Justia Corporate Compliance Opinion Summaries

In October 2018, a Boeing 737 MAX airliner crashed in the sea near Indonesia, killing everyone on board. In March 2019, a second 737 MAX crashed in Ethiopia, again killing everyone on board. Within days of the second crash, all 737 MAX airliners around the world were grounded. The FAA kept the planes grounded until November 2020, when it was satisfied that serious problems with the planes’ flight control systems had been corrected. The Pension Plan, a shareholder of the Boeing Company, filed a derivative suit on behalf of Boeing under the Securities Exchange Act of 1934, 15 U.S.C. 78n(a)(1), alleging that Boeing officers and board members made materially false and misleading public statements about the development and operation of the 737 MAX in Boeing’s 2017, 2018, and 2019 proxy materials.The district court dismissed the suit without addressing the merits, applying a Boeing bylaw that gives the company the right to insist that any derivative actions be filed in the Delaware Court of Chancery. The Seventh Circuit reversed. Because the federal Exchange Act gives federal courts exclusive jurisdiction over actions under it, applying the bylaw to this case would mean that the derivative action could not be heard in any forum. That result would be contrary to Delaware corporation law, which respects the non-waiver provision in Section 29(a) of the federal Exchange Act, 15 U.S.C. 78cc(a). View "Seafarers Pension Plan v. Bradway" on Justia Law

Bruce, Phillip, and Judith are siblings and co-equal general partners of the Guttman Family Limited Partnership, which owns Los Angeles County real estate. Bruce sued to dissolve the partnership, Corporations Code 15908.02(a). Phillip and Judith initiated a statutory procedure to buy out Bruce’s interest in the partnership. Court-appointed appraisers submitted valuations of the partnership’s properties. One appraiser concluded that the value of the partnership properties was $37,180,000, another appraiser established the value at $38,300,000, and the third at $39,037,000. The court agreed with Bruce that the buyout procedure did not require a consensus among the appraisers, or among two of them.Bruce, believing the appraisals undervalued the properties, dismissed his complaint without prejudice. The court then granted Phillip and Judith’s motion to vacate the dismissal. The court of appeal dismissed Bruce’s petition for review. In addition to the commencement of trial limitation on a plaintiff’s right to dismiss, a plaintiff may not dismiss an action when a defendant seeks affirmative relief in the case. Because Phillip and Judith were pursuing the affirmative relief available under the buyout provision at the time Bruce filed his request to dismiss the action, the entry of dismissal was improper. View "Guttman v. Guttman" on Justia Law

Blizzard invested in a tire pyrolysis project in Kansas and subsequently sued Schaefers. A Kansas jury returned a $3.825 million fraud judgment, which was entered in California. The California court added a judgment debtor (BKS) pursuant to the “outside reverse veil piercing” doctrine, which arises when the request for piercing comes from a third party outside the targeted business entity. The targeted entity was BKS. Schaefers owns a 50 percent interest in that LLC. Schaefers’ wife, Karin, owns the other 50 percent. Neither Karin nor BKS was a defendant in the Kansas action. The California court found that BKS is Schaefers’ alter ego.The court of appeal affirmed in part. The evidence is sufficient to support the finding that BKS is Schaefers’ alter ego. The court remanded for further proceedings so that the trial court may weigh competing equities that bear on the veil-piercing issue. Blizzard is entitled to recover the damages awarded by the Kansas judgment, but Karin may be an innocent third party who would suffer substantial harm if recovery is accomplished through the reverse veil piercing; there is no indication that she was involved in the fraud committed by Schaefers. Karin may not be responsible for debts incurred by Schaefers after their separation in 1996. View "Blizzard Energy, Inc. v. Schaefers" on Justia Law

Indeck develops, owns, and operates conventional and alternative fuel power plants. DePodesta, Indeck's vice president of business development, had overall responsibility for Indeck’s electrical generation project development efforts. Dahlstrom was director of business development. DePodesta and Dahlstrom had signed confidentiality agreements.In 2010, Dahlstrom founded HEV, a consulting firm that develops electrical power generation projects. DePodesta later became a member of HEV. In 2013, DePodesta, Dahlstrom, and HEV formed an LLC to develop natural-gas-fired, simple cycle power plants in Texas. The two subsequently copied and removed from Indeck’s premises thousands of documents and files. DePodesta resigned from Indeck on November 1, 2013, and Dahlstrom on November 4. They did not tell anyone at Indeck that they intended to pursue an opportunity with a new LLC. In 2014, Indeck filed suit, alleging breach of the confidentiality agreements and fiduciary duties,” seeking injunctive relief and disgorgement.The Illinois Supreme Court affirmed in part and reversed in part. Indeck’s confidentiality agreement was unenforceable as overbroad and Indeck failed to prove it had sustained injury based on any breach. Any profits from breaches of fiduciary duty after the defendants were speculative; there was no identifiable fund traceable to those breaches, so a constructive trust was not available. However, defendants breached their fiduciary duties during their employment and were required to disgorge their salaries. Indeck failed to prove the injury necessary for its claim of usurpation of a corporate opportunity. View "Indeck Energy Services, Inc. v. DePodesta" on Justia Law

The two equal stockholders of UIP Companies, Inc. were deadlocked and could not elect new directors. One of the stockholders, Marion Coster, filed suit in the Court of Chancery and requested appointment of a custodian for UIP. In response, the three-person UIP board of directors — composed of the other equal stockholder and board chairman, Steven Schwat, and the two other directors aligned with him— voted to issue a one-third interest in UIP stock to their fellow director, Peter Bonnell, who was also a friend of Schwat and long-time UIP employee (the “Stock Sale”). Coster filed a second action in the Court of Chancery, claiming that the board breached its fiduciary duties by approving the Stock Sale. She asked the court to cancel the Stock Sale. After consolidating the two actions, the Court of Chancery found what was apparent given the timing of the Stock Sale: the conflicted UIP board issued stock to Bonnell to dilute Coster’s UIP interest below 50%, break the stockholder deadlock for electing directors, and end the Custodian Action. Ultimately, however, the court decided not to cancel the Stock Sale. The Delaware Supreme Court reversed the Court of Chancery on the conclusive effect of its entire fairness review and remanded for the court to consider the board’s motivations and purpose for the Stock Sale. "If the board approved the Stock Sale for inequitable reasons, the Court of Chancery should have cancelled the Stock Sale. And if the board, acting in good faith, approved the Stock Sale for the 'primary purpose of thwarting' Coster’s vote to elect directors or reduce her leverage as an equal stockholder, it must 'demonstrat[e] a compelling justification for such action' to withstand judicial scrutiny." View "Coster v. UIP Companies, Inc." on Justia Law

California Senate Bill 826 requires all corporations headquartered in California to have a minimum number of females on their boards of directors. Corporations that do not comply with SB 826 may be subject to monetary penalties. The shareholders of OSI, a corporation covered by SB 826, elect members of the board of directors. One shareholder of OSI challenged the constitutionality of SB 826 on the ground that it requires shareholders to discriminate on the basis of sex when exercising their voting rights, in violation of the Fourteenth Amendment.The Ninth Circuit reversed the dismissal of the suit for lack of standing. The plaintiff plausibly alleged that SB 826 requires or encourages him to discriminate based on sex and, therefore, adequately alleged an injury-in-fact, the only Article III standing element at issue. Plaintiff’s alleged injury was also distinct from any injury to the corporation, so he could bring his own Fourteenth Amendment challenge and had prudential standing to challenge SB 826. The injury was ongoing and neither speculative nor hypothetical, and the district court could grant meaningful relief. The case was therefore ripe and not moot. View "Meland v. Weber" on Justia Law

In 1986 Deibel, Hoeg, and Steffen founded Hy-Pro Corporation. Deibel, its president, received 2,500 shares, representing 12.5% of the authorized stock. Deibel guaranteed Hy-Pro’s payment of a $100,000 debt to a bank. Within a year Deibel demanded that Hoeg leave. When Hoeg refused, Deibel quit but held onto his stock even. A state court suit settled, but the settlement was not reduced to writing. Deibel insists that under the settlement Hy-Pro would pay $15,000 and arrange with the bank to release his guarantee. Hoeg and Steffen assert that Deibel was also to surrender his shares.Almost 30 years later, Deibel filed a federal suit. HyPro was sold in 2017 for about $20 million; a 12.5% share would exceed $2.5 million. Indiana has a two-year period of limitations for such claims. The Seventh Circuit affirmed the dismissal of the suit as untimely, rejecting Deibel’s claims that he was still an investor when the firm was sold, and, if not, that a firm’s refusal to recognize him as an investor was a “continuing wrong.” When Deibel did not return his shares, Hy-Pro canceled Deibel’s stock. Deibel has not been on the company’s books as a shareholder since 1992. Deibel received multiple letters from various parties, including the IRS, notifying him of that fact; his claim accrued no later than 1998. View "Deibel v. Hoeg" on Justia Law

Through several corporations, members of the Boersen family have farmed in Michigan for several generations. After 2016's poor crop, their corporate entities could not cover their debts. One creditor, Helena, obtained a nearly 15-million-dollar judgment against the Boersen entities and family members who ran them. Much of the farm equipment was repossessed and, unable to obtain financing, the Boersens discontinued farming until 1999, when family members Stacy and Nick formed new entities, secured financing to lease the land and remaining equipment, and resumed farming. Because the original defendants could not pay their debt, Helena sued Stacy and Nick and their new companies.The Sixth Circuit affirmed summary judgment in favor of the defendants. The leases do not transfer the debtors’ assets; none of the involved entities owes any money to Helena. Stacy and Nick’s use of the family farm’s production history to obtain crop insurance does not constitute a “transfer of assets.” Neither Stacy nor Nick was an owner, manager, or shareholder of any of the Boersen entities covered by the judgment; no Boersen legacy owner or guarantor serves as an officer of or is otherwise employed by, either new company. No original Boersen defendant received anything of value from the new companies other than fair market value payments on leases. Nor was either new company used to commit a wrong against Helena. View "Helena Agri-Enterprises, LLC v. Great Lakes Grain, LLC" on Justia Law

Appellant Alex Bäcker was the co-founder and majority common stockholder of QLess, Inc. In June 2019, the Company’s board removed Alex as CEO following an internal investigation into workplace complaints. Alex eventually relented to the change and expressed support for his successor, Kevin Grauman. In the week leading up to the November 15, 2019 board meeting, the Company’s outside counsel circulated board resolutions that, among other things, would appoint Grauman to the board. Alex made a series of statements that collectively represented support for Grauman’s appointment. On the eve of the board meeting, the Company’s independent director unexpectedly resigned, giving Alex a board majority. Alex leapt into action, devising a secret counter agenda to fire Grauman and lock-in Alex’s control of the Company. Alex caught his fellow directors by surprise at the meeting, passing his counter agenda over objections and seizing control of the Company. Palisades Growth Capital II, L.P., the majority owner of the Company’s Series A preferred stock, filed a complaint in the Court of Chancery seeking to reverse Alex’s actions. Following a paper trial, the court held that, even if technically legal, the board’s actions were invalid as a matter of equity because Alex affirmatively deceived a fellow director to establish a quorum. After review of the parties briefs and the record on appeal, the Delaware Supreme Court held the Court of Chancery's finding of affirmative deception was not clearly erroneous. The Supreme Court also held that the Court of Chancery did not impose an equitable notice requirement for regular board meetings, that Appellants failed to properly raise an equitable participation defense below, and that the Court of Chancery did not exercise its equitable powers to grant relief for a de facto breach of contract claim. Accordingly, the Supreme Court affirmed the Court of Chancery’s March 26, 2020 Memorandum Opinion. View "Backer v. Palisades Growth Capital" on Justia Law

Sterling Bank purchased Damian Services. The stock purchase agreement set up a two-million-dollar escrow to resolve disputes arising after the purchase and established comprehensive rights, obligations, remedies, and procedures for resolving disputes. After the purchase, a former Damian employee called some of Damian’s clients to tell them of a billing practice that the sellers had instituted years earlier. When Sterling learned of the situation, it investigated with the help of a forensic accountant. Sterling concluded that under the sellers’ management, Damian had overcharged its clients by over one million dollars. Sterling refunded the overpayments to its current clients, then unsuccessfully demanded indemnification from the escrow, claiming that the sellers had misrepresented Damian’s liabilities and vulnerability to litigation.The district court granted the sellers summary judgment, reasoning that Sterling missed the deadline for claiming indemnification under the stock purchase agreement. The court denied the sellers’ request for statutory interest on the escrow money.The Seventh Circuit reversed. Whether Sterling’s demand for indemnification was late depends on disputed facts. Even if the demand was late, however, the agreement’s elaborate terms provide that any delay could be held against Sterling only “to the extent that [sellers] irrevocably forfeit[] rights or defenses by reason of such failure.” Undisputed facts show that the sellers have not irrevocably forfeited any claims or defenses. View "Sterling National Bank v. Block" on Justia Law