United States: SDNY Refuses To Equate Financing And Refinancing (Corporate Alert, May 4, 2016)

The Herrick Advantage

SEC Chair Mary Jo White has recently stated the Commission's growing concern regarding the use of non-GAAP measures in financial reporting. This Monday's print edition of Investor's Business Daily features comments from Herrick partner Richard Morris about the issue. Morris told IBD, "[Non-GAAP is] telling someone in clear and plain English how you should look at their company, and that is a valid service. But without rigorous testing and audits, questionable things get through."

Herrick chairman Irwin Kishner was also quoted in the April 20th edition of Hedge Fund Alert , where he discussed the Dodd-Frank Act's "Bad Actor" rule, and the SEC's ability to grant waivers to the enforcement of the rule. Under Dodd-Frank, investment firms or employees found guilty of felonies or misdemeanors, or that are subject to certain SEC orders, no longer qualify to offer private securities for up to ten years.

SDNY Refuses to Equate Financing and Refinancing

The U.S. District Court for the Southern District of New York rejected an issuer's contention that a refinancing is a subset of the term "financing." The lawsuit arose out of an exchange offer pursuant to which the issuer sought to exchange unsecured notes for a new issue of senior secured notes.

The trustee for the holders of the existing senior secured notes sought to enjoin the exchange offer on the ground that it violated the terms of the indenture for the existing senior notes. The issuer relied upon an exception to the indenture's debt incurrence covenant which permitted qualified securitization financing. The trustee argued that the exchange offer did not constitute a financing at all. Instead, the trustee claimed the exchange offer was a refinancing since old debt was being exchanged for new debt without any new raising of capital. The trustee also called the court's attention to another exception to the debt incurrence covenant which permitted certain types of refinancing indebtedness. The type of refinancing covered by the exchange offer was not permitted under this exception. The court ruled that adherence to the issuer's interpretation of financing would effectively render meaningless the refinancing indebtedness covenant contained in the indenture.

Citibank, N.A. v. Norske Skogindustrier ASA, No. 16-cv-850 (S.D.NY. Mar. 8, 2016)

Delaware Ruling Legitimizes Litigation Finance

The Delaware Superior Court held that the use of litigation finance, which involves the use of a litigation claim as collateral for financing, is permissible under Delaware law in certain situations. The Court's holding arose out of a lawsuit alleging wrongful use and disclosure of confidential technology. The plaintiff entered into a financing agreement with a litigation claim lender. The defendant sought to dismiss the lawsuit on the basis that the financing agreement violated Delaware's prohibition against champerty and maintenance. This prohibition is intended to prevent disinterested third parties from encouraging a frivolous or unwanted claim.

The Court ruled that the financing agreement at issue was not champertous since the plaintiff did not assign its claim to a third party. Instead, the plaintiff remained the owner of the claim and held all rights of control over the claim. The Court further ruled that the litigation financing was not engaged in for the purpose of continuing a frivolous or unwanted lawsuit.

Charge Injection Technologies, Inc. v. E.I. DuPont de NeMours & Co., C.A. No. 07C-12-134-JRJ (Del. Supr. Ct., New Castle Cty., Mar. 9, 2016)

Delaware Court Recognizes Elimination of Fiduciary Duties

The Delaware Chancery Court dismissed a former limited partner's claim that the general partner failed to act in good faith in connection with a merger transaction involving an affiliate of the general partner. The claimant alleged that the general partner agreed to an unfair merger price and thus breached the contractual requirement in the partnership agreement that the general partner act in good faith.

The partnership agreement eliminated all fiduciary duties and replaced them with a contractual governance scheme. That scheme includes a series of "safe harbors" to address potentially conflicted transactions. The merger was approved by a conflicts committee and a majority of the unaffiliated limited partners. The partnership agreement provides that if the safe harbor requirement is satisfied, then a potentially conflicted transaction will not constitute a breach of the partnership agreement or of any duty stated or implied in law or in equity.

The claimant argued that the conflicts committee itself was conflicted and that such conflict was not adequately disclosed to the limited partners. The Court found that the partnership agreement, by eliminating all fiduciary duties, extinguished the common law duty of disclosure that exists under Delaware law. The only disclosure obligation contained in the partnership agreement is that a summary of the merger agreement be provided to the limited partners in advance of the merger vote. In light of the safe harbor scheme and the explicit elimination of fiduciary duties, the Court ruled that the limited partner approval safe harbor could not be read to require additional disclosures.

Dieckman v. Regency GP LP, C.A. No. 11130-CB (Del. Ch. Ct., Mar. 29, 2016)

Private Equity Funds Found Responsible for Pension Liabilities of Portfolio Company

A federal district court in Massachusetts, on remand from a federal appeals court, ruled that two private equity funds were liable for the pension plan withdrawal liability of one of their bankrupt portfolio companies after finding that each fund was engaged in a "trade or business" and that the funds had formed a "partnership-in-fact" that was a trade or business under common control with their portfolio company.

The case arose after a union-sponsored pension plan sued the portfolio company and the funds seeking to collect the portfolio company's fair share of the pension plan underfunding. Under the Employee Retirement Income Security Act ("ERISA"), pension plan, underfunding liability is imposed on a joint and several basis on the portfolio company and on all "trades or businesses" in a "controlled group" within the portfolio company. The union-sponsored pension plan claimed that each of the funds was a "trade or business." The funds argued that they were passive investors in the portfolio company, rather than a "trade or business" for purposes of ERISA.

In ruling against the funds, the Court's analysis focused upon the funds' active involvement in the management of the portfolio company and their management fee offset arrangement under which the management fee that a fund would otherwise pay its general partner is reduced by the management fee paid by the portfolio company to an affiliate of the general partner. The Court also considered the degree of the investigative and due diligence activities conducted by the funds prior to making their investment in the portfolio company.

Sun Capital Partners III v. New England Teamsters & Trucking Industry Pension Fund, 10-10921-DPW (D. Mass., Mar. 28, 2016)

"Investment-Only" Exemption Under H-S-R Act Challenged by DOJ

The U.S. Department of Justice (the "DOJ") has filed a civil antitrust complaint against two investment funds alleging that the funds improperly relied upon the "investment-only" exemption of the Hart-Scott-Rodino Act of 1976 (the "HSR Act") in acquiring voting shares of two oilfield services companies. The HSR Act requires parties to notify the DOJ and Federal Trade Commission and delay closing mergers, or asset or securities acquisitions valued at or in excess of $78.2 million in order to permit governmental review of the transaction. The HSR Act exempts "passive investments" of less than 10% of the outstanding voting stock. In order to qualify for such exemption, the acquiring party must have "no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer."

The DOJ claimed that the actions and statements of intention of the funds were inconsistent with investment-only intent. In support of its claim, the DOJ relied upon (i) meetings the funds had with both management teams; (ii) lobbying efforts engaged in by the funds to persuade other stockholders to vote in favor of the merger; (iii) the funds advocating specific integration plans and executive compensation strategies; and (iv) the funds seeking operational and strategic changes at the target company. The DOJ also called attention to the funds' website which described the funds' activist approach to investing.

Amendments Proposed to Delaware Appraisal Statute

Amendments to the appraisal provisions contained in the Delaware General Corporate Law have been proposed by the Corporation Law Section of the Delaware Bar Association. Under the proposed amendments, stockholders will not be entitled to exercise appraisal rights if (i) the number of shares for which appraisal is sought is less than or equal to 1% of the outstanding shares, or (ii) value of the consideration for the aggregate number of shares for which appraisal is sought is less than or equal to $1 million. The foregoing exclusions would apply only to shares previously listed on a national securities exchange. The proposed amendments would also permit an issuer to reduce the amount of interest that accrues during the appraisal process by making a cash payment to stockholders seeking appraisal in advance of the court's appraisal determination. These amendments were proposed in response to the increased prevalence of appraisal suits in merger and acquisition transactions.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.