Business and Corporate Disputes

Iowa Law Protects LLC’s Owners From Personal Liability

Matthew McKinney — Tue, 21 May 2013 18:50:30 +0000

A February 27, 2013 Iowa Court of Appeals opinion serves as yet another real-world example of how and why taking the time to set up a formal entity – in this case an Iowa LLC – can benefit and provide protection to the LLC’s owners (whether members or managers). In the February 2013 opinion, the Iowa appellate court upheld a district court’s order that refused to allow a third-party (the plaintiff) to pierce the veil of an LLC in an effort to hold the LLC’s 2 members (50/ 50 owners) personally liable on several claims, including breach of contract and unjust enrichment claims. Citing to Cemen Tech, Inc. v. Three D Indus., L.L.C., 753 N.W.2d 1, 6 (Iowa 2008), the Iowa Court of Appeals found summary judgment in favor of the LLC’s owners was proper. Specifically, the appellate court found that despite allegations that the LLC’s tax returns show improper distributions and despite the LLC selling its assets after an administrative dissolution, the LLC’s owners were entitled to limited liability and the protections afforded under the Iowa Limited Liability Company Act.

For more information and to learn how you can seek protection as a business owner, consider contacting a licensed attorney in your jurisdiction.

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PART II – 2013 Law Eliminates Statutory Authority to Recover Attorneys’ Fees in Derivative Litigation

Matthew McKinney — Sat, 18 May 2013 14:00:34 +0000

PART II – 2013 Changes to the Iowa Business Corporation Act.

This post addresses yet another substantive change to Iowa law – as adopted by the 2013 legislature – and which relates to the ability to recover reasonable attorneys fees in derivative litigation. The 2013 bill amends existing Iowa law (Iowa Code Section 490.746) by eliminating a court’s statutory authority to award attorneys’ fees incurred in a derivative proceeding. The amended subsection (below and redlined) removes all prior references to recovering attorneys fees and simply permits an award of expenses:

Iowa Code Section 490.746. Prior to the new language reproduced above, this Code section provided statutory authority to a court to award expenses and reasonable attorney fees. As evidenced above, the 2013 changes eliminate all references to attorney fees, and thereby eliminates a court’s statutory authority under this subsection to award attorneys fees. Despite the change, a court may still order a corporation to pay the plaintiff’s expenses (defined in Iowa Code Section 490.140) if the court determines that the proceeding has resulted in substantial benefit to the corporation and alternatively may order the plaintiff to pay the defendant’s expenses if it finds the proceeding was commenced without reasonable cause or for an improper purpose (Iowa Code Section 490.746). As a result of this change, shareholder plaintiffs may think twice about asserting a claim on behalf of their entity to correct wrongdoing as they are no longer able to recover attorney fees (under this subsection) personally expend in prosecuting a lawsuit.

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PART I – A Director’s Fiduciary Duty to Question and Disclose Information?

Matthew McKinney — Fri, 17 May 2013 14:00:52 +0000

PART I – 2013 Changes to the Iowa Business Corporation Act.

This post is the first in a series of posts that will address several changes to the Iowa Business Corporation Act (Iowa Code Chapter 490) as approved by the Iowa legislature and signed by Governor Terry Branstad during the 2013 legislative session.

One many changes to Iowa’s Business Corporation Act relates to a directors’ duty to disclose information in discharging his/her fiduciary duties. The newly adopted subsection, which amends Iowa Code Section 490.830, states:

Upon first blush, this language may seem fairly straightforward. In practice, however, and upon deeper analysis, the language may raise several questions and dilemmas. For instance, when a plaintiff asserts a claim against a director (hereinafter “defendant-director”) under this language and attempts to prove the defendant-director violated this subsection by failing to disclose “material information” (as referenced above), how will a plaintiff successfully prosecute and prove up his/her case against the defendant-director? Specifically, how will a plaintiff establish the defendant-director knew with certainty (as opposed to whether the defendant-director “reasonably believed”) the remaining board / committee members did “not already know[]” the “material information.” Common sense tells us that when a case hinges upon proving someone else possessed specific knowledge (the defendant-director’s knowledge) about what another person knew at a specific point in time, you are likely facing an uphill battle. Why an uphill battle? In many cases a defendant-director may prevail by raising a simple defense and claiming:

When such a defense is raised, proving the defendant-director’s state of mind at a particular point in history – and specifically what he/she knew with certainty about what someone else knew – may be very difficult.

In theory, the foregoing tells us that to strictly comply with the new language, a director with “material information” must first question his/her fellow directors about whether they are aware of the “material information.” Upon learning a fellow director is not aware of the “material information,” the director possessing the information must then discharge his/her new “duty” under this subsection and disclose the information in accordance with the remainder of the subsection. In other words and in practice, this new subsection appears to create a duty to question, followed by a duty to disclose.

Finally, in this author’s mind, the new subsection renews several issues initially raised when Steve Jobs, former Chairman and CEO of Apple, revealed his personal health problems while at Apple. Many criticized and questioned whether fiduciary duties were breached when Steve Jobs allegedly failed to timely disclose his health problems – an issue that many blamed for several precipitous drops in Apple’s stock price. See this article. For some, in addition to the dilemma identified above, the new subsection may create a question as to whether a director (particularly in a company where the director plays a critical role or where the company is built around the director) who learns of a terminal health problem is required to disclose his/her personal health problem – a matter that may significantly affect the company in an adverse manner – in order to comply with the new duty to disclose “material information.”

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Governor Branstad Approves Changes to Iowa’s Business Corporation Act

Matthew McKinney — Wed, 15 May 2013 20:02:41 +0000

As originally noted here, on March 6, 2013 a bill was introduced in the Iowa legislature to enact several changes to Iowa’s Business Corporation Act (Iowa Code Chapter 490). After receiving unanimous approval from both the Iowa House of Representatives and the Iowa Senate, the bill was sent to Governor Branstad for signature on April 2, 2013. Three days later, April 5, 2013, Governor Branstad signed House File 469 in to law. Click here for a complete copy of the new law. Sign-up (to the right) and follow this blog for future posts addressing how House File 469 amends Iowa law.

Changes to the Iowa Model Business Corporation Act?

Matthew McKinney — Thu, 07 Mar 2013 03:26:35 +0000

In the 2013 Legislative Session (the 85th General Assembly), which began January 14, 2013, Iowa Legislators introduced new legislation that proposes several changes to Iowa’s Model Business Corporation Act. As of March 6, 2013, the bill, HSB143, has been introduced, discussed, and voted out of the House Judiciary Committee. To track and/or read the proposed legislation, please click here:

http://coolice.legis.iowa.gov/Cool-ICE/default.asp?Category=billinfo&Service=Billbook&menu=false&ga=85&hbill=HSB143

Does Your Business’ Information Qualify for Protection as a Trade Secret? The Iowa Supreme Court Explains.

Matthew McKinney — Tue, 31 Jul 2012 17:36:07 +0000

On July 27, 2012 the Iowa Supreme Court published its opinion in Iowa Film Production Services et al. v. Iowa Department of Economic Development, No. 10-1719 (July 27, 2012). The Iowa Film opinion addresses several issues, including how Iowa courts define trade secrets. The Court explained that to qualify as a trade secret the matter must: (1) constitute information (a question of law); (2) hold independent economic value (a question of fact); and (3) be the subject of efforts that are reasonable under the circumstances to maintain secrecy (a question of fact). See Iowa Film, p. 21. With the foregoing in mind, the Iowa Supreme Court explained just how expansive the definition of a trade secret is:

Iowa Film, p. 22 (internal citations and quotations omitted).

The Iowa Film opinion contains additional analysis and information that readers may find helpful on the topic of Iowa Trade Secret law. To read more about trade secrets, click here. For further information on Iowa law regarding confidential business information and/or trade secrets, you should consider contacting a licensed attorney in your jurisdiction.

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Does the Lack of a Succession Plan Constitute a Breach of Fiduciary Duty?

Matthew McKinney — Thu, 26 Jul 2012 17:28:38 +0000

On June 21, 2012, in response to Plaintiff alleging HP’s Board of Directors breached their fiduciary duties to the company and its shareholders by failing to implement a succession plan, the Delaware Court of Chancery explained that it is “not aware” of any “Delaware precedent that stands for the proposition that failure to adopt a long-term succession plan amounts to a breach of duty.” Zucker v. Andresssen, C.A. No. 6014-VCP, p. 28 (Del. Ch. June 21, 2012) (CLICK FOR OPINION). In support of its opinion, the Court cited another case, acknowledging: “[a]spirational ideals of good corporate governance practices for boards of directors that go beyond the minimal legal requirements of the corporation law are highly desirable, often tend to benefit stockholders, sometimes reduce litigation and can usually help directors avoid liability. But they are not required by the corporation law and do not define standards of liability.” Zucker, p. 29 (citing Brehm v. Eisner, 746 A.ed 244, 256 (Del. 2000)).

Despite the foregoing, the Court cited other procedural requirements that the Plaintiff did not satisfy, and concluded its opinion by emphasizing it “ha[d] no need to address whether the duty of care requires directors to adopt succession plans, and it expresses no view on that issue.” Zucker, p. 30. While the Zucker Court did not completely resolve the issue, dicta within the opinion indicates such a claim may be difficult to establish.

The Zucker opinion reflects the Delaware Court’s impression on the issue, but it is important to keep in mind that Iowa Courts frequently look to Delaware law and opinions for guidance on business and corporate law issues.

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Holding A Corporation’s Owners Personally Liable – Piercing the Corporate Veil in an Iowa Corporation

Matthew McKinney — Fri, 04 May 2012 01:24:38 +0000

Piercing the corporate veil is an equitable remedy employed by Iowa courts “to further the public convenience, cure wrongs, protect against fraud, and advance the ends of justice …” HOK Sport, Inc. v. FC Des Moines, L.C., 495 F.3d 927, 935 (8th Cir. 2007). To this end, Iowa courts may hold a corporation’s owner(s) liable if equity requires.

The Eighth Circuit Court of Appeals thoroughly explained the theory of piercing the corporate veil in HOK Sport, Inc., stating in part:

Id. at 935 (internal citations omitted).

The court continued its analysis, explaining that the corporate form may be disregarded if one of six different factors is established:

Id. at 936 (internal citations omitted). A litigant that is seeking to apply the doctrine and hold individuals personally liable is not required to prove all six factors. For example, proving fraud may be sufficient, but it is not a prerequisite for piercing the corporate veil in all circumstances. See Adam v. Mount Pleasant Bank & Trust Co., 355 N.W.2d 868, 872 (Iowa 1984) (“Fraud is not a prerequisite for piercing the corporate veil.”); State ex rel. Miller v. Internal Energy Mgmt. Corp., 324 N.W.2d 707, 715 (Iowa 1982) (“[F]raud constitutes a sufficient basis for piercing the corporate veil.”); see also Team Cent., 271 N.W.2d at 923.

The HOK Sport, Inc. opinion contains a wealth of information on this subject along with multiple citations to other helpful legal authorities. While the opinion relates to a non-profit corporation, the court repeatedly states the same law would apply to a for-profit corporation. HOK Sport, Inc., at 935-6.

The HOK Sport, Inc. opinion was filed in August 2007 and addresses piercing the corporate veil as that theory is applied to corporations. What is currently unknown, however, is how an Iowa court would apply the reasoning of HOK Sport, Inc. to a limited liability company, especially considering the statutory protections that apply to limited liability companies in Iowa as explained in this post.

For more information on Iowa law regarding piercing the corporate veil, or about how owners of Iowa corporations may be held liable for certain actions and/or inactions, you should consider contacting a licensed attorney.

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Personal Liability Protections Afforded to Directors of Iowa Corporations

Matthew McKinney — Thu, 26 Apr 2012 13:58:03 +0000

Iowa law enables Iowa corporations to extend important personal liability protections to their directors. Specifically, Iowa Code Section 490.202(2)(d) permits corporations to protect directors from personal liability for the directors’ actions and/or omission taken in their capacity as board members. To this end, Iowa Code Section 490.202(2)(d) permits an Iowa corporation’s articles of incorporation (“Articles”) to expressly eliminate or limit the personal liability of a director to the corporation or its shareholders for money damages. See Iowa Code Section 490.202(2)(d).

As may be suspected, however, these protection are not absolute. For example, under Iowa law and as of the date of publishing this post, a corporation cannot eliminate or limit liability for at least the following:

In addition to the protections afforded under Iowa Code Section 490.202, an Iowa corporation may also provide further protection to directors through indemnification provisions and/or advancement of expenses provisions. For more information on the various liability protections that may be afforded to directors, you should consider contacting a licensed attorney.

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Advancement of Legal Expenses – A Detailed Procedure For How Your Company May be Required to Pay (Advance) Your Legal Expenses

Matthew McKinney — Mon, 16 Apr 2012 02:22:12 +0000

If you are a director, officer, member, manager, or even an employee in a business, and you find yourself in a legal dispute (formal litigation or otherwise), the business may be required to pay (advance) your legal expenses as they are incurred. State laws, along with perhaps your organization’s governing documents (including any applicable Operating Agreement, Bylaws, or a Shareholder Agreement), often impose requirements upon businesses to pay (advance) legal expenses in all sorts of cases (to read more on this topic, please click here). While the business may be legally required (including ordered by a court) to advance legal expenses to you / your attorney as they are incurred (as opposed to at the very end of the case), the business will undoubtedly keep a close eye on those expenses and may seek to challenge the amounts being paid and/or the payment procedure itself.

A business’ challenge to the advancement of legal expenses can prove time consuming and costly for all involved. In March 2012, the Delaware Court of Chancery acknowledged that in certain cases a special master (typically a local attorney) is appointed to oversee challenges to advancement amounts and/or payment procedures; however, the court recognized, appointing a special master adds yet another layer of expense and time. Danenberg v. Fitracks, Inc., 6454-VCL, 15 (Del. Ch. Mar. 5, 2012) (stating: ”But appointing a special master comes at a cost. Seasoned Delaware lawyers are not cheap, and the additional layer of review lengthens the timeline to payment.”). The court then identified an alternative means of addressing challenges to advancement amounts and payment procedures.

After acknowledging the inherent drawbacks of appointing a special master, the Delaware court outlined a detailed, step-by-step procedure for how parties may resolve advancement disputes (such as challenges to the advancement amount and/or payment logistics) without a special master:

Before the 10th calendar day of each month, Danenberg’s counsel will submit an advancement demand for fees and expenses incurred during the previous month. Any fees or expenses not included in the demand are deemed waived. The advancement demand will include the following:
1. A detailed invoice identifying the fees and expenses for which advancement is requested. The invoice shall provide for each time entry the date, timekeeper, billing rate, task description, time incurred, and amount charged. The invoice shall identify with detail for each expense the date of the charge, its nature, and the amount incurred.
2. A certification signed by the senior member of the Delaware bar representing Danenberg attesting that (i) he personally reviewed the invoice, (ii) each time entry and expense falls within the scope of Danenberg’s advancement rights, (iii) in his professional judgment, the fees and expenses charged are reasonable in light of the factors listed in Rule 1.5(a), and (iv) the services rendered were thought prudent and appropriate in his good faith professional judgment.
Before the 20th calendar day of the month, Fitracks’ counsel will respond to the advancement demand in writing. The response shall identify each specific time entry or expense to which Fitracks objects and explain the nature of the objection. The senior member of the Delaware bar representing Fitracks shall certify that (i) he personally reviewed the advancement demand and (ii) in his professional judgment, the disputed fees and expenses are not reasonable or otherwise fall outside the scope of the advancement right. The response shall cite any legal authority on which Fitracks relies. Any objection not included in the response is deemed waived.
Fitracks shall pay the undisputed amount contemporaneously with the response. If Fitracks disputes more than 50% of the amount sought in any advancement demand, Fitracks shall pay 50% of the amount sought and Danenberg’s counsel shall hold the amount exceeding the undisputed amount in its escrow account pending resolution of the dispute regarding such portion.
Before the 25th calendar day of each month, Danenberg’s counsel will reply to the advancement response in writing and provide supporting information and authority.
Before the last calendar day of the month, the senior members of the Delaware bar representing each side will meet, in person, and confer regarding any disputed amounts. Any additional advancement that results from the meet-and-confer session will be paid with the next month’s payment of undisputed amounts.
Not more frequently than quarterly, Danenberg may file an application pursuant to Court of Chancery Rule 88 seeking a ruling on the disputed amounts. Briefing shall consist of a motion, an opposition filed within fifteen days of the motion, and a reply filed within ten days of the opposition. Danenberg and Fitracks shall not raise any new arguments not previously raised with the other side in the applicable demand, response, reply, or meet-and-confer. Danenberg and Fitracks only shall cite authorities identified in writing in the applicable demand, response, or reply. The Court will determine if a hearing is warranted.
If the Court grants an application in whole or part, then pre-judgment interest is due on the adjudicated amount from the date of the applicable advancement demand. In addition, in parallel with the next advancement demand, Danenberg may demand indemnification for the fees and expenses incurred in connection with the granted application, proportionate to the extent of success achieved. The parties shall address the indemnification demand in the same manner as the advancement demand. Except in connection with a successful application, Danenberg shall not seek or receive advancement or indemnification for time spent preparing invoices and advancement demands, addressing responses, or conferring regarding advancement requests.

This step-by-step procedure provides excellent guidance and insight on how other courts may also seek to resolve challenges to advancement amounts without appointing a special master. For more information on advancement / reimbursement of legal expenses you should consider contacting a licensed attorney.

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