Quarterly State Compliance Review

In Maine, Senate Bill 193, effective May 3, amended the LLC law to clarify the need to have an entity indicator in the name when the LLC is filing an assumed name or registration of name. In Indiana, House Bill 1394, effective July 1, amended provisions of the business entity laws regarding the registration of LLPs, electronic signatures on LP filings, execution of corporate and LLC annual and biennial reports, LLC purposes, LLC officers, and the dissolution of LLCs by member consent. In Iowa, House Bill 566, effective July 1, amended the LLC Act to provide the manner in which real estate located in Iowa held by a domestic or foreign LLC may be transferred.

In New Jersey, Assembly Bill 3049, effective June 30, amended the New Jersey Shareholders' Protection Act to authorize certain business combinations between resident corporations and interested shareholders. Also in New Jersey, Assembly Bill 3050, effective June 30, amended the Business Corporation Act to allow shareholders to participate in shareholders' meetings by remote communication and to provide that dissenters' rights are the exclusive remedy for dissatisfied shareholders in corporate mergers.

In South Dakota, House Bill 1163, effective July 1, amended the LP law to provide that certificates of limited partnership, amendment and cancellation may be filed by electronic transmission. Also in South Dakota, House Bill 1106, also effective July 1, amended provisions of the LLC act dealing with operating agreements, admission of members, contributions by members, distributions, mergers, conversions, domestications, foreign LLCs, and direct and derivative actions. In Utah, effective July 1, the Unincorporated Business Entities Act (enacted by 2011 Senate Bill 131 and 2012 Senate Bill 256) went into effect, repealing the existing partnership, LP and LLC acts and enacting new ones.

In Virginia, Senate Bill 779, effective July 1, amended the LLC law to state that unless otherwise provided in the articles of organization or an operating agreement, an assignment of an interest in an LLC does not entitle the assignee to participate in the LLC's management and affairs or to become or to exercise any rights of a member. Also in Virginia, House Bill 1748, effective July 1, amended provisions of the LLC law regarding the execution and content of documents filed with the Secretary of the Commonwealth, the transaction of business by foreign LLCs and the annual registration fee for LLCs that have ceased to exist.

IN THE STATE COURTS
DE Supreme Court Enforces Obligation to Negotiate in Good Faith an Agreement in Accordance with a Term Sheet

In SIGA Technologies, Inc. v. PharmAthene, Inc., No. 314, 2012, decided May 24, 2013, SIGA contacted PharmAthene seeking financing to develop a drug. The companies negotiated a term sheet whereby SIGA would grant PharmAthene a license to make and sell the drug in return for a license fee, milestone payments, and royalties. They entered into a Loan Agreement and a Merger Agreement, both of which stated that if the merger was terminated the parties would negotiate in good faith a license agreement in accordance with the terms set forth in the term sheet.

Following successful drug trials, SIGA began to have “seller's remorse” over giving up control over what appeared to be a billion-dollar drug. SIGA terminated the merger and sent PharmAthene a draft agreement which would have increased the license fee from $6 million to $100 million, and the milestone payments from $10 million to $235 million. It also increased the royalties and revised several non-economic terms to favor SIGA. SIGA also refused to negotiate if PharmAthene continued to claim that the term sheet was binding. PharmAthene sued and the Chancery Court held SIGA liable for a breach of its obligation to negotiate in good faith a definitive license agreement based on the term sheet's terms.

The Delaware Supreme Court affirmed that ruling. The court stated that the incorporation of the term sheet in the loan and merger agreements reflected the parties' intent to negotiate toward a license agreement with terms similar to those in the term sheet. And, as the court noted, the terms SIGA proposed differed dramatically from those terms.

The court then dealt with the issue of damages and held that where the parties have an agreement that bans a party from renouncing the deal, abandoning negotiations or insisting on conditions not in conformance with the preliminary agreement, that includes an obligation to negotiate in good faith, and the record supports the trial court's finding that the parties would have reached an agreement but for the defendant's bad faith negotiating, the plaintiff is entitled to recover contract expectation damages.

DE Supreme Court Clarifies When Court Can Reform LLC Agreement on the Basis of a Unilateral Mistake

In Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, No. 437, 2012, decided May 9, 2013, Scion and ASB entered into five joint ventures that involved the formation of LLCs. The first and second LLC agreements provided that Scion would be paid only after ASB recovered its investment. However, the LLC agreements for the third, fourth and fifth ventures contained a drafting error that provided that Scion would be paid before ASB recovered its investment. Scion's co-founder saw the error. However, ASB did not become aware of it until Scion asked for its payment.

ASB then brought a suit in the Delaware Chancery Court seeking a reformation of the sales proceeds provisions of the last three LLC agreements to comport with the original agreement. Scion counterclaimed to enforce the agreements as written. The Chancery Court reformed the LLC agreements and Scion appealed.

The Delaware Supreme Court held that for purposes of a reformation claim, a mistaken party's fault in failing to know or discover the facts before making the contract does not bar a reformation claim unless the fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. In applying that standard to this case the court noted that while ASB's president admitted he did not read the disputed agreements, he did read the original agreement and relied upon his staff to let him know of any significant changes. Thus his actions were reasonable and did not amount to bad faith.

The court also held that under Delaware law reformation based on a unilateral mistake is available where a party can show that it was mistaken and that the other party knew of the mistake but remained silent. Finally, the court noted that ratification of a document subject to reformation requires actual knowledge of the mistake. Here, ASB had no knowledge of the mistake and therefore could not have ratified the document. Thus, the Chancery Court's decision to reform the LLC agreements was affirmed.

CA Appellate Court Holds That Investment Bank Was Not Liable for Aiding and Abetting Securities Fraud

In AREI II Cases, Cal. Ct. App. No. A130447, decided May 29, 2013, AREI developed and structured a transaction to acquire and manage senior housing facilities. The plaintiffs were investors. The defendant, an investment bank, assisted AREI in obtaining financing from lenders. The plaintiffs filed a suit alleging that they were induced to invest based on misrepresentations contained in the private placement memorandum. They claimed that AREI violated Corporations Code Sec. 25401, which prohibits misrepresentations or omissions of material fact in connection with the sale of securities. The plaintiffs sought to hold the defendant investment bank liable for aiding and abetting under Sec. 25504.1 ' which imposes liability on any person who materially assists in the violation of Sec. 25401. The trial court sustained the defendant's demurrer and the plaintiffs appealed.

The California Court of Appeal noted that for the purposes of liability under Sec. 25504.1, it is not enough that a person provided material assistance in a larger scheme to defraud if that person had no role in the part of the scheme that constituted the violation of the securities law. Here the plaintiffs' complaint did not allege facts demonstrating how the investment bank assisted in the act of selling or offering to sell securities by means of false and misleading statements ' which was the primary underlying securities law violation. Thus, the plaintiffs' cause of action against the defendant based on Sec. 25504.1 failed.

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 legislation of interest to corporate lawyers that went into effect between May 1 and July 1, 2013 as well as some recent cases of interest, including two from the Delaware Supreme Court.

IN THE STATE LEGISLATURES

There were a number of amendments to state business entity statutes that went into effect during this period. Highlights include the following:

In Maine, Senate Bill 193, effective May 3, amended the LLC law to clarify the need to have an entity indicator in the name when the LLC is filing an assumed name or registration of name. In Indiana, House Bill 1394, effective July 1, amended provisions of the business entity laws regarding the registration of LLPs, electronic signatures on LP filings, execution of corporate and LLC annual and biennial reports, LLC purposes, LLC officers, and the dissolution of LLCs by member consent. In Iowa, House Bill 566, effective July 1, amended the LLC Act to provide the manner in which real estate located in Iowa held by a domestic or foreign LLC may be transferred.

In New Jersey, Assembly Bill 3049, effective June 30, amended the New Jersey Shareholders' Protection Act to authorize certain business combinations between resident corporations and interested shareholders. Also in New Jersey, Assembly Bill 3050, effective June 30, amended the Business Corporation Act to allow shareholders to participate in shareholders' meetings by remote communication and to provide that dissenters' rights are the exclusive remedy for dissatisfied shareholders in corporate mergers.

In South Dakota, House Bill 1163, effective July 1, amended the LP law to provide that certificates of limited partnership, amendment and cancellation may be filed by electronic transmission. Also in South Dakota, House Bill 1106, also effective July 1, amended provisions of the LLC act dealing with operating agreements, admission of members, contributions by members, distributions, mergers, conversions, domestications, foreign LLCs, and direct and derivative actions. In Utah, effective July 1, the Unincorporated Business Entities Act (enacted by 2011 Senate Bill 131 and 2012 Senate Bill 256) went into effect, repealing the existing partnership, LP and LLC acts and enacting new ones.

In Virginia, Senate Bill 779, effective July 1, amended the LLC law to state that unless otherwise provided in the articles of organization or an operating agreement, an assignment of an interest in an LLC does not entitle the assignee to participate in the LLC's management and affairs or to become or to exercise any rights of a member. Also in Virginia, House Bill 1748, effective July 1, amended provisions of the LLC law regarding the execution and content of documents filed with the Secretary of the Commonwealth, the transaction of business by foreign LLCs and the annual registration fee for LLCs that have ceased to exist.

IN THE STATE COURTS
DE Supreme Court Enforces Obligation to Negotiate in Good Faith an Agreement in Accordance with a Term Sheet

In SIGA Technologies, Inc. v. PharmAthene, Inc., No. 314, 2012, decided May 24, 2013, SIGA contacted PharmAthene seeking financing to develop a drug. The companies negotiated a term sheet whereby SIGA would grant PharmAthene a license to make and sell the drug in return for a license fee, milestone payments, and royalties. They entered into a Loan Agreement and a Merger Agreement, both of which stated that if the merger was terminated the parties would negotiate in good faith a license agreement in accordance with the terms set forth in the term sheet.

Following successful drug trials, SIGA began to have “seller's remorse” over giving up control over what appeared to be a billion-dollar drug. SIGA terminated the merger and sent PharmAthene a draft agreement which would have increased the license fee from $6 million to $100 million, and the milestone payments from $10 million to $235 million. It also increased the royalties and revised several non-economic terms to favor SIGA. SIGA also refused to negotiate if PharmAthene continued to claim that the term sheet was binding. PharmAthene sued and the Chancery Court held SIGA liable for a breach of its obligation to negotiate in good faith a definitive license agreement based on the term sheet's terms.

The Delaware Supreme Court affirmed that ruling. The court stated that the incorporation of the term sheet in the loan and merger agreements reflected the parties' intent to negotiate toward a license agreement with terms similar to those in the term sheet. And, as the court noted, the terms SIGA proposed differed dramatically from those terms.

The court then dealt with the issue of damages and held that where the parties have an agreement that bans a party from renouncing the deal, abandoning negotiations or insisting on conditions not in conformance with the preliminary agreement, that includes an obligation to negotiate in good faith, and the record supports the trial court's finding that the parties would have reached an agreement but for the defendant's bad faith negotiating, the plaintiff is entitled to recover contract expectation damages.

DE Supreme Court Clarifies When Court Can Reform LLC Agreement on the Basis of a Unilateral Mistake

In Scion Breckenridge Managing Member, LLC v. ASB Allegiance Real Estate Fund, No. 437, 2012, decided May 9, 2013, Scion and ASB entered into five joint ventures that involved the formation of LLCs. The first and second LLC agreements provided that Scion would be paid only after ASB recovered its investment. However, the LLC agreements for the third, fourth and fifth ventures contained a drafting error that provided that Scion would be paid before ASB recovered its investment. Scion's co-founder saw the error. However, ASB did not become aware of it until Scion asked for its payment.

ASB then brought a suit in the Delaware Chancery Court seeking a reformation of the sales proceeds provisions of the last three LLC agreements to comport with the original agreement. Scion counterclaimed to enforce the agreements as written. The Chancery Court reformed the LLC agreements and Scion appealed.

The Delaware Supreme Court held that for purposes of a reformation claim, a mistaken party's fault in failing to know or discover the facts before making the contract does not bar a reformation claim unless the fault amounts to a failure to act in good faith and in accordance with reasonable standards of fair dealing. In applying that standard to this case the court noted that while ASB's president admitted he did not read the disputed agreements, he did read the original agreement and relied upon his staff to let him know of any significant changes. Thus his actions were reasonable and did not amount to bad faith.

The court also held that under Delaware law reformation based on a unilateral mistake is available where a party can show that it was mistaken and that the other party knew of the mistake but remained silent. Finally, the court noted that ratification of a document subject to reformation requires actual knowledge of the mistake. Here, ASB had no knowledge of the mistake and therefore could not have ratified the document. Thus, the Chancery Court's decision to reform the LLC agreements was affirmed.

CA Appellate Court Holds That Investment Bank Was Not Liable for Aiding and Abetting Securities Fraud

In AREI II Cases, Cal. Ct. App. No. A130447, decided May 29, 2013, AREI developed and structured a transaction to acquire and manage senior housing facilities. The plaintiffs were investors. The defendant, an investment bank, assisted AREI in obtaining financing from lenders. The plaintiffs filed a suit alleging that they were induced to invest based on misrepresentations contained in the private placement memorandum. They claimed that AREI violated Corporations Code Sec. 25401, which prohibits misrepresentations or omissions of material fact in connection with the sale of securities. The plaintiffs sought to hold the defendant investment bank liable for aiding and abetting under Sec. 25504.1 ' which imposes liability on any person who materially assists in the violation of Sec. 25401. The trial court sustained the defendant's demurrer and the plaintiffs appealed.

The California Court of Appeal noted that for the purposes of liability under Sec. 25504.1, it is not enough that a person provided material assistance in a larger scheme to defraud if that person had no role in the part of the scheme that constituted the violation of the securities law. Here the plaintiffs' complaint did not allege facts demonstrating how the investment bank assisted in the act of selling or offering to sell securities by means of false and misleading statements ' which was the primary underlying securities law violation. Thus, the plaintiffs' cause of action against the defendant based on Sec. 25504.1 failed.

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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