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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Delaware Supreme Court Confirms that Dilution Claims Typically Are Derivative and Are Extinguished After a Merger

Stockholder claims alleging wrongful dilution are typically considered to be derivative in nature.  Several decisions out of Delaware, however, have created exceptions to this general rule allowing stockholders to sue directly (rather than derivatively on behalf of the corporation) where, for example, a controlling stockholder authorizes a “disloyal expropriation” which reduces the economic value and voting power of the non-conflicted stockholders.  See, e.g., Gentile v. Rossette, 906 A.2d 91, 100 (Del. 2006); Gatz v. Ponsoldt, 925 A.2d 1265 (Del. 2007); Feldman v. Cutaia, 951 A.2d. 727 (Del. 2008).  In El Paso Pipeline GP Company, L.L.C. v. Brinckerhoff, No. 103, 2016, 2016 Del. LEXIS 653 (Del. Dec. 20, 2016), the Delaware Supreme Court declined to add to these exceptions and reaffirmed the general rule that dilution claims must be brought derivatively.  As a result, a derivative plaintiff losses his or her standing to pursue a dilution claim if the entity is acquired through a merger.

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U.S. Supreme Court Confirms that a Corporate Insider Receives a “Personal Benefit” by Providing Confidential Information to a Trading Relative or Friend, Affirming Conviction for Insider Trading

In Salman v. United States, No. 15-628, 580 U.S. ___, 2016 WL 7078448 (2016), the United States Supreme Court (Alito, J.) unanimously affirmed the insider trading conviction of petitioner Bassam Salman on the ground that Mr. Salman’s brother-in-law had breached his fiduciary duty by making a gift of confidential information to a “trading relative or friend.”  In doing so, the Supreme Court adhered to its prior ruling in Dirks v. SEC, 463 U.S. 646 (1983), and rejected a more lenient application of insider trading liability that the United States Court of Appeals for the Second Circuit had adopted in United States v. Newman, 773 F.3d 438 (2d Cir. 2014).

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Rule 504 Becomes Useful Tool for Smaller Capital Raising and M&A Transactions

On October 26, 2016, the SEC amended Rule 504 of Regulation D under the Securities Act of 1933 (the “Securities Act”) to increase the maximum amount of securities that may be sold thereunder in any 12-month period from $1 million to $5 million. Consequently, the rarely used Rule 504 may now prove useful to issuers of securities in smaller capital raising and M&A transactions.

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What Are ‘Commercially Reasonable Efforts’ in M&A Transactions?

Two recent rulings out of the Delaware Court of Chancery have highlighted the importance of clearly defining the terms of pre-closing obligations. In an M&A transaction, it takes significant time to get from a signed letter of intent to a closed deal. Pre-closing obligations, and the level of effort a party is required to exert to meet those obligations, are typically subject to heavy negotiation. While practitioners tend to negotiate according to a sliding scale of efforts standards—”commercially reasonable efforts,” for example, require something less than “best efforts”—neither Delaware nor New York courts have articulated tiered efforts standards in such a manner. Furthermore, and what the recent Delaware rulings again underscore, the various formulations do not have precisely defined meanings in common law.

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What You Need to Know About Mergers and Acquisitions Involving Government Contractors and Their Suppliers

Volume X – Accounting for the Cost of Business Combinations Under Government Contracts

Mergers and acquisitions create additional costs and complex accounting issues for government contractors.  There are fees for accounting, legal, and business consultants.  There may be restructuring costs associated with combining business operations.  Segments may be closed and retirement plans may be terminated.  Golden handcuffs and golden parachutes are also common.  Assets may be revalued, goodwill may be created, and there may be changes in cost accounting practices.

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