Second Circuit Holds that Contingent Equity-Based Compensation of Former Lehman Employees are Subordinate to Creditor Claims

In In re Lehman Bros. Holdings Inc. 855 F.3d 459 (2d Cir. 2017), the United States Court of Appeals for the Second Circuit affirmed a district court order subordinating the claims of former Lehman Bros. (“Lehman”) employees for undelivered equity-based compensation to those of the defunct bank’s general creditors. The Court determined the compensation benefits were securities that had been purchased by the former employees when they agreed to receive them in exchange for their labor and the asserted damages arose from those purchases, requiring the claims’ subordination under the Bankruptcy Code. The decision is important to employees and employers weighing the value of hybrid compensation packages and creditors seeking to safeguard their priority position among bankruptcy claimants.   Continue Reading

WannaCry Ransomware Alert

This is not a drill.

Companies and law enforcement agencies around the world have been left scrambling after the world’s most prolific ransomware attack hit over 500,000 computers in 150 countries over a span of only 4 days. The ransomware – called WannaCry, WCry, WannaCrypt, or WannaDecryptor – infects vulnerable computers and encrypts all of the data. The owner or user of the computer is then faced with an ominous screen, displaying a countdown timer and demand that a ransom of $300 be paid in bitcoin before the owner can regain access to the encrypted data. The price demanded increases over time until the end of the countdown, when the files are permanently destroyed. To date, the total amount of ransom paid by companies is reported to be less than $60,000, indicating that companies are opting to let their files be destroyed and to rely instead on backups rather than pay the attackers. Nevertheless, the total disruption costs to businesses is expected to range from the hundreds of millions to the billions of dollars. Continue Reading

SEC Adopts Rule Requiring Hyperlinks to Exhibits and HTML Formatting

On March 1, 2017, the Securities and Exchange Commission (“SEC”) announced the adoption of amendments that will require registrants that file certain registration statements and reports subject to the exhibit requirements of Item 601 of Regulation S-K (i) to include within each filing a hyperlink to each exhibit referenced therein and (ii) to submit all such filings to EDGAR in HTML format. The new requirements are set to go into effect on September 1, 2017 for most registrants.

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Delaware Court of Chancery Holds that Cancellation of Shares Through Merger Deprives Stockholder of Standing in Section 220 Action

In Weingarten v. Monster Worldwide, Inc., C.A. No. 12931-VCG, 2017 WL 752179 (Del. Ch. Feb. 27, 2017), the Delaware Court of Chancery (Glasscock, V.C.) clarified when a plaintiff has standing to vitiate inspection rights under Delaware General Corporation Law Section 220, 8  Del. C. § 220.  In a case of first impression, the Court decided that the language of Section 220(c) does not confer standing to a former stockholder bringing an action to exercise his or her inspection rights after the former stockholder’s shares were canceled in a merger.  To reach this conclusion, the Court relied upon the plain meaning of the statute, eschewing policy arguments from both parties.

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SNAP IPO Debuts On NYSE

SNAP Inc., the parent company of Snapchat, went public yesterday with a valuation of approximately $33.4 billion. The Company raised $3.4 billion at $17 per share, and is now trading well above the IPO price. While SNAP has reported growing revenues ($404.5 million in 2016, up from $58.7 million in 2015), it has also reported growing net losses ($514.6 million in 2016, up from $372.9 million in 2015).

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New York Appellate Division Revives Non-Monetary Class Action Settlement in M&A Class Action with Revised Standard of Review

In Gordon v. Verizon Communications, Inc., No. 653084/13, 2017 WL 442871 (N.Y. App. Div. Feb. 2, 2017), the Appellate Division of the Supreme Court of the State of New York, First Judicial Department (the “First Department”), reversed an order denying plaintiffs’ motion for final approval of a proposed non-monetary settlement in a shareholder class action litigation related to Verizon Communication Inc.’s (“Verizon”) acquisition of Vodafone Group PLC’s (“Vodafone”) stake in Verizon Wireless (“VZW”).  With its decision, the New York Appellate Division breathed new life into beleaguered disclosure-only class action settlements, and modernized what it believed had become an outdated analytical framework for approving class action settlement agreements.  It also appeared to accord special weight to provisions in such agreements whereby corporations promise to obtain fairness opinions in connection with future transactions in determining the overall fairness of the agreements.  Thus, while non-monetary class action settlements are increasingly disfavored in other courts — most notably, in the Delaware Court of Chancery — New York courts remain receptive to their utility.

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Delaware Court Affirms Utility of Non-Reliance Clause in Dismissing Fraud Claim

In IAC Search, LLC v. Conversant LLC (f/k/a ValueClick, Inc.), 2016 WL 6995363 (Del. Ch. Nov. 30, 2016), the Delaware Court of Chancery provided a reminder on how potentially-overlooked contractual provisions could have a significant bearing on the types of claims an aggrieved party may bring.

IAC v. Conversant is the progeny of cases decided by the Delaware Court of Chancery examining fraud claims in the mergers and acquisition context. Previously, the court had established in Abry Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006), that “murky integration clauses, or standard integration clauses without explicit anti-reliance representations, will not relieve a party of its oral and extra-contractual fraudulent representations.”

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Ninth Circuit Holds that Alleged Violations of Aspirational Corporate Conduct Standards Are Insufficient to State a Claim for Securities Fraud

In Retail Wholesale & Department Store Union Local 338 Retirement Fund v. Hewlett-Packard Co., 2017 U.S. App. LEXIS 955 (9th Cir. Jan. 19, 2017), the United States Court of Appeals for the Ninth Circuit addressed for the first time whether an undisclosed violation of a company’s code of ethics can support a claim of securities fraud.  The Ninth Circuit held that general pronouncements that a company seeks to adhere to high ethical standards, despite the later revelation that the company’s chief executive officer failed to meet those standards, cannot support a claim.  The Court observed that in order to support a claim for securities fraud, a statement must be capable of being shown to be “objectively false,” and noted that general, aspirational statements about adhering to corporate ethical standards are akin to immaterial puffery.  A contrary result, the Court explained, would turn every instance of wrongdoing by corporate employees into a securities case.  This decision reconfirms the Ninth Circuit’s strict application of the heightened pleading standards applicable in securities cases.

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Delaware Court of Chancery Rejects Bylaw That Required Supermajority Stockholder Vote to Remove Directors in Violation of 8 Del. C. § 141(k)

In Frechter v. Zier, C.A. No. 12038-VCG, 2017 WL 345142 (Del. Ch. Jan. 24, 2017) (Glasscock, V.C.), the Delaware Court of Chancery granted plaintiff’s motion for summary judgment on a declaratory relief claim and held that 8 Del. C. § 141(k) prohibits company bylaws from requiring more than a majority vote to remove directors from a company’s board.  The Frechter decision confirms that company bylaws may not impose requirements or implement procedures that conflict with 8 Del. C. § 141(k).  Continue Reading

Higher Filing Thresholds for HSR Act Premerger Notifications and Interlocking Directorates Announced

1. Higher Thresholds For HSR Filings

On January 19, 2017, the Federal Trade Commission announced revised, higher thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product and will be effective thirty days after publication in the Federal Register. Publication is expected within one week, so the new thresholds will likely become effective in late February 2017. Acquisitions that have not closed by the effective date will be subject to the new thresholds.

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