New Developments

Nebraska court on the internal affairs doctrine

The Supreme Court of Nebraska has held that the internal affairs doctrine, as embodied in the Nebraska corporations act, requires that Delaware law apply to the Delaware holding company of a Nebraska operating company and that the facts alleged do not state a claim under Delaware law. In Johnson v. Johnson, the father owned 75% of the Delaware parent company and five children owned the remaining 25%. Richard, the favored son, owned 10% of the parent and was to succeed the father as head of the Nebraska subsidiary. Michael, who owned 6% of the parent, was to succeed Richard. The three were the directors of both the parent and the subsidiary. The parent’s only asset was subsidiary stock and the subsidiary did business only in Nebraska. The father died with Richard named as personal representative. Richard terminated Michael from his employment with the subsidiary, filled his father’s director slot with a long time employee, and gave himself a large raise. The parent has never paid dividends. Richard convened a parent shareholder meeting at which he voted all of the father’s stock in favor of ratification of Richard’s actions. Michael sued alleging that Richard’s actions constituted oppression and were a breach of fiduciary duties. He requested equitable relief that, in essence, sought the appointment of a receiver, dissolution, and an accounting.

The court, per Gerrard, J., held that the Nebraska corporations act, substantively equivalent to MBCA § 15.05(c), required the application of the internal affairs doctrine and the factors in Section 6 of the Restatement (Second) of Conflict of Laws that warrant overriding that application do not apply. Michael did not challenge the trial court’s holding that Delaware law did not permit the dissolution of the parent or the appointing of a receiver by a foreign forum on these facts. Thus, once it is clear that Delaware law applies, Michael’s complaint does not state a claim upon which relief can be granted.

The court is certainly correct. The nub of the complaint is that Michael has been wronged as a shareholder of the Delaware parent, not as an employee of the Nebraska subsidiary. Thus his only redress is against his brother as controller of the Delaware parent. This highlights a danger of suggesting that a local corporation incorporate out of state.

Delaware court of chancery on Schnell and advance notice bylaw

The Delaware Court of Chancery has refused to invoke the Schnell doctrine to invalidate the announcement of the annual meeting of stockholders that was given in a way “intended to limit the rights of some stockholders” and that precluded “a contested election for the board.” In Accipiter Life Sciences Fund v. Helfer, LifePoint Hospitals, Inc.’s advance notice bylaw requires a stockholder proposal to be submitted “not later than “the 10^th day following the day on which public announcement of the date of such annual meeting is first made.”

LifePoint intended to hold its annual meeting on May 8, 2006. On January 12, 2006, LifePoint received a stockholder proposal and desired to avoid further proposals. On February 1^st, an associate at LifePoint’s outside counsel, Waller Lansden in Nashville, suggested announcing the May 8^th annual meeting date immediately to establish the deadline for shareholder proposals as early as possible. The Waller Lansden partner forwarded the suggestion to the company, which approved the tactic on February 2nd. The company decided to make the announcement in its fourth quarter earnings press release, which was released on February 6^th (read the press release). The announcement of the annual meeting was paragraph seven of the press release and neither the title of the press release nor any subheading made any allusion to the annual meeting.

Unbeknownst to LifePoint, Accipiter, a large stockholder, intended to wage a proxy fight to elect a slate of dissident directors. Two Accipiter financial analysts read the February 6^th press release but did not notice the annual meeting announcement. Accipiter formally nominated a slate of directors on March 31^st, which LifePoint rejected as untimely.

Vice Chancellor Lamb held that Schnell should be invoked only “where compelling circumstances suggest that the company unfairly manipulated the voting process in such a serious way as to constitute an evident or grave incursion into the fabric of the corporate law.” Although the Vice Chancellor found LifePoint’s actions to be “troubling”, he declined to exercise his equitable powers to provide relief. Perhaps most importantly, the Vice Chancellor found that LifePoint had no reason to know of the proposed dissident slate and thus did not intend to limit such contest for director positions. Nor did the notice render Accipiter’s challenge “extremely difficult or impossible”, presumably not warranting that uniquely Delawarean epithet, Draconian, which no doubt would have impelled relief. Moreover, there was no affirmative decision to omit mention of the meeting in the headline or a subhead, simply a failure to consider whether the announcement should have been highlighted. Finally, and perhaps at bottom, it is undisputed that Accipiter could have met the deadline had its employees simply read the press release carefully.

This case is no doubt rightly decided and raises at least two teaching possibilities. One is reinforcing the importance of careful attention to statutory requirements (by LifePoint and its counsel) and of careful attention to corporate documents (by Accipiter). In that sense this case is a very nice compliment to McKesson Corp. v. Derdiger, (page 546) in which inattention to detail made the company’s annual meeting date arguably invalid. The second teaching point is the ethical one. One could start with the motivations behind, and ethics of, advance notice bylaws. More prominent, of course, is the action of the lawyers: the associate who first spotted the possibility, the partner who forwarded the idea to the company, and the company general counsel who approved the idea.

Indiana court on partnership

The Indiana Court of Appeals has affirmed a trial court finding that no partnership existed. In Copenhaver v. Lister, Copenhaver began working with a partnership that drilled water wells. Copenhaver’s primary duty was to rebuild a 1966 drilling rig. A few months later the original partners, Lister and Norris, split up and divided the assets of the partnership. Lister apparently continued to use the partnership’s name, Lister Well Drilling. Copenhaver continued to work and continued to be paid by Lister Well Drilling. About a year after Lister and Norris split up, Lister became ill and, upon recovery, believed Copenhaver was stealing from him. Lister filed an action for replevin and Copenhaver counterclaimed seeking a declaration that a partnership existed and for an accounting.

The court, per Baker, J., upheld the trial court’s finding of no partnership.

Indiana retains the UPA (1914) but the statutory definition of “partnership” is functionally identical to that of the current UPA, at least in this setting. Indiana overlays, as several other states do, pre-UPA criteria on the UPA definition of partnership. Thus, the court cited a ten year old Indiana Court of Appeals case that trotted out snippets from Indiana cases from the 1910s, ‘20s, ‘30s, ‘40s, and ‘50s. These criteria vary the UPA standards by imposing such requirements as,

[T]hat the parties must have joined together to carry on a trade or adventure for their common benefit, each contributing property or services, and having a community of interest in the profits.

(cites omitted)

In my view these sorts of overlays cloud the question, increase litigation, and defeat uniformity in an important area of law. The Indiana Supreme Court should make it clear that the test is the statutory one unencumbered by extraneous requirements.

Minnesota Supreme Court on imputing sole officer's intent to corporation

The Supreme Court of Minnesota has held that the intent of a corporation’s sole officer (and director and shareholder) may be imputed to the corporation. In Travelers Indemnity Co. v. Bloomington Steel & Supply Co., Reiners, Bloomington’s sole shareholder, director, and officer, struck Padilla, an employee of another company that shared space with Bloomington. Padilla sued Reiners for assault and battery and also sued Bloomington on theories of respondeat superior and negligence (negligent hiring, retention, and supervision). Travelers denied any obligation to defend Bloomington under an exclusion for acts “expected or intended” by Bloomington. Travelers argued that Reiners’ actions, expectations, and intent should be imputed to Bloomington.

The court, per Page, J., held that Reiners’ acts and knowledge in the course of his employment and within the scope of his authority will be imputed to Bloomington. The court declined to disregard the separation between Reiners and Bloomington simply because Reiners controlled Bloomington.

Reiners had pleaded guilty to criminal charges stemming from his assault on Padilla and the record contained at least some indications of Reiners’ prior aggressive behavior. Quaere what more Travelers will have to show and how much more judicial time and money will be expended before Travelers’ efforts to deny liability are successful?

Montana Supreme Court on Corporate Dissolution

The Supreme Court of Montana has held that dissolution of a corporation is an appropriate remedy even where the innocent shareholder will be economically harmed. In Sartori v. S & S Trucking, Inc., Stacy and Sartori formed a corporation, S & S Trucking, Inc. (Gee, how did they think of THAT name??), to purchase a hauling business. Sartori and Stacy each owned half of the corporation. A bank loaned Sartori, but not Stacy, $78,000 to purchase to business. The loan was secured by property owned by Sartori and property owned by Stacy. Within weeks the parties’ relationship deteriorated and Sartori took several actions that effectively undermined the corporation. Sartori then had the audacity to sue Stacy for breach of fiduciary duties and sought dissolution; Stacy counterclaimed and asked that the corporation not be dissolved.

The Supreme Court, per Leaphart, J., affirmed that the trial court had the power to order dissolution under MBCA §14.30 because the corporation could no longer be conducted to the advantage of the shareholders because of deadlock. The court also affirmed the trial court’s removal of Sartori as a shareholder and a director and denial to Sartori of any compensation for his ownership interest (presumably because Sartori’s damage to the corporation was larger than the value of his ownership) under a non-MBCA provision allowing a court to,

[M]ake any order to grant the relief other than dissolution as, in its discretion, it considers appropriate, including, without limitation, an order:

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    (d) providing for the purchase at fair value of shares of any shareholder, either by the corporation or by other shareholders.

(2) Relief … may be granted as an alternative to … dissolution or may be granted whenever, under the circumstances of the case, relief but not dissolution would be appropriate.

The court also remanded for a calculation of damages owed by Sartori.

Stacy’s objection was that the loan would have to be repaid or refinanced in some way, which I presume would entail the sale of the business for cash. He argued that an appropriate remedy would be to leave the loan in place and simply remove Sartori as a shareholder, director, and officer.

It strikes me that Stacy’s victory is a hollow one indeed. The opinion is silent as to whether the loan can likely be refinanced on comparable terms or whether sale of the business is likely to generate sufficient money to satisfy the loan. Presumably Stacy’s collateral is subject to seizure if necessary to satisfy the bank. Further, it is unclear what assets Sartori has that could be used to satisfy a judgment of damages against him for harm to the corporation. I would think the fairer result is the one Stacy seeks: remove Sartori, render him liable for damages caused to the corporation, and allow Stacy to own and operate the corporation by himself.

Colorado Supreme Court on Reverse Piercing

The Supreme Court of Colorado has held that reverse piercing of the corporate veil is a viable claim for relief. In In re Phillips (June 26, 2006), the court answered a certified question from the United States District Court for the District of Colorado. The trustee in bankruptcy of Phillips, an individual sought to recover property transferred from a corporation controlled by Phillips. To recover the property the trustee alleged that the corporation was Phillips’ alter ego and thus that the corporate transfers were actually transfers by Phillips. The court held that reverse piercing is a viable theory because its goals are parallel to those of ordinary piercing: achieving equity by disregarding the distinction between a corporation and its shareholders. The court cautioned that innocent shareholders and corporate creditors must be adequately protected before reverse piercing is imposed.