Corporate Securities Law Blog

In Institutional Investors Group v. Avaya, Inc., 2009 U.S. App. LEXIS 9110 (3d Cir. April 30, 2009), a panel of the United States Court of Appeals for the Third Circuit applied the United States Supreme Court’s 2007 decision in Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 (2007), for the first time to existing case law in the Third Circuit. In Tellabs, the Supreme Court held that a plaintiff who seeks to bring a claim for securities fraud under the Private Securities Litigation Reform Act (the “Reform Act”) must plead an inference of scienter that is “cogent and at least as compelling as any opposing inference of non-fraudulent intent.” [See blog article on Tellabs.] In Avaya, the Third Circuit held that the standard articulated in Tellabs requires courts to review scienter holistically, and not through analysis of any individual allegation of scienter, though the court did confirm that the Reform Act’s particularity requirement for pleading scienter remains a determinative factor when conducting this analysis.
 

June 10,2009 marked an extraordinary day of announcements affecting executive compensation for both recipients of financial assistance from the Troubled Asset Relief Program (“TARP”) and other publicly held companies, including:

• The U.S. Department of the Treasury (“Treasury”) issued a statement outlining the Administration’s expectations and planned legislative proposals for executive compensation reform for publicly held companies.
   
• The Securities and Exchange Commission (“SEC”) announced it will soon be proposing new expanded compensation disclosure rules that could take effect in time for the 2010 proxy season.
   
• The Treasury issued regulations providing its much anticipated guidance on standards for executive compensation and corporate governance for TARP recipients.
   
• The Treasury established an Office of the Special Master for TARP Executive Compensation (the “Special Master”).

The City of Los Angeles Office of Finance recently implemented a Tax Penalty Amnesty Program (the "Program") that allows businesses that have not registered with the Office of Finance, or that have unpaid taxes or underreported gross receipts, to avoid a penalty of up to 40% of the tax due for tax periods ending on or before July 31, 2009. Additionally, no criminal action will be brought against any taxpayer that participates in the Program. The Program began May 1, 2009, and will be available through July 31, 2009.

A recent Delaware Court opinion, Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, Case No. 3658-VCS (Del. Ch. Apr. 20, 2008), provides important guidance regarding whether and to what extent managers and members of a limited liability company (“LLC”) organized in Delaware owe duties to the LLC and its members. Section 18-1101(c) of the Delaware Limited Liability Company Act provides that “To the extent that…a member or manager...has duties (including fiduciary duties) to a limited liability company,…the member’s or manager’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.” However, in Bay Center, the Chancery Court held that where the LLC is silent or ambiguous as to the duties members and managers owe to each other, they will be subject to the traditional fiduciary duties that directors of a Delaware corporation owe. It also imposed the duties of good faith and fair dealing on the manager of the LLC to perform its management functions in good faith. Therefore, the Bay Center decision is important in that it underscores the necessity of LLC participants that do not want to be subject to traditional fiduciary duties to clearly and unambiguously modify or eliminate these duties in the LLC operating agreement.

The IRS recently issued "safe harbor" guidance that home loans modified under the Home Affordable Modification Program (HAMP) will not adversely affect real estate mortgage investment conduits (REMICs). Without this guidance, payments from the US government to lenders and servicers of home loans under HAMP may have resulted in a 100% penalty tax and may have jeopardized the securitization vehicle's tax-advantaged classification as a REMIC.

On Wednesday, March 25, 2009, the Delaware Supreme Court issued an opinion reversing the Chancery Court's decision in Ryan v. Lyondell Chemical Co., 2008 WL 2923427 (Del. Ch. July 29, 2008). We posted about the Chancery Court decision on the Corporate and Securities Law Blog here. In reversing the Chancery Court decision, the Delaware Supreme Court granted summary judgment in favor of Lyondell’s directors and in doing so held that a board of directors determination to adopt a “wait and see” approach in response to an unsolicited takeover bid was subject to the business judgment and that Revlon duties did not apply until the Board began negotiating with the bidder. This case provides important guidance for directors of Delaware corporations in discharging their fiduciary duties in connection with company sales.

An election under section 338(h)(10) of the Internal Revenue Code is often used to characterize the sale of stock of an S corporation as a deemed sale of all of the corporation's assets. A proper federal election under section 338 will be deemed a proper election for California tax purposes, unless the taxpayer separately elects otherwise. The election will trigger corporate-level tax at the current rate of 1.5% on the hypothetical sale of assets arising from the election.

Sweeping changes to the obligations of providers, health plans and their service providers ("business associates") under HIPAA privacy and security rules were included in the American Recovery and Reinvestment Act of 2009. Previously only health plans and providers were covered under HIPAA and subject to the criminal and civil monetary penalties. Effective February 17, 2010, business associates are now directly covered. These new requirements will require amendments to all business associate agreements. Business associates must also draft policies and procedures to implement their obligations under the privacy and security standards. Immediate steps must be taken to prepare for implementation.

In Rubke v. Capitol Bancorp Ltd., 2009 WL 69278 (9th Cir. Jan. 13, 2009), the United States Court of Appeals for the Ninth Circuit affirmed the dismissal of a class action complaint alleging violations of Section 11 of the Securities Act of 1933 and Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 through materially misleading statements and omissions in connection with a tender offer. The Ninth Circuit carefully considered each alleged misleading statement and omission, ultimately determining that none was actionable. The decision in Rubke highlights the types of statements and omissions that would not be viewed as materially misleading when made by a corporation in connection with a tender offer.

The American Recovery and Reinvestment Act of 2009 ("ARRA"), which President Obama signed into law on February 17, 2009, created a federal subsidy of the premiums payable by certain terminated employees for continuation coverage provided under employer-sponsored group health plans pursuant to the requirements of the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended (also known as "COBRA"). The premium subsidy and new notification requirements under COBRA that apply to employers and plan administrators as a result of this legislation are summarized below.