Quarterly State Compliance Review

In New Jersey, Assembly Bill 1543, effective March 8, enacted the Revised Uniform Limited Liability Company Act. Among the differences between the Revised Act and the LLC act it replaces are that the Revised Act provides that an operating agreement may be oral or implied, that an LLC has perpetual duration, that the default rule for allocating profits, losses and distributions is on a per-capita basis, and that an LLC is required to provide indemnification under
certain circumstances.

In the District of Columbia, Bill 19-584, which was signed by the Mayor on Feb. 8 and which goes into effect after a 30-day Congressional review period and publication in the D.C. Register, authorized the creation and operation of Benefit Corporations. In Pennsylvania, House Bill 1616, effective Jan. 22, also authorized Benefit Corporations.

Among the bills that were recently introduced and are still pending are the following: In California, Assembly Bills 434, 457 and 491 would amend provisions of the corporation law governing preferred shares, reorganizations, and emergency bylaws. In New York, Assembly Bill 942/Senate Bill 3259 would eliminate the LLC publication requirement and Assembly Bill 4946 would permit shareholders to attend meetings via remote communication.

California (Senate Bill 121), Minnesota (House Bills 287 and 398), New York (Senate Bill 177), and Pennsylvania (House Bill 462) introduced bills dealing with corporate political spending. And Missouri (House Bill 510), Montana (House Bill 362), and Nebraska (Legislative Bill 168) introduced bills to authorize Series LLCs.

In the State Courts

DE Chancery Court Dismisses Suit Against Court-Ordered Custodian

In Jepsco, Ltd. v. B.F. Rich Co, Inc., C.A. No. 7343, decided Feb. 14, 2013, a minority stockholder brought a suit against a custodian who had been appointed by the Delaware Chancery Court following a dispute over the election of directors. The custodianship resulted in a settlement agreement and the sale of the corporation's only asset. The stockholder alleged that the custodian breached his statutory and fiduciary duties by selling the sole asset without either obtaining its consent or notifying it that the majority had consented to the sale.

The Delaware Chancery Court dismissed the breach of statutory duty claim on the grounds of judicial immunity. The court noted that the custodian was acting under court order when he implemented the settlement by selling the sole asset. Thus, he could not be stripped of his immunity even if he had violated the corporation law by selling the asset without the consent of or notice to the minority stockholders.

The court dismissed the breach of fiduciary duty claim on the grounds of laches, noting that such a cause of action must be brought within three years of accrual. Here, the cause accrued, at the latest, when the court terminated the custodianship and the stockholder filed its complaint after that date.

DE Chancery Court: Receiver Not Necessary for Corporation Dissolved More Than 10 Years

In In the Matter of Krafft-Murphy Company, Inc., C.A. No. 6049, decided Feb. 4, 2013, asbestos claimants with pending claims against a corporation that had been dissolved for more than 10 years sought the appointment of a receiver. In Delaware, the Chancery Court may appoint a receiver at any time where a dissolved corporation has undistributed assets. In this case the corporation's only assets were liability insurance policies it had purchased while it was in operation. Thus, the court had to determine whether the corporation was amenable to suits brought more than 10 years after its dissolution in order to determine if the policies constituted undistributed assets.

The Chancery Court held that the corporation was not amenable to such suits. The court stated that while it is clear the Delaware legislature intended to extend a dissolved corporation's liability for at least three years, there was no evidence it intended to extend liability beyond 10 years. Thus, because the corporation would not be liable for suits of the kind at issue, the insurers had no obligation to pay under the insurance policies. Accordingly, the insurance policies have no value and the corporation has no undistributed assets that justify the appointment of a receiver.

CA Supreme Court: State's Survival Statute Does Not Apply to Foreign Corporations

Greb v. Diamond International Corporation, S183365, decided Feb. 21, 2013, was another lawsuit filed against a dissolved Delaware corporation for injuries due to asbestos exposure. The issue was whether Delaware's three-year corporate survival statute applied, which would result in the suit being dismissed, or California's survival statute ' Sec. 2010 of the General Corporation Law (GCL) ' which did not have a three-year time limit. The trial court ruled that Delaware law applied and the appellate court affirmed. The California Supreme Court granted review to resolve a conflict among the appellate courts over whether Sec. 2010 applied to foreign corporations.

The California Supreme Court ruled that Sec. 2010 did not apply to foreign corporations. The court rejected the plaintiffs' argument that Sec. 102(a) of the GCL, which provides that the GCL applies to corporations “organized” under the law, meant that the law applied to foreign corporations that had to qualify to do business and that were subject to various requirements which the plaintiffs characterized as “organizational mandates.” The court stated that had the legislature intended to impose such a litigious and intrusive scheme on qualified foreign corporations it would have made its intention clear.

Similarly, the court held that a past version of the law, which stated that it applied to “private corporations” did not mean that foreign corporation were covered. In addition, the court rejected an argument based on a past provision of the state Constitution which provided that foreign corporations would not be allowed to transact business in the state on more favorable terms than domestic corporations. According to the court, that provision merely prohibited the legislature from granting a privilege to a foreign corporation that it did not grant to a domestic corporation.

NY Court of Appeals Upholds Option Agreement

In Fundamental Long Term Care Holdings, LLC v. Cammeby's Funding LLC, 2013 NY Slip Op 951, decided Feb. 14, 2013, an LLC entered into an option agreement entitling the option holder to acquire one-third of the LLC's membership units for $1,000. The agreement provided that upon exercise of the option, the LLC shall deliver certificates for the acquired units and the acquirer shall be admitted as a member. However, when the option was exercised, the LLC responded that it could not issue membership units until the option holder provided a capital contribution of at least the fair market value of its interests. According to the LLC its operating agreement required such a capital contribution before any new members could be admitted. The LLC sought a declaration that the option holder was bound by the operating agreement. The trial court ruled in favor of the option holder, the appellate division affirmed, and the LLC appealed.

The New York Court of Appeals affirmed. The court agreed with the lower courts that the option agreement unambiguously granted the option holder the right to acquire a one-third interest for $1,000. The court rejected the plaintiff's contention that the option agreement and operating agreement had to be read together as requiring a two-step process whereby first the option holder paid $1,000 for the right to acquire the units, and then made a capital contribution. The court pointed out that the option agreement and operating agreement were not inextricably intertwined. Furthermore the parties here were sophisticated and counseled and had they meant for fair market value to be due upon exercise of the option they would not have omitted that term from the option agreement.

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).

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This edition of the Quarterly State Compliance Review looks at some recently enacted and introduced legislation of interest to corporate lawyers. It also looks at some recent cases of interest, including Delaware and California decisions dealing with the ability to sue dissolved corporations.

In The State Legislatures

There were several bills of interest that either went into effect or were introduced during the period between Jan. 1, 2013 and April 1, 2013. Highlights include the following:

In New Jersey, Assembly Bill 1543, effective March 8, enacted the Revised Uniform Limited Liability Company Act. Among the differences between the Revised Act and the LLC act it replaces are that the Revised Act provides that an operating agreement may be oral or implied, that an LLC has perpetual duration, that the default rule for allocating profits, losses and distributions is on a per-capita basis, and that an LLC is required to provide indemnification under
certain circumstances.

In the District of Columbia, Bill 19-584, which was signed by the Mayor on Feb. 8 and which goes into effect after a 30-day Congressional review period and publication in the D.C. Register, authorized the creation and operation of Benefit Corporations. In Pennsylvania, House Bill 1616, effective Jan. 22, also authorized Benefit Corporations.

Among the bills that were recently introduced and are still pending are the following: In California, Assembly Bills 434, 457 and 491 would amend provisions of the corporation law governing preferred shares, reorganizations, and emergency bylaws. In New York, Assembly Bill 942/Senate Bill 3259 would eliminate the LLC publication requirement and Assembly Bill 4946 would permit shareholders to attend meetings via remote communication.

California (Senate Bill 121), Minnesota (House Bills 287 and 398), New York (Senate Bill 177), and Pennsylvania (House Bill 462) introduced bills dealing with corporate political spending. And Missouri (House Bill 510), Montana (House Bill 362), and Nebraska (Legislative Bill 168) introduced bills to authorize Series LLCs.

In the State Courts

DE Chancery Court Dismisses Suit Against Court-Ordered Custodian

In Jepsco, Ltd. v. B.F. Rich Co, Inc., C.A. No. 7343, decided Feb. 14, 2013, a minority stockholder brought a suit against a custodian who had been appointed by the Delaware Chancery Court following a dispute over the election of directors. The custodianship resulted in a settlement agreement and the sale of the corporation's only asset. The stockholder alleged that the custodian breached his statutory and fiduciary duties by selling the sole asset without either obtaining its consent or notifying it that the majority had consented to the sale.

The Delaware Chancery Court dismissed the breach of statutory duty claim on the grounds of judicial immunity. The court noted that the custodian was acting under court order when he implemented the settlement by selling the sole asset. Thus, he could not be stripped of his immunity even if he had violated the corporation law by selling the asset without the consent of or notice to the minority stockholders.

The court dismissed the breach of fiduciary duty claim on the grounds of laches, noting that such a cause of action must be brought within three years of accrual. Here, the cause accrued, at the latest, when the court terminated the custodianship and the stockholder filed its complaint after that date.

DE Chancery Court: Receiver Not Necessary for Corporation Dissolved More Than 10 Years

In In the Matter of Krafft-Murphy Company, Inc., C.A. No. 6049, decided Feb. 4, 2013, asbestos claimants with pending claims against a corporation that had been dissolved for more than 10 years sought the appointment of a receiver. In Delaware, the Chancery Court may appoint a receiver at any time where a dissolved corporation has undistributed assets. In this case the corporation's only assets were liability insurance policies it had purchased while it was in operation. Thus, the court had to determine whether the corporation was amenable to suits brought more than 10 years after its dissolution in order to determine if the policies constituted undistributed assets.

The Chancery Court held that the corporation was not amenable to such suits. The court stated that while it is clear the Delaware legislature intended to extend a dissolved corporation's liability for at least three years, there was no evidence it intended to extend liability beyond 10 years. Thus, because the corporation would not be liable for suits of the kind at issue, the insurers had no obligation to pay under the insurance policies. Accordingly, the insurance policies have no value and the corporation has no undistributed assets that justify the appointment of a receiver.

CA Supreme Court: State's Survival Statute Does Not Apply to Foreign Corporations

Greb v. Diamond International Corporation, S183365, decided Feb. 21, 2013, was another lawsuit filed against a dissolved Delaware corporation for injuries due to asbestos exposure. The issue was whether Delaware's three-year corporate survival statute applied, which would result in the suit being dismissed, or California's survival statute ' Sec. 2010 of the General Corporation Law (GCL) ' which did not have a three-year time limit. The trial court ruled that Delaware law applied and the appellate court affirmed. The California Supreme Court granted review to resolve a conflict among the appellate courts over whether Sec. 2010 applied to foreign corporations.

The California Supreme Court ruled that Sec. 2010 did not apply to foreign corporations. The court rejected the plaintiffs' argument that Sec. 102(a) of the GCL, which provides that the GCL applies to corporations “organized” under the law, meant that the law applied to foreign corporations that had to qualify to do business and that were subject to various requirements which the plaintiffs characterized as “organizational mandates.” The court stated that had the legislature intended to impose such a litigious and intrusive scheme on qualified foreign corporations it would have made its intention clear.

Similarly, the court held that a past version of the law, which stated that it applied to “private corporations” did not mean that foreign corporation were covered. In addition, the court rejected an argument based on a past provision of the state Constitution which provided that foreign corporations would not be allowed to transact business in the state on more favorable terms than domestic corporations. According to the court, that provision merely prohibited the legislature from granting a privilege to a foreign corporation that it did not grant to a domestic corporation.

NY Court of Appeals Upholds Option Agreement

In Fundamental Long Term Care Holdings, LLC v. Cammeby's Funding LLC , 2013 NY Slip Op 951, decided Feb. 14, 2013, an LLC entered into an option agreement entitling the option holder to acquire one-third of the LLC's membership units for $1,000. The agreement provided that upon exercise of the option, the LLC shall deliver certificates for the acquired units and the acquirer shall be admitted as a member. However, when the option was exercised, the LLC responded that it could not issue membership units until the option holder provided a capital contribution of at least the fair market value of its interests. According to the LLC its operating agreement required such a capital contribution before any new members could be admitted. The LLC sought a declaration that the option holder was bound by the operating agreement. The trial court ruled in favor of the option holder, the appellate division affirmed, and the LLC appealed.

The New York Court of Appeals affirmed. The court agreed with the lower courts that the option agreement unambiguously granted the option holder the right to acquire a one-third interest for $1,000. The court rejected the plaintiff's contention that the option agreement and operating agreement had to be read together as requiring a two-step process whereby first the option holder paid $1,000 for the right to acquire the units, and then made a capital contribution. The court pointed out that the option agreement and operating agreement were not inextricably intertwined. Furthermore the parties here were sophisticated and counseled and had they meant for fair market value to be due upon exercise of the option they would not have omitted that term from the option agreement.

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).

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