Originally published in the April 2017 issue of The Corporate Counselor, the Quarterly State Compliance Review surveyed legislation and case law affecting business entity law. The following is a summary of notable changes to business entity statutes, as well as several significant state court decisions.
Amendments to Business Entity Statutes
- Pennsylvania House Bill 1398 enacted new general partnership, limited partnership, and limited liability company acts. The new laws went into effect on February 21 for all GPs, LPs, and LLCs formed on or after that date and April 1 for pre-existing GPs, LPs, and LLCs that did not elect to be governed by the new law at an earlier date.
- Louisiana House Bill 806 allowed LLCs that did not own immovable property to dissolve by affidavit. The bill was effective February 1.
- New Jersey Assembly Bill 1934, which was effective February 28, exempted veterans organizations from the nonprofit corporation annual report fee.
State Court Decisions
The Delaware Supreme Court, in Shawe v. Elting, confirmed the Chancery Court’s power to appoint a custodian to sell a corporation, even if it is profitable. While acknowledging that a sale should be the last resort when the corporation is profitable, in this case the co-owners’ feud was causing irreparable harm, and separating the co-owners was the only way to protect the enterprise.
The Delaware Supreme Court, in Dieckman v. Regency GP LP, held that the implied covenant of good faith and fair dealing protects investors even when a partnership agreement expressly waives fiduciary duties. The state’s high court therefore reversed the Chancery Court’s dismissal of a limited partner’s action for breach of fiduciary duty against a general partner where the dismissal was based on the partnership agreement’s waiver of fiduciary duties.
The Delaware Chancery Court, in Weingarten v. Monster Worldwide, Inc., ruled that a plaintiff seeking to inspect corporate records under Sec. 220 of the corporation law must be a stockholder both at the time the demand was made on the corporation and at the time of filing the complaint. Here, the plaintiff was a stockholder when demanding an inspection, but due to the corporation being acquired was not a stockholder when filing the action. Therefore the plaintiff lacked standing to sue under Sec. 220.
A New York appellate court, in Gordon v. Verizon Communications, Inc., approved a proposed settlement of a shareholder class action even though it only provided additional disclosures and governance reforms and no monetary compensation. The court applied a seven factor test and concluded that the settlement was in the best interests of the corporation and shareholder class.
A California appellate court, in People v. Black, held that a promissory note was not a security. The note was not an indiscriminate offer to randomly selected people, was not intended for wide distribution, and it provided for repayment to the investor if the deal failed. Thus, it failed to meet the definition of a security under both the state and federal tests.