Justia Corporate Compliance Opinion Summaries

Philip Shawe and his mother, Shirley Shawe, filed an interlocutory appeal of an August 13, 2015 Chancery Court opinion and July 18, 2016 order appointing a custodian to sell TransPerfect Global, Inc., a Delaware corporation. After a six-day trial the Court issued an opinion concluding that the “warring factions” were hopelessly deadlocked as stockholders and directors. The court carefully considered three alternatives to address the dysfunction and deadlock, and in the end decided that the circumstances of the case required the appointment of a custodian to sell the company. On appeal, the Shawes did not challenge the Court’s factual findings; instead, Philip Shawe claimed for the first time on appeal that the court exceeded its statutory authority when it ordered the custodian to sell a solvent company. Alternatively, Shawe contended that less drastic measures were available to address the deadlock. Shirley Shawe argued for the first time on appeal that the custodian’s sale of the company might result in an unconstitutional taking of her one share of TransPerfect Global stock. The Supreme Court disagreed with the Shawes and affirmed the Chancery Court’s judgment. View "Shawe v. Elting" on Justia Law

Richard, Father, Mother, and sister (Kathryn) formed the family Corporation in 1990. Under its articles of incorporation and bylaws, each family member served as a lifetime director. Mother died in 2000. In 2010, the remaining family members elected Phyllis to a three-year term on the board. Father died in 2010. Phyllis’s term expired in 2013. Under Indiana Code 23-17-12-3, a nonprofit corporation must be governed at all times by at least three directors. Richard claimed that when Phyllis’s term expired, the Corporation was no longer lawfully constituted and the two remaining board members could not act on the Corporation’s behalf or exercise corporate powers. Indiana law provides that when a nonprofit director’s term expires without further action by the board: “the director continues to serve until … a successor is elected, designated, or appointed and qualifies.” That language is reflected in the Corporation’s bylaws and the 2010 resolution appointing Phyllis to the board. Kathryn and Phyllis voted in 2013 to elect Phyllis to a second term. The board then took several actions over Richard’s objections, including authorizing gifts to Saint Francis (on whose board Kathryn also serves) and electing Kathryn’s son as a fourth board member. Richard filed suit, as an individual and derivatively. The Seventh Circuit affirmed dismissal. Under Indiana law, only a shareholder or member of a corporation may bring a derivative action on the corporation’s behalf. Richard is neither a shareholder nor a member. The Corporation’s articles of incorporation provide that it “shall have no members.” Richard’s purported individual claims for money judgment belong to the Corporation and his other individual claims failed on their merits. View "Doermer v. Callen" on Justia Law

The three underlying legal actions, involving breach of contract, breach of fiduciary duty, stock valuation, bankruptcy, and appeals, took place in Illinois. Plaintiffs, including attorneys involved in the underlying actions, sought to indemnification in post-trial proceedings. Defendant is a Delaware corporation with offices in Illinois. The Delaware Court of Chancery awarded plaintiffs $79,540.14 for pursuing the post-trial action and $241,492.50 for the Illinois proceedings, plus 20% of the expenses they incurred enforcing their indemnification right through this proceeding. The court cited the corporations’ bylaws, under which the plaintiffs are entitled to mandatory if indemnification would be permitted under the Delaware General Corporation Law and Section 145(a) of that law. View "Dore v. Sweports Ltd." on Justia Law

A 16-count complaint alleged conspiracy to funnel valuable pharmaceutical interests away from an entity in which the Plaintiff, CelestialRX, LLC, is a member. The claims include allegedly improper self-dealing by two members of a three-member LLC. On motions to dismiss and for summary judgment, the Delaware Chancery Court rejected a claim that plaintiffs had contractually released certain claims and analyzed the LLC agreement to conclude that good faith—a subjective standard, applies separately to both the transaction and to the conflicted party’s analysis of whether it is “fair and reasonable,” but must be read consistently with the purpose of specific standards, which is to permit conflicted transactions in certain circumstances. The court urged the parties to mediate the dispute. View "CelestialRX Investments, LLC.v. Krivulka" on Justia Law

IBM's proposed purchase of Merge Healthcare was supported by a vote of close to 80% of Merge stockholders. Former Merge stockholders sought post-closing damages against the company’s directors for what they alleged was an improper sale process. Merge did not have an exculpation clause in its corporate charter, so its directors have potential liability for acts violating their duty of care, in the context of an allegedly less-than-rigorous sales process. The Delaware Court of Chancery dismissed. Demonstrating such a violation of the duty of care is not trivial: it requires a demonstration of gross negligence, but it is less formidable than showing disloyalty. Regardless of that standard, the uncoerced vote of a majority of disinterested shares in favor of the merger cleansed any such violations, raising the presumption that the directors acted within their proper business judgment. View "In Re Merge Healthcare Inc. Stockholder Litigation" on Justia Law

The plaintiff was a limited partner/unitholder in a publicly-traded master limited partnership (“MLP”). The general partner proposed that the partnership be acquired through merger with another limited partnership in the MLP family. The seller and buyer were indirectly owned by the same entity, creating a conflict of interest. The general partner in this case sought refuge in two of the safe harbor conflict resolution provisions of the partnership agreement: “Special Approval” of the transaction by an independent Conflicts Committee, and “Unaffiliated Unitholder Approval.” The plaintiff alleged in its complaint that the general partner failed to satisfy the Special Approval safe harbor because the Conflicts Committee was itself conflicted. The general partner moved to dismiss the complaint and claimed that, in the absence of express contractual obligations not to mislead investors or to unfairly manipulate the Conflicts Committee process, the general partner need only satisfy what the partnership agreement expressly required: to obtain the safe harbor approvals and follow the minimal disclosure requirements. The Court of Chancery “side-stepped” the Conflicts Committee safe harbor, but accepted the general partner’s argument that the Unaffiliated Unitholder Approval safe harbor required dismissal of the case. The court held that, even though the proxy statement might have contained materially misleading disclosures, fiduciary duty principles could not be used to impose disclosure obligations on the general partner beyond those in the partnership agreement, because the partnership agreement disclaimed fiduciary duties. On appeal, the plaintiff argued that the Court of Chancery erred when it concluded that the general partner satisfied the Unaffiliated Unitholder Approval safe harbor, because he alleged sufficient facts to show that the approval was obtained through false and misleading statements. The Supreme Court determined that the lower court focused too narrowly on the partnership agreement’s disclosure requirements. “Instead, the center of attention should have been on the conflict resolution provision of the partnership agreement.” The Supreme found that the plaintiff pled sufficient facts, that neither safe harbor was available to the general partner because it allegedly made false and misleading statements to secure Unaffiliated Unitholder Approval, and allegedly used a conflicted Conflicts Committee to obtain Special Approval. Thus, the Court reversed the Court of Chancery’s order dismissing Counts I and II of the complaint. View "Dieckman v. Regency GP LP, Regency GP LLC" on Justia Law

Micrins Surgical went out of business in 2009, without paying all of its taxes. Eriem Surgical was incorporated the same day, purchased Micrins’ inventory, took over its office space, hired its employees, used its website and phone number, and pursued the same line of business, selling surgical instruments. Teitz, the president and 40% owner of Micrins, continued to play a leading role in Eriem, though its sole stockholder is Teitz’s wife. Eriem uses “Micrins” as a trademark. The IRS treated Eriem as a continuation of Micrins and collected almost $400,000 of Micrins’ taxes from Eriem’s bank accounts and receivables. Eriem filed wrongful levy suit, 26 U.S.C. 7426(a)(1). The Seventh Circuit affirmed judgment in favor of the IRS, concluding that Eriem is a continuation of Micrins. The Supreme Court has never decided whether state or federal law governs corporate successorship when the dispute concerns debts to the national government; the Internal Revenue Code says nothing about corporate successorship. Illinois law uses a multi‐factor balancing standard to determine successorship. Rejecting an argument that the change in ownership should be dispositive, the court upheld the district court’s conclusion that Mrs. Teitz serves is proxy for her husband, so that there has not been a complete change of ownership. View "Eriem Surgical, Inc. v. United States" on Justia Law

Appellants The Source Store LLC (“Source 1”), The Source LLC (“Source 2”), Michael L. Hodge (“Hodge”), George M. Brown (“Brown”), and Christopher Claiborne (“Claiborne”) appealed the district court’s order denying their Joint Motion to Dismiss, by which they sought to dismiss the derivative claims brought by respondents Donnelly Prehn and Dwight Bandak on behalf of Source 1. The Supreme Court did not reverse the district court’s decision not to hear Appellants’ Joint Motion to Dismiss. Further, the Court affirmed the district court’s finding that Hodge breached his fiduciary duty to Source 1 and its members. Specifically, the Court affirmed the district court’s awards related to the following: (1) Hodge’s breach of his fiduciary duty as to the management of the asset auction; (2) Hodge’s breach of his fiduciary duty related to his failure to minimize expenses during dissolution; (3) Prehn’s entitlement to back salary and reimbursement for the loan; and (4) the unjust enrichment of Hodge and Source 2. The Court affirmed the district court’s award of attorney’s fees. View "Prehn v. Hodge" on Justia Law

This appeal in a derivative suit brought by a stockholder of Zynga, Inc. centered on whether the Court of Chancery correctly found that a majority of the Zynga board could impartially consider a demand and thus correctly dismissed the complaint for failure to plead demand excusal under Court of Chancery Rule 23.1. The Supreme Court reversed dismissal of plaintiff's complaint: "Fortunately for the derivative plaintiff, however, he was able to plead particularized facts regarding three directors that create a reasonable doubt that these directors can impartially consider a demand. [. . .] in our view, the combination of these facts creates a pleading stage reasonable doubt as to the ability of these directors to act independently on a demand adverse to the controller's interests. When these three directors are considered incapable of impartially considering a demand, a majority of the nine member Zynga board is compromised for Rule 23.1 purposes and demand is excused." View "Sandys v. Pincus, et al." on Justia Law

This appeal arose from a conflict among the three members of IE Test, LLC (IE Test). After a dispute between defendant Kenneth Carroll and the other members, Patrick Cupo and Byron James, IE Test filed an action to expel Carroll, pursuant to the Limited Liability Company Act (LLCA). In 2004,Carroll and Cupo formed Instrumentation Engineering, LLC. Carroll owned a fifty-one percent interest in Instrumentation Engineering, and Cupo owned the remaining forty-nine percent. James was employed by Instrumentation Engineering, initially as Business Development Manager and later as Vice President. Carroll, Cupo, and James entered into a preliminary agreement stating intention to enter into an operating agreement for IE Test. Carroll claimed that Instrumentation Engineering owed substantial sums to him and his companies, and that became a point of contention among Cupo, James, and Carroll soon after they agreed to share ownership of IE Test. Carroll acknowledged that IE Test had no legal obligation to repay him for losses sustained because of Instrumentation Engineering's bankruptcy, but pressed for compensation that would allow him to recover some of his lost investment. By early 2010, Cupo and James were actively pursing a strategy to use the LLCA to expel Carroll as a member of the LLC. The trial court found in IE Test's favor on its claim based on subsection 3(c), reasoning that the "not reasonably practicable" language imposed a less stringent standard than did subsection 3(a). The trial court granted IE Test's motion for partial summary judgment and expelled Carroll as an LLC member. Carroll appealed. In an unpublished opinion, an Appellate Division panel affirmed, construing N.J.S.A.42:2B-24(b)(3), and its counterpart provision in the Revised Uniform Limited Liability Company Act (RULLCA), N.J.S.A.42:2C-46(e), to mandate that a trial judge engage in predictive reasoning in order to evaluate the future impact of an LLC member's current conduct. The panel found that Carroll's relationship with Cupo and James never recovered from Carroll's demand that he be compensated in a manner that permitted him to recoup his lost investment. The Supreme Court reversed. Applied to the record of this case, the standard of subsection 3(c) did not warrant a grant of partial summary judgment expelling Carroll from IE Test. View "IE Test, LLC v. Carroll" on Justia Law