Expansion of Regulation A to Reporting Companies: Increased Alternatives Now Available to Public Companies Seeking to Raise Capital or for Mergers and Acquisitions

On December 19, 2018, the SEC announced that it had adopted final rules that allow reporting companies to rely on the Regulation A exemption from registration for their securities offerings.[1]

Until recently, the only way that companies subject to the reporting requirements of Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) have been able to access the capital markets has been through a private placement in public equity (PIPE) or a traditional registered public offering. PIPE’s have presented a number of issues regarding confidentiality, illiquidity of securities, limitations on offering size[2] and greater pricing discounts, whereas registered public offerings can be both time-consuming and costly. These issues are particularly magnified for smaller public companies that may not be eligible to use S-3 shelf registrations. Continue Reading

Delaware Courts Address Production of Emails and Other Electronically Stored Information In Response to Section 220 Demands

Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220, provides that any stockholder of a Delaware corporation “shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose, and to make copies and extracts from . . . the corporation’s stock ledger, a list of its stockholders, and its other books and records.”  Whether emails and other electronically stored information (“ESI”) created and maintained by the corporation constitute “other books and records” within the meaning of Section 220 has been a matter of some uncertainty.  Recent decisions from the Delaware Courts provide useful guidance to practitioners on this question. Continue Reading

Class Size Doesn’t Matter—Seventh Circuit Holds That Federal Law Bars Private Securities Class Actions Brought Under State Law Regardless of the Number of Putative Class Members

In Nielen-Thomas v. Concorde Investment Servs., LLC, No. 18-2875, 2019 WL 302766 (7th Cir. Jan. 24, 2019), the United States Court of Appeals for the Seventh Circuit held that the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), Pub. L. 105-353, 112 Stat. 3227, bars all putative class actions brought by private plaintiffs in a representative capacity under state law, regardless of the estimated size of the class. The Seventh Circuit’s decision effectively eliminates the ability of a single plaintiff in a securities class action to represent a putative class of unnamed persons in any State within the Seventh Circuit (Illinois, Wisconsin and Indiana).   Continue Reading

California Court of Appeal Enforces Delaware Forum Selection Bylaw

In Drulias v. 1st Century Bancshares, Inc., No. H045049, 2018 WL 6735137 (Cal. App. Dec. 21, 2018), the California Court of Appeal, Sixth Appellate District, affirmed an order staying a stockholder lawsuit brought in the Superior Court of California, Santa Clara County, on forum non conveniens grounds based upon enforcement of an exclusive Delaware forum selection bylaw. This decision confirms that California courts will enforce forum selection bylaws designating Delaware as the exclusive venue for intra-corporate claims.  Continue Reading

The Effects of the SEC Shutdown on the Capital Markets

Although EDGAR continues to accept filings, the government shutdown has now eclipsed its 28th day and the SEC continues to operate with limited staff which is having a crippling effect on the ability of many companies to raise money in the public markets. This is particularly due to the fact that the SEC is unable to perform many of the critical functions during the lapse in appropriations, including the review of new or pending registration statements and/or the declaration of effectiveness of any registration statements.

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Regulation A May Prove Useful Alternative to Form S-4 Registration for Public Companies Doing Smaller M&A Deals

Last month, the U.S. Securities and Exchange Commission (“SEC”) announced it had adopted final rules to amend certain parts of Regulation A[1] promulgated under the Securities Act of 1933 (“Securities Act”).

These new rules implement changes as directed by the Economic Growth, Regulatory Relief, and Consumer Protection Act[2] signed into law on May 24, 2018 by President Donald J. Trump. There are two conceptual changes, both affecting Regulation A as it applies to reporting companies. Continue Reading

Delaware Court of Chancery Declares Ineffective Exclusive Federal Forum Provision for 1933 Act Claims

In Sciabacucchi v. Salzberg, C.A. No. 2017-0931-JTL, 2018 WL 6719718 (Del. Ch. Dec. 19, 2018), the Delaware Court of Chancery (Laster, V.C.) held that a forum-selection provision in a Delaware corporation’s charter or bylaws which purported to govern external investor claims not involving the internal affairs of the corporation are not authorized under Delaware law. Thus, the Court declared ineffective a provision in a certificate of incorporation requiring any claim brought against it under the Securities Act of 1933 (“1933 Act”) to be filed in federal court. This decision clarifies the limits on the scope of forum selection provisions enacted by Delaware corporations. Continue Reading

Opportunity Zones Update

The Tax Cuts and Jobs Act created a new tax incentive program through investment in “qualified opportunity funds”. Qualified opportunity funds are intended to encourage investment in low-income communities by providing three tax incentives to investors:

  • Investors can defer taxes on eligible capital gain arising from a sale or exchange of assets by investing in qualified opportunity funds.
  •  10% of the deferred gain may be permanently excluded from federal income tax by way of a step-up in basis if an investor holds its interest in the qualified opportunity fund for at least five years, with an additional 5% basis step up if the investment is held for seven years.
  • If the investor holds the investment in the qualified opportunity fund for at least 10 years, an elective basis adjustment made upon sale of the interest in the fund provides a permanent exclusion from taxation for any appreciation in excess of the originally deferred gain.

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Getting to Business Judgment in an Interested Transaction: Controlling Stockholder Must Put Procedural Protections in Place Prior to the Commencement of Economic Negotiations

In Flood v. Synutra Int’l, Inc., No. 101, 2018, 2018 Del. LEXIS 460 (Del. Oct. 9, 2018), the Delaware Supreme Court (Strine, C.J.) held that a controlling stockholder who pursues a merger with the controlled company will have the benefit of business judgment review pursuant to Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”), as long as the requisite procedural protections under MFW are put in place prior to the commencement of economic negotiations. In MFW, the Delaware Supreme Court created a framework through which a controlling stockholder could enter into a strategic transaction with the controlled company and still avail itself of the deferential business judgment standard of review. To have the business judgment standard apply, the transaction must be conditioned “ab initio” upon both (1) the approval of an independent, adequately-empowered Special Committee of the board of directors that fulfills its duty of care, and (2) the uncoerced, informed vote of a majority of the minority stockholders (the “MFW Procedural Protections”). Synutra arose from an issue left open in MFW regarding when the MFW Procedural Protections will be deemed to have been in place “ab initio.Continue Reading

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