First, several plaintiffs have filed lawsuits based on requests for zip codes. In fact, in the last weeks plaintiffs have filed three new class actions in San Diego alleging violations of Song-Beverly based on retailers requests for zip codes during credit card transactions. To date, no published decision has addressed whether a request for a zip code violates Song-Beverly.
Second, many plaintiffs are now suing retailers for requesting personal information during transactions related to the return of merchandise. A petition is currently pending before the Fourth District Court of Appeal related to such a lawsuit. A ruling is expected in the next 30 days.
For further information, please contact John Dineen at (619) 338-6609.
]]>The SEC and USAO coordinated their efforts in the simultaneous investigations. For example, the SEC turned over to the USAO all documents obtained through the defendants’ cooperation with the SEC investigation. Further, the SEC received instructions from the USAO on how best to conduct SEC depositions in order to create the “best possible record” to support a potential false statement criminal prosecution. The SEC also agreed to conduct the interviews in Oregon so that the Portland office of the USAO would have jurisdiction over any false statements case that might arise from statements made during the depositions.
The SEC and USAO also took steps to conceal the existence of the criminal investigation from the defendants. The USAO decided it would not get involved in the SEC investigation so as not to “impede” it, in light of the fact that the defendants were cooperating with the SEC by, among other things, agreeing not to invoke their Fifth Amendment privilege. In addition, the SEC went so far as to instruct court reporters at the depositions not to disclose the existence of the criminal investigation to the defendants. Finally, in response to questioning by an attorney for one of the defendants, an SEC staff attorney refused to disclose whether a simultaneous criminal prosecution was ongoing, and suggested the questions be directed to the “other agencies . . . mentioned” by the defense attorney.
In the criminal case, the district court granted the defendants’ motion to dismiss the indictments on the ground that the government had violated the defendants’ due process rights by deceitfully pursuing simultaneous civil and criminal investigations. On appeal, the Ninth Circuit disagreed and reversed. The Court focused on a standard form the SEC gives to all witnesses, including the defendants, in connection with its requests for production of information. This form disclosed that information obtained during the course of SEC investigations is “often” made available “to other governmental agencies, particularly the United States Attorneys and state prosecutors. There is a likelihood that information supplied by you will be made available to such agencies where appropriate.” The form further advised, specifically with regard to the Fifth Amendment right against self-incrimination, that:
Information you give may be used against you in any federal . . . civil or criminal proceeding brought by the Commission or any other agency. You may refuse, in accordance with the rights guaranteed to you by the Fifth Amendment of the Constitution of the United States, to give any information that may tend to incriminate you or subject you to fine, penalty, or forfeiture.
The SEC also warned defendants at the start of each deposition that “the facts developed in this investigation might constitute violations of . . . criminal laws.” The Ninth Circuit held that these disclosures by the SEC undermined any assertion that the defendants were deceived regarding the risks that information they were providing voluntarily to the SEC might be used in a parallel criminal proceeding against them.
This decision is of great importance to corporations and their officers, directors and employees who are targeted by a regulatory investigation. It removes the chilling effect the district court’s decision had on strategic and tactical cooperation between prosecutors and SEC investigators, and emphasizes the need for practitioners to explore thoroughly with targeted clients the risks of criminal liability in weighing the pros and cons of cooperation with the SEC.
For further information, please contact Mark Berube at (212) 332-3820.
]]>The ruling in the court case applies to LLCs registered in California that only have income from outside the state. However, there are two other cases pending before the courts that involve different groups of taxpayers - LLCs with income from both within and without California and LLCs with only California income. Those types of LLCs may also be eligible for refunds.
]]>Overall, the decisions to date from all circuits since Tellabs suggest that courts are applying a more stringent pleading standard. . . . This result should not be particularly surprising, however. The 2d, 3d and 7th circuits appear to recognize Tellabs as materially heightening the requirements for pleading scienter. In the 1st, 6th and 9th circuits, where Tellabs’ “tie goes to the plaintiff” rule on competing inferences can be viewed as lowering the bar for plaintiffs, because competing inferences rarely are “precisely in equipoise” (Tellabs, 127 S. Ct. at 2514 (Scalia, J., concurring)), the difference between “tie goes to the defendant” and “tie goes to the plaintiff” is not practically important.
For further information, please contact John Stigi at (213) 617-5589.
]]>The Court of Appeals concluded that such derivative suits were allowed and rested its decision on two grounds. First, the Court noted the general importance of derivative suits and the fact that these suits are judicially created remedies. Second, the Court noted that the “absence of evidence that the [New York] Legislature decided to abolish” the derivative suit as a remedy for management malfeasance at LLCs suggested that the Court had license to craft a remedy to combat “faithless fiduciaries” of LLCs.
The Court first examined the history of the derivative suit generally. It noted that this remedy was “not created by statute, but by case law.” The Court noted that this same principle drove the Second Circuit to a similar conclusion when it held that limited partners could sue on a partnership’s behalf. Noting that “the Legislature obviously did not intend to give corporate fiduciaries a license to steal,” the court held that public policy supported allowing LLC derivative lawsuits.
Second, the Court noted the absence of any language in the Limited Liability Company Law that spoke either for or against allowing derivative suits against LLCs. The Court noted that “it could hardly be argued that the mere absence of authorizing language in the Limited Liability Company Law bars the courts from entertaining derivative suits by LLC.” The Court held that the legislative history was “far too ambiguous to permit us to infer that the Legislature intended wholly to eliminate . . . a basic, centuries-old protection for shareholders, leaving the courts to devise some new remedy.” In light of its public policy concerns about “faithless fiduciaries” run amok, and its conclusion that the Legislature had not manifested any intent to eliminate LLC derivative suits when it had failed to explicitly provide for such a remedy, the Court concluded that Plaintiff could proceed derivatively.
In dissent, Judge Susan P. Read strenuously objected to the Court’s holding, calling the result “unique in the annals of the Court of Appeals.” In particular, Judge Read argued that the majority had “read into” the Limited Liability Company Law a “policy choice[]” that the New York Legislature had explicitly “considered and rejected.” Examining the legislative history, Judge Read noted that the bill to create the Limited Liability Company Law was part of an effort to combat a business environment that was seen as “unfriendly to fledgling businesses” and to make New York more “pro-business.”
The Limited Liability Company Law initially languished in limbo between the Assembly and Senate. Only after the Assembly introduced a version of the Bill that did not authorize LLC derivative suits was the stalemate broken. Judge Read argued, this was the compromise reached by the Legislature: “exclusion of provisions authorizing derivative actions from the Assembly bill in exchange for the Senate’s agreement to the balance of the law.” Consequently, Judge Read concluded that, on the basis “judicial fiat” the majority had created a right “unfettered by the prudential safeguards against abuse” that had been “rejected by the Legislature, and, for more than a decade after the Limited Liability Company Law’s enactment, was not recognized by any New York court.”
In contrast to the decisions recently handed down by the California and Delaware Supreme Courts, Tzolis broadens the standing requirement to allow individual members of an LLC to bring suit against that same LLC “on behalf of” that same LLC. Moreover, by broadening New York law to allow derivative lawsuits against LLCs, New York courts have signaled a greater willingness to potentially expand the derivative suit to other corporate formations.
For further information, please contact John Stigi at (213) 617-5589.
]]>(This is an update to our February 14, 2008 blog post.)
On February 21, 2008, the Internal Revenue Service ("IRS") released Revenue Ruling 2008-13, which confirms and expands upon the position taken in Private Letter Ruling ("PLR") 200804004 that compensation intended to qualify as "performance-based compensation" under Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"), will not be exempt from the $1 million deduction limit if such compensation may be paid upon a covered executive's involuntary termination without cause by the employer, the executive's termination for good reason or the executive's retirement.
]]>As background, Code Section 162(m) generally limits the ability of public companies to deduct compensation in excess of $1 million paid to certain executive officers ("covered executives"). However, compensation that meets the requirements of "performance-based compensation" is exempt from the $1 million limit under Code Section 162(m). Generally, compensation qualifies as performance-based only if it is payable when predetermined performance objectives are actually achieved in accordance with performance criteria that has been approved by shareholders. The regulations under Code Section 162(m) further provide that compensation does not fail to qualify as performance-based merely because compensation is payable upon death, disability or a change in ownership or control.
In PLRs released in 1999 and 2006, the IRS expanded on the regulations and ruled that compensation does not fail to qualify as performance-based merely because compensation is payable upon termination of the covered executive's employment by an employer without cause or by the executive for good reason (or for retirement). The IRS' stated view in its 1999 PLR was that involuntary terminations without cause or for good reason were similar to terminations due to death, disability or a change in ownership or control. Although a PLR may not be relied upon by taxpayers other than the taxpayer receiving the PLR, the earlier PLRs illustrated the IRS' position on the issue and thus many corporations and practitioners structured employment/compensation arrangements based on these PLRs.
As we said in our February 14, 2008 blog post, PLR 200804004 essentially reversed the IRS' position that had been espoused in the earlier two PLRs. However, in Revenue Ruling 2008-13, the IRS specifically points out that neither the IRS nor the Department of Treasury has previously issued any guidance on which taxpayers are entitled to rely that expressly addresses the situations that are addressed in the Revenue Ruling. Revenue Ruling 2008-13 resolves the inconsistency between the PLRs by making it clear that if performance-based compensation is also payable to a covered executive due to an involuntary termination without cause, a termination for good reason or due to retirement, then such compensation arrangements cannot qualify as performance-based compensation.
In recognition of the public outcry regarding PLR 200804004 and acknowledging the disruption that Revenue Ruling 2008-13 could have on preexisting compensation arrangements that were implemented in reliance on the IRS' earlier position, the IRS provided transitional relief since Revenue Ruling 2008-13 shall only apply prospectively. In other words, Revenue Ruling 2008-13 will not be applied to disallow a deduction for any compensation that otherwise satisfies the requirements for qualified performance-based compensation under Code Section 162(m) and that is paid under a plan, agreement, or contract that has payment terms similar to the terms described in the Ruling if either:
Given this important change to Code Section 162(m) performance-based compensation arrangements, public companies should review their outstanding employment/compensation arrangements to determine whether they will need to be amended to comply with Revenue Ruling 2008-13. In particular, companies should focus on whether performance-based compensation is payable to a covered executive (or an employee who could become a covered executive), without regard to whether the performance goal is attained, in the event of an involuntary termination without cause, termination for good reason or retirement. Moreover, all future employment agreements (including any amendments to existing employment agreements) and future performance-based compensation arrangements should be prepared in light of Revenue Ruling 2008-13. In any event, we are available to discuss any specific situations you or your company may have with respect to this issue.
For further information, please contact Gregory Schick at (415) 774-2988 or Michael Chan at (213) 617-5537.
]]>On appeal, the California Supreme Court acknowledged the applicability of the “internal affairs doctrine,” which requires courts generally to apply the law of the state of incorporation to disputes between corporations and their officers and directors. The Court noted, however, that application of Delaware law to the case at hand would be unnecessary if California law were identical. The Court, therefore, turned first to an analysis of whether California law, like Delaware law, imposes a continuous ownership rule.
The Court examined Section 800(b) of the California Corporations Code. That statute provides, in pertinent part:
No action may be instituted or maintained in right of any domestic or foreign corporation by any holder of shares . . . unless . . . : [¶] (1) The plaintiff alleges in the complaint that plaintiff was a shareholder, of record or beneficially . . . at the time of the transaction or any part thereof of which plaintiff complains or that plaintiff’s shares . . . thereafter devolved upon plaintiff by operation of law from a holder who was a holder at the time of the transaction or any part thereof complained of.
Cal. Corp. Code § 800(b) (emphasis added). While the plain meaning of the “instituted or maintained” in Section 800(b) “point[ed] to a continuous ownership requirement,” neither this nor the legislative history, the Supreme Court held, “clearly impose[d]” such a reading.
In light of the absence of clear legislative meaning or intent, the Court held that “other considerations” supported requiring continuous ownership to maintain standing in a shareholder derivative suit. Specifically, the Court reasoned that requiring plaintiff shareholders to continuously hold shares in the corporation they were suing was “all but compel[led]” by “basic legal principles pertaining to corporations.” Fundamentally, a derivative claim “does not belong to the shareholder asserting it.” Instead such standing is “justified only by the stockholder relationship.” While the court allowed that “equitable considerations” might apply where a corporation merges solely to deprive a plaintiff standing or when a merger “is merely a reorganization that does not affect the plaintiff’s ownership interest,” no such facts had been alleged in the case before it. “Consequently, when the stockholder relationship is terminated, either voluntarily or involuntarily a derivative plaintiff loses standing to sue because her or she no longer has even an indirect interest in any recovery pursued for the corporation’s benefit.” Or, more colloquially, such a plaintiff has “no dog in the hunt.” In reaching its decision, the Court in Grosset explicitly overruled the California Court of Appeal’s decision in Gaillard v. Natomas Co., 173 Cal. App. 3d 410, 219 Cal. Rptr. 74 (Cal. App. 1985), where the court held that Section 800(b) required stock ownership only at the time the action was filed.
Grosset suggests that most important principle guiding the California Supreme Court in determining whether a plaintiff in a shareholder derivative action has standing to sue is whether, at the time of the suit, that plaintiff has an interest — either direct or indirect — in the outcome of the litigation. Once a plaintiff ceases to be a shareholder he or she ceases to have such an interest. This is true irrespective of whether that plaintiff chose to sell his or her shares and irrespective of the whether the plaintiff spent many years (and many dollars) litigating the case preceding the merger. While there are circumstances where a plaintiff might retain standing despite not holding shares, such as when a merger is used to “wrongfully deprive” a plaintiff of standing or where a merger does not affect a plaintiff’s ownership interest, such circumstances are unusual and do not apply to the vast majority of mergers of California-based corporations.
For further information, please contact John Stigi at (213) 617-5589.
]]>The court declined this invitation. While the court expressly reserved the right to create equitable standing for non-stockholders based on exigent circumstances — as the court had done a year earlier in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, 930 A.2d 92 (Del. 2007), granting creditors equitable standing to bring derivative actions against directors of insolvent corporations — the court refused to craft such standing for non-stockholding board members. Instead, the court held that equitable standing could only be expanded in the face of significant “exigency.” A court must be convinced that, in not granting a plaintiff standing, there would be a “failure of justice on behalf of the corporation” where “stockholders would be without any immediate and certain remedy.”
Based upon the facts before it, the court found it unlikely that a “failure of justice” would occur if Schoon were prevented from bringing suit. Observing that a stockholder “aligned with” Schoon already was litigating against Troy in other matters, the court concluded that “a stockholder derivative action would fully and adequately redress any injuries” to the company that were suffered due to a breach of fiduciary duties by the board. Schoon’s suit presented “no new exigencies” that would require an extension of equitable standing to non-stockholding directors.
The decision in Schoon suggests that Delaware courts are unlikely to expand standing to those who lack a direct financial interest in a corporation. Although the same court had granted standing to non-stockholding creditors in Gheewalla, the court took pains to distinguish it from Schoon, observing that the lesson of Gheewalla was merely that courts could “substitute[] creditors for shareholders” who “no longer have a financial interest” in an insolvent corporation. While the court observed that a handful of jurisdictions and the American Law Institute had expanded standing to encompass non-shareholding board members, it expressed little enthusiasm for adopting such a standard in the future. Though not entirely foreclosing on the possibility of expanding equitable standing to encompass non-shareholding board members in the future, the court did little to suggest such an expansion will be forthcoming. “Given the absence of statutory authority” for such an expansion, and given the absence of evidence that such standing would be necessary to “prevent a complete failure of justice,” the court concluded that a stockholder derivative action, and not a non-stockholder board member action, was the better way to redress any injury resulting from a breach of fiduciary duty by a corporate board.
For further information, please contact John Stigi at (213) 617-5589.
]]>Other than specifically referencing the regulation that only mentions death, disability or a change in ownership or control, the IRS provided no explanation in its ruling as to the change in its position, nor does the ruling reference or distinguish the 1999 and 2006 PLRs. However, at a February 14, 2008 nationwide webcast, the IRS official who signed the new PLR indicated that the IRS' view now was that terminations without cause or for good reason were problematic because compensation could be paid out even when performance was "poor", which is contrary to the central intent and purpose of the Section 162(m) performance-based exception. This view presumably reflects a belief that a termination without cause or for good reason is more likely to occur under circumstances when the executive and/or the employer is underperforming.
While PLRs are only binding on the requesting taxpayer, this new PLR provides a surprising result that impacts not only the design of future arrangements intended to qualify for the performance-based exemption, but perhaps also for existing arrangements that were drafted based on the IRS' position in its 1999 and 2006 rulings. Calendar-year, public companies that are currently in the process of designing their Code Section 162(m) performance goals should consider this new PLR with respect to any compensation that would be paid under a termination without cause or good reason event. The IRS official indicated that further guidance is intended to be provided by the IRS in February 2008 and that companies should therefore not yet take any drastic actions with respect to their performance-based compensation plans, previously filed tax returns and/or financial accounting. We note that the IRS official said that the IRS is actively working on this issue and is trying to respond to concerns that have been expressed by practitioners and companies. However, we also note that the IRS official said that the new PLR reflects a conscious decision by the IRS and that such decision was briefed to higher ranking officials within the IRS which could mean that the future guidance will not overrule the new PLR. In any event, we are available to discuss any specific situations you or your company may have with respect to this issue.
For further information, please contact Gregory Schick at (415) 774-2988 or Michael Chan at (213) 617-5537.
]]>Under the new thresholds, (i) the “size of the transaction” test is satisfied if, as a result of the transaction, the acquiring person (as defined under the HSR Rules) will acquire and hold certain assets, voting securities, and/or interests in non-corporate entities valued at more than $63.1 million, and (ii) the “size of persons” test is satisfied if one “person” has at least $12.6 million in annual net sales or total assets and the other party has at least $126.2 million in annual net sales or total assets.
Three important concepts should be highlighted in connection with the “size of persons” test. A “person” under the HSR Rules means an “ultimate parent entity” and all entities which it controls, directly or indirectly. An “ultimate parent entity” is an entity or natural person that controls the buyer or seller and is not itself controlled by anyone else. “Control” within the meaning of the HSR Rules means (1) either (i) holding 50% or more of the outstanding voting securities of an issuer or (ii) in the case of an unincorporated entity, having the right to 50% or more of the profits of the entity, or have the right in the event of dissolution to 50% or more of the assets of the entity; or (2) having the contractual power presently to designate 50% or more of the directors of a for-profit or not-for-profit corporation.
For persons not engaged in manufacturing, only total assets are considered in calculating the “size of persons” test. Further, the “size of persons” is eliminated for transactions valued at greater than $252.3 million, in which case the transaction is reportable regardless of the size of the parties.
While the HSR filing fees were not changed, the thresholds that determine the amount of the filing fee were increased. Under the new thresholds, for reportable transactions valued under $126.2 million, the filing fee is $45,000; for reportable transactions valued at or above $126.2 million and below $630.8 million, the filing fee is $125,000; and for reportable transactions valued at or above $630.8 million, the filing fee is $280,000.
Please note that the above summary provides general guidelines only. The HSR Rules have many exceptions, exemptions and fine points.
For further information, please contact Carlton Varner at (213) 617-4146, Bob Magielnicki at (202) 218-0002 or Jason Northcutt at (202) 218-6860.
]]>
On December 27, 2007 the Tennessee Chancery Court ordered sportswear retailer Finish Line, Inc. (FINL.O), to complete its purchase of Tennessee-based shoe and hat retailer Genesco, Inc. (GCO.N), as contemplated by a merger agreement offering $54.50 per share for a total purchase price of $1.5 billion.
]]>Finish Line and UBS, which had proposed to finance the deal, cited events amounting to a Materially Adverse Effect ("MAE"), as well as fraudulent inducement and securities fraud by Genesco, in an attempt to back out of a deal that was looking increasingly like a losing proposition for the acquirers. Chancellor Lyle found that there was an MAE that was excepted from excusing performance by the general economic and general industry conditions carve-outs in the merger agreement. She ordered specific performance in reliance solely on Tennessee principles of equity rather than citing the merger agreement provision requiring it.The MAE provision in the merger agreement contained several carve-outs, including exceptions for a downturn due to general economic conditions or general industry conditions:
"'Company Material Adverse Effect" shall mean any event, circumstance, change or effect that, individually or in the aggregate, is materially adverse to the business, condition (financial or otherwise), assets, liabilities or results of operations of the Company and the Company Subsidiaries, taken as a whole; provided however, that none of the following shall constitute, or shall be considered in determining whether there has occurred, and no event, circumstance, change or effect resulting from or arising out of any of the following shall constitute, a Company Material Adverse Effect: … changes in the national or world economy or financial markets as a whole or changes in the general economic conditions that affect the industries in which the Company and Company Subsidiaries conduct their business, so long as such changes or conditions do not adversely affect the Company and the Company Subsidiaries, taken as a whole, in a materially disproportionate manner relative to other similarly situated participants in the industries or markets in which they operate…"
Relying on expert testimony regarding the downward turn of Genesco's 2007 financial performance, including analysis from expert M&A attorneys testifying as to professional customs, standards and interpretation in drafting MAE provisions, Chancellor Ellen Hobbs Lyle stated that the analyses were "dispositive of the MAE issue," because Genesco's decline was due to "general economic conditions such as higher gasoline, heating oil and food prices, housing and mortgage issues, and increased consumer debt loads," and therefore came within the MAE carve-outs of changes in general economic conditions and industry conditions.
The court found that Finish Line and UBS ailed to prove that Genesco had fraudulently induced Finish Line to enter into the merger agreement or that Genesco had committed securities fraud. With expressions of interest in Genesco from Foot Locker and six private equity firms in its back pocket, Genesco negotiated a provision (Section 3.24) of the merger agreement effectively stating that it had no affirmative contractual duty to provide information, even that relating to its financial performance, nor did it have liability with respect to information not specified in its representations and warranties. The court found that Section 3.24 and the parties' due diligence procedures put the onus on Finish Line to renew all requests for information until such information was provided.
To make the determination that specific performance of the merger was warranted, Chancellor Lyle's opinion relied on Tennessee principles of equity and did not cite to the clause in the merger agreement requiring it (Section 9.9). The court concluded that the merger "has a reasonable chance of succeeding" based again on expert testimony, and that "specific performance is not a futile, harsh result."
On December 21, the Chancery Court came to an opposite conclusion, denying specific performance in the Cerberus-United Rentals decision ("URI"). Chancellor William Chandler found that the Cerberus affiliates had made clear that they understood the agreement to eliminate any right to specific performance. URI either knew or should have known of their understanding, and had an affirmative duty to rectify the understanding. There was another remedy available: a $100 million reverse termination fee.
Hit particularly hard by the credit industry woes, UBS sued both Finish Line and Genesco in New York in October for relief from its obligation to fund the deal. Chancellor Lyle stated in her opinion that if the New York court finds the merger would result in an insolvent entity, the merger will be halted. In the meantime, Finish Line is considering an appeal of the Tennessee court order.
Companies finding themselves in Finish Line's shoes are not likely to agree with Chancellor Lyle that specific performance is not a futile, harsh result. Specific performance can create an unhappy, unprofitable business combination and is often treated by courts reviewing troubled M&A deals as an "extraordinary remedy," as Delaware's Vice Chancellor Noble described it in a recent case, to be awarded only if there is no other adequate remedy.
In light of recent decisions such as the URI decision and the prevailing view that specific performance is an extraordinary, and perhaps even harsh, remedy, the Genesco decision may not indicate an increased likelihood that specific performance will be awarded for M&A deals outside of Tennessee. The decision does serve as a reminder that choice of law and forum clauses do matter and should be carefully negotiated and considered when a merger agreement is drafted. Skilled M&A counsel should be aware of the implications of choice of law and forum and be prepared to raise the issue with clients.
Another way to possibly avoid the imposition of what could be an untenable business combination is to engage skilled M&A legal counsel to draft the merger agreement, including provisions providing for remedies other than specific performance when specific adverse circumstances arise, as in URI, thereby narrowing the instances in which specific performance can be sought and making it more difficult to prove there can be no adequate remedy at law.
Finally, the Genesco case shows that nothing can take the place of conducting detailed and thorough due diligence to identify potential risks, and of responding to those risks by including effective contractual protections in MAE and other merger agreement provisions.
For further information, please contact Tom Hopkins at (805) 879-1813, Elena Acevado Dalcourt at (858) 720-7410 or Jonathan Richter at (805) 879-1822.
]]>The amendments to the best price rule adopted by the SEC:
Many commentators believe that as a result of these amendments, tender offers may become a viable structure for a business recombination.
Clarification
The amendments to the best price rule applies to both third party tender offers and issuer tender offers. They provide that a bidder may not make a tender offer unless "the consideration paid to any security holder for securities tendered in the tender offer is the highest consideration paid to any other security holder of securities tendered in the tender offer." The change to the best price rule clarifies that the best-price rule applies only to the consideration paid for securities tendered and not to the consideration paid for other purposes such as compensatory arrangements so long as certain requirements are met as discussed below. Prior to the amendments, certain courts interpreted the best price rule to apply to changes made to the target company's executive compensation and severance arrangements in contemplation of the sale of the company.
Exemption
The amendments expressly exempt from the best price rule employment compensation, severance and other employee benefit arrangements entered into by the bidder or target company with any holder of securities of the target company as well as payments made or to be made in connection with those arrangements, provided that such payments are being paid or granted for services performed or to be performed and are not calculated based on the number of shares tendered or to be tendered.
Safe Harbor
The amendments also contain a non-exclusive safe harbor provision excluding the compensation, severance and benefit arrangements from the best price rule if they are approved by the target company's independent directors. The safe harbor is also available for a third-party tender offer if the bidder is a party to the arrangement and the arrangements are approved by the bidder's independent directors. It is also available for an issuer tender offer if the compensatory arrangement is approved by the independent directors of the issuer's affiliate if the affiliate is a party to the arrangements.
The compensation arrangements must be approved by the approving entities compensation committee or a committee that performs similar functions composed of independent directors. If the company does not have a compensation committee or the committee is not composed of independent directors, the compensatory arrangements may be approved by a special committee of the approving entity composed of independent directors formed for the purpose of approving the arrangements.
Director's independence is determined for a listed company if the director satisfies the independence standards of the applicable exchange listing standards. For a non-listed company, director independence is determined by the company using a definition of independent director of a selected exchange and applying such definition to all members of the committee.
Foreign private issuers may utilize the safe harbor by having the arrangements approved by members of the board of directors, or any committee of the board of directors authorized to approve the arrangement under the law or regulations of the issuer's home country. The members of the board or committee need not be independent under U.S. listing standards, but must be independent under the laws, regulations, codes or standards of the issuer's home country.
The board or committee that approves the compensatory arrangements need not determine that the compensation arrangements meet the requirements that the payments are being paid or granted for services performed or to be performed and are not calculated based on the number of shares tendered or to be tendered to qualify for the safe harbor.
For further information, please contact Tom Hopkins at (805) 879-1813.
]]>A requirement that corporations additionally file such information in a return with the Internal Revenue Service ("IRS") was added in 2006. However, because regulations providing guidance on this new reporting requirement have yet to be issued, the obligation to file an information return with the IRS has been temporarily waived. The IRS still plans to issue regulations regarding the reporting requirement and the regulations may be effective retroactively to January 1, 2007. Note, however, that employers must continue to supply employees with the required information statements.
For further information and sample information statements, please contact Dawn Moehn at (213) 617-4246
]]>Charter ultimately was forced to restate its financial statements to reflect the proper accounting for these transactions. Investors sued Charter, certain of its management, its auditors and the two suppliers and customers who agreed to the allegedly sham transactions with Charter. The lower courts dismissed the claims against Scientific-Atlanta and Motorola, holding that the Supreme Court’s prior decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994), precluded liability against secondary actors who, like Scientific-Atlanta and Motorola, allegedly only aided and abetted another’s primary violation of the securities laws.
In a five-to-three decision, the Supreme Court affirmed the dismissal of the Rule 10b-5 claims against Scientific-Atlanta and Motorola. Justice Kennedy, writing for the majority, held that the main flaw of the plaintiff’s claim was the absence of reliance by the investors on the conduct of the suppliers and customers:
Reliance by the plaintiff upon the defendant’s deceptive acts is an essential element of the § 10(b) private cause of action. It ensures that, for liability to arise, the “requisite causal connection between a defendant’s misrepresentation and a plaintiff’s injury” exists as a predicate for liability.
. . .[Scientific-Atlanta and Motorola] had no duty to disclose; and their deceptive acts were not communicated to the public. No member of the investing public had knowledge, either actual or presumed, of [their] deceptive acts during the relevant times. [Investors], as a result, cannot show reliance upon any of [the suppliers’ and customers’] actions except in an indirect chain that we find too remote for liability.
Stoneridge, 2008 WL 123801, at *6. The Court went on to discuss the policy reasons supporting its judgment that the “indirect chain” of causation and reliance was too remote. The investors, the Court observed, were contending that in an efficient market investors rely not only upon the public statements relating to a security but also upon the integrity of the underlying transactions those statements reflect. While the Court did not disagree with that concept, it nevertheless rejected it as a basis for federal securities fraud liability because it would expand the scope of such liability to “the whole marketplace in which the issuing company does business.” Id. at *7. This proposed expansion of federal securities liability, the Court held, was not supported (and in some instances contradicted) by existing legal authority, Congressional intent, practical economic considerations and public policy. Finally, the Court noted that abuses by secondary actors in these instances can be remedied through state law claims and enforcement actions by the Securities & Exchange Commission. Justice Stevens dissented, largely on the ground that he disagreed with the policy rationales cited by the majority to limit the scope of federal securities fraud liability.
The decision in Stoneridge reflects the Supreme Court’s willingness to reach judgments regarding securities litigation issues by invoking economic theory, Congressional intent and public policy considerations, not just strict legal analysis. As we have noted in prior posts (see, e.g., here), the Court has issued a flurry of important securities law decisions in the past several years after a decade-long drought, and in each has made reference to these types of considerations in deciding whether to expand or limit the scope of federal securities litigation. It is fair to expect that the Court will decline to take more securities cases in the next several years to allow the lower courts to digest and apply its recent decisions.
For further information, please contact John Stigi at (213) 617-5589
]]>The newly adopted amendments will allow smaller reporting companies to eliminate the following disclosure items from periodic reports and proxy soliciting materials (all item references are to Regulation S-K unless otherwise indicated):
Additionally, the newly adopted amendments reduce the disclosure burden on smaller reporting companies by allowing them to:
The new scaled disclosure regime will replace in its entirety the current "small business issuer" disclosure regime (thus eliminating Regulation S-B), and will include approximately 1,600 reporting companies not eligible for the current "small business issuer" reporting system, or 13% of all reporting companies. All the designated "SB" disclosure forms will be eliminated, subject to transition periods for small business issuers currently using the SB forms.
One benefit of the elimination of the Form SB-2 registration statement is that smaller reporting companies will be able to incorporate by reference from Exchange Act filings to the extent allowed by Form S-1, while still taking advantage of the reduced disclosures previously permitted in Form SB-2. Current small business issuers will have the option to file their next annual report for a fiscal year ending on or after December 15, 2007 on either Form 10-KSB or Form 10-K, and may continue to file periodic reports under the Regulation S-B disclosure regime until the annual report is filed for the following fiscal year.
It is important to note that smaller reporting companies may choose to provide the disclosure required of larger companies on an item-by-item or a la carte basis without being required to adopt the full disclosure regime required of larger companies. As such, though not required, we believe that smaller reporting companies should consider carefully whether any of the disclosure items required of larger companies would be useful to (or expected by) its investors and provide such additional disclosure as is appropriate under the circumstances. For example, we recommend that smaller reporting companies continue to provide a separate "Risk Factors" section in their registration statements and periodic reports, as such disclosure helps provide protection against liability and it is helpful for investors to have all of an issuer's risk factors in one location.
There will be a new check box on each registration statement and periodic report form asking if the issuer is a smaller reporting company. An issuer that meets such definition will be required to check that box even if the issuer does not avail itself of the scaled disclosure flexibility.
A non-reporting company filing its first registration statement under either the Securities Act (e.g., an IPO) or the Exchange Act would calculate its public float as of a date within 30 days of the date of filing the registration statement. For an IPO, public float is calculated based on the estimated offering price and the number of shares held by non-affiliates before the offering, increased by the estimated number of shares to be sold in the offering. For an Exchange Act registration, public float is calculated in the same fashion as for already reporting issuers, and if public float is not calculable, then the revenue test will apply.
We believe the new scaled disclosure requirements will be a welcome relief for many newly eligible smaller reporting companies. The scaled requirements provide an opportunity to reduce compliance costs and management and board diversion, particularly with respect to the preparation of proxy soliciting materials, which need not include Compensation Discussion and Analysis or much of the information required in the compensation tables.
For further information, please contact Rob Wernli at 858.720.8941.
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