Corporate law Archives - Page 22 of 32

SawStop Dismissal Explained: Opinion Crosscutting SawStop’s Antitrust Lawsuit Released

Judge Claude M. Hilton of the Eastern District of Virginia recently issued a Memorandum Opinion following up on his June 27, 2014 order (on which we previously wrote here and here) dismissing the complaint filed against the power tool industry bySawStop, LLC.

To recap, according to the February 2014 complaint, in 2000, Stephen Gass, inventor of “SawStop” and a patent attorney, began licensing negotiations with several companies now named as defendants in the lawsuit. As a result, the companies allegedly held a vote on how to respond to SawStop and shortly thereafter ended their individual licensing negotiations with Gass. The complaint also alleges the companies conspired to alter voluntary standards to prevent SawStop technology from becoming an industry standard.

In his opinion dismissing SawStop’s antitrust claims, Judge Hilton wrote:

An alleged antitrust conspiracy is not established simply by lumping ‘the defendants’ together.

Judge Hilton found no evidence that any of the named manufacturer defendants conspired through their industry organization, the Power Tool Institute, Inc. (PTI), not to license SawStop’s safety technology. Judge Hilton also found that the conspiracy allegations were belied by SawStop’s admissions in the complaint that it was actively negotiating with Emerson, Ryobi, and Black & Decker “well after the alleged group boycott began in October 2001,” concluding that “[s]uch history fails to show an agreement to restrain trade.”

The judge also pointed to other contradictions in SawStop’s complaint, including evidence that Ryobi signed an agreement with SawStop regarding royalties related to SawStop’s technology licensing during the time period of the alleged conspiracy. In addition, the judge ruled that Black & Decker’s proposed a licensing agreement with the SawStop, which was negotiated 6 to 8 months after the alleged conspiracy was formed, similarly contradicted SawStop’s allegations. The judge further dismissed SawStop’s arguments that Black & Decker’s 1% royalty payment offer was disingenuous, noting that even if that were the case, such actions do “not sufficiently infer conspiratorial conduct” and cannot be characterized as refusals to deal.

Finally, the judge found that SawStop failed to adequately plead that the defendants corrupted the standard setting process or otherwise agreed to a boycott, pointing out that the complaint alleged that only 5 of the 24 defendants had representatives on the relevant standards-setting committee. Moreover, the court found SawStop’s allegations of competitive harm resulting from the conspiracy (lost sales and profits from UL failing to mandate its safety technology on the market) insufficient, stating:

‘Lost sales’ do not amount to competitive harm because [users] were not ‘in some way constrained from buying [SawStop’s] products’ . . . and failing to mandate [SawStop’s] proposed safety standard does not thereby harm their market access.

Finding no support for an inference that defendants had entered into an agreement to boycott SawStop’s product or otherwise restrain trade, the court dismissed SawStop’s complaint in its entirety.

In addition to the antitrust lawsuit, SawStop technology is at the center of an ongoing rulemaking by the U.S. Consumer Product Safety Commission (CPSC). You can read more about the CPSC’s rulemaking here.

Article By:

Helen J. Kim

Charles A. Samuels

Of:

Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.

ATP Tour, Inc. v. Deutscher Tennis Bund: How Broad Was That Bylaw?

On our July 1st posting, I noted a recent Form 8-K filing that discloses the adoption of a fee-shifting bylaw. In ATP Tour, Inc. v. Deutscher Tennis Bund, 2014 Del. LEXIS 209 (Del. May 8, 2014), the Delaware Supreme Court held that a fee-shifting provisions in a non-stock corporation’s bylaws can be valid and enforceable under Delaware law. In reaching this conclusion, the Court said: ”A bylaw that allocates risk among parties in intra-corporate litigation would also appear to satisfy the DGCL’s requirement that bylaws must ‘relat[e] to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.’” Note that the Court held that a fee-shifting bylaw “can be valid and enforceable”. Thus, the Court only addressed the question of facial validity – it expressly disclaimed any conclusions on either the adoption or use of the bylaw in question.

In my review of the bylaw at issue in the case, it seems to me that it is so broadly worded that it arguably covers situations unrelated to the business of the corporation et cetera. Here is the bylaw as quoted in the Court’s opinion:

In the event that (i) any [current or prior member or Owner or anyone on their behalf (“Claiming Party”)] initiates or asserts any [claim or counterclaim (“Claim”)] or joins, offers substantial assistance to or has a direct financial interest in any Claim against the League or any member or Owner (including any Claim purportedly filed on behalf of the League or any member), and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the League and any such member or Owners for all fees, costs and expenses of every kind and description (including, but not limited to, all reasonable attorneys’ fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.

Now, let’s suppose that one member of the corporation is driving to pick up her child at school and collides with an automobile driven by another member who is on her way to a social occasion. If the first member sues the second member and fails to obtain a judgment on the merits, will that member be liable under the bylaw for attorneys’ fees and other costs? The bylaw seems to require only that a member assert a claim against another member and fail to obtain a judgment. The bylaw does not on its face require that the claim be brought by or against a member qua member.

Article By:

Keith Paul Bishop

Of:

Allen Matkins Leck Gamble Mallory & Natsis LLP

Hobby Lobby: The Supreme Court’s View and Its Impact

For the second time in two years the United States Supreme Court (the “Court”) hasruled against the Obama Administration with respect to elements of the Affordable Care Act (the “ACA”). In a 5-4 decision announced today in Burwell v. Hobby Lobby Stores, Inc. (“Hobby Lobby”) (f/k/a Sebelius v. Hobby Lobby Stores, Inc.), the Court ruled that the federal government, acting through Health and Human Services (“HHS”), overstepped its bounds by requiring faith-based private, for-profit employers to pay for certain forms of birth control that those employers argued contradicted their religious beliefs, in violation of the Religious Freedom Restoration Act of 1993 (“RFRA”).

In Hobby Lobby, the Court found that for-profit employers are “persons” for purposes of the RFRA. The Court, assuming that the government could show a compelling interest in its desire to provide women with access to birth control, ultimately held that the government could have met this interest in a less burdensome way.

Background

Among its many insurance mandates, the ACA requires non-grandfathered health insurance plans to cover “preventive services” at no cost to participants.

As part of its implementation of the ACA, HHS added 20 contraceptives that were required to be included as preventive services, including four that may have the effect of preventing a fertilized egg from developing.

Hobby Lobby argued that requiring the company to pay for or provide pills and procedures that they believe terminate life—so-called abortifacients—intrudes intrudes on their religious beliefs. Hobby Lobby sued HHS, asserting that requiring them to pay for or provide abortifacients violated their First Amendment rights to freedom of religion and also violated the RFRA.

The RFRA provides that the federal government “shall not substantially burden a person’s exercise of religion” unless that burden is the least restrictive means to further a compelling governmental interest. The Administration argued, however, that neither Hobby Lobby nor Conestoga or any other for-profit, faith-based employer was a person for purposes of the RFRA or the First Amendment.

The Decision

Writing for the majority, Justice Samuel Alito held that private—as opposed to publicly traded—employers could be considered “persons” for the RFRA. The Court noted that the law imposed a substantial burden on religious beliefs, requiring the owners of Hobby Lobby to engage in conduct that “seriously violates their sincere religious beliefs.”

The Court noted that for the government to prevail it needed to demonstrate a compelling state interest and that its application was the least restrictive means to achieve its goals. The Court assumed (with Justice Kennedy providing the swing vote in his concurrence) that the government does, in fact, have a compelling interest to, among other things, promote “public health” and “gender equality” by providing contraceptive coverage for women. However, the Court found that even assuming a compelling interest there were less restrictive alternatives for the government. The government could, the four-person majority noted, simply provide these benefits to all, without charge to the individuals; in his concurrence, Justice Kennedy questioned this, and noted the Court’s opinion does not decide this issue. But Kennedy and the four-person majority agreed the government could extend the accommodation it made religiously affiliated employers: they do not have to provide the benefit but their insurers or third-party administrators would without charge to either the employers or the employees.

Because there are less restrictive alternatives, the Court found that HHS had violated the RFRA as applied to these faith-based, for profit, private employers.

The Impact

The Hobby Lobby ruling has a direct impact on a relatively small number of employers—as a percentage of total employers across the country there are very few that can be considered faith-based employers.

However, the ruling is significant in that it signals an ongoing willingness by the Court to exercise its checks-and-balances power. The Court indicated it may not provide the Administration much leeway in its implementation of the ACA, when implementation impacts and is limited by other federal rights.

The ruling may also be significant for certain religious-affiliated non-profit employers who are operating under the accommodation discussed above. By identifying the accommodation as a less restrictive alternative, the Court may be signaling it believes that the exception HHS provided them suffices to meet any concerns they may have. The Court, however, noted it was not deciding this issue, and the “government-pay” approach tendered by four justices may provide a possible opening for relief for the religious-affiliated non-profit employers.

Finally, the Hobby Lobby decision should stand as a reminder that while there may be differences of opinion about specific rules and requirements under the ACA, and some of those differences may be decided against the government, the law itself is not going away. Employers need to continue to monitor new developments and implement strategies for complying with the ACA.

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Of:

Retroactive Tax Planning Re: U.S. Shareholders of Foreign Corporations

Converting Subpart F Income into Qualified Dividends

U.S. shareholders of foreign corporations are generally not subject to tax on the earnings of such corporations until the earnings are repatriated to the shareholders in the form of a dividend. Moreover, when a foreign corporation is resident in a jurisdiction with which the United States has a comprehensive income tax treaty, the dividends distributed to its individual U.S. shareholders are eligible for reduced qualified dividend tax rates (currently taxed at a maximum federal income tax rate of 20 percent).

Where a foreign corporation is classified as a “controlled foreign corporation” (“CFC”) for an uninterrupted period of 30 days or more during any taxable year, however, its U.S. shareholders must include in income their pro rata share of the Subpart F income of the CFC for that taxable year, whether or not such earnings are distributed. A CFC is a foreign corporation, more than 50 percent of which is owned (by vote or value), directly or indirectly, by “U.S. shareholders.” A U.S. shareholder, for the purpose of the CFC rules, is a U.S. person who owns, directly, indirectly or constructively, at least ten percent of the combined voting power with respect to the foreign corporation.

In addition to the inability to defer taxation on its share of a CFC’s subpart F income, one of the pitfalls of a U.S. shareholder owning stock in a CFC is that subpart F income is treated as ordinary income to the U.S. shareholder (currently taxed at a maximum federal income tax rate of 39.6 percent), regardless of whether the CFC is resident in a jurisdiction that has an income tax treaty with the United States. Therefore, the U.S. shareholder would not be able to repatriate its profits at qualified dividend rates.

Among other things, subpart F income generally includes passive investment income (e.g., interest, dividends, rents and royalties) and net gain from the sale of property that gives rise to passive investment income. Gain on the sale of stock in a foreign corporation, for example, falls within this category. Consequently, when a CFC sells stock of a lower-tier corporation, the U.S. shareholders of the CFC will have to include their share of the gain from the sale as subpart F income, which will be taxed immediately at ordinary income rates.

Check-the-Box Elections

Pursuant to the “check-the-box” entity classification rules, a business entity that is not treated as a per se corporation is an “eligible entity” that may elect its classification for federal income tax purposes. An eligible entity with two or more members may elect to be classified as either a corporation or a partnership. An eligible entity with only one member may elect to be classified as either a corporation or a disregarded entity.

Generally, the effective date of a check-the-box election cannot be more than 75 days prior to the date on which the election is filed. However, Rev. Proc. 2009-41 provides that if certain requirements are met, an eligible entity may file a late classification election within 3 years and 75 days of the requested effective date of the election. These requirements may be met if:

The entity failed to obtain its requested classification solely because the election was not timely filed
The entity has not yet filed a tax return for the first year in which the election was intended
The entity has reasonable cause for failure to make a timely election

The conversion from a corporation into a partnership or disregarded entity pursuant to a check-the-box election results in a deemed liquidation of the corporation on the day immediately preceding the effective date of the election. Distributions of property in liquidation of the corporation generally are treated as taxable events, as if the shareholders sold their stock back to the corporation in exchange for the corporation’s assets. As a result, the corporation shareholders would recognize gain on the liquidating distributions to the extent the fair market value of the corporation’s assets exceeds the basis of the shareholders’ shares. In addition, subject to limited exceptions, the corporation generally would recognize gain on the liquidating distribution of any appreciated property.

Converting Subpart F Income into Qualified Dividends

A CFC that elects to convert from a corporation into a partnership or disregarded entity generally would recognize Subpart F income on the deemed liquidation, to the extent it holds property that gives rise to passive investment income (such as stock in subsidiary corporations). The subpart F income inclusion rules only apply, however, when the foreign corporation has been a CFC for a period of 30 uninterrupted days in the given taxable year. Where the election is made effective as of January 2, the liquidation of the foreign corporation would be deemed to occur on January 1 of that year. Because the foreign corporation would be deemed to have been liquidated on January 1, it would not have been a CFC for 30 days during the year of liquidation. As a result, subpart F income would not be triggered on the deemed liquidation of the foreign corporation.

In addition, as a result of the check-the-box election, a U.S. shareholder of the foreign corporation would recognize gain on the deemed liquidation as if the shareholder sold its stock back to the corporation in exchange for the corporation’s assets. Section 1248(a) provides, however, that when a U.S. person sells or exchanges its shares in a foreign corporation that was a CFC during the 5-year period prior to disposition, the gain from the sale is recharacterized as a dividend to the extent of the allocable share of the earnings and profits of the foreign corporation. To the extent the foreign corporation is resident in a country with which the U.S. has an income tax treaty, its individual U.S. shareholders would be eligible for the reduced qualified dividend income tax rate on such dividend.

This may be illustrated by the following example:

A, a U.S. individual, is the sole shareholder of X, a foreign corporation resident in a country with which the United States has a comprehensive income tax treaty. X owns 40 percent of the shares of Y, another foreign corporation. In October 2013, X sells all of its shares of Y. X is a CFC and the net gain from the sale of the Y shares constitutes subpart F income. As a result, the gain would have to be included in A’s gross income as ordinary income. Instead, X files a retroactive check-the-box election pursuant to Rev. Proc. 2009-41 to be treated as a disregarded entity as of January 2, 2013. The election results in a deemed liquidation of X on January 1, 2013. Because X has not been a CFC for a period of 30 uninterrupted days in 2013, however, subpart F income is not triggered on the deemed liquidation of X. In addition, the gain recognized by A on the deemed liquidation of X is recharacterized as a dividend and subject to tax at the reduced rates applicable to qualified dividend income.

As a result, the combination of Section 1248(a) and the retroactive check-the-box rules allows individual U.S. shareholders of a CFC to convert gain that would be realized upon the sale of the CFC’s assets from subpart F income (taxed as ordinary income at rates up to 39.6 percent) to qualified dividend income (currently taxed at 20 percent). Following the deemed liquidation of the foreign corporation, because all of the assets would be deemed to have been distributed to the shareholders in complete liquidation of the corporation, and the shareholders would recognize gain on the receipt of the assets, the basis of the assets would be stepped up to fair market value, reducing or eliminating gain recognized upon the subsequent sale of the assets of the former CFC.

Article By:

Jeffrey L. Rubinger

Nadia E. Kruler

Joshua Kaplan

Of:

Bilzin Sumberg Baena Price & Axelrod LLP

SEC (Securities and Exchange Commission) Gives Insider Trader a $30,000 Slap On The Wrist

On April 23, 2014, the SEC agreed to settle insider trading charges against Chris Choi, a former accounting manager at Nvidia Corporation who allegedly set into motion a trading scheme that reaped nearly $16.5 million in illicit profits and avoided losses. Given the amount of the purported loss, the fact that Choi was the original “tipper,” and the fact that nearly every other member of the scheme has been indicted, the Choi settlement seems like nothing more than a slap on the wrist: a $30,000 penalty without admitting to the insider trading allegations. The Choi settlement also represents a notable departure from the SEC’s recent insider trading fines and penalties against “tippers.”

According to the SEC’s complaint, on at least three occasions during 2009 and 2010, Choi tipped material nonpublic information about Nvidia’s quarterly earnings to his friend Hyung Lim. SEC v. Choi, No. 14-cv-2879 (S.D.N.Y. Apr. 23, 2014). Lim passed the information along to Danny Kuo, a hedge fund manager at Whittier Trust Company, who passed the information to his boss and to a group of managers at three other hedge funds.

Kuo and the other tippee-hedge fund managers used Choi’s information to trade in advance of Nvidia earnings announcements and reaped trading gains and/or avoided losses of approximately $16.5 million.

The SEC alleged that Choi was liable for this trading because he “indirectly caused trades in Nvidia securities that were executed” by the hedge funds and “did so with the expectation of receiving a benefit and/or to confer a financial benefit on Lim.” The SEC charged him with violations of Section 10(b) of the Exchange Act (and Rule 10b-5) and Section 17(a) of the Securities Act.

Choi, without admitting or denying the SEC’s allegations, agreed to settle the matter and to the entry of an order: (1) permanently enjoining him from violations of Section 10(b), Rule 10b-5, and Section 17(a); (2) barring him from serving as an officer or director of certain issuers of securities for five years; and (3) ordering him to pay a $30,000 penalty.

Not only is Choi’s settlement a significant departure from the resolutions obtained by his “downstream” tippees, a number of whom were convicted on criminal charges of insider trading, it is a departure from recent SEC “tipper” settlements. For example:

A former executive at a Silicon Valley technology company, who allegedly tipped convicted hedge fund manager Raj Rajaratnam with nonpublic information that allowed the Galleon hedge fund to make nearly $1 million profit, agreed to pay more than $1.75m to settle the SEC’s insider trading charges. See SEC Charges Silicon Valley Executive for Role in Galleon Insider Trading Scheme.
A physician who served as the chairman of the safety monitoring committee overseeing a clinical trial for an Alzheimer’s drug being jointly developed by two pharmaceutical companies, who allegedly tipped a hedge fund manager with safety data and eventually data about negative results in the trial approximately two weeks before they became public, which allowed the hedge fund to make nearly $276 million in gains, agreed to pay more than $234,000 in disgorgement and prejudgment interest to settle the SEC’s insider trading charges. The physician’s penalty may have been mitigated by the fact that he cooperated with and received a non-prosecution agreement from the U.S. Attorney’s Office in a parallel criminal action. See SEC Charges Hedge Fund Firm CR Intrinsic and Two Others in $276 Million Insider Trading Scheme Involving Alzheimer’s Drug.
A former executive director of business development at a pharmaceutical company located in New Jersey, who allegedly tipped a hedge fund manager (a friend and former business school classmate) with material nonpublic information regarding the company’s anticipated acquisition that allowed the manager to make nearly $14 million in gains, escaped criminal prosecution and agreed to pay a $50,000 penalty to settle the SEC’s insider trading charges. See SEC Charges Pharmaceutical Company Insider and Former Hedge Fund Manager for Insider Trading, Resulting in Approximately $14 Million in Profits.

There are a few reasons the SEC may have settled with Choi for such a small civil penalty. First, the SEC recently settled with Lim, the second chain in the insider trading scheme. Lim tentatively agreed to disgorgement or to pay a penalty once he has completed his cooperation with the U.S. Attorney’s Office for the Southern District of New York and has been sentenced in its pending, parallel criminal action¾ i.e., United States v. Lim, 12-cr-121 (S.D.N.Y.). It also could be Choi’s limited financial means. We likely will never know the reason for the SEC’s agreed-upon resolution, but the fact of the resolution may have some value to other defendants.

Article By:

William L. Carr

Kevin A. Wisniewski

Of:

Drinker Biddle & Reath LLP

Accepting on-site registration for 14th Annual SuperConference from InsideCounsel

The National Law Review is pleased to bring you information about the upcoming 14th Annual Super Conference hosted by Inside Counsel. You can still register on-site!

Now offering an exclusive National Law Review discount until May 12. Register HERE.

When

Monday, May 12 – Wednesday, May 14, 2014

Where

Chicago, IL

The annual InsideCounsel SuperConference, for the past 13 years, has offered the highest value for educational investment within a constructive learning and networking environment. Legal professionals will gain the opportunity to elevate the quality of their performance and learn ways to become a strategic partner within his/her organization. In two-and-half days attendees earn CLE credits, network with hundreds of peers and legal service providers and hear strategies to tackle corporate legal issues that are top of mind throughout this comprehensive program. SuperConference is presented by InsideCounsel magazine, published by Summit Professional Networks.

Now celebrating its 14th year, InsideCounsel’s SuperConference is an exclusive corporate legal conference attracting more than 500 senior level in-house counsels from Fortune-1000 and multi-national companies. The three-day event offers opportunities to showcase your firm’s industry knowledge and thought leadership while interacting with GC’s and other senior corporate counsel during exclusive networking and educational opportunities. The conference agenda offers the perfect blend of experts and national figure heads from some of the nation’s largest corporations, top law firms, government and regulatory leaders, and industry trailblazers. The conference agenda and educational program receives consistent high marks.

In This “Unreliable” Opinion, California Court Requires Privity For Action Against Unlicensed Broker-Dealer

Since California Corporations Code Section 25501.5 was enacted ten years ago, I’ve been repeatedly asked “What do it mean?“. The statute provides that a person who purchases a security from, or sells a security to, an unlicensed broker-dealer may bring an action for rescission of the sale or purchase or, if the plaintiff or the defendant no longer owns the security, for damages. The question has always been whether the statute requires privity of contract.

Now, there is a judicial answer; just not one that can be relied upon (more about that below). In Alpinieri v. Tgg Mgmt. Co., 2014 Cal. App. Unpub. LEXIS 3177 (Cal. App. 4th Dist. May 5, 2014), the Fourth District Court of Appeal concluded:

The Legislature’s use of the commonplace phrases “purchases a security from” and “sells a security to” demonstrates it intended a civil action for rescission or damages under section 25501.5 be available only to a person who transacts directly with an unlicensed broker-dealer, that is, who is in privity with that unlicensed broker-dealer. We see no indication in section 25501.5′s language any intent other than to restrict a claim for rescission or damages against one who is directly responsible for violating the statute by virtue of selling the security. Because no contrary legislative intent appears in the statute, there is no basis to disregard literal construction.

(citation omitted). The Court distinguished two other decisions involving the privity requirement under the Corporate Securities Law of 1968, Moss v. Kroner, 197 Cal. App. 4th 860 (2011) and Viterbi v. Wasserman, 191 Cal. App. 4th 927 (2011), on the basis that those cases did not involve Section 25501.5.

Why is this an “unreliable” holding? The opinion, which was penned by Associate Justice Terry B. O’Rourke, was not certified for publication. Under Rule 8.115(a) of the California Rules of Court, an unpublished opinion, with certain exceptions ”must not be cited or relied on by a court or a party in any other action”.

Article By:

Keith Paul Bishop

Of:

Allen Matkins Leck Gamble Mallory & Natsis LLP

You can still register for Inside Counsel's 14th Annual Super Conference in Chicago!

The National Law Review is pleased to bring you information about the upcoming 14th Annual Super Conference hosted by Inside Counsel. It’s not to late to register!

Now offering an exclusive National Law Review discount until May 12. Register HERE.

When

Monday, May 12 – Wednesday, May 14, 2014

Where

Chicago, IL

Federal Trade Commission (FTC) Wins Appeal: ProMedica Merger with St. Luke’s Not Allowed

vonBriesen

On April 22, 2014, the U.S. Court of Appeals for the Sixth Circuit (Sixth Circuit) upheld the Federal Trade Commission’s (FTC) finding that the merger between Ohio-basedProMedica Health System, Inc. (ProMedica) and St. Luke’s Hospital (St. Luke’s), an independent community hospital that operates in the one of the same counties as ProMedica, would adversely affect competition in violation of federal antitrust law. Prior to the merger, ProMedica and St. Luke’s comprised two of the four hospital systems in Lucas County, Ohio. After the two systems merged, ProMedica held more than 50% of the applicable market share.

Accordingly, in 2011 the FTC ordered ProMedica to divest itself of St. Luke’s. ProMedica appealed the FTC’s order to the Sixth Circuit. In a unanimous opinion, the Sixth Circuit denied ProMedica’s petition to overturn the FTC order, citing concerns about anti-competitive behavior and the ability of ProMedica to unduly influence reimbursement rates with healthcare insurance companies.

The full 22-page court opinion may be accessed here.

Article By:

Patrick J. Cannon

Of:

von Briesen & Roper, S.C.

Why October 1, 2014 Is An Important Date For Management Persons Of Nevada Entities

Two years ago, the Nevada Supreme Court in an en band decision held that a state district court may exercise jurisdiction over the nonresident officers and directors of a Nevada corporation with its principal place of business in Spain. Consipio Holding, BV v. Carlberg, 282 P.3d 751 (Nev. 2012). The Supreme Court reasoned

When officers or directors directly harm a Nevada corporation, they are harming a Nevada citizen. By purposefully directing harm towards a Nevada citizen, officers and directors establish contacts with Nevada and “affirmatively direct [] conduct” toward Nevada.

At the time, Nevada, unlike Delaware, had no implied consent statute. Thus, the Nevada Supreme Court’s holding was based on Nevada’s long-arm statute, NRS 14.065(1).

In the ensuing session, the Nevada legislature decided to address the issue as well by enacting an implied consent statute:

Every nonresident of this State who, on or after October 1, 2013, accepts election or appointment, including reelection or reappointment, as a management person of an entity, or who, on or after October 1, 2014, serves in such capacity, and every resident of this State who accepts election or appointment or serves in such capacity and thereafter removes residence from this State shall be deemed, by the acceptance or by the service, to have consented to the appointment of the registered agent of the entity as an agent upon whom service of process may be made in all civil actions or proceedings brought in this State by, on behalf of or against the entity in which the management person is a necessary or proper party, or in any action or proceeding against the management person for a violation of a duty in such capacity, whether or not the person continues to serve as the management person at the time the action or proceeding is commenced. The acceptance or the service by the management person shall be deemed to be signification of the consent of the management person that any process so served has the same legal force and validity as if served upon the management person within this State.

NRS 75.160(1). Under the statute, an “entity” means a corporation, whether or not for profit; limited-liability company; limited partnership; or a business trust. NRS 78.160(10)(b). A “management person” means a director, officer, manager, managing member, general partner or trustee of an entity. NRS 75.160(10)(c).

Apparently, the Nevada legislature did not consult with Professor Eric Chiappinelli who last year published an article arguing that Delaware’s implied consent statute was unconstitutional. The Myth of Director Consent: After Shaffer, Beyond Nicastro, 37 Del. J. Corp. L. 783 (2013).

Why does the statute refer to October 1? Pursuant to NRS 218D.330(1), each law and joint resolution passed by the Legislature becomes effective on October 1 following its passage, unless the law or joint resolution specifically prescribes a different effective date.

Article By:

Keith Paul Bishop

Allen Matkins Leck Gamble Mallory & Natsis LLP

Category: Corporate law

SawStop Dismissal Explained: Opinion Crosscutting SawStop’s Antitrust Lawsuit Released

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ATP Tour, Inc. v. Deutscher Tennis Bund: How Broad Was That Bylaw?

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