Corporate Securities Law Blog

On July 16, 2008, the Internal Revenue Service ("IRS") issued proposed new regulations relating to the information return and information statement requirements under Section 6039 of the Internal Revenue Code. As we reported in our January 24, 2008 blog article, Code Section 6039 requires corporations to file an information return with the IRS (the "Return") and furnish a written information statement (the "Statement") to each employee who exercises incentive stock options ("ISOs") or sells or otherwise transfers shares acquired under an employee stock purchase plan ("ESPP") by January 31 following the year in which such transactions occur.

A recent Stanford University study casts doubt on the validity of the corporate governance ratings provided by Institutional Shareholder Services (ISS) and its principal competitors.

Governance rating firms seek to measure the effectiveness of a public company's corporate governance.  They maintain that this rating is predictive of the company's future performance.

Stanford's study claims to be the first objective analysis of the predictive value of corporate governance ratings.  It examined more than 15,000 ratings of 6,827 separate companies from 2005 to 2007.

In Julian v. Eastern States Construction Services, Inc., 2008 WL 2673300 (Del. Ch. July 8, 2008), the Delaware Chancery Court held that board members of a close corporation breached their duty of loyalty and would be required to disgorge bonuses where the directors approved self-compensation without sufficient independent protections.  This case provides guidance regarding the process board members must follow in order for a self-interested directorial compensation decision to survive an “entire fairness” review.

The Delaware Chancery Court recently decided two different motions for preliminary injunctions, with vastly different results. In both cases, the issue was whether disclosures in the respective proxy statements were sufficient to enable stockholders to consider fairly a proposed merger. In Wayne County Employees’ Retirement System v. Corti, C.A. No. 3534-CC (Del. Ch. July 1, 2008), Chancellor Chandler denied plaintiff’s motion for a preliminary injunction to halt a special meeting of stockholders based upon inadequate proxy statement disclosures. In David P. Simonetti Rollover IRA v. Margolis, C.A. No. 3694-VCN (Del. Ch. June 27, 2008), Vice Chancellor Noble granted a preliminary injunction based on inadequate disclosures in the challenged proxy statement. These two decisions, issued just days apart, provide further guidance to practitioners regarding the materiality of information to be included in proxy statements.

IRS Notice 2007-86 extended the deadline for employers to bring documents into compliance with the final regulations of Section 409A of the Internal Revenue Code (the "Code") until December 31, 2008.  With less than six months remaining in the year, we strongly encourage all employers to now take action to implement a Section 409A review process in order to allow for sufficient time to assess compliance alternatives and prepare amendments to implement any necessary changes.  Because the amendment process may generally require Board action and employee consent, advance planning for the steps that need to be taken before the end of the year becomes even more crucial.

Increasingly in recent years, purchase agreements are being negotiated to add a go-shop provision, permitting a target's board not only to consider unsolicited offers but also to actively solicit bids for the target for a limited period of time in order to fulfill target board fiduciary duties to shareholders.  The term "go-shop" is a relatively new addition to M&A transaction terminology.  "Go-shop" refers to a provision in a purchase agreement that permits a target company's board of directors to actively solicit competing bids for a specified period of time following the execution of the agreement.  Over the last two years, go-shop provisions have become more common.  According to a recent ABA study, 2% of deals announced in 2005 had go-shop provisions while 29% of deals announced in 2006 had them.

In SEC v. Talbot, 2008 WL 2574513 (9th Cir. June 30, 2008), the United States Court of Appeals for the Ninth Circuit held that a board member could be liable for insider trading under the “misappropriation theory” where the board member owed no fiduciary duty to the company whose stock he traded.  This holding reversed summary judgment granted in favor of the board member, and broadened the scope of potential liability for misappropriation of information by board members and officers of companies.

In Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 18, 2008), the Delaware Chancery Court held that a company’s advance notice provision did not preclude a dissident shareholder from nominating its own slate of directors.  Levitt is part of a trio of cases recently issued by the Delaware Chancery Court that address the issue of the voting rights of shareholders.  Consistent with JANA Master Fund v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), aff’d, 2008 WL 2031337 (Del. May 13, 2008) [See blog article] and In re IAC/Interactive Corp., 2008 WL 2462767 (Del. Ch. Mar. 22, 2008) [See blog article], the Levitt court held that an advance notice provision that purported to require shareholders to give notice 120 days before nominating directors instead allowed shareholders to nominate directors without any independent notice.

In In re IAC/Interactive Corp., 2008 WL 2462767 (Del. Ch. Mar. 22, 2008), the Delaware Chancery Court held that management could spin the company into multiple parts without obtaining the approval of the majority shareholder.  The court’s 78-page decision boiled down to a deceptively simple question:  was the majority shareholder required to grant a consent to corporate management before IAC was broken up?  The court held that such approval was not necessary, finding that IAC’s governance agreement did not allow IAC to exercise its voting right.  This case, particularly when read with Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 18, 2008) [See blog article] and JANA Master Fund v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), aff’d, 2008 WL 2031337 (Del. May 13, 2008) [See blog article], should signal to shareholders and corporate management alike that shareholder agreements between sophisticated parties will be strictly construed.

In JANA Master Fund v. CNET Networks, Inc., 2008 WL 660556 (Del. Ch. Mar. 13, 2008), aff’d, 2008 WL 2031337 (Del. May 13, 2008), the Delaware Chancery Court held that CNET’s advance notice bylaw did not preclude JANA from financing and issuing its own proxy solicitation.  This case, in combination with Levitt Corp. v. Office Depot, Inc., 2008 WL 1724244 (Del. Ch. Apr. 18, 2008) [See blog article], and In re IAC/Interactive Corp., 2008 WL 2462767 (Del. Ch. Mar. 22, 2008) [See blog article], serves to remind companies that advance notice provisions will be narrowly construed under Delaware law, particularly where the franchise of the stockholder is at stake.