Corporate Securities Law Blog

In In re Netsmart Technologies, Inc. Shareholders Litigation, C.A. No. 2536-VCS (Del. Ch. Mar. 14, 2007), Vice Chancellor Strine held that the shareholder plaintiffs demonstrated a probability of success on the merits of their claim that the Netsmart board of directors failed to fulfill their Revlon duties in considering and approving a cash sale of the company to two private equity firms.  The Court determined that the board’s decision not to conduct a broad market canvass for strategic acquirers, and instead focus the search for acquirers solely on private equity firms, did not appear to be reasonable under the circumstances.  The Court also held that the post-signing “market check” recommended by the company’s financial advisers was not appropriate for a small-cap company like Netsmart, thus was far too passive to have been effective in mitigating the narrowness of the pre-signing market canvass.  This decision provides guidance to boards when considering a sale to a private equity firm — an increasingly common situation affecting boards of directors of public companies throughout the country.

In Notice 2007-49, the IRS indicated how it will define "covered employee" for purposes of Internal Revenue Code §162(m)'s annual limit of $1,000,000 on deducting compensation of public company officers in light of the September 8, 2006 amendments to Item 402 of Regulation S-K.

The September 8, 2006 amendment to the SEC executive compensation disclosure rules (i) added the "principal financial officer" as a "named executive officer" by reason of position, and (ii) reduced from four to three the number of other executives treated as "named executive officers" by reason of compensation. Companies must comply with the amended disclosure rules for fiscal years ending on or after December 15, 2006. However, §162(m) applies only to the chief executive officer, and does not apply to the chief financial officer, by reason of the executive's position. Also, §162(m) applies to officers other than the CEO only to the extent the SEC requires disclosure of their compensation.

Notice 2007-49 states the term "covered employee," for purposes of §162(m), will apply to the principal executive officer and the three highest compensated officers (other than the principal executive officer and principal financial officer). Accordingly, the term "covered employee" does not include those individuals for whom disclosure is required under the SEC executive compensation disclosure rules on account of the individual being the principal financial officer.

For further information, please contact David Paik or Martin Smith.

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