United States: April 2014 Corporate Alert

The Herrick Advantage

We are pleased to note that Herrick partners Mike Heitner and Glenn Stein recently represented long-time client Top Rank, Inc.., the leading international boxing promoter, in connection with Sony Computer Entertainment's sponsorship of Top Rank's upcoming pay-per-view marquee boxing programs. The sponsorship will give the Sony PlayStation 4 brand prominent placement at several internationally televised matches. The first of these blockbuster sponsored events was the Manny Pacquiao vs. Timothy Bradley rematch held on April 12 at the MGM Grand Garden Arena in Las Vegas.

New York Court of Appeals Rules Lost Profits Constitute General Damages

New York's highest court in a sharply divided 4-to-3 opinion ruled that lost profits sought by a manufacturer and distributor of medical devices in a breach of contract action constituted general damages. The claimant was party to a distribution agreement governed by New York law with the developer and manufacturer of a coronary stent. Under the distribution agreement, the claimant was designated as the exclusive distributor of the coronary stent for a worldwide-market territory, excluding the United States and certain other countries. The distribution agreement contained a damages limitation provision restricting the parties to general damages. This provision specifically provided that neither party would be liable to the other for any indirect, special, consequential, incidental or punitive damages.

The claimant filed a breach of contract suit after the coronary stent manufacturer announced that it was recalling and removing the coronary stent from the worldwide market. The claimant sought damages for lost profits related to its resale of the coronary stents. The claimant argued that its claim for lost profits constituted general damages which were not barred under the distribution agreement.

The New York Supreme Court granted summary judgment in favor of the coronary stent manufacturer concluding that the lost profits at issue were consequential damages and subject to the distribution agreement's damages limitation provision. The Appellate Division affirmed the lower court decision concluding that the damages provision barred the breach of contract claim. The Court of Appeals, in reversing the Appellate Division, stated that lost profits may be either general or consequential damages depending upon the contractual circumstances. The Court of Appeals ruled that the lost profits claimed under the distribution agreement were general, rather than consequential, damages since the lost profits were the direct and probable consequence of the breach of the distribution agreement.

Biotronik A.G. v. Conor Medsystems Ireland, Ltd., 2014 WL 1237154 (N.Y. Ct. of App. Mar. 27, 2014)

Hedge Funds Fail to Qualify as "Eligible Assignees" Under Loan Agreement

A federal district court ruled that certain hedge funds failed to qualify as "eligible assignees" under a bankrupt debtor's loan agreement. As a consequence of this ruling, the hedge funds were ineligible to vote on the debtor's plan of reorganization.

Under the loan agreement, the definition of "eligible assignee" included any commercial bank, insurance company, financial institution or institutional lender. The hedge funds unsuccessfully argued that the term "financial institution" should be broadly interpreted to include all entities that handle and invest funds. The court, however, applying the principle of statutory construction, noscitur a sociis, found that the phrase "financial institution" should be interpreted in a manner that harmonizes with the other phases in the "eligible assignee" definition. The court went on to hold that the term "financial institution" should be narrowly interpreted to mean entities that make loans.

Meridian Sunrise Village, LLC v. NB Distressed Debt Inv. Fund Ltd., No. 13-5503RBL (W.D. Wash., Mar. 7, 2014)

Delaware Court of Chancery Provides Guidance on Indemnification Issues

The Delaware Court of Chancery addressed the application of indemnification provisions contained in a stock purchase agreement (the "SPA"). One of the seller's subsidiaries covered by the SPA was party to a referral contract with a hospital that permitted the subsidiary to offer discounted rates to clients directed to the hospital by the subsidiary. The dispute before the court arose out of a letter the hospital sent to the buyer under the SPA advising that (i) another hospital had improperly gained access to the discounted rates and (ii) the referral contract required the parties thereto to negotiate a resolution. A second letter was set by the hospital to the buyer following the expiration of the survival period under the SPA seeking to work cooperatively to reach resolution.

Prior to the expiration of the survival period under the SPA, the buyer informed the seller of the issue raised by the hospital in its letter. The buyer claimed that it was entitled to indemnification under the SPA. The SPA provided that the buyer was entitled to indemnification if any claim was commenced or threatened against it by a third party prior to the expiration of the survival period. The court ruled the buyer was not entitled to indemnification after concluding the hospital had failed to threaten to make a claim prior to the expiration of the survival period. The court based its conclusion on the grounds that the hospital's initial letter (i) was followed by an additional non-threatening letter; (ii) was not preceded by any prior communications between the hospital and the buyer; (iii) referenced a provision of the referral contract requiring the parties to cooperate in seeking resolution of the issue; and (iv) failed to specify a response deadline.

I/Mx Information Mgmt. Solutions, Inc. v. Multiplan, Inc. and HMA Acq. Corp., No. 7786-VCP (Del. Ch. Ct., Mar. 27, 2014)

Delaware Chancery Court Addresses Charter Exculpatory Provisions

The Delaware Chancery Court dismissed a breach of fiduciary duty claim brought against the disinterested directors of a target company. The claim related to the target company's sale process which concluded in a merger. The target company's board of directors was accused of favoring one bidder over the other bidders and conducting an insufficient "market check" over a 24-hour period during a holiday weekend.

The court considered the claim in light of the exculpatory provisions (as permitted under Section 102(b)(7) of the Delaware General Corporation Law) contained in the target company's certificate of incorporation. These provisions limited director liability to breaches of the duty of loyalty and actions not taken in good faith. The court ruled that the exculpatory provisions would apply unless the directors acted with a purpose other than that of advancing the best interests of the target company. The court dismissed the claim after finding no evidence that the disinterested directors and target company's stockholders had differing economic interests in the merger.

Chen v. Howard-Anderson, No. 5878-VCL (Del. Ch. Ct., Apr. 8, 2014)

"Loyalty Discounts" Found Not to Violate Antitrust Laws

A federal district court refused to recognize an antitrust challenge involving loyalty-discount contracts. The court held that such contracts are not anticompetitive so long as the prices offered thereunder are above cost. The challenge arose out of contracts entered into by a pharmaceutical company with hospital group purchasing organizations ("GPOs") covering a specific drug. These contracts provided for loyalty discounts when the GPOs purchased higher volumes and higher market shares of the drug. The right to receive a loyalty discount was further conditioned upon no competing drug being given more favorable treatment on the GPOs' hospital formularies. The claimant unsuccessfully argued that these contracts served to lock out competition and preserve significant market share held by the drug.

Eisai Inc. v. Sanofi-Aventis U.S., LLC, No. 08-4168 (MLC) (D.N.J. Mar. 28, 2014)

Delaware Supreme Court Declines to Exercise Equitable Powers in Favor of Terminated CEO

The Delaware Supreme Court upheld a lower court decision which ruled against a former CEO on his wrongful termination claim. The former CEO, who also served as a director, was terminated as the CEO at a regularly scheduled board meeting. Following his termination, the former CEO remained as a director serving on the audit and compensation committees of the board.

Approximately eight months following the termination of his CEO employment, the former CEO sent a letter to the company's general counsel and two directors claiming that the termination of his employment was invalid. In support of his claim, the former CEO argued that under Delaware case law a special equitable notice of requirement, which was not observed, applied to the termination of his employment. The court, following the reasoning of the lower court, ruled that the former CEO had acquiesced in the termination of his employment by, among other things, continuing to serve as a director.

Klaassen v. Allegro Dev. Corp., No. 583, 2013 (Del. Sup. Ct. Mar. 14, 2014)

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