Delaware Business Law Report : Delaware Business Lawyers & Attorneys: Morris James Firm: Finance & Business Law

The Journal of Structured Finance has published an article written by Shannon Frazier entitled "Trustee Representation in Structured Finance Transactions." 

The article provides an overview of certain fundamental trustee issues that arise in virtually all financing arrangements involving a trust structure.  Some of the topics discussed include capacity, indemnification and limitations on trustee liability, among others.  Hopefully, the article will prove to be a valuable resource for parties to structured financings.

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Under Delaware law does a class of stock have voting rights other than those set forth in the certificate of incorporation?

Yes.  Regardless of the voting limitations imposed on a class of stock in the certificate of incorporation, a class of stock is entitled to vote on certain proposed amendments to the certificate of incorporation that affect them adversely but such right does not extend to mergers that affect the class adversely.

Unless otherwise provided in the certificate of incorporation, a stockholder is entitled to one vote per share of capital stock.   A corporation may issue one or more classes of stock with such voting powers, full or limited, or no voting power, and such restrictions as shall be stated and expressed in the certificate of incorporation.  However, even stock that does not otherwise have any right to vote has the right to a vote by class by statute with respect to specified categories of amendments to the certificate of incorporation.  The statute creates a right to a class vote when a proposed amendment to the certificate of incorporation would:

(1) increase or decrease the number of authorized shares of the class,

(2) increase, decrease or eliminate the par value of the shares of the class, or

(3) alter or change the powers, preferences or special rights of the shares of the class so as to affect them adversely.

However, Delaware courts have held that the right given to preferred stockholders to vote as a class on charter amendments which affect their rights and privileges adversely does not carry with it a right to class votes on mergers unless such right is expressly provided in the charter.

 

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While the majority of case law in Delaware suggests that a Delaware court will apply default fiduciary duties when a limited liability company agreement (an “LLC agreement”) is silent as to the existence and application of fiduciary duties, the Delaware Supreme Court has not yet weighed in and therefore this issue is not settled law. 

Can an argument be made that default fiduciary duties violate the strong policy favoring freedom of contract established by Delaware’s legislature, and that Delaware courts should not apply default fiduciary duties even if the parties have not specifically provided for the elimination of fiduciary duties?

In an article for the American Business Law Journal, Chief Justice Steele contends that “default fiduciary duties violate the strong policy favoring freedom of contract established by Delaware’s legislature,” and “Delaware courts should not apply default fiduciary duties even if the parties have not specifically provided for the elimination of fiduciary duties.” See Myron T. Steele, Freedom of Contract and Default Contractual Duties in Delaware Limited Partnerships and Limited Liability Companies, 46 Am. Bus. L.J. 221, 223-224 (2009). He argues that courts “should not read any default fiduciary duties into an LLC agreement because the parties’ prescribed and proscribed conduct in their operating agreement contains the entire agreement that the parties intend and expect.”  The Chief Justice also reasons that the court should “favor the contracting parties’ ex ante calculation of costs and benefits of fiduciary duties, and courts should not, on their own, endeavor to reassess that decision ex post.”  In his article, Chief Justice Steele asserts that the Court of Chancery itself is split on the issue of default fiduciary duties, and points to two decisions by Chancellor Chandler which support not applying default fiduciary duties.

I wonder how likely it is that Chief Justice Steele could persuade his fellow Justices to support this theory?

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In July, the U.S. Senate passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”), a 2,000 page bill containing what may be the most sweeping financial reforms since the Great Depression.

The Act itself proclaims that it is “An Act to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail”, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.” With these goals in mind, the Act sets forth major overhauls of virtually every aspect of business, from the regulation of swaps, derivatives, and hedge funds to the fiduciary duties of brokers to executive compensation to the creation of the Bureau of Consumer Financial Protection and the Financial Stability Oversight Council, and more.

The task now facing the business and legal communities is a daunting one: to delve into the substance of the Act and come to understand the subtleties and nuances this new law, to find a way to transact business within the confines of these new regulations.

What this all means for the finance industry is unclear.  On one hand, there is no doubt that the market hates uncertainty.  It can be hoped that the certainty brought to the economic landscape by the passage of the Act will lead to greater stability and long-term growth.  On the other hand, the complexity of the legislation and the new requirements of the Act may deter businesses from participating in the financing transactions that are so important to the movement of money within our economy.  In either circumstance, the latter part of 2010 should be an interesting time for investors, attorneys, and Wall Street financiers alike.

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One of the hallmarks of the Delaware Limited Liability Company Act (the "Delaware LLC Act") is its flexibility. Indeed, the Delaware LLC Act seeks “to give maximum effect to the principle of freedom of contract and to the enforceability of limited liability company agreements.”  To that end, the Delaware LLC Act expressly permits “written, oral or implied” LLC agreements, and generally allows parties to enforce unwritten, unsigned LLC agreements.

In October 2009, however, the Delaware Supreme Court was called upon in the case of Olson v. Halvorsen to review of the application of the statute of frauds to LLC agreements.  Construing the Delaware LLC Act and the statute of frauds together, and finding that the General Assembly did not clearly intend the Delaware LLC Act to render the statute of frauds inapplicable, the Delaware Supreme Court held that the statute of frauds does, in fact, apply to LLC Agreements.  As a result, according to the Delaware Supreme Court, the statute of frauds prevents enforcement of oral LLC agreements that require more than one year to complete.

It appears that this outcome is not the one intended by the Delaware legislature in drafting the Delaware LLC Act. In light of the Olson decision, on June 10, 2010, the Governor signed House Bill No. 372, which (in part) amends Section 18-101(7) of the Delaware LLC Act to provide “[a] limited liability company agreement is not subject to any statute of frauds…” (emphasis added).

Furthermore, although the Olson decision related solely to limited liability companies, the legislature made similar amendments to the Delaware Partnership Act and the Delaware Limited Partnership Act, clarifying that the operating agreements of such entities are likewise exempt from any statute of frauds.

These amendments will go into effect on August 2, 2010. 

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The American Securitization Forum has announced that the ASF 2011 Conference will be held February 6-9, 2011 at the Orlando World Center Marriott in Orlando, Florida. Billed as the “largest securitization conference in the world,” it is sure to be replete with industry experts, legislators, issuers and investors.

With over 1000 attendees, the ASF 2010 Conference in National Harbor, Maryland, was a hugely successful event and provided ample opportunities for networking with lawyers and businesspeople from across the country and throughout the world.  The atmosphere at the 2010 conference was one of cautious optimism, as the players in the securitization industry began to see a slight thaw in the credit markets and a slow resurgence in securitization transactions.  Hopefully, this trend will continue and the atmosphere at the ASF 2011 conference will be even more positive.  We will find out if that is the case come February!

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Delaware has recently amended its General Corporation Law to provide for a more streamlined mechanism for merging a parent entity with its corporate subsidiary.  With this amendment, Delaware grants to corporations and other business entities even greater flexibility to engage in complex transactions in an efficient and expedient manner.

The new Section 267 of the Delaware General Corporation Law permits an Entity owning at least 90% of the outstanding shares of each class of stock of a corporation (such corporation and Entity being organized under Delaware law or the law of any other state or the District of Columbia, the laws of which do not forbid such a merger) may merge with or into such corporation by authorizing the merger in accordance with such Entity’s governing documents and by filing with the Delaware Secretary of State a “certificate of ownership and merger.” This new Section goes on to set forth the requirements of the certificate of ownership and merger and to provide for circumstances where the parent Entity does not own all of the outstanding stock of the subject corporation. 

Conforming amendments were made to the Delaware Limited Liability Company Act, the Delaware Partnership Act and the Delaware Limited Partnership Act. 

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Morris James LLP is pleased to announce that five of its partners have been recognized among the top Delaware litigation attorneys in Benchmark Litigation 2011 - The Guide to America's Leading Litigation Firms and Attorneys.

Morris James’ Litigation Stars

Rich Galperin 
Clark Collins
Richard Herrmann
Lewis Lazarus
Edward McNally 

Benchmark Litigation focuses exclusively on litigation lawyers and firms in the United States.  Recommendations are based on extensive face-to-face and telephone interviews with the nation’s leading private practice lawyers and in-house counsel.

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