United States: April 2015 Corporate Alert

The Herrick Advantage

Over the years our sports law group has successfully represented some of the industry's biggest names. In a recent acquisition, we advised the purchaser of the Kansas City Royals minor league affiliate, the Lexington Legends. The deal, which included the acquisition of the team's home stadium, Whitaker Bank Ballpark, was subject to approval by the Southern Atlantic League, Minor League Baseball and Major League Baseball. This transaction ensured that the current CEO of the team would be able to continue the execution of his long-term business and growth plan. The deal team included Herrick corporate partner Daniel A. Etna and associate Liliana Chang.

Delaware Chancery Court Awards $171 Million in Conflict of Interest Transaction Claim

The Delaware Chancery Court awarded $171 million in damages to the common unitholders of a limited partnership against its general partner in connection with a "dropdown" transaction. This transaction involved the limited partnership's purchase of assets held by the general partner. The limited partnership agreement permitted such a purchase so long as it was approved by a committee whose members believed, in good faith, that the purchase was in the best interests of the limited partnership.

The "dropdown" transaction was evaluated and approved by a committee of three directors of the general partner's board of directors. The committee was advised by outside counsel and a financial advisor. While the committee members initially expressed reservations about certain aspects of the proposed transaction, they ultimately determined that the transaction was in the best interests of the limited partnership. The committee members made special note that they believed the proposed transaction would be immediately accretive to the common unitholders. The proposed transaction was approved after the committee received a fairness opinion from its financial advisor.

After trial, the court discredited the committee members' testimony as to their state of mind and opinion as to the merits of the transaction. The court, in holding that the committee members did not hold a good faith belief that the transaction was in the limited partnership's best interests, criticized the committee members for fixating myopically on accretion. The court further criticized the committee members for failing to vigorously vet the transaction or negotiate with the general partner to obtain the best possible price.

In re El Paso Pipeline Partners L.P. Derivative Litig., C.A. No. 7141-VCL (Del.Ch.Ct., Apr. 20, 2015)

SEC Expands Regulation A+

The SEC adopted new rules that update and expand Regulation A. These new rules, referred to informally as Regulation A+, were mandated under Title IV of the Jumpstart Our Business Startups Act of 2012. Regulation A+ provides an updated exemption from registrations under the Securities Act of 1933, as amended. Regulation A+ creates two tiers of offerings:  (1) Tier 1 for offerings of securities of up to $20 million in a 12-month period with not more than $6 million in offers by selling stockholders that are affiliates of the issuer and (2) Tier 2 for offerings of securities of up to $50 million in a 12-month period with not more than $15 million in offers by selling stockholders that are affiliates of the issuer.  Both tiers require the filing of an offering statement on Form 1-A.  Additionally, Tier 2 offerings are subject to the following requirements: (i) audited financial statements must be included in the issuer's offering materials; (ii) the issuer must file annual and semi-annual reports with the SEC and, as needed; current reports upon the occurrence of certain significant changes or transactions; and (iii) investments by non-accredited investors are limited to no more than 10% of either their net worth or annual income (whichever is greater).

State securities law registration and qualification requirements are preempted in Tier 2 offerings as all investors in such offerings are considered "qualified purchasers." Tier 1 offerings will continue to be subject to both federal and state oversight although the coordinated review program of Regulation A offerings implemented by the North American Securities Administrators Association is expected to alleviate some of the burden.

SEC Rel. No. 33-9741 (Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A) (Mar. 25, 2015)

U.S. Supreme Court Addresses Liability for Statements of Opinion

The U.S. Supreme Court held that a statement of opinion does not become actionable under the "untrue statement of material fact" clause of Section 11 of the Securities Act of 1933, as amended, simply because subsequent events prove it wrong, provided the opiner honestly held the opinion. The case arose out of an opinion made by the issuer in a registration statement that it was in compliance with federal and state laws. The issuer was subsequently sued by the government for allegedly receiving kickbacks from pharmaceutical companies. Certain investors then sued the issuer claiming that the legal compliance statements amounted to untrue statements of material fact and that the issuer failed to state material facts necessary to make those statements not misleading.

The lower court ruled that because Section 11 is a strict liability statute that does not depend on the issuer's state of mind, the investors could state a claim if the opinion included a material misstatement, even if the opinion accurately conveyed the issuer's belief. The Supreme Court, however, reversed and remanded the claim. The Supreme Court held that a statement of opinion does not constitute an untrue statement of fact merely because the opinion ultimately ends up being incorrect.  However, the Supreme Court went on to state that an opinion can qualify as an untrue statement of fact if the opinion expressed was not sincerely held.  Furthermore, opinions can be actionable under Section 11 if they contain or are based upon untrue statements of fact.  In remanding the case, the Supreme Court ruled that for purposes of applying Section 11's omissions clause, the determination of whether a statement is misleading is an objective inquiry that depends on a reasonable investor's perspective. 

Omnicare, Inc. v. Laborer's Dist. Council Constr. Indus. Pension Fund, No. 14-435 (U.S. Sup. Ct. Mar. 24, 2015)

Delaware Chancery Court Finds No Waiver of Appraisal Rights in Squeeze-out Merger

The Delaware Chancery Court ruled that minority stockholders that agreed to allow a corporation to force them to vote in favor of a merger didn't waive their appraisal rights when the corporation failed to exercise its drag-along rights. The minority stockholders received a letter from the corporation advising as to the merger and the right to receive a cash payment. Thereafter, certain of the minority stockholders sought to initiate an appraisal proceeding for their shares. In response, the corporation tried to specifically enforce the "drag-along" rights contained in a stockholders agreement to which the minority stockholders were bound. The drag-along rights included the right to compel minority stockholders to vote in favor of certain change-in-control actions including mergers. The court, however, found that since the corporation never exercised the drag-along right to require the minority stockholders to vote in favor of the merger, the minority stockholders did not waive their appraisal rights. 

Halpin v. Riverstone Nat'l, Inc., No. 9796-VCG (Del. Ch. Ct., Feb. 26, 2015)

Delaware Supreme Court Refuses to Find Breach of the Implied Covenant of Good Faith and Fair Dealing

The Delaware Supreme Court reversed a $15.1 million award of damages to the buyer of a 65% interest in an investment advisory firm. The buyer argued that it would not have paid $25 million for such interest, but for its expectancy that it would manage seven specified funds for three or more years. Shortly after the buyer's purchase of the interest in the investment advisory's firm, the seller withdrew a majority of the assets from the largest of the seven funds and deposited them in a newly-created competing fund. The seller also exercised a performance-based contractual termination right which resulted in the termination of the buyer's investment advisory contract with the six other funds.

The lower court found that the seller had breached the implied covenant of good faith and fair dealing by: (i) depriving the buyer of the benefit of its bargain to manage the seven funds for three or more years; (ii) transferring a majority of the assets out of the largest fund to a newly-created competing fund; and (iii) implementing a lower fee structure for such competing fund which made it impossible for the buyer to compete. The Delaware Supreme Court ruled that the lower court erred by implying contractual obligations on the part of the seller not found in its contract with the buyer. The Delaware Supreme Court stated that the implied covenant of good faith and fair dealing cannot be used to end run negotiated agreements or to create a duty separate and apart from the contract between a buyer and a seller. 

Nationwide Emerging Managers, LLC v. Northpointe Holdings, LLC, No. 441,2014 (Del. Sup. Ct., Mar. 18, 2015)

U.S. Supreme Court "Reels in" Reach of Sarbanes-Oxley Act

The U.S. Supreme Court reversed a lower court conviction based upon an alleged violation of Section 1519 of the Sarbanes-Oxley Act.  Section 1519 provides that a person may be fined or imprisoned for up to 20 years if he "knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document or tangible object with the intent to impede, obstruct or influence" a federal investigation. The conviction arose out of an inspection of a commercial fishing vessel in the Gulf of Mexico. The inspection revealed that the ship's catch contained undersized red grouper in violation of federal conservation regulations. The ship's captain was instructed by the federal inspector to keep the undersized fish segregated from the rest of the catch until the ship returned to port. The captain instead told a crew member to throw the undersized fish overboard. For this offense, the captain was charged with destroying, concealing and covering up undersized fish to impede a federal investigation.

At trial, the captain argued that Section 1519 was a law designed to protect investors and restore trust in financial markets following the collapse of Enron Corporation. The captain further argued that Section 1519's reference to "tangible object" subsumes objects used to store information, such as computer hard drives, not fish. The federal appeals court confirmed the captain's conviction by concluding that Section 1519 applies to the destruction or concealment of fish because, as objects having physical form, fish fall within the dictionary definition of "tangible object." In reversing the conviction, the Supreme Court ruled that the dictionary definition needed to be considered in light of the specific context in which that language is used as well as the broader context of the statute in its entirety.

Yates v. United States, No. 13-7451 (U.S. Sup. Ct. Feb. 25, 2015)

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