Delaware Supreme Court Imposes New Limits on Stockholder Ratification Defense In Connection With Equity Incentive Plans

In In re Investors Bancorp, Inc. Stockholder Litigation, No. 169, 2017, 2017 WL 6374741 (Del. Dec. 13, 2017), the Delaware Supreme Court limited the ability of directors to assert the stockholder ratification defense when facing a challenge to their implementation of equity incentive plans (“EIP”). When properly invoked, the stockholder ratification defense entitles directors to have a court review their conduct under the more deferential business judgment rule standard, rather than the more stringent “entire fairness” standard. The Delaware Supreme Court held that where stockholders approve an EIP containing general parameters that afford directors discretion to determine specific awards, and their exercise of discretion is properly challenged as a breach of fiduciary duty due to alleged self-dealing, a board must prove that its actions were entirely fair to the corporation and its stockholders. This ruling has the important effect of shifting the burden from complainant stockholders to defending directors and subjects their awards of grants to stricter scrutiny. Continue Reading

The Effects of Tax Reform on Private Equity

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (TCJA), the most extensive overhaul of the United States tax regime in over thirty years. The new tax law will have a significant impact upon individual taxpayers in all income tax brackets, all businesses and every sector of the economy, including private equity. This alert provides a brief summary of some of the provisions that are likely to impact private equity, both at a fund level and the portfolio company level, and provides some insight in terms of what private equity professionals should consider in their tax structuring going forward. Continue Reading

California Court of Appeal Holds that Demand Futility Must be Reassessed at Time of Filing of Amended Complaint

In Apple Inc. v. Superior Court, No. H044133, 2017 WL 6275830 (Cal. App. Dec. 11, 2017), the California Court of Appeal, Sixth District, considered whether a plaintiff asserting a shareholder derivative lawsuit must plead demand futility with respect to the board of directors in place at the time of the filing of the amended complaint or the initial complaint, when the composition of the board has changed in the interim. The Court of Appeal, following the rule enunciated by the Delaware Supreme Court in Braddock v. Zimmerman, 906 A.2d 775 (Del. 2006), concluded that pleading of demand futility must be assessed with respect to the board of directors in place at the time the amended complaint is filed. This decision reflects the tendency by California courts to look to Delaware corporate law on issues related to shareholder derivative litigation. Continue Reading

Tax Reform 101 – Estate Planning For High Net Worth Individuals

The new tax bill passed by Congress and signed into law by the President today has increased the amount individuals can transfer free of Gift, Estate and Generation Skipping Transfer (“GST”) taxes.  The law now provides:

  • Beginning in 2018, the Estate/Gift/GST tax exemptions are increased from $5,000,000 to $10,000,000, indexed for inflation (approximately $11,200,000 in 2018).
  • The increased exemptions will expire on December 31, 2025 (i.e., the increased exemptions revert to the current $5 million exemption beginning on January 1, 2026, still indexed for inflation) unless Congress acts to extend them.  The US Department of Treasury and the IRS will prepare regulations to confirm that gifts made during this period up to the increased exemption amounts will not later be subject to tax if the exemptions are reduced.
  • The 40% tax rate for Estate/Gift/GST tax remains the same.
  • The annual Gift tax exclusion will still increase to $15,000 in 2018.
  • The basis adjustment rules, which provide that the basis of any asset passing from a decedent at death will be adjusted to the fair market value of that asset as of the decedent’s date of death (i.e., a step up in basis), remain the same.

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Congress Passes Final Tax Reform Bill

With the affirmative vote in the House today, both Houses of Congress have now passed a final version of the Tax Cuts and Jobs Act, clearing the legislation for President Trump’s signature. President Trump is widely expected to sign the legislation into law, although White House officials have now raised the prospect that the Act may not be signed until January. This significant legislation will impact nearly every sector of the U.S. economy and U.S. individual taxpayers in all income brackets. Continue Reading

Tax Reform – The Current State of Play

On December 2, the Senate passed its version of the Tax Cuts and Jobs Act. The House of Representatives earlier approved a competing version of the Act on November 16. The Senate and House entered into conference this week to resolve differences between the two versions of the Act. The attached chart summarizes and compares key components of the two versions. Continue Reading

Second Circuit Affirms Class Certification Holding that Direct Evidence of Price Impact is Not Always Necessary to Demonstrate Market Efficiency

In Waggoner v. Barclays PLC, No. 16-1912 (2d Cir. Nov. 6, 2017), the United States Court of Appeals for the Second Circuit, in a Rule 10b-5 securities fraud action, affirmed the district court’s order granting class certification and, in the process, made a number of significant rulings including concluding that direct evidence of price impact is not always necessary to demonstrate market efficiency and confirming that defendants seeking to rebut the fraud-on-the-market presumption must do so by a preponderance of evidence. The decision will potentially make it easier for securities fraud plaintiffs seeking class certification to demonstrate market efficiency, including, for example, when the securities at issue are not traded on national exchanges. Continue Reading

U.S. Tax Reform: The Current State of Play

This post  was updated on November 20, 2017 to reflect the most recent state of the legislation.

On November 16, 2017, the House of Representatives voted on and passed the Tax Cuts and Jobs Act. If passed by the Senate, the Act would significantly change the current federal income tax regime in the United States. The legislation would impact all levels of the U.S. economy. The final version of the Tax Cuts and Jobs Act passed by the House is the culmination of a series of negotiations and amendments to the original version of the Act that was released by the House on November 2, 2017. The attached chart summarizes key aspects of the Tax Cuts and Jobs Act passed by the House today. Continue Reading

SEC Approves New Audit Reporting Standard Requiring Auditors to Disclose More Detailed Information Learned During the Audit

On October 23, 2017, the Securities and Exchange Commission approved the Public Company Accounting Oversight Board’s (“PCAOB”) proposal to adopt a new auditing standard, AS 3101. AS 3101 will require auditors to disclose more detailed information about what they learn during the course of an audit. This new auditing standard requires a major revision in how auditors think about what and how they communicate to boards and investors. It requires increased transparency on the part of auditors. Continue Reading

Nevada Supreme Court Adopts Delaware’s Tooley Test to Determine Whether Shareholder Claims are Direct or Derivative

In Parametric Sound Corp. v. The Eighth Judicial District Court of the State of Nevada, ___ P.3d ___, 2017 WL 4078845 (Nev. Sept. 14, 2017), the Nevada Supreme Court addressed the circumstances under which breach of fiduciary duty claims asserted in connection with a strategic transaction may be brought by shareholders directly (including in a class action) or must be bought derivatively, on behalf of the corporation. In reaching its decision, the Supreme Court expressly adopted the test articulated by the Delaware Supreme Court in Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031 (Del. 2004), and clarified prior ambiguities in Cohen v. Mirage Resorts, Inc., 119 Nev. 1, 62 P.3d 720 (2003). The Nevada Supreme Court thus held that whether a claim is direct or derivative turns on the following two questions: (1) who suffered the alleged harm (the corporation or the suing stockholders, individually); and (2) who would receive the benefit of any recovery or other remedy (the corporation or the stockholders, individually). Applying this test, the Court granted defendants’ petition for writ of mandate and directed the district court to dismiss the shareholder plaintiff’s direct, class claims for breach of fiduciary duty arising from the approval by the board of directors of Parametric Sound Corporation (“Parametric”) of a reverse triangular merger between a subsidiary of Parametric and VTB Holdings, Inc. (“Turtle Beach”). This decision provides much needed legal certainty in a jurisdiction seeking to expand its incorporations. Continue Reading

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