Selected 2014 Developments in Corporate and Securities Law

• Publication year: 2015
• Author: Richard G. Burt, Cathryn S. Gawne, and Robert Rugani

Selected 2014 Developments in Corporate and Securities Law

Richard G. Burt, Cathryn S. Gawne, and Robert Rugani

The following article summarizes selected state and federal developments in corporate and securities law and highlights noteworthy California case law.

California Legislation Adopted in 2014

"Flexible Purpose Corporations" Now "Social Purpose Corporations"

Companies organized in California as flexible purpose corporations are governed by the Corporate Flexibility Act of 2011 (the "Act"),¹ which was amended in 2014 by Senate Bill No. 1301.² As a result, the type of corporation authorized under the Act now will be known as a "social purpose corporation."³ A flexible purpose corporation formed prior to January 1, 2015 may elect to change its name by amending its articles of incorporation to replace the previously required words "flexible purpose corporation" with "social purpose corporation," but is not required to do so. Regardless of whether it changes its name, an existing flexible purpose corporation will be governed by the provisions of the amended Act.⁴

Under the amendment, directors of a social purpose corporation are now required to consider and weigh such factors as the directors deem relevant, including the overall prospects of the social purpose corporation, the best interests of the social purpose corporation and its shareholders, and the purposes of the social purpose corporation as set forth in its articles of incorporation.⁵Prior to the amendment, the directors' consideration and weighing of those factors was discretionary and included evaluation of the corporation's short-term and long-term prospects rather than its overall prospects. The amendment also permits a shareholder of a social purpose corporation to bring a derivative action to enforce the performance of this duty.⁶

The amendment requires that the annual report sent to shareholders after the corporation's fiscal year end to include specified financial statements and a management discussion and analysis (called a "special purpose MD&A") concerning the corporation's stated purposes as set forth in its articles of incorporation and to contain other specified information.⁷ A special-purpose current report must be sent to shareholders within 45 days of the occurrence of specified events, including (i) the making of an expenditure in furtherance of the corporation's special-purpose objectives, where such expenditure has, or is likely to have, a material adverse impact on the corporation's results of operations or financial condition,

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or (ii) a decision by the board of directors to withhold such an expenditure, where the planned expenditure was likely to have had a material positive impact on results of operations or financial condition.⁸ Prior to January 1, 2015, flexible purpose corporations with fewer than 100 shareholders of record were exempt from the annual-report and special-purpose current-report requirements in some circumstances. The amendment repeals this exemption.⁹

The amendment also provides that a social purpose corporation may "change status" to a "business corporation"¹⁰ by amending its articles of incorporation.¹¹In addition, if the social purpose corporation has already issued shares, the status change must be approved by the affirmative vote of at least two-thirds of the outstanding shares of each class of stock (or a greater vote if required in the corporation's articles of incorporation), and shareholders with dissenting shares (as defined in Code section 1300(b)) may exercise dissenters' rights pursuant to Code section 3305 and Chapter 13 (commencing with Code section 1300).¹² Mergers involving social purpose corporations are affected in a similar way.¹³ The Act previously stated that a social purpose corporation could convert to a domestic corporation by the same process, but did not provide for dissenters' rights.¹⁴

Standardizing California's Business-Entity Filing Process

In preparation for the Secretary of State's long-awaited Business Connect online-filing system, Senate Bill No. 1041¹⁵ amended various sections of the Corporations Code to standardize the process and content of filings for different types of business entities. The changes affect a wide variety of filings, including resignation of agent for service of process; cancellation of entity-name registration; name change filed by a foreign limited liability company, limited partnership, or limited liability partnership; and reinstatements of a fraudulently terminated business entity. Although these changes are not substantive, failure to follow the new requirements is likely to result in rejection of the filing.

Enhanced Requirements under California's Data-Breach Notification Law

Assembly Bill No. 1710,¹⁶ which amended California Civil Code sections 1798.81.5, 1798.82, & 1798.85, expands notification requirements applicable to businesses¹⁷ that own or license computerized data that include "personal information"¹⁸ about a California resident. Prior law required such businesses, following discovery or notification of the security breach, to notify any California resident whose unencrypted personal information was, or is reasonably believed to have been, acquired by an unauthorized person. The law also included specific provisions that must appear in the notification.

The amendment imposes an additional requirement if the business subject to the notification obligation was also the "source of the breach."¹⁹ In such case, the notification to California residents must include an offer to provide at no cost to the affected person "appropriate identity theft prevention and mitigation services, if any," for at least 12 months.²⁰

It is unclear whether the use of the term "if any" means that the business need not offer such services if it does not otherwise offer them or whether it means that such services need not be provided if mitigation or prevention (or both) is not feasible. Many commentators interpret the "if any" language as mandating the offer of at least a credit-monitoring service.²¹

The amendment extends certain data-security requirements to businesses that maintain personal information. Previously, those requirements applied only to businesses that own or license personal information. Businesses are required to implement and maintain "reasonable security procedures and practices appropriate to the nature of the information" to protect the personal information from unauthorized access, destruction, use, modification, or disclosure.²²

Finally, the amendment prohibits the sale of, advertisement for sale of, or offer to sell an individual's social security number except in specific circumstances.²³ Previously, only the public posting or display of a social security number was prohibited.

Repeal of Law Prohibiting Bitcoin

California Corporations Code section 107 prohibited corporations, flexible purpose corporations, associations, and individuals from issuing or putting in circulation, as money, anything but the "lawful money of the United States." In recognition of the growing use of cash alternatives, such as bitcoin and cryptocurrencies,²⁴ Assembly Bill No. 129²⁵ repealed the prohibition.

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Recent Developments in California Case Law

Parent Company and its Officers Can Be Liable for Interference with a Contract of a Subsidiary

In Asahi Kasei Pharma Corp. v. Actelion Ltd.,²⁶ a Japanese pharmaceutical corporation (Asahi) developed a drug, which it wanted to market in in North America and Europe. Asahi entered into a license agreement with a California-based company (CoTherix) to obtain FDA clearance and market the drug. A Swiss pharmaceutical company (Actelion) marketed a competing drug that held the dominant share of the relevant market. Asahi's drug, if it came to market, would put pressure on the price of Actelion's drug. Through a subsidiary, Actelion acquired all the stock of CoTherix and shortly thereafter notified Asahi that CoTherix would discontinue development of Asahi's drug.

Asahi sued, and the jury found that Actelion tortiously interfered with Asahi's license agreement with CoTherix and assessed $546,875,000 in compensatory damages against Actelion.²⁷ The jury also assessed $30,000,000 in punitive damages against some of Actelion's officers personally.²⁸

Actelion and its officers argued that, as a matter of law, they could not be liable for interference with the license agreement because, under existing case law, the duty not to interfere with a contract falls only on "strangers" to the contract.²⁹ A contracting party cannot, as a matter of law, be liable for interfering with its own contract, they pointed out.³⁰

Here, the interference occurred after Actelion had acquired all the stock of CoTherix, making CoTherix its wholly-owned subsidiary. As a result, the defendants argued, they were not "strangers" to the contract. But because Actelion was not an original party to the contract and had not assumed the contract as part of the acquisition, Actelion was not itself a party to the contract and could be considered a stranger to the contract.³¹

California law recognizes that corporate owners, directors, and officers can be liable for interfering with contracts of the corporation.³² A corporate owner, director, or officer may have the affirmative defense of justification, but that defense does not apply if the defendant uses "unlawful means" to interfere with a contract.³³ At trial, Asahi presented evidence, and the jury found, that defendants used unlawful means, namely, fraud and extortion, to interfere with Asahi's license agreement with CoTherix.³⁴

Substantial evidence was also presented that each of the officer-defendants "actively participated in the tortious conduct"³⁵ of...