Business Law

SEC Settles Charges with Operator of Unregistered Cryptocurrency Exchange

In the first case of its kind, the SEC has settled charges with Zachary Coburn, the operator of the cryptocurrency exchange EtherDelta, both the New York Times and CoinDesk report. In the settlement order, the SEC takes note of the fact that most of the trades on EtherDelta occurred after the SEC issued The DAO Report in July 2017. That report clarified that many of the crypto-tokens being offered in initial coin offerings (ICOs) met the test for a “security” under SEC v. W.J. Howey Co. and that issuers and or exchanges trading in such tokens needed to either follow the registration requirements of the federal securities laws or qualify for an exemption. While noting Coburn’s cooperation in “facilitating the staff’s investigation involving an emerging technology,” the settlement order still required him to pay disgorgement and interest of $313,000 and a civil fine of $75,000 for operating an unregistered securities exchange.

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Court of Appeals Considers Scope of Implied Duty of Good Faith and Fair Dealing

The Tennessee Court of Appeals (Gibson, J.) recently considered a breach of contract case brought by an aspiring country music artist. In the case, Gregg v. Estate of Cupit, a Washington state insurance salesman pursuing his dream in Nashville signed a record contract with Cupit Records. He paid nearly $350,000 for Cupit Records to record, release and promote multiple singles on his behalf, but ultimately his music career was unsuccessful. After the owner of Cupit Records passed away, the artist sued the owner’s estate for breach of contract, claiming the company had failed to adequately promote his records. The trial court agreed and awarded the artist nearly $225,000.

The Court of Appeals, however, reversed, focusing on the provisions in the contract stating that the artist was paying a “flat fee of one hundred thousand per single” for promotion of three singles and that “[b]oth parties understand the music business is a speculative business and there are no guarantees.” There was no evidence that Cupit Records had breached its implied duty of good faith and fair dealing by underpromoting the artist’s records or failing to keep a detailed accounting of the funds that it spent on the artist. The Court of Appeals was not inclined to use the implied duty of good faith to rescue the artist from the bad bargain he had made.

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Delaware Supreme Court Sheds Light on Standard for Application of Business Judgment Rule to Controlling Shareholder Mergers

The Delaware Supreme Court has clarified the standard it set forth in Kahn v. M&F Worldwide Co. (Del. 2014) (“MFW”) regarding when the business judgment rule applies to mergers proposed by a controlling shareholder that have been “cleansed” by a vote of a special committee of disinterested directors and the informed vote of the majority of minority shareholders. In MFW, the Delaware Supreme Court “held that business judgment review applied to a merger proposed by a controlling stockholder conditioned before the start of negotiations on” both sets of votes.

In the recent opinion, Flood v. Synutra International, Inc., Chief Justice Strine wrote for a divided court that in order for the business judgment rule to apply, the conditions of a majority vote of independent directors and minority shareholders must be in place ab initio, or at the beginning of negotiations. This requirement is to ensure “that controllers could not use the conditions as bargaining chips during economic negotiations.” The ab initio requirement should not be taken literally, however, to mean that the conditions of the “cleansing” votes must be in the controlling shareholder’s first offer. Rather, they need only be established before any “substantive economic negotiations” take place.

The opinion also clarified that if the business judgment rule applies, “a plaintiff can plead a duty of care violation only by showing that the Special Committee acted with gross negligence, not by questioning the sufficiency of the price.” A dissenting justice argued that the court should have maintained a bright-line rule and held that the ab initio requirement is only satisfied “when the Dual Protections are contained in the controller’s initial formal written proposal.” Otherwise, the controlling shareholder transaction should be subject to the less-forgiving “entire fairness” standard.

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Court of Appeals Addresses Dissolution Provisions of Tennessee LLC Act

In FDA Properties v. Miller, the Court of Appeals (Gibson, J.) looked at the effect of a member’s bankruptcy on the dissolution of an LLC. The LLC in question was organized in 2005 under the Tennessee LLC Act (the Revised LLC Act was enacted in 2005, but is only effective for LLCs organized after Jan. 1, 2006, and those older LLCs choosing to be governed by the Revised Act). After one of the four members of the LLC declared bankruptcy, the other members expelled him through a written document, though no formal vote was taken. The Court of Appeals determined that Tenn. Code Ann. § 48-245-101(a)(5), which lists ten different events upon which dissolution occurs, applied to the LLC. One such event in the statutory list is the bankruptcy of any member, and the LLC did not include an exception to that rule in its operating agreement. However, because the trial court did not rule on whether the dissolution provisions in the LLC’s operating agreement modified the statutory bases for dissolution, the Court of Appeals remanded for further proceedings.

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Tech Companies Encourage National Data Privacy Laws to Preempt California Law

During a Senate hearing Wednesday, major technology and internet companies — including Apple, Alphabet, Amazon, AT&T, Charter and Twitter — encouraged the passage of federal legislation to protect data privacy that would preempt the tough privacy law that California adopted, set to take effect in 2020, Reuters reports. The companies acknowledged the importance of being more transparent with personal data use and giving users more control over their data, but argue that California’s legislation is too burdensome due to confusing language, making compliance difficult. In addition to California adopting tough privacy laws, the European Union General Data Protection Regulation took effect in May. Violations carry stiff fines in the millions of dollars. The U.S. Commerce Department is seeking comments on how to set nationwide data privacy laws.  

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Monkey Business

In other public offering news, SurveyMonkey’s parent corporation, SVMK Inc., began trading as a public company on Sept. 26. Known by many as a go-to resource for simple online surveying, SurveyMonkey raised more than $180 million in its initial public offering, according to The New York Times DealBook. SVMK is trading on the Nasdaq Stock Market under the ticker symbol “SVMK." 

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Upcoming Business Law Events at the UT College of Law

The Tennessee Journal of Business Law is hosting two upcoming events at the UT College of Law that are of interest to business lawyers in East Tennessee. On Friday, September 14, from 8:00 a.m. to 3:45 p.m., the law school is hosting “Connecting the Threads II,” a series of presentations from business law professors who teach throughout the United States. On Friday, September 21, from 8:30 a.m. to 4:00 p.m., the law school is hosting “Law and Business Tech: Cybersecurity, Blockchain and Electronic Transactions,” a one-day event bringing together representatives from the business world, the cybersecurity field, and the legal profession. Both events are free and open to the public, with CLE credit available for a fee.

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Delaware Chancery Court Awards Fair Value to Expelled LLC Member

In a recent decision, Domain Associates, L.L.C. v. Shah, the Delaware Chancery Court determined that an expelled member of a member-managed LLC was entitled to the fair market value of his member interest. Shah was forced to withdraw by the other members of Domain, a venture capital firm registered as a member-managed Delaware LLC. Domain argued that Shah was entitled only to the value of his capital account under the LLC agreement. Vice Chancellor Laster held that although the forced withdrawal was authorized under the LLC agreement, the agreement was silent on the amount Shah would receive upon withdrawal. Because the agreement was silent, and Section 18-604 of the Delaware LLC Act applies only to voluntary withdrawals, no provision of the LLC Act controlled. Domain had chosen a member-managed model, “whose governance structure resembled a partnership.” Therefore, the court applied a 2006 Chancery Court decision interpreting the Delaware Revised Uniform Partnership Act and held that Shah was entitled to a payout “equal to the fair value of [his] economic interest.”  

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Moonves Forced to Retire After Sexual Harassment Allegations

CBS announced on Sunday that its long-time Chairman and CEO, Leslie Moonves, would be departing the company in the wake of sexual harassment allegations. “In the end, it was the evidence that Mr. Moonves had misled his board — even more than the allegations of abuse from multiple women — that doomed him,” reported the New York Times. How to deal with the allegations against Mr. Moonves was the latest challenge for a board that already had been split by the ongoing dispute between Mr. Moonves and CBS’s controlling shareholder, Shari Redstone.

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GDPR Privacy Complaints Filed Against Google in the EU

Privacy complaints against Google have been filed in Ireland and Britain by Brendan Eich, known for being the creator of JavaScript, co-founding the web browser Mozilla and founding the private web browser Brave, Reuters reports.  The European General Data Protection Regulation (GDPR) is a new privacy law that had a two-year lead-in period to provide time for companies to comply. However, the complaint argues that Google and the advertising technology industry are not processing personal data in a way that properly secures it.  Noncompliance with the GDPR carries heavy fines for serious violations. This test case could trigger an article in the GDPR and spur an EU-wide investigation.

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