Corporate AlertOctober 2014
The Herrick Advantage
Herrick is proud to have represented a major telecommunications client in obtaining approval for a New York City franchise for the construction of a fiber optic cable loop to provide telecommunications service throughout New York City. The Herrick team was led by Kevin Fullington, co-chair of our Government Relations group, and Herrick corporate partners Irwin Kishner and Dan Etna.
The team worked together to negotiate, draft and secure the approvals, through a public review process, for a franchise that allows our client to install fiber cable city-wide. This important project will significantly enhance the communication capabilities of one of the largest cities in the world.
Delaware Chancery Court Rejects Controlling Stockholder Claim
The Delaware Court of Chancery granted a motion to dismiss a lawsuit challenging a merger. The merger was approved by a majority of the target company's shares held by persons other than the acquirer and its affiliates. The lawsuit alleged that the (i) acquirer breached its duty as a controlling stockholder by causing the target company to engage in a merger and (ii) target company's directors breached their fiduciary duties by approving the merger.
The claimants argued that the acquirer, despite owning less than 1% of the target company's stock, nonetheless was able to exert control through a management agreement under which an affiliate of the acquirer managed the day-to-day operations of the target company. The court, however, found that the management agreement did not preclude the target company's directors from freely deciding whether to approve the merger. As a result of such finding, the court ruled that the business judgment standard of review applied to the merger. The court further ruled that even if a majority of the target company's directors were not independent, the business judgment standard of review still would apply by reason of the stockholder approval of the merger.
In re KKR Fin. Holdings LLC S'holder Litig., C.A. No. 9210-CB (Del. Ch. Ct. Oct. 14, 2014)
Delaware Supreme Court Rules Non-Binding Letter of Intent Provisions Not Transformed by Merger Agreement
The Delaware Supreme Court ruled that an integration clause in a merger agreement providing for the survival of a letter of intent did not transform the non-binding provisions of the letter of intent into contractually-binding provisions. The merger agreement provided for the payment of post-closing payments based on the achievement of performance milestones involving the acquired company's technology. The lawsuit arose after the surviving company determined that the performance milestones could not be achieved.
Under the integration clause of the merger agreement, the letter of intent provisions, rather than being merged into the merger agreement, survived and continued in effect. The letter of intent contained a non-binding provision under which the surviving company would devote sufficient funding toward achievement of the performance milestones. The court, in reversing a lower court jury verdict, ruled that the fact the letter of intent survived the merger was "not transformational" and in no way served to convert the non-binding provisions into contractually-binding obligations.
ev3, Inc. v. Lesh, No. 515m 2013 (Del. Sup. Ct. Sept. 30, 2014)
Delaware Chancery Court Applies Business Judgment Rule to Decisions of Interested Directors of Insolvent Company
The Delaware Court of Chancery applied the business judgment standard of review to high-risk investment strategies approved by the directors of an insolvent company, a majority of whom were found to be interested. The creditors of the insolvent company claimed that the high-risk investment strategies were approved by the directors in favor of the company's sole stockholder to the detriment of the creditors. The court ruled that the actions taken by the directors should be analyzed under the business judgment standard of review provided that the directors could justify their decisions as being consistent with seeking to maximize the value of the company as a whole. In so ruling, the court noted that, under a prior Delaware Supreme Court decision, directors of an insolvent company owe no special duty to the creditors of an insolvent company.
Quadrant Structured Products Co., Ltd. v. Vertin, C.A. No. 6990 (Del. Ch. Ct. Oct. 1, 2014)
Accredited Investor Definition Questioned
The SEC's Investor Advisory Committee (the "IAC") has recommended that the SEC should revise the definition of accredited investor. This definition is most commonly used to determine the suitability of an individual that desires to invest in an unregistered, private placement transaction. Under the current definition, private placement purchases are limited to individuals who earn at least $200,000 annually ($300,000 for a married couple) or have a net worth of $1 million, excluding their primary residence.
The IAC is of the view that relying on income and net worth standards "oversimplifies the factors that determine whether an individual truly has the wealth and liquidity to shoulder the potential risks of private offerings." Instead, the IAC recommended that the SEC adopt a revised definition that takes into account an individual's education, professional credentials (such as a chartered financial analyst designation or Series 7 license) and investment experience. The IAC further recommended that if the SEC decides to maintain income and net worth standards, the SEC should limit participation in private placements to a certain percentage of the investor's income or assets.
Under the Dodd-Frank financial reform law, the SEC is required to review the accredited investor definition every four years. This definition is in the process of undergoing a review for the first time. The IAC was established under Dodd-Frank to make recommendations to the SEC. Although the SEC is not obligated to adopt the IAC's recommendations, SEC Chairwoman Mary Jo White commented that the SEC would consider the IAC's recommendations and undertake a "deep-dive study" into the accredited investor definition.
Recommendation of the Investor Advisory Committee: Accredited Investor Definition (Oct. 9, 2014)
Single-Bidder Sale Strategy Approved by Illinois Court Applying Delaware Law
The Circuit Court of Cook County, Illinois ruled that the board of directors of a Delaware corporation acted properly in utilizing a single-bidder process in connection with an all cash merger transaction which was approved by over 99% of the target company's shares that voted thereon. The merger price represented a 63% premium for the target company's shares. Notwithstanding the merger price premium, the claimants argued that the target company's directors breached their fiduciary Revlon duties. Revlon duties, which apply to corporate change of control/company sale transactions, require directors to undertake reasonable efforts to secure the best value reasonably available to the stockholders.
The court ruled that an auction process was not required in order for the target company's directors to fulfill their Revlon duties. In this regard, the court noted that the acquiring company was identified by the target company's financial advisor as the company most likely to acquire the target company. The court further noted that the target company's directors had fully and favorably negotiated the merger price. The court further ruled that the approval of the merger by the stockholders provided a separate basis for dismissal of the claim.
Keating v. Motorola Mobility Holdings, Inc., No. 11-CH-28854 (Ill. Cir. Ct. Ch. Div. Oct. 2, 2014)
Delaware Federal Court Rules that Private Equity Fund Not Liable For WARN Act Liability of Portfolio Company
The United States District Court for the District of Delaware held that a private equity fund could not be held responsible for its portfolio company's alleged violation of the federal and New Jersey WARN Acts. These acts require that employees receive advance notice of business closings or mass layoffs. The court determined that the private equity fund and its portfolio company could not be viewed as a "single employer" for purposes of the violations under the WARN Acts. The court reached its determination after applying a five-factor test developed by the Department of Labor. The five factors covered by the test are (i) common ownership, (ii) common directors and officers, (iii) de facto exercise of control, (iv) unity of personnel policies and (v) dependency of operations.
The private equity fund did not dispute that the first two factors were satisfied. As to the third factor, de facto exercise of control, the court focused on whether the private equity fund specifically directed the alleged violations of the WARN Acts. The court found that the private equity fund had not specifically directed such violations. With respect to the fourth factor, unity of personnel policies, the court did not find that the private equity fund and portfolio company had a centralized human resources system or other indicia of unity of personnel policies. As to the fifth factor, dependency of operations, the court found there was no evidence of sufficient day-to-day involvement by the private equity fund in the portfolio company's operations to create a dependency of operations. The failure to satisfy the foregoing three factors was sufficient to weigh against a finding of liability on the part of the private equity fund.
Czyzewski v. Sun Capital Partners, Inc. (In re Jevic Holding Corp.), No. 13-1127 (U.S. Dist. Ct. of Del. Sept. 29, 2014)
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]
© 2014 Herrick, Feinstein LLP. Corporate 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.