Quarterly State Compliance Review

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, 2015, including amendments to Delaware's corporation and LLC laws. It also looks at some recent cases of interest, including two decisions from Delaware's Chancery Court.

IN THE STATE LEGISLATURES

DE Amends its Corporation And LLC Laws

Senate Bill 75 amended the Delaware General Corporation Law. The amendments went into effect on Aug. 1 (unless otherwise indicated) and include the following:

Sec. 102(a) was amended to add a new circumstance under which the Division of Corporations may waive the requirement that a corporation's name must be distinguishable from other names on its records. Secs. 102 and 109 were amended to provide that the certificate of incorporation and bylaws may not contain any provision that would impose liability on a stockholder for the attorneys' fees or expenses of the corporation or any other party in connection with an internal corporate claim. A new Sec. 115 was added; it provides that the certificate of incorporation or bylaws may require that 'internal corporate claims be brought in the courts of Delaware, and may not prohibit bringing such claims in the courts of Delaware.

Secs. 152 and 157 were amended to clarify certain issues regarding the issuance of stock. Sec. 204 was amended in several respects to clarify, confirm and change the procedures through which a corporation may ratify a defective corporate act. These amendments are effective with respect to defective acts and proposed issuances of putative stock ratified or to be ratified pursuant to a resolution adopted by a board of directors on or after Aug. 1, 2015.

The subchapter governing public benefit corporations was amended to: 1) repeal the requirement that the name of a public benefit corporation had to contain the words “public benefit corporation” or abbreviations “P.B.C.” or “PBC”; 2) provide that a corporation that is not a public-benefit entity may become one with the approval of two-thirds (formerly 90%) of the outstanding stock entitled to vote; and 3) restrict appraisal rights where the shares were listed on a national securities exchange or held of record by more than 2,000 stockholders.

Senate Bill 78 amended the Delaware Limited Liability Company Act. The amendments are effective Aug. 1, 2015 and include the following: Sec. 18-204, which deals with the granting of powers of attorney and the circumstances upon which they will be considered irrevocable, were amended to confirm that the provisions apply to proxies. Several sections of the law were amended to delete the default requirement for a class or group vote of members in connection with a merger, consolidation, transfer, continuance, termination and winding up of series, conversion, and windup of an LLC. However, an LLC whose original certificate of formation was filed with the Secretary of State and effective on or before July 31, 2015 will continue to be governed by the default requirement of a group vote unless the LLC agreement provides otherwise. And Sec. 18-407 was amended to confirm that unless otherwise provided in the LLC agreement a delegation of the rights and powers to manage and control the business and affairs of an LLC by a member or manager is irrevocable if it states that it is irrevocable.

Amendments to Business Entity Laws of Other States

Amendments to business entity statutes went into effect in a number of states during the last quarter. Highlights include the following:

In Connecticut, Senate Bill 967, effective Oct. 1, amended provisions of the Business Corporation Act regarding proxies, voting trusts, shareholder agreements, qualification of directors, indemnification, advancement of expenses and insurance. In Maryland, House Bill 522, effective Oct. 1, amended the General Corporation Law to provide that directors and stockholders may consent to an action by a consent that will become effective at a future time and amended provisions regarding subscriptions and mergers.

In Minnesota, House Bill 977, effective Aug. 1, enacted the Revised Uniform Limited Liability Company Act, providing mandatory and default provisions regarding the formation and operation of LLCs. In Montana, House Bill 258, effective Oct. 1, enacted the Montana benefit corporation law, authorizing the formation of benefit corporations, and allowing existing corporations to become benefit corporations.

In Ohio, House Bill 3, effective Sept. 24, reduced certain business entity filing fees and amended the provision regarding the required content of a foreign corporation's application for a license to do business. In Texas, Senate Bill 860, effective Sept. 1, amended the Business Organizations Code regarding the ratification of defective acts by a corporation, mergers following tender offers, and filing requirements for fundamental business transactions. And in Washington, Senate Bill 5031, effective July 24, amended the Business Corporation Act regarding the standard of conduct and liabilities of directors and officers as related to the taking of corporate business opportunities.

IN THE STATE COURTS

DE Chancery Court Dismisses Suit Against General Partner's Directors

In re Kinder Morgan, Inc. Corporate Reorganization Litigation, C.A. No. 10093, decided Aug. 20, 2015, arose out of the merger of a Delaware Master Limited Partnership into a wholly owned subsidiary of its general partner ' a Delaware corporation. Because the merger involved a conflict of interest, the general partner's directors sought approval from a special committee, as provided for in the MLP's partnership agreement. After the merger was approved, unit- holders filed suit, alleging, among other things, that the general partner, its directors, and an LLC it controlled breached duties owed to them under the partnership agreement.

The Delaware Chancery Court first dismissed the counts against the directors and the LLC because they were not parties to the partnership agreement. The court also dismissed the count against the general partner. The court noted that the partnership agreement eliminated common law fiduciary duties and substituted a contractual duty that required the board and committees to reasonably believe their actions were fair and reasonable to the MLP ' not the limited partners, and in the MLP's best interests ' not the limited partners' best interests. The allegations of the complaints may have supported an inference that the directors breached duties to the limited partners. But as to the MLP itself the allegations supported an inference that they acted reasonably and in the MLP's best interests, as the merger was a possible solution to the MLP's looming 'financial crisis.

DE Chancery Court Approves Advancement of Disputed Expenses

Holley v. Nipro Diagnostics, Inc., C.A. No. 9670, decided Aug. 14, 2015, was a dispute over whether the nearly $300,000 in fees and expenses charged by consulting firms hired by Holley qualified for advancement.

Holley was a defendant in two suits alleging violations of insider trading laws. One was a criminal action and the other was a civil action brought by the SEC. Both were based on the same conduct. Fees and expenses allocated to the criminal action were not advanceable. Fees allocated to the SEC action were. Thus, the question was whether the fees and expenses charged by the consulting firms would have been incurred in defense of the SEC action even if there was no criminal action.

The Delaware Chancery Court stated that Holley's attorneys were the most competent to answer that question. And his attorneys submitted affidavits averring that the consulting firms' fees and expenses would have been necessary even if the criminal action did not exist. According to the court, the attorneys' good-faith certifications were sufficient evidence for the court to hold that the disputed fees and expenses should be advanced.

MA Appeals Court Ratifies Defective Issuance of Notes

Finnegan v. Baker, No. 13-P-1195, (Mass. App.) decided Aug. 14, 2015, was a shareholder dispute over control of a closely held Delaware corporation. The issue was whether the issuance of convertible notes to certain shareholders without formal director approval was void or merely voidable. The trial court held the issuances voidable and that they had been ratified. An appeal followed.

The Massachusetts Appeals Court affirmed. The court agreed with the trial judge that the lack of compliance with corporate formalities made the issuances merely voidable and not void given the informal manner in which the corporation handled its affairs. The court also pointed out that since the trial court's decision, Delaware had amended its corporation law to permit the ratification of defective issuances, and held that based on the factors present in this case a court would have ratified the issuances had those sections been effect at the time.

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.

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, 2015, including amendments to Delaware's corporation and LLC laws. It also looks at some recent cases of interest, including two decisions from Delaware's Chancery Court.

IN THE STATE LEGISLATURES

DE Amends its Corporation And LLC Laws

Senate Bill 75 amended the Delaware General Corporation Law. The amendments went into effect on Aug. 1 (unless otherwise indicated) and include the following:

Sec. 102(a) was amended to add a new circumstance under which the Division of Corporations may waive the requirement that a corporation's name must be distinguishable from other names on its records. Secs. 102 and 109 were amended to provide that the certificate of incorporation and bylaws may not contain any provision that would impose liability on a stockholder for the attorneys' fees or expenses of the corporation or any other party in connection with an internal corporate claim. A new Sec. 115 was added; it provides that the certificate of incorporation or bylaws may require that 'internal corporate claims be brought in the courts of Delaware, and may not prohibit bringing such claims in the courts of Delaware.

Secs. 152 and 157 were amended to clarify certain issues regarding the issuance of stock. Sec. 204 was amended in several respects to clarify, confirm and change the procedures through which a corporation may ratify a defective corporate act. These amendments are effective with respect to defective acts and proposed issuances of putative stock ratified or to be ratified pursuant to a resolution adopted by a board of directors on or after Aug. 1, 2015.

The subchapter governing public benefit corporations was amended to: 1) repeal the requirement that the name of a public benefit corporation had to contain the words “public benefit corporation” or abbreviations “P.B.C.” or “PBC”; 2) provide that a corporation that is not a public-benefit entity may become one with the approval of two-thirds (formerly 90%) of the outstanding stock entitled to vote; and 3) restrict appraisal rights where the shares were listed on a national securities exchange or held of record by more than 2,000 stockholders.

Senate Bill 78 amended the Delaware Limited Liability Company Act. The amendments are effective Aug. 1, 2015 and include the following: Sec. 18-204, which deals with the granting of powers of attorney and the circumstances upon which they will be considered irrevocable, were amended to confirm that the provisions apply to proxies. Several sections of the law were amended to delete the default requirement for a class or group vote of members in connection with a merger, consolidation, transfer, continuance, termination and winding up of series, conversion, and windup of an LLC. However, an LLC whose original certificate of formation was filed with the Secretary of State and effective on or before July 31, 2015 will continue to be governed by the default requirement of a group vote unless the LLC agreement provides otherwise. And Sec. 18-407 was amended to confirm that unless otherwise provided in the LLC agreement a delegation of the rights and powers to manage and control the business and affairs of an LLC by a member or manager is irrevocable if it states that it is irrevocable.

Amendments to Business Entity Laws of Other States

Amendments to business entity statutes went into effect in a number of states during the last quarter. Highlights include the following:

In Connecticut, Senate Bill 967, effective Oct. 1, amended provisions of the Business Corporation Act regarding proxies, voting trusts, shareholder agreements, qualification of directors, indemnification, advancement of expenses and insurance. In Maryland, House Bill 522, effective Oct. 1, amended the General Corporation Law to provide that directors and stockholders may consent to an action by a consent that will become effective at a future time and amended provisions regarding subscriptions and mergers.

In Minnesota, House Bill 977, effective Aug. 1, enacted the Revised Uniform Limited Liability Company Act, providing mandatory and default provisions regarding the formation and operation of LLCs. In Montana, House Bill 258, effective Oct. 1, enacted the Montana benefit corporation law, authorizing the formation of benefit corporations, and allowing existing corporations to become benefit corporations.

In Ohio, House Bill 3, effective Sept. 24, reduced certain business entity filing fees and amended the provision regarding the required content of a foreign corporation's application for a license to do business. In Texas, Senate Bill 860, effective Sept. 1, amended the Business Organizations Code regarding the ratification of defective acts by a corporation, mergers following tender offers, and filing requirements for fundamental business transactions. And in Washington, Senate Bill 5031, effective July 24, amended the Business Corporation Act regarding the standard of conduct and liabilities of directors and officers as related to the taking of corporate business opportunities.

IN THE STATE COURTS

DE Chancery Court Dismisses Suit Against General Partner's Directors

In re Kinder Morgan, Inc. Corporate Reorganization Litigation, C.A. No. 10093, decided Aug. 20, 2015, arose out of the merger of a Delaware Master Limited Partnership into a wholly owned subsidiary of its general partner ' a Delaware corporation. Because the merger involved a conflict of interest, the general partner's directors sought approval from a special committee, as provided for in the MLP's partnership agreement. After the merger was approved, unit- holders filed suit, alleging, among other things, that the general partner, its directors, and an LLC it controlled breached duties owed to them under the partnership agreement.

The Delaware Chancery Court first dismissed the counts against the directors and the LLC because they were not parties to the partnership agreement. The court also dismissed the count against the general partner. The court noted that the partnership agreement eliminated common law fiduciary duties and substituted a contractual duty that required the board and committees to reasonably believe their actions were fair and reasonable to the MLP ' not the limited partners, and in the MLP's best interests ' not the limited partners' best interests. The allegations of the complaints may have supported an inference that the directors breached duties to the limited partners. But as to the MLP itself the allegations supported an inference that they acted reasonably and in the MLP's best interests, as the merger was a possible solution to the MLP's looming 'financial crisis.

DE Chancery Court Approves Advancement of Disputed Expenses

Holley v. Nipro Diagnostics, Inc., C.A. No. 9670, decided Aug. 14, 2015, was a dispute over whether the nearly $300,000 in fees and expenses charged by consulting firms hired by Holley qualified for advancement.

Holley was a defendant in two suits alleging violations of insider trading laws. One was a criminal action and the other was a civil action brought by the SEC. Both were based on the same conduct. Fees and expenses allocated to the criminal action were not advanceable. Fees allocated to the SEC action were. Thus, the question was whether the fees and expenses charged by the consulting firms would have been incurred in defense of the SEC action even if there was no criminal action.

The Delaware Chancery Court stated that Holley's attorneys were the most competent to answer that question. And his attorneys submitted affidavits averring that the consulting firms' fees and expenses would have been necessary even if the criminal action did not exist. According to the court, the attorneys' good-faith certifications were sufficient evidence for the court to hold that the disputed fees and expenses should be advanced.

MA Appeals Court Ratifies Defective Issuance of Notes

Finnegan v. Baker, No. 13-P-1195, (Mass. App.) decided Aug. 14, 2015, was a shareholder dispute over control of a closely held Delaware corporation. The issue was whether the issuance of convertible notes to certain shareholders without formal director approval was void or merely voidable. The trial court held the issuances voidable and that they had been ratified. An appeal followed.

The Massachusetts Appeals Court affirmed. The court agreed with the trial judge that the lack of compliance with corporate formalities made the issuances merely voidable and not void given the informal manner in which the corporation handled its affairs. The court also pointed out that since the trial court's decision, Delaware had amended its corporation law to permit the ratification of defective issuances, and held that based on the factors present in this case a court would have ratified the issuances had those sections been effect at the time.

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.