May 01, 2018

MONTH-IN-BRIEF: Corporations, LLCs & Partnerships

Lawrence A. Goldman, Tarik Haskins

Corporate Law

Kentucky, and Not Federal, Court to Hear Dissenter Rights Action

By Thomas E. Rutledge, Stoll Keenon Ogden PLLC

A recent decision from the federal district court held that, on the basis of “Burford Abstention,” an action arising under the dissenter rights statute should be heard in state, not federal, court. Henley Mining, Inc. v. Parton, Civ. No. 6:17-CV-00092-GFVT, 2018 WL 1526081 (E. D. Ky March 28, 2018).

In connection with the merger of several companies in which he was a shareholder, David Parton exercised dissenter rights in accordance with the dissenter-rights provisions of the Kentucky Business Corporation Act. The successor corporation paid to Parton what it thought was the amount due; Parton disagreed with that amount. In response thereto, and again consistent with the Kentucky Business Corporation Act, the corporation filed a complaint with the court seeking a determination of the fair value of Parton’s interest. This suit was filed in federal court on the basis of diversity jurisdiction, Parton being a citizen of Virginia while Henley Mining, the successor corporation, was incorporated (and presumably has its principal place of business) in Kentucky.

Henley asked that the action be dismissed on the basis of Burford Abstention, essentially an argument that, notwithstanding the fact that the federal court has jurisdiction, it should decline to exercise it because the matter in controversy is particular to the competency of state courts.

Citing Caudill v. Eubanks Farms, Inc., 301 F.3d 658, 659 (6th Cir. 2002), it was observed that:

A corporation is “itself a creature of state law” and, specifically, “The Kentucky Legislature has enacted a comprehensive legislative scheme to govern businesses which elect to incorporate in the state.”

Finding that the question presented with respect to dissenter rights is “a difficult question of state law bearing on policy concerns,” the action was dismissed without prejudice so that it may be re-filed in state court.

Corporate Governance

If Material to Stockholders, a Delaware Corporate Board Has a Fiduciary Duty to Disclose the Reasons for a Director’s Abstention

By Lawrence A. Goldman, Gibbons P.C.

In Appel v. Berkman, the founder and Chairman of Diamond Resorts abstained from the Board’s vote to approve a sale of the company and made his reasons known to the Board.  The company’s proxy statement to stockholders recommending a tender of shares as part of the sale process noted that the Chairman had abstained from the Board’s vote but did not disclose the reasons for his abstention. The Delaware Supreme Court stated that directors have a fiduciary duty to disclose fully all material information that would have a significant effect upon a stockholder vote when it seeks or recommends stockholder action. In determining whether particular information would be material, the Court adopted a contextual approach, which requires an examination of whether certain facts would materially affect the mix of information provided to stockholders. The Court stated that a Chairman’s abstention from voting on the sale of the business he founded is not common and when his reasons for doing so contradict the board’s recommendations to stockholders, the information is material and should have been set forth in the proxy statement.

Tarik Haskins

Partner; Morris, Nichols, Arsht & Tunnell LLP

Tarik is a partner in the Commercial Law Counseling Group. His practice covers a range of commercial transactions including mergers and acquisitions, secured financings, joint ventures, and business counseling.

Lawrence A. Goldman

Counsel, Gibbons P.C.

Larry, a member of the Corporate Department of Gibbons P.C., counsels middle market and smaller public company clients on a broad array of corporate and transactional matters, focusing on mergers and acquisitions (domestic and cross-border); capital formation and finance; governance; private placements and securities law compliance; distressed business restructuring and the corporate aspects of bankruptcy reorganization; and the organization and governance of joint ventures. He has substantial experience representing audit committees and other special board committees in corporate governance and internal investigation matters. He is a frequent speaker nationally on corporate matters, with a particular emphasis on the organization and operation of businesses as limited liability companies or other alternative entities. He is the author of The New Jersey Limited Liability Company Forms and Practice Manual and has been engaged as an expert witness on alternative entity governance and other corporate issues in litigation arising from transactional matters. Larry is a graduate of Colgate University, Boston University School of Law, and New York University School of Law (LL.M Taxation).