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Connecticut Law Firms Poised to Compete for Corporate Clients

Submitted by Amaris Elliott-Engel on Sat, 12/16/2017 - 15:18

Here is a recent story I wrote for the Connecticut Law Tribune about changes to the law for corporations and LLCs that went into effect earlier this year:

While Delaware remains the hub of corporate law with a large number of publicly traded companies choosing to incorporate there, Connecticut is aiming to compete with the state and other large commercial jurisdictions, as recent reforms have been made to state laws governing corporations and limited liability companies.

Corporate law practitioners say these changes to Connecticut’s LLC and corporations law are part of the state’s effort to compete in being friendly to businesses and to entice corporate lawyers to advise their clients to incorporate in Connecticut.

When the Connecticut Uniform Limited Liability Company Act went into effect July 1, it was the first major update to Connecticut’s laws about LLCs since 1993. And major changes to the Connecticut Business Corporation Act went into effect Oct. 1.

These reforms are “mostly for the benefit of lawyers,” said John H. Lawrence Jr., a partner at Shipman & Goodwin in Hartford and a member of the American Bar Association committee that promulgates the model law on which Connecticut’s corporate law is based.

“Clients spend very little time focusing on these kinds of issues,” Lawrence said. “These are really tools to make advice on business matters easier and clearer. A lawyer has to have confidence that Connecticut will be as up-to-date as Delaware or New York or any other big commercial state.”

Before Connecticut adopted the new LLC law based on the Uniform Law Commission’s model law, “it was difficult to recommend to clients that Connecticut be the jurisdiction where they formed their LLCs if they were looking for outside investment,” said Matthew H. Gaul, a partner at Carmody Torrance Sandak & Hennessy in New Haven and a member of the Connecticut Bar Association’s Business Law Section committee that vetted the model law.

In terms of attracting corporations, Lawrence said Connecticut’s adoption of the latest changes to the ABA’s Model Business Corporation Act will make it competitive with other commercial jurisdictions.

The new Connecticut law allows corporations to correct prior “defective actions,” which is something Delaware law allows, said Lane T. Watson, a partner with Day Pitney in Hartford who represents companies in mergers and acquisitions and venture capital financing, and on other issues.

The most common situation in which a corporation has taken a defective action is when more stock has been issued than the articles of incorporation authorized, Lawrence said. That could scuttle a company’s effort to go public because some stockholders would not be able to sell their shares, Lawrence said.

The new law also allows companies to require that lawsuits regarding internal corporate matters be heard in Connecticut courts and thus prevent forum-shopping by plaintiffs, Lawrence said.

New legislation also allows corporations to eliminate a board of directors member’s responsibility to disclose when he or she has an investment opportunity that would be of benefit to the corporation, Lawrence noted.

The change in the law “eliminates a complicating factor in what is a national and international economy” to obtaining investments from venture capitalists, Lawrence said.

Connecticut corporations also can now undertake “two-step mergers” without getting the approval of shareholders, Watson said. Delaware law allows two-step mergers, in which an investor who accrues enough stock can gain control of a corporation. Once an investor’s control is in place, the investor merges the corporation into a new entity, even if other shareholders object.

Allowing two-step mergers without shareholder approval is seen as another way corporations can be acquired, giving businesses a reason to incorporate in Connecticut and not elsewhere, Watson said.

Marcel Bernier, a partner with Murtha Cullina in Hartford, was an active proponent of updating the LLC law in Connecticut. He said adoption of the model LLC law will make the state more competitive with other states. One benefit of adopting the model, he said, is that Connecticut judges and lawyers will be able to look to case law that has developed in other states to develop Connecticut’s own version of the law.

That’s important, Gaul said, because Connecticut previously had only a few court decisions involving LLCs, and there were gaps concerning the fiduciary duties of LLC members.

“Investors really don’t like uncertainty,” Gaul added.

The new LLC law also extends some concepts from corporate law into the realm of LLCs, Watson said. That includes a ban on LLCs making distributions to members if doing so would make them insolvent, he said. It also includes allowing LLC members to bring a “derivative” lawsuit claiming there has been a breach of fiduciary duty on behalf of the LLC itself, he said. The old statute was silent as to whether a member of an LLC claiming there has been a breach of a fiduciary duty may file that claim directly or on a derivative basis, Bernier said.

As a result, there have been conflicting Connecticut Superior Court decisions on whether LLC members may bring derivative lawsuits.

The new law also allows for LLC operating agreements to alter the duty of loyalty or the duty of care, which Bernier said is important to encourage investment. The new law also allows for the complete elimination of the duty of loyalty.

Allowing the parties to have the liberty to enter an operating agreement that changes these fiduciary duties will encourage hedge fund managers and other venture capitalists to invest in Connecticut LLCs knowing they are “not more exposed to liability than their comfort level,” Bernier said.

Another legal change, albeit from almost four years ago, also will encourage businesses to form LLCs in Connecticut, Gaul said. Following Connecticut’s enactment of the Connecticut Entity Transactions Act on Jan. 1, 2014, Connecticut LLCs are permitted to change into Delaware corporations, Gaul said. “That matters, because most venture capitalists want to be investing in Delaware corporations,” he noted. That means corporate practitioners can advise their clients to form their LLCs and attract investors in Connecticut, while retaining the option to eventually incorporate in Delaware.

Supreme Court Rules Ecuadoreans Can Sue Chevron in Canada

The Canada Supreme Court has ruled that Ecuadoreans can sue Chevron and its Canadian subsidiary within that country to enforece a $9.5 billion judgment in Ecuador, The Globe and Mail's Sean Fine reports. Fine notes that the ruling weakens the corporate veil between a corporate parent and its subsidiary and "has major implications for Canadian multinational companies whose business activities raise environmental or human-rights concerns around the globe."

Delaware Losing Luster as Corporate Haven

Companies including Dole and are souring on Delaware as the place of their incorporation, The Wall Street Journal's Liz Hoffman reports: "Dole is one of several companies that say the state has become less hospitable toward business. Among their gripes: a growing tide of shareholder litigation, which some feel the state hasn’t done enough to curb. One new measure bars companies from shifting their legal fees to shareholders who sue and lose—a boon to would-be plaintiffs."

One of the main complaints from Dole and is against appraisal suits, which require companies to pay interest on the value of all claims disputing the price paid.

Delaware is the legal home to 54 percent of public companies, and the Delaware Court of Chancery has had its filings increase by 20 percent between 2003 and 2012, the WSJ reports.

SEC Concerned By Fee-Shifting Bylaws

Securities and Exchange Commission Chair Mary Jo White expressed concern this week about corporate bylaws that force shareholders to pick up legal bills if they lose their lawsuits against boards of directors, Reuters reports. The Delaware Supreme Court upheld that sort of bylaws in May, even though, under the "American rule," each litigant normally has to pay for its own legal costs.

Delaware 'King of the Deal Universe'

We already knew that Delaware was the land of corporations. But Steven Davidoff Solomon writes in DealBook that, because more than 60 percent of public companies are incorporated in Delaware, the state's judiciary are imposing their "worldview of deal-making" and influencing how other state courts interpret corporate law: the "concepts of impartiality and independence are the guiding principles of Delaware’s view of mergers and acquisitions. It means that Delaware is pushing for deals to be approved and vetted by independent directors. More important, these directors should obtain conflict-free advice that is both studied and considered. And a record should be made or else — so that the Delaware courts can carefully scrutinize the transaction." As a result, Davidoff Solomon reports that stapled financing--in which a bank would offer financing to prospective buyers of a company its advising during a deal--is all but dead. And companies, in order to avoid conflicts, now funnel deals "through independent directors advised by lawyers and bankers who are also independent."


Corporate Guru Leo Strine Won't Forget Family Court On the DE Supreme Court, Defends Secret Arbitration Program

Delaware Business Court Insider's Jeff Mordock reported this week on Leo E. Strine Jr.'s confirmation as the chief justice of the Delaware Supreme Court. While Delaware is a preferred forum for America's corporations, one thing that struck me about Jeff's coverage is that Strine said he plans to focus on family court, which is an often overlooked area of law: "'One of the things I never forget is how important Family Court is. The Justice of the Peace Court comes into contact with more Delaware residents than any other court. The challenge of delivering the high-quality justice our court has done with limited resources is a daunting one and I'm committed to giving my all to do that. My background has positioned me well to understand the challenges of my colleagues in the other courts."'

Strine also defended the Court of Chancery's confidential arbitration program against the argument that it violates the First Amendment. Delaware is appealing to the U.S. Supreme Court in a last-ditch attempt to reinstate the program after the Third Circuit struck it down.

U.S. Supreme Court Asked to Review Delaware's Oversight of Private Arbitrations

After the Third Circuit rejected the Delaware Court of Chancery from overseeing private arbitrations, Delaware has asked the U.S. Supreme Court to review what some called "secret trials," Reuters reports. "The arbitration process was seen by Delaware attorneys as a key to boosting the attractiveness of the Court of Chancery," Reuters further reports. "It was also considered economically important to the state, as at least one company in an arbitration dispute had to be incorporated in Delaware."

Leo Strine Picked to Lead 'Most Important Business Court in the World"

Leo Strine, current chancellor of the Delaware Court of Chancery, has been nominated to lead the Delaware Supreme Court, Delaware Law Weekly's Jeff Mordock writes in a more indepth report on this week's development: "'Strine heads the most important business court in the world,' said Thomas J. Reed, a professor at Widener University School of Law, after the chancellor had submitted his application. 'He's been there for a long time and the Delaware Supreme Court's docket is driven by filings and decisions from the Chancery Court. He knows business law inside and out and that gives him a tremendous edge,'" Mordock reports.

Who Will Be the Next Delaware Supreme Court Justice?

Delaware may be an itty-bitty-sized state, but its impact on the American legal system is outsized because so many companies incorporate under Delaware law. Reuters reports "the state's tight-knit legal community is abuzz over whether the outspoken head of the Court of Chancery, Leo Strine, will become chief justice of the state's Supreme Court."

Delaware Law Weekly's Jeff Mordock reported earlier this month "the competition to become the next chief justice is a close two-horse race between Delaware Court of Chancery Chancellor Leo E. Strine Jr. and Superior Court Judge Jan R. Jurden." The full DLW story:


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