Corporate Alert

February 2016

The Herrick Advantage

Upcoming Speaking Engagement:

Herrick Sports Law Group co-chair Daniel Etna will be speaking at a seminar organized by the Union Internationale des Avocats (UIA) Sports Law Commission in Miami Beach. The program will bring together leading industry professionals to address the latest trends in sports law in Europe and the United States. Daniel will participate on a panel discussing media, sponsorships and protection of rights. John's panel will address cross-border sports issues. For more information about the conference, click here.

Corporate Department Deal News:

Herrick is pleased to have represented The European Fine Art Foundation (TEFAF), the owner and operator of the world's premier art fair, TEFAF Maastricht, in a joint venture with New York based Artvest Partners. We worked closely on this matter with TEFAF's Dutch attorney, Maarten P. H. Sanders of Bergh Stoop & Sanders N.V. The partnership, which was widely reported in the news, including The New York Times, will launch two TEFAF-branded art fairs at the Park Avenue Armory—in an unprecedented showcase for prominent art dealers from around the world. We also advised TEFAF in negotiating a license agreement for the rebranding initiative and the partnership in negotiating its arrangement with the Park Avenue Armory. Herrick's deal team included Stephen Brodie, Howard Spiegler, Barry Werbin and Jason Kleinman.

New York Extends Reach of Shareholder Liability for Unpaid Compensation Statute
The New York Business Corporation Law has been amended to make the top ten shareholders (determined on the basis of the fair value of their respective beneficial interests) of corporations incorporated outside of New York jointly and severally liable for the unpaid compensation amounts of employees that perform services in New York. As a result, employees can elect to seek recovery from only one, a few or all of the top ten shareholders. These amounts include (i) salaries, overtime, vacation, holiday and severance pay, (ii) employer contributions to or payments of insurance or welfare benefits, (iii) employer contributions to pension and annuity funds and (iv) other amounts due and payable for services rendered by the employees.

The amendment does not cover limited liability companies formed outside of New York. Prior to the amendment, only the top ten shareholders of corporations incorporated in New York and members of limited liability companies formed in New York faced joint and several personal liability for the unpaid compensation of employees.

The liability for unpaid compensation exists regardless of whether the shareholders or members play any role in the management of the corporation or limited liability company.

Section 630 of New York Business Corporation Law

Disclosure-Only Settlements Viewed Unfavorably in Delaware
The Delaware Chancery Court has rejected another disclosure-only settlement in connection with a class action brought by stockholders challenging an acquisition transaction. The claimants alleged that (i) the acquisition of the target company was made on an undervalued basis and (ii) the target company's board of directors disseminated materially false and misleading disclosure to the target company's stockholders. A proposed settlement of the class action was eventually reached. Under the proposed settlement, the target company made supplemental financial disclosures in exchange for a release of all claims (including unknown claims) pertaining to the acquisition transaction.

In rejecting the proposed settlement, the Delaware Chancery Court ruled that the supplemental financial disclosures were extraneous and immaterial. The court stated that it will be "increasingly vigilant" in scrutinizing future disclosure-only settlements; settlements which historically have been met with favor by Delaware courts. The court further stated that approval of future disclosure-only settlements should be expected only in situations where the additional disclosures obtained are "plainly material" and the release is limited to cover only disclosure and fiduciary duty claims concerning the sale process. The Delaware Chancery Court found the prior practice of the Delaware courts has provided marginal value to stockholders and instead benefitted the class action lawsuit litigators through the award of attorneys' fees.

In re Trulia, Inc. Stockholders Litig., C.A. No. 10020-CB (Del. Ch. Ct. Jan. 22, 2016)

Delaware Chancery Court Expands Transactions Subject to Entire Fairness Standard
The Delaware Chancery Court ruled that transactions between a corporation and an entity affiliated with a controlling stockholder will be reviewed under the heightened entire fairness standard in the absence of certain procedural safeguards being implemented. The claim arose in connection with consulting agreements under which an entity affiliated with the controlling stockholder received significant compensation in return for nominal services. The court applied the heightened entire fairness standard of review after finding that the consulting agreements were neither approved by (i) a committee of independent directors nor (ii) a fully informed, non-coerced vote of the unaffiliated stockholders. In so holding, the court recognized that the application of the entire fairness standard had historically been limited to going-private transactions.

In re EZCORP Inc. Consulting Agreement Derivative Litig., C.A. No. 9962-VCL (De. Ch. Ct. Jan. 25, 2016)

U.S. Court of Appeals for Second Circuit Dismisses Failure-of-Oversight Claims Against Directors
The U.S. Court of Appeals for the Second Circuit affirmed the dismissal of claims brought against the directors of JPMorgan Chase for failure to implement internal controls adequate to detect Bernard Madoff's Ponzi scheme. The claimants charged that while the directors were exculpated from liability under the bank's charter for breach of the duty of care, they remained liable for breach of the duty of loyalty. The court, applying Delaware case law, ruled that in order for the claimants to prevail a showing that the directors "utterly failed to implement any reporting or information system" was required.

Central Laborers v. Dimon, No. 14-4516 (2d Cir. Jan. 6, 2016)

Delaware Chancery Court Allows Partnership Preferential Transfer Claim to Proceed
The Delaware Chancery Court refused to dismiss a claim brought by certain partners in a partnership formed to acquire shares of Facebook stock before its IPO. The partnership agreement gave each of the partners an equity stake in the partnership represented by Units. This agreement further provided that any distributions would be made to the partners in proportion to their respective percentage interests (defined as the number of Units held by each partner divided by the number of Units outstanding). Notwithstanding the foregoing, the general partner was found to have entered into side letters with certain partners under which they received one Facebook share for each of their Units, without regard to their actual percentage interest.

The court found the side letters to be unenforceable on two grounds. First, the integration clause contained in a subscription agreement entered into after the side letters were executed provided that all prior understandings and agreements with respect to the Facebook shares were superseded by such agreement. Second, the court found that the general partner did not have the authority to grant the Facebook share distribution right contained in the side letters. Such a right was in direct contravention of the partnership agreement. The court ruled that the general partner could not use the side letters to amend the partnership agreement unilaterally.

ESG Capital Partners II, LP v. Passport Special Opportunities Master Fund, L.P., C.A. No. 11053-VCL (Del. Ch. Ct. Dec. 16, 2015)

Delaware Chancery Court Requires Statutory Formalities for Stockholder Ratification to Be Observed
The Delaware Chancery Court ruled that a controlling stockholder failed to validly ratify non-employee director compensation. The controlling stockholder was found to have approved such compensation in a deposition and affidavit. The court held that in order for the ratification of the non-employee director compensation to be valid, such ratification must be effected formally through a vote at a stockholders' meeting or by written consent in accordance with Section 228 of the Delaware General Corporation Law.

Espinoza v. Zuckerberg, C. A. No. 9745-CB (Del. Ch. Ct. Oct. 28, 2015)

FTC Raises Hart-Scott-Rodino Act Thresholds
The Federal Trade Commission (the "FTC") announced revised Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act") jurisdictional thresholds. The HSR Act requires parties to transactions meeting certain size and other tests, to file premerger notification forms with both the FTC and Department of Justice Antitrust Division and observe a mandatory waiting period prior to closing. The HSR Act requires the FTC to revise the thresholds annually based on changes in the gross national product. The effective date for the new thresholds is February 25, 2016.

Under the revisions, a notification must generally be filed under the HSR Act when a buyer will hold voting securities or assets valued in excess of $78.2 million as a result of the transaction, so long as the respective parties have in excess of $15.6 million and $156.3 million in either net annual sales or total assets. Acquisitions valued above $312.6 million require notification regardless of the size of the parties involved, unless an exemption is available.

The filing fee schedule under the HSR Act is:

(i) $45,000 for transactions valued in excess of $78.2 million, but less than $156.3 million,

(ii) $125,000 for transactions valued at $156.3 million or more, but less than $781.5 million, and (iii) $280,000 for transactions valued at $781.5 million or more.

FTC News Release - FTC Announces New Clayton Act Monetary Thresholds for 2016 (Jan. 21, 2016)

For more information on the issues in this alert, or corporate matters generally, please contact:

Daniel Etna at +1 212 592 1557 or [email protected]

© 2016 Herrick, Feinstein LLP. This alert is published by Herrick, Feinstein LLP for information purposes only. Nothing contained herein is intended to serve as legal advice or counsel or as an opinion of the firm.