The Herrick Advantage
Herrick Corporate partners Irwin A. Kishner and Daniel A. Etna recently advised longtime client Legends Hospitality in a major strategic partnership with concert and entertainment giant Live Nation. The deal, which has Legends operating food and beverage services at 34 of Live Nation's music venues in North America, is one of the largest venue food and beverage contracts in history.
Delaware Discourages Appraisal Arbitrageurs
The Delaware Supreme Court recently affirmed the Chancery
Court's ruling in Huff Fund Investment Partnership v. CKx,
Inc., in a decision that could potentially slow the
surge in appraisal proceedings. In Huff Fund, two bidders expressed
an interest in acquiring CKx. One bidder, a private equity fund,
bid $5.50 per share and the other bidder, unidentified, bid $5.60
per share. CKx accepted the lower bid because CKx knew that the
higher bidder had not yet obtained the financing to close the deal.
Huff Fund Investment Partnership, was among the investors that
petitioned for appraisal, claiming that the fair value of the
company is higher than the deal price. Vice Chancellor Sam
Glasscock III held that the deal price was the most reliable and
probative indicator of fair value and rejected each party's
expert valuations. Earlier this year, Vice Chancellor Glasscock
similarly held in In re Appraisal of Ancestry.com that the fair
value is "best represented by the market price." The
Delaware Supreme Court's decision in Huff Fund affirms Vice
Chancellor Glasscock's holdings in both Huff Fund and
Ancestry.com.
This decision may subdue the recent upward trend of appraisal
proceedings. Companies in recent years have been spending millions
of dollars in defense costs due to appraisal litigation initiated
by hedge funds. In addition to CKx and Ancestry.com, Dole Food Co.
has also recently battled appraisal suits. This prompted Dole's
President to propose to the Delaware legislature a bill to restrict
such suits and a threat to take its business out of the state if
the laws did not change. The Dole proposal would limit appraisal
challenges to investors who held shares before a takeover
announcement and would lower the current statutory interest payout
of 5.75%.
Huff Fund Investment Partnership v. CKx, Inc., Civil
Action No. 6844-VCG
Delaware Focuses on Fee-Shifting Bylaws
The Delaware courts and state legislature are addressing the
ramifications of last year's Delaware Supreme Court decision in
ATP Tour, Inc. v. Deutscher Tennis Bund, upholding the
facial validity of a fee-shifting bylaw in a non-stock corporation
as a matter of contract law.
In Strougo v. Hollander, the Delaware Chancery Court
recently held that a non-reciprocal fee-shifting bylaw, adopted
after a plaintiff's interest in the corporation was eliminated
in a reverse stock split, could not bind a stockholder challenging
the fairness of the transaction. On May 30, 2014, First
Aviation Services, Inc. ("First Aviation") consummated a
10,000-to-1 reverse stock split, the effect of which was to
involuntarily eliminate the interests of certain stockholders and
make First Aviation a privately-owned company. Shortly
thereafter, on June 3, 2014, the board of directors of First
Aviation adopted a fee-shifting bylaw that was admittedly modeled
after the bylaw at issue in ATP Tour. First
Aviation's bylaw provided that it would apply to "any
current or prior stockholder . . . [who] does not obtain a judgment
on the merits that substantially achieves . . . the full remedy
sought . . . ". On June 14, 2014, the plaintiff, on
behalf of himself and a class of former stockholders that were
similarly cashed out, sued First Aviation and its directors
challenging the fairness of the reverse stock split, and later
amended the complaint to challenge the bylaw provision. In
the instant case, the court only decided whether the bylaw was
applicable to the former stockholder.
Delaware courts view bylaws as "an inherently flexible
contract between the corporation and its stockholders," thus,
the court began its analysis under contract law
principles. Accordingly, the court reasoned that "a
stockholder whose equity interest is eliminated is equivalent to a
non-party to the corporate contract, meaning that a former
stockholder is not subject to, or bound by, any bylaw amendments
after one's interest in the corporation has been
eliminated." Rather, the bylaws in effect at the time of the
cash-out transaction would bind the stockholder who challenges the
transaction post- closing. Furthermore, the court held that
the plain language of the Delaware General Corporation Law
("DGCL") contemplates that the term
"stockholder" refers only to current stockholders, and
"not to former stockholders who no longer have an equity
interest in the corporation."
Earlier this month, the Corporation Law Council of the Delaware
State Bar Association (the "Council") proposed two
amendments to the DGCL that, if enacted, would prohibit
fee-shifting provisions in both the certificate of incorporation
and the bylaws. As the council reasoned, the widespread
adoption of fee-shifting provisions would make "stockholder
litigation, even if meritorious, untenable" because few
stockholders would accept the risk of litigation if it meant
"exposure to millions of dollars in attorneys' fees to
attempt to rectify a perceived corporate wrong, no matter how
egregious."
Strougo v. Hollander, C.A. No. 9770-CB WL 1189610 (Del. Ch. March 16, 2015)
Delaware Chancery Court Addresses Arbitration Provision
In 3850 & 3860 Colonial Blvd., LLC v. Griffin, the
limited liability company agreement of Rubicon Media, LLC provided
that disputes would be resolved by arbitration. Rubicon
Media, LLC was subsequently converted into a corporation and its
certificate of incorporation implemented a litigation-only approach
for disputes. Members of Rubicon brought suit in Delaware Chancery
Court, alleging breaches of fiduciary duties, among other things.
Rubicon asserted that the Court lacks subject matter jurisdiction
because the parties agreed in Rubicon's LLC agreement to submit
all disputes to arbitration.
Whether parties have an agreement to arbitrate "is generally a
decision for a court," and there is a presumption that parties
intended "issues of substantive arbitrability to be decided by
a court." This presumption can be rebutted with evidence that
parties "clearly and unmistakably" intended otherwise. A
previous case, Willie Gary (906 A.2d 76, 19 (Del. 2006)),
established that this evidence is found where an arbitration clause
generally provides for arbitration of all disputes and also
incorporates a set of arbitration rules that empower arbitrators to
decide arbitrability. However, even if those two elements are
satisfied, the Court must resolve issues of substantive
arbitrability if the party seeking to avoid arbitration makes
"a clear showing that its adversary has made essentially no
non-frivolous argument about substantive arbitrability."
Here, the Court found that the arbitration provision in the Rubicon
LLC agreement meets both prongs of Willie Gary - it
applies to "any dispute arising under or relating to" the
LLC agreement and, by stating that arbitration will be governed by
the Commercial Arbitration Rules of the American Arbitration
Association, empowers an arbitrator to rule on jurisdiction. The
Court also found that Rubicon has a non-frivolous argument for
arbitration since it is unclear whether the plaintiff's claims
arise out of the LLC agreement or the certificate of incorporation
and, therefore directed the case to an arbitrator to decide the
issue of arbitrability.
The Court also addressed the issue of whether Rubicon Inc. could be
required to arbitrate based on a provision in a contract to which
it is not a signatory. The Court relied on its previous ruling in
Bernstein v. TractManger, Inc. (953 A. 2d at 1005) that
"rights created by an LLC's operating agreement may be
enforced against the corporation into which the LLC was
converted." The Court also noted that requiring arbitration of
claims involving affiliates of signatories is "not
unusual." Therefore, the Court held that requiring Rubicon
Inc. to arbitrate is permissible and not inequitable.
3850 & 3860 Colonial Blvd., LLC v. Griffin, C.A. No. 9575-VCN, (February 26, 2015)
NJ Courts Will Not Enforce Unclear Arbitration Provisions. Will SCOTUS Weigh In?
This spring, the United States Supreme Court
("SCOTUS") may take up U.S. Legal Services Group v.
Atalese, a case decided by the New Jersey Supreme Court
("NJSC") in September of 2014. In Atalese,
the NJSC held that an arbitration provision providing that disputes
"shall be submitted to binding arbitration" was not
enforceable in New Jersey, unless such an arbitration provision was
accompanied by language that is unambiguous and sufficiently clear
to a reasonable consumer and states that the party was waiving its
statutory right to seek relief in a court of law.
In January, the defendant in Atalese filed a petition of
writ of certiorari with SCOTUS. In late February, several amicus
briefs, including an amicus brief of the Chamber of Commerce of the
United States of America and the New Jersey Civil Justice Institute
were also filed with SCOTUS. The petitioner and the amicus curiae
generally argue that, among other things, the NJSC's decision
in Atalase should be overturned because it is in conflict
with the Federal Arbitration Act, which requires parties that have
executed agreements containing arbitration clauses to arbitrate
instead of seeking relief in a judicial forum. The petitioner
points to SCOTUS' decision in Doctors' Associates v.
Casarotto. In Casarotto, SCOTUS overturned a decision
of the Montana Supreme Court which had upheld a notice requirement
for all agreements containing an arbitration provision. In their
opinion, SCOTUS noted that Congress "precluded states from
singling out arbitration provisions for suspect status" when
it passed the Federal Arbitration Act. Essentially, SCOTUS held
that state courts may not invalidate arbitration provisions under
state laws that treat arbitration provisions different from other
contractual provisions.
The decision in Atalese may threaten small businesses with
burdensome litigation costs in the event of a dispute if they have
contracted with customers in New Jersey and expressly agreed to
arbitrate. Unless, SCOTUS decides to review and overturn
Atalese, the ruling in that case will remain the law in
New Jersey.
Atalese v. United States Legal Services Group, L.P., 219 N.J. 430 (2014)
New York Attorney General's Proposed Financial Frauds Whistleblower Act
New York Attorney General Eric T. Schneiderman is proposing
legislation in Albany to protect and reward employees who report
information about illegal activity in the banking, securities, and
insurance and financial services industries. The proposed
legislation, "Financial Frauds Whistleblower Act," would
provide financial compensation to whistleblowers that voluntarily
provide original information, not previously known to the Attorney
General, which leads to more than $1 million in penalties and
settlement proceeds for financial fraud or misconduct. The Act
would also protect whistleblowers against retaliation by current
and prospective employers. In 2010, the New York State False
Claims Act was amended to include incentives and protections for
whistleblowers who report abuses of taxpayer funded state
expenditures. However, no law currently exists in New York State to
protect or incentivize whistleblowers who report securities or
financial frauds.
The rewards to whistleblowers would not be drawn from state funds,
but from monetary recoveries from wrongdoers. Whistleblowers
would receive 10% to 30% of the money obtained in a fraud case.
Additionally, the proposed legislation would create significant
incentives for employees to provide information to the Attorney
General rather than reporting such information internally. The
Financial Frauds Whistleblower Act is similar to the whistleblower
program that was created under the Dodd-Frank Act. However, the SEC
has previously explained that such whistleblower programs encourage
whistleblowers to first report any misconduct internally, a factor
which the SEC considers when determining the amount of the monetary
award. Accordingly, the expectation was that directors would foster
a culture that affirmatively encourages employees to report any
wrongdoing without any fear of retaliation. As for New York, we
have yet to see the proposed text of the Financial Frauds
Whistleblower Act, and, if adopted, the effect it will have in the
corporate governance of companies.
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