In an Alert published on Thursday, Andrea Ravich provides an update on changes to Minnesota corporate law regarding limited liability companies (LLCs) that will take effect in January 2018, and notes action items for companies to ensure compliance.

Copyright: tashatuvango / 123RF Stock Photo

An overhaul of Minnesota corporate law on limited liability companies, or LLCs, that was phased in over three years will take full effect in January 2018. The new act differs significantly from the old act, but is modeled after the Revised Uniform Limited Liability Company Act and is similar in many ways to LLC laws in Delaware and other states.

Action Items Prior to January 1, 2018

Now is the time for Minnesota companies to ensure compliance. Within the next 120 days, LLCs should:

— Confirm that your LLC is registered and in good standing with Minnesota Secretary of State (file annual reports and/or renewal, as applicable).
— Review your LLC’s existing governing documents (i.e., any agreements between the members). Unless your LLC adopts a new operating agreement in writing, its current governing documents will continue in effect under the new act.
— With guidance of legal and tax counsel, consider whether there may be any opportunities to update, clarify and/or amend your LLC’s existing membership agreement.

To read Andrea’s full discussion of the impending changes, please visit the Fox Rothschild website.


Andrea L. Ravich is an associate in the firm’s Corporate Department, resident in its Minneapolis office.

The Problem

As every founder knows, starting and scaling a company is an extremely difficult and multi-faceted undertaking. In addition to the primary goals of developing a viable product, finding (and in some cases building from scratch) a robust market, and raising the capital necessary to sustain their business and operations, founders and their core teams also grapple with the day-to-day management and operations of a growing enterprise, whether that be personnel issues, forecasting cash needs and burn rates or tackling the legal and regulatory hurdles that often go hand-in-hand with the creation of disruptive technologies. Unfortunately, given the size and complexity of the average founder’s workload, it is no surprise that emerging companies of all sizes occasionally neglect to heed the advice of their attorneys and ensure that any and all corporate actions taken by the company and its officers are properly authorized and, if necessary, approved by the company’s Board and stockholders.

The Exposure

Copyright: tang90246 / 123RF Stock Photo

Under the Delaware General Corporation Law (the “DGCL”) otherwise permissible corporate acts that do not satisfy the consent and other procedural requirements of the DGCL, the corporation’s organizational documents or any other agreement to which the corporation is a party, are deemed to be “defective corporate acts” and are generally held to be void and of no legal force and effect.[i] The pre-2014 historical body of Delaware case law held such corporate acts, taken without “scrupulous adherence to the statutory formalities” of the DGCL, to be acts undertaken “without the authority of law” and therefore necessarily void.[ii] Prior to the enactment of Sections 204 and 205 of the DGCL, the relevant line of Delaware case law held that corporate acts, transactions and equity issuances that were void or voidable as a result of the corporation’s failure to comply with the procedural requirements of the DGCL and the corporation’s governing documents could not be retroactively ratified or validated by either (i) unilateral acts of the Corporation intended to cure the procedural misstep or (ii) on equitable grounds in the context of litigation or a formal petition for relief to the Court of Chancery.[iii] In short, there was no legally recognized cure for such defective actions and the company was left forever exposed to future claims by disgruntled shareholders, which could ultimately jeopardize future financings, exits and ultimately the very existence of the company.

The Statutory Cure

Luckily, for those founders who make the potentially serious misstep of failing to obtain the required consents and approvals before taking a particular action (e.g. issuing options to employees or executing a convertible note or SAFE without the prior consent of the Board), in 2014 Delaware enacted Sections 204 and 205 of the DGCL, which served to clarify the state of the law in Delaware and fill a perceived gap in the DGCL by providing new mechanisms for a corporation to unilaterally ratify defective corporate acts or otherwise seek relief from the Court of Chancery.[iv]

While both Sections 204 and 205 were intended to remedy the same underlying issue and provide a clear process for ratifying or validating a defective corporate act, the mechanics set forth in the respective sections take disparate routes to arrive at the intended result:

  • Section 205 provides a pathway for ratification that runs through the courts, allowing a corporation, on an ex parte basis, to request that the court determine the validity of any corporate act.
  • Section 204, on the other hand, is considered a “self-help statute” in the sense that the procedural mechanic provided for in the statute allows a company to ratify the previously defective act unilaterally, without the time and expense involved with petitioning the court for validation of the corporate act in question.

In the case of early stage companies, the expenditure of the heavy costs and valuable time associated with seeking validation in the Court of Chancery render Section 205 a less than ideal tool for curing defective acts. This post therefore focuses on Section 204, which provides a far less onerous mechanic for ratifying defective corporate acts, allowing a corporation to cure past errors “without disproportionately disruptive consequences.”[v]

Section 204 in Practice

Section 204 provides Delaware corporations with a procedure to remedy otherwise void or voidable corporate acts, providing that “no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in [Section 204].”[vi] Pursuant to Section 204, a corporation’s Board may retroactively ratify defective corporate acts by adopting written resolutions setting forth:

  • the specific defective corporate act(s) to be ratified;
  • the date on which such act(s) occurred;
  • the underlying facts that render the act(s) in question defective (e.g., failure to obtain the authorization of the Board or inadequate number of authorized shares); and
  • that the Board has approved the ratification of the defective corporate act(s).

Additionally, if a vote of one or more classes of stockholders was initially required to authorize the defective act at the time such act was taken (e.g., the approval of a majority of the Series A preferred stockholders in the case of an act that falls within the purview of the Series A protective provisions), then ratifying resolutions of the relevant class of stockholders are also required in order to cure the prior defect in the corporate act.

In sum, founders and their Boards should, at minimum, undertake the below listed procedural steps* in order to ensure that otherwise defective corporate acts are cured and ratified in the manner prescribed by the DGCL.

  • A resolution by the Board setting forth (i) the defective corporate act to be ratified, (ii) the date of the defective act, (iii) if shares or other equity is involved, the number, class and date of the equity issuance, (iv) the reason for the defect, and (v) the approval and ratification by the Board of the defective corporate act.
  • Approval of the stockholders or a particular class of stockholders (in the form of a written consent) if such an approval was required at the time of the defective corporate act.
  • Proper notice of the ratification sent to all stockholders (including stock that may have been invalidly issued). The notice must include a copy of the ratifying resolution/consent and an explanation that any claim that the ratification in question is not effective must be brought before the Court of Chancery no later than 120 days from the effective date of the ratification.
  • In certain circumstances, the filing of a “Certificate of Validation” with the Delaware Department of State to cure the defective corporate act being ratified (e.g., if shares were issued without filing the necessary Certificate of Amendment to increase the authorized shares of a corporation).

*This list should not be considered all-inclusive. Each situation is unique and further actions may be required depending on the underlying facts and the cause of the defect in question.

Startups represented by seedling growthTakeaways

The potential adverse impact of an uncured defective corporate act cannot be understated. For an early stage company seeking to raise capital from venture investors or other outside parties (or eventually exit through an acquisition), the risks associated with such defective acts are particularly acute. As a practical example, a corporation’s failure to observe the proper procedures in the election of a director can result in the invalidation of such election. In the event of such a defective election, actions taken by, or with the approval of, the improperly elected Board may be void or voidable. This or other defective corporate acts may result in the corporation being in breach of representations and warranties in any number of contracts, including stock purchase agreements executed as part of a financing round or M&A transaction.

Generally speaking, relatively extensive due diligence is typically the first step in all venture financings and other major corporate transactions. As part of this process, counsel for the investor or acquiror will undoubtedly review all material actions of the company along with the corresponding Board and stockholder consents as a means of “tying out” the company’s cap table. Any defective corporate act that was not later ratified by the company in accordance with Section 204 or 205 will at best need to be ratified or validated in advance of the closing of the transaction, and at worst may result in either (i) a reduction in the company’s valuation due to the perceived risk that past actions are ultimately void or unenforceable, or (ii) in extreme situations, the abandonment or termination of the transaction.

In an ideal world, companies of all sizes would always observe the proper procedures in authorizing corporate acts and ensuring that all other necessary steps are taken to ensure the validity of such actions. Unfortunately, in the fast-paced and often frenzied world of a startup, certain “housekeeping” items occasionally fall by the wayside. Upon the discovery of a defective corporate act by a company or its counsel, it is vital that the proper ratification procedures be undertaken in order to ensure that any and all past actions that could potentially be rendered defective are rectified and ratified in accordance with Section 204 (or in some cases Section 205) of the DGCL.


[i] A “defective corporate act” includes any corporate act or transaction that was within the power granted to a corporation by the DGCL but was thereafter determined to have been void or voidable for failure to comply with the applicable provisions of the DGCL, the corporation’s governing documents, or any plan or agreement to which the corporation is a party. See 8 Del. C. § 204(h)(1); See also, e.g., Blades v. Wisehart, C.A. No. 5317-VCS, at 8 (Del. Ch. Nov. 17, 2010) (requiring “scrupulous adherence to statutory formalities when a board takes actions changing a corporation’s capital structure”); STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“stock issued without authority of law is void and a nullity”).

[ii] See, e.g., Blades v. Wisehart, C.A. No. 5317-VCS, at 8 (Del. Ch. Nov. 17, 2010) (requiring “scrupulous adherence to statutory formalities when a board takes actions changing a corporation’s capital structure”); STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“stock issued without authority of law is void and a nullity”).

[iii] Id.

[iv] See H.B. 127, 147th Gen. Assemb., Reg. Sess. (Del. 2013): “Section 204 is intended to overturn the holdings in case law . . . that corporate acts or transactions and stock found to be “void” due to a failure to comply with the applicable provisions of the General Corporation Law or the corporation’s organizational documents may not be ratified or otherwise validated on equitable grounds.”

[v] In re Numoda Corp. S’holders Litig., Consol. C.A. No. 9163-VCN, 2015 WL 402265, at 8 (Del. Ch. Jan. 30, 2015).

[vi] 8 Del. C. § 204(a).

Changes to the Illinois Limited Liability Company Act that took effect on July 1, 2017 may impact either your current Illinois LLCs or your future ventures. The changes generally conformed Illinois law more closely to a model law for limited liability companies drafted by the National Conference of Commissioners on Uniform State Laws that has already been adopted by 15 states and the District of Columbia.

Copyright: tashatuvango / 123RF Stock Photo

Among the changes to the Illinois law are:

Default Member Management
An LLC will now be member-managed by default unless there is explicit language in the operating agreement stating that the LLC is to be manager-managed. Similar to Delaware, you are no longer required to specify in an LLC’s Articles of Organization whether it will be member-managed or manager-managed, but instead are only required to provide information regarding each manager and each member with management authority.

Oral Operating Agreements
Oral and implied operating agreements are now permitted and are also expressly exempted from the statute of frauds.

Designating Specific Authority of Members and Managers
Illinois LLCs can now establish or limit the authority of a member or manager to transfer real estate or enter into other transactions on behalf of the LLC by filing a document with the Illinois Secretary of State.

Waiver of Fiduciary Duties
With the exception of the duty of care, fiduciary duties may be restricted or eliminated by including clear and unambiguous language in the operating agreement. The operating agreement can now alter the duty of care so long as it does not authorize intentional misconduct or a knowing violation of law.

Limitation of Member’s or Manager’s Liability
An operating agreement can now eliminate or limit a member or manager’s liability to the LLC and the other members, unless such liability relates to a breach of certain specified fiduciary duties, a financial benefit to which such member or manager is not entitled, an intentional infliction of harm on the LLC or another member, or an intentional crime.

Elimination of Assumed Agency Status
A member of an LLC is no longer considered an agent of the LLC solely as a result of being a member.

Access to Books and Records
The provision regarding rights of members to inspect the books and records of an LLC has been revised to clarify the distinct rights held by members, disassociated members and transferees, and to permit LLCs to impose reasonable conditions and restrictions on access to information.

Authorized Signatories for State Filings
Documents to be filed with the Illinois Secretary of State may now be signed by any person authorized by the LLC, not just a manager or member, provided that both the name and title of the person signing are typed or printed where indicated on the applicable form. In addition, digital signatures will now be accepted by the Illinois Secretary of State.

Conversion and Domestication
Illinois now allows the conversion of a general partnership, limited partnership, business trust or corporation into an Illinois LLC, and vice versa. Prior to the changes to Illinois law, an entity other than a partnership could only convert to an Illinois LLC through a multi-step process involving a merger. Now, the converting entity simply files Articles of Conversion with the Illinois Secretary of State. The revised Act will also permit a foreign LLC to become an Illinois LLC through the filing of Articles of Domestication with the Illinois Secretary of State.

Please note that the summary above is not comprehensive, and is only intended to provide an overview of some of the significant changes to Illinois LLC law. Accordingly, we recommend that you consult with legal counsel to determine how the changes to Illinois law may affect your current Illinois LLCs or any Illinois LLCs that you may wish to form in the future.

Ethan Zook writes:

As was alluded to in a prior blog post, one of the major changes that has been enacted through Pennsylvania’s Act 170 is the ability, through the operating agreement, to contractually vary fiduciary duties of members and managers in Pennsylvania limited liability companies.

What Fiduciary Duties?

Pennsylvania flag icon
Copyright: somartin / 123RF Stock Photo

There are two major fiduciary duties to be aware of: the duty of care and the duty of loyalty. The fiduciary duty of loyalty is comprised of five subsections which can be summarized as follows:

  1. account to the company and hold as trustee for it any property, profit or benefit derived in the conduct or winding up of the company’s activities;
  2. do not use the company’s property for personal gain;
  3. do not appropriate a company opportunity for personal gain;
  4. refrain from engaging in self-dealing with the company; and
  5. refrain from competing with the company in the conduct of the company’s activities and affairs.

The duty of care is to refrain from engaging in gross negligence, recklessness, willful misconduct or knowing violation of law. Lastly, there is an obligation of good faith and fair dealing to be aware of, however, it is not a fiduciary duty.  Rather, it is treated as a contractual obligation, and as will be discussed, can be contractually altered by the operating agreement.

A member of a member-managed limited liability company owes to the company and the other members the fiduciary duties of loyalty and care. Managers of manager-managed limited liability companies owe to the company and the members those same duties.

Contracting Around Fiduciary Duties

The Act gives tremendous deference to the operating agreement, the main governing document for Pennsylvania limited liability companies.  If not manifestly unreasonable, the operating agreement may alter subsections 1), 2), and 4) of the duty of loyalty stated above.  Subsections 3) and 5) can be eliminated altogether.  Further, if not manifestly unreasonable, the operating agreement may also identify types of activities that do not violate the duty of loyalty, may freely alter the duty of care, and may prescribe the standards by with the performance of the contractual obligation of good faith and fair dealing is to be measured. Any other fiduciary duty can be altered or eliminated though the operating agreement, if not manifestly unreasonable.

Manifestly Unreasonable?

In any dispute regarding the reasonableness of the terms of the operating agreement, courts will decide whether those terms are manifestly unreasonable as a matter of law. That determination will be made as of the time the challenged term became part of the operating agreement by considering circumstances existing only at such time. This does not shed much light on what will be considered manifestly unreasonable under the terms of the Act. Instead, for now, we are left with intuition in deciding what is manifestly unreasonable.

Despite the ambiguity surrounding “manifestly unreasonable”, the Act makes it clear what fiduciary duties can be altered and eliminated. With that, it has become more important than ever to review the operating agreements of investment, potential partner, and current parent and subsidiary companies to see how loyal that company has chosen to be to itself and its members.


Ethan Zook is an associate in the firm’s Corporate Department, resident in its Exton office.

Once you have made the decision to incorporate your business, and gone through the formation process, it can feel like your company is ready to take on the world. However, there is one important item that cannot be neglected: the minute book. A minute book is the living official record of a business and contains all of the important documents to reflect the business’ history.

Checklist
Copyright: mexrix / 123RF Stock Photo

Maintaining organized records in a minute book is critical for any business.  For example, when a company seeks a new loan, raises funds via new investors, or becomes the target of an acquisition, it must undergo due diligence and produce its minutes to prove it has complied with both regulatory and its own self-governing documents such as its charter and bylaws.

The minute book begins with a business’ incorporation documents, including its articles of incorporation and bylaws (or articles of organization and operating agreement, if it’s an LLC). As time passes, and if the minute book is properly maintained, it will contain the documents that, among other things: authenticate compliance with governing documents via board and equity holder consents; confirm the company’s officers, directors and/or managers, who may resign or be replaced from time-to-time; and substantiate the capitalization of the company by memorializing changes in equity ownership.  Having a complete and current record streamlines any due diligence process and increases the company’s credibility from the very beginning.

Furthermore, the minute book will contain the “minutes” from the company’s annual and special board and equity holder meetings. The minutes are a written description of what took place at the meetings and serve to memorialize the actions taken by those in attendance during the meeting.  These records are valuable for preserving institutional memory, ensuring compliance with the company’s constitutional documents, and substantiating board or shareholder actions and processes if challenged later.

A corporation that commits to maintaining its minute book can save substantial time, money, and stress when it is called for review. On the other hand, neglecting to document the corporation’s history as it occurs can leave the company stuck trying to piece together years, if not decades, of information when the pressure is on to produce the records.

Pennsylvania legislation known as Act 170 (the “Act”), which went into effect earlier this week, represents a comprehensive revision to the existing laws of partnerships and limited liability companies.  The Act amends Pennsylvania law on corporations and unincorporated associations and adopts the Uniform Partnership Act, Uniform Limited Partnership Act and Uniform Limited Liability Company Act and is effective in two stages:

  • On February 21, 2017 for all entities that file on or after February 21, 2017; and
  • On April 1, 2017 for all existing entities unless such entities elect to be governed by the Act.

Below is an overview of some of the most significant changes to Pennsylvania laws governing business entities included in the Act.

Pennsylvania flag icon
Copyright: somartin / 123RF Stock Photo

New Nonprofit and Benefit Entities

The Act authorizes nonprofit limited partnerships and limited liability companies and also creates benefit limited liability companies, companies that are intended to be operated and governed for the dual purpose of generating profit while also having a material positive impact on society or the environment. Pennsylvania is only the third state to authorize benefit limited liability companies, joining Maryland and Oregon.

Transfer of Interests and Governance Rights

Absent a provision in the partnership or operating agreement to the contrary, the only interest in a partnership or limited liability company that may be transferred is the partner or member’s Transferable Interest. The Transferable Interest is the financial interest in the entity that entitles the holder to receive distributions, but does not include any voting or management rights. A transfer of the Transferable Interest does not cause disassociation of the transferor and does not entitle the transferee to participate in the conduct of the company’s activities and affairs, to have access to records or other information, or compel or dictate the timing of distributions.

Charging Orders

Similar to the rights of a transferee, the sole method by which a judgment creditor can extract any value from a debtor’s interest in a partnership or limited liability company is by way of a charging order, which gives the creditor a lien on the debtor’s Transferable Interest in the entity. As discussed above, this only provides the creditor with the right to receive distributions and does not include any management rights. Additionally, the creditor’s right to distributions excludes “amounts constituting reasonable compensation for present or past service or payments made in the ordinary course of business under a bona fide retirement plan or other benefits program.”  If the charging order does not satisfy the creditor’s judgment in full, the creditor may foreclose on the debtor’s interest, but a purchaser at a foreclosure sale will not become a partner or member and will only obtain the Transferable Interest. The exception to the foregoing is in a single member limited liability company, in which case the purchaser obtains the debtor’s entire interest, the debtor is disassociated as a member, and the purchaser becomes a member with full governance rights.

Full Shield Protection for Partners

The existing law on partnerships was amended to replace the former ‘partial shield’ protection for partners and replace it with ‘full shield’ protection by removing language that implied that a partner in a limited liability partnership or limited liability limited partnership could be liable for any act of a person under the supervision and control of the partner even if the partner had no responsibility to supervise or control the act giving rise to the liability.  As a result of the revised language, partners are now only liable for their own negligence or wrongful acts.

Elimination or Alteration of Fiduciary Duties

The Act also includes significant changes with respect to the ability of partners or members to eliminate or alter certain fiduciary duties through careful drafting of the operating or partnership agreement. This topic will be discussed in more detail in a follow-up post.

Early stage companies are typically urged, and appropriately so, to ensure that their “charter documents,” specifically their certificate of incorporation and bylaws, are consistent with statutory requirements in their jurisdiction of organization, and reflect the short term and identifiable long-term objectives of the founding shareholders.  Many founders will search for “boilerplate” documents on the internet or other public sources, and as their enterprises grow, seek to modify those forms to cover such items as super-majority voting provisions, director removal provisions, etc.  Issues may arise, however, where those modifications are not consistent with statutory requirements.

For example, the Delaware Court of Chancery recently held in Frechter v. Zier, C.A. No. 12038-VCG, that a bylaw provision requiring supermajority stockholder approval for the removal of a director was inconsistent with Section 141(k) of Delaware’s General Corporation Law.  Section 141(k) provides that (other than in cases of staggered boards or cumulative voting) a director may be removed with or without cause by a majority of the voting stockholders.  While some provisions of the DGCL are based on a default rule that applies “unless otherwise provided in the certificate of incorporation or bylaws” the Court of Chancery held the majority standard set forth in Section 141(k) could not be modified by a bylaw provision.

The lesson taught by this decision is that it should not be assumed that statutory requirements may always be modified by inclusion of a contrary provision in a corporation’s certificate of incorporation or bylaws.  The starting point should always be a clear understanding of the statutory requirement.  The next step in the analysis is whether the statutory requirement is subject to modification within a corporation’s charter documents, and, if so, where that modification must be set forth in order to be enforceable.  In making this analysis, the different processes for how a corporation’s certificate of incorporation may be amended as compared to an amendment to a corporation’s bylaws must be considered.  In this regard, it should be noted that Section 102(b)(4) of the DGCL allows a corporation to include a provision in its certificate of incorporation that requires a supermajority vote for any corporate action.

Early stage companies, when drafting and amending their charter documents and considering such issues as general voting provisions, director removal, approval of corporate actions such as mergers, asset sales and dissolutions, should give appropriate thought to how the applicable statutory provisions require those issues to be addressed. Doing so will avoid statutory challenges to the validity of those actions in the future.

Canada and investing
Copyright: aldorado10 / 123RF Stock Photo

Canada has seen some recent success in having its venture-backed companies progress through IPO, and total venture capital invested in Canadian companies has doubled over the past 5 years.  As U.S.-based investors look across the border for investment opportunities involving Canadian technology companies, they should be aware of some key differences between U.S. and Canadian laws that impact the way deals are structured in Canada.  Here is a quick summary of some of the important items to consider:

  • Canadian securities laws are set at the provincial, as opposed to the federal, level. Canada is working towards a national securities law framework, but for now Canadian companies have to consider the laws of their particular province.  From a practical point of view, this is much less likely to impact private companies than companies entering the public markets.
  • Canadian corporate law allows a company to have unlimited authorized capital, and most Canadian companies take advantage of this opportunity. Obviously, this raises dilution concerns which are usually addressed by including protective provisions in a company’s charter documents or an investor rights type agreement which imposes a predetermined level of shareholder approval before additional shares may be issued.
  • Canadian companies can issue preferred shares in series, as seen in the US. However, in Canada, no series of shares can have a priority over any other series within the same class of shares with respect to dividends or return of capital.  Consequently, Canadian companies will typically issue multiple classes of preferred shares, rather than multiple series within a single class of shares, in order to allow for differing liquidation preferences among different investment rounds.
  • Investors should review any possible conflicts between Canadian statutory voting rights, which provide for separate class voting rights in connection with certain extraordinary corporate events, and negotiated approval rights. Similarly, Canadian law is not as flexible as, for example, Delaware law in the area of shareholder consents.  In Canada, shareholder consent must be obtained either at a duly called shareholder meeting or by way of a unanimous written consent (although this does not apply as to matters that require shareholder consent as a result of contractual approval rights).  Considering that at some point a unanimous written consent of shareholders may be a logistical nightmare, voting trusts are sometime used, or powers of attorney are granted by investors.
  • Unanimous shareholder agreements are an interesting creature of Canadian law. This is an agreement among all of the shareholders of a company that, although a contract, is considered as one of the company’s organizational documents, alongside the company’s articles and bylaws.  As such, they are considered binding on all future shareholders, even if they do not sign the agreement.  Also, they allow shareholders to impose limits on the authority of the company’s directors to manage the business of the company, so that the shareholders may bypass the board and manage the company directly.  These agreements are widely used by Canadian private companies, and frequently also cover, in a single document, many of the governance, voting and shareholder rights that U.S.-based transactions may address in multiple agreements, such as investor rights, voting and registration rights agreements.
  • Board nomination rights are also typically found in a unanimous shareholder agreement as opposed to the articles of incorporation. In this regard, it is important to note that some Canadian companies, depending upon their province of organization, may require that at least 25 percent of the company’s directors be Canadian residents, and that, in order for a valid meeting of the directors of the company to be held, at least 25 percent of the directors present must be Canadian residents.  U.S.-based investors who wish to ensure that they can place non-Canadian residents on the board of directors should negotiate for these rights in the context of the composition of the non-Canadian members of the board.

Certainly this is not an exhaustive list of issues to be considered in a cross-border investment transaction.  However, it is important for U.S. investors to understand and be prepared to address these significant differences between U.S. and Canadian deal structure when developing and implementing investment strategies.

In a recent post, Michael Hart discussed a reported wave of shareholder lawsuits that may cause entrepreneurs to reconsider incorporating in Delaware. Now, he and Paul Wassgren note a new development in Nevada, another favorable state for entity formation, that could have the same effect there.

Copyright: klotz / 123RF Stock Photo
Copyright: klotz / 123RF Stock Photo

Despite the soaring summer temperatures in the deserts of Nevada, it appears that hell has finally frozen over in the Silver State.  Often perceived as a “tax-free state,” Nevada has enacted a commerce tax on businesses with Nevada-sourced income, effective July 1, 2015.  In truth, Nevada has had a Modified Business Tax in place for some time, but it was limited to certain industries such as gaming and mining.

The new commerce tax is more pervasive, and while still industry-specific, the tax applies to nearly all entities conducting business within the State of Nevada. In addition, all businesses are now required to file the Commerce Tax Return Form annually, even if there is no tax liability.  This is a sea change for the Silver State.

Finally, also effective July 1 of this year, the annual state business license application fee for Nevada corporations has more than doubled to $500, up from $200.  In light of these changes, entrepreneurs may start to reconsider the trend in favor of incorporating in Nevada.


Paul Wassgren is a partner in the firm’s Las Vegas and Los Angeles (Century City) offices, and Michael Hart is an associate in the Los Angeles (Century City) office.

Michael Hart writes:

With over 54% of public companies choosing to incorporate in Delaware, it’s evident that the state has long been regarded as a safe haven for corporations.  That sentiment may be changing, however.  According to a recent article in The Wall Street Journal (subscription required), a recent wave of shareholder lawsuits challenging the sale price of their companies is making businesses think twice about incorporating in Delaware.

Copyright: tang90246 / 123RF Stock Photo
Copyright: tang90246 / 123RF Stock Photo

The shareholder suits are being encouraged by a Delaware law that requires companies to pay interest on the value of all shareholder claims, no matter who the victor is.  Thus, a shareholder of a company that’s been sold can forgo the acquisition payment, challenge the sale price, lose and then receive the original acquisition payment plus the interest that accrued while litigating the challenged sale price.  Although Delaware is still perceived to offer many advantages, such as broad latitude to corporate management in day-to-day operations, strong anti-takeover laws and sophisticated business courts, early-stage businesses with an eye toward being acquired may want to consider incorporating in states that offer greater protections against shareholder lawsuits.

Oklahoma, for example, enacted a law last year requiring plaintiffs that lose shareholder lawsuits to pay both sides’ legal fees.  As other states enact similar laws to draw corporations away from Delaware, the decision to incorporate there is no longer such an easy one to make. Early stage companies in particular that are not headquartered in Delaware may have other reasons for incorporating in the state where their main office is located, such as minimizing the administrative costs and tax burden of being registered to conduct business in multiple states, and potentially limiting the jurisdictions in which they can be sued.


Michael Hart is an associate in the firm’s Los Angeles (Century City) office.