Gibbons Law Alert

Gibbons Law Alert

Tagged: Corporate Law

The Ties That Bind: When Will a Court Expel a Member of an LLC?

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Posted in General Litigation

On August 8, 2016

In IE Test, LLC v. Carroll, the New Jersey Supreme Court addressed when a limited liability company (LLC) can expel a member under a statute authorizing a member’s disassociation for conduct that has made it “not reasonably practicable to carry on” the LLC’s activities. IE Test had three members, two of whom actively ran the business and drew salaries, and a third who played no role in the LLC’s day-to-day affairs. Before an operating agreement was executed, a dispute arose between the two active members and the passive member over the passive member’s compensation. Consequently, no operating agreement was ever signed. The two active members then sought to judicially disassociate the passive member on the statutory ground that the impasse and absence of an operating agreement made it “not reasonably practicable” that he could continue as a member. The trial court granted summary judgment, expelling the passive member, and the Appellate Division affirmed.

In “Spring-Loaded” Options Case, Court Finds Failure to Disclose Board’s “Unclean Heart” Does Not Violate Federal Securities Laws But Allows Common Law Fiduciary Duty Claims to Proceed Against Directors Approving Options

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Posted in Securities

On June 8, 2016

In a far-reaching opinion addressing a host of issues relating to the granting of so-called “spring-loaded” stock options to a corporation’s board of directors, the District of New Jersey dismissed a claim under Section 14(a) of the Exchange Act because federal securities laws do not require the corporation to disclose in its proxy statement that the options were part of a “spring-loading” scheme. But the court allowed common-law breach of fiduciary duty claims to proceed against the directors who served on the board’s compensation committee under the entire-fairness doctrine.

Delaware Supreme Court Clarifies Reach of Personal Jurisdiction Over Nonresident Directors and Officers of Delaware Corporations Under 10 Del. C. § 3114

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Posted in General Litigation

On March 10, 2016

The Delaware Supreme Court, in Marc Hazout v. Tsang Mun Ting, No. 353, 2015 (Feb. 26, 2016) (Strine, C.J.), held that the reach of personal jurisdiction under 10 Del. C. § 3114 over nonresident officers and directors of Delaware corporations, contrary to Court of Chancery precedent, is not limited to claims by stockholders against such officers and directors for breach of fiduciary duty. Rather, under the plain language of the statute, a nonresident officer or director of a Delaware corporation, by virtue of accepting and holding office, has consented to personal jurisdiction in Delaware, subject to the requirements of due process, in two classes of cases: (i) “all civil actions or proceedings brought in this State, by or on behalf of, or against such corporation, in which such officer [or director] is a necessary or proper party”; or (ii) “any action or proceeding against such officer [or director] in violation of a duty in such capacity.”

Delaware Supreme Court Says that Minority Stockholder Which Manages Company’s Day-to-Day Affairs is not a “Controlling Stockholder” and Confirms that Mandatory Stockholder Approval of Merger Transaction Compels Application of Business Judgment Rule

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Posted in General Litigation

On October 8, 2015

The Delaware Supreme Court’s recent decision in Corwin v. KKR Financial Holdings LLC makes two important points about corporate governance litigation. First, the court rejected the novel argument that an owner of less than 1% of a company’s stock could be considered a “controlling stockholder” because it managed the company’s day-to-day affairs under a management agreement. Second, the court confirmed that when a transaction has been approved by a majority of the company’s disinterested stockholders, the highly deferential business judgment rule should govern any challenges to the transaction, even if the stockholder vote was statutorily required and not voluntary.

Recent DGCL Sections Facilitate Ratification, Validation of Defective Corporate Acts; Minimal Reported Court Activity To Date But More Expected

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Posted in General Litigation

On July 7, 2015

It’s been more than a year since the Delaware General Corporation Law added sections 204 and 205, allowing boards of directors to ratify, or the Court of Chancery to validate, defective corporate acts, including the issuance of stock that did not fully comply with corporate formalities. The Delaware General Assembly’s unanimous adoption of sections 204 and 205 elevated substance over form by giving effect to corporate action that at all times was treated as validly authorized, even if the action was technically deficient.

Delaware Corporations May Enact Bylaws Requiring Litigation to be Venued in Delaware Courts

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Posted in General Litigation

On July 8, 2013

On June 25, 2013, the Delaware Court of Chancery paved the way for the boards of directors of Delaware corporations to amend their bylaws to include forum selection clauses requiring any litigation related to the corporation’s internal affairs to be conducted in Delaware courts. Adopting such provisions is intended to avoid the inefficiency and cost of Delaware corporations having to defend against the same litigation in multiple forums (e.g., both in Delaware and the state of the corporation’s principal place of business, as well as in state and federal court).

New Law Places Stricter Limits on Shareholder Derivative Suits

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Posted in General Litigation

On April 3, 2013

On April 2, 2013, Governor Christie signed A-3123, which revises New Jersey’s law concerning shareholder derivative proceedings under N.J.S.A. § 14A:3-6. According to the New Jersey Corporate and Business Law Study Commission, the purpose of this new law is to preclude derivative lawsuits that impose excessive and unnecessary costs on New Jersey corporations. The law applies to both derivative proceedings brought on behalf of a single shareholder and shareholder class actions against a corporation or its directors that arise out of a breach of duty imposed by New Jersey statutory or common law.

Pennsylvania Supreme Court Concludes That Dissenting Shareholders’ Post-Merger Recourse Is Limited to Judicial Appraisal

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Posted in General Litigation

On September 26, 2012

As discussed in a previous post, the Third Circuit’s August 2012 ruling in Mitchell Partners, L.P. v. Irex Corp. predicted that the Pennsylvania Supreme Court would “permit a post-merger suit for damages based on the majority shareholders’ breach of their fiduciary duties.” As a result, the Third Circuit concluded that Pennsylvania’s appraisal statute did not preclude dissenting minority shareholders who are “squeezed out” in a merger from seeking remedies beyond the appraisal remedies provided in the statute. However, on certification, the Pennsylvania Supreme Court concluded that minority shareholders who oppose a merger have no recourse — in the absence of fraud or fundamental unfairness — other than to seek judicial appraisal of the value of their post-merger shares.

Creditors of Insolvent Delaware Limited Liability Companies Lack Standing to Pursue Derivative Claims

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Posted in General Litigation

On October 28, 2011

Relying on the plain language of Delaware’s Limited Liability Company Act, the Delaware Supreme Court, in CML V, LLC v. John Bax, et al., recently ruled that creditors of insolvent Delaware limited liability companies lack standing to sue derivatively for their managers’ alleged breach of their fiduciary duties. According to Chief Justice Myron T. Steele, writing for the Court, 6 Del. C. § 18-1002 of Delaware’s Limited Liability Company Act is “unambiguous and limits derivative standing in LLCs exclusively to ‘member[s]’ or ‘assignee[s].’” In so holding, the Court distinguished insolvent LLCs from insolvent corporations, which are subject to derivative claims by creditors, noting that “the General Assembly is free to elect a statutory limitation on derivative standing for LLCs that is different than that for corporations, and thereby preclude creditors from attaining standing.”

Minority Shareholders Not Precluded From Seeking Damages for Majority Shareholders’ Post-Merger Breaches of Fiduciary Duty

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Posted in General Litigation

On September 30, 2011

In Mitchell Partners, L.P. v. Irex Corporation, et al., the Third Circuit concluded that Pennsylvania’s appraisal statute does not preclude dissenting minority shareholders who are “squeezed out” in a merger from seeking remedies beyond the appraisal remedies provided in the statute. In the precedential ruling, the Third Circuit predicted that the Supreme Court of Pennsylvania would “permit a post-merger suit for damages based on the majority shareholders’ breach of their fiduciary duties.”

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