Can a Delaware LLC own property outside of Delaware or outside the US?

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

This is a quick post to answer a frequently asked question. Are there any limits under the Delaware LLC Act on a Delaware LLC owning property (real, personal or mixed) outside of the State of Delaware or outside of the US? The answer is an unequivocal NO.

In some cases owning property in a state is not considered as “doing business” in that state, while the the same ownership may constitute doing business in another state. When a business entity, such as a LLC, formed in one state seeks to “transact” or “do business” in another state or a foreign country, that state or country will require a form of registration in the jurisdiction before the entity may transact or do business. The requirements to “do business” in a jurisdiction very from state to state and country to country. A non-Delaware LLC seeking to do business in Delaware must qualify as a “foreign LLC” in Delaware, however Delaware does not impose any requirements on a Delaware LLC when it sees to do business or own property in another jurisdiction.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

The Implied Contractual Covenant of Good Faith and Fair Dealing Under the Delaware LLC Act

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

Sections 18-1101 of the Delaware Act provides in (c) and (e) that under a company agreement that fiduciary duties of a member, manager or other person bound by the agreement “may be expanded or restricted or eliminated by provisions in the limited liability company agreement;  provided that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.” (emphasis added) In this post I will not address what fiduciary duties may exist or whether in fact there are default fiduciary duties, that must wait for another post. As a result of conflicting decisions out of the Court of Chancery the question of whether there are default fiduciary duties is not yet settled, though I have my personal beliefs where the outcome should lie. You should understand that in this context when the courts speak about “fiduciary duties” in a LLC they are referring to the “duty of loyalty.” This post will be limited to the meaning of the implied contractual obligation of good faith and fair dealing.

Subsection (a) of 18-1101 states “The rule that statutes in derogation of the common law are to be strictly construed shall have no application to this chapter” and (b) states “It is the policy of this chapter to give the maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”

It was not casually that the Delaware Legislature selected the terms “implied contractual covenant”. By using those terms the Legislature was instructing the Courts that the must look to contract law and not corporate law in analyzing the relationship among the members and other bound by the agreement. The use of the terms emphasizes that corporate concepts of “good faith” and “fair dealing” are in apposite and as is review under the corporate concept of “entire fairness”.

The implied contractual covenant of good faith and fair dealing (the “contractual covenant”) is well understood in Delaware jurisprudence. The contractual covenant applies only to performance and enforcement after the contract has been formed and not to pre-contract negotiations. The Restatement (Second) of Contracts, Sec. 205 (1981) provides “Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement.” “The phrase good faith is used in a variety of contexts, and its meaning varies somewhat with [its use]. Good faith performance or enforcement of a contract emphasizes faithfulness to an agreed common purpose and consistency with the justified expectations of the other party, it excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate the community standards of decency, fairness or reasonableness.”

The implied contractual covenant of good faith and fair dealing establishes a minimum floor of conduct which cannot be waived by the parties.  However in at least one occasion the Delaware courts have refused to over ride an express contractual term on that basis reasoning that the “implied” duty will not come into play if the subject is expressly covered by the contract.

Numerous Delaware cases have filled in the missing terms in a contract to determine exactly what is the contractual covenant in a specific transaction. Courts look at the language used by the parties and from there the courts extrapolate the “probable intent” of the parties from that language. The Court of Chancery has stated that in determining whether the contractual covenant has been breached “requires a court to extrapolate the ‘spirit’ of the contract from its express terms, and ‘determine the terms the parties would have bargained for to govern the dispute had they foreseen the circumstances under which their dispute arose.'”

Just what is “good faith and fair dealing”? Delaware courts which have addressed the contractual covenant have developed concepts of interpretation however they have not established one bright line rule. Courts look for culpability and intent in determining whether the line has been crossed. Courts have precluded parties from “arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits of the contract.” It has been held that the contractual covenant will “prevent one party from unfairly taking advantage of the other party”, additionally the contractual covenant “requires a party to avoid hindering or preventing the other party’s performance.”

Thus, the implied contractual covenant of good faith and fair dealing requires conduct by the parties in the enforcement and performance of the contract which “excludes a variety of types of conduct characterized as involving ‘bad faith’ because they violate the community standards of decency, fairness or reasonableness,” “arbitrary or unreasonable conduct,” and conduct which would “prevent one party from unfairly taking advantage of the other party”.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Doctrine of Independent Legal Signifcance applies to Delaware LLCs

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

Delaware attorneys who practice in the area of limited liability companies and limited partnerships had generally formed a conclusion that the corporate concept to independent legal significance also applied to limited liability companies and limited partnerships. The corporate concept enunciated in Warner Communications, Inc. v. Chris-Craft Industries, Inc., 583 A.2d 962 (Del.Ch. 1989) held that an action validly taken pursuant to one section the the DGCL are legally independent from actions that might have been taken under another section.

In September, 2007, Vice Chancellor Parsons decided the case of Twin Bridges Limited Partnership, et. al v. Draper, CA 2351-VCP, a case involving a challenged amendment to the LLC agreement followed by a merger being used to resolve a dispute between the majority and minority members. In foot note 47 he observed “Whether the doctrine of independent legal significance applies in the context of a limited partnership dispute is an open question in this State.” While the Vice Chancellor was correct that no Delaware court had previously decided the issue, Delaware alternative entity attorneys thought the issue was settled. The decision created substantial discussion within the bar.

Transactional attorneys embrace the doctrine as it provides independent avenues to reach the same result and does not preclude the use of one avenue solely on the bases that that the drafter did not use or comply with another avenue to the result. Litigators do not embrace the doctrine as it produces an escape hatch for a defendant in litigation.

The Delaware tradition is not to amend the law in response to a court decision until the decision is final. In the 2009 amendments to both the Delaware LLC Act and the Delaware Revised Uniform Limited Partnership Act the Delaware Legislature amended Section 1101  to add a new subsection (h) which reads “Action validly taken pursuant to one provision of this chapter shall not be deemed invalid solely because it is identical or similar in substance to an action that could have been taken pursuant to some other provision of this chapter but fails to satisfy one or more requirement prescribed by such other provision.”

The new section states what Delaware attorneys understood the doctrine to provide and now definitively applies the doctrine of independent legal significance to both limited liability companies and limited partnerships under Delaware law.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Meetings of Members or Managers of a Delaware LLC

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

In previous posts I have discussed the need for minutes of meetings and just what should appear in the minutes of those meetings. In this post I will discuss the need for meetings and the requirements of the Act as well as the counterparts under the DGCL.

Section 211(b) and (c) of the DGCL provide:
(b) Unless directors are elected by written consent in lieu of an annual meeting as permitted by this subsection, an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided in the bylaws. Stockholders may, unless the certificate of incorporation otherwise provides, act by written consent to elect directors; provided, however, that, if such consent is less than unanimous, such action by written consent may be in lieu of holding an annual meeting only if all of the directorships to which directors could be elected at an annual meeting held at the effective time of such action are vacant and are filled by such action. Any other proper business may be transacted at the annual meeting.
(c) A failure to hold the annual meeting at the designated time or to elect a sufficient number of directors to conduct the business of the corporation shall not affect otherwise valid corporate acts or work a forfeiture or dissolution of the corporation except as may be otherwise specifically provided in this chapter. If the annual meeting for election of directors is not held on the date designated therefor or action by written consent to elect directors in lieu of an annual meeting has not been taken, the directors shall cause the meeting to be held as soon as is convenient. If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director. The shares of stock represented at such meeting, either in person or by proxy, and entitled to vote thereat, shall constitute a quorum for the purpose of such meeting, notwithstanding any provision of the certificate of incorporation or bylaws to the contrary. The Court of Chancery may issue such orders as may be appropriate, including, without limitation, orders designating the time and place of such meeting, the record date or dates for determination of stockholders entitled to notice of the meeting and to vote thereat, and the form of notice of such meeting.

Under 141(f) the members of the board of a corporation my act by written consent if  all  of the member of the board consent. This provision is intended to insure discussion and that all views are heard. There is no similar unanimity requirement in the LLC Act unless the parties include such language in the company agreement.

Unlike the DGCL which requires meetings, the LLC Act in 18-302 (members) and 18-402 (managers) defers to the terms of the company agreement. Under (a) of both sections the agreement may grant of withhold voting rights to any member (manager), group or class. The agreement may provide under (a) for the taking of any action, including the amendment of the agreement, “without the vote or approval of any member or class or group of members…”  The agreement may deny voting rights to some members or groups or classes of member (or managers). Under (c), unless otherwise provided in the agreement, any action may be taken by written consent which must be signed by “not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all members entitled to vote thereon were present  and voting.” Again, unlike Section 211(b) there is not a requirement that the non consenting members or managers be notified of the action taken and unlike 211(b) managers are not required to be unanimous in taking an action by written consent.

Conditions for voting at a meeting of members or managers is determined in the company agreement. “Voting by members may be on a per capita, number, financial interest, class, group or any other basis.” (18-302(b)) Under (c) “A limited liability company agreement may set forth provisions relating to notice of the time, place or purpose of any meeting …, waiver of any such notice, action by consent without a meeting, the establishment of a record date, quorum requirements, voting in person or by proxy, or any other matter with respect to the exercise of any such right to vote.”

Subsection (d) provides certain default rules, unless otherwise provided in the agreement: (i) meetings may be conducted by conference telephone call, (ii) any matter may be consented to by written consent, without prior notice and without vote  (iii) members may act through a proxy and (iii) members may provide their consent though “electronic transmission” which functions as a signed writing.

The LLC Act, unlike the DGCL does not require an annual meeting of members or managers. The LLC Act defers to the company agreement. Unless otherwise provided in the company agreement all actions requiring the approval of either members or managers may be taken by written consent signed by the number of member or members “necessary to authorize or take such ation at a meeting..”.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Indemnification and Advancement Rights Under the Delaware LLC Act

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

We have pointed out in previous posts that the Delaware LLC Act is an enabling act, that is, it provides a framework upon which the drafter of the company agreement may build.  The Delaware Act contains many default provisions, however indemnification is not one of them.

Section 18-108, Indemnification, provides:
“Subject to such standards and restrictions, if any, as are set forth in its limited liability company agreement, a limited liability company may, and shall have the power to, indemnify and hold harmless any member or manager or other person from and against any and all claims and demands whatsoever.”

Section 108 confirms that the LLC has the power to indemnify and hold harmless any member or manager or other person, however the drafters left it up to the terms of the LLC agreement to establish first whether the company will indemnify and then the standards to be applied.

The starting and ending point on any claim for indemnification is the company agreement itself. The most often litigated  issue under indemnification is the right of a covered person to receive an advancement for expenses.  In practical terms the right to an advancement is as important as the right to indemnification itself.  Litigation and defending ones self in a court or investigative proceeding are expensive in the real world. In the absence of a right to an advancement the covered person may not be able to avail himself or herself to indemnification as they may not be able to afford the initial cost to defend themselves in the proceeding. The Act itself, unlike Section 145 of the DGCL, does not address advancement. Delaware courts have held that in the absence of a provision in the company agreement itself, there is no implied right to receive an advancement for expenses. The courts have applied corporate decisions to claims for advancement. The courts have concluded that under Delaware law the right to expenses and the right to advancement are distinct concepts and the right to recover expenses does not imply the right to an advancement.

The indemnification provisions of the company agreement need to be carefully drafted to cover, or eliminate from coverage, persons who the company intends to either cover or eliminate. Most indemnification provisions are drawn from Section 145 and standard corporate bylaw provisions.  The DGCL does not differentiate between claims for indemnification and advancement by a plaintiff or defendant. Therefore if a company does not want a aggrieved member or manager who is suing the company to seek an advancement of expenses to sue the company, the company agreement must preclude such claims.

In a recent case the Delaware Courts have held that a company may amend its company agreement to limit or eliminate a right to indemnification between the time of the occurrance which gives rise to a  right to indemnification and the time that the claim for indemnification is made.

The indemnification provisions in the accompaning PDF file are typical of well drafted company agreements. Indemnification Section

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Responsibilities of a manager under a Delaware LLC

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

The Delaware LLC Act does not contain a specific section defining the responsibilities of the manager of a Delaware LLC. The Act defines the manager and provides default rules regarding specified management functions, however as is the general case with the Delaware Act, it looks to the company agreement to define the rights, liabilities and responsibilities of the manager. The lack of clear guidance within the act points up the importance of a properly and professionally drafted company agreement.

Section 18-101(7) provides that the LLC company agreement is the agreement “of the member or members as to the affairs of a limited liaility company and the conduct of its business.” The section further provides that a “… manager of a limited liability company … is bound by the limited liability company agreemeent whether or not …the manager…executes the limited liability company agreement.” Sub section (10) defines the manager as “…a person who is named as a manager  of a limited liability company…in a limited liability company agreement…”

What these sections do not address is how the “manager” accepts its position. As by definition the manager is not a party to the company agreement, it needs to have executed an instrument acknowledging its agreement to become the manager. In my practice we do that by a letter agreement which we annex to the company agreement. The manager ceases to be a manager at the time provided in the agreement. However Section 18-602 provides that a manager may resign at any time, but if the resignation constitutes a violation of the company agreement the manager is answerable to the company in damages.

Section 18-402 states the default rule that the management of a LLC is vested with its members as is the case with a general partnership.  The caveat of the section is that the agreement may vest the management in whole or in part in one or more managers, each of whom shall have the authority to bind the company unless otherwise provided in the agreement. The manager is chosen in the manner provided in the company agreement, and holds the offices and has the responsibilities accorded a manager in the agreement.

A person may be both a member and a manager of the LLC. Under 18-403 a manager may make a contribution to the capital of the LLC and share in the profits as a member. A person who is both a manager and a member, subject to the LLC agreement, has the rights and powers of a manager and subject to the LLC agreement, is subject to the restrictions and liabilities of being a member.

Exactly what are the rights and powers of the manager? The Delaware Act provides little guidance other than referring to the company agreement. We know that 18-402 grants to the manager the the authority to “manage in whole or in part” the LLC as provided in the LLC agreement. We also know that under 18-407 the manager has, subject to the LLC agreement, the  power and authority to delegate the “rights and powers to  manage and control the business and affairs of the limited liability company…” This power to delegate presupposes that the manager is vested with such management and control authority on behalf of the LLC.

Under Section 18-802 a manager may petition the Court of Chancery for a judicial dissolution of the LLC. Under 18-802, unless otherwise provided in the agreement, the manager may wind up the affairs of the LLC.

A Delaware court would find that the manager of a Delaware LLC has fiduciary duties to the company and its members. Section 18-1101 permits the company agreement to limit or eliminate those fiduciary duties, provided “that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.”

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Facebook puts your trademarks at risk

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

Facebook has announced a new feature which allows a person to register a Facebook username as a URL. The feature became available on June 13, 2009. This feature may be fun for Dick and Jane, however it places your trademarks at risk as a Facebook user can create a username with your trademark without your permission and become a cyber squatter.

Facebook has created an electronic registration form where you can register your trademark and avoid cybersquatters. The link is http://www.facebook.com/help/contact.php?show_form=username_rights. You can, of course, create a Facebook user name with your trademark and register your tradename yourself. To register your trademark you will need the registration number which appears on the certificate which you received from the Trademark Office.

Cybersquatting has become a problem for many trademark holders as well as celebrates.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Appraisal rights under Delaware LLC Act

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

In connection with a merger or consolidation under the DGCL, a stockholder of a Delaware corporation has the right to have the Court of Chancery determine the fair value of their stock and require that the corporations pay that value, a process known as “appraisal rights.” Appraisal rights arrise  under several sections of the DGCL.

• Section 251, Merger or consolidation of domestic corporations and limited liability company.
• Section 252, Merger or consolidation of domestic an foreign corporations.
• Section 253(d), Merger of parent corporation and subsidiary or subsidiaries,  (a stockholder in a corporate subsidiary has appraisal rights in a “short form” parent subsidiary merger when the parent corporation does not own all of the subsidiary’s stock immediately prior to the merger).
• Section 254, Merger or consolidation of domestic corporation and joint-stock or other association.
• Section 257, Merger or consolidation of domestic stock and nonstock corporations.
• Section 258, Merger or consolidation of domestic and foreign stock and nonstock corporations.
• Section 263, Merger or consolidation of domestic corporations.
• Section 264, Merger or consolidation of domestic corporation and limited liability company.

Section 262 provides the mechanism for the appraisal. Section 262(b)(1) limits appraisal rights such that “no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of § 251 of this title.”

Section  262(b)(2) determines those situations when appraisal rights are granted:

(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to §§ 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except:

           a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof;

b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or held of record by more than 2,000 holders;

c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or

d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph.

The LLC Act does not have a corollary to Section 262. Section 18-210, Contractual appraisal rights, provides as follows:

A limited liability company agreement or an agreement of merger or consolidation may provide that contractual appraisal rights with respect to a limited liability company interest or another interest in a limited liability company shall be available for any class or group or series of members or limited liability company interests in connection with any amendment of a limited liability company agreement, any merger or consolidation in which the limited liability company is a constituent party to the merger or consolidation, any conversion of the limited liability company to another business form, any transfer to or domestication or continuance in any jurisdiction by the limited liability company, or the sale of all or substantially all of the limited liability company’s assets. The Court of Chancery shall have jurisdiction to hear and determine any matter relating to any such appraisal rights.

The LLC Act goes in the opposite direction from the DGCL. The DGCL provides for mandatory appraisal rights in certain circumstances in connection with a merger or consolidation while the LLC Act provides that appraisal rights do not exist except when those rights are specifically provided for in the company agreement or an agreement of merger.

The lack of mandatory, statutory, appraisal rights has the potential to lead to mischief.  In the case of merger which is structured to squeeze out a member for less than the fair value of their interest it is likely that if presented to the Court of Chancery, the court would apply the implied contractual covenant of good faith and fair dealing to grant the member relief. The Court has not yet been faced with this issue, but it is only a matter of time before that happens.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Delaware Court of Chancery orders stockholder meeting under Section 211

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

The LLC Act does not require that the company hold meetings of its members. In the context of an LLC the need and requirements for meetings of member and or its governing body are determined under the terms of its company or operating agreement. I have commented in earlier blogs that it is my personal belief that an LLC should have an annual as well as periodic meetings of its members and governing body and that appropriate minutes be prepared and preserved for such meetings.

Under the Delaware General Corporation Law (DGCL), Section 211(c) (Meetings of stockholders), provides in part that “… if no date has been designated, for a period of 13 months after the last to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director.”

In Section 211 the DGCL uses the term “stockholder” to define the person or persons who have the right to seek an order calling for a meeting, while Section 220 (Inspection of books and records) defines “stockholder in (a)(2) to mean “… a holder of record of stock in a stock corporation, or a person who is the beneficial owner of shares of such stock held either in a voting trust or by a nominee on behalf of such person…” In the context of the DGCL when stock is held in the name of a “nominee” that includes a person who holds stock in “street name”, that is, the stock is held in a brokerage or similar account where the name of the beneficial owner is not recorded on the corporation’s stock transfer ledger.

In Opportunity Partners, L.P. v. Transtech Service Partners Inc., CA 4340-VCP, Decided April 14,2009, Opportunity_Partners_v_Transtech_Opinion the Delaware Court of Chancery was faced with the a claim that the Defendant had not held a stockholder meeting for more than 13 months. The company defended on the basis that (1) the Plaintiff was not the record owner of any shares and therefore not a stockholder and (2) that the Plaintiff had “questionable goals” to call a meeting.

The Court considered the definitional issues of 211 and 220 and stated that while the differences between the two sections present “intriguing questions” the Court concluded that it need not decide the issue as it found that by the time of the hearing the Plaintiff had successfully transferred stock from street name to its name of record. (The pleadings were amended with the Court’s consent).

The Court found no basis for the claim of “questionable goals” which would outweigh the rights of stockholders to have a meeting called.

In the court’s analysis of 211 the Court observed that it does not mandate an order for a meeting. However it observed that “the Delaware Supreme Court has recognized that a stockholder’s right to have a meeting to elect directors is ‘virtually absolute’. Moreover, the Supreme Court has held that ‘[g]iven the importance of an annual meeting of stockholders in the administration of corporate affairs, ‘prompt’ relief is essential under Section 211.’ Nonetheless, a stockholder’s prima facie case can be defeated by an adequate affirmative defense.” [Citations omitted]. The Court found that the defenses asserted by the Company were insufficient overcome the right of the stockholders to have a prompt meeting.

After addressing the complexities of the proxy system and the mechanics of calling an election as well as other matters affecting this Company, the Court ordered a meeting within 60 days and ordered that the record date be prior to a meeting of stockholders previously scheduled to approve a business combination so as to avoid the incumbent directors having an advantage in an annual meeting.

I have an active Delaware business practice as well as a practice in Delaware’s State and Federal courts. If you or your client have a business matter or a matter which you wish to litigate in Delaware or has a matter pending in Delaware, we would appreciate the opportunity to consult with you regarding our representation. Please remember that we do not accept representation without a written engagement letter.

Delaware Court of Chancery again addresses a board’s duty of care

Steven D. Goldberg, Esq. Wilmington, DE
sgoldberg@stevendgoldberg.com
http://www.stevendgoldberg.com
Contact me if you need assistance in forming/organizing a Delaware business entity or any matter of Delaware law. Delaware Forms and Publications are available at http://www.delawarellclaw.com

In one of his final decisions before retiring from the Delaware Court of Chancery, Vice Chancellor Lamb revisits the board’s duty of care in the context of committee of a corporate board which was delegated authority to negotiate the terms of a debt offering.  (San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, Inc., et al, CA 4446-VCL, May 12, 2009).  amylin

While this case arrose under the DGCL and not the LLC Act, the issues of stockholder voting franchise and fiduciary duties have equal impact on LLC’s and their company agreements, again unlsess those rights or duties have been reduced or eliminated by the agreement.

After many twists and turns, the plaintiff’s original claim seeking a judgment declaring the invalidity of a “poison put” contained within a continuing directors provision of the credit agreement was rendered moot as the outside investor group was no longer nominating a majority of the board. [The credit agreement contained a provision under which if the “Continuing Directors do not constitute a majority of the Company’s Board of Directors…”  the trustee could declare a non-monetary default and demand immediate payment of the notes at par. The notes were selling at a steep discount.  “Continuing Directors” were defined as the directors who at the issue date were directors and any new directors whose nomination was “approved” by at least a majority of the directors then still in office who were either directors at the issue date or whose nomination and election were previously approved.] Continuing director provisions are often found in loan agreements for public debt and syndications, they are problematical because of the potential to strip from the stockholder their franchise to exercise their voting rights to elect members of the board and the potential to entrench the board.

At that point the Vice Chancellor could have dismissed the remaining two counts (breach of duty of care of the defendant directors in approving the continuing director provision and a declaration that the board could “approve” dissident director candidates for the purpose of the continuing director requirement without endorsing or supporting their candidacy). The Vice Chancellor determined to not dismiss the two remaining counts and weighed in on the issues.

The board delegated to a “pricing committee” the authority to negotiate and approve the terms of the credit agreement. The plaintiff claimed that the board (acting through the pricing committee) breached its duty of care in the adoption of the loan agrement  insofar as the loan agreement contained the continuing director provision. The basis of the claim was that committee never discovered that loan agreement contained the provision.

In order to be actionable the board must have been “grossly negligent” in making the decision which is the subject of the action. The Vice Chancellor, citing Brehm v. Eisner, stated that the duty of care requires that:

in making business decisions, directors must consider all material information reasonably available, and that the directors’ process is actionable only if grossly negligent. . . . [T]he standard for judging the informational component of the directors’ decisionmaking does not mean that the Board must be informed of every fact. The Board is responsible for considering only material facts that are reasonably available, not those that are immaterial or out of the Board’s reasonable reach.

Notwithstanding the fact that the pricing committee was unaware of the provision, which one would be hard pressed not to consider “material”, the court concluded that the committee and thus the board was not “grossly negligent”. Here I will quote at length from the decision as it is instructive to both boards and counsel who represent them:

The board retained highly-qualified counsel. It sought advice from Amylin’s management and investment bankers as to the terms of the agreement. It asked its counsel if there was anything “unusual or not customary” in the terms of the Notes, and it was told there was not. Only then did the board approve the issuance of the Notes under the Indenture. This is not the sort of conduct generally imagined when considering the concept of gross negligence, typically defined as a substantial deviation from the standard of care.

The plaintiff argues that the board’s questioning if there was anything “unusual or not customary” in the Indenture was insufficient. But the way in which the board inquired into the material terms of the Indenture cannot be equated with gross negligence in failing to inform itself’s Certainly, no one suggests that the directors’ duty of care required them to review, discuss, and comprehend every word of the 98-page Indenture.

This case does highlight the troubling reality that corporations and their counsel routinely negotiate contract terms that may, in some circumstances, impinge on the free exercise of the stockholder franchise. In the context of the negotiation of a debt instrument, this is particularly troubling, for two reasons. First, as a matter of course, there are few events which have the potential to be more catastrophic for a corporation than the triggering of an event of default under one of its debt agreements. Second, the board, when negotiating with rights that belong first and foremost to the stockholders (i.e., the stockholder franchise), must be especially solicitous to its duties both to the corporation and to its stockholders This is never more true than when negotiating with debtholders, whose interests at times may be directly adverse to those of the stockholders. Outside counsel advising a board in such circumstances should be especially mindful of the board’s continuing duties to the stockholders to protect their interests. Specifically, terms which may affect the stockholders’ range of discretion in exercising the franchise should, even if considered customary, be highlighted to the board. In this way, the board will be able to exercise its fully informed business judgment. Finally the Vice Chancellor addressed the issue of whether the board could “approve” the dissident director slate while still opposing their election. The court concluded that they could. Black’s Law Dictionary defines “to approve” to mean “to give formal sanction to; to confirm authoritatively.” Citing the definition the Company argued that while endorsement or recommendation may necessarily imply approval, the reverse is not true. Further the Company claimed that the board may approve a slate of nominees for the purpose of the Indenture (i.e., sanctioning their nomination for election) without endorsing them, and may simultaneously recommend and endorse its own slate instead. The Court held that the Company’s reading of the Indenture was correct and that it could approve the slate of nominees.

Having determined that the Company had the power to approve the slate under the Indenture, the Court then focused on whether the board had properly exercised its power to do so. The Court, after reviewing the issues underlying approval, ultimately determined that on the record the issue was not ripe for adjudication. The factual record was not well developed and was not helpful to the board. The Court noted that the board had made negative public statements about the outside investor groups and their nominees. The court further observed that the approval of the nominees was made in exchange for a partial settlement with the plaintiffs which dismissed the personal claims against the directors which would not have been covered by D&O insurance and the Company’s indemnification powers. The court observed that “[t]hese circumstances at least raise a question whether the board’s decision to approve was made in a good faith exercise of its considered business judgment, or instead taken simply to avoid facing a suit for money damages against themselves personally.”

Ultimately the stockholder voted and both the Chairman of Amlin and the lead independent director were not re-elected and replace by the outside shareholder group. Two new independent directors were also elected.

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