported a valuation other than one that supported the controlling stockholder.

The court upheld the $2 billion damage award, concluding it was a reasoned estimation of the difference between the price actually paid for the company and the price that the corporation would have paid had the deal been entirely fair. In addition, the court affirmed the attorneys' fee award. In so doing, the court upheld the use of the “percentage of the common fund” method of calculating the award rather than the “lodestar” method. The court also found that $300 million, which represented 15% of the common fund created by the judgment, was a reasonable exercise of discretion and in the range of past awards when a case progressed to a full trial.

DE Chancery Court Applies Business Judgment Rule to a Merger

In In re Synthes, Inc. Shareholder Litigation, C.A. No. 6452 (Del. Ch.) decided Aug. 17, 2012, minority stockholders brought a suit alleging a breach of fiduciary duty after a corporation was acquired in a merger in which all stockholders received 65% stock and 35% cash. The plaintiffs alleged that the merger was a conflict transaction subject to a review under the entire fairness standard because the controlling stockholder had a financial motive adverse to the minority stockholders ' namely that he was anxious to sell his shares and had to sell to one buyer. According to the plaintiffs, the controlling stockholder and the other directors breached their duty of loyalty by refusing to consider another, all cash bid that did not meet the controlling stockholder's criteria.

The Delaware Chancery Court held that the entire fairness standard should not be applied. The court noted that the controlling stockholder received the same treatment in the merger as the minority stockholders and that he did not seek a premium for his own controlling position, even though he could have. The court also noted that the strategic process the board entered into was patient and reasonably calculated to generate the best value the market could pay. The board considered several offers and found the all cash bid risky. It also did not accept the acquiror's first bid but engaged in extensive negotiations that resulted in a higher price. The court also found that the pled facts did not support an inference that there was any breach of fiduciary duty on the defendants' part and thus, the defendants' motion to dismiss was granted.

NY Appellate Court Denies LLC Managers' Motion

In 546-552 West 146th Street LLC v. Arfa, 2012 N.Y. Slip Op. 05895, decided Aug. 7, 2012, managers of LLCs were sued for allegedly inflating the prices the LLCs paid for properties. The suit was dismissed and the managers successfully appealed to obtain indemnification pursuant to the operating agreements. The managers then moved for their fees on fees, that is, the attorney fees incurred in obtaining the indemnification. The trial court denied their motion and they appealed.

The New York Supreme Court, Appellate Division, affirmed. The managers sought indemnification pursuant to a section of the operating agreements providing that the LLCs would indemnify managers from and against “all claims and demands” to the extent permitted by the LLC law. The latter permits an LLC to indemnify managers from and against “any and all claims and demands.” The court explained that indemnification statutes must be strictly construed and absent explicit statutory authority a court will refuse to award fees on fees. Furthermore, the courts should not infer an intention to waive the rule that parties are responsible for their own attorney's fees unless the intent is unmistakable. Here, the court noted, neither the operating agreements nor the statute explicitly or unambiguously provide for an award of fees on fees.

NV Supreme Court: Personal Jurisdiction Exists over Officers and Directors

In Consipio Holding, BV v. Carlberg, No. 58128 (Nev. Supr.), decided Aug. 9, 2012, shareholders of a Nevada corporation filed a complaint in a Nevada court against the corporation's officers and directors, alleging they assisted the former CEO in financially harming the corporation for their personal gain. None of the defendants were citizens or residents of Nevada. Without conducting a hearing the district court granted the defendants' motions to dismiss for lack of personal jurisdiction. The plaintiffs appealed.

The Nevada Supreme Court reversed, holding that a district court can exercise personal jurisdiction over nonresident officers and directors who directly harm a Nevada corporation. The court noted that by purposefully directing harm toward a Nevada corporation, officers and directors establish contacts with Nevada, affirmatively direct conduct toward Nevada, and cause important consequences in Nevada. The court also found support for allowing personal jurisdiction in a section of the Nevada corporation law that authorizes lawsuits against officers or directors for violation of their authority and which provides notice to officers and directors that they are subject to such suits in Nevada for violating Nevada law.

Sandra Feldman is a publications and research attorney for CT Corporation and a member of this newsletter's Board of Editors. CT Corporation is 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 between Aug. 1 and Oct. 1, including amendments to Delaware's corporation, LLC and LP laws. It also looks at some recent decisions of interest from the courts of Delaware, New York and Nevada.

IN THE STATE LEGISLATURES

DE Amends Its Corporation, LLC, LP And GP Laws

House Bill 342, effective Aug. 1, enacted various amendments to the General Corporation Law, including requiring certain certificates of merger, consolidation and conversion to include the type of entity of each constituent, repealing a provision allowing a foreign corporation to withdraw by filing a certificate of dissolution from the home jurisdiction, and providing that the forwarding address for service of process set forth in a certificate of transfer may not be that of the corporation's registered agent without the written consent of the registered agent being filed.

House Bills 338, 340, and 339, effective Aug. 1, amended the Delaware LLC, LP and partnership laws to restrict the use of the word “bank” or any variation thereof in a name; to provide that an LLC agreement or a partnership agreement may be made effective as of the effective time of filing the certificate of formation or certificate of limited partnership; to require certificates of merger, consolidation and conversion to include the type of entity of each constituent; to provide that the forwarding address for service of process set forth in a certificate of transfer may not be that of the entity's registered agent without the registered agent's written consent being filed; and to provide that no obligation of a member or manager to another member or manager, or obligation of a partner to a partnership or LP is subject to the defense of usury.

The LLC law was also amended to provide that a manager of a Series LLC may apply to the Chancery Court to dissolve a series and appoint a liquidating trustee, and to repeal a provision that allowed a manager's personal representative or assignee to apply to the Chancery Court to wind up the LLC's affairs and appoint a liquidating trustee.

Amendments to the Business Entity Laws of Other States

In Connecticut, House Bill 5073, effective Oct. 1, amended the corporation law to provide that the bylaws may require, under certain conditions, a corporation soliciting proxies to include in its proxy materials individuals nominated by shareholders, and to reimburse the expenses incurred by shareholders in soliciting proxies. The bill also amended sections dealing with indemnification, voting groups, and appraisal rights. In Illinois, Senate Bill 1127, effective Aug. 2, amended the corporation law to provide that a right to indemnification and advancement of expenses arising under a charter or bylaw provision may not be eliminated by an amendment to that provision after the act that is the subject of the action for which indemnification is sought unless explicitly authorized in the provision.

In Louisiana, House Bill 1178, effective Aug. 1, authorized formation of a benefit corporation. In Maryland, House Bill 777 and Senate Bill 855, effective Oct. 1, amended provisions of the LLC law dealing with, among other things, the applicability of default provisions, voting, proxies, meetings, inspection of records, assignment of interests, withdrawal of members and charging orders. And in North Carolina, House Bill 572, effective Oct. 1, required nonprofit corporations receiving more than $5,000 of public funding in a year to publicly disclose their financial statements and to require those statements to contain certain details about the funds.

IN THE STATE COURTS

DE Supreme Court Affirms Award

In Americas Mining Corporation v. Theriault, No. 29, 2012 (Del. Supr.), decided Aug. 27, 2012, a corporation's controlling stockholder proposed that the corporation acquire his interest in another company for $3 billion. The board of directors formed a Special Committee, which recommended approval of the acquisition. The corporation's minority stockholders filed a derivative suit alleging that the controlling stockholder and board of directors breached their fiduciary duty of loyalty by acquiring the company for much more than it was worth. The Chancery Court, employing an entire fairness review, found that neither the process nor price were fair, and awarded the plaintiffs $2 billion in damages and $300 million in attorneys' fees. The defendants appealed.

The Delaware Supreme Court affirmed. The court agreed with the Chancery Court that the burden of proving entire fairness stayed with the defendants because the Special Committee was neither well-functioning nor informed, and it agreed that the process undertaken and price paid by the corporation were not entirely fair. According to the court, the Special Committee's mindset was affected by the controlling stockholder. The committee failed to consider any options other than the controlling stockholder's bid, and failed to pursue a financial analysis that would have supported a valuation other than one that supported the controlling stockholder.

The court upheld the $2 billion damage award, concluding it was a reasoned estimation of the difference between the price actually paid for the company and the price that the corporation would have paid had the deal been entirely fair. In addition, the court affirmed the attorneys' fee award. In so doing, the court upheld the use of the “percentage of the common fund” method of calculating the award rather than the “lodestar” method. The court also found that $300 million, which represented 15% of the common fund created by the judgment, was a reasonable exercise of discretion and in the range of past awards when a case progressed to a full trial.

DE Chancery Court Applies Business Judgment Rule to a Merger

In In re Synthes, Inc. Shareholder Litigation, C.A. No. 6452 (Del. Ch.) decided Aug. 17, 2012, minority stockholders brought a suit alleging a breach of fiduciary duty after a corporation was acquired in a merger in which all stockholders received 65% stock and 35% cash. The plaintiffs alleged that the merger was a conflict transaction subject to a review under the entire fairness standard because the controlling stockholder had a financial motive adverse to the minority stockholders ' namely that he was anxious to sell his shares and had to sell to one buyer. According to the plaintiffs, the controlling stockholder and the other directors breached their duty of loyalty by refusing to consider another, all cash bid that did not meet the controlling stockholder's criteria.

The Delaware Chancery Court held that the entire fairness standard should not be applied. The court noted that the controlling stockholder received the same treatment in the merger as the minority stockholders and that he did not seek a premium for his own controlling position, even though he could have. The court also noted that the strategic process the board entered into was patient and reasonably calculated to generate the best value the market could pay. The board considered several offers and found the all cash bid risky. It also did not accept the acquiror's first bid but engaged in extensive negotiations that resulted in a higher price. The court also found that the pled facts did not support an inference that there was any breach of fiduciary duty on the defendants' part and thus, the defendants' motion to dismiss was granted.

NY Appellate Court Denies LLC Managers' Motion

In 546-552 West 146th Street LLC v. Arfa , 2012 N.Y. Slip Op. 05895, decided Aug. 7, 2012, managers of LLCs were sued for allegedly inflating the prices the LLCs paid for properties. The suit was dismissed and the managers successfully appealed to obtain indemnification pursuant to the operating agreements. The managers then moved for their fees on fees, that is, the attorney fees incurred in obtaining the indemnification. The trial court denied their motion and they appealed.

The New York Supreme Court, Appellate Division, affirmed. The managers sought indemnification pursuant to a section of the operating agreements providing that the LLCs would indemnify managers from and against “all claims and demands” to the extent permitted by the LLC law. The latter permits an LLC to indemnify managers from and against “any and all claims and demands.” The court explained that indemnification statutes must be strictly construed and absent explicit statutory authority a court will refuse to award fees on fees. Furthermore, the courts should not infer an intention to waive the rule that parties are responsible for their own attorney's fees unless the intent is unmistakable. Here, the court noted, neither the operating agreements nor the statute explicitly or unambiguously provide for an award of fees on fees.

NV Supreme Court: Personal Jurisdiction Exists over Officers and Directors

In Consipio Holding, BV v. Carlberg, No. 58128 (Nev. Supr.), decided Aug. 9, 2012, shareholders of a Nevada corporation filed a complaint in a Nevada court against the corporation's officers and directors, alleging they assisted the former CEO in financially harming the corporation for their personal gain. None of the defendants were citizens or residents of Nevada. Without conducting a hearing the district court granted the defendants' motions to dismiss for lack of personal jurisdiction. The plaintiffs appealed.

The Nevada Supreme Court reversed, holding that a district court can exercise personal jurisdiction over nonresident officers and directors who directly harm a Nevada corporation. The court noted that by purposefully directing harm toward a Nevada corporation, officers and directors establish contacts with Nevada, affirmatively direct conduct toward Nevada, and cause important consequences in Nevada. The court also found support for allowing personal jurisdiction in a section of the Nevada corporation law that authorizes lawsuits against officers or directors for violation of their authority and which provides notice to officers and directors that they are subject to such suits in Nevada for violating Nevada law.

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