Quarterly State Compliance Review

In Alabama, Senate Bill 61, effective July 1, amended the Business and Nonprofit Entities Code provisions governing mergers and conversions to revise filing procedures, contents of forms, effective dates, and approval and contents of plans. In Colorado, Senate Bill 156, effective May 15, amended the public benefit corporation law to provide that a benefit report must be prepared annually.

In Indiana, Senate Bill 377, effective July 1, amended provisions of the business entity laws regarding the use of forum selection clauses in the governing documents of corporations and LLCs, registered agents, reinstatement of foreign corporations and LLCs, assumed business names, and the domestication of non-profit corporations. In Iowa, Senate Bill 2200, effective July 1, amended the business corporation law provisions regarding the duration of shareholder voting trusts and the delivery of financial information to shareholders.

In Mississippi, Senate Bill 2511, effective July 1, amended the laws regarding name reservations for corporations, LLCs and LPs to provide that the 180-day reservation period may be renewed once and to repeal statutory provisions allowing for the registration of corporate names. In New York, Assembly Bill 8072/Senate Bill 5845 and Senate Bill 6249, effective July 1, extensively amended the provisions governing non-profit corporations by, among other things, changing how non-profits will be categorized, amending procedures for incorporating, dissolving, and merging, and revising many governance and oversight rules.

In South Dakota, House Bill 1152, effective July 1, provided that the name of a limited partnership may include the abbreviations “L.P.” or “LP.” In Tennessee, Senate Bill 1613, effective July 1, provided that a partner in an LLP is not personally liable for an obligation of a partnership incurred while the partnership is an LLP, whether arising in contract, tort, or otherwise, solely by reason of being or acting as a partner. In Utah, Senate Bill 133, effective May 13, enacted the Benefit Corporation Act authorizing new or existing business corporations to become benefit corporations.

In Washington, Senate Bill 5999, effective June 12, authorized and set forth the procedures for an organization to convert to and from a corporation or an LLC. In West Virginia, Senate Bill 202, effective July 1, enacted the West Virginia Benefit Corporation Act authorizing new or existing business corporations to become benefit corporations. And in Wyoming, House Bill 14, effective July 1, increased the fee for filing a certificate of authority from $10 to $25, imposed a $75 fee for filing an application for conversion and provided for the administrative forfeiture for LLPs and LLCs that fail to comply with the registered agent requirement.

IN THE STATE COURTS

DE Supreme Court Holds That Fee-Shifting Bylaw Is Valid

In ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013, Delaware Supreme Court, decided May 8, 2014, members of a Delaware non-stock corporation sued the corporation and certain directors in federal court alleging federal anti-trust and Delaware fiduciary duty claims. The members did not prevail on any of their claims. The corporation then moved to recover its legal fees, costs and expenses, based on a bylaw provision that shifted attorney fees and costs to the unsuccessful plaintiffs in intra-corporate litigation. The federal court found that the bylaw's validity was an open question under Delaware law, and certified questions to the Delaware Supreme Court asking it whether and under what circumstances such a bylaw provision is valid and enforceable.

The Delaware Supreme Court held that fee-shifting bylaw provisions are permissible under Delaware law. The court noted that neither the General Corporation Law nor any other Delaware statute prohibited directors from enacting fee shifting bylaws. The common law did not prohibit it either. The court was also asked whether the bylaw provision would be rendered unenforceable if the board adopted it to deter legal challenges to other corporate actions under consideration. The court noted that a legally permissible bylaw provision would be unenforceable in equity if adopted for an improper purpose. However, the intent to deter litigation is not invariably an improper purpose. Thus, such an intent would not render the fee-shifting bylaw provision unenforceable.

The final question was whether a fee-shifting bylaw provision was enforceable against members who joined the corporation before the provision's enactment and who agreed to be bound by rules that may be adopted or amended thereafter by the board. The court ruled that because the corporation law permits a corporation to confer upon directors the power to adopt and amend bylaws, the members are bound by bylaw provisions unilaterally adopted by the board.

DE Chancery Court Distinguishes Between Direct and Derivative Claims

In Allen v. El Paso Pipeline GP Company, L.L.C., C.A. No. 7520, Delaware Chancery Court, decided May 19, 2014, a limited partner in a Delaware limited partnership challenged the limited partnership's acquisition of a 25% interest in a company from the parent of the limited partnership's general partner. The complaint included a direct claim that the defendants violated a provision of the partnership agreement regarding the general partner's obtaining of approval of conflict of interest transactions. The plaintiff moved for class certification and the defendants opposed the motion on the grounds that the claim was derivative.

The Delaware Chancery Court granted the motion. The court noted that the test for distinguishing between direct and derivative claims is the same for limited partnerships as corporations. The determination turns on who suffered the alleged harm and who would receive the benefits of recovery ' the limited partnership or the limited partners. In this case, the defendants argued that the plaintiff's claim was that the limited partnership paid too much for the 25% interest, that this harmed the limited partnership and that the recovery would be for the limited partnership to be repaid. Therefore, according to the defendants, the claim was derivative.

The court, however, disagreed. The court explained that the plaintiff's claim was that the defendants violated a provision of the partnership agreement that required the general partner to obtain approval of a conflict of interest transaction by either obtaining approval of a disinterested committee of directors or limited partners, or by judicial approval. This was a contractual obligation owed to the limited partners and it was the limited partners who suffered the alleged harm. In addition, the court could award relief to the limited partners directly. Thus, the remedy did not necessarily have to go to the limited partnership.

TX Supreme Court: Corporation May Recover Damages for Injury to Its Reputation

Waste Management of Texas, Inc. v. Texas Disposal Systems Landfill, Inc., No. 12-0522, Supreme Court of Texas, decided May 9, 2014, was a suit involving two corporations competing for waste-disposal contracts. The plaintiff corporation claimed that the defendant corporation defamed it by publishing a community alert saying that the plaintiff's landfills were less environmentally sensitive than they actually were. The jury returned a verdict in favor of the plaintiff corporation. The award included $5 million for injury to reputation and $20 million in exemplary damages. The exemplary damage award was reduced by the trial court, which applied the statutory cap and treated the injury to reputation as non-economic damages.

The Texas Supreme Court noted that the appeal distilled to this question: To what degree was the defendant corporation liable for libel? To answer that question, the court considered three separate inquiries: 1) Can a corporation even suffer reputation damages? 2) If so, are they economic or non-economic damages for purposes of the statutory cap on exemplary damages? and 3) Did the evidence support the jury's $5 million damage award?

The court held that: 1) it is well settled that corporations, like people, have reputations and may recover for harm inflicted on them; 2) for the purpose of the cap on exemplary damages an injury to reputation is non-economic, as it is not a pecuniary loss, as required by the statute in order to be considered “economic loss”; and 3) because there was no evidence of actual damages to the plaintiff corporation's reputation, the evidence was insufficient to support the jury's award.

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 May 1 and July 1, 2014 as well as some recent cases of note.

IN THE STATE LEGISLATURES

There were a number of amendments to state business entity statutes that went into effect during the period that began on May 1, 2014 and ended on July 1, 2014. Highlights include the following:

In Alabama, Senate Bill 61, effective July 1, amended the Business and Nonprofit Entities Code provisions governing mergers and conversions to revise filing procedures, contents of forms, effective dates, and approval and contents of plans. In Colorado, Senate Bill 156, effective May 15, amended the public benefit corporation law to provide that a benefit report must be prepared annually.

In Indiana, Senate Bill 377, effective July 1, amended provisions of the business entity laws regarding the use of forum selection clauses in the governing documents of corporations and LLCs, registered agents, reinstatement of foreign corporations and LLCs, assumed business names, and the domestication of non-profit corporations. In Iowa, Senate Bill 2200, effective July 1, amended the business corporation law provisions regarding the duration of shareholder voting trusts and the delivery of financial information to shareholders.

In Mississippi, Senate Bill 2511, effective July 1, amended the laws regarding name reservations for corporations, LLCs and LPs to provide that the 180-day reservation period may be renewed once and to repeal statutory provisions allowing for the registration of corporate names. In New York, Assembly Bill 8072/Senate Bill 5845 and Senate Bill 6249, effective July 1, extensively amended the provisions governing non-profit corporations by, among other things, changing how non-profits will be categorized, amending procedures for incorporating, dissolving, and merging, and revising many governance and oversight rules.

In South Dakota, House Bill 1152, effective July 1, provided that the name of a limited partnership may include the abbreviations “L.P.” or “LP.” In Tennessee, Senate Bill 1613, effective July 1, provided that a partner in an LLP is not personally liable for an obligation of a partnership incurred while the partnership is an LLP, whether arising in contract, tort, or otherwise, solely by reason of being or acting as a partner. In Utah, Senate Bill 133, effective May 13, enacted the Benefit Corporation Act authorizing new or existing business corporations to become benefit corporations.

In Washington, Senate Bill 5999, effective June 12, authorized and set forth the procedures for an organization to convert to and from a corporation or an LLC. In West Virginia, Senate Bill 202, effective July 1, enacted the West Virginia Benefit Corporation Act authorizing new or existing business corporations to become benefit corporations. And in Wyoming, House Bill 14, effective July 1, increased the fee for filing a certificate of authority from $10 to $25, imposed a $75 fee for filing an application for conversion and provided for the administrative forfeiture for LLPs and LLCs that fail to comply with the registered agent requirement.

IN THE STATE COURTS

DE Supreme Court Holds That Fee-Shifting Bylaw Is Valid

In ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013, Delaware Supreme Court, decided May 8, 2014, members of a Delaware non-stock corporation sued the corporation and certain directors in federal court alleging federal anti-trust and Delaware fiduciary duty claims. The members did not prevail on any of their claims. The corporation then moved to recover its legal fees, costs and expenses, based on a bylaw provision that shifted attorney fees and costs to the unsuccessful plaintiffs in intra-corporate litigation. The federal court found that the bylaw's validity was an open question under Delaware law, and certified questions to the Delaware Supreme Court asking it whether and under what circumstances such a bylaw provision is valid and enforceable.

The Delaware Supreme Court held that fee-shifting bylaw provisions are permissible under Delaware law. The court noted that neither the General Corporation Law nor any other Delaware statute prohibited directors from enacting fee shifting bylaws. The common law did not prohibit it either. The court was also asked whether the bylaw provision would be rendered unenforceable if the board adopted it to deter legal challenges to other corporate actions under consideration. The court noted that a legally permissible bylaw provision would be unenforceable in equity if adopted for an improper purpose. However, the intent to deter litigation is not invariably an improper purpose. Thus, such an intent would not render the fee-shifting bylaw provision unenforceable.

The final question was whether a fee-shifting bylaw provision was enforceable against members who joined the corporation before the provision's enactment and who agreed to be bound by rules that may be adopted or amended thereafter by the board. The court ruled that because the corporation law permits a corporation to confer upon directors the power to adopt and amend bylaws, the members are bound by bylaw provisions unilaterally adopted by the board.

DE Chancery Court Distinguishes Between Direct and Derivative Claims

In Allen v. El Paso Pipeline GP Company, L.L.C., C.A. No. 7520, Delaware Chancery Court, decided May 19, 2014, a limited partner in a Delaware limited partnership challenged the limited partnership's acquisition of a 25% interest in a company from the parent of the limited partnership's general partner. The complaint included a direct claim that the defendants violated a provision of the partnership agreement regarding the general partner's obtaining of approval of conflict of interest transactions. The plaintiff moved for class certification and the defendants opposed the motion on the grounds that the claim was derivative.

The Delaware Chancery Court granted the motion. The court noted that the test for distinguishing between direct and derivative claims is the same for limited partnerships as corporations. The determination turns on who suffered the alleged harm and who would receive the benefits of recovery ' the limited partnership or the limited partners. In this case, the defendants argued that the plaintiff's claim was that the limited partnership paid too much for the 25% interest, that this harmed the limited partnership and that the recovery would be for the limited partnership to be repaid. Therefore, according to the defendants, the claim was derivative.

The court, however, disagreed. The court explained that the plaintiff's claim was that the defendants violated a provision of the partnership agreement that required the general partner to obtain approval of a conflict of interest transaction by either obtaining approval of a disinterested committee of directors or limited partners, or by judicial approval. This was a contractual obligation owed to the limited partners and it was the limited partners who suffered the alleged harm. In addition, the court could award relief to the limited partners directly. Thus, the remedy did not necessarily have to go to the limited partnership.

TX Supreme Court: Corporation May Recover Damages for Injury to Its Reputation

Waste Management of Texas, Inc. v. Texas Disposal Systems Landfill, Inc., No. 12-0522, Supreme Court of Texas, decided May 9, 2014, was a suit involving two corporations competing for waste-disposal contracts. The plaintiff corporation claimed that the defendant corporation defamed it by publishing a community alert saying that the plaintiff's landfills were less environmentally sensitive than they actually were. The jury returned a verdict in favor of the plaintiff corporation. The award included $5 million for injury to reputation and $20 million in exemplary damages. The exemplary damage award was reduced by the trial court, which applied the statutory cap and treated the injury to reputation as non-economic damages.

The Texas Supreme Court noted that the appeal distilled to this question: To what degree was the defendant corporation liable for libel? To answer that question, the court considered three separate inquiries: 1) Can a corporation even suffer reputation damages? 2) If so, are they economic or non-economic damages for purposes of the statutory cap on exemplary damages? and 3) Did the evidence support the jury's $5 million damage award?

The court held that: 1) it is well settled that corporations, like people, have reputations and may recover for harm inflicted on them; 2) for the purpose of the cap on exemplary damages an injury to reputation is non-economic, as it is not a pecuniary loss, as required by the statute in order to be considered “economic loss”; and 3) because there was no evidence of actual damages to the plaintiff corporation's reputation, the evidence was insufficient to support the jury's award.

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).