Quarterly State Compliance Review

In Connecticut, House Bill 529, effective July 1, enacted a new LLC Law, based on the Revised Uniform Limited Liability Act, providing the default and mandatory provisions governing newly formed and pre-existing LLCs.

In Georgia, House Bill 87, effective July 1, amended the laws governing business entities to allow the Secretary of State to provide that annual registrations may be valid for up to three years, and House Bill 192, also effective July 1, amended the corporation law regarding the standard of care for directors and officers.

In Kentucky, House Bill 35, effective June 29, authorized the formation of a public benefit corporation, defined as a for profit corporation that is intended to produce a public benefit and operate in a responsible manner, and Senate Bill 235, also effective June 29, amended the LLC law provisions governing expulsion of members, member voting and meetings, charging orders, dissociation, derivative suits, and more.

In Mississippi, Senate Bill 2350, effective July 1, amended the corporation law to eliminate the maximum 10-year period on voting trust agreements and to provide for the winding up of an administratively dissolved corporation.

In Oklahoma, House Bill 2357, effective May 12, increased the fee for reinstating the charter of a suspended or forfeited corporation.

In Tennessee, Senate Bill 482, effective May 9, permitted nonprofit corporations and LLCs to reserve and use more than five assumed names during the same five-year
period. In Utah, House Bill 41, effective May 9, added a chapter to the corporation law regulating business combinations and Senate Bill 231, also effective May 9 permitted the reinstatement of a dissolved corporation that owes taxes, fees or penalties if it is current on a payment plan with the State Tax Commission.

In Virginia, House Bill 2230, effective July 1, amended the corporation law to permit a meeting of shareholders to be held solely by means of remote communication.

And in Wyoming, Senate Bill 100, effective July 1, amended the LLC law provisions regarding management of an LLC and repealed the requirement that distributions be made in money upon dissolution.

IN THE STATE COURTS

DE Chancery Court: Pleading a Unocal Claim Does Not Excuse a Demand

Ryan v. Armstrong, C.A. 12717 (Delaware Chancery Court), decided May 15, 2017, was a stockholder derivative suit alleging that the defendant directors attempted a failed acquisition as a defensive maneuver to make a proposed merger more difficult in order to entrench themselves. The plaintiff did not make a demand. Instead, he claimed that because he pled a viable claim for review under Unocal's enhanced scrutiny of anti-takeover defensive maneuvers, demand was excused.

The Delaware Chancery Court noted that at the pleading stage, it had to assume the Unocal standard of review was triggered. However, the court ruled that the fact a claim implicates Unocal is insufficient, on its own, to satisfy Rule 23.1's demand requirement. The court acknowledged that past decisions might have suggested otherwise, but found they were not persuasive here, where the plaintiff's Unocal claim was weak. Thus, the court ruled the plaintiff had to plead specific facts to overcome the presumptions of the business judgement rule. Furthermore, because the corporation had an exculpatory clause, the plaintiff had to plead facts to show the defendant directors breached their duty of loyalty. Because they could not do that, the derivative suit was dismissed.

MI Supreme Court Rules on Limitations Period for Member Oppression Suit

Frank v. Linkner, No. 151888 (Michigan Supreme Court), decided May 15, 2017, involved a dispute between the plaintiffs — owners of common units in a Michigan LLC — and its manager. The plaintiffs claimed the manager told them that their interests would not be diluted or subordinated. However, in 2009, the LLC issued preferred units. The operating agreement was amended to provide the new units with a distribution preference. In 2012, the LLC sold its assets and distributed all of the proceeds to the preferred unitholders. The plaintiffs filed suit, alleging, among other causes, member oppression under Sec. 450.4515 of the Michigan LLC Act. The trial court dismissed the claim for being untimely, but the appellate court reversed.
The Michigan Supreme Court noted that Sec. 450.4515 provided, in part, that an action had to be commenced within three years after the cause of action accrued. The first issue presented to the court was whether that was a statute of limitations or a statute of repose. That was relevant because a statute of limitations can be tolled by the fraudulent concealment statute, but a statute of repose cannot. The court stated that a statute of limitations establishes a time limit based on the date the claim accrued. Here, Sec. 450.4515 clearly states that the three-year period runs from the date of accrual. Therefore, it is a statute of limitations.

The second issue was when the plaintiffs' cause of action accrued. The appellate court held that it was in 2012 when the LLC sold and distributed its assets. However, the Michigan Supreme Court disagreed. According to the court, an action for member oppression accrues when the defendant's actions allegedly interfered with the plaintiff's interest as a member, making the plaintiff eligible for relief. Here, that alleged interference with the plaintiffs' interest as members took place when their interests were subordinated in 2009. Thus, the plaintiffs' cause of action for member oppression was barred by the three-year statute of limitations unless they are entitled to equitable tolling.

TX Supreme Court Upholds Forum Selection Clause in Shareholders Agreement

Pinto Technology Ventures, L.P. v. Sheldon, No. 16-0007 (Texas Supreme Court), decided May 19, 2017, was a suit filed in Texas by minority shareholders against majority shareholders, alleging dilution of their equity interests. The defendants invoked a forum selection clause
contained in their amended shareholders agreement that designated Delaware as the proper forum for any disputes arising out of the agreement. The trial court dismissed the suit, but the appellate court reversed, finding that because the plaintiffs alleged statutory and common-law tort claims, and not contractual claims, the dispute did not arise out the shareholders agreement.

The Texas Supreme Court reversed. Reviewing the allegations, the court noted that the dispute concerned the elimination of preemptive and shareholder status rights, dilution of equity, various misrepresentations, and the failure to take actions required by the shareholders agreement. The court applied the “but for” test and found that but for the shareholders agreement, there would be no dispute over the loss of rights. The court also pointed out that the statutory and tort claims involved many of the same operative facts as a contract claim would have. In addition, the allegations invoked the amended shareholders agreement as an integral part of the alleged injuries. Thus, the court held that the plaintiffs' non-contractual claims arose out the amended shareholders agreement, and the forum selection clause applied to the claims against the majority shareholders.

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Sandra Feldman is an attorney with 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 between May 1 and July 1, as well as some recent cases of interest from the courts of Delaware, Michigan, and Texas.

IN THE STATE LEGISLATURES

There were a large number of amendments to state business entity statutes that went into effect during the period that began on May 1, 2017 and ended on July 1, 2017. Highlights include the following:

In Connecticut, House Bill 529, effective July 1, enacted a new LLC Law, based on the Revised Uniform Limited Liability Act, providing the default and mandatory provisions governing newly formed and pre-existing LLCs.

In Georgia, House Bill 87, effective July 1, amended the laws governing business entities to allow the Secretary of State to provide that annual registrations may be valid for up to three years, and House Bill 192, also effective July 1, amended the corporation law regarding the standard of care for directors and officers.

In Kentucky, House Bill 35, effective June 29, authorized the formation of a public benefit corporation, defined as a for profit corporation that is intended to produce a public benefit and operate in a responsible manner, and Senate Bill 235, also effective June 29, amended the LLC law provisions governing expulsion of members, member voting and meetings, charging orders, dissociation, derivative suits, and more.

In Mississippi, Senate Bill 2350, effective July 1, amended the corporation law to eliminate the maximum 10-year period on voting trust agreements and to provide for the winding up of an administratively dissolved corporation.

In Oklahoma, House Bill 2357, effective May 12, increased the fee for reinstating the charter of a suspended or forfeited corporation.

In Tennessee, Senate Bill 482, effective May 9, permitted nonprofit corporations and LLCs to reserve and use more than five assumed names during the same five-year
period. In Utah, House Bill 41, effective May 9, added a chapter to the corporation law regulating business combinations and Senate Bill 231, also effective May 9 permitted the reinstatement of a dissolved corporation that owes taxes, fees or penalties if it is current on a payment plan with the State Tax Commission.

In Virginia, House Bill 2230, effective July 1, amended the corporation law to permit a meeting of shareholders to be held solely by means of remote communication.

And in Wyoming, Senate Bill 100, effective July 1, amended the LLC law provisions regarding management of an LLC and repealed the requirement that distributions be made in money upon dissolution.

IN THE STATE COURTS

DE Chancery Court: Pleading a Unocal Claim Does Not Excuse a Demand

Ryan v. Armstrong, C.A. 12717 (Delaware Chancery Court), decided May 15, 2017, was a stockholder derivative suit alleging that the defendant directors attempted a failed acquisition as a defensive maneuver to make a proposed merger more difficult in order to entrench themselves. The plaintiff did not make a demand. Instead, he claimed that because he pled a viable claim for review under Unocal's enhanced scrutiny of anti-takeover defensive maneuvers, demand was excused.

The Delaware Chancery Court noted that at the pleading stage, it had to assume the Unocal standard of review was triggered. However, the court ruled that the fact a claim implicates Unocal is insufficient, on its own, to satisfy Rule 23.1's demand requirement. The court acknowledged that past decisions might have suggested otherwise, but found they were not persuasive here, where the plaintiff's Unocal claim was weak. Thus, the court ruled the plaintiff had to plead specific facts to overcome the presumptions of the business judgement rule. Furthermore, because the corporation had an exculpatory clause, the plaintiff had to plead facts to show the defendant directors breached their duty of loyalty. Because they could not do that, the derivative suit was dismissed.

MI Supreme Court Rules on Limitations Period for Member Oppression Suit

Frank v. Linkner, No. 151888 (Michigan Supreme Court), decided May 15, 2017, involved a dispute between the plaintiffs — owners of common units in a Michigan LLC — and its manager. The plaintiffs claimed the manager told them that their interests would not be diluted or subordinated. However, in 2009, the LLC issued preferred units. The operating agreement was amended to provide the new units with a distribution preference. In 2012, the LLC sold its assets and distributed all of the proceeds to the preferred unitholders. The plaintiffs filed suit, alleging, among other causes, member oppression under Sec. 450.4515 of the Michigan LLC Act. The trial court dismissed the claim for being untimely, but the appellate court reversed.
The Michigan Supreme Court noted that Sec. 450.4515 provided, in part, that an action had to be commenced within three years after the cause of action accrued. The first issue presented to the court was whether that was a statute of limitations or a statute of repose. That was relevant because a statute of limitations can be tolled by the fraudulent concealment statute, but a statute of repose cannot. The court stated that a statute of limitations establishes a time limit based on the date the claim accrued. Here, Sec. 450.4515 clearly states that the three-year period runs from the date of accrual. Therefore, it is a statute of limitations.

The second issue was when the plaintiffs' cause of action accrued. The appellate court held that it was in 2012 when the LLC sold and distributed its assets. However, the Michigan Supreme Court disagreed. According to the court, an action for member oppression accrues when the defendant's actions allegedly interfered with the plaintiff's interest as a member, making the plaintiff eligible for relief. Here, that alleged interference with the plaintiffs' interest as members took place when their interests were subordinated in 2009. Thus, the plaintiffs' cause of action for member oppression was barred by the three-year statute of limitations unless they are entitled to equitable tolling.

TX Supreme Court Upholds Forum Selection Clause in Shareholders Agreement

Pinto Technology Ventures, L.P. v. Sheldon, No. 16-0007 (Texas Supreme Court), decided May 19, 2017, was a suit filed in Texas by minority shareholders against majority shareholders, alleging dilution of their equity interests. The defendants invoked a forum selection clause
contained in their amended shareholders agreement that designated Delaware as the proper forum for any disputes arising out of the agreement. The trial court dismissed the suit, but the appellate court reversed, finding that because the plaintiffs alleged statutory and common-law tort claims, and not contractual claims, the dispute did not arise out the shareholders agreement.

The Texas Supreme Court reversed. Reviewing the allegations, the court noted that the dispute concerned the elimination of preemptive and shareholder status rights, dilution of equity, various misrepresentations, and the failure to take actions required by the shareholders agreement. The court applied the “but for” test and found that but for the shareholders agreement, there would be no dispute over the loss of rights. The court also pointed out that the statutory and tort claims involved many of the same operative facts as a contract claim would have. In addition, the allegations invoked the amended shareholders agreement as an integral part of the alleged injuries. Thus, the court held that the plaintiffs' non-contractual claims arose out the amended shareholders agreement, and the forum selection clause applied to the claims against the majority shareholders.

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