Articles Posted in Corporations

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Marketing entrepreneurs’ greatest strengths are their creativity and vision. It is this vision that drives many to take the leap to start their own agency/consultancy or join a start-up venture to market an exciting new product. Unfortunately, most marketers are not well-versed in the intricate legal issues involved with starting a business. This can lead to a variety of problems, especially as the venture begins to become successful.  A common misconception is that good legal advice is often too expensive for the early stages of a business venture. This is not the case – provided the right counsel is selected. To ensure the success of any new venture, marketers should take steps to avoid the following common pitfalls:

  1. Delaying discussion of legal issues until past the start-up phase. It’s all too common (and tempting) to ignore legal issues involved with starting a business. The instinct is to wait until your company receives additional funding or has a problem to hire an attorney. But having legal counsel during the start-up is essential to preventing large and costly problems that could ultimately derail your business.
  2. Initial business formation. Entrepreneurs are often not aware of the different tax filing categories. LLC, S-corporation and C-corporation are the most common, but there are others. Each has a different structure and design, with different tax consequences. As the company founder, you should sit down with an attorney to determine which structure is best for your business. Failure to do so may result in higher taxes and expose you to additional liabilities. Choosing the correct structure can result in significant savings, a more robust investment platform and a more secure future.
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In the midst of the Great Depression, Congress enacted two laws to shore up practices that were considered to have led in part to the Market Crash of 1929: the Securities Act of 1933 (“1933 Act”), which governs initial securities offerings; and the Securities and Exchange Act of 1934 (“1934 Act”), which governs all subsequent trading. The 1933 Act permits both state and federal courts to hear claims brought under that Act, and bars defendants from removing such claims to federal court. The 1934 Act, however, grants federal court exclusive jurisdiction to hear claims brought under that Act.

In 1995, Congress passed the Private Securities Litigation Reform Act (“Reform Act”) to curb apparent abuses of plaintiff’s use of the class action vehicle in litigation involving nationally traded securities. The Reform Act included substantive reforms in both state and federal court, and procedural reforms only in federal court. The Reform Act fell prey to the law of unintended consequences, and, following its passage, plaintiffs began circumventing the obstacles imposed by the Reform Act by filing securities class actions in state court. To prevent the run-around of the Reform Act, Congress responded in 1998 with the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). In relevant part, SLUSA provided an exception to the 1933 Act’s general rule that state and federal courts exercise concurrent jurisdiction over claims brought under that Act. Following the passage of SLUSA, a split developed between state and federal courts as to whether SLUSA deprived state courts of subject matter jurisdiction over cases involving “covered class actions” (actions in which damage are sought on behalf of 50 of more people) asserting only 1933 Act claims.

On March 20, 2018, in Cyan v. Beaver County Employees Retirement Fund, No. 15-1439, the Supreme Court resolved the split and issued a unanimous opinion authored by Justice Kagan. The Cyan case arose out of the purchase of shares of stock in Cyan, a telecommunications company, by three pension funds and one individual in an initial public offering. After the stock declined in value, the plaintiffs brought a damages class action in California Superior Court against Cyan. The allegations stemmed from material misstatements contained Cyan’s offering documents. The plaintiffs alleged that Cyan violated the 1933 Act, but did not allege any violations of California state law claims. Cyan moved to dismiss the case alleging that SLUSA stripped state courts of subject matter jurisdiction over class actions arising solely under the 1933 Act. The California Superior Court denied the dismissal, and the state appellate courts denied review of that ruling. The Supreme Court granted certiorari to resolve the split among state and federal courts. The Supreme Court also addressed a related removal question raised by the federal government as amicus curiae.

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In its 2009 decision in Shenker v. Laureate Educ., Inc., 411 Md. 317, the Court of Appeals of Maryland inserted a caveat in the premise that shareholder lawsuits against corporate directors must be pursued as a derivative action on behalf of the corporation itself. By declaring that a corporation’s impending sale gave rise to common-law duties by directors that could be enforced directly by shareholders, the high court outlined an exception that risked swallowing the rule. Last month, however, the Court of Special Appeals gave a more thorough explanation about when Shenker applies – and, as to be expected, it’s not as broad as disgruntled shareholders might hope.
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Governments and businesses know – or at least they should – that there’s a difference between being vicariously liable and being directly negligent. Jurors may not, however, so how carefully should the distinction be explained come time for crafting jury questions? Perhaps not much – according to a new opinion of the Court of Special Appeals, provided the jury is otherwise instructed properly by the trial court and counsel, blurring the line between vicarious liability and negligence in a jury question can be excusable.
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Silverman|Thompson|Slutkin|White real estate litigation attorneys succeeded in obtaining summary judgment on behalf of the private owner of a project-based Section 8 housing project in a breach of lease action pending in the Circuit Court for Baltimore City. The case involved a determination of whether projects funded by the Department of Housing and Urban Development may proceed with eviction upon a showing that drug-related criminal activity had occurred. Maryland law previously required that, after adducing evidence that a tenant had breached their lease by engaging in drug-related criminal activity, the landlord also prove that the breach was material, substantial and warranted eviction, thereby allowing a judge or jury to countermand the landlord’s decision to evict. The ruling by the Honorable Laurence P. Fletcher-Hill, which has wide implications for all federally-funded housing projects, held that Maryland law is preempted by federal law to the extent it would permit a judge or jury to review a HUD-assisted landlord’s decision to proceed with the eviction of a tenant who has committed drug-related criminal activity. As a result, if a federally-assisted landlord can prove by undisputed fact that a tenant has engaged in drug-related criminal activity in or near the leased premises, the landlord has established grounds for eviction as a matter of law and is entitled to terminate the lease.
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Civil litigators know that the impending bankruptcy of an opponent is bad news for any lawsuit that’s ongoing or in the works: Bankruptcy operates as an automatic stay of any state-court litigation against the debtor until the bankruptcy gets resolved. Oddly, however, the precise effect of such a stay was an open question in Maryland up until last month. With Kochhar v. Bansal, Md. Ct. Spec. App., Sept. Term 2014, No. 435 (Feb. 27, 2015), the state now joins the majority of other jurisdictions in deeming any and all proceedings and filings after a bankruptcy stay as void, and not merely voidable.
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Toward the end of last year, I attended a discovery conference in D.C. Throughout the panel discussions of the proposed changes to the Federal Rules of Civil Procedure and various electronic discovery resources, I found myself thinking about the practical application to my current cases and future client representation. In other words, I was wondering how it applied to my legal practice and my clients.
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For users of the popular Pandora Internet Radio website, the day the music dies has been delayed for at least a few more years. That’s thanks to U.S. District Court Judge Denise Cote of the Southern District of New York, who earlier this month saved the music service from being stripped of its rights to play songs owned by major record companies Sony/EMI, Warner, Universal, and BMG. It’s a case showing that the ever-shifting legal landscape regarding online music consumption is still in many ways tied to the Golden Age of Radio.

For those who aren’t familiar (and if you’re a music fan, definitely check it out), Pandora works by playing songs that correspond to a general type of music or artist that the user selects. The listener can give positive or negative feedback for each song that plays, allowing the site to narrow its selections to songs that the listener is more likely to enjoy. Along the way, links are provided so that users can easily buy the songs or albums from online retailers. Combined with its popular streaming service and mobile app, this nifty little audio experiment has turned into big business: Pandora reportedly has more than 150 million registered users and is valued at $2.6 billion, having pulled in $427.1 million in revenue is Fiscal Year 2013.
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The processes of setting and communicating prices are two of the most fundamental roles of a business. Price affects a business’s sales, revenue, investment returns, and ultimately profit. As a result, the term “price fixing” has a strong negative connotation, and deservedly so. Restrictions on price competition represent actual threats to the economy, and they carry the possibility of harsh penalties. However, the term sometimes may be misused in reference to pro-competitive, legal conduct, which actually may be beneficial for businesses and consumers.

In a recent decision, an administrative law judge dismissed three illegal price-fixing charges brought against McWane, Inc. by the Federal Trade Commission, but upheld four charges alleging that it illegally excluded competitors from the market.

The privately-owned McWane, Inc. is the nation’s largest manufacturer of iron pipe and other products used in water distribution and wastewater treatment. In January 2012, the FTC Complaint accused McWane of orchestrating a complex scheme in which it worked with competitors Star Pipe Products Limited and Sigma Corporation to raise and stabilize prices. The FTC also alleged that a trade group was created to assist in this illegal scheme by serving as a clearinghouse through which the companies could exchange pricing information.

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Delaware law permits a court to pierce the corporate veil of a company and hold its owners personally liable “where there is fraud or where [the corporation] is in fact a mere instrumentality or alter ego of its owner.” See, e.g., Geyer v. Ingersoll Publ’ns Co., 621 A.2d 784, 793 (Del.Ch.1992). In order to state a claim for piercing the corporate veil under the “alter ego” theory, a party must show (1) that the corporation and its principals sought to be held liable operated as a single economic entity, and (2) that an overall element of injustice or unfairness is present. See, e.g., Trevino v. Merscorp, Inc., 583 F.Supp.2d 521, 528 (D. Del. 2008) (applying Delaware law). The fraud or injustice that must be demonstrated in order to pierce the corporate veil must be found in the principal’s use of the corporate form. See Mobil Oil Corp. v. Linear Films, Inc., 718 F. Supp. 260, 267 (1989); Blair v. Infineon Technologies AG, 720 F. Supp. 2d 462, 473 (D. Del. 2010).
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