Northeast Harbor Golf Club, Inc. v. Harris

Northeast Harbor Golf Club, Inc. v. Harris

61 A.2d 11146 (1995) 

Facts. Nancy Harris was president of the plaintiff corporation, Northeast Harbor Golf Club, Inc. from 1971 to 1990 when she was forced to resign. Over time, Nancy purchased parcels of land surrounding the golf course in her name and informed the directors and other officers at the annual meetings. In 1988, Harris began the process of obtaining a five-lot subdivision and NE brought a suit for breach of fiduciary duty to act in the best interest of the corporation. Main Issue: Corporate Opportunity. NE sought an injunction to prevent development and also to impose a constructive trust on the property for the benefit of the Club. The DC found Harris had not usurped the corporate opportunity b/c her good faith acquisition of real estate was not in the Club’s line of business and that the club lacked financial ability to purchase that real estate. 

Issue. Did the DC err in finding that Harris did not breach her fiduciary duty as president of the Club by purchasing and developing the property around the golf course?

Held. Yes, the trial court’s “line of business test” was erroneous and should’ve followed ALI §5.05 standards, so it was vacated and remanded. Harris should’ve fully disclosed to the board and the club must have rejected it properly. Because Harris failed to offer the opportunity at all, she couldn’t’ defend her case.

 

 

Alderstein v. Wertheimer

Alderstein v. Wertheimer

Del. Ct. Ch.

2002 WL 205865

 

Facts. Alderstein, who was former Chairman and CEO of SpectruMedix Corp. sued the company and the current directors. Prior to the suit on July 9, 2001, a meeting was held in which a board majority issued to a Reich Partnership a number of shares of a new class of supervoting preferred stock that conveyed to the Reich Partnership a majority of the voting power of the Company’s stock. Basically Alderstein sued Wertheimer and Mencher because they did not give notice of a meeting that would result in his removal from his CEO position.

 

Rule. Company’s insolvency doesn’t justify not giving advance notice of a meeting’s agenda.

 

Issue: Did SpectruMedix’s dire financial circumstance and actual or impending insolvency justify directors’ actions in not giving advance notice of meeting to prevent controlling shareholder from exercising rights?

 

Held. No. SpecturMedix’s dire financial situation and impending insolvency does not justify Wertheimer’s and Mencher’s actions. It is such times of dire consequence when the established rules of good board conduct are the most important. Directors cannot accomplish their fiduciary duties to a corporations though trickery and deceit. 

The Importance of Rule 506 of Regulation D

Rule 506 Regulation D

Rule 506 of Regulation D is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

1. The company cannot use general solicitation or advertising to market the securities;
2. The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospectiveinvestment;
3. Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investorsdisclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accreditedinvestors as well;
4. The company must be available to answer questions by prospective purchasers;
5. Financial statement requirements are the same as for Rule 505; and
6. Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.

Importance of Rule 505 of Regulation D

Rule 505 of Regulation D

Rule 505 of Regulation D allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company:

1. Can only offer and sell up to $5 million of its securities in any 12-month period;
2. May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
3. Must inform purchasers that they receive “restricted” securities, meaning that the securities cannot be sold for six months or longer without registering them; and
4. Cannot use general solicitation or advertising to sell the securities.

Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investorsdisclosure documents that generally are equivalent to those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers.

Here are some specifics about the financial statement requirements applicable to this type of offering:

1. Financial statements need to be certified by an independent public accountant;
2. If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company’s balance sheet (to be dated within 120 days of the start of the offering) must be audited; and
3. Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

What is an Accredited Investor?

Accredited Investors

Under the Securities Act of 1933, a company that offers or sells its securities must register the securities with the SEC or find an exemption from the registration requirements. The Act provides companies with a number of exemptions. For some of the exemptions, such as rules 505 and 506 of Regulation D, a company may sell its securities to what are known as “accredited investors.”

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

a bank, insurance company, registered investment company, business development company, or small business investment company;

an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;

a charitable organization, corporation, or partnership with assets exceeding $5 million;

a director, executive officer, or general partner of the company selling the securities;

a business in which all the equity owners are accredited investors;

a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;

a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year;

or
a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

Meehan v. Shaughnessy

Meehan v. Shaughnesy

404 Mass. 419, 535 N.E.2d 1255 (1989)

 

Facts. Plaintiffs, Meehan and Boyle were senior partners at the Defendant’s firm, Parker Coulter. Meehan and Boyle had a 10.8% share of the law firm. The firm said: okay now you’re leaving, there were procedures for the removal of clients. The Plaintiffs decided to leave, they gave thirty days notice (instead of the agreed upon three months – but this was waived by a partner in the firm), took other attorneys from the firm with them . They recruited Meehan, Boyle, Cohen, Schafer, Black, and Fitzgerald to start their own firm. The letters to the clients was on the Parker Coulter Letterhead. The partnership agreement provided rights for the parties after dissolution that resolved the allocation of business immediately. Departing attorneys were entitled to receive their share of their capital contribution and net income currently entitled, as well as a right to a portion of the firm’s unfinished business. The main point of contention was the stealing of clients. They took 142 of the 350 contingent fee cases pending at Parker Coulter.

 

Issue. The issue is whether the conduct of Plaintiffs violated a fiduciary duty owed to the remaining partners of the firm.

 

Holding. Lawyers can leave, clients can leave. You should send out a joint letter or an approved letter. Relationships in the profession is very important. Why burn all these bridges?

The P’s conduct regarding their secret planning for their new law firm was not necessarily unacceptable. P’s would have to engage in some initial planning for the new firm to ensure that they would have the necessary resources to start their own firm. P’s conduct went too far concerning the retentions of all their former clients. P’s left D at a disadvantage when they denied they were leaving and when they secured clients while D’s were initially trying to plan for P’s departure. P violated the partnership agreement by violating their fiduciary duty, but they will only held responsible for damages arising from their conduct. P’s are entitled to their share of capital contribution and compensation.

 

Examine: 403(c)