United States: June 2015 Corporate Alert

The Herrick Advantage

Herrick recently represented Bounce Boat, an operator of one of the largest private event yachts in the northeast, in securing its charter for the 2015 season and in executing a contract for its first cruise this year – the June 5 birthday party of famous hip hop artist, Jadakiss. The deal team, led by corporate partner Richard M. Morris, included IP partner Barry Werbin, and associates Julie Albinsky and Liliana Chang.

Delaware Supreme Court Rules on Exculpatory Provisions

The Delaware Supreme Court unanimously held that a claim for damages against independent, disinterested directors of a corporation with exculpatory provisions in its certificate of incorporation must be dismissed in the absence of disloyalty or bad faith allegations. This holding applies to all situations including controlling stockholder cases.  The claim arose out of the approval, by the board of directors, of a going private transaction that was led by controlling stockholders.

In addressing a previously unsettled area of case law, the court ruled that the claimant "must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board's conduct."  The court further ruled that the claimant must plead "facts supporting a rational influence that the director harbored self-interest adverse to the stockholders' interests, acted to advance the self-interest of an interested party from whom they could not be presumed to act independently, or acted in bad faith."

In re Cornerstone Therapeutics Inc. Stockholder Litig. No 564, 2014 (Del. Sup. Ct., May 14, 2015)

Delaware Chancery Court Provides Guidance on Dead Hand Proxy Puts

The Delaware Chancery Court provided guidance on its prior ruling regarding the validity of a dead hand proxy put (the "Put") contained in a corporation's credit agreement. Under the Put, the debt covered by the credit agreement would have effectively accelerated if a majority of the directors were replaced by nominees of activist stockholders over the span of two annual meetings without the right of the board of directors to approve the activist stockholder nominees as continuing directors whose election would not count toward determining if the Put had been triggered. The case before the court arose out of a stockholder class action challenging the Put.

In denying, the defendants' motion to dismiss, the court ruled that its denial should not be viewed as applying to any "change-in-control" provision contained in a credit agreement.  Rather, the court's ruling was limited to the Put and the underlying facts and circumstances including the timing of the adoption of the Put.  The court further ruled that its decision did not apply to other acceleration rights that might be triggered by breaches of debt covenants or similar lender-protective provisions that do not affect the stockholder franchise.

Pontiac Gen. Employees Retirement Syst. v. Ballantine, C.A. No. 9789-VCL (Del. Ch. Ct., May 8, 2015)

Delaware Chancery Court Permits Voluntary Dissolution of Profitable Limited Liability Company Despite Operating Agreement to the Contrary

The Delaware Chancery Court ruled in favor of the dissolution of a limited liability company even though (i) there was no management deadlock, (ii) the company was profitable and (iii) the company's operating agreement barred voluntary dissolution. In so ruling, the court disregarded the integration clause in the operating agreement and considered other agreements that were contemporaneously entered into by the members at the time of the formation of the limited liability company.  In particular, the court found that the termination of a supply contract between the company and one of its members frustrated the company's business purpose. The termination of this supply agreement also resulted in the termination of non-competition provisions previously applicable to certain members of the limited liability company.

Meyer Natural Foods LLC v. Duff, C.A. No. 9703-VCN (Del. Ch. Ct., June 4, 2015)

Delaware Enacts Statute Banning "Loser Pays" By-Laws

Delaware's governor has signed into law a statute prohibiting Delaware corporations from adopting "fee shifting" by-laws which require the losing party in a stockholder derivative suit to pay the attorney fees of the prevailing party.  Debate over "fee shifting" by-laws began in May 2014 following a ruling by the Delaware Supreme Court that "fee shifting" by-laws were not invalid and might be a permissible way to discourage litigation. The statute, however, does permit Delaware corporations to adopt forum selection by-laws that require derivative suits to be filed in the Delaware courts. The statute will become effective on August 1, 2015.

Senate Bill 75, 148th Gen. Assembly,  An Act to Amend Title 8 of the Delaware Code Relating to the General Corporation Law (DE June 24, 2015)

SEC Brings Illegal Brokerage Charges against EB-5 Immigrant Investor Program

The Securities and Exchange Commission (the "SEC") instituted illegal brokerage charges for the first time in connection with an EB-5 Immigrant Investor Program.  This program provides a means for foreigners to obtain legal U.S. residency by investing directly in a U.S. business or private regional center that promotes economic development in specific areas and industries. The SEC charged two firms for acting as unregistered brokers for more than $79 million of investments made under the EB-5 program. The SEC found the firms used a website to solicit EB-5 investors.  While these firms promised to help investors choose the right regional center to invest with, the SEC claimed the firms directed most of the EB-5 investors to the same handful of regional centers which paid the firms approximately $35,000 per EB-5 investor once as investor's green card was issued. 

SEC Rel. No. 2015-17 (SEC Charges Unregistered Brokers in EB-5 Immigrant Investor Program) (June 23, 2015)

SEC Receives Recommendation to Formalize Section 4(a)(1-1/2) Registration Exemption

The Securities and Exchange Commission Advisory Committee on Small and Emerging Companies formally submitted to the Securities and Exchange Commission a recommendation regarding the formalization of an exemption from securities registration commonly known as "Section 4(a)(1-1/2)." This exemption is a legal construct that has developed based on case law. The Section 4(a)(1-1/2) exemption incorporates elements of exemptions available under Securities Act of 1933 Section 4(a)(1) for persons other than an issuer, underwriter or dealer and Section 4(a)(2) for transactions by an issuer not involving a public offering.  Due to the lack of formal recognition of the Section 4(a)(1-1/2) exemption, the expenses involved for a transaction based thereupon can be significant.

See the Advisory Committee's recommendation here:

http://www.sec.gov/info/smallbus/acsec/recommendation-section-4-a-1.5-exemption.pdf

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