A recent decision by the U.S. Court of Appeals for the Third Circuit offers an important reminder of the distinction between the roles (and exposure to liability) of corporate directors and board observers. In a precedential opinion on a matter that previously lacked judicial guidance, the appeals court held that as a matter of law the functions of the defendant nonvoting board observers were not “similar” to the functions of board directors for purposes of imposing liability under Section 11 of the Securities Act of 1933.
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Taja West has contributed 19 entries to our website, so far.
Preserving privilege with respect to pre-closing communications between a selling corporation’s counsel and its management is an important negotiation point in many transactions, so that the seller can prevent the buyer from using such communications against the seller in disputes between the buyer and the seller, but the buyer can continue to assert that privilege in disputes with third parties. The default rule under Delaware law is that the privilege passes to the buyer post-closing. More specifically, section 259 of the Delaware General Corporation Law provides, in part, that “all property, rights, privileges, powers and franchises” shall pass to the surviving corporation. However, the parties may negotiate around this provision in the transaction documents according to the Delaware Court of Chancery’s decision in Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP.
By: Franca Tavella
On June 11, 2019, the IRS issued final regulations that will prohibit taxpayers from using state programs to sidestep state and local tax (SALT) deduction limitations. The SALT deduction, which has been in existence for over 100 years, has historically allowed high-income taxpayers to deduct certain state and local property, income and sales taxes on their federal tax returns without limitation. However, the Tax Cuts and Jobs Act of 2017 capped the SALT deduction at $10,000 per return for single filers, head of household filers, and married taxpayers filing jointly (the cap for married taxpayers filing separately is $5,000). As a result, states with relatively higher tax burdens – such as New York, Connecticut and New Jersey – developed various programs to help their residents circumvent the $10,000 SALT cap. For example, a taxpayer in New York could contribute to a charitable fund created by the State for educational or other purposes in return for a state income tax credit and the ability to separately deduct the entire charitable contribution on their federal tax return.
Shareholder agreements and operating agreements contain a variety of knobs and levers, many of which a company’s founders hope never to invoke. Chief among them are the provisions for resolving disputes or deadlocks in decision-making on fundamental matters and the dissolution provisions. The former sets forth the roadmap for dealing with situations where there is disagreement among the decision-makers regarding actions fundamental to the business and operations of the company, and the latter sets forth the means and methods for disbanding the company and winding up its affairs (generally based on a vote of the stakeholders). Under ordinary circumstances, when a company’s end is near, its constituents amicably initiate the dissolution process without court intervention. However, on rare occasions, they may find themselves in an intractable deadlock as to whether dissolution is necessary or appropriate. Thus, one faction may ask a court to dissolve the company by judicial decree, while another faction may oppose that request. The Delaware Chancery Court visited upon one such occasion in the case of Acela Investments, LLC v. DiFalco. On May 17, 2019, the court issued its Acela decision, which offers a rare example of the circumstances under which the court may invoke its judicial dissolution powers.
The Dangers of Copy and Paste: Using Corporate Statutory Language in an LLC May Result in Unintended Consequences
Limited liability companies (LLCs) are famously referred to as “creatures of contract”, whereas the governance of a corporation is comparatively fixed by statute. When forming an LLC, the members have broad discretion to determine the substance and scope of fundamental features including management, tax and indemnification matters. Parties are largely free to draft an LLC’s operating agreement as they desire, and Delaware law will “give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”
By: Franca Tavella
On June 21, 2018, the United States Supreme Court decided South Dakota v. Wayfair Inc., et al., which upheld South Dakota’s economic nexus law allowing the state to impose sales tax upon online retailers who sell goods into South Dakota but do not have a physical nexus with that state – i.e., property or employees in the state. In doing this, the Supreme Court overruled the physical presence requirement set forth in Quill Corporation v. North Dakota in 1992.
By: Adam Chelminiak
The Corporation Law Section of the Delaware State Bar Association recently published its proposed amendments to the Delaware General Corporation Law (DGCL) for 2019.1
The amendments reflect a broad effort to modernize the DGCL’s provisions addressing electronic documentation of actions and electronic transmissions of items such as notices and consents. The most significant changes contemplated by the proposed amendments are: (i) the introduction of safe harbor procedures for electronic documentation, execution and delivery of various acts and transactions; (ii) revisions to the default provisions for the delivery of stockholder notices; and (iii) revisions to the provisions governing delivery of stockholder consents by electronic submission. The proposed amendments also include important clarifying changes to the provisions of Section 141(f) with concern to board actions by written consent.
New Amendment to NJ Law Against Discrimination Renders Common Employment Agreement Provisions Unenforceable
New Jersey employers should take note of a newly enacted amendment to the New Jersey Law Against Discrimination (LAD) that directly impacts employment agreements and settlement agreements of discrimination claims. The amendment was signed by Governor Phil Murphy on March 18, 2019 and is effective immediately.
The Wage and Hour Division of the U.S. Department of Labor (DOL) recently issued an opinion letter that addresses whether employees must be compensated for the time they spend participating in an employer-sponsored community service program outside of normal working hours. The specific program reviewed by the DOL did not require employees to participate, did not direct or control the volunteer activities and also provided a reward to the group of employees with the greatest community impact. The winning group’s supervisor then maintained the discretion on how to distribute the award/bonus to each employee in the group based on multiple factors, including, but not limited to, how many hours each employee volunteered during the year.
By: Lori Smith
The other day I had a client ask me to review some form documents that another party wanted to use in connection with the client’s website. The basis of the request was that he thought I had prepared, or at least reviewed, these documents when they were originally created – over 10 years ago (coincidentally I had reviewed them, but had been somewhat critical, in part, at that time as off-market). This got me thinking about how many companies (and lawyers) rely on templates or precedential deal documents collected over many years, without thinking about the specific facts and circumstances of the deal they are doing or the passage of time and how that might implicate the need for updates and revisions.
- Corporate Transparency Act and Implications for Entity Formation and Transaction Structures
- Nasdaq’s Giant Leap Towards Diversity on the Board
- The Marijuana Opportunity Reinvestment and Expungement Act of 2019
- IRS to Allow “Workaround” to Deduction Limits for State and Local Income Taxes
- Finders May Finally Be Keepers: SEC Proposes Rules Allowing for Unregistered Broker-Dealers to Participate in Capital-Raising Transactions Under Certain Circumstances