Corporate Securities Law Blog

In March, Nasdaq advised Applied Materials (NMS-AMAT) that a member of its audit committee, Y.S. Liu, failed to meet Nasdaq's independence requirements. Mr. Liu promptly resigned as a member of the committee. The basis upon which Mr. Liu was disqualified suggests that Nasdaq interprets independence strictly. Nasdaq's action also suggests that it intends to monitor SEC filings aggressively to police compliance with its listing requirements. Nasdaq can be expected to make use of its newly obtained right to issue public letters of reprimand in its enforcement efforts.

In late 2005, the SEC charged 16 individuals with providing false vendor confirmations to the auditors of Royal Ahold. These cases highlight the care that must be taken in providing third-party auditor confirmations.

In December 2005, the SEC granted Nasdaq the right to issue public letters of reprimand to listed companies for relatively minor violations of certain Nasdaq rules where delisting would be too harsh. In a recent Form 8-K, Paula Financial announced the receipt of the first letter of reprimand.

Material Adverse Effect or MAE Clauses ("MAE Clause")  that allow a buyer to terminate a transaction in the event of a material adverse change in the business being sold between signing and closing of a transaction are commonly used in acquisition agreements as a condition to closing.  Courts have recently made it more difficult for parties to rely on MAE Clauses as a means of abandoning a deal to which they have committed.

A recent Delaware Chancery Court ruling, ABRY Partners v. F&W, reflects the tension between promoting freedom of contract, and protecting parties from fraud.  The court reiterated the principle that a contract cannot insulate a seller who either deliberately lies or knows that the entity being sold has lied.  The court also found, however, that between sophisticated parties, a contract can be crafted to insulate a seller from a rescission claim based upon false statements made unintentionally.