Justia Corporate Compliance Opinion Summaries

Articles Posted in Commercial Law
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1st Century was a Delaware corporation headquartered in Los Angeles; its shares were publicly traded on the NASDAQ. 1st Century and Midland announced merger plans. Midland was to acquire 1st Century for $11.22 in cash per share, a 36.3 percent premium over 1st Century’s closing share price on March 10, 2016. The merger was subject to approval by the holders of a majority of 1st Century’s outstanding shares. A shareholder vote on the proposed merger was scheduled. 1st Century’s certificate of incorporation authorized its directors “to adopt, alter, amend or repeal” the company’s bylaws, “subject to the power of the stockholders of the Corporation to alter or repeal any Bylaws whether adopted by them or otherwise.” 1st Century’s board of directors exercised that power when it approved the merger agreement, adding a forum selection bylaw providing that, absent the corporation’s written consent, Delaware is “the sole and exclusive forum for” intra-corporate disputes, including any action asserting a breach of fiduciary duty claim. The trial court stayed a putative shareholder class action, concluding that the bylaw’s forum selection clause was enforceable. The court of appeal affirmed, holding that a forum selection bylaw adopted by a Delaware corporation without stockholder consent is enforceable in California. View "Drulias v. 1st Century Bancshares, Inc." on Justia Law

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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

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In 1998 IGF bought Continental’s crop-insurance business at a price to be determined at either side’s option by the exercise of a put or call. In 2001 Continental exercised its put option; under the contractual formula, IGF owed Continental $25.4 million. Around that same time, IGF sold its business to Acceptance for $40 million. The Symons, who controlled IGF, structured the purchase price: $16.5 million to IGF; $9 million to IGF's parent companies Symons International and Goran in exchange for noncompetition agreements; and $15 million to Granite, an affiliated Symons-controlled company, for a reinsurance treaty. Continental, still unpaid, sued for breach of contract and fraudulent transfer. The court found for Continental and pierced the corporate veil to impose liability on the controlling companies and individuals. The Seventh Circuit affirmed, finding Symons International liable for breach of the 1998 sale agreement; Symons International, Goran, Granite, and the Symons liable as transferees under the Indiana Uniform False Transfer Act; and the Symons liable under an alter-ego theory. The Symons businesses observed corporate formalities only in their most basic sense. The noncompetes only made sense as a fraudulent diversion of the purchase money, not as legitimate protection from competition. The reinsurance treaty. which was suggested bySymons and outside industry norms, was unjustified and overpriced. View "Cont'l Cas. Co. v. Symons" on Justia Law

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Corporate citizens of Delaware, Nebraska, and Illinois, sued Americold, a “real estate investment trust” organized under Maryland law, in a Kansas court. Americold removed the suit based on diversity jurisdiction, 28 U.S.C. 1332(a)(1), 1441(b). The federal court accepted jurisdiction and ruled in Americold’s favor. The Tenth Circuit held that the district court lacked jurisdiction. The Supreme Court affirmed. For purposes of diversity jurisdiction, Americold’s citizenship is based on the citizenship of its members, which include its shareholders. Historically, the relevant citizens for jurisdictional purposes in a suit involving a “mere legal entity” were that entity’s “members,” or the “real persons who come into court” in the entity’s name. Except for that limited exception of jurisdictional citizenship for corporations, diversity jurisdiction in a suit by or against the entity depends on the citizenship of all its members, including shareholders. The Court rejected an argument that anything called a “trust” possesses the citizenship of its trustees alone; Americold confused the traditional trust with the variety of unincorporated entities that many states have given the “trust” label. Under Maryland law, the real estate investment trust at issue is treated as a “separate legal entity” that can sue or be sued. View "Americold Realty Trust v. ConAgra Foods, Inc." on Justia Law

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Carhart and Halaska own CHI. CHI terminated its sales agent, MRO, which filed a federal suit for breach of contract. Carhart bought MRO’s claim for $150,000 and became the plaintiff in a suit against a company of which he was a half owner. Halaska then sued Carhart in Wisconsin state court for breach of fiduciary duties to CHI and Halaska by becoming the plaintiff and by writing checks on CHI bank accounts without approval, depositing payments owed CHI into Carhart’s own account, and withholding accounting and other financial information from Halaska. A receiver was appointed, informed the federal court that CHI had no assets out of which to pay a lawyer, and consented to entry of a $242,000 default judgment (the amount sought by Carhart), giving Carhart a potential profit of $92,000 on his purchase of MRO’s claim. In Carhart’s suit to execute that judgment, CHI’s only asset was its Wisconsin suit against Carhart. The court ordered the sale of CHI’s lawsuit at public auction; Carhart, the only bidder, bought it for $10,000, ending all possibility that CHI could proceed against him for his alleged plundering of the company. The Seventh Circuit reversed. Auctioning off the lawsuit placed Carhart ahead of CHI’s other creditors. Carhart was not a purchaser in good faith. No valid interest is impaired by rescinding the sale, enabling CHI to prosecute its suit against Carhart. View "Carhart v. Carhart-Halaska Int'l, LLC" on Justia Law

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Husband and wife acquired a 25 percent interest in the LLC. Hartley served as president and managing member. A judgment dissolving the marriage awarded wife one-half of the LLC share. Husband's other obligations to wife were secured by his LLC share. Wife did not file a UCC Financing Statement, but gave Hartley and other LLC members written notice. Amendments to the LLC’s records and its tax returns showed her interest. Husband defaulted on his obligations to wife. Hartley loaned husband $200,000 from his pension plan, secured by the same membership share pledged to wife. Hartley did not disclose the loan or his security interest to wife. Wife notified Hartley that she intended to take the LLC share and sued to foreclose "judicial liens" created by the dissolution judgment. Hartley determined that she had not filed a financing statement and filed his own. A court ordered husbandto transfer his share to wife. He complied. Husband failed to repay the Hartley loan; the pension plan published "Notice of Disposition" announcing sale of husband's LLC interest to satisfy the debt. The trial court declared that wife has a 25 percent membership interest, not encumbered by the Hartley claims. The court of appeal affirmed. Where a perfected security interest is created by breaching a fiduciary duty owed to another, equitable principles may give priority to an earlier unperfected security interest. View "Feresi v. The Livery, LLC" on Justia Law

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Brothers Patrick and Thomas each owned one‐third of the stock of Commercial Light, a Chicago electrical contractor. Between 1982 and the 2008 sale of the company, Thomas was the CEO, board chairman, and president. The other officers were the company’s treasurer, and its executive vice‐president. The board of directors had only two members: Thomas and a lawyer. Patrick took no part in the company’s management. Patrick sued, claiming that when Morris became executive vice‐president in 1992, he, with Thomas’s approval, started jacking up the salaries and bonuses paid so that the compensation of the three officers soared, totaling $22 million between 1993 and 2000, and that the lawyer on the board rubber‐stamped Thomas’s compensation decisions. The Seventh Circuit affirmed a jury verdict finding breach of fiduciary duty. The jury did not have to find that the compensation was excessive in order to find a breach of fiduciary duty by concealment. Illinois allows as a remedy for breach of fiduciary duty a forfeiture of all the fiduciary’s earnings during the period of breach. The court speculated on why the highly-educated Patrick did not discover the concealment until several years after the sale, but noted that the appeal only concerned jury instructions. View "Halperin v. Halperin" on Justia Law

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Rahman filed a securities class action against KB, an importer of infant furniture and products, and individuals, alleging violation of Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 and (2) and Section 20(a) of the Exchange Act. The complaint alleged that defendants misled investors by artificially inflating KB’s stock price by issuing deceptive public financial reports and press releases dealing with compliance with customs laws and overall financial performance. A second amended complaint specified failure to disclose product recalls, safety violations, and illegal staffing practices. The district court dismissed for failure to satisfy the heightened scienter pleading standard required by the Private Securities Litigation Reform Act, 15 U.S.C. 78u-4(b)(2). The Third Circuit affirmed. View "Rahman v. Kid Brands, Inc." on Justia Law

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Baxter’s Colleague Infusion Pump, an electronic device used to deliver intravenous fluids to patients, was known to have a range of defects. The FDA sent Baxter warning letters. Baxter’s response was not satisfactory. In 2005 the FDA sought forfeiture of all Baxter‐owned Pumps. In 2006, Baxter entered into a Consent Decree to stop manufacturing and distributing all models of the Pump within the U.S., and committed to bringing the approximately 200,000 Pumps in the hands of health care professionals into compliance with the FDA Act. Baxter devoted significant resources to fixing the Pumps, but the FDA was not satisfied and ordered a product recall. In a derivative suit, plaintiffs alleged that that Baxter’s directors and officers breached fiduciary duties by consciously disregarding their responsibility to bring about compliance with the Consent Decree, causing Baxter to lose more than $550 million. Plaintiffs did not first ask Baxter’s board of directors to pursue those claims, but alleged futility. The district court dismissed, finding that Westmoreland failed adequately to plead demand futility, as required by FRCP 23.1(b)(3) and Delaware substantive law. The Seventh Circuit reversed, stating that particularized facts furnished by plaintiffs cast a reasonable doubt that the defendants’ conduct was the product of a valid exercise of business judgment. View "Westmoreland Cnty. Emps. Retirement Sys. v. Parkinson" on Justia Law

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Polar Holding was sole shareholder of PMC, a company engaged in the petroleum-additive business. PMC was in default on a loan for which it had pledged valuable intellectual property as collateral, and Polar Holding was in the midst of an internal dispute between members of its board of directors regarding business strategy for PMC. One of the directors, Socia, formed a competing company, Petroleum, for the purpose of acquiring PMC’s promissory note and collateral from the holder of PMC’s loan. Petroleum brought suit against Woodward, an escrow agent in possession of PMC’s collateral, alleging that PMC was in default on the payment of its promissory note. Polar Holding and PMC intervened and filed counterclaims against Petroleum and a third-party complaint against additional parties, including Socia. Polar Holding and PMC allleged breach of fiduciary duty, civil conspiracy, and tortious interference. After PMC filed for bankruptcy, its claims became the property of the bankruptcy trustee. Polar Holding’s claims were later dismissed. The Sixth Circuit affirmed dismissal of a tortious interference claim as addressed by the district court, but reversed dismissal of a breach-of-fiduciary-duty claim against Socia and a civil-conspiracy claim against individual third-party defendants.View "Petroleum Enhancer, L.L.C. v. Woodward" on Justia Law