Tag: State law


Delaware LLC and Partnership Law

Gregory P. Williams is chair of the Corporate Department at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Delaware has recently adopted legislation amending the Delaware Limited Liability Company Act (LLC Act), the Delaware Revised Uniform Limited Partnership Act (LP Act) and the Delaware Revised Uniform Partnership Act (GP Act) (collectively, the LLC and Partnership Acts). The following is a brief summary of some of the more significant amendments that affect Delaware limited liability companies (Delaware LLCs), Delaware limited partnerships (Delaware LPs) and Delaware general partnerships (Delaware GPs).

Default Class or Group Voting Requirements Eliminated

The LLC Act and the LP Act have been amended to eliminate the default class or group voting requirements in connection with the merger or consolidation, transfer or continuance, conversion, dissolution and winding up of a Delaware LLC or Delaware LP and the termination and winding up of a series of a Delaware LLC or Delaware LP. The recent amendments provide that, in connection with the foregoing matters, the default class or group voting requirements under the LLC Act and the LP Act, as in effect on July 31, 2015, will continue to apply to a Delaware LLC or Delaware LP whose original certificate of formation or certificate of limited partnership was filed with the Delaware Secretary of State and is effective on or before July 31, 2015, unless otherwise provided in a limited liability company agreement or partnership agreement.

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Attorney-Whistleblowing and Conflicting Regulatory Regimes

Jennifer M. Pacella is Assistant Professor of Law at City University of New York (CUNY), Zicklin School of Business, Baruch College.

In my latest article, Conflicted Counselors: Retaliation Protections for Attorney-Whistleblowers in an Inconsistent Regulatory Regime, I examine the ever-evolving issue of attorney-whistleblowing, the reporting requirements under the Sarbanes-Oxley Act (“SOX”) of attorneys representing issuer-clients, the potential for conflict of these requirements with the rules of professional conduct in various states, and the lack of retaliation protections for attorneys subject to these rules. Although attorney-whistleblowing undoubtedly invokes concerns about ethics and client relationships, SOX requires attorneys who “appear and practice” before the Securities and Exchange Commission to internally blow the whistle on their clients by reporting evidence of material violations of the law “up-the-ladder” when they represent issuers. If an attorney fails to adhere to these requirements, he/she will be subject to SEC-imposed civil penalties and disciplinary action. The SOX rules also allow an attorney to make a permissive disclosure to the SEC, revealing confidential information without the issuer-client’s consent, in certain instances, including when the attorney reasonably believes necessary to prevent substantial financial injury to the issuer.

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NY Court: RMBS Statute of Limitations Runs from Time of Securitization

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, George T. Conway III, Elaine P. Golin, Graham W. Meli, and Justin V. Rodriguez.

In an important decision for financial institutions and investors in residential mortgage-backed securities (RMBS), the New York Court of Appeals unanimously ruled yesterday (June 11, 2015) that claims for breach of representations and warranties made in an RMBS securitization accrue when the representations and warranties are made, which typically occurs when the securitization closes. ACE Securities Corp. v. DB Structured Products, Inc., No. 85 (June 11, 2015) (see our prior memo). The court held that New York’s six-year statute of limitations for breach-of-contract claims thus begins to run at that time—and not when the securitization sponsor refuses, possibly years or decades later, to comply with a securitization trustee’s demand for the contractual remedy of cure or repurchase of non-compliant loans. Accordingly, claims arising out of most pre-financial crisis RMBS securitizations are now time-barred.

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In re Kingate

David Parker is a partner in the Litigation and Risk Management practice at Kaplan, Kleinberg, Kaplan, Wolff & Cohen, P.C. The following post is based on a Kleinberg Kaplan publication by Mr. Parker and David Schechter.

The U.S. Court of Appeals for the Second Circuit, in In re Kingate Management Limited Litigation, recently made it significantly easier for plaintiffs in the Second Circuit and New York, Connecticut and Vermont state courts to bring class actions alleging violations of state law in litigation involving certain types of securities. By allowing these claims to proceed under state law, the Second Circuit has signaled that plaintiffs may now be able to avoid the rigorous pleading standards of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which requires that pleadings contain robust fraud allegations pleaded with particularity. The PSLRA also requires that plaintiffs allege the defendant acted with scienter—in other words, that the defendant knew the alleged statement was false at the time it was made, or was reckless in not recognizing that the alleged statement was false.

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State Contract Law and Debt Contracts

The following post comes to us from Colleen Honigsberg and Sharon Katz, both of the Accounting Division at Columbia Business School, and Gil Sadka of the Department of Accounting at the University of Texas at Dallas.

In our recent JLE paper, State Contract Law and Debt Contracts, we examine the association between state contract law and debt contracts. A recent stream of papers in finance and economics studies the role debt contracts play in mitigating agency problems between equity and debt holders (for example, Baird and Rasmussen, 2006; Chava and Roberts, 2008; Roberts and Sufi, 2009; Nini, Smith, and Sufi, 2009). This area of literature examines both the contract terms and the implications of covenant violations. While these studies generally treat contract law as a uniform product across states and assume that all contracts are enforced in a similar fashion, in practice lenders and borrowers select the state law that will govern the contract. Because the legal rights of both parties vary depending on the law chosen, the state contract law may be associated with enforcement. To examine this relationship, we first categorize each state’s contract law by whether it is favorable or unfavorable to lenders, and then we examine the characteristics of the contracts and the relevant parties across states. Lastly, we test whether the contract terms, frequency of covenant violations, and repercussions of covenant violations are related to the state contract law.

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Crossing State Lines Again—Appraisal Rights Outside of Delaware

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, Matthew Solum, David B. Feirstein, and Laura A. Sullivan. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Even as the Delaware appraisal rights landscape continues to evolve, dealmakers should not assume that the issues and outcomes will be the same in transactions involving companies incorporated in other states. Although once an afterthought on the M&A landscape, in recent years appraisal rights have become a prominent topic of discussion among dealmakers. In an earlier M&A Update (discussed on the Forum here) we discussed a number of factors driving the recent uptick in shareholders exercising statutory appraisal remedies available in cash-out mergers. With the recent Delaware Supreme Court decision in CKx and Chancery Court opinion in Ancestry.com, both determining that the deal price was the best measure of fair price for appraisal purposes, and the upcoming appraisal trials for the Dell and Dole going-private transactions, the contours of the modern appraisal remedy, and the future prospects of the appraisal arbitrage strategy, are being decided in real-time. These and almost all of the other recent high-profile appraisal claims have one thing in common—the targets in question were all Delaware corporations and the parties have the benefit of a well-known statutory scheme and experienced judges relying on extensive (but evolving) case law. But, what if the target is not in Delaware?

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Limited Commitment and the Financial Value of Corporate Law

The following post comes to us from Martijn Cremers, Professor of Finance at the University of Notre Dame, and Simone Sepe of the College of Law at the University of Arizona. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

For at least 40 years, a large body of literature has debated the effects of state competition for corporate charters and the value of state corporate laws. The common assumption of these studies is that interstate competition affects the way state corporate laws respond to managerial moral hazard, i.e., the agency problem arising between shareholders and managers out of the separation of ownership from control (Jensen and Meckling, 1976). Nevertheless, scholars have been sharply divided about the importance of interstate competition, and particularly whether interstate competition fosters a “race to the top” that maximizes firm value (Winter, 1977; Easterbrook and Fischel, 1991; Romano, 1985, 1993) or a “race to the bottom” that pushes states to cater to managers at the expense of shareholders (Cary, 1974; Bebchuk, 1992; Bebchuk and Ferrell, 1999, 2001).

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Jurisdiction Shifting—Creative Structuring Opportunities

Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, Sarkis Jebejian, and David B. Feirstein.

As we have noted in prior M&A Updates, when dealmakers face a transaction where one or both of the parties are incorporated outside the Delaware comfort zone, they often confront unexpected structuring issues unique to entities or deals undertaken in that state or country. These may include corporate law, tax, accounting or structuring concerns and, most often, the deal teams will have to adjust the transaction terms to accommodate these issues.

But a recent decision from the Virginia Supreme Court is a timely reminder that, on occasion, these issues can be managed using some resourceful and creative structuring involving shifting jurisdictions. In the case, a Virginia corporation planned to sell its assets which, under Virginia law, would trigger appraisal rights for minority stockholders. Seemingly to avoid this result, the seller undertook a multi-step restructuring ahead of the sale which began with a “domestication” under Virginia law that shifted its jurisdiction of incorporation to Delaware. Under the Virginia statute, no appraisal rights apply to such a reincorporation. Once reincorporated in Delaware, the seller continued its restructuring, ultimately selling its assets to the buyer. Notably, Delaware does not provide for appraisal rights in an asset sale. The Virginia court dismissed the minority stockholders’ argument that they were entitled to appraisal rights. It rejected a “steps transaction” argument that looked to collapse the multiple steps and focus on the substance of the transaction (i.e., a sale of the company’s assets to the buyer), favoring instead the seller’s assertion that the first-stage move to Delaware had independent legal significance and therefore was effective to shift the appraisal rights analysis to Delaware law.

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What Happens in Nevada? Self-Selecting into Lax Law

The following post comes to us from Michal Barzuza, Professor of Law at the University of Virginia School of Law, and David Smith, Professor of Finance at the University of Virginia.

In our paper, What Happens in Nevada? Self-Selecting into Lax Law, forthcoming in the Review of Financial Studies, we study the financial reporting behavior of firms that incorporate in Nevada, the second most popular state for out-of-state incorporations, after Delaware. Compared to Delaware, Nevada law has weak fiduciary requirements for corporate managers and board members. We find evidence consistent with the idea that lax shareholder protection under Nevada law induces firms prone to financial reporting errors to incorporate in Nevada, and that lax Nevada law may also cause firms to engage in risky reporting behavior. [1] In particular, we find that Nevada-incorporated firms are 30 – 40% more likely to report financial results that later require restatement than firms incorporated in other states, including Delaware. These results hold when we narrow our set of restatements to more serious infractions, including restatements that reduce reported earnings, and to restatements that raise suspicions of fraud or lead to regulatory investigations.

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The State of State Competition for Incorporations

Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law.

The competition by states for incorporations has long been the subject of extensive scholarship. Views of this competition differ radically. While some commentators regard it as “The Genius of American Corporate Law,” others believe it leads to a “Race to the Bottom” and yet others have taken the position that it barely exists. Despite this lack of consensus among corporate law scholars, scholars in other fields have treated state competition for incorporations as a paradigm case of regulatory competition.

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