Wednesday, March 18, 2015

It's Not Just Delaware For Which You Need To Watch Out


For various historical reasons whose intrinsic validity can certainly be questioned, most business entities formed outside their home jurisdiction are organized in Delaware. This favoritism for Delaware is based upon the assumption that the Delaware statute are in some manner both unique and favorable.
It needs to be appreciated that, however, nearly every state has a business entity statute that is in some manner unique (or near unique) and, depending upon the objectives of particular constituents to a venture, favorable. At the same time, if a provision is favorable to some constituent, it may not be favorable to others.
There is currently pending in Delaware a dispute as to whether or not the Delaware General Corporation Law should be amended to preclude provisions in either the certificate of incorporation or the bylaws which, beyond the provisions already set forth in statute, would provide for the shifting of liability for expenses in derivative actions.  HERE IS A HERE IS A LINK to a prior posting on this topic.
The attention upon this controversy in Delaware should not be interpreted as an indication that similar debates have not taken place in other states or that they have not already adopted laws on the topic. Specifically, the Oklahoma legislature, in 2014, amended its Business Corporation Act to provide for mandatory fee shifting against plaintiffs in certain derivative actions. In effect, Oklahoma has already mandated the treatment that, even in an optional format, is right now being debated in Delaware. Specifically, Oklahoma law now provides that:
·        If the derivative action “confers a substantial benefit on the corporation,”, the court may order the corporation to pay the legal fees incurred by the plaintiff shareholders in prosecuting the action; and
·        in any derivative action, the court shall require the non-prevailing party to pay the expenses, including attorneys’ fees, incurred by the prevailing party. 18 Okla. Stat. § 1126.
As such, by statute, Oklahoma has already adopted an interim provision that will, undoubtedly, limit the willingness of shareholders of an Oklahoma corporation to challenge actions taken by the Board of Directors and management which may implicate their fiduciary duties to the corporation. HERE IS A LINK to that Oklahoma statute.
It is not just Delaware that has atypical laws.

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