Quarterly State Compliance Review

In Delaware, House Bill 127 added two new sections to the General Corporation Law, which became effective on April. New Sec. 204 establishes a procedure under which a corporation may ratify an overissue of stock, an election of directors, or another corporate act or transaction that, due to a lack of compliance with the GCL, certificate of incorporation, bylaws or other agreement or plan, is void or voidable. In order to ratify the corporate act, the board of directors must adopt a resolution. That resolution will have to be approved by the stockholders if the corporate act being ratified required stockholder approval. If the act being ratified would have required filing with the secretary of state, then the corporation will have to file a certificate of validation. New Sec. 205 authorizes the Delaware Chancery Court to ratify defective acts when the Sec. 204 procedure is not available and to rule on the validity and effectiveness of an act ratified pursuant to Sec. 204. Delaware House Bill 124 enacted amendments to the Delaware Revised Uniform Limited Partnership Act affecting limited liability limited partnerships (LLLPs). These amendments, which went into effect April 1, clarify which provisions of the Delaware Revised Uniform Partnership Act apply to LLLPs, confirm that an LLLP's statement of qualification may be cancelled if it fails to appoint a successor registered agent, confirm that a cancelled LLLP may apply for reinstatement, and confirm that an LP's status as an LLLP begins upon the effective date of its statement of qualification.

Also in Delaware, House Bill 52 amended the corporate franchise tax law to provide that the maximum corporate franchise tax of $180,000 and the $350 multiplier for computing tax liability using the assumed capital value method are retained at current thresholds. The bill removed a sunset provision scheduled to return the thresholds to pre-2009 levels of $165,000 and $250, respectively, at the end of 2013.

Elsewhere, in Colorado, House Bill 1138, effective April 1, enacted the Colorado Public Benefit Corporation Act, authorizing a corporation to become a benefit corporation by including a statement to that effect in its articles of incorporation. A benefit corporation is a for-profit entity intended to produce a public benefit and operate in a responsible and sustainable manner. And in New Jersey, Assembly Bill 4023, effective Jan. 17, amended the Revised LLC Act to modify the provision regarding the rights of a member's judgment creditor.

IN THE STATE COURTS

DE Supreme Court Clarifies Forum Non Conveniens Doctrine

Martinez v. E. I. Dupont De Nemours and Company, Inc., No. 669, 2012, Delaware Supreme Court, decided Feb. 20, 2014, was a suit filed against a Delaware corporation by Argentine nationals, claiming they were exposed to asbestos while working in Argentina at plants owned by a great-great grand subsidiary of the Delaware corporation. The Delaware Superior Court dismissed on forum non conveniens grounds and the plaintiffs appealed.

The court affirmed. The court noted that to prevail under the forum non conveniens doctrine, a defendant must meet the high burden of showing that the traditional factors (such as relative ease of access to proof, availability of compulsory process for witnesses, and whether the controversy is dependent upon application of important Delaware law) weigh so heavily that the defendant will face “overwhelming hardship” if the lawsuit proceeds in Delaware. In finding that that this “overwhelming hardship” standard was met in this case, the court emphasized that the case involved novel and important issues of Argentina law and policy that were more appropriately determined by Argentina's courts. In addition, there was no countervailing local interest in the case because the plaintiffs were not Delaware residents nor did the alleged injuries occur in Delaware.

Claim Based on Doctrine of Acquiescence

The plaintiffs in Lehman Brothers Holdings Inc. v. Spanish Broadcasting System, Inc., C.A. No. 8321, Delaware Chancery Court, decided Feb. 25, 2014, invested in preferred stock in the defendant corporation. The Certificate of Designation provided that a non-payment of dividends was a triggering event conferring certain rights on the plaintiffs including the right to prevent the corporation from acquiring additional debts. According to the plaintiffs, the corporation failed to pay dividends and a triggering event occurred by July 2010. Thereafter the corporation acquired additional debt. However the plaintiffs did not attempt to assert any of the rights conferred by the triggering event or object to the acquisition of debt until February 2013, when they filed suit for breach of contract.

The Delaware Chancery Court granted the defendant's motion for summary judgment based on the doctrine of acquiescence. The court noted that acquiescence works where a plaintiff has remained silent with knowledge of its rights and the defendant had knowledge of the plaintiff's silence and relied on it to the defendant's detriment. Here, the court found that the plaintiffs had at the very least imputed knowledge of their rights considering they were set forth in public documents and the plaintiffs knew they did not receive dividends. In addition they knew of the defendant's planned acquisition of debt and did nothing. The defendant relied on the fact that no one objected to the debt. Had it known there were objections, it could have acted to avoid an alleged breach.

DE Chancery Court: Board Did Not Breach Its Fiduciary Duties in Selling Corporation

In re Answers Corporation Shareholders Litigation,'C.A. No. 6170, Delaware Chancery Court, decided Feb. 3, 2014, involved the sale of a Delaware corporation by merger. The plaintiff shareholders filed suit, alleging among other claims that the board violated its fiduciary duties in approving the transaction. The defendants moved for summary judgment on that claim.

The Delaware Chancery Court noted that in change of control transactions, the board has a fiduciary duty to maximize the sale price. And where a disinterested board majority approved the transaction, the plaintiffs must rely on claims that the board acted in bad faith or was controlled by an interested party.

Here, the court noted, the evidence showed that the board fielded and considered a variety of unsolicited offers, rejected the buyer's request for exclusivity, explored the possibility of raising the price, performed a market check, and responded appropriately to the company's positive quarterly results considering its legitimate concerns about the corporation's future. In addition, there was no evidence that the disinterested directors were dominated by the chairman/CEO, no persuasive theory as to why they would favor the CEO, nor was there evidence that the CEO attempted to impose his will on the disinterested directors. Thus, the court concluded that there were no genuine issues of material fact concerning the board's compliance with its duties or its being controlled by an interested party and granted the motion for summary judgment.

TX Court Rules on Abatement of Action By Entities Lacking Capacity to Sue

In In re Immobiliere Jeuness Establissement, No. 14-13-00771, Texas Court of Appeals, 14th Dist., decided Feb. 6, 2014, the plaintiff was an entity organized under the laws of Lichtenstein. The plaintiff was a limited partner in Texas limited partnerships, and brought a derivative suit in Texas on the LPs' behalf. The plaintiff was not registered to do business in Texas and the LPs were involuntarily terminated. The defendants obtained an order of abatement until the plaintiff registered to do business and the LPs were reinstated. The plaintiff's motions to set aside the order were denied and it petitioned for a writ of mandamus.

The Texas Court of Appeals noted that mandamus is appropriate when the relator demonstrates that it has no adequate remedy by appeal. Here, the court found that the plaintiff was able to demonstrate no adequate remedy regarding the order of abatement until the LPs were reinstated because only the general partner had the authority to reinstate the LPs. The plaintiff had no control over the reinstatement and thus no adequate remedy by appeal. Therefore, mandamus was granted regarding that part of the trial court's order. However, the court also noted that the plaintiff had control over its own registration and chose not to register. Thus, it had an adequate remedy by appeal and mandamus was denied regarding the order of abatement until the plaintiff registered.

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 Jan. 1, 2014 and April 1, 2014. It also looks at some recent decisions of interest, including three from the Delaware courts.

IN THE STATE LEGISLATURES

Legislation affecting corporations, LLCs and other types of business organizations went into effect in Delaware and a number of other states. Highlights include the following:

In Delaware, House Bill 127 added two new sections to the General Corporation Law, which became effective on April. New Sec. 204 establishes a procedure under which a corporation may ratify an overissue of stock, an election of directors, or another corporate act or transaction that, due to a lack of compliance with the GCL, certificate of incorporation, bylaws or other agreement or plan, is void or voidable. In order to ratify the corporate act, the board of directors must adopt a resolution. That resolution will have to be approved by the stockholders if the corporate act being ratified required stockholder approval. If the act being ratified would have required filing with the secretary of state, then the corporation will have to file a certificate of validation. New Sec. 205 authorizes the Delaware Chancery Court to ratify defective acts when the Sec. 204 procedure is not available and to rule on the validity and effectiveness of an act ratified pursuant to Sec. 204. Delaware House Bill 124 enacted amendments to the Delaware Revised Uniform Limited Partnership Act affecting limited liability limited partnerships (LLLPs). These amendments, which went into effect April 1, clarify which provisions of the Delaware Revised Uniform Partnership Act apply to LLLPs, confirm that an LLLP's statement of qualification may be cancelled if it fails to appoint a successor registered agent, confirm that a cancelled LLLP may apply for reinstatement, and confirm that an LP's status as an LLLP begins upon the effective date of its statement of qualification.

Also in Delaware, House Bill 52 amended the corporate franchise tax law to provide that the maximum corporate franchise tax of $180,000 and the $350 multiplier for computing tax liability using the assumed capital value method are retained at current thresholds. The bill removed a sunset provision scheduled to return the thresholds to pre-2009 levels of $165,000 and $250, respectively, at the end of 2013.

Elsewhere, in Colorado, House Bill 1138, effective April 1, enacted the Colorado Public Benefit Corporation Act, authorizing a corporation to become a benefit corporation by including a statement to that effect in its articles of incorporation. A benefit corporation is a for-profit entity intended to produce a public benefit and operate in a responsible and sustainable manner. And in New Jersey, Assembly Bill 4023, effective Jan. 17, amended the Revised LLC Act to modify the provision regarding the rights of a member's judgment creditor.

IN THE STATE COURTS

DE Supreme Court Clarifies Forum Non Conveniens Doctrine

Martinez v. E. I. Dupont De Nemours and Company, Inc., No. 669, 2012, Delaware Supreme Court, decided Feb. 20, 2014, was a suit filed against a Delaware corporation by Argentine nationals, claiming they were exposed to asbestos while working in Argentina at plants owned by a great-great grand subsidiary of the Delaware corporation. The Delaware Superior Court dismissed on forum non conveniens grounds and the plaintiffs appealed.

The court affirmed. The court noted that to prevail under the forum non conveniens doctrine, a defendant must meet the high burden of showing that the traditional factors (such as relative ease of access to proof, availability of compulsory process for witnesses, and whether the controversy is dependent upon application of important Delaware law) weigh so heavily that the defendant will face “overwhelming hardship” if the lawsuit proceeds in Delaware. In finding that that this “overwhelming hardship” standard was met in this case, the court emphasized that the case involved novel and important issues of Argentina law and policy that were more appropriately determined by Argentina's courts. In addition, there was no countervailing local interest in the case because the plaintiffs were not Delaware residents nor did the alleged injuries occur in Delaware.

Claim Based on Doctrine of Acquiescence

The plaintiffs in Lehman Brothers Holdings Inc. v. Spanish Broadcasting System, Inc., C.A. No. 8321, Delaware Chancery Court, decided Feb. 25, 2014, invested in preferred stock in the defendant corporation. The Certificate of Designation provided that a non-payment of dividends was a triggering event conferring certain rights on the plaintiffs including the right to prevent the corporation from acquiring additional debts. According to the plaintiffs, the corporation failed to pay dividends and a triggering event occurred by July 2010. Thereafter the corporation acquired additional debt. However the plaintiffs did not attempt to assert any of the rights conferred by the triggering event or object to the acquisition of debt until February 2013, when they filed suit for breach of contract.

The Delaware Chancery Court granted the defendant's motion for summary judgment based on the doctrine of acquiescence. The court noted that acquiescence works where a plaintiff has remained silent with knowledge of its rights and the defendant had knowledge of the plaintiff's silence and relied on it to the defendant's detriment. Here, the court found that the plaintiffs had at the very least imputed knowledge of their rights considering they were set forth in public documents and the plaintiffs knew they did not receive dividends. In addition they knew of the defendant's planned acquisition of debt and did nothing. The defendant relied on the fact that no one objected to the debt. Had it known there were objections, it could have acted to avoid an alleged breach.

DE Chancery Court: Board Did Not Breach Its Fiduciary Duties in Selling Corporation

In re Answers Corporation Shareholders Litigation,'C.A. No. 6170, Delaware Chancery Court, decided Feb. 3, 2014, involved the sale of a Delaware corporation by merger. The plaintiff shareholders filed suit, alleging among other claims that the board violated its fiduciary duties in approving the transaction. The defendants moved for summary judgment on that claim.

The Delaware Chancery Court noted that in change of control transactions, the board has a fiduciary duty to maximize the sale price. And where a disinterested board majority approved the transaction, the plaintiffs must rely on claims that the board acted in bad faith or was controlled by an interested party.

Here, the court noted, the evidence showed that the board fielded and considered a variety of unsolicited offers, rejected the buyer's request for exclusivity, explored the possibility of raising the price, performed a market check, and responded appropriately to the company's positive quarterly results considering its legitimate concerns about the corporation's future. In addition, there was no evidence that the disinterested directors were dominated by the chairman/CEO, no persuasive theory as to why they would favor the CEO, nor was there evidence that the CEO attempted to impose his will on the disinterested directors. Thus, the court concluded that there were no genuine issues of material fact concerning the board's compliance with its duties or its being controlled by an interested party and granted the motion for summary judgment.

TX Court Rules on Abatement of Action By Entities Lacking Capacity to Sue

In In re Immobiliere Jeuness Establissement, No. 14-13-00771, Texas Court of Appeals, 14th Dist., decided Feb. 6, 2014, the plaintiff was an entity organized under the laws of Lichtenstein. The plaintiff was a limited partner in Texas limited partnerships, and brought a derivative suit in Texas on the LPs' behalf. The plaintiff was not registered to do business in Texas and the LPs were involuntarily terminated. The defendants obtained an order of abatement until the plaintiff registered to do business and the LPs were reinstated. The plaintiff's motions to set aside the order were denied and it petitioned for a writ of mandamus.

The Texas Court of Appeals noted that mandamus is appropriate when the relator demonstrates that it has no adequate remedy by appeal. Here, the court found that the plaintiff was able to demonstrate no adequate remedy regarding the order of abatement until the LPs were reinstated because only the general partner had the authority to reinstate the LPs. The plaintiff had no control over the reinstatement and thus no adequate remedy by appeal. Therefore, mandamus was granted regarding that part of the trial court's order. However, the court also noted that the plaintiff had control over its own registration and chose not to register. Thus, it had an adequate remedy by appeal and mandamus was denied regarding the order of abatement until the plaintiff registered.

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).