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.

West Virginia case on defective entity formation

The West Virginia Supreme Court of Appeals has held that a deed is valid and enforceable by a grantee business entity that was not in existence when the deed was executed if the deed was executed in anticipation of the entity’s formation and is properly delivered to the entity after formation. In Heartland, L.L.C. v. McIntosh Racing Stable, L.L.C., (W.Va.2006) three individuals negotiated to purchase a horse stable and real estate. At a pre-closing all parties agreed that the individuals would form Heartland, L.L.C. to purchase the property, the deed was executed naming Heartland as the grantee, and Heartland’s Articles of Organization were signed. The Articles were not filed for six months and the next day the buyer filed suit to compel specific performance. The seller defended on the ground, inter alia, that it had not entered into a binding contract because the purchaser was not in existence when the contract was signed. The court upheld the validity of the deed citing to precedent from 1889 and 1900 and also citing to P.D. 2000, L.L.C. v. First Financial Planners, Inc., (casebook page 745).