United States: August 2015 Corporate Alert

The Herrick Advantage

Herrick corporate partners Irwin A. Kishner and Daniel A. Etna advised longtime client, Legends Hospitality Management, LLC, a premier provider of hospitality, merchandising and ticketing services, in its equity investment in DraftKings, a daily fantasy sports contest service. The $300 million venture funding round involved both new and existing investors and was reported in Sports Business Journal as "sending a historic wave of investment into the [fantasy sports industry]."

SEC Adopts Final Pay-Ratio Disclosure Rule

The Securities and Exchange Commission ("SEC"), by a 3-2 vote, adopted a final rule implementing the CEO pay-ratio disclosure requirements of Section 953(b) of the Dodd-Frank Act.  The rule adds Item 402(u) of Regulation S?K which will require certain SEC reporting companies to disclose annually the: (i) median annual total compensation of all their employees, excluding the CEO; (ii) annual total compensation of the CEO; and (iii) ratio of the annual total compensation of the median employee to the CEO's annual total compensation. 

The rule applies to all SEC reporting companies required to provide executive compensation disclosure under Item 402 of Regulation S-K. Smaller reporting companies, emerging growth companies, foreign private issuers, multijurisdictional disclosure system filers and registered investment companies are not subject to the rule. 

The pay-ratio disclosure must be included in any annual report, proxy or information statement, or registration statement that requires executive compensation disclosure under Item 402 of Regulation S-K.  Companies subject to the rule must comply for the first fiscal year beginning on or after January 1, 2017. 

SEC Release No. 34-75610 (Aug. 5, 2015)

Seventh Circuit Expands Successor Liability in Context of Pension Plans

The Seventh Circuit Court of Appeals expanded the situations under which an asset purchaser may be liable for an asset seller's ERISA multiemployer pension plan withdrawal liability.  The case arose out of the sale by a unionized electrical contractor of all of its assets to a non-union engineering company.  During the course of negotiating the sale, the seller disclosed that it had contingent withdrawal liability.  This withdrawal liability was expressly not assumed by the purchaser in the asset sale agreement. 

Under case law precedent followed in the Seventh Circuit, courts may impose successor liability on an asset purchaser for multiemployer pension plan withdrawal liability where: (i) the asset purchaser had notice of the withdrawal liability before closing and (ii) there was a substantial continuity in the operation of the business before and after the asset sale.  The lower court ruled in favor of the purchaser after finding that it did not have pre-closing knowledge of the withdrawal liability since it was contingent and uncertain as to amount.  The Seventh Circuit reversed the lower court decision after determining that the requirement of pre-closing knowledge of the withdrawal liability could be satisfied by notice of either existing or contingent withdrawal liability.  The Seventh Circuit ruled that such result was necessary since the exact amount of withdrawal liability cannot be determined prior to the closing of the asset sale. 

Tsareff v. ManWeb Services, Inc., Case No. 14-1618 (7th Cir. July 27, 2015)

Delaware Chancery Court Invalidates Stockholder-Adopted By-Law

The Delaware Chancery Court held a stockholder-adopted by-law amendment that granted stockholders the right to remove corporate officers over the objection of the board of directors was invalid under Delaware law.  The case arose out of a by-law adopted by the majority stockholder which provided that any officer could be removed, with or without cause, at any time by the board of directors or by the stockholders acting at an annual or special meeting, or by written consent.  Following the adoption of the by-law, the majority stockholder removed the chief executive officer and elected himself to fill the resulting vacancy.  The majority stockholder then filed suit with the court seeking confirmation that the chief executive officer had been lawfully removed.  The court, in holding that the by-law was invalid, ruled that the by-law would enable stockholders to "make substantive business decisions" for the company and thus "unduly interfere" with the right of the directors to manage the company. 

Gorman v. Salamone, C.A. No. 10183-VCN (Del. Ch. July 31, 2015)

Delaware Chancery Court Recognizes Release in Spin-off Transaction

The Delaware Chancery Court upheld the validity of a release pertaining to a corporate spin-off transaction.  The release extinguished certain claims that the spin-off company may have been able to assert against its former parent company and its directors.  Prior to the spin-off transaction, the parent company was a defendant in a False Claims Act lawsuit for allegedly engaging in unlawful pharmaceutical off-label marketing of a product of the spin-off subsidiary. 

As part of the spin-off transaction, the spun-off company released all claims it might have had against the parent company relating to the assets transferred to the spun-off company including liability for False Claims Act violations. 

The stockholders of the spun-off company brought a derivative suit action seeking an order rescinding the release.  The court ruled that the stockholders had no standing to bring the claim because they did not own the spun-off company's stock at the time the release was executed. In so ruling, the court followed Delaware's "continuous ownership" rule.  This rule limits standing to bring derivative claims to stockholders who owned stock at the time of the alleged wrongdoing and at all times thereafter. The court, in refusing to exempt the spun-off company's stockholders from the continuous ownership rule, stated that exceptions to such rule are recognized only in "egregious" circumstances. 

In re AbbVie Inc. Stockholder Derivative Litig., C.A. No. 9983-VCG (Del. Ch. July 21, 2015)

Delaware Chancery Court Dismisses Breach of Fiduciary Duty Claims in Connection with Reorganization

The Delaware Chancery Court ruled that the duties owed by the members of a conflict committee in connection with a corporate reorganization had been modified by the language contained in the partnership agreement of one of the participants in the reorganization. The reorganization was approved on behalf of the limited partnership by a conflicts committee of its general partner. The claimants unsuccessfully charged that the conflicts committee had breached its fiduciary duties by approving the reorganization on undervalued financial terms.

The court ruled, based on the language of the partnership agreement and prior Delaware case law precedent addressing similar language, that all default fiduciary duties had been eliminated and replaced by a contractual obligation for the general partner to act in a manner that it reasonably believed to be in, or not inconsistent with, the best interests of the limited partnership, rather than the limited partners.  The specific language contained in the partnership agreement reviewed by the court reads, in pertinent part, as follows: "Any standard of care, any duty imposed by this Agreement or under the Delaware Act or any applicable law, rule or regulation shall be modified, waived or limited as required to permit the General Partner to act under this Agreement [...] and to make any decision pursuant to the authority prescribed in this Agreement so long as such action is reasonably believed by the General Partner to be in, or not inconsistent with, the best interests of the Partnership."

In re Kinder Morgan, Inc. Corporate Reorganization Litig., C.A. No. 10093-VCL (Del Ch. Aug. 20, 2015)

Delaware Chancery Court Strongly Criticizes Valuation Firm

The Delaware Chancery Court granted an award of damages to the holders of stock options cancelled in a merger. The court found that the cash-out value assigned to the stock options was arrived at through an arbitrary and capricious process. The court strongly criticized the work of a valuation firm retained to value the companies party to the merger. The court called the valuation firm's work a "new low."

The court had many issues with the work performed by the valuation firm.  These issues included the court finding that the valuation firm: (i) did not conduct a comparable companies analysis even though the valuation firm in the recent past deemed another transaction to be comparable (and had such analysis been conducted, it would have yielded a higher value for the merger); (ii) arrived at the same valuation as an independent tax advisor even though different analytic inputs were used (leading the court to conclude that the valuation firm copied the tax advisor's report); (iii) used only a "cost method" analysis and discarded all other valuation methodologies without explanation; and (iv) used the wrong financial projections in making its recommendation.  

Fox v. CDX Holdings Inc., C.A. No. 8031-VCL (Del.Ch. July 28, 2015)

Federal District of New York Invalidates New York City "Responsible Banking Act"

The United States District Court for the Southern District of New York invalidated a New York City Local Law entitled the "Responsible Banking Act" (the "RBA").  The RBA was intended to require banks to make public their efforts to be socially responsible, particularly in low-income neighborhoods. The RBA created a Community Investment Advisory Board ("CIAB") responsible for collecting data from the 21 banks eligible to hold New York City's $150 billion in annual deposits. The data covered by the RBA included information pertaining to maintenance of foreclosed properties, investments in affordable housing, and product and service offerings.  This data exceeded the types of data required to be collected by federal and state banking regulators and was subject to public disclosure. The CIAB was further required to use the data collected to develop "best practices" against which the 21 banks would be compared and evaluated. The court invalidated the RBA on the ground that it was preempted under federal and state banking laws.

The New York Bankers Assoc., Inc. v. The City of New York, 15 Civ. 4001 (KPF) (S.D.N.Y. Aug. 7, 2015)

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