Banking and Finance Law Report : Banking & Finance Lawyer & Attorney : Porter Wright Morris & Arthur Law Firm : Bankruptcy, Commercial Lending

Bankers and other financial institution executives may find it of interest that the Ohio Supreme Court recently granted a motion for reconsideration in a widely-reported, much-criticized decision concerning the enforcement of non-competition agreements, a subject that is almost always of interest. 

Essentially, in the first case the Court reasoned that a successor to a corporate merger could not enforce a  contract that pre-existed the merger.  Such reasoning came as a surprise to many observers.  The new decision is Acordia of Ohio, L.L.C. v. Fishel, 2012-Ohio-4648. A summary of the Court's decision can be found here.

The Court now stated that it had previously - and erroneously - mis-read Ohio precedent regarding the legal effect of a corporate merger.

Here's an excerpt:

"Upon further consideration, we now recognize that the lead opinion's reading of Morris [v. Investors Life Insurance Co.] was incomplete. While Morris does state that the absorbed company ceases to exist as a separate business entity, the opinion does not state that the absorbed company is completely erased from existence. Instead, the absorbed company becomes a part of the resulting company following merger. The merged company has the ability to enforce noncompete agreements as if the resulting company had stepped into the shoes of the absorbed company. It follows that omission of any 'successors or assigns" language in the employees' noncompete agreements in this case does not prevent the L.L.C. from enforcing the noncompete agreements.

While we now hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into each original contracting company's shoes, we agree with Justice Cuppa's assertion in his dissent in Acordia I that even though the agreements transfer to the L.L.C. by operation of law, the transfer does not 'foreclose appropriate relief to the parties to the noncompete agreement under traditional principles of law that regulate and govern noncompete agreements.' ... In other words, the employees still may challenge the continued validity of the noncompete agreements based on whether the agreements are reasonable and whether the numerous mergers in this case created additional obligations or duties so that the agreements should not be enforced on their original terms.

The language in Acordia I stating that the L.L.C. could not enforce the employees' noncompete agreements as if it had stepped into the original contracting company's shoes or that the agreements must contain 'successors and assigns' language in order for the L.L.C. to enforce the agreements was erroneous. We hold that the L.L.C. may enforce the noncompete agreements as if it had stepped into the shoes of the original contracting companies, provided that the noncompete agreements are reasonable under the circumstances of this case. We accordingly reverse the judgment of the court of appeals and remand this cause to the trial court so that it may determine the reasonableness of the noncompete agreements." (Emphasis supplied.)

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Both Ohio corporations and Ohio LLCs are permitted (but not required) to enter into indemnity agreements with their officers, directors, managers and employees. But when forming an Ohio corporation or Ohio LLC, entities should carefully consider the differing mandatory indemnity obligations that also apply to each type of organization.  

As we noted in a previous post, the Ohio Supreme Court recently stated in Miller v. Miller that even without an indemnity agreement, Ohio corporations have certain mandatory responsibilities to pay directors' litigation expenses (provided that a director first submits an "undertaking" to the corporation) under Ohio Revised Code §1701.13(E)(5)(a).

Mandatory indemnity requirements for Ohio LLCs are quite different. Ohio Revised Code §1705.32(C) states that to the extent that a "manager, officer, employee or agent" of a limited liability company has been successful on the merits or otherwise in defense of any action, suit or proceeding related to their status as a manager, officer, employee or agent, such person "shall" be indemnified against expenses that were actually and reasonably incurred. 

This statute does not allow an Ohio LLC to avoid the indemnity by making a statement in its articles of organization or operating agreement. The LLC statute also applies to managers, officers, employees and agents - the Ohio corporate statute described above applies only to directors. In those regards, an Ohio LLC's mandatory indemnity requirements may seem more burdensome (from the LLC's perspective) than the indemnity requirements applicable to an Ohio corporation.

The circumstances in which an Ohio LLC would have to pay litigation expenses are, however, less burdensome in other respects. While an Ohio corporation must indemnify litigation expenses as they are incurred, an Ohio LLC does not have to make any payments at all until a case has concluded. Also, Ohio corporations are only repaid by a director if it is proven by clear and convincing evidence in court that the director's action or failure to act was taken deliberately to harm the corporation or with reckless disregard for the best interest of the corporation. By contrast, an Ohio LLC only has to pay the litigation expenses of a manager, officer, agent or employee if such persons are actually successful in defending the cases brought against them. Finally, while an Ohio corporation is required to reimburse "expenses incurred," an Ohio LLC is only required to reimburse "expenses actually and reasonably incurred."     

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Ohio corporations should carefully consider whether their articles of incorporation or code of regulations should state that Ohio Revised Code §1701.13(E)(5)(a) does not apply to the corporation. Without making that exclusion, the lack of an indemnity agreement will not prevent a director from exercising his statutory right to receive (from the corporation) payment of his litigation expenses.

Corporations and their directors often enter into indemnity agreements. These agreements usually state that the company will reimburse the director for certain expenses (such as legal fees) incurred by the director as a result of his or her status as a director. But Miller v. Miller, a recent decision by the Ohio Supreme Court, makes clear that even without an indemnity agreement, Ohio corporations have (unless otherwise stated in their articles of incorporation or code of regulations) certain mandatory responsibilities to pay directors' litigation expenses. 

Ohio Revised Code §1701.13(E)(5)(a) states that Ohio corporations "shall" pay the expenses (when they are incurred) of directors who are subject to "actions, suits, or proceedings" asserted against a director because he is a director. The only step a director must take to receive such advances is to execute an "undertaking," which must state that the director will: (i) reasonably cooperate with the corporation concerning the action, suit or proceeding, and (ii) repay all expense to the corporation if it is proven in court by clear and convincing evidence that the director's action or failure to act was taken deliberately to harm the corporation or with reckless disregard for the best interest of the corporation.  This statute applies to directors only (not corporate officers, employees, agents, other representatives, etc.). 

In Miller v. Miller, the Ohio Supreme Court ruled that a corporation's obligation to pay litigation expenses to a director (after receiving the director's "undertaking") is mandatory- there is no requirement for an underlying indemnification agreement. The Court further stated that a corporation cannot avoid this duty to advance expenses by claiming that the director's alleged misconduct, if proven, would be a violation of the director's fiduciary duties.  Finally, the court noted that a corporation can avoid this mandatory duty to pay litigation expenses - but only if the corporation's articles of incorporation or code of regulations specifically state that Ohio Revised Code §1701.13(E)(5)(a) does not apply.   

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The U.S. House of Representatives, by a vote of 380 to 41, has passed the Jumpstart Our Business Startups Act, or JOBS Act [link to House Bill], in the form previously approved by the Senate last week [link to Senate Amendment]. The bill now goes to President Obama, who is expected to sign it into law. The JOBS Act could significantly impact community banks, among other businesses, regarding the categories summarized below.

SEC Registration

The JOBS Act increases the threshold for SEC registration from 500 shareholders of record to 2,000 shareholders of record for banks and bank holding companies. The increase allows some banks to raise capital by selling stock to new investors without having to register under Section 12(g) of the Securities Exchange Act of 1934.

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Recently-enacted legislation makes a number of important changes to the Ohio General Corporation Law and the Ohio Limited Liability Company Act that financial institutions and their executives should consider.  The bill will become effective May 4, 2012.

Here are some key points:

Dissenting Shareholder  Rights:  The bill substantially changes our statutes, which have not been substantively amended since 1970, to make Ohio dissenting shareholder processes similar to those followed in other major commercial states, such as Delaware.  The significant provisions are:

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Having your laptop or smartphone searched or detained by Customs on your way back from a business trip would be a nightmare for most travelers, including bankers and other finance professionals. However, this scenario is quite possible under new governmental policies. In 2009, Customs and Border Protection (“CBP”) and Immigration and Customs Enforcement (“ICE”) both issued their respective new policies on border searches of electronic devices. It was a coordinated effort of CBP and ICE to update and harmonize their border policies to detect an array of illegal activities, including terrorism, cash smuggling, contraband, child pornography, copyright, and export control violations.

With all the technology innovations that allow business travelers to carry massive amounts of information in small electronic devices, CBP and ICE are facing an enormous challenge. On the one hand, travelers have a legitimate right to carry information on electronic devices. In that respect, there are serious concerns regarding the traveler’s expectation of privacy. On the other hand, the government has a duty to combat illegal activities and to enforce U.S. law at the border. The difficulty is finding the right balance between the government’s duty to enforce the law and the rights of travelers.

The legal basis for ICE and CBP policies is the border search exception to the Fourth Amendment requirement that officers obtain a warrant before searching someone’s property. But, assuming that they have this power, another key issue is exactly what CBP and ICE are allowed to do with one’s laptop. In short, they have authority to search and share information on laptops, disks, drives, tapes, mobile phones, Blackberries, cameras, music players, and any other electronic or digital devices — with or without “reasonable suspicion1” of illegality. Detention of the devices and/or information requires probable cause that an illegal activity is underway or is about to occur.

Searches
CBP searches may be conducted with or without suspicion of an unlawful activity. To the extent practicable, CBP searches should be conducted in the presence of a supervisor. ICE searches should be conducted by an ICE Special Agent, CBP Officer, or Border Patrol Agent. The searches should be conducted in the presence of, or with the knowledge of, the traveler. Naturally, the guidelines provide for exceptions to the traveler’s presence under certain circumstances where national security or operational considerations are an issue. ICE guidelines specifically state that the traveler’s consent for the search is not needed.

Detention
CBP detention of a device should not exceed five days, but that period can be extended. ICE detention periods may be longer — up to 30 calendar days or longer — if circumstances warrant. CBP is required to issue a Custody Receipt to the owner of the device (CBP Form 6051D) at the time of detention. ICE will also give the owner of the device documentation regarding its custody. Detention of electronic devices requires probable cause to believe that the device, or its contents, contains evidence of illegality that CBP and ICE are authorized to enforce.

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