United States: October 2015 Corporate Alert

The Herrick Advantage

This month, Herrick's Sports Law Group was featured in national and local news commenting on the latest issues in sports law. Several prominent media outlets turned to Daniel Etna, for insight on recent legal developments surrounding the legalization of daily sports fantasy sites, including Fox 5 News, NorthJersey.com, The Record and Law360. Most recently, he weighed in for the New York Times on Nevada's decision to treat fantasy sports sites as gambling, surmising that the current state and federal activity on the issue is creating mounting pressure to regulate daily sports fantasy games.

In their recent New York Law Journal's Mergers & Acquisitions article, Jared Bartie, Daniel Etna and Irwin Kishner discuss the unique aspects that distinguish the purchase and sale of professional sports teams apart from regular M&A transactions. The article identifies a number of crucial areas that require specialized guidance when navigating the transaction process, including knowledge of league guidelines, owner qualifications, the diligence process, stadium and arena issues and key expense and revenue drivers.

Herrick is proud to have represented Lelands, the industry leader in sports memorabilia, in the resolution of the nationally reported litigation over former NFL player Jim Brown's 1964 Championship ring. The settlement will result in the return of the ring to Jim Brown five decades after he said that it had been stolen from his house during a robbery. In a Reuters article, Herrick litigation partner William Fried said, "We're pleased that Mr. Brown is getting his ring back, and we're pleased this case has resolved."

Delaware Supreme Court Rules on Director Independence

The Delaware Supreme Court reversed a lower court decision dismissing a derivative lawsuit brought by stockholders against the board of directors. The lawsuit arose out of an interested party transaction in which the company purchased assets from an entity controlled by two members of the board of directors. The claimants alleged that the five-member board of directors breached its fiduciary duty in approving the transaction. The transaction, however, was approved by a committee consisting of the company's other three members of the board of directors.

The claimants argued that, although the committee members were financially disinterested in the transaction, the committee lacked independence by reason of two of the three committee members' business and financial relationships with the interested directors. The lower court dismissed the lawsuit after finding that the claimants failed to allege specific allegations to support a claim that the committee lacked independence. The Delaware Supreme Court, however, ruled that a director's close personal relationship with interested board members could compromise the director's independence and was sufficient to avoid dismissal of the lawsuit.

Del. Cty. Emps. Ret. Fund v. Sanchez, No. 702 (Del. Sup. Ct., Oct. 2, 2015)

Delaware Supreme Court Applies Business Judgment Rule to Post-Closing Review of Merger

The Delaware Supreme Court reviewed the conduct of a board of directors in connection with a completed merger transaction under the business judgment rule. The merger was approved by a majority of the target company's stockholders, other than the acquiring company and its affiliates. Several of the target company's stockholders brought suit subsequent to the merger, claiming that the directors of the target company breached their fiduciary duties in approving the merger. The lower court reviewed the merger under the business judgment rule standard and dismissed the action. The Delaware Supreme Court, in upholding the lower court decision, relied upon the fact that the merger had been approved by a majority of the disinterested stockholders of the target company on an informed and uncoerced basis. Such approval was sufficient to prevent the application of a higher standard of review to the merger.

Corwin v. KKR Financial Holdings LLC, Consol. C.A. No. 9210-CB (Del. Sup. Ct., Oct. 2, 2015)

Delaware Chancery Court Decision Focuses upon Financial Advisor Liability

The Delaware Chancery Court refused to dismiss a claim brought against a financial advisor to a target company for aiding and abetting the target company's directors' alleged breach of fiduciary duty in connection with a merger transaction that closed at a price of $21 per share. The financial advisor had previously made a presentation to the acquiring company regarding the acquisition of the target company and proposed a specific price range between $17 and $21 per share. The target company's board of directors was unaware of such a presentation and accepted the financial advisor's certification that it was unconflicted and had limited dealings with the acquiring company. After the merger agreement was signed, the financial advisor informed the target company about its prior presentation to the acquiring company. The target company's board of directors decided that the financial advisor's presentation did not change its decision to proceed with the merger and continue with the financial advisor. The court ruled that it was unable to conclude that the financial advisor's interaction with the acquiring company had not harmed the target company's stockholders.

In re Zale Corp. Stockholders Litig., C.A. No. 9388-VSP (Del. Ch. Ct., Oct. 1, 2015)

Delaware Chancery Court Provides Guidance on Financial Advisor Valuation Disclosure

The Delaware Chancery Court refused to enjoin an all-cash tender offer claiming to contain defective disclosure. The claimants alleged that the proxy statement pertaining to the tender offer was materially misleading because it implied that management, instead of the financial advisor, had prepared the unlevered, after-tax free cash flows contained in the proxy statement. The court ruled that the proxy statement accurately disclosed that management assisted the financial advisor by providing certain revenue projections and other inputs from which the financial advisory calculated unlevered, after-tax free cash flows and a discounted cash flow valuation. In so holding, the court stated that Delaware case law does not require disclosure of all management inputs into a financial advisor's valuation.

Nguyen v. Barrett, C.A. No. 11511-VCG (Del. Ch. Ct., Oct. 9, 2015)

SEC Provides Guidance Regarding Exclusion of Shareholder Proposals

The SEC Division of Corporation Finance (the "Division") issued a staff legal bulletin providing guidance with respect to the exclusion of shareholder proposals from proxy statements. The bulletin addresses Rule 14a-8(i)(9) of the Securities Exchange Act of 1934 which permits a company to exclude a shareholder proposal from its proxy statement if the proposal directly conflicts with one of the company's own proposals to be submitted to shareholders at the same meeting.

On a going-forward basis, the Division will look to whether there is a direct conflict between a shareholder proposal and management proposal, and will not consider a shareholder proposal to be in conflict with a management proposal if a reasonable shareholder could logically vote for both.

How a Shareholder Proposal and Management Proposal May Directly Conflict:

(1) Where a company seeks shareholder approval of a merger and there is a shareholder proposal to vote against the merger.

(2) Where a shareholder proposal that asks for the separation of the company's chairman and CEO would directly conflict with a management proposal seeking approval of a bylaw provision requiring the CEO to be the chair at all times.

How a Shareholder Proposal and Management Proposal May Not Directly Conflict:

(3) Where a company does not allow shareholder nominees to be included in the company's proxy statement, a shareholder proposal that would permit a shareholder or group of shareholders holding at least 3% of the company's outstanding stock for at least 3 years to nominate up to 20% of the directors would not be excludable if a management proposal would allow shareholders holding at least 5% of the company's stock for at least 5 years to nominate for inclusion in the company's proxy statement 10% of the directors.

(4) Where a shareholder proposal asking the compensation committee to implement a policy that equity awards would have no less than four-year annual vesting would not directly conflict with a management proposal to approve an incentive plan that gives the compensation committee discretion to set the vesting provisions for equity awards.

The Division noted that in these examples, the board of directors may have to consider the effects of both proposals, if both are approved by the shareholders.

Staff Legal Bulletin No. 14H, http://www.sec.gov/interps/legal/cfslb14h.htm (Oct. 22, 2015)

SEC Advisory Committee on Small and Emerging Companies Makes Broker-Dealer Recommendation

The SEC Advisory Committee on Small and Emerging Companies submitted a recommendation to the SEC pertaining to the regulation of broker-dealers, finders and other intermediaries in small business capital formation transactions. The committee found that less than 15% of the Regulation D private offerings are used by financial intermediaries, such as broker-dealers or finders. The committee attributed the low usage rate in part to the ambiguity of the definition of "broker" under federal securities laws. The committee recommended that the SEC clarify the ambiguity in broker-dealer regulation by determining that persons who receive transaction-based compensation solely for making introductions to prospective investors are not subject to broker registration under federal securities laws. The committee further recommended that the SEC exempt from federal broker registration any intermediary registered as a broker under state law that is actively and regularly involved in the solicitation of investors and private financings.

https://www.sec.gov/info/smallbus/acsec/acsec-finders-issue-recommendation-draft.pdf (Sept. 23, 2015)

Weak Cybersecurity May Lead to Bank Ratings Downgrades

Standard & Poor's has issued an advisory that it may downgrade banks with weak cybersecurity, regardless of whether the banks have been attacked. A downgrade may also result after an actual attack if Standard & Poor's determines the attack caused significant reputational issues that could result in a major loss of customers or if the monetary or legal losses significantly hurt capital.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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