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).
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.
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.
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.
In Nguyen v. Barrett, C.A. No. 11511-VCG, 2016 WL 5404095 (Del. Ch. Sept. 28, 2016) (Glasscock, V.C.), the Delaware Court of Chancery dismissed an amended complaint seeking damages for alleged disclosure violations in connection with a tender offer that had already closed. The Chancery Court’s opinion demonstrates the challenges plaintiffs face when they pursue non-exculpated disclosure claims for damages post-closing. It also shows that these challenges increase when the disclosure claims were previously pled but not pursued at the preliminary injunction stage — a time when the Chancery Court is still in a position to ensure stockholders are provided sufficient information to cast an informed vote. The Court confirmed that the preferred practice is for plaintiffs to pursue disclosure claims at that earlier stage.
If the New York State Department of Financial Services (“DFS”) has its way, come January 1, 2017, financial services companies that require a form of authorization to operate under the banking, insurance, or financial services laws (“Covered Entities”) will be required to comply with a new set of comprehensive cybersecurity regulations aimed at safeguarding information systems and nonpublic information.
In Ray v. Spirit Airlines, Inc., No. 15-13792, 2016 WL 4578347 (11th Cir. Sept. 2, 2016), the United States Court of Appeals for the Eleventh Circuit held that a defendant corporation is not distinct from its own officers and employees for purposes of forming an “enterprise” under the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. § 1961, et seq. (“RICO”). The Eleventh Circuit thus joins the Second, Seventh and Tenth Circuits in holding that a corporation cannot form an enterprise with its own agents, as the only way the corporation can act is through those agents.
In Securities & Exchange Commission v. Jensen, No. 14-55221, 2016 WL 4537377 (9th Cir. Aug. 31, 2016), the United States Court of Appeals for the Ninth Circuit broke new ground by providing the Securities & Exchange Commission (“SEC”) with a new independent cause of action under SEC Rule 13a-14, 17 C.F.R. § 240.13a-14, against a CEO or CFO who certifies false or misleading statements. The Court also held that the disgorgement remedy authorized under Section 304 of the Sarbanes-Oxley Act, 15 U.S.C. § 7243 (“SOX 304”), applied regardless of whether a restatement was caused by the personal misconduct of an issuer’s CEO and CFO or by other issuer misconduct. The majority opinion left some important questions unanswered, but Judge Bea, who concurred with the majority’s analysis and holding, wrote separately to clarify the intended scope of the new legal rules announced by the Court’s opinion.
In two recent decisions, City of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. Comstock, C.A. No. 9980-CB, 2016 Del. Ch. LEXIS 133 (Del. Ch. Aug. 24, 2016) (Bouchard, C.) (“Comstock”), and Larkin v. Shah, C.A. No. 10918-VCS, 2016 Del. Ch. LEXIS 134 (Del. Ch. Aug. 25, 2016) (Slights, V.C.), the Delaware Court of Chancery addressed the salutary effect of stockholder approval on the standard of review to be applied when evaluating damages claims in post-closing merger litigation. The Delaware Supreme Court first recognized this effect in Corwin v. KKR Financial Holdings, LLC, 125 A.3d 304, 309 (Del. 2015), holding that “[w]hen a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.” But, since Corwin, the precise meaning of the phrase “not subject to the entire fairness standard” — and thus the scope of Corwin’s holding — had not been addressed. Comstock and Larkin do so, with Larkin extending Corwin’s holding the furthest. Larkin declares that fully informed, uncoerced stockholder approval changes the standard of review in post-closing litigation to the more deferential business judgment rule in all instances save one: when the presence of a controlling stockholder triggers entire fairness review, in which case the entire fairness standard remains applicable.
Volume IX – Unclassified Contracts? Foreign Buyers Still Make a Difference
Last month, we discussed the extent to which a foreign buyer can introduce an unacceptable level of foreign ownership, control, or influence (“FOCI”) that, absent mitigation, will render the target ineligible for the facility security clearances needed to perform classified work. This month, we look at foreign ownership through a broader lens. Specifically, we consider how the United States regulates the proposed acquisition of a U.S. business by a foreign interest, irrespective of whether classified contracts and classified information may be involved in the planned transfer.