Justia Corporate Compliance Opinion Summaries

Two shareholders brought a shareholder derivative suit against the directors of an Indiana company, Biglari Holdings, that owns two restaurant chains, Western Sizzlin’ and Steak ‘n Shake, which operate some restaurants, and franchise others. They claimed that the board approved “entrenchment transactions,” intended to cement CEO Biglari’s control of the company and enrich him at the expense of other shareholders: the sale of an investment company to CEO Biglari and a stock offering. The plaintiffs characterized the board’s members as Biglari’s puppets and alleged demand futility: that it was a forgone conclusion that the board would not respond to their demands. The Seventh Circuit affirmed the district court's rejection of the claim. Given the stringency of the Indiana standard of demand futility and the lack of strong support for the plaintiffs’ claims to demonstrate that futility, the challenged transactions, individually or together, cannot be deemed so oppressive to shareholders as to create a substantial doubt that the transactions were the product of a valid exercise of business judgment by an unbiased and independent board. View "Taylor v. Biglari" on Justia Law

The Company was organized as a limited liability company in 2007; its sole managing member was another LLC, whose sole members were the Ngs, who controlled and managed the Company. Defendant was one of the Company’s lawyers. The Company’s stated purpose was to serve as an investment company making secured loans to real estate developers. The Managers actually created the Company to perpetrate “a fraudulent scheme” by which the Company transferred the money invested in it to another entity the Managers controlled. Defendant knew that the Managers intended to and did use the Company for this fraudulent purpose and, working with the Managers, helped the Company conceal the nature of its asset transfers. The Company was eventually rendered insolvent and its investors filed an involuntary bankruptcy petition. The bankruptcy trustee filed suit against Defendant, alleging tort claims based on Defendant’s involvement in the Company’s fraud. Defendant argued that the claims are barred by the in pari delicto doctrine. The court of appeal affirmed dismissal, finding that the in pari delicto applies to the trustee and rejecting an argument that the doctrine should not bar her claims because the wrongful acts of the Managers should not be imputed to the Company. View "Uecker v. Zentil" on Justia Law

Wiest, formerly a Tyco employee, claimed that Tyco unlawfully terminated his employment for reporting suspected securities fraud violations pertaining to the accounting treatment of two Tyco events, in violation of the anti-retaliation provision of the Sarbanes-Oxley Act, 18 U.S.C. 1514A. Wiest claims that for six months, he refused, as an accountant, to process payments allegedly due from Tyco that related to two Tyco employee and dealer meetings in resort settings. Tyco contends that Wiest’s involvement with the events at issue was minimal and he did not frustrate, or even inconvenience, Tyco’s management, and that ,more than eight months later, Tyco’s human resources director—who had no knowledge of, Wiest’s alleged protected activity— investigated complaints that Wiest made inappropriate sexual comments to several female Tyco employees, and that he had inappropriate sexual relationships with two subordinates, resulting in Wiest’s termination. The Third Circuit affirmed summary judgment for Tyco. Wiest failed to offer any evidence to establish that his protected activity was a contributing factor to any adverse employment action; Tyco established that it would have taken the same actions with respect to Wiest in the absence of Wiest’s accounting activity given the thoroughly documented, investigation conducted by its human resources director. View "Wiest v. Tyco Elec. Corp" on Justia Law

Plaintiffs held warrants to buy common stock issued by defendant BlueFire Ethanol Fuels, Inc. The warrants included an anti-dilution provision, requiring BlueFire to adjust the exercise price set in the warrants “to equal the consideration paid” by a subsequent investor for equity interests in BlueFire. The anti-dilution provision did not apply to certain issuances of securities, as specified in a list of five categories of exceptions. A few years after issuance of the warrants, BlueFire entered into an agreement with non-party Lincoln Park Capital Fund, LLC, creating an “equity line of credit” or a “standby equity distribution agreement.” Lincoln promised to make up to $10 million available to BlueFire to be accessed at the option of BlueFire over a set period of time. In exchange, BlueFire issued common stock and warrants to Lincoln at the time the agreement was executed, and promised to issue additional common stock in exchange for any future cash received from Lincoln. Plaintiffs sued BlueFire for breach of contract and declaratory relief when BlueFire refused to apply the warrants’ anti-dilution provision to the Lincoln agreement. Plaintiffs also sued individual defendants Arnold Klann and Christopher Scott for breach of fiduciary duty. After a bench trial, the court rejected the breach of fiduciary duty claim against Klann and Scott. But the court ruled the anti-dilution provision applied to the Lincoln transaction and that BlueFire had breached the warrants. The court also reduced the exercise price for the warrants from $2.90 per share to $0 per share, and authorized plaintiffs to immediately exercise the warrants. The court did not award monetary damages to plaintiffs. The parties appealed aspects of the judgment adverse to their respective interests. After review, the Court of Appeal agreed that a corporation’s officers did not have a fiduciary duty to warrant holders. The Court also agreed with the court’s interpretation of plaintiffs’ warrants. The anti-dilution provision applies to the Lincoln agreement and stock issuances to Lincoln resulting from that agreement. But substantial evidence did not support the court’s decision to reduce plaintiffs’ exercise price to $0. The Court therefore reversed the judgment and remanded for retrial solely on the proper remedy for BlueFire’s breach of contract. View "Speirs v. Bluefire Ethanol Fuels, Inc." on Justia Law

TriQuint Semiconductor, Inc., and its directors were defendants in two consolidated shareholder derivative suits filed in Washington State. TriQuint moved to dismiss those suits on the ground that its corporate bylaws establish Delaware as the exclusive forum for shareholder derivative suits. The trial court denied TriQuint’s motion to dismiss, and the Supreme Court allowed TriQuint’s petition for an alternative writ of mandamus. After review, the Supreme Court concluded that, as a matter of Delaware law, TriQuint’s bylaw was a valid forum-selection clause and bound its shareholders. The Court also concluded that, as a matter of Oregon law, the bylaw was enforceable. The Court issued a peremptory writ of mandamus directing the trial court to grant TriQuint’s motion to dismiss. View "Roberts v. TriQuint Semiconductor, Inc." on Justia Law

The Court of Chancery issued four opinions which were appealed to the Delaware Supreme Court. In sum, the appeal and cross-appeal in this case centered on the Chancery Court’s final judgment finding that RBC Capital Markets, LLC aided and abetted breaches of fiduciary duty by former directors of Rural/Metro Corporation ("Rural" or the "Company") in connection with the sale of the Company to an affiliate of Warburg Pincus LLC, a private equity firm. RBC raised six issues on appeal, namely: (1) whether the trial court erred by holding that the board of directors breached its duty of care under an enhanced scrutiny standard; (2) whether the trial court erred by holding that the board of directors violated its fiduciary duty of disclosure by making material misstatements and omissions in Rural’s proxy statement, dated May 26, 2011; (3) whether the trial court erred by finding that RBC aided and abetted breaches of fiduciary duty by the board of directors; (4) whether the trial court erred by finding that the board of directors’ conduct proximately caused damages; (5) whether the trial court erred in applying the Delaware Uniform Contribution Among Tortfeasors Act ("DUCATA"); and (6) whether the trial court erred in calculating damages. After careful consideration of each of RBC’s arguments on appeal, the Supreme Court found no reversible error and affirmed the "principal legal holdings" of the Court of Chancery. View "RBC Capital Markets, LLC v. Jervis" on Justia Law

Plaintiff, a stockholder in DeVry, which operates for-profit colleges and universities, filed a shareholders’ derivative suit against DeVry’s board of directors. A 2005 incentive plan authorized awards of stock options to key employees, including the CEO. The plan limited awards to 150,000 shares per employee per year. Nonetheless, the company granted Hamburger, who became its CEO in 2006, options on 184,100 shares in 2010, 170,200 in 2011, and 255,425 in 2012. DeVry, discovering its mistake, reduced each grant under the 2005 plan to 150,000 shares, but allocated Hamburger 87,910 shares available under the company’s 2003 incentive plan, which held shares that had not been allocated. Only the company’s Plan Committee, not the Compensation Committee, was authorized to grant stock options under the 2003 plan; there was no Plan Committee in 2012. The grant of 87,910 stock options was approved by the Compensation Committee, and then by the independent directors as a whole. The Seventh Circuit affirmed dismissal. The directors who approved the Compensation Committee’s recommendation were disinterested: the recommendation was a valid exercise of business judgment. Administration of the 2003 plan by the Compensation Committee, given the nonexistence of the Plan Committee, was not “a clear or intentional violation of a compensation plan,” View "Donnawell v. Hamburger" on Justia Law

Plaintiff Jeffrey Weinman was the Chapter 7 Trustee for Adam Aircraft Industries (“AAI”). Defendant Joseph Walker was an officer of AAI and served as its president and as a member of its Board of Directors. Throughout his employment, Walker had neither a written employment contract nor a severance agreement with AAI. In February 2007, the Board decided it wanted to replace Walker as both president and as a board member. Since AAI did not want Walker’s termination to disrupt its ongoing negotiations for debt financing, AAI suggested that Walker could voluntarily “resign” in lieu of termination and could also continue to support the company publicly. Subsequently, Walker agreed, and the parties executed a Memorandum of Understanding (“MOU”) outlining the terms of Walker’s separation, and they also embodied these terms in two Separation Agreements and Releases. About a year after terminating Walker, AAI declared bankruptcy. It then sued in bankruptcy court to avoid further transfers to Walker, to recover some transfers previously made to Walker, and to disallow Walker’s claim on AAI’s bankruptcy. The bankruptcy court denied AAI’s claims. The Bankruptcy Appellate Panel (“BAP”) affirmed this ruling in its entirety. AAI appealed part of the ruling, arguing that its obligations and transfers to Walker were avoidable under the Code on two alternative bases. Finding no reversible error, the Tenth Circuit affirmed the BAP's decision. View "Weinman v. Walker" on Justia Law

This case involved an appeal from a complicated transaction between a private company whose equity was wholly owned by the family of A.R. Sanchez, Jr., Sanchez Resources, LLC (the “Private Sanchez Company”), and a public company in which the Sanchez family constituted the largest stockholder bloc with some 16% of the shares and that was dependent on the Private Sanchez Company for all of its management services, Sanchez Energy Corporation (the “Sanchez Public Company”). The transaction at issue required the Sanchez Public Company to pay $78 million to: (i) help the Private Sanchez Company buy out the interests of a private equity investor; (ii) acquire an interest in certain properties with energy-producing potential from the Private Sanchez Company; (iii) facilitate the joint production of 80,000 acres of property between the Sanchez Private and Public Companies; and (iv) fund a cash payment of $14.4 million to the Private Sanchez Company. In this derivative action, the plaintiffs alleged that this transaction involved a gross overpayment by the Sanchez Public Company, which unfairly benefited the Private Sanchez Company by allowing it to use the Sanchez Public Company‟s funds to buy out their private equity partner, obtain a large cash payment for itself, and obtain a contractual right to a lucrative royalty stream that was unduly favorable to the Private Sanchez Company and thus unfairly onerous to the Sanchez Public Company. As to the latter, the plaintiffs alleged that the royalty payment was not only unfair, but was undisclosed to the Sanchez Public Company stockholders, and that it was the Sanchez family's desire to conceal the royalty obligation that led to a convoluted transaction structure. The Court of Chancery dismissed the complaint, finding that the defendants were correct in their contention that plaintiffs had not pled demand excusal under "Aronson v. Lewis," (473 A.2d 805 (1984)). "Determining whether a plaintiff has pled facts supporting an inference that a director cannot act independently of an interested director for purposes of demand excusal under "Aronson" can be difficult. And this case illustrates that." Because of that, the Supreme Court found that plaintiffs pled facts supporting an inference that a majority of the board who approved the interested transaction they challenged could not consider a demand impartially. Therefore, the Court reversed and remanded so that plaintiffs could prosecute this derivative action. View "Delaware County Employees Retirement Fund, et al. v. Sanchez, et al." on Justia Law

The plaintiffs filed a challenge in the Court of Chancery to a stock-for-stock merger between KKR & Co. L.P. ("KKR") and KKR Financial Holdings LLC ("Financial Holdings") in which KKR acquired each share of Financial Holdings's stock for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. The plaintiffs' primary argument was that the transaction was presumptively subject to the entire fairness standard of review because Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee. As a result, the plaintiffs alleged that KKR was a controlling stockholder of Financial Holdings, which was an LLC, not a corporation. The Court of Chancery held that the business judgment rule was invoked as the appropriate standard of review for a post-closing damages action when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders. For that and other reasons, the Court of Chancery dismissed plaintiffs' complaint. In this decision, the Delaware Supreme Court found that the Chancellor was correct in finding that the voluntary judgment of the disinterested stockholders to approve the merger invoked the business judgment rule standard of review and that the plaintiffs' complaint should have been dismissed. "Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests." View "Corwin, et al. v. KKR Financial Holdings LLC., et al." on Justia Law