Quarterly State Compliance Review

The California Court of Appeal held that under California law a director of an insolvent corporation does not owe a fiduciary duty to the corporation's creditors. The court also declined to create such a duty, which, according to the court, would conflict with and dilute the statutory and common law duties that directors owe the corporation and its shareholders. Therefore, the only extra-contractual duty owed to a creditor is that owed under the trust fund doctrine ' which is the duty to avoid actions that divert, dissipate or unduly risk corporate assets that might otherwise be used to pay creditors. However, the court did find that the plaintiff had alleged that the defendants breached their duties under the trust fund doctrine and reversed the trial court's judgment.

Sandra Feldman is a publications and research attorney for CT Corporation and a member of this newsletter's Board of Editors. CT Corporation is part of Wolters Kluwer Corporate Legal Services (www.ctlegalsolutions.com).

This edition of the Quarterly State Compliance Review looks at some legislation of interest to corporate lawyers that went into effect between Aug. 1 and Oct. 1, including amendments to Delaware's corporation, LLC and LP laws. It also looks at some recent decisions of interest, including two from the Delaware Supreme Court.

IN THE STATE LEGISLATURES

DE Amends Its General Corporation Law, LLC Act and LP Act

Senate Bill 77, effective Aug. 1, enacted amendments to Delaware's General Corporation Law. The bill, among other things, permits a corporation that is both a nonprofit nonstock corporation and an association of professionals to have a name that does not contain a corporate indicator under certain circumstances and permits a corporation to use the word “trust” in its name under certain circumstances.

The indemnification section was amended to clarify when the right to indemnification or advancement of expenses arising under a provision of the certificate of incorporation or a bylaw can be eliminated or impaired by an amendment to the certificate of incorporation or a bylaw.

The provisions governing conversions of other entities and domestications were amended to provide that the certificates required to be filed (a certificate of incorporation and a certificate of conversion/domestication) must be filed simultaneously or provide for the same future effective date or time.

The bill also clarified that no corporation may be dissolved, merged, transferred or converted until all franchise taxes have been paid and all annual franchise tax reports have been filed.

Delaware's LLC Act and LP Act were amended by Senate Bill 76 and Senate Bill 95 respectively, effective Aug. 1. The bills provide, among other things, that the name of an LLC and an LP must be distinguishable from the name of another domestic entity of the same type and that a certificate of cancellation that is filed before the dissolution or winding up of an LLC or LP may be corrected by filing a certificate of correction.

The bills also provided that a future effective date set forth in a certificate filed under the LLC or LP act may not be later than the 180th day after filing, effective for filings made on or after Jan. 1, 2012. The provisions governing conversions of other entities and domestications were amended to provide that the certificates required to be filed must be filed simultaneously or provide for the same future effective date or time.

The bills also clarify that consents to actions without a meeting may be made by electronic transmission, and that a supermajority amendment provision of an LLC or partnership agreement only applies to provisions of the agreement that are expressly included in the agreement. In addition, the LLC act was amended to provide that, for LLCs formed on or after Jan. 1, 2012, if an LLC agreement does not provide for the manner in which it may be amended, the LLC agreement may be amended with the approval of all members.

Amendments to Business Entity Laws of Other States

In Connecticut, House Bill 6590, effective Oct. 1, amended the corporation law to authorize the board of directors to fix separate record dates for determining shareholders entitled to notice of a meeting and to vote at the meeting, and authorizes the board to allow shareholders to participate in a meeting remotely.

In Missouri, Senate Bill 366, effective Aug. 28, authorized corporations to enter into conversions. In Nevada, Senate Bill 405, effective Oct. 1, amended the provisions of the corporation law dealing with, among other things, restrictions on mergers between certain public corporations and acquiring stockholders, electronic notices and communications, stock transfers, proxies, dissolution, indemnification, and dissenters' rights.

In North Carolina, Senate Bill 457, effective Oct. 1, amended the provisions of the corporation law governing appraisal rights. And in Texas, Senate Bill 748, effective Sept. 1, amended the provisions of the Business Organizations Code dealing with, among other things, plans of merger, exchange and conversion, dissenters' rights, appointment of receivers, conflict of interest transactions, limited partner voting, charging orders for partnership interests, and the effect of death or divorce on LLC interests.

IN THE STATE COURTS

DE Supreme Court Holds That Corporations Waived Deadline for Members to Elect Merger Consideration

In Amirsaleh v. Board of Trade of the City of New York, Inc., No. 75, 2010 (Del. Supr.), decided Aug. 16, 2011, the plaintiff was a member of a New York corporation that merged into a Delaware corporation. The merger agreement allowed the members to choose their consideration as long as they submitted an election form before the deadline stated in the agreement. The plaintiff and other members failed to submit their forms by the deadline. The defendant corporations decided to waive the deadline. The plaintiff and other members then submitted their election forms. The defendants, in an ad hoc manner and without notifying the members, imposed a new deadline and decided that the plaintiff's form was untimely. As a result, the plaintiff, who was electing to receive stock in the survivor, received cash instead.

The plaintiff filed a suit in the Delaware Chancery Court, alleging a breach of the implied covenant of good faith and fair dealing. The Chancery Court ruled in the defendants' favor, and the plaintiff appealed.

The Delaware Supreme Court reversed. However, its ruling was not based on the implied covenant of good faith and fair dealing, but on the waiver doctrine. The court found that the defendants waived the initial deadline. The court then noted that to retract a waiver the retracting party must give reasonable notice to the non-waiving party before that party suffers prejudice. Here, the defendants never gave the plaintiff reasonable notice of the new deadline. Instead they engaged in an ad hoc, sub-optimal process to establish a new deadline retroactively that resulted in the plaintiff being prejudiced. Therefore, the defendants failed to retract their waiver, and the election form submitted by the plaintiff was timely and had to be honored.

DE Supreme Court Holds That Indemnification Claim Was Timely Under Laches Analysis

In InterActiveCorp. v. O'Brien, No. 629, 2010 (Del. Supr.), decided Aug. 11, 2011, the plaintiff, a corporate officer, filed suit in Florida seeking indemnification of his litigation expenses from his corporate employer. The trial court found for the employer, but the appellate court reversed. The employer then filed for bankruptcy, and the plaintiff filed an action in the Delaware Chancery Court against the defendant, the employer's parent corporation, which had assumed the employer's obligation to indemnify the plaintiff. The defendant moved for summary judgment on the grounds that the suit was barred by the statute of limitations. The Chancery Court held that it was not required to apply the statute of limitations, that it could instead apply a laches analysis, and that under that analysis the plaintiff's suit was timely. The defendant appealed.

The Delaware Supreme Court affirmed. The court acknowledged that under ordinary circumstances a suit in equity will not be stayed for laches after the time fixed by the analogous statute of limitations at law ' which in this case would be three years and would bar the plaintiff's suit. However, the court agreed with the lower court that this was one of the few cases where the statute of limitations should not be applied because of extraordinary circumstances.

The court first pointed out that the plaintiff promptly sought indemnification and advancement in Florida, and that he could not move against the parent while the decision denying his request was on appeal. The court then pointed out that the employer's bankruptcy was unexpected and that the plaintiff filed his action in Delaware shortly after the employer's bankruptcy plan was approved. Thus, the plaintiff's delay was not unreasonable. Furthermore, considering the parent controlled the litigation from the outset and was the party ultimately responsible for any award in the plaintiff's favor, the parent was not prejudiced.

CA Appellate Court Holds That Directors of Insolvent Corporations Do Not
Owe Fiduciary Duties to Creditors

In Henry v. Edgell, G-043639 (Cal. App., 4 Dist.), decided Aug. 23, 2011, a creditor of a corporation sued the corporation's directors alleging they breached their fiduciary duties to him by failing to prevent the misappropriation of corporate assets and by acquiring a major asset for themselves. The trial court sustained demurrers in favor of the defendants, and the plaintiff appealed.

The California Court of Appeal held that under California law a director of an insolvent corporation does not owe a fiduciary duty to the corporation's creditors. The court also declined to create such a duty, which, according to the court, would conflict with and dilute the statutory and common law duties that directors owe the corporation and its shareholders. Therefore, the only extra-contractual duty owed to a creditor is that owed under the trust fund doctrine ' which is the duty to avoid actions that divert, dissipate or unduly risk corporate assets that might otherwise be used to pay creditors. However, the court did find that the plaintiff had alleged that the defendants breached their duties under the trust fund doctrine and reversed the trial court's judgment.

Sandra Feldman is a publications and research attorney for CT Corporation and a member of this newsletter's Board of Editors. CT Corporation is part of Wolters Kluwer Corporate Legal Services (www.ctlegalsolutions.com).