Tag: Delaware

740,000 Reasons to Think Twice Before Putting a Company in Bankruptcy

A recent decision from a bankruptcy court in Delaware provides a cautionary tale about the risks of involuntary bankruptcy.

In the Delaware case, the debtor managed a group of investment funds. The business was all but defunct when several investors, dissatisfied with the debtor’s management, filed an involuntary Chapter 7 petition.  They obtained an order for relief from the bankruptcy court, then removed the debtor as manager of the funds and inserted their hand-picked manager.  So far, so good.

The debtor, who was not properly served with the involuntary petition and did not give the petition the attention it required, struck back and convinced the bankruptcy court to set aside the order for relief. The debtor then went after the involuntary petitioners for damages.  After 8 years of litigation, the Delaware court awarded the debtor $740,000 in damages – all of it attributable to attorneys’ fees and costs.

If you file an involuntary petition and the bankruptcy court dismisses it, then a debtor can recover costs and reasonable attorneys’ fees.  The legal fees include the amount necessary to defeat the involuntary filing.  In addition, if the court finds that the petition was filed in bad faith, then the court also can enter judgment for all damages proximately caused by the filing and punitive damages.  The Delaware court awarded the debtor $75,000 for defeating the involuntary petition.

The debtor also sought a judgment for attorneys’ fees in pursuit of damages for violating the automatic stay.  The involuntary petitioners had replaced the debtor as manager without first obtaining leave from the court to do so.  The investment fund was barely operating and had little income to support a claim for actual damages.  Nevertheless, the Delaware court awarded $665,000 in attorneys’ fees related to litigating the automatic stay violation.

Because the debtor had no “actual” damages from the stay violation, the involuntary petitioners contended that the debtor was not entitled to recovery of attorneys’ fees.  The Delaware court pointed out that “actual” damages (e.g., loss of business income) are not a prerequisite to the recovery of attorneys’ fees, much to the chagrin of the defendants.  The court held that attorneys’ fees and costs are always “actual damages” in the context of a willful violation of the automatic stay.

The Delaware court also rejected defendants’ argument that the fee amount was “unreasonable” since there was no monetary injury to the business.  In other words, the debtor should not have spent so much money on legal fees because it lost on its claim.  The court held that defendants’ argument was made “with the benefit of hindsight” – at the end of litigation when the court had ruled, after an evidentiary trial, that debtor suffered no actual injury.  The court pointed out that the debtor sought millions in damages for the loss of management’s fees, and even though the court rejected the claim after trial, it was not an unreasonable argument for the debtor to make.  The court concluded that “the reasonableness of one’s conduct must be assessed at the time of the conduct and based on the information that was known or knowable at the time.”

The involuntary petitioners likely had sound reasons to want the debtor removed as fund manager.  But by pursuing involuntary bankruptcy and losing, they ended up having to stroke a check to the debtor for over $700,000.  Talk about adding insult to injury.  The upshot is that involuntary bankruptcy is an extreme and risky action that should be a last-resort option undertaken with extreme caution.

© 2024 Ward and Smith, P.A.. All Rights Reserved.

by: Lance P. Martin of Ward and Smith, P.A.

For more news on Bankruptcy Litigation, visit the National Law Review’s Bankruptcy & Restructuring section.

Delaware Legalizes Recreational Marijuana

Delaware became the latest state to legalize recreational marijuana on April 23, 2023 when the state’s Governor failed to veto two bills that allow for the legalization of marijuana, effective immediately.  Individuals who are 21 years of age and older may possess and use up to one ounce of marijuana.  It will be taxed in a manner similar to alcohol.

The law provides that nothing in the law is “intended to impact or impose any requirement or restriction on employers with respect to terms and conditions of employment including but not limited to accommodation, policies or discipline.”  This means that employers in Delaware do not have to permit marijuana use at work or during work time and still may drug test for marijuana and take disciplinary action for positive test results.

Employers should bear in mind, however, that the use of medical marijuana still is protected under Delaware law, as it has been since 2011. The new recreational marijuana law does not change the rights of users of medical marijuana.  Specifically, the Delaware Medical Marijuana Act provides, in pertinent part, that “an employer may not discriminate against a person in hiring, termination, or any term or condition of employment . . . if the discrimination is based upon either of the following: a. [t]he person’s status as a cardholder; or b. [a] registered qualifying patient’s positive drug test for marijuana . . . unless the patient used, possessed or was impaired by marijuana on the premises of the place of employment or during his hours of employment.”

Delaware joins a growing list of states that have adult-use recreational marijuana laws.  Employers should review their drug and alcohol policies frequently to ensure that they are complying with all applicable state and local marijuana laws.

Jackson Lewis P.C. © 2023
For more Cannabis legal news, click here to visit the National Law Review

Is The End Of FINRA Drawing Nigh?

The Financial Industry Regulatory Authority, aka FINRA, is a non-profit Delaware corporation.  It was formed in 2007 by the combination of the National Association of Securities Dealers, Inc. and the regulatory arm of the New York Stock Exchange, Inc.  FINRA is a self-regulatory organization that primarily regulates securities broker-dealers.

Professor Benjamin P. Edwards recently reported that a complaint has been filed in Florida challenging the constitutionality of FINRA.  The lawsuit filed by two broker-dealers alleges:

However, FINRA’s current structure and operations, particularly in light of the transformation of the organization over the course of the last two decades, contravene the separation of powers, violate the Appointments Clause of the United States Constitution (the “Constitution”) and constitute an impermissible delegation of powers. Because it purports to be a private entity, FINRA is unaccountable to the President of the United States (the “President,” or “POTUS”), lacks transparency, and operates in contravention of the authority under which it was formed.  It utilizes its  own in-house tribunals in a manner contrary to Article III and the Seventh Amendment of the Constitution and deprives entities and individuals of property
without due process of law.

The plaintiffs are seeking, among other things, declaratory and injunctive relief.

For more Finance Legal News, click here to visit the National Law Review

© 2010-2022 Allen Matkins Leck Gamble Mallory & Natsis LLP

Delaware Franchise Taxes Are Around the Corner

If you are a Delaware corporation, you likely received a notice from the Secretary of State of Delaware informing you that your company’s Annual Report and franchise tax payment are due by March 1, 2020. These notices are sent to the corporation’s registered agent. You are still required to file an Annual Report and pay the franchise tax even if your corporation never engaged in business or generated revenue. Delaware requires these to be submitted online.

There are two ways to calculate your Delaware franchise taxes (the Authorized Shares Method and the Assumed Par Value Capital Method). Delaware defaults to calculating its franchise taxes owed by using the Authorized Shares Method, which almost always results in a higher tax liability for startups with limited assets. However, by using the Assumed Par Capital Value Method, startups are often able to significantly lower their franchise tax burden.

For example, a typical early-stage startup corporation with: (i) 10 million authorized shares of stock; (ii) 9 million issued shares of stock; (iii) a par value of $0.0001; and (iv) gross assets of $100,000, would result in the following franchise tax obligations under the different methods:

  • $85,165 under the Authorized Shares Method

  • $400 under the Assumed Par Value Capital Method

    If you are incorporated in Delaware, but conducting business in another state, you must be qualified to do business in that state – meaning, you might be subject to that state’s franchise tax (if any) as well. For example, a Delaware corporation doing business in Texas must still register for a foreign qualification to conduct business in Texas ($750 filing fee), submit a Texas annual Franchise Tax Report (due by May 15 of each year), and pay the associated tax.

Texas franchise taxes are based on an entity’s margin (unless filing under an EZ computation),

and are calculated based on one of the following ways:

  • total revenue times 70 percent;

  • total revenue minus cost of goods sold (COGS);

  • total revenue minus compensation; or

  • total revenue minus $1 million (effective Jan. 1, 2014).

© 2020 Winstead PC.

For more on franchise taxation, see the National Law Review Tax Law section.

Delaware, Consent, And The Adequacy Of Email Notice

Since the turn of this century, Delaware has allowed corporations to give notices to stockholders by electronic transmission.  8 Del. Code § 232(a).  However, the statute is conditioned upon the stockholder’s consent.  California has a similar consent requirement in Corporations Code § 20.  Delaware is now proposing to amend Section 232 to permit a corporation to give notice by electronic mail unless the stockholder has objected.  See Senate Bill No. 88.  The bill would also define “electronic mail” for the first time.

As I was pondering these changes, I came across the following observations about the adequacy of email notifications penned by the estimable and eminently quotable Justice William W. Bedsworth of the California Court of Appeal:

“Email has many things to recommend it; reliability is not one of them. Between the ease of mistaken address on the sender’s end and the arcane vagaries of spam filters on the recipient’s end, email is ill-suited for a communication on which a million dollar lawsuit may hinge.  A busy calendar, an overfull in-box, a careless autocorrect, even a clumsy keystroke resulting in a ‘delete’ command can result in a speedy communication being merely a failed one.”

Lasalle v. Vogel, 2019 Cal. App. LEXIS 533 (footnote omitted).  Justice Bedsworth’s comments were directed to the adequacy of email notice before taking a default judgment and not the Delaware bill.  Nonetheless, his concerns about the adequacy of email are entirely opposite to stockholder notice.

 

© 2010-2019 Allen Matkins Leck Gamble Mallory & Natsis LLP
Read more about Corporate Law on the National Law Review Corporate & Business Law page.

Private Email Woes Infect The Private Sector in Delaware

emailVice Chancellor J. Travis Laster’s ruling in Amalgamated Bank v. Yahoo!, Inc., C.A. No. 10774-VCL (Del. Ch. Feb. 2, 2016) should sound a tocsin to directors that their “private” emails may not be so private.  The ruling addressed Amalgamated Bank’s demand to inspect the books and records of Yahoo! pursuant to Section 220 of the Delaware General Corporation Law.  The bank sought to inspect, among other things, documents that reflect discussions or decisions of Yahoo’s full Board or Committee.  Documents covered by the demand included emails to and from the directors, from management or the compensation consultant, emails among the directors themselves, and documents and communications prepared by Yahoo officers and employees about the Board‘s deliberations.

Vice Chancellor Laster found that emails were records subject to inspection under Section 220 and that through Delaware’s jurisdiction over a corporation, a court can compel production of documents in the possession of officers, directors, and managing agents of the firm.  According to the Vice Chancellor, the court can impose sanctions or other consequences on the firm if the officer, director, or managing agent fails to comply. He further noted that if a personal email account was used to conduct corporate business, the email is subject to production under Section 220. Directors and corporate officers should therefore take heed that emails concerning corporate business may be subject to disclosure even if conducted using a private email address.

Article By Keith Paul Bishop of Allen Matkins Leck Gamble Mallory & Natsis LLP

© 2010-2016 Allen Matkins Leck Gamble Mallory & Natsis LLP

 

Delaware Adds to Growing Patchwork of Social Media Laws

On August 7, Delaware Governor Jack Markell signed a law to prohibit employers from interfering with the personal social media accounts of their prospective and current employees.  The new law, which also took effect on August 7, defines “personal social media” to encompass any account on a social networking site created and operated by a prospective or current employee exclusively for his or her personal use.  The term does not include accounts created or operated by an employer and that are operated by an employee as part of his or her employment.

Specifically, the new law prohibits an employer from requesting or requiring a prospective or current employee to:

  • disclose a username or password for the purpose of allowing the employer to access personal social media;

  • access personal social media in the presence of the employer;

  • use personal social media as a condition of employment;

  • divulge any personal social media (except as otherwise permitted by the new law);

  • add a person, including the employer, to the list of contacts associated with the prospective or current employee’s personal social media,

  • invite or accept an invitation from any person, including the employer, to join a group associated with the prospective or current employee’s personal social media; or

  • alter settings on the prospective or current employee’s personal social media that affect a third party’s ability to view the contents of the medium.

The new law also forbids an employer from taking adverse action against a prospective or current employee for failing to comply with any of these requests or demands.

Despite these broad prohibitions, nothing in the new law prevents an employer from:

  • exercising its right or obligation under its personnel policies, federal or state law, case law, or other rules or regulations to require or request that an employee divulge a username, password, or social media “reasonably believed to be relevant” to an investigation of alleged employee misconduct or violation of applicable laws and regulations (so long as the social media is used solely for purposes of that investigation or a related proceeding);

  • requiring or requesting an employee to disclose a username, password, or other accessing credentials for (i) an electronic communication device supplied by or paid for in whole or in part by the employer; or (ii) an account or service provided by the employer, obtained by virtue of the employee’s employment relationship, or used for the employer’s business purposes;

  • accessing, blocking, monitoring, or reviewing electronic data stored on an employer’s network or on an electronic communications device supplied by or paid for in whole or in part by the employer;

  • complying with a duty to screen prospective or current employees, or to monitor or retain employee communications, (i) under federal or state law or by a self-regulatory organization, as defined in the Securities and Exchange Act of 1934 (like FINRA); or (ii) in the course of a law enforcement employment application or officer conduct investigation performed by a law enforcement agency; or

  • accessing, using, or viewing information about a prospective or current employee otherwise available in the public domain.

The new Delaware law continues a growing trend across the country.  Twenty-one other states have similar laws restricting employer access to a prospective or current employee’s personal social media account, including Arkansas, California, Colorado, Connecticut, Illinois, Louisiana, Maryland, Michigan, Montana, Nevada, New Hampshire, New Jersey, New Mexico, Oklahoma, Oregon, Rhode Island, Tennessee, Utah, Virginia, Washington, and Wisconsin.

ARTICLE BY Katharine H Parker & Daniel L. Saperstein of Proskauer Rose LLP

© 2015 Proskauer Rose LLP.

New State Privacy Laws Go Into Effect on Jan. 1, 2015 (California and Delaware)

State legislators have recently passed a number of bills that impose new data security and privacy requirements on companies nationwide. The laws include new data breach notification requirements, marketing restrictions, and data destruction rules. Below is an overview of the new laws and amendments that will go into effect on January 1, 2015.

Amendments to California’s Data Security and Breach Notification Law

In October 2014, California Governor Jerry Brown signed into law California bill AB 1710, an amendment to California’s existing data security and breach notification law. As a result, the following changes to California’s law will go into effect on Jan. 1:

1. Companies that maintain personal information about Californians will need to implement and maintain reasonable security procedures and practices.

California’s current data security and breach law requires companies that own or license personal information about Californians to “implement and maintain reasonable security procedures and practices appropriate to the nature of the information.”  For purposes of this data security requirement, California defines “personal information” as an individual’s first name (or first initial) and her last name in combination with her social security number, driver’s license or California ID number, any medical information, or a financial account number (such as a credit or debit card number) and the associated access code.

Under existing law, the terms “own” and “license” include personal information retained as a part of a business’s internal customer accounts or for the purpose of using the information in transactions.

As of Jan. 1, California law will require companies that merely “maintain” personal information about Californians (such as cloud providers), but do not own or license the information, also implement and maintain reasonable security procedures and practices appropriate to the nature of the information.

2. Companies that maintain personal information about Californians will be required to immediately notify the owner or licensee of the personal information in the event of a breach.

California currently requires companies that own or license personal information to disclose a data breach where it is reasonably believed that unencrypted personal information about a Californian was acquired without authorization. Current law also provides that such disclosure be made “in the most expedient time possible and without unreasonable delay.”

As of Jan. 1, companies that maintain personal information will be required to notify the owner or licensee of the personal information “immediately” after discovery of a breach if the personal information was, or is reasonably believed to have been, acquired by an unauthorized person.

For purposes of data breach disclosure, “personal information” includes login credentials (“[a] user name or email address, in combination with a password or security question and answer that would permit access to an online account,”) as well as an individual’s first name (or first initial) and her last name in combination with her social security number, driver’s license or California ID number, any medical information, or a financial account number (such as a credit or debit card number) and the associated access code.

As a reminder, other than for user name and password breaches (discussed below), current California law requires that a breach notification must be written in plain language and must include specific types of information about the breach.

Where the security breach involves the breach of online account information and no other personal information, then California law requires a business to provide the security breach notification in electronic or other form, directing the person whose personal information has been breached to promptly change her password and security question or answer, as applicable, or to take other steps appropriate to protect the online account with that business as well as all other online accounts for which the person uses the same name or email address and password or security question or answer.

However, where the security breach involves the breach of login credentials of an email account provided by a business, the business must not send the security breach notification to that email address. Instead, the business may comply with California law by providing notice by hard copy written notice or by clear and conspicuous notice delivered to the individual online when the individual is connected to the online account from an IP address or online location from which the business knows the resident customarily accesses the account.

3. After a breach, companies might be required to provide free identity theft prevention and mitigation services for 12 months.

AB 1710’s co-author stated in a press release that the bill “[r]equires the source of the breach to offer identity theft prevention and mitigation services for 12 months at no cost to individuals affected by a data breach. However, it is not clear whether this position is supported by the text of the bill, which only states that “if any” identity theft prevention and mitigation services are to be provided, then such services must be provided for 12 months at no cost.  An earlier version of the bill had stated that identity theft and mitigation services “shall beprovided” to individuals affected by a data breach.

Given the ambiguity of the requirement to provide free identity theft prevention and mitigation services, whether and how this provision will be enforced in 2015 is something to watch.

4. Companies may not sell, advertise for sale, or offer to sell an individual’s social security number.

The amendment also includes a new prohibition on social security numbers. As of Jan. 1, California law will prohibit the sale, the advertisement for sale, and the offer to sell an individual’s social security number. Businesses that own, license, or maintain information on an individual’s social security number will want to keep this new prohibition in mind when contemplating data transfer or broker agreements, or other transactions involving the personal information of Californians.

California’s New Minor Privacy Marketing and Privacy Law

California’s “Privacy Rights for California Minors in the Digital World Law”, SB 568, (1) bars some online operators from marketing certain products and services to minors, and (2) allows minors under 18 to request deletion of certain content from websites on which they have registered (known informally as the “eraser law.”)

1. Restrictions on Marketing to Minors

Operators of websites, online services, online applications, and mobile applications that are directed to minors are prohibited from marketing or advertising the following products and services:

  • Alcoholic beverages

  • Tobacco, cigarette, or cigarette papers, or blunt wraps, or any other preparation of tobacco, or any other instrument or paraphernalia that is designed for the smoking or ingestion of tobacco, products prepared from tobacco, or any controlled substance

  • Electronic cigarettes

  • Salvia divinorum or Salvinorin A, or any substance or material containing Salvia divinorum or Salvinorin A

  • Drug paraphernalia

  • Firearms or handguns, ammunition or reloaded ammunition, handgun safety certificates, BB device

  • Less lethal weapons

  • Dangerous fireworks

  • Aerosol containers of paint capable of defacing property

  • Etching cream capable of defacing property

  • Tanning in an ultraviolet tanning device

  • Dietary supplement products containing ephedrine group alkaloids

  • Tickets or shares in a lottery game

  • Body branding or permanent tattoos

  • Obscene matter

These operators also are prohibited from: (1) knowingly using, disclosing, or compiling a minor’s personal information for the purposes of marketing or advertising any of those prohibited products or services, and (2) knowingly allowing a third party to use, disclose, or compile the minor’s personal information to market or advertise these products or services.

If an operator has actual knowledge that a minor is using the services, the operator may not target marketing or advertising to that minor based on the minor’s personal information.  The operator also may not use, disclose, or compile the minor’s personal information to market or advertise the prohibited products or services, nor may the operator allow a third party to use, disclose, or compile the minor’s personal information for the prohibited products and services.

2. Deletion Requirement

If a minor is a registered user of a website, online service, online application, or mobile application, the operator must allow the minor to remove content and information that the minor had publicly posted on the website, service, or app.  Operators also are required to provide notice of this right to registered minors.

Operators are not required to delete content or information if:

  • Any federal or state law requires the operator to maintain the content or information;

  • The content or information was provided by an individual other than the minor;

  • The content or information is anonymized;

  • The minor did not properly follow the instructions for requesting deletion; or

  • The minor received compensation or consideration for providing the content.

Amendments to California’s Invasion of Privacy Law

California’s Invasion of Privacy law will also receive an update on January 1, 2015. The California Invasion of Privacy law currently prohibits the attempt to capture, in a manner that is offensive to a reasonable person, any type of visual image, sound recording, or other physical impression, when the person is engaged in a personal or familial activity under circumstances where they had a reasonable expectation of privacy. Current California law prohibits the activities described where the attempt to capture is done through a visual or auditory enhancing device. As of January 1, 2015, the above activities will be prohibited when done using any device.

New Delaware Data Destruction Law

Companies conducting business in Delaware will be required to take all reasonable steps to destroy or arrange for the destruction of a consumer’s personal identifying information when those records are no longer retained. Destruction may occur by shredding, erasing, or otherwise destroying or modifying the personal identifying information so as to render the information unreadable or indecipherable.

The Delaware law defines personal identifying information as a consumer’s first name or first initial and last name in combination with one of the following: signature; date of birth; social security number; passport number; driver’s license or state identification card number; insurance policy number; financial services account number, bank account number, credit card number, or other financial information; or confidential health care information.

Entities subject to the Gramm-Leach-Bliley Act, covered entities subject to HIPAA, and consumer reporting agencies subject to the FCRA are exempt from the new law. Other entities, however, may be subject to private enforcement actions, which allow for the recovery of treble damages. These have the potential to add up quickly, as each record unreasonably disposed of constitutes a violation under the statute. In addition, the Delaware Attorney General and Division of Consumer Protection of the Department of Justice may bring suit in certain circumstances.

ARTICLE BY

David N. Fagan
Kurt Wimmer
Jeff Kosseff
Katherine R. H. Gasztonyi
OF
Covington & Burling LLP

After Legislature Acts, Delaware Ready to Become 2nd State to Legalize Online Gaming

Recently published in The National Law Review was an article by Griffin Finan of Ifrah Law regarding Delaware and Online Gaming:

Delaware is now poised to become the second state to legalize online gaming. On Wednesday, that state’s Senate passed a bill that would legalize web table games, including poker, video lottery games, and traditional lottery games to be offered online.

Democratic Governor Jack Markell supports the bill and is expected to sign it into law soon. Earlier in the month the bill passed the state’s house of representatives by a 29-8 vote.

The bill, known as the Delaware Gaming Competitiveness Act of 2012, would authorize the state lottery and the three racetrack casinos it regulates to offer various form of Internet gambling, including poker. The bill would also authorize NFL parlay betting and keno. Games likely would not be live until early 2013.

After the bill is signed into law, Delaware will become the second U.S. state, after Nevada, to legalize online gaming. Nevada recently issued its first licenses authorizing companies in the state to offer online poker.

After the Department of Justice issued a legal opinion last December that purely intrastate online gaming did not violate the Wire Act, several states have explored legalizing online gaming to generate revenue and create jobs. The Delaware bill was motivated in part by efforts to retain jobs at the state’s racetrack casinos and to generate revenue for the state. The State Department of Finance projects that the bill would generate $7.75 million in new state revenues.

The small population of Delaware makes it unclear if there will be enough people to support the games. The law allows the state to explore compacts with other states to share gamers. Rhode Island and West Virginia have been mentioned as states that would be interested in such a compact, but those states would need to pass similar legislation to put a compact into effect.

The state lottery will operate the online gambling sites and is required to use verification systems to ensure that gamers are within the state and minors are excluded.

We support Delaware’s efforts to legalize online gaming in the interests of bringing jobs and badly needed revenue to the state. We will see if this leads to other states passing similar laws.

© 2012 Ifrah PLLC