Quarterly State Compliance Review

In Georgia, Senate Bill 128, effective July 1, amended the corporation law provisions dealing with directors and officers. In Iowa, House Bill 2373, effective July 1, amended the LLC law to provide for the issuance of a certificate of authorization for a foreign LLC. In Kansas, House Bill 2112, effective July 1, substantially amended the General Corporations Code, adding and changing provisions governing many areas. In Mississippi, Senate Bill 2483, effective July 1, amended the corporation law to provide that articles of incorporation may include a provision requiring certain internal corporate claims to be brought in the county where the principal office is located.

In Utah, Senate Bill 40, effective May 10, amended the nonprofit corporation law to address when actions may be taken by the board of directors without a meeting. In Virginia, House Bill 918, effective July 1, amended the LLC law to authorize LLCs to provide members with access to their records by electronic means and House Bill 955, effective July 1, amended provisions of the LLC law regarding conversions, reorganizations and mergers. And in West Virginia, House Bill 2897, effective June 10, provided an exemption for residents under 30 years of age from the filing fees for incorporating or forming a domestic corporation, LLC, LP or partnership of which the person is an incorporator, member or partner.

IN THE STATE COURTS

In Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Manning, No. 14-1132, U.S. Supreme Court, decided May 16, 2016, a shareholder brought suit against the defendant alleging losses due to manipulative short selling. The suit was filed in a state court and alleged violations of state laws. Although the plaintiff did not bring any claims under federal securities laws, his complaint referenced an SEC regulation governing such short selling. The defendant removed the case to federal court asserting federal jurisdiction on two grounds ' Sec. 1331, the general federal question statute, and Sec. 27 of the Securities Exchange Act ' which is the Exchange Act's exclusive jurisdiction provision. The plaintiff moved to remand to state court. The district court denied the motion, but the Third Circuit reversed. The defendant sought review, solely as to whether Sec. 27 committed the plaintiff's case to federal court.

The U.S. Supreme Court held that the jurisdictional test of Sec. 27 is the same as that of Sec. 1331. Thus, if a case arises under the Exchange Act, Sec. 27 vests the federal courts with exclusive jurisdiction when the plaintiff pleads: 1) a cause of action under the Exchange Act or an implementing regulation; or 2) a state law claim that necessarily raises a disputed and substantial issue of the Exchange Act's meaning. In this case, the defendant did not challenge the Third Circuit's holding that his claims did not raise a federal issue. Thus, the district court lacked jurisdiction under Sec. 27.

DE Supreme Court

Genuine Parts Company v. Cepec, No. 528, 2015, Delaware Supreme Court, decided April 18, 2016, was a suit filed in Delaware against a Georgia corporation that registered to do business in Delaware and appointed a registered agent pursuant to the Delaware General Corporation Law. The claims were unrelated to any of the corporation's activities in Delaware. The corporation moved to dismiss for lack of personal jurisdiction. The Superior Court held that the corporation consented to Delaware's general jurisdiction by registering and denied the motion. The corporation appealed.

The Delaware Supreme Court reversed, stating that Delaware cannot exercise general jurisdiction over a foreign corporation merely because it registered to do business and appointed a registered agent. The court noted that the Superior Court's holding was based on a Delaware Supreme Court decision that had been decided before the U.S. Supreme Court's decision in Daimler AG v. Bauman, 134 S.Ct. 746 (2014). In Daimler, the Court held that it is inconsistent with due process to exercise general jurisdiction over a foreign corporation that is not “essentially at home” in the state and that subjecting a corporation to general jurisdiction in every state in which it does substantial business is “unacceptably grasping.” In this case, the Georgia corporation was clearly not at home in Delaware. And in light of Daimler , Delaware's registration provisions must be read as allowing service of process to be made in a convenient way but not as a consent to general jurisdiction.

NY Court of Appeals

In In the Matter of Kenneth Cole Productions, Inc., Shareholder Litigation, 2016 NY Slip Op 03545, New York Court of Appeals, decided May 5, 2016, the controlling shareholder of a New York corporation offered to buy the remaining shares, and, in effect, take the publicly traded corporation private. Shareholder class action suits were filed challenging the going-private merger. The trial court dismissed the complaint and the Appellate Division affirmed. The shareholders appealed.

The primary issue was what standard should be applied by courts reviewing a going-private merger that is subject, as this merger was, to approval by both a special committee of independent directors and a majority of the minority shareholders. The parties argued whether the court should apply the entire fairness standard or adopt the test recently established by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014).

The New York Court of Appeals held that it was adopting the Delaware standard. That standard provides that in controller buyouts, the business judgment rule will be applied if: 1) the controller conditions the procession of the transaction on the approval of both a special committee and a majority of minority shareholders; 2) the committee is independent; 3) the committee is empowered to freely select its own advisers and say no definitively; 4) the committee meets its duty of care in negotiating a fair price; 5) the vote of the minority is informed; and 6) there is no coercion of the minority.

A complaint is sufficient to state a cause of action for breach of fiduciary duty if it alleges a reasonably conceivable set of facts showing that any of the six conditions did not exist. Conclusory allegations or bare legal assertions will not be sufficient. Under that standard, the courts below properly determined that the allegations did not withstand the defendants' motion to dismiss.

In Finerty v. Abex Corporation, 2016 NY Slip Op 03511, New York Court of Appeals, decided May 3, 2016, the plaintiff filed an action alleging strict product liability against, among others, the parent corporation of the company that manufactured, distributed and sold auto parts that the plaintiff claimed exposed him to asbestos. The parent corporation moved to dismiss. The trial court denied the motion, the Appellate Division affirmed, and the parent corporation appealed.

The New York Court of Appeals reversed. The court noted that manufacturers, retailers and distributors of defective products can be held strictly liable for injuries. However, there was no evidence that the parent corporation manufactured, distributed or sold the auto parts. The parent corporation could not be held derivatively liable to the plaintiff under a theory of strict liability unless it disregarded the separate identity of the subsidiary and involved itself in the subsidiary's affairs, such that the corporate veil could be pierced. ' a conclusion that neither the trial court nor the Appellate Division reached. In addition, it was error for the Appellate Division to conclude that the parent corporation could be subject to strict liability based on it being in the best position to exert pressure on the subsidiary to improve the safety of its products.

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