United States: September 2015 Corporate Alert

The Herrick Advantage

This month, Herrick partners were quoted in prominent publications on recent trends in M&A. Irwin A. Kishner noted an increase in mergers and acquisitions involving real estate managers in Pensions & Investments and pointed to an interest among large private equity firms to acquire boutique real estate firms to capitalize on investor interest. "It's one-stop shopping. It's ready to go, all nicely wrapped and packaged, and is another service to offer to clients."

In a New Jersey Law Journal article analyzing expectations for a strong finish in middle-market M&A activity in the fourth quarter of 2015, Edward B. Stevenson said that cash-rich companies as well as foreign businesses and individuals looking to invest in the U.S. market remain plentiful. He added, "I expect the fourth quarter to probably be the busiest quarter for 2015 based on the number of deals in the pipeline."

SEC Amends Regulation A Rules

As mandated by Title IV of the JOBS Act, amendments to Regulation A were recently adopted by the SEC. The amended rules, commonly referred to as Regulation A+, effectively create two new exemptions from registration:  (i) the "Tier 1" exemption which permits offerings of securities for an aggregate offering price not to exceed $20 million taking  into account all securities offerings made by the issuer during the last 12 months, and (ii) the "Tier 2" exemption which permits offerings of securities for an aggregate offering price not to exceed $50 million, taking into account all securities offerings made by the issuer during the last 12 months. The two exemptions have similar terms, but they also have significant differences, which may have ramifications for their relative utility for small businesses. While Tier 2 offerings contain many requirements similar to a registered offering, the requirement in a Tier 1 offering remain quite similar to the Regulation A offering under the prior rules. The intention of Regulation A+ is to create a more useful intermediate step between staying private and going public. Before adoption of the amendments, only offerings up to $5 million could be exempted and unaccredited investors have generally not been permitted to invest in these offerings. The new Regulation A+ could give companies an opportunity to find a meaningful new source of capital without having to rush into a public offering.

SEC Release Nos. 33-9741, 34-71120, and 39-2493; File No. S7-11-13 - Amendments for Small land Additional Issues Exemptions under the Securities Act.

OCIE Plans a Second Round of Cybersecurity Examinations of Broker-Dealers and Investment Advisors

Earlier this year, the SEC Office of Compliance Inspections and Examinations (OCIE) examined 57 registered broker-dealers and 49 registered investment advisers to better understand how broker-dealers and investment advisers address cybersecurity issues.

On September 15, 2015, the SEC released a Risk Alert containing its plan for a second round of cybersecurity examinations of registered broker-dealers and investment advisers. In the examinations, the SEC will collect and analyze information from the selected firms relating to their practices for governance and risk assessment, access rights and controls, data loss prevention, vendor management, employee training, and incident response.

Just one week after the OCIE issued its Risk Alert, the SEC charged an investment adviser with violating Rule 30(a) of Regulation S-P (the "Safeguards Rule") for failing to adopt written policies and procedures reasonably designed to safeguard customer records and information. The charged investment adviser had experience a cyberattack in July 2013 on its third party-hosted server, which compromised the personally identifiable information of over 100,000 individuals stored on the server. The investment adviser has agreed to settle the charge for approximately $75,000, and cease and desist from committing or causing any future violations of the SEC's Safeguards Rule.

Office of Compliance Inspections and Examinations Risk Alert: Volume IV, Issue 8 (Sept. 15, 2015)

Delaware Court of Chancery Criticizes "Disclosure-Only" M&A Litigation Settlement

The Delaware Court of Chancery warned that settlements in merger and acquisition stockholder litigation will be scrutinized more closely going forward to ensure the protection of stockholder interests.

In In Re Riverbed Technology, Inc. Stockholders Litigation, the Court of Chancery considered claims by stockholders of Riverbed Technology, Inc., alleging that, with respect to the announced acquisition of the corporation, the corporation had been undervalued and the disclosures in the proxy materials were inadequate. Ultimately, the parties reached a "disclosure-only" settlement, whereby the corporation agreed to make additional disclosures related to business relationships of the corporation's financial advisors and information used by the financial advisors in their fairness opinions. Additionally, the corporation agreed not to object to a fee request by the plaintiffs.  In exchange, the plaintiff stockholders agreed to grant the corporation a broad release of all potential Federal and State law claims arising from the transaction.

The Court of Chancery approved the settlement on the theory that the parties had placed "reasonable reliance" on the "formerly settled practice" that the Court of Chancery would approve a settlement negotiated in good faith. The Court of Chancery deemed the consideration exchanged to be relatively equal, albeit low in value; the Court of Chancery declared that the corporation made a "peppercorn" of additional disclosures in exchange for a "mustard seed" of released claims.

Despite the fact that the Court of Chancery approved the settlement, it stated that it found "troubling" disclosure-only settlements of this type, where the corporation receives a broad release of claims. The Court of Chancery further stated that it is "hubristic" to think that the Court is capable of properly evaluating, and dismissing as insubstantial, all potential Federal and State claims against the corporation. The Court went on to warn that similar settlements would not be approved going forward because the releases involved extend "beyond the claims asserted and the results achieved." As a result, corporations should thoroughly analyze the scope of the release relative to the benefits received by the stockholder class.

In Re Riverbed Technology, Inc. Stockholders Litigation, 2015 WL 5458041, C.A. No. 10484-VCG (Del. Ch. Sept. 17, 2015)

Second Circuit Holds that Internal Whistleblowers are Protected by Dodd-Frank

A divided panel of the Second Circuit recently held that Dodd-Frank's anti-retaliation provisions also applied to employees who reported suspected wrongdoing internally, even if they did not report the information to the SEC.  The Second Circuit deferred to the SEC's interpretive guidance on an issue that has divided lower courts, and split with the Fifth Circuit's 2013 decision in Asadi v. G.E. Energy (USA), LLC in which the Fifth Circuit held that whistleblowers who faced retaliation were covered by Dodd-Frank's anti-retaliation provisions only if they reported the suspected violation to the SEC.

The claimant was the former finance director at Neo@Ogilvy LLC ("Neo"), a media agency, until April 2013.  According to the claimant, he uncovered various practices that amounted to accounting fraud while employed by Neo. When the claimant reported the alleged violations internally, according to the opinion, a senior officer at Neo "became angry with him, and he was terminated as a result of his whistleblower activities in April 2013." The suit against Neo was brought shortly thereafter alleging that the claimant  was discharged in violation of Dodd-Frank. While employed at Neo, and for about six months after he was fired, the claimant did not report any of the allegedly unlawful activities to the SEC.

In the present case, the Second Circuit addressed whether the "arguable tension" between two provisions of the Securities Exchange Act of 1934 created "sufficient ambiguity" to warrant deference towards the SEC's interpretation. Section 21F(a)(6) of Dodd-Frank defines a whistleblower as an individual who provides information relating to a violation of the securities laws to the SEC, while SEC Exchange Act Rule 21F-2 prohibits discrimination against a "whistleblower" for providing information concerning securities laws violations to, among others, "a person with supervisory authority over the employee."  The court found that two provisions were sufficiently ambiguous, and deferred to the SEC's interpretation that Dodd-Frank's anti-retaliation provisions applied to "individuals who report to persons or governmental authorities." Accordingly, the court reversed the judgment of the district court which, followed the reasoning in Asadi, and held that despite not reporting the suspected violation to the SEC, employee whistleblowers who force retaliation for reporting the violation to senior officers are covered by Dodd-Frank's anti-retaliation provisions.

Berman v. Neo@Ogilvy LLC, No. 14-4626, 2015 WL 5254916 (2d Cir. Sept. 10, 2015)

Delaware Court Holds Controlling Stockholder and Executive Liable for $148 Million for Breach of Fiduciary Duties

On August 27, 2015, the Delaware Court of Chancery held that Dole Food Company, Inc. ("Dole") Chief Executive Officer and controlling shareholder, David Murdock, and its General Counsel, C. Michael Carter, were jointly and severally liable for damages exceeding $148 million as a result of Murdock and Carter's intentional misconduct in connection with a going-private transaction.

Murdock, who owned approximately 40% of Dole's common stock, sought to acquire all of the remaining common stock that he did not already own. He had initially offered to pay $12.00 per share.  Following the Court of Chancery's opinion in MFW Shareholders Litigation, Murdock conditioned his proposal on (i) approval from a special committee comprised of disinterested and independent directors and (ii) the affirmative vote of a majority-of-the-minority shareholders, likely in the hope of subjecting scrutiny of the transaction to the more deferential business judgment standard of review as opposed to the more burdensome "entire fairness" test.  The special committee was formed and negotiated the initial offer up to $13.50. The board of directors approved the transaction, and the unaffiliated shareholders narrowly approved the merger by a vote of 50.9%.

The court, however, found that Murdock and Carter could not show that the merger was the product of both fair dealing and fair price in light of the many instances of their fraudulent and deliberately misleading conduct throughout the process. The court noted that Murdock and Carter, among other things, intentionally withheld information from the special committee, issued misleading press statements and engaged in conduct deliberately designed to drive down the share price prior to the planned takeover proposal.  "By engaging in fraud," the court held, "Carter deprived the [special committee] of its ability to obtain a better result on behalf of the stockholders, prevented the [special committee] from having the knowledge it needed to potentially say 'no,' and foreclosed the ability of the stockholders to protect themselves by voting down the deal."  The court further held that the shareholders were entitled to a "fairer price designed to eliminate the ability of defendants to profit from their breaches of the duty of loyalty," and ordered the defendants liable for the difference between the price paid and the "fairer price."

In re Dole Food Co., Inc. Stockholder Litigation, Consolidated C.A. No. 8703-VCL (Del. Ch. Aug. 27, 2015).

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