United States: Delaware Court Rules On Appraisal Rights And Default Voting Instructions, SEC Settles Charges With PE Fund Adviser Acting As Unregistered Broker And Google Wins Copyright Case Against Oracle

This week's Corporate news roundup includes updates regarding a Delaware court's holding relating to Delaware General Corporation Law Section 262 and appraisal rights in the context of default voting instructions, the SEC's recent settlement with a Maryland-based private equity firm that acted as an unregistered broker and Google's recent federal copyright win against Oracle:


The Delaware Court of Chancery recently held that certain beneficial stockholders were not entitled to exercise appraisal rights in connection with a merger transaction, because they failed to meet the dissenting shareholder requirement of Section 262 of the Delaware General Corporation Law. While the relevant beneficial owners opposed the merger and provided voting instructions consistent with this to the third party nominee that was the registered record-holder of such shares, the record-holder nominee voted the relevant shares in favor of the merger due to a meeting adjournment and generation of a new meeting record [which had the effect of replacing the broker's instructions with the default ("for") instructions]. The Delaware court held that if a corporation shows that a record holder voted its shares in favor of a merger, whether intentionally or not, the plaintiff holder will not be entitled to appraisal rights because the Section 262 requirements will not have been met. For more information on In re Appraisal of Dell Inc., read here.


On June 1, 2016, the SEC announced that a Maryland-based private equity fund advisory firm and its owner had agreed to pay over $3 million to settle charges that they engaged in brokerage activity and charged fees without registering as a broker-dealer and committed other securities law violations. In reaching settlement, the SEC stated that before a firm provides brokerage services and receives compensation in return, it must be properly registered as a broker-dealer. The SEC also stated that private equity fund advisers must manage their funds in accordance with relevant governing documents. The SEC's investigation had found that the firm and owner engaged in conflicted transactions and inadequately disclosed fees and expenses, for example by charging fees to portfolio companies for providing operating partner oversight despite a fund's limited partnership agreement that did not disclose that the firm received such fees (which resulted in a conflict of interest because the firm used fund assets to compensate itself). Of the settlement amount, about $2.34 million constitutes disgorgement (of which about $500,000 will be distributed back to affected clients), with another $284,000 representing interest and another $500,000 in penalties. For more information on the Blackstreet Capital Management settlement, read here.


On May 26, 2016, a federal jury ruled in favor of Google in a six-year old, $8 billion copyright case, finding that Google's use of Oracle-owned Java programming language in Google's Android operating system constituted fair use and thus did not violate copyright law. Oracle had sued Google in August 2010 for using parts of Java without permission in its Android smartphone software. In 2014, a federal appeals court ruled that Oracle could copyright the Java parts. After a Google appeal, and a denial by the U.S. Supreme Court of Google's petition, the case returned to federal district court to determine whether Google's use of Java was covered by rules permitting "fair use" of copyright material. Oracle plans to appeal. For more information, read here.


On May 13, 2016, the SEC issued Compliance and Disclosure Interpretations (C&DIs) relating to its equity crowdfunding rules that went effective May 16, 2016. The C&DIs cover matters such as permitted information dissemination, investment limits, financial statements, advertising and promoter compensation. The SEC clarified that prior to filing its crowdfunding filing (Form C) with the SEC and providing it to the relevant intermediary, the issuer may disseminate information not constituting an offer of securities (e.g., factual business information that does not condition the public mind or arouse public interest). The SEC also clarified that Regulation Crowdfunding investment limits apply to all investors, but for non-natural persons the limits will be based on revenue and net assets as of the most recent fiscal year end. It addressed certain financial statement requirements for recent-formed issuers (who, for example, may provide a balance sheet as of inception date, if the offering is conducted between inception and 120 days after reaching the annual balance sheet date for the first time). The SEC noted that issuers may advertise offering terms (including amount of securities offered, nature and price of the securities, and the offering closing date) under Regulation Crowdfunding, but any advertising that is made other than through intermediary-provided communication channels on the intermediary's platform will be limited to notices that include no more than the information described in Regulation Crowdfunding Rule 204(b) (and video advertising that is Rule 204(b)-compliant is acceptable). It clarified that a third party publication (such as a media article) could constitute a notice that would subject an issuer to the Rule 204 notice limitations if the article advertises the offering terms and the issuer has been directly or indirectly involved in the publication's preparation. Finally, it stated that when an issuer is compensating a third party to promote the offering outside of the intermediary's communication channels, third-party communications must comply with the Rule 204(b) notice requirements. For more information, read here.

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