Justia Corporate Compliance Opinion Summaries

Tibet, a holding company, “effectively control[led]” Yunnan, a manufacturer. Tibet attempted to raise capital for Yunnan's operations through an initial public offering (IPO). Zou was an investor in Tibet and the sole director of CT, a wholly-owned subsidiary of Tibet. Tibet’s control of Yunnan flowed through CT. Zou told Downs, a managing director at the investment bank A&S, about the IPO. A&S agreed to serve as Tibet’s placement agent. Zou and downs were neither signatories to Tibet’s IPO registration statement nor named as directors of Tibet but were listed as non-voting board observers chosen by A&S without formal powers or duties. The registration statement explained, “they may nevertheless significantly influence the outcome of matters submitted to the Board.” The registration statement omitted information that Yunnan had defaulted on a loan from the Chinese government months earlier. Before Tibet filed its amended final prospectus, the Chinese government froze Yunnan’s assets. Tibet did not disclose that. The IPO closed, offering three million public shares at $5.50 per share. The Agricultural Bank of China auctioned off Yunnan’s assets, which prompted the NASDAQ to halt trading in Tibet’s stock. Plaintiffs sued Zou, Downs, Tibet, A&S, and others on behalf of a class of stock purchasers under the Securities Act of 1933, 15 U.S.C. 77k(a). The Third Circuit directed the entry of summary judgment in favor of Zou and Downs, holding that a nonvoting board observer affiliated with an issuer’s placement agent is not a “person who, with his consent, is named in the registration statement as being or about to become a director[ ] [or] person performing similar functions,” under section 77k(a). The court noted the registration statement’s description of the defendants, whose functions are not “similar” to those of board directors. View "Obasi Investment Ltd v. Tibet Pharmaceuticals Inc" on Justia Law

Brooks, Debtor's CEO, was charged with financial crimes. In class action and derivative lawsuits, Debtor proposed a global settlement that indemnified Brooks for liability under the Sarbanes Oxley Act (SOX), 15 U.S.C. 7243. Cohen, Debtor’s former General Counsel and a shareholder, claimed that the indemnification was unlawful. The district court approved the settlement, Cohen, represented by CLM, appealed. The Second Circuit vacated, noting that the EDNY would determine CLM’s attorneys’ fees award. Debtor initiated Chapter 11 bankruptcy proceedings. The Bankruptcy Court confirmed Debtor’s liquidation plan, with a trustee to pursue Debtor’s interest in recouping its losses from the ongoing actions.Brooks died in prison. Because his appeal had not concluded, some of his convictions and restitution obligations were abated. Stakeholders negotiated a second global settlement agreement, under which $142 million of Brooks’ restrained assets were to be distributed to his victims; $70 million has been remitted to Debtor. The Bankruptcy Court awarded CLM fees for the SOX 304 claim; the amount would be determined if Debtor received any funds on account of the claim. CLM’s Fee Appeal remains pending at the district court.CLM requested a $25 million reserve for payment of its fees. The Bankruptcy Court ordered Debtor to set aside $5 million. CLM’s Fee Reserve Appeal remains pending. CLM then moved, unsuccessfully, for a stay of Second Settlement Agreement distributions. In its Stay Denial Appeal, CLM’s motion requesting a stay of distributions was denied. The Third Circuit affirmed. The $5 million reserve is sufficient. A $5 million attorneys’ fees award for 1,502.2 hours of legal work totaling $549,472.61 of documented fees would yield an hourly rate of $3,328.45 and a lodestar multiplier of over nine. In common fund cases where attorneys’ fees are calculated using the lodestar method, multiples from one to four are the norm. View "SS Body Armor I, Inc. v. Carter Ledyard & Milburn, LLP" on Justia Law

Catambay’s husband was sued in Santa Clara County for embezzlement. Longview International won a judgment for more than one million dollars and recorded an abstract of judgment in San Mateo County, creating a judgment lien on a house owned by Catambay’s husband in Redwood City. Two days later, Catambay’s husband conveyed the Redwood City house to her as part of a marital settlement agreement in their then-pending dissolution proceeding. Catambay discovered that at the time Longview recorded the abstract of judgment its corporate powers had been suspended. The Delaware corporation had failed to provide an annual statement of information and pay a $25 fee. She sought to intervene in the Santa Clara County embezzlement case and moved to expunge the judgment lien from the Redwood City property. Longview argued that its corporate powers had been reinstated, which retroactively validated any actions it took while suspended. The court of appeal affirmed the denial of Catambay’s motion. Recording an abstract of judgment is a procedural act that is retroactively validated once a suspended corporation’s powers are reinstated. View "Longview International, Inc. v. Stirling" on Justia Law

After a limited liability company and its individual members failed to make payments on a real estate loan, the lender sued. One member, Kenneth Duffus, cross-claimed against a second member, Lee Baker, Jr., alleging breach of contract and tort claims related to the management of the business. Baker counterclaimed against Duffus, also alleging breach of contract and tort claims. After several years of litigation, only the claims by and between Duffus and Baker remained; the superior court granted partial summary judgment to Duffus, finding that the statutes of limitation barred Baker’s counterclaims. A trial jury found against Baker on Duffus’s breach of contract and tort claims, and awarded damages to Duffus. Baker appealed the grant of summary judgment and a number of procedural issues from the trial. Because the Alaska Supreme Court determined it was error to conclude that Baker’s claims were not compulsory counterclaims, thus changing the statutes of limitation analysis, it reversed the superior court’s grant of summary judgment, vacated the judgment, and remanded for a new trial on both Duffus’s cross-claims and Baker’s counterclaims. View "Baker v. Duffus" on Justia Law

After Hawk died, his wife, Nancy, decided to sell the family business, Holiday Bowl and made a deal with MidCoast, which claimed an interest in acquiring companies with corporate tax liabilities that it could set off against its net-operating losses. Holiday first sold its bowling alleys to Bowl New England, receiving $4.2 million in cash and generating about $1 million in federal taxes. Nancy and Billy’s estate then sold Holiday Bowl to MidCoast for about $3.4 million,"in essence exchanging one pile of cash for another minus the tax debt MidCoast agreed to pay." MidCoast never paid the taxes. The United States filed a transferee-liability action against Nancy and Hawk’s estate. The Tax Court ruled for the government. The Sixth Circuit affirmed, reasoning that the Hawks were transferees of a delinquent taxpayer under 26 U.S.C. 6901, and that Tennessee has adopted the Uniform Fraudulent Transfer Act, which provides remedies to creditors (like the United States) when insolvent debtors fraudulently transfer assets to third parties. Holiday Bowl owed taxes. “Congress, with assistance from the courts, has constructed a formidable defense against taxpayer efforts to traffic in net operating losses and other corporate tax benefits.” View "Billy F. Hawk, Jr., GST Non-Exempt Marital Trust v. Commissioner of Internal Revenue" on Justia Law

In 2011 Caterpillar made serious inquiries about the possible acquisition of a Chinese mining company and its wholly‐owned subsidiary (Siwei). Caterpillar completed that acquisition in June 2012. Only after the closing did Caterpillar gain access to Siwei’s physical inventory and find that Siwei had overstated its profits and improperly recognized revenue. Caterpillar took a $580 million goodwill impairment charge just months after the acquisition. Plaintiffs, Caterpillar shareholders, filed a shareholder derivative suit alleging that several former Caterpillar officers breached their fiduciary duties by failing to conduct an adequate investigation of the Siwei acquisition, which caused Caterpillar’s loss. They made an unsuccessful demand that the Caterpillar Board bring the litigation. The district court dismissed the complaint for failure adequately to allege that the Board wrongfully refused to pursue the Plaintiffs’ claim. The Seventh Circuit affirmed. The Board’s decision not to litigate was protected by the “wide bounds of the business judgment rule.” The plaintiffs might come to a different conclusion about the strategic importance of the acquisition, the risk that litigation might cause disruption and excessive cost for Caterpillar, or the need to interview Siwei’s former CEO, but those types of business and investigative choices are exactly what the business judgment rule protects. View "Lowinger v. Oberhelman" on Justia Law

A participant in an Employee Stock Ownership Program (ESOP) filed suit after owners of a closely held corporation sold the company to its ESOP. The participant contended that the trustee chosen for the ESOP by the corporation breached its fiduciary duties to the ESOP and overpaid for the stock — improperly enriching the corporation's owners at the expense of its employees.The Fourth Circuit affirmed the district court's careful findings of fact concluding that the trustee had breached its fiduciary duties. In regard to liability, the district court found four major failures involving SRR's report; that the trustee failed to act as a prudent fiduciary solely on behalf of the ESOP participants; that the value of Stock Appreciation Rights (SARs) issued in connection with the ESOP's purchase of Constellis should have been deducted from Constellis's equity value for purposes of SRR’s valuation; and that the ACADEMI sale did not constitute a meaningful comparator. Furthermore, the court found no error in the district court's damages award and fee award. View "Tim Brundle v. Wilmington Trust, N.A." on Justia Law

Boschetti sued Pacific Bay, Sparks, and others, alleging that Boschetti and Sparks owned commercial real property through membership in limited liability companies and partnerships, that defendants provide real property management services for the real estate portfolio, and that Pacific Bay paid itself improper distributions in violation of its fiduciary duty to Boschetti. Sparks and Pacific Bay cross-complained, seeking dissolution of six of the out-of-state LPs and LLCs because Sparks and Boschetti could not coexist effectively given the litigation. Boschetti sought to avoid dissolution by buy-outs. When an action is brought to dissolve a California LP or LLC, the other partners or members may avoid the dissolution by purchasing, for cash, the interests owned by the party seeking dissolution, Corp. Code 15908.02(b), 17707.03(c)(1). These “buyout” provisions do not apply to an action to dissolve a general partnership, sections 16801–16807. An amended cross-complaint alleged that Boschetti and Sparks have a general partnership and sought an order dissolving that partnership. The out-of-state LPs and LLCs hold title to property owned by the general partnership. Boschetti again sought to avoid dissolution and moved to stay the dissolution of the LPs and LLCs. The court of appeal held that the trial court lacks authority to order the dissolution of the out-of-state entities. View "Boschetti v. Pacific Bay Investments Inc." on Justia Law

Stockholder-plaintiff KT4 Partners LLC appealed the Court of Chancery’s post-trial order granting in part and denying in part KT4’s request to inspect various books and records of appellee Palantir Technologies Inc., a privately held technology company. The Court of Chancery found that KT4 had shown a proper purpose of investigating suspected wrongdoing in three areas: (1) “Palantir’s serial failures to hold annual stockholder meetings”; (2) Palantir’s amendments of its Investors’ Rights Agreement in a way that “eviscerated KT4’s (and other similarly situated stockholders’) contractual information rights after KT4 sought to exercise those rights”; and (3) Palantir’s potential violation of two stockholder agreements by failing to give stockholders notice and the opportunity to exercise their rights of first refusal, co-sale rights, and rights of first offer as to certain stock transactions. The Court ordered Palantir to produce the company’s stock ledger, its list of stockholders, information about the company’s directors and officers, year-end audited financial statements, books and records relating to annual stockholder meetings, books and records relating to any cofounder's sales of Palantir stock. The Court otherwise denied KT4's requests, including a request to inspect emails related to Investors' Rights Agreement amendments. Both sides appealed, but the Delaware Supreme Court was satisfied the Court of Chancery did not abuse its discretion with respect to all but two issues: (1) denying wholesale requests to inspect email relating to the Investors' Rights Agreement; (2) and requests to temper the jurisdictional use restriction imposed by the court. "Given that the court found a credible basis to investigate potential wrongdoing related to the violation of contracts executed in California, governed by California law, and among parties living or based in California, the basis for limiting KT4’s use in litigation of the inspection materials to Delaware and specifically the Court of Chancery was tenuous in the first place, and the court lacked reasonable grounds for denying the limited modifications that KT4 requested." View "KT4 Partners LLC v. Palantir Technologies, Inc." on Justia Law

Two of Oxbow Carbon LLC’s minority Members, Crestview Partners, L.P. and Load Line Capital LLC, attempted to force a sale of Oxbow over the objection of Oxbow’s majority Members, William Koch and his affiliates (the “Koch Parties”). This dispute centered on the proper interpretation of the governing Third Amended and Restated Limited Liability Company Agreement (the “LLC Agreement”). Although the Court of Chancery found that the minority investors affiliated with Koch, Ingraham Investments LLC and Oxbow Carbon Investment Company LLC (collectively, the “Small Holders”), could block the sale unless it met certain payment conditions, the court nonetheless found a contractual gap in the LLC Agreement because the Board did not specify the terms and conditions under which the Small Holders acquired their units. Using the implied covenant of good faith and fair dealing, the Court of Chancery filled that gap by implying a “Top-Off” option for the Small Holders’ units, effectively stripping them of the right to block the proposed transaction. On appeal, Oxbow claimed that: (1) the trial court improperly applied the implied covenant; (2) there was no contractual gap; (3) Oxbow did not breach the LLC Agreement; and (4) the court’s rulings on remedies were made in error. The Delaware Supreme Court determined the Court of Chancery correctly interpreted the LLC Agreement’s plain language, but erred by finding a contractual gap concerning the admission of the Small Holders. Thus, the Court affirmed in part, reversed in part, and remanded the Court of Chancery’s February 12, 2018, decision, and vacated its August 1, 2018, decision on remedies. View "Oxbow Carbon & Minerals Holdings, Inc., et al. v. Crestview-Oxbow Acquisition, LLC, et al." on Justia Law