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									January 2010                                                                                                   Volume 10, Issue 1




                           Delaware Corporate and Alternative Entity Law Update



Special points of
                          No Threat of Litigation, No Advancement of Expenses. No Kidding.
interest:
                          In Duthie v. CorSolutions             o r n n o o net e
                                                                  m s t i
                                                               t e’ i et nt udr k           a      claims were resolved in arbi-

 Advancement of          Medical, Inc., 2009 WL               a clinical and financial audit of   tration, and Matria represented
  Expenses                1743650 (Del. Ch. June 16,             oS l i s d es aae
                                                                       uo        s
                                                               C ro t n’ i aem ng-                 to the Chancery Court that it
                          2009), the Chancery Court            ment programs. As part of a         had no intentions of pursuing

 Fiduciary Standards
                          held that a provision in a cor-      defensive strategy, the CEO         further claims against the offi-
 Short-form Merger
                               i        ic e
                            oao’ eti t f n r
                          prt nscrf a o i o-            c      and COO asserted affirmative        cr B cue t of es
                                                                                                    es  . eas h fcr    e i ’
                          poration requiring advance-          claims for defamation, tortious     claims against Matria were no
 Material Adverse
                         ment of expenses in defense of       interference with economic            n          r
                                                                                                   l gr“ d etrsos t
                                                                                                    o e a i c epne o              ,
  Effects                 litigation no longer applied         advantage, and ERISA. Cor-          or negation of, any claims
                          after no further threat of litiga-     o t n’ eti t f n r
                                                                   uo          ic e
                                                               S l i s crf a o i o-        c        gi t h , h hney
                                                                                                        n     e
                                                                                                   aa s t m ” t C acr e

 Liquidation             tion against the officers ex-        poration required the advance-      Court held that the claims
  Preferences             isted. This case arose out of        ment of expenses incurred by        were solely offensive and were
                              ta el cr’ 05 c
                               r       t
                          Ma i H ahae 20 a-    s               its officers and directors in       therefore not eligible for ad-

 Duty of Good Faith      quisition of CorSolutions.           defense of litigation, and the      vancement.
                          Following the acquisition,           Chancery Court had held in a

 Legislative Updates     Matria sued the former CEO           2008 decision that the officers
                          and COO of CorSolutions              were entitled to mandatory
                          (both of whom were also di-          advancement of litigation ex-
                          rectors) for fraud and breach        penses in asserting their af-
Inside this issue:        of contract, alleging failure to     firmative claims. Following             Link to Court Opinion:
                          disclose a CorSolutions cus-         the 2008 decision, the fraud                  Click Here

Gantler v. Stephens   2

Berger v. Pubco       2   Accused of Breaching Fiduciary Duty, Law Firm Receives Advancement of
Corp.                     Expenses from Accuser
Hexion Specialty      2   In Jackson Walker L.L.P. v.          holders reached an agreement        on behalf of Spira in relations
Chemicals Inc. v.         Spira Footwear, Inc., 2008           that resulted in a change of        with third parties, it was an
Huntsman Corp.            WL 2487256 (Del. Ch. June            control of Spira. Afterwards,        aet n a n td o
                                                                                                          ”
                                                                                                   “gn ad w s etl t       ie
                          23, 2008), the Chancery Court        new management terminated           advancement of its litigation
In re: Trados Incor- 3    held that outside litigation         the law firm and filed an ac-       expenses. The court distin-
porated Shareholder
                           one w s n aet l i
                          cusl a a “gn eg        ” i-          tion against the firm for           guished Fasciana v. Electronic
Litigation
                          ble for advancement of ex-           breach of fiduciary duties and      Data Systems Corp., 829 A.2d
Lyondell Chemical     3   penses under 8 Del.C. §145               i           r s ic e
                                                                 el ec. p a eti t
                                                               ng gne S i ’ crf a                  160 (Del. Ch. 2003), which
Company v. Ryan                  e
                           n h o pn’ eti t
                          ad t cm ayscrf a        ic e         of incorporation and bylaws         held that counsel engaged in
                          of incorporation and bylaws.         both provided for mandatory         corporate advisory work was
Changes to the Dela- 4    A law firm had acted as out-           dacm n o aonys et
                                                               avne et f t re’ f s         e       not an agent.
ware GCL                  side litigation counsel for            n     xess o
                                                               ad epne fr S i ’         pars
                          Spira Footwear in a Texas            “i c r of ese p ye
                                                                 d et s fcr m l es
                                                                  r o, i ,              o                          Link to Court
Changes to Dela-    4
                          action arising out of a stock-       ad aet” T e C acr
                                                                 n gn .  s      h hney                               Opinion:
ware General Corpo-
ration and Alterna-       holder contest for control of        Court held that because the                          Click Here
tive Entity Laws          Spira. The competing stock-          law firm had the power to act
Page 2



                                  Officers and Directors Held to the Same Fiduciary Standard
                                  Gantler v. Stephens, 965 A.2d       fiduciary duty claims against       the proposal without discus-
                                  695 (Del. 2009) involved alle-      the officers. The Supreme           sion, were material, stating
                                  gations that the directors and      Court directly held, apparently     that without such representa-
                                  officers of First Niles Finan-      for the first time, that officers   tion, a shareholder might have
                                  cial breached their fiduciary       of Delaware corporations owe        evaluated the reclassification
                                  duties by rejecting an opportu-     the same fiduciary duties of        of shares more skeptically.
                                  nity to sell First Niles in favor   care and loyalty as directors       Finally, the Court rejected the
                                  of a reclassification of the        owe. In so doing, the Su-           defense of stockholder ratifica-
                                   o pn’ sae. i t is
                                  cm ays hrs Fr Nl         s e        preme Court noted that 6            tion of the reclassification of
                                  had received three bids to pur-     Del.C. § 102(b)(7) does not         shares, holding that ratifica-
                                  chase the company, and cer-         authorize a provision in the        tion is limited to (i) circum-
                                  tain officers had failed to in-     certificate of incorporation        stances whereas a fully in-
                                  form the board of directors of      exculpating officers        from    formed vote approves action
                                  failures by the company to          monetary liability for a breach     that does not require stock-
                                  comply with certain due dili-       of their duty of care. The          holder approval to become
                                  gence requests, which failure       Court also held that statements     effective, and (ii) director ac-
     Link to Court Opinion:       ultimately resulted in a with-      in proxy materials concerning       tions and conduct that the
              Click Here          drawal of a bid. The Dela-            e
                                                                       h or’ crf ” os -
                                                                      t bads“ae l cni      u         d    stockholders are specifically
                                  ware Supreme Court reversed         eration and deliberation of a       asked to approve.
                                    hney ors i i a o’ s s
                                  C acr C ut d m s l f                third-party offer, when in fact
                                   h hrhl r rah f
                                    e
                                  t saeo e’ bec od s                  the board had voted to reject


                                  Minority Shareholders Involuntarily Cashed Out in Merger
                                  Berger v. Pubco Corp., 976          Corporation Law governing            h o r ors i i s f
                                                                                                            e w
                                                                                                          t l e cut f d g o ’ nn
                                  A.2d 132 (Del. 2009) involved       stockholder appraisal rights.       breach of the fiduciary duty of
                                  minority stockholders involun-      In a class action by minority       disclosure, the Delaware Su-
                                  tarily cashed out in a short-       stockholders, the Chancery          preme Court held that the
                                  form merger. The case in-           Court held that such stock-         Chancery Court had erred in
                                  volved a short-form merger          holders were entitled to a          fashioning a remedy that in-
                                  where the notice of merger (i)      quasi-appraisal     proceeding,      l e ot ” n srw
                                                                                                            u           -i
                                                                                                          c dd “p n ad eco
                                  provided no significant detail      including supplemental disclo-      requirements. The Court rea-
                                  of the plans, prospects or op-      sures and requirements that                             ot t p
                                                                                                          soned that the “p u a-  -o ”
         Link to Court Opinion:   erations of the company, and        the minority stockholders both      proach is less burdensome to
              Click Here          (ii) was accompanied by an          opt into the class and escrow a     the stockholders and benefits
                                  outdated version of Section         portion of the merger pro-          the stockholders by reducing
                                  262 of the Delaware General         ceeds. While agreeing with          the risk of forfeiture.


                                   ei s ae f ue’ e os
                                     o            s
                                  ASr u C s o B yr R m re
                                  In Hexion Specialty Chemi-          Huntsman.       There was no        Hexion's performance. The
                                  cals, Inc. v. Huntsman Corp.,         f ac g u rv i
                                                                         n n
                                                                      “i ni ot poio,a ”      sn s         Court held that Hexion had
                                  965 A.2d 715 (Del.        Ch.       is often typical. After the deal    breached the agreement by
                                  2008) the Delaware Chancery         no longer seemed attractive to      scuttling its own financing and
                                  Court specifically enforced a       Hexion, it concluded that the       by not acting in good faith.
                                  $10.4 billion merger agree-         combined entity after the ac-       The Hexion decision contains
                                  ment, holding that the acquir-      quisition would be insolvent        a detailed discussion of
                                  ing company had intentionally       and, that as a consequence,         MAEs.
                                  breached numerous covenants         financing would be unavailable
                                  under the contract. In 2007,        and that a Material Adverse
         Link to Court Opinion:   Hexion had agreed to stringent        f c (MA ” hd h e e
                                                                          e
                                                                      Ef t“ E ) a t rfr        e o
              Click Here          terms for the purchase of           occurred, effectively excusing
                                                                                                                                   Page 3
V o lu me 1 0 , I ssu e 1

Divergent Stockholder Interests Lead to Class Action
In re: Trados Incorporated        cents per share. In denying a        equally with the common.
Shareholder Litigation, 2009      motion to dismiss, the Dela-         The Court remarked that the
WL 2225958 (Del. Ch. July         ware Chancery Court held that        common stockholders would
24, 2009) was a class action      the interests of the preferred       have been no worse off had
suit brought by a former          and common shareholders              merger not occurred, but
shareholder of Trados. The        diverged with respect to the         noted that it would not neces-
complaint alleged breaches of     decision of whether to pursue        sarily be a breach of fiduciary
fiduciary duties arising out of   the merger, and that plaintiffs        u fr bad o prv a
                                                                           y
                                                                       dt “o a or t apoe
a $60 million purchase by         had pled sufficient facts to         transaction that, as a result of
merger of Trados by SDL,          permit an inference that a ma-       liquidation preferences, does
plc. Of the purchase price,       jority of the board had im-          not provide any consideration
preferred stockholders re-        properly favored the interests        o h o m n t ko es
                                                                            e
                                                                       t t cm o s chl r ” o      d .
ceived $52 million, executive     of the preferred shareholders.       Finally, the Court noted that
officers received $8 million      The Court also held that al-           [ ]i ts r h a n -
                                                                              l        u a
                                                                       “w h eii t et t ni i         d
pursuant to a recently adopted     h g eeay h or’
                                    o
                                  t uh gnrl t badsl e                  vidual stockholder that is not a
                                                                                                          Link to Court Opinion:
compensation plan, and com-       duty is to prefer the interests      controlling stockholder can
mon stockholders received         of the common stockholders,          generally vote in its individual        Click Here
nothing. A majority of the        directors owe fiduciary duties       interest, the same cannot be
directors were designees of the   to both the preferred and com-       said of directors designated to
preferred stockholders, and       mon stockholders where the           the board by such a stock-
the board had earlier deter-      right claimed by the preferred       holder. ”
mined the fair market value of    is not a preference as against
the common stock was 10           the common but one shared



Breach of Good Faith
Following up on the Care-         a potential bid was a breach of      strating a conscious disregard
mark, Disney, and Stone v.         h ic r u
                                    e r o ’ y f od
                                  t d et s dt o go                      o h u e. cod g o
                                                                              s i ”
                                                                       fr i dts A cri t         n
Ritter cases, the Delaware        faith. Distinguishing a breach       the Supreme Court, the appro-
Supreme Court continued to        of the duty of care from a lack      priate question is not whether
flesh out the contours of the     of good faith, the Delaware          the directors should have done
duty of good faith in Lyondell    Supreme Court held that lack         everything in their power to
Chemical Co. v. Ryan, 970         of good faith sufficient to sus-     obtain the best price for the
A.2d 235 (Del. 2009) in the       tain a claim of the breach of        company, but rather whether
                                                                                                          Link to Court Opinion:
context of a sale of the com-     the duty of loyalty may be            h e i c r u el ae
                                                                         o      r o
                                                                       t s d et s“tr f l   t y id
pany. The plaintiffs in Lyon-      on f “i c r n n o-
                                                 d a t i
                                  fudia f ui yi et n                   to attempt to obtain the best            Click Here
dell alleged that the board of    ally fails to act in the face of a    a re
                                                                          e c”
                                                                       slpi .
director's passive approach to    known duty to act, demon-
                                                                                                                                      Page 4
V o lu me 1 0 , I ssu e 1

                                    Changes to the Delaware General Corporation Law
                                    Section 145(f) was amended to       stockholders entitled to vote at     the right of the corporation
                                    prohibit elimination or impair-     a meeting and stockholders
                                                                                                            
                                                                                                           a conviction of a felony or a
                                    ment of rights to indemnifica-      entitled to notice of the meet-
                                    tion or advancement of ex-          ing.                                judgment of a breach of the
                                    penses by amending the cer-                                             duty of loyalty, in either
                                                                        Section 225(c) was added to         case in connection with the
                                    tificate of incorporation or the
                                                                        grant the Chancery Court            duties of the director to the
                                    bylaws, as the case may be,
                                                                        power to remove directors           corporation
                                    after the occurrence of the act
                                                                        under certain circumstances;
                                    or omission to which the ex-                                            
                                                                                                           a failure by the director to
                                                                        namely:
                                    penses are related.                                                     act in good faith, and
    Click on the highlighted text
   to be directed to the affected                                        
                                                                        application for removal by
                                    Section 213(a) was amended to                                           
                                                                                                           a finding by the Court that
      Section of the DE GCL
                                    permit the board of directors        the corporation or by a
                                                                         stockholder derivatively in        judicial removal is necessary
                                    to fix separate record dates for                                        to avoid irreparable harm




                                    Changes to Delaware Alternative Entity Law
                                    Section 18-1101 of the Lim-         Similarly, Section 15-1201 of      applies to partnerships and
                                    ited Liability Company Act          the Delaware Revised Uniform       limited partnerships, respec-
                                    was amended to clarify that         Partnership Act and Section        tively.
                                    the doctrine of independent         17-1101 of the Delaware Re-
                                    legal significance, as devel-       vised Uniform Limited Part-
    Click on the highlighted text   oped in Delaware corporate          nership Act were amended to
   to be directed to the affected   law, applies to limited liability   clarify that the doctrine of
     Sections of the DE LLCA,
           UPA and ULPA             companies.                          independent legal significance
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Delaware Corporate and
Alternative Entity Law Update

About the Author:
                      Keith R. Sattesahn, Partner, received his B.S. degree from Juniata College and his J.D. degree from Temple University
                      School of Law (where he was a member of the Temple University Law Quarterly). Mr. Sattesahn concentrates his prac-
                      tice in the areas of complex corporate restructurings, corporate governance and alternative entity law as well as Informa-
                      tion Technology and Intellectual Property law. He is admitted to practice in Delaware and Pennsylvania. You can reach
                      Keith at 302.652.5200 or ksattesahn@stewartlaw.pro. Special thanks to Andrew J. Rennick, Law Clerk, for his valuable
                      contributions to this newsletter.




  This update is for informational purposes only and should not be considered legal advice. Please consult an attorney regarding your specific
                 situation before taking any action. Receipt of this update does not constitute an attorney-client relationship.

								
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