Common Issues in Derivative Lawsuits

When you invest your money in a company, you expect a positive return on your investment. Unfortunately, that is not always the case. A corporation may suffer harm for a variety of reasons, which can cause a shareholder’s investment to become risky. South Carolina and federal laws give shareholders certain rights they can exercise to protect their investment in a corporation, including the right to file a derivative lawsuit. A South Carolina corporate lawyer may advise a shareholder to file a derivative lawsuit for a variety of reasons.

What Is a Derivative Lawsuit?

Before we look at some common issues that may give rise to a derivative lawsuit, it may be helpful to review a short explanation of derivative lawsuits.

A derivative lawsuit is an action filed by a current shareholder on behalf of the corporation. The corporation had the right to file the lawsuit, but for some reason, the directors and officers of the corporation chose not to file the lawsuit to pursue a valid legal action. In the lawsuit, the shareholder is pursuing a claim against a third party for harm sustained by the corporation.

What Are Common Issues That Give Rise to a Derivative Lawsuit?

In many cases, derivative lawsuits are filed by shareholders against the corporation’s officers or directors for misconduct that harmed the company. For example, a derivative suit may allege the directors or officers breached their fiduciary duty, corporate waste, fraud, proxy violations, excessive compensation and benefits for officers, misappropriation of corporate opportunities, and other wrongdoing.

However, a derivative lawsuit may also be filed against other third parties when the directors and officers refuse to act in the corporation’s best interest. In some cases, a shareholder may file a derivative lawsuit against accountants, financial advisors, and other parties who may have harmed the company.

South Carolina Requirements for Filing a Derivative Lawsuit

Shareholders can only bring a derivative action in South Carolina under certain circumstances. In order to have the standing to file a derivative lawsuit on behalf of a corporation, a shareholder must:

  • Have owned his or her shares when the alleged illegal activity or wrongdoing occurred. The shareholder may have purchased the shares before the alleged event or received the shares from another shareholder who owned the shares at the time of the alleged event;
  • Represent the best interests of the corporation; and,
  • Attempt to resolve the matter directly with the corporate directors and officers outside of court. The complaint filed by the shareholder must include a detailed explanation of the efforts made by the shareholder to resolve the situation with the corporation. If the shareholder did not make any efforts to resolve the matter outside of court, the complaint must explain why no efforts were made to settle the matter before filing the lawsuit.

Contact a South Carolina Corporate Attorney for More Information

Corporation law can be complex and challenging, especially when it relates to shareholder rights. If you have questions regarding misconduct by officers and directors of a corporation, contact a South Carolina corporate attorney to discuss your legal rights, including a derivative action.

Corporate Bylaws in a Nutshell

What should my business include in its corporate bylaws?

One of the key foundational documents for corporations and partnerships are corporate bylaws which establish the rules for the internal operations and governance of the entity. Unlike Articles of Incorporation, bylaws are not filed with the Secretary of State in South Carolina. While the state does not require businesses to create bylaws, this document is essential for establishing the day-to-day operations of an organization.

Bylaws also serve to make your business more legitimate in the eyes of state and federal authorities, financial institutions and investors. In fact, it you are seeking a business loan or venture capital, banks and other financiers typically request copies of foundational documents as part of their due diligence.

In other words, bylaws are crucial for establishing a new business organization.

What topics are covered in bylaws?

While there are no state guidelines governing how bylaws should be prepared, there are certain items that should be covered. First, the document should outline the corporate or business structure, and establish the rights, obligations and powers of officers, directors and shareholders. Bylaws also specify how officers are nominated and elected, as well as the term of office, either one, two or three years.

Because many companies have a board of directors, bylaws also establish the number of board members, who are typically elected by shareholders. In turn, the board members elect or appoint the officers and directors. While officers report to the board, the board of directors reports to the shareholders. In addition, bylaws establish where and when meetings will be conducted, typically quarterly or annually, what constitutes a quorum in addition to voting and proxy rules. Other important features of bylaws include information about issuance of shares, a dispute resolution procedure as well as any other operational details.

Other Considerations

In cases where there are multiple partners or business owners, bylaws do not established how ownership will be transferred. For this reason, we often recommend putting a buy-sell agreement in place that provides a mechanism for buying out the shares of a departing partner or owner.

In the end, corporate by laws are a roadmap that will help to clarify how your business will be run. If you are starting a business and need assistance with drafting bylaws or preparing and filing any other foundational documents, you should engage the services of an experienced business law attorney.

Judge Rules South Carolina Biotech Firm Tricked Workers into Accepting

Incentive Plan Changes that Depleted their Wealth, Awards them $53.5 Million.

Did a company’s change in its employee compensation package amount to fraud?

When employers use incentive-based compensation plans to motivate their employees, the result often benefits all involved. But not when a company decides it has been too generous and tries to reduce compensation covertly. According to a recent legal ruling, this is what happened at ArborGen in Summerville, South Carolina.

 The court entered judgments against the company, several related companies, and board members of these companies, for conniving to reduce the value of options promised to 10 of its employees without their realizing it. The judge’s award of $53.5 included punitive damages and interest.

The employees had participated in a lucrative stock option plan designed to enable them to benefit from the growth of ArborGen. As the company grew, members of the board of directors decided they had been too generous. They came up with a plan to dilute the option plan of the employees, a goal they accomplished through misrepresentations and false information, according to the lawsuit. Instead of receiving $11.3 million in equity based on a $550 million valuation of the company after its growth, the employees received a mere $414,330 in incentive compensation. ArborGen was worth even more—$650 million—when it was converted to a C-corporation.

The case illustrates the importance of care and deliberation when creating employee incentive and compensation plans. It also is a reminder of the need for full disclosure and for abiding by legal rules when seeking to make changes. A qualified corporate attorney can advise on the best approach. Attempting to correct mistakes through shortcuts or subterfuge only results in negative outcomes:  legal liability and even greater costs for management, board members and the company as a whole.

 

Corporate Law Policy Updates in South Carolina

With the new year well underway, it is always important to take a look at the new and pending policies set to impact South Carolina business owners and those involved in the corporate world. On Tuesday, January 12th, the South Carolina General Assembly convened for the first time in 2016, and the year promises to bring about a number of important changes.

For those in the healthcare field, the Assembly has begun its review of an important bill targeted at those facing severe illness, known as the Right to Try Act (Senate Bill 929). Under this act, patients seeking alternative courses of treatment – particularly those who are facing a terminal illness – may be able to access drugs that have not yet met full approval from the FDA, but have passed the first phase of approval.

Meanwhile, a subcommittee continues to discuss the Certificate of Need bill, which would place limits on the amount of equipment facilities can purchase with the use of state and federal funding – which would require a detailed statement explaining why the equipment is necessary for the successful operation of the business or facility.

Other interesting legislation up for debate in the House includes various amendments to the state’s Educational Tax Credit For Exceptional Needs Children, as well as various other taxation amendments. Also, the Senate heard testimony from various individuals involved in the construction industry, particularly those who feel greater oversight of independent contractors is necessary to ensure proper work environments for sub-contractors.

As well, the South Carolina Governor’s Office unveiled its 2015-2016 budget, which includes nearly $1.3 billion in unallocated funds. According to Governor Haley, this extra money will likely be used to enhance South Carolina’s infrastructure, as well as a $300 million cash push toward the various education initiatives at work around the state.

If you have questions about legal policy in South Carolina, particularly with regard to corporate and real estate matters, please contact a preeminent South Carolina law firm today!

Dupont and Dow set to merge their businesses

I’ve heard that this has been a big year for mergers and acquisitions.Is this true?

The short answer to that question is, yes. Recently another big merger was announced. Dow Chemical and DuPont are planning to combine their businesses. If the merger is approved by regulators in each of the individual countries, it will be the 18th largest merger ever completed. The estimated time required to complete the process is 2 years. The resulting combined company would be worth $130 billion.

One might ask why the two companies would bother merging at all. It turns out that the combined companies have identified $3 billion dollars in annual cost savings. The companies suggest that such a figure would translate to $30 billion in market value. In addition, DuPont will be shedding $700 million in costs before the process starts. Dow will cut $300 million. Until the process ends, shareholders of each company will hold 50 percent of the combined company.

All is not said and done with this agreement, however. Regulators have shown that they are not comfortable with the enormous number of mergers this year and may look to intervene here in the United States. The reason would be that mergers can be seen as anticompetitive. Regulators have stepped in between Office Depot and Staples recently because that deal was seen as anticompetitive. To try to head off any potential interruption from regulators, the merged company would plan to split into three separate companies: an agricultural company, a material science company and a specialty products company. However, the new agricultural company would still be the industry’s largest.

This potential deal ranks fifth in terms of value of all potential deals announced this year. The largest so far is a potential merger between Pfizer and Allergan, valued at $160 billion. The next is a potential merger between Anheuser-Busch, InBev and SABMiller valued at $117.4. The third largest is a potential merger between Royal Dutch Shell and BG Group valued at $81.5 billion, and the fourth largest is a potential merger between Charter Communications and Time Warner Cable valued at $79.5 billion. All of the aforementioned deals are still pending.

If you have questions about the best way to manage your business, corporation or shareholders, please do not hesitate to contact one of our skilled business and corporate attorneys. 

A Look at Google’s New Structure & Tips for Companies Looking to Regroup

What are some options for a business looking to reorganize and regroup?

In August, 2015, Google, Inc. announced a drastic reorganization plan in which it planned to focus more intently on its original business endeavor: search engines. Over the past several years, Google has dabbled in everything from driverless cars to medical research – and sources have suggested that its investors have grown weary of the growing list of “distractions.” Accordingly, Google used the unique Delaware corporate law structure – which is similarly utilized by a vast number of Fortune 500 companies – to create a new company known as Alphabet.

Basically speaking, Google created the Alphabet holding company to manage its portfolio of burgeoning concepts that fall outside the realm of internet products – including Calico, its medical research firm, Google X research labs,, Fiber,which is working on a nationwide broadband network, and several capital investment firms. From there, the Alphabet umbrella will subsume Google, Inc., and its shareholders – who in combination own a company worth $226 billion. All owners will maintain the same percentage interest, just with a much broader scope.

How did a company the size of Google ever convince all its shareholders that this restructuring was a good idea? Well, under Section 251(g) of Delaware General Corporate Law, it didn’t have to. Under this little-known code section, companies wishing to merge with a holding company (i.e., Alphabet, Inc.) do not need shareholder consent to complete the transaction. Although the board of directors is still bound by the fiduciary duties of loyalty and fair dealing, a majority vote was not required in this instance, allowing the company to reorganize in the way it saw fit.

Interestingly, Google’s Class C stock, which is held by a vast majority of its non-executive shareholders, precludes participation in corporate voting and does not carry any voting rights at all. So, even if the shareholders disagreed with the move, they would need to initiate a costly derivative lawsuit to unravel the merger.

If you have questions about the best way to manage your business, corporation or shareholders, please do not hesitate to contact one of our skilled business and corporate attorneys at Willcox, Buyck & Williams. Serving clients from Florence to Myrtle, South Carolina, we can be reached  at 843.536.8050 or 843.461.3020.

Attorneys File Final Briefs In Charleston Cruise Terminal Appeals

Can agencies regulate business licenses?

In 2012 the South Carolina State Department of Health and Environmental Control issued a permit to allow the State Ports Authority to renovate a waterfront warehouse in Charleston.  The State Ports Authority filed the permit to add more pilings in the water and turn the warehouse into a cruise ship terminal for passengers.  The Ports Authority proposed the $35 million dollar terminal after Carnival Cruise Lines decided to permanently base a passenger cruise liner in Charleston.  Opponents to the renovations filed arguments stating the new terminal will increase pollution while decreasing property values and the quality of life in the area.

In early 2014, an Administrative Law Judge upheld the permit on the basis that opponents lacked standing to appeal the original decision.  The Administrative Law Judge ruled the opponents, consisting of neighborhood preservation and conservation groups did not state “specific, admissible facts to support their allegations and statements.”  The groups appealed the Administrative Law Judge’s Ruling to the state Court of Appeals.  Opponents have suggested a different site for the terminal, which is further away from the Historic District.  The State Ports Authority said the proposed alternate site is not large enough for a passenger terminal and will be needed to support freight shipments for a proposed business expansion.

In addition to the state suit, the site is also subject to a federal suit based on a permit filed by the Army Corps of Engineers.  The Army Corps filed a federal permit in 2013.  A judge ruled the Army Corps failed to consider the impact of the terminal on the Historic District.  The Army Corps agreed to expand its review to consider the impact of both the pilings in the water and the Historic District.

A business typically has to file for permits when expanding or renovating existing building.  The process for filing, investigating, and getting a permit is extensive and involves many different legal considerations.  If your business is involved in litigation surrounding a regulatory permit filing or considering the process to expand your facility, contact the experienced business and corporate law attorneys at the Willcox, Buyck & Williams, P.A.  The attorneys at Willcox, Buyck & Williams have been in business for over 120 years and have offices in Florence (843) 536-8050 and Myrtle Beach (843) 461-3020.

Lumber Liquidators CEO Abruptly Quits

Is a business responsible for the actions of its chief officers?

The CEO of Lumber Liquidators, Robert Lynch, abruptly resigned last week after three years on the job amidst a Justice Department investigation.  Lynch also served as the company’s president and director.

The company recently announced the Justice Department is seeking criminal charges against it after an investigation over flooring products it imported from China.  The laminate flooring reportedly contained a high level of formaldehyde.  The company recently suspended sale of its entire laminate flooring inventory made in China pending a review of its sourcing compliance program by a board committee.  

After discovering the chemical issue in the laminate flooring, Lumber Liquidators sent out free air testing kits for consumers who installed the flooring.  More than 97% of those customers who used the kits reported the level of formaldehyde concentration in the air was within the World Health Organization Guidelines.  The company also stopped buying Chinese laminate flooring and is purchasing the product from Europe and North America.  In the wake of Lynch’s departure, the company stated that its founder, Thomas Sullivan would take over as CEO until a replacement is found.  Lumber Liquidators refused to comment on the resignation.

Certain officers and board members of companies have a fiduciary duty to the company’s shareholders.  This means the officer is required in some situations to disclose particular information and knowledge to shareholders.  It is important for companies to have clear policies for its fiduciaries for disclosing information and to research the officers’ and board members past employment and potential conflicts of interest to avoid potential lawsuits.           

If you own a business, avoid a lawsuit for the actions of an officer by contacting an attorney to review business policies and disclosure requirements.  The law firm of Willcox, Buyck & Williams has been in business for over 120 years and its business and corporate law attorneys have extensive experience in preparing corporate papers, managing fiduciary requirements, and representing clients in business disputes.  They have offices in Florence (843) 536-8050 and Myrtle Beach (843) 461-3020.  Contact them today for a consultation.