Tag Archives: Board of directors

Board Proposes Rules to Reform Pre- and Post-Election Representation Case Procedures

The National Labor Relations Board will publish in the Federal Register tomorrow a Notice of Proposed Rulemaking, which proposes amendments to its existing rules and regulations governing procedures in representation cases. The proposed amendments are intended to reduce unnecessary litigation, streamline pre- and post-election procedures, and facilitate the use of electronic communications and document filing.

“One of the most important duties of the NLRB is conducting secret-ballot elections to determine whether employees want to be represented by a labor union,” said Chairman Wilma B. Liebman in a statement. “Resolving representation questions quickly, fairly, and accurately has been an overriding goal of American labor law for more than 75 years.” Click here to view her full statement. 

If finally adopted after a public notice-and-comment process, the proposed amendments would:

  •  Allow for electronic filing of election petitions and other documents.
  • Ensure that employees, employers and unions receive and exchange timely information they need to understand and participate in the representation case process.
  • Standardize timeframes for parties to resolve or litigate issues before and after elections.
  • Require parties to identify issues and describe evidence soon after an election petition is filed to facilitate resolution and eliminate unnecessary litigation.
  • Defer litigation of most voter eligibility issues until after the election.
  • Require employers to provide a final voter list in electronic form soon after the scheduling of an election, including voters’ telephone numbers and email addresses when available.
  • Consolidate all election-related appeals to the Board into a single post-election appeals process and thereby eliminate delay in holding elections currently attributable to the possibility of pre-election appeals.
  • Make Board review of post-election decisions discretionary rather than mandatory.

For details on the proposed amendments, view our fact sheet here and summary here.

As the Notice of Proposed Rulemaking states:

The Board believes that the proposed amendments would remove unnecessary barriers to the fair and expeditious resolution of questions concerning representation. The proposed amendments would simplify representation-case procedures and render them more transparent and uniform across regions, eliminate unnecessary litigation, and consolidate requests for Board review of regional directors’ pre- and post-election determinations into a single, post-election request.  The proposed amendments would allow the Board to more promptly determine if there is a question concerning representation and, if so, to resolve it by conducting a secret ballot election.

Board Member Brian Hayes dissented from the proposed rulemaking.  In his opinion,

The Board and General Counsel are consistently meeting their publicly-stated performance goals under the current representation election process, providing an expeditious and fair resolution to parties in the vast majority of cases, less than 10 percent of which involve contested preelection issues.  Without any attempt to identify particular problems in cases where the process has failed, the majority has announced its intent to provide a more expeditious preelection process and a more limited postelection process that tilts heavily against employers’ rights to engage in legitimate free speech and to petition the government for redress.  Disclaiming any statutory obligation to provide any preliminary notice and opportunity to comment, the majority deigns to permit a limited written comment period and a single hearing when the myriad issues raised by the proposed rules cry out for far greater public participation in the rulemaking process both before and after formal publication of the proposed rule.  The majority acts in apparent furtherance of the interests of a narrow constituency, and at the great expense of undermining public trust in the fairness of Board elections.

His dissent may be found here.

In the Notice of Proposed Rulemaking, the Board responded to the dissent.

Public comments are invited on all aspects of the proposed rules and should be submitted within 60 days of publication in the Federal Register, either electronically to www.regulations.gov, or by mail or hand-delivery to Lester Heltzer, Executive Secretary, NLRB, 1099 14th Street NW, Washington DC 20570.  Reply comments to the initial comments may be filed during an additional 14 day period. In addition, members of the public will be invited to attend a public hearing, to be scheduled for July 18 and July 19, if necessary, to comment on the proposed amendments and make other suggestions for improving the Board’s representation case procedures.

Breach of Fiduciary Duty in the Context of Insolvency: Can Individual Creditors Seek Recovery?

In the context of today’s distressed financial markets, we have witnessed desperate people doing desperate things. Financial fraud (i.e., fraud committed against financial institutions) has risen dramatically. Owners and officers of companies are getting more than just a little creative with accounting functions, inventory controls and receivable reporting, to name just a few hot spots. As a result, they are more and more frequently becoming the target of suits by lenders and other creditors. These suits seek to hold the officers of the insolvent company responsible for fraud, and in some cases breach of fiduciary duties to creditors (primarily, in an effort to reach D&O policies).

Are these actions against officers and directors a source of potential recovery by an individual creditor? Though the Supreme Court of Illinois has yet to rule on this issue, a recent bankruptcy case holds that individual creditors lack standing to bring this type of action.

The Question of Insolvency

In the day-to-day operations of a going concern, officers and directors owe a fiduciary duty to their shareholders. But what happens when the company enters the “zone of insolvency”? The officers and directors then also owe a fiduciary duty to the company’s creditors. Companies often ask, “How do we know when are we in the zone of insolvency?” The answer is simple: if you are asking the question, you are likely in the zone. Of course, there are established legal assessments—such as the “balance sheet test,” the “cash flow test” and the “unreasonably small capital test.” But, in practice, if the board of directors is pondering the question of its own insolvency, then it’s a safe bet that the company is already there.

If an officer or director breaches his fiduciary duties in any number of ways, who may bring the action against that individual? May a creditor, on its own, successfully sue an officer or director for breaching his fiduciary duties? Judge Carol A. Doyle, former Chief Judge of the Northern District of Illinois Bankruptcy Court, predicted how the Illinois Supreme Court would handle this question in the context of insolvency.

In this recently published case (In Re John H. Netzel, et al., January 20, 2011), the court discussed the important distinction raised by the 7th Circuit Court of Appeals between claims based on liability owed to the general creditor body (which only a trustee in bankruptcy can assert) and claims that are more specific to an individual creditor (which only the creditor can assert). As a general rule, fiduciary duty is owed to shareholders, not creditors. That means a creditor may not sue an officer or director for a breach of fiduciary duty. The advent of insolvency, however, creates the exception to the general rule. Upon finding that the exception exists, the fiduciary owes a duty not only to the shareholders, but also to the general creditor body.

The state of the law in Illinois is that the winding up of an insolvent company’s affairs requires the officers and directors to marshal the assets and hold them in trust for the entire creditor body, pro rata. In this context, Judge Doyle made a small step of well-reasoned logic by holding that the Illinois Supreme Court would likely not permit an individual creditor to sue on its own behalf in order to obtain more than its pro ratashare of the insolvent company’s remaining assets. Therefore, according to this recent case, individual creditors lack standing to bring an individual action for breach of fiduciary duty by an officer or director of an insolvent company.

It appears that the exception to this standard would be a harm that was personal to the creditor—not injurious to the creditor body as a whole. However, it is difficult to imagine a scenario where a breach of fiduciary duty or a fraud committed by an officer or director would not also be injurious on some level to the entire creditor body.

Delaware Chancery Court Provides Further Clarification as to When the “Entire Fairness” Standard of Review is Appropriate and How It Will Be Applied

On January 14, 2011, the Delaware Chancery Court issued an opinion in In re John Q. Hammons Hotels Shareholder Litigation that a merger transaction in which a controlling stockholder received consideration different than that received by the minority stockholders met the “entire fairness” standard. This opinion followed the Court’s determination in October 2009 that “entire fairness,” was the appropriate standard of review in this case.

Factual Background

The lawsuit arose following a going private transaction involving the merger of John Q. Hammons Hotels, Inc., a publicly traded Delaware corporation, with and into an unaffiliated third party. In early 2004, Mr. Hammons (the Chairman, CEO and controlling stockholder of JQH) informed the Board that he had begun discussions with third-parties regarding a potential sale of JQH or his interest in JQH. The Board thereafter formed a special committee of the Board to evaluate and negotiate a proposed transaction on behalf of the minority stockholders and to make a recommendation to the Board regarding any such transaction.

After nine months of negotiations and deliberations between potential acquirors and the special committee, the Board (without the vote of Hammons who recused himself from the Board vote) approved an offer from an unaffiliated third party for $24 per share for shares of Class A common stock. JQH stock had been trading at $4 – $7 per share prior to the rumors of the merger. Pursuant to the terms of the merger agreement, the merger was conditioned on a waivable requirement that the merger agreement be adopted by the affirmative vote of a majority of the shares of Class A common stock held by unaffiliated holders. At a duly held stockholder meeting, more than 72% of the outstanding shares of Class A common stock voted to adopt the merger agreement.

After the consummation of the merger, a group of minority Class A stockholders brought a class action suit against Hammons for, among other things, allegedly breaching his fiduciary duties by negotiating an array of private benefits for himself that were not shared with the minority stockholders.

Standard of Review/Ruling

In an earlier ruling, the Court determined that “entire fairness” is the proper standard of review for this transaction, and not the less onerous business judgment rule favored by the defendants. The Court noted that the business judgment rule would have been appropriate but for certain procedural deficiencies in the approval of the transaction. The Court stated that in a case where the controlling stockholder and the majority are in a sense “competing” for portions of the consideration, there must be “robust procedural protections in place to ensure that the minority stockholders have sufficient bargaining power.”

The Court ruled that the business judgment rule would have applied if the merger was (1) recommended by a disinterested and independent special committee of the board and (2) approved by a majority of all minority stockholders by a vote that is not waivable. In Hammons, the transaction was approved by a majority of the minority of stockholders voting on the matter, but such vote could have been waived by the special committee.

On the first factor of the “entire fairness” analysis, i.e., “fair dealing”, the Court based its opinion on the following factors:

  1. the special committee that negotiated and approved the transaction satisfied the threshold requirements for independence (e.g., it retained independent and skilled legal and financial advisors, held dozens of meetings over the 9 month period leading up to the merger and negotiated with several interested parties, all resulting in a transaction in which the unaffiliated Class A stockholders ultimately received $24 per share, an 85% increase over the initial offer);
  2. members of the special committee were highly qualified and had extensive experience in the hotel industry;
  3. members of the special committee understood their authority and duty to reject any offer that was not fair to the unaffiliated stockholders as evidenced by their rejection of the initial offer from a separate third party;
  4. evidence at trial demonstrated that the members of the special committee were thorough, deliberate and negotiated at arm’s length with both competing potential acquirors over a nine month period to achieve the best deal for the minority stockholders.

Moreover, as to the plaintiffs’ claim that Hammons coerced or strong-armed the special committee, the Court noted that the plaintiffs provided no credible evidence at trial demonstrating any improper conduct on the part of Hammons and stated that “plaintiffs have not come close to showing the Merger resulted from an unfair process.”

On the second factor of the “entire fairness” review, i.e., “fair price”, the Court analyzed the testimony made by the valuation experts from both sides. Ultimately, the Court found the defendants’ valuation expert to be more credible, believable and well-reasoned.

Finally, as to the issue of whether Hammons breached a fiduciary duty to the minority stockholders, the Court found that because he did not participate in the approval of the merger as a director, he was not on both sides of the merger, he did not make an offer as a controlling stockholder and he did not engage in any conduct that adversely affected the merger consideration obtained by the unaffiliated minority stockholders, he did not breach any fiduciary duties to the minority stockholders.

For companies with controlling stockholders that engage in M&A transactions, this case illustrates the importance of establishing an independent and disinterested special committee of the board and giving the committee the power to negotiate the transaction.  In addition, potential targets should note the importance of procedural safeguards in approving transactions, such as a non-waivable vote of a majority of all of the minority stockholders. Such safeguards will help boards of directors preserve the protections afforded by the business judgment rule and help to avoid challenges to their decisions by disgruntled stockholders.