On May 13, the University of Colorado Law School hosted a webinar titled “Cases Every Business Lawyer Should Know,” featuring Mark Loewenstein, associate dean for curricular affairs and Monfort Professor of Commercial Law. More than 480 people signed up to watch the hour-long presentation, part of the law school’s monthly Colorado Law Talks series, which has drawn audiences of hundreds since moving to videoconference format in March.
Loewenstein discussed more than a dozen cases, about half of them dealing with limited liability companies and the other half having to do with corporate law, including the fiduciary duties of directors and the duty of good faith. These are a few of the highlights.
OBEID v. HOGAN
This 2016 case from the Delaware Court of Chancery raises the question: What are the implications of using a corporate-like structure in an LLC? Loewenstein noted it’s increasingly common for LLCs to use corporate structures featuring boards of directors and officers. But does corporate law then apply? “The answer is, yeah, it may apply, depending on what the issue is and how it arises,” Loewenstein said. “The Obeid case is a nice example of that.”
The case involves an LLC that was set up like a corporation with a board of directors. After a falling out, one of the LLC’s members sued the company, and the other LLC members appointed a non-member to a special litigation committee. Because the LLC looked like a corporation, the court turned to corporate law for guidance. “Under corporate law, you can’t have a board committee that includes non-board members,” Loewenstein said, and the court decided the litigation committee appointment was improper.
“The court went on to state almost the obvious,” Loewenstein said, which is that for a member-managed LLC, the courts should look to general partnership law, and in a manager-managed LLC, courts should look to limited partnership law. “And finally, as in this case, if you have a corporate structure in the LLC, then the courts may look to corporate law for guidance.”
MARCHAND v. BARNHILL
This case arose out of a deadly listeria outbreak caused by ice cream from Blue Bell Creameries. A Blue Bell stockholder brought a derivative action against the company’s directors alleging they breached their fiduciary duties by failing to provide adequate oversight of the company’s compliance with food safety regulations.
“What’s interesting about this is that the managers of the company regularly reported to the board that they were in compliance with all FDA regulations,” Loewenstein said. “And the board accepted that at face value and did nothing further about it.”
The Court of Chancery dismissed the lawsuit, finding the stockholder hadn’t provided facts showing the Blue Bell board failed to implement reporting or compliance systems. But in June 2019, the Delaware Supreme Court reversed that decision.
“The takeaway from the case is pretty clear,” Loewenstein said. “That is, the board has an affirmative obligation to do more than that, to at least question the officers [and] to require that the officers document their conclusions that the food safety requirements have been totally complied with.”
“The bottom line is that they have to have in place some kind of a system to assure compliance with applicable law,” he added.
Loewenstein said the case leaves open the question of how far that obligation extends. “After all, a large corporation operating in multiple jurisdictions and sometimes many lines of business obviously has lots of legal requirements to be aware of,” he said, adding the Delaware decisions haven’t addressed that. “But I think that’s coming down the road.”
NEMEC v. SHRADER
Loewenstein called this 2010 case from the Delaware Supreme Court a “terrific teaching tool” when it comes to the contractual duty of good faith. The dispute centered around consulting firm Booz Allen’s stock plan, which allowed retired company officers to sell their shares back to Booz Allen at book value for two years after retirement. Two retired officers who held a significant percentage of the company’s stock decided to exercise their option as the two-year deadline approached in spring of 2008, and they got about $160 per share.
Around the same time, Booz Allen was in negotiations to sell part of its business to The Carlyle Group, but the deal wasn’t finalized until a few months after the retired executives cashed out. The division sold to Carlyle for more than $700 per share, and the retired officers sued Booz Allen directors, alleging breach of the implied covenant of good faith and fair dealing. They said the timing of their stock redemption was meant to shut them out of the value gained in the Carlyle deal.
However, the Court of Chancery dismissed the case, and a majority of the Delaware Supreme Court affirmed the dismissal. The majority held that there was no breach of good faith because Booz Allen’s stock plan explicitly authorized the company to redeem the retirees’ shares at the time and price that it did.
“It demonstrates that the court is not going to easily exercise that kind of judicial option to expand the rights of a party,” Loewenstein said. “You want something, put it in the agreement itself.”