Quarterly State Compliance Review

In California, Senate Bill 351 amended the General Corporation Law and Nonprofit Corporation Law regarding officers and directors, Assembly Bill 1471 amended the social purpose corporation act regarding permitted names, Assembly Bill 557 amended the Nonprofit Corporation Law regarding dissolution and foreign surrender, and Assembly Bill 506 amended the LLC law regarding operating agreements, record-keeping, member rights and interests, dissolution, foreign registration, conversion, and merger.

In Indiana, House Bill 1015 enacted the Idaho Benefit Corporation Act, authorizing the formation and operation of benefit corporations. In New Hampshire, Senate Bill 266 amended the business entity laws regarding formation, domestication, conversion, foreign registration, and filing fees, and Senate Bill 223 amended the entity laws regarding the name availability standard. In Oregon, House Bill 2330 amended the entity laws regarding the procedure for effecting mergers, exchanges, and conversions.

In Tennessee, House Bill 767/Senate Bill 972 enacted the Tennessee For-Profit Benefit Corporation Act, authorizing the formation and operation of for-profit benefit corporations. In Washington, Senate Bill 5387 enacted a new Business Entities Code, utilizing a hub and spoke model. And in Wyoming, House Bill 235 provided a procedure for the reinstatement of foreign corporations, LLCs, and LLPs within two years after the date of administrative revocation.

IN THE STATE COURTS

Merger Price Is Fair Value in Appraisal Action

In Merion Capital LP v. BMC Software, Inc., C.A. No. 8900 (Delaware Chancery Court), decided Oct. 21, 2015, arbitrageurs sought an appraisal of shares of a corporation after it was taken private. The merger price was $46.25 per share. At trial, the plaintiffs' expert, using a discounted cash flow analysis (“DCF”), valued the shares at $67.08 per share. The corporation's expert, also using a DCF analysis, valued them at $37.88 per share.

The Delaware Chancery Court conducted its own DCF analysis and valued the shares at $48 per share. However, the court decided not to defer to that valuation because it was based on management's problematic projections, as well as concerns in determining the discount and terminal growth rates. Therefore, instead, the court decided the merger price was the fair value. The court noted that the record demonstrated the corporation conducted a robust, arms-length sales process. And when the sales process is thorough, effective and free of self-interest, the deal price is the appropriate measure.

Chancery Court Dismisses Veil-Piercing Claim

In Doberstein v. G-P Industries, Inc., C.A. No. 9995 (Delaware Chancery Court) decided Oct. 30, 2015, the plaintiff entered into a contract with a corporation under which the corporation was to serve as a general contractor on a home renovation project. The corporation went bankrupt and failed to complete the project. The plaintiff sued, seeking, among other counts, to pierce the corporate veil and hold the corporation's president liable.

The Delaware Chancery Court dismissed that count. The plaintiff alleged that the president repeatedly communicated false statements to her concerning the work being done and that she relied on them to her detriment, and that the president and corporation increased their billing during the last weeks of the project knowing they were going to abandon it and go out of business. However, according to the court, those allegations stated at most a claim for fraud. They were not sufficient to support a claim for piercing the corporate veil because the plaintiff was unable to tie the president's wrongful acts to the manipulation of the corporate form. It was not enough to allege that the president knew the corporation was going out of business and induced the plaintiff to make accelerated payments. She needed to allege that he siphoned funds to himself and used the corporate form to shield those funds and himself from liability.

MN Court of Appeals: Limited Partnerships Must Be Represented By Licensed Counsel

The issue in Hinckley Square Associates v. Cervene, A15-0496 (Minnesota Court of Appeals) decided Nov. 9, 2015, was whether a Minnesota limited partnership can appear in a Minnesota court without being represented by licensed counsel. The litigation arose out of a landlord-tenant dispute. The landlord, an LP, filed an eviction action against a tenant. The LP sought to appear through two laypeople ' a general partner and a management agent. The tenant moved to dismiss based on the LP appearing without an attorney ' citing a Minnesota Supreme Court case for the proposition that artificial entities must be represented by counsel. The trial court denied the motion, concluding that the cited decision did not apply to limited partnerships. At trial, the court ruled in favor of the LP and the tenant appealed the decision not to dismiss.

The Minnesota Court of Appeals reversed. The court noted that both the Minnesota Supreme Court and federal courts have stated that there is a strong public policy supporting the rule that corporations must be represented by counsel and that this rule protects the public and courts from the consequences of ignorance and venality. The court concluded that the underlying rationale applies to LPs. The court also noted that Minnesota courts have applied the rule to LLCs and federal courts have applied it to LPs.

TX Court of Appeals: Members of Non-Profit Corporation Lack Derivative Suit Standing

The issue in Tran v. Vicinity, Inc., No. 01-14-00973 (Texas Court of Appeals) decided Nov. 10, 2015, was whether members of a Texas non-profit corporation possess derivative standing to sue on behalf of the corporation when neither its articles of organization nor bylaws so authorize. The Texas Court of Appeals ruled that they did not.

The plaintiffs contended that, as members of a non-profit corporation, they had standing akin to shareholder standing for for-profit corporations. However, the court disagreed. It examined the Texas Business Organizations Code and found that the general provision governing derivative suits limited the class of people who could bring them to “shareholders” and that members are not shareholders. In addition, the Code provisions specifically governing non-profits did not contain a provision authorizing derivative suits to be brought on their behalf.

Sandra Feldman is an attorney for CT Corporation and a member of this newsletter's Board of Editors.

This edition of the Quarterly State Compliance Review looks at some legislation of interest to corporate lawyers that went into effect on Jan. 1, 2016. It also looks at some recent decisions from the courts of Delaware, Minnesota and Texas.

IN THE STATE LEGISLATURES

Legislation affecting corporations, LLCs and other types of business organizations went into effect on January 1, 2016 in a number of states. Highlights from around the country include the following:

In California, Senate Bill 351 amended the General Corporation Law and Nonprofit Corporation Law regarding officers and directors, Assembly Bill 1471 amended the social purpose corporation act regarding permitted names, Assembly Bill 557 amended the Nonprofit Corporation Law regarding dissolution and foreign surrender, and Assembly Bill 506 amended the LLC law regarding operating agreements, record-keeping, member rights and interests, dissolution, foreign registration, conversion, and merger.

In Indiana, House Bill 1015 enacted the Idaho Benefit Corporation Act, authorizing the formation and operation of benefit corporations. In New Hampshire, Senate Bill 266 amended the business entity laws regarding formation, domestication, conversion, foreign registration, and filing fees, and Senate Bill 223 amended the entity laws regarding the name availability standard. In Oregon, House Bill 2330 amended the entity laws regarding the procedure for effecting mergers, exchanges, and conversions.

In Tennessee, House Bill 767/Senate Bill 972 enacted the Tennessee For-Profit Benefit Corporation Act, authorizing the formation and operation of for-profit benefit corporations. In Washington, Senate Bill 5387 enacted a new Business Entities Code, utilizing a hub and spoke model. And in Wyoming, House Bill 235 provided a procedure for the reinstatement of foreign corporations, LLCs, and LLPs within two years after the date of administrative revocation.

IN THE STATE COURTS

Merger Price Is Fair Value in Appraisal Action

In Merion Capital LP v. BMC Software, Inc., C.A. No. 8900 (Delaware Chancery Court), decided Oct. 21, 2015, arbitrageurs sought an appraisal of shares of a corporation after it was taken private. The merger price was $46.25 per share. At trial, the plaintiffs' expert, using a discounted cash flow analysis (“DCF”), valued the shares at $67.08 per share. The corporation's expert, also using a DCF analysis, valued them at $37.88 per share.

The Delaware Chancery Court conducted its own DCF analysis and valued the shares at $48 per share. However, the court decided not to defer to that valuation because it was based on management's problematic projections, as well as concerns in determining the discount and terminal growth rates. Therefore, instead, the court decided the merger price was the fair value. The court noted that the record demonstrated the corporation conducted a robust, arms-length sales process. And when the sales process is thorough, effective and free of self-interest, the deal price is the appropriate measure.

Chancery Court Dismisses Veil-Piercing Claim

In Doberstein v. G-P Industries, Inc., C.A. No. 9995 (Delaware Chancery Court) decided Oct. 30, 2015, the plaintiff entered into a contract with a corporation under which the corporation was to serve as a general contractor on a home renovation project. The corporation went bankrupt and failed to complete the project. The plaintiff sued, seeking, among other counts, to pierce the corporate veil and hold the corporation's president liable.

The Delaware Chancery Court dismissed that count. The plaintiff alleged that the president repeatedly communicated false statements to her concerning the work being done and that she relied on them to her detriment, and that the president and corporation increased their billing during the last weeks of the project knowing they were going to abandon it and go out of business. However, according to the court, those allegations stated at most a claim for fraud. They were not sufficient to support a claim for piercing the corporate veil because the plaintiff was unable to tie the president's wrongful acts to the manipulation of the corporate form. It was not enough to allege that the president knew the corporation was going out of business and induced the plaintiff to make accelerated payments. She needed to allege that he siphoned funds to himself and used the corporate form to shield those funds and himself from liability.

MN Court of Appeals: Limited Partnerships Must Be Represented By Licensed Counsel

The issue in Hinckley Square Associates v. Cervene, A15-0496 (Minnesota Court of Appeals) decided Nov. 9, 2015, was whether a Minnesota limited partnership can appear in a Minnesota court without being represented by licensed counsel. The litigation arose out of a landlord-tenant dispute. The landlord, an LP, filed an eviction action against a tenant. The LP sought to appear through two laypeople ' a general partner and a management agent. The tenant moved to dismiss based on the LP appearing without an attorney ' citing a Minnesota Supreme Court case for the proposition that artificial entities must be represented by counsel. The trial court denied the motion, concluding that the cited decision did not apply to limited partnerships. At trial, the court ruled in favor of the LP and the tenant appealed the decision not to dismiss.

The Minnesota Court of Appeals reversed. The court noted that both the Minnesota Supreme Court and federal courts have stated that there is a strong public policy supporting the rule that corporations must be represented by counsel and that this rule protects the public and courts from the consequences of ignorance and venality. The court concluded that the underlying rationale applies to LPs. The court also noted that Minnesota courts have applied the rule to LLCs and federal courts have applied it to LPs.

TX Court of Appeals: Members of Non-Profit Corporation Lack Derivative Suit Standing

The issue in Tran v. Vicinity, Inc., No. 01-14-00973 (Texas Court of Appeals) decided Nov. 10, 2015, was whether members of a Texas non-profit corporation possess derivative standing to sue on behalf of the corporation when neither its articles of organization nor bylaws so authorize. The Texas Court of Appeals ruled that they did not.

The plaintiffs contended that, as members of a non-profit corporation, they had standing akin to shareholder standing for for-profit corporations. However, the court disagreed. It examined the Texas Business Organizations Code and found that the general provision governing derivative suits limited the class of people who could bring them to “shareholders” and that members are not shareholders. In addition, the Code provisions specifically governing non-profits did not contain a provision authorizing derivative suits to be brought on their behalf.

Sandra Feldman is an attorney for CT Corporation and a member of this newsletter's Board of Editors.