United States: August 2014 Corporate Alert

The Herrick Advantage

Herrick, Feinstein LLP is proud to have represented Small Bone Innovations, a leader in the musculoskeletal/orthopedics sector, in its agreement to be acquired by Stryker Corporation (Stryker), one of the world's leading medical technology companies, in an all-cash transaction, which is valued at up to $375 million. The acquisition of substantially all of the North American assets closed at the end of July and a separate closing will be held later this year for the acquisition of the assets of the French and German operations. The acquisition will provide Stryker with the ability to fully address a broad range of small bone procedures (particularly in the foot and ankle) and provide patients and customers with a complete set of solutions for their health needs.

The Herrick deal team was led by corporate partners Edward B. Stevenson and Glenn L. Stein, and included partner Louis Tuchman, counsel Joel Wagman, and associates Liliana Chang, John D. Cleaver, Benjamin H. Hendrick and Nicholas R. Montorio.

CFPB Issues Bitcoin Alert

The Consumer Financial Protection Bureau ("CFPB") issued a consumer advisory warning consumers about the risks of virtual currencies (which are also referred to as digital currencies) such as Bitcoin. The CFPB also announced that consumers who encounter a problem with a virtual currency product or service can now submit a complaint with the CFPB.

The advisory warns that virtual currencies carry significant risk to consumers, including:

  • Exchange rates are volatile and costs unclear.
  • Hackers and scammers pose serious security threats.
  • Virtual currency companies may not offer help or refunds for lost or stolen funds.

Virtual currencies are designed to be an alternative to current payment systems. Better-known virtual currencies include Bitcoin, XRP, and Dogecoin.  Virtual currencies are intended to afford a means for people to track, store, and send payments over the Internet, and they may have the potential to make payment processing cheaper or faster.  Virtual currencies, however, are not backed by any government or central bank.  In addition, since virtual currency accounts are not insured by the Federal Deposit Insurance Corporation or the National Credit Union Share Insurance Fund, if a virtual currency company fails – and many have – the government will not cover the loss.


Privately-Held Company Held Liable for Failure to Disclose Merger Talks

The U.S. Court of Appeals for the Eleventh Circuit upheld a $1.5 million jury award in favor of a former employee.  Upon the termination of his employment, he had the option to either retain the vested portion of the shares awarded to him under the company's bonus plan or sell such shares back to the company.  The employee elected to sell his shares back to the company in reliance upon a prior statement made by the company that it "took pride in its privately-held status" and will continue to remain private.

At the time of the stock sale, the former employee was unaware that the company was engaged in active merger negotiations.  The company was eventually acquired by means of a merger in which stockholders received an amount in excess of four times the per share amount paid by the company to the former employee.  The former employee claimed that the company had committed securities fraud by failing to disclose that it was engaged in merger negotiations.  The court found that the company had a duty to disclose sufficient facts to make its statement as to continuing to remain private not misleading.

Finnerty v. Steifel Labs., Inc., No. 12-13947 (11th Cir. U.S. Ct. of App., June 30, 2014)

Delaware Supreme Court Finds Exception to Attorney-Client Privilege with Respect to Stockholder Inspection Right

The Delaware Supreme Court expanded the scope of stockholder discovery in connection with a "books and records" demand under Section 220 of the Delaware General Corporation Law.  Under Section 220, a stockholder of a Delaware corporation has the right upon written demand to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records. A "proper purpose" is defined as one reasonably related to the stockholder's interest as a stockholder.

The case arose out of allegations that certain executive officers were aware that the management team of a Mexican subsidiary authorized the payment of bribes to Mexican officials.  An article published in The New York Times supported these allegations.  The purpose of the demand filed by the stockholder was to investigate, among other things, (i) potential mismanagement and (ii) possible breaches of fiduciary duty by the executive officers and the Mexican subsidiary's management team.  In response to the demand, the corporation produced hundreds of thousands of pages of documents, but redacted or otherwise refused to provide documents that it determined were not "necessary or essential" to the demand or that were protected by the attorney-client privilege and/or the work product doctrine.

The court, applying the Garner doctrine, ruled that the responsive documents withheld by reason of the attorney-client privilege and/or the work product doctrine must be produced.  The Garner doctrine, named for a 1970 decision of the U.S. Fifth Circuit Court of Appeals, provides for an exception to the attorney-client privilege in order to prove breaches of fiduciary duty by those in control of a corporation upon a showing of good cause.  In so ruling, the court cautioned that the Garner doctrine exception to the attorney-client privilege is "narrow, exacting and intended to be very difficult to satisfy."

Wal-Mart Stores, Inc. v. Indiana Elec. Workers Pension Trust Fund IBEW, No. 13-614 (Del. Sup. Ct. July 23, 2014)

Delaware Court of Chancery Dismisses Breach of Fiduciary Duty Claims in Connection with Change of Control Transaction

The Delaware Chancery Court dismissed a claim brought by former stockholders of a target company alleging that the directors of the target company failed to fulfill their "Revlon fiduciary duties" in connection with a change of control of the target company.  The "Revlon fiduciary duties," which are applicable in change of control transactions, requires a target company's board of directors to make a reasonable effort to obtain the highest value for the target company.

The court found that the actions taken by the target company's board of directors defeated the breach of fiduciary duty claim.  In particular, the board of directors was found to have made inquiry of 24 potential purchasers of the target company.  The board of directors was also found to have engaged in spirited negotiations (including the rejection of multiple offers) with the ultimate acquirer.  The court further found no basis for claimants' related argument that the board of directors had breached its fiduciary duty through the adoption of "draconian deal protective devices."  On this point, the court stated that the target company's use of non-solicitation, standstill change-in-recommendation, information rights and termination fee provisions in connection with the change of control transaction did not "deviate in a meaningful way from similar types of provisions that repeatedly have been approved" by the court.

Dent v. Ramtron Int'l. Corp., C.A. No. 7950-VCP (Del. Ch.  Ct., June 30, 2014

Delaware Court of Chancery Dismisses Breach of Fiduciary Duty Claims Against Corporation in Self-Tender Offer

The Delaware Chancery Court dismissed a claim brought by former stockholders against a corporation alleging that it breached its fiduciary duties to stockholders by failing to disclose material facts during a self-tender offer. The claimants charged that they were induced to sell their shares for an inadequate price due to misrepresentations made by the corporation's board of directors.  The court ruled that, under Delaware law, corporations do not owe a fiduciary duty of disclosure to their stockholders in connection with a self-tender offer.  Instead, any disclosure-duty based claim must be based on a theory of legal or equitable fraud.  The court found that the claimants had not made any allegation in their pleadings that the corporation or its board of directors committed legal or equitable fraud.

Buttonwood Tree Value Partners LP v. R.L. Polk & Co., C. A. No. 9250-VSG (Del. Ch. Ct. Aug. 7, 2014)

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