Justia Corporate Compliance Opinion Summaries

Petitioner Brian Menezes served as the chief financial officer and interim chief executive officer of Safety Components International, Incorporated (SCI), from 1999 until 2006. SCI was a publicly traded Delaware company with its headquarters and principal place of business located in Greenville, South Carolina. In June 2006, SCI terminated Petitioner. Petitioner sued SCI, alleging, among other things, breach of contract and violation of the South Carolina Payment of Wages Act. A short time after his termination, Petitioner exercised his stock options and became an SCI shareholder. The SCI board of directors entered into merger negotiations with the former International Textile Group (FITG). WL Ross & Company, LLC (Respondents), controlled both SCI and FITG. The SCI Board publicly announced the terms of the merger on August 30, 2006, with the filing of a Form 8-K with the Securities and Exchange Commission (SEC). On September 1, 2006, the SCI Board filed a Joint Proxy Statement/Prospectus (Form S-4) with the SEC. It was clear from the Form S-4, that due to Respondent's ownership role in SCI and FITG, the planned procedures at the 2006 Annual Meeting were a formality. Petitioner argued that Respondents breached their fiduciary duty to SCI's shareholders by approving merger terms which were unfair to SCI shareholders, failing to conduct due diligence regarding the financial condition of FITG, and failing to protect SCI's minority shareholders. On appeal to the Supreme Court, Petitioner argued that the court of appeals erred in its analysis of when a claim for breach of fiduciary duty accrued under Delaware law. The Supreme Court disagreed: "The court of appeals performed a knowledgeable and perceptive analysis of the instant case. However, our review of Delaware law leads us to a different conclusion regarding the efficacy of Petitioner's claim. Thus, we affirm the court of appeals' decision in part, reverse in part, and remand for further proceedings consistent with this opinion." View "Menezes v. WL Ross & Company" on Justia Law

BDI elected under I.R.C. 1362(a) to be treated as an S-corporation, not subject to federal taxation because its profits and losses passed through to Barden, its sole shareholder. MSC owns the Majestic Star Casino and Hotel. BDI acquired MSC in 2005. BDI elected to treat MSC as a QSub (I.R.C. 1361(b)(3)(B), not as a separate tax entity. MSC, therefore, paid no federal taxes. In 2009, MSC and its affiliates filed voluntary bankruptcy petitions. Barden and BDI were not debtors. After the petition, Barden caused revocation of BDI’s status as an S-corporation; MSC’s QSub status automatically terminated because it was no longer wholly owned by an S-corp. Neither BDI nor Barden sought authorization from the debtors or from the Bankruptcy Court. MSC allegedly was unaware that it had a new obligation to pay income taxes. As of first date federal taxes would have been due, the debtors had paid no federal income taxes. The Bankruptcy Court permitted conversion of MSC to a limited liability company, so that MSC would no longer qualify for QSub status, even if the Revocation had not occurred. The debtors sought to avoid the Revocation, which, they alleged, caused an unlawful post-petition transfer of property. The Bankruptcy Court granted summary judgment to the debtors. The Third Circuit vacated and directed that the petition be dismissed for lack of jurisdiction. View "In Re:Majestic Star Casino LLC" on Justia Law

Allen Davis exercised an option to purchase additional shares in CNG, a closely-held corporation but did not report the option as income on his federal income tax return. On appeal, Davis and CNG taxpayers challenged their respective deficiency notices in the Tax Court. The Tax Court determined that Davis should have included the value of the shares he received from the option's exercise in his 2004 gross income and sustained the Commissioner's deficiency notice. The Tax Court upheld the CNG taxpayers' deductions. Because the court held that CNG granted Davis the option in connection with the performance of services and that he should have included the value of the shares he received as ordinary income under 26 U.S.C. 83(a), the court also upheld CNG taxpayers' deductions, which were proper under section 83(h). Accordingly, the court affirmed the judgment of the Tax Court. View "Davis v. Commissioner of IRS" on Justia Law

The Kepleys owned 30% of ATA’s outstanding capital stock. Lanz bought one share of Series A Convertible Preferred Stock in the corporation and a right to purchase common stock. At that time, Lanz, ATA, and its shareholders entered into an agreement, prohibiting sale of restricted shares (including Lanz’s share) to ATA’s competitors. In 2010, the Kepleys learned that Lanz sought to sell his share and purchase option to Crimson, an ATA competitor, for $2,799,000. The Kepleys sued, contending that Crimson’s president told them that they could not afford the Lanz shares or litigation and that Crimson would “shut it down or squeeze them out.” The Kepleys sold their shares to Crimson. Lanz did not complete the sale of his stock and remained a shareholder in ATA, 30 percent of which Crimson then owned. The Kepleys sought the difference between the sale price and the fair market value of the shares. The district court dismissed, finding that the Kepleys lacked standing because their alleged injury amounted to diminution in stock value, suffered by the corporation, and only derivatively shared by the Kepleys. The Sixth Circuit reversed, holding that the Kepleys, who are no longer shareholders and cannot pursue derivative claims, have standing for a direct suit. View "Kepley v. Lanz" on Justia Law

The bankruptcy trustee of Northlake, a Georgia corporation, filed suit against defendant, a shareholder of Northlake, alleging that a 2006 Transfer was fraudulent. The facts raised in the complaint and its exhibits, taken as true, were sufficient to conclude that Northlake's benefits under the Shareholders Agreement were reasonably equivalent exchange for the 2006 Transfer. Because the complaint contained no allegations indicating why these benefits did not constitute a reasonably equivalent exchange for the 2006 Transfer, the court had no ground to conclude that they did not. Accordingly, the court affirmed the judgment of the district court. View "Crumpton v. Stephen" on Justia Law

Fitness Holdings, the debtor in this bankruptcy case, was a home fitness corporation. At issue was whether debtor's pre-bankruptcy transfer of funds to its sole shareholder, in repayment of a purported loan, could be a constructively fraudulent transfer under 11 U.S.C. 548(a)(1)(B). The court held that a court has the authority to determine whether a transaction created a debt if it created a right to payment under state law. Because the district court concluded that it lacked authority to make this determination, the court vacated the decision and remanded for further proceedings. View "In re: Fitness Holdings Int'l" on Justia Law

In the 1960s, the founder’s sons (plaintiff and his brothers) joined the business, later incorporated as MBP. The business grew to have annual sales of $60 million. Plaintiff served as vice-president, secretary, and a member of the board of directors, and was a shareholder. Plaintiff had a “spiritual awakening” in 1995. He claims that the change resulted in antagonism toward him. Plaintiff delivered a eulogy at his father’s 2009 funeral, which upset family members. Days later, plaintiff received notice of termination of his employment and that various benefits would cease. The letter explained that “[y]our share of any draws from the corporation or other entities will continue to be distributed to you.” Plaintiff continued on the board of directors until August, 2009, when the shareholders did not re-elect him. Plaintiff filed charges of religious discrimination under Title VII of the Civil Rights Act of 1964, 42 U.S.C. 2000e-2(a)(1) and of hostile work environment. The district court dismissed, finding that he was not an employee under Title VII and did not establish existence of a hostile work environment. The Third Circuit affirmed, stating that it was clear that plaintiff was entitled to participate in development and governance of the business. View "Mariotti. v. Mariotti Bldg. Prods., Inc." on Justia Law

Indiana Boxcar, a holding company that owns several railroads, petitioned for review of the Board's determination that Indiana Boxcar was an "employer" for purposes of the Railroad Retirement Act and the Railroad Unemployment Insurance Act, 45 U.S.C. 231, 351. To be an employer under those two Acts, a company such as Indiana Boxcar must be "under common control" with a railroad. Before this case, the Board repeatedly held that parent corporations like Indiana Boxcar were not under common control with their railroad subsidiaries. Under Board precedent, the term "common control" did not usually apply to two companies in a parent-subsidiary relationship. Here, however, the Board did not adhere to that precedent and did not reasonably explain and justify its deviation from its precedent. Therefore, the court held that the Board's decision was arbitrary and capricious under the Administrative Procedure Act, 5 U.S.C. 706(2)(A). Accordingly, the court vacated and remanded to the Board. View "Indiana Boxcar Corp. v. RRRB" on Justia Law

Appellants challenged the IRS's deficiency finding, as well as an accuracy-related penalty. On appeal, appellants argued that the Tax Court misunderstood relevant law when it affirmed the IRS's calculation of their remaining basis in their S corporation. They also challenged the factual basis for the Tax Court's decisions affirming the Service's rejection of their over-reporting claim and upholding its imposition of the penalty. The court rejected defendant's first challenge, concluding that a shareholder's basis was decreased "for any period" by the amount of that shareholder's pro rata share of the corporation's losses, and a shareholder incurred previously unabsorbed losses in the first year the shareholder had adequate basis to do so. In regards to the over-reporting claim, the court held that the Tax Court made no clear error when it upheld the IRS's determination not to reduce the sole proprietorship's income. Consequently, there was no dispute that appellants' 2003 tax return understated their taxes by an amount that qualified as substantial. Accordingly, the court affirmed the judgment. View "Barnes, et al v. Commissioner, IRS" on Justia Law

The Securities and Exchange Commission filed a civil enforcement action against 12 defendants, alleging that they violated registration, disclosure, and anti-fraud provisions of federal securities law, in connection with a “reverse merger” that involved creation of a shell company for the purpose of OTC trading, followed my merger of a private company into the shell, with an exchange of stock. A reverse merger enables a private company to access public markets without undertaking the expensive process of an initial public offering. One of the defendants, Tsai, has formed more than 100 shell companies.The district court granted the SEC partial summary judgment and granted permanent injunctions against the defendants. Tsai appealed. The Sixth Circuit affirmed entry of the injunction. Tsai’s failure to challenge findings with respect to his industry experience and education means the court did not abuse its discretion in finding he had at least some degree of scienter. View "Secs. & Exch. Comm'n v. Sierra Brokerage Servs, Inc." on Justia Law