In Frechter v. Zier, C.A. No. 12038-VCG, 2017 WL 345142 (Del. Ch. Jan. 24, 2017) (Glasscock, V.C.), the Delaware Court of Chancery granted plaintiff’s motion for summary judgment on a declaratory relief claim and held that 8 Del. C. § 141(k) prohibits company bylaws from requiring more than a majority vote to remove directors from a company’s board. The Frechter decision confirms that company bylaws may not impose requirements or implement procedures that conflict with 8 Del. C. § 141(k). Continue Reading
1. Higher Thresholds For HSR Filings
On January 19, 2017, the Federal Trade Commission announced revised, higher thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product and will be effective thirty days after publication in the Federal Register. Publication is expected within one week, so the new thresholds will likely become effective in late February 2017. Acquisitions that have not closed by the effective date will be subject to the new thresholds.
Stockholder claims alleging wrongful dilution are typically considered to be derivative in nature. Several decisions out of Delaware, however, have created exceptions to this general rule allowing stockholders to sue directly (rather than derivatively on behalf of the corporation) where, for example, a controlling stockholder authorizes a “disloyal expropriation” which reduces the economic value and voting power of the non-conflicted stockholders. See, e.g., Gentile v. Rossette, 906 A.2d 91, 100 (Del. 2006); Gatz v. Ponsoldt, 925 A.2d 1265 (Del. 2007); Feldman v. Cutaia, 951 A.2d. 727 (Del. 2008). In El Paso Pipeline GP Company, L.L.C. v. Brinckerhoff, No. 103, 2016, 2016 Del. LEXIS 653 (Del. Dec. 20, 2016), the Delaware Supreme Court declined to add to these exceptions and reaffirmed the general rule that dilution claims must be brought derivatively. As a result, a derivative plaintiff losses his or her standing to pursue a dilution claim if the entity is acquired through a merger.
Sheppard Mullin’s Corporate and Securities Group Wishes You and Yours the Happiest of Holidays in 2016 and Continued Happiness and Success In 2017.
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.