Corporate AlertJune 2014
The Herrick Advantage
At the podium…
Earlier this month, Herrick hosted a conversation with John Sculley, former Apple CEO, and award-winning documentary photographer, Doug Menuez. Our two guests provided an insider's view of Silicon Valley in the 1980s and 90s, and lent insight into Mr. Sculley's relationship with Steve Jobs. The conversation was sponsored by Harvard Business School Club of New York and moderated by Bill Murphy Jr., journalist and author of Breakthrough Entrepreneurship and The Intelligent Entrepreneur.
Corporate partner Richard Morris led a panel of private equity professionals in a discussion about alternative asset investments in Europe. Panelists addressed a range of topics including raising money in Europe, accessing the best deals within the new EU regulations and how to reach global investors. Herrick partnered with Matthew Hudson, founder of London law firm, MJ Hudson, and author of Funds: Private Equity, Hedge and All Core Structure on the event.
Contracts Under Seal and Delaware Law
A Delaware Court of Chancery decision can be expected to result in greater scrutiny of the survival provisions contained in agreements governing corporate transactions. Survival periods establish the time periods during which claims may be brought for breaches of representations and warranties. The court ruled that notwithstanding any contractually negotiated survival period contained in the transaction agreement, the "ordinarily applicable statute of limitations governs the time period in which actions for breach can be brought." The court further ruled that the statute of limitations period may be negotiated to cover a shorter, but not longer, period.
Statutes of limitations for breach of contract claims are not uniform throughout the United States. Delaware has a three-year statute of limitation, while in New York the statute of limitation is six years. For transactions governed by Delaware law, the statute of limitations for breach of contract claims can be extended for up to a maximum period of 20 years through the use of a contract under seal. Under this approach, the contracting parties add the corporate seal or the word "Seal" under or next to the signature lines of the transaction agreement. The recitals of the transaction agreement should specifically reference that the parties intend to enter into contract under seal with a longer statute of limitations. Further, the testimonium clause on the signature page of the transaction agreement should reference that such agreement is a contract under seal.
ENI Hldgs., LLC v. KBR Group Hldgs., LLC, C.A. No. 8075-VCG (Del. Ch. Ct. Nov. 27, 2013)
Delaware Supreme Court Upholds Facial Validity of "Fee-Shifting" By-Laws
The Delaware Supreme Court upheld the facial validity of a "fee-shifting" by-law requiring an unsuccessful claimant in intracorporate litigation to reimburse the corporation for its litigation expenses. The case involved ATP Tour, Inc. ("ATP"), an international tennis federation and operator of a professional tennis tournament. ATP is a Delaware non-stock corporation (rather than the more common for profit Delaware corporation).
After two of ATP's members unsuccessfully brought suit against ATP in federal court, ATP invoked its "fee-shifting" by-law to recover its litigations expenses. The federal court certified the issue as to the enforceability of the "fee-shifting" by-law to the Delaware Supreme Court. The Court, while ruling in favor of ATP, stressed that the enforceability of a "fee-shifting" by-law "depends on the manner in which it was adopted and the circumstances under which it was invoked." The court further ruled that "fee-shifting" by-laws that "may otherwise be facially valid will not be enforced if adopted or used for an inequitable purpose."
ATP Tour, Inc. v. Deutscher Tennis Bund, No. 534, 2013 (Del. Sup. Ct. May 8, 2014)
Delaware Chancery Court Refuses to Dismiss Going-Private Transaction Claim Against 48% Stockholder and Majority Debt Holder
The Delaware Chancery Court refused to dismiss a stockholder's challenge to a going-private transaction. The going-private transaction was effected by a controlling stockholder owning 48% of the company's equity and 82% of the company's debt. The controlling stockholder, however, did not have any representatives on the company's board of directors. The claimant alleged that the going-private transaction was unfair to the minority stockholders. In finding for the claimant, the court ruled that the controlling stockholder's debt and equity ownership was sufficient to support a claim that the controlling stockholder owed fiduciary duties to the minority stockholders. The court further ruled that the claimant's allegation that the fairness opinion relied upon by the company's board of directors in approving the going-private transaction was based upon an unreasonable discount rate was sufficient to support a claim that the price offered in the going-private transaction was not entirely fair.
Hamilton Partners, L.P. v. Highland Capital Mgmt., L.P., C.A. 6547-VCN (Del. Ch. Ct. May 7, 2014)
Delaware Chancery Court Dismisses Breach of Fiduciary Duty Claim Based on Failure to Obtain Fairness Opinion
The Delaware Chancery Court dismissed stockholders' claim that the board of directors acted in bad faith by failing to obtain a fairness opinion in connection with a merger transaction. As a result of the company's charter containing a provision exculpating the directors for breaches of the duty of care (as provided for in Section 102(b)(7) of the Delaware General Corporation Law), the stockholders were required to allege facts to support a finding that the directors acted in bad faith in approving the merger transaction. The directors ultimately determined not to pursue the fairness opinion for cost reasons. The Court, while noting that the directors "did not conduct a perfect sales process," nonetheless found that the directors did not "utterly fail to undertake any action to obtain the best price for stockholders." Relevant actions taken by the directors included (i) consultation with legal counsel; (ii) engagement of an investment bank to assist in shopping the company and provide an informal recommendation as to the adequacy of the merger consideration; (iii) evaluation of other offers; and (iv) consideration of whether to seek a fairness opinion.
The New York Court of Appeals ruled that a "no-action" clause contained in a trust indenture governed by New York law did not bar a security holder's claims based on the issuer's obligations with respect to credit default swaps. A "no-action" clause typically requires a security holder's claim to be pursued through the indenture trustee following receipt of authorization from the holders of at least a majority of the indebtedness outstanding under the trust indenture. The language in the "no-action" clause before the court was limited to security holder's claims based "upon or under or with respect to" the trust indenture. The court determined that the absence of any reference in the "no-action" clause to the securities subject to the trust indenture limited such clause's application only to contractual claims arising under the trust indenture. Accordingly, the "no-action" clause was found not to preclude security holders' common law and statutory claims relating to the securities covered by the trust indenture.
A United States appeals court affirmed the dismissal of a lawsuit challenging a public company's shareholder vote that rendered excess executive compensation tax deductible. Under Section 162(m) of the Internal Revenue Code, a company may deduct an executive's compensation in excess of $1 million if (i) an independent committee of the company's directors approves the compensation on the basis of objective performance standards and (ii) the compensation is approved by a majority vote in a separate shareholder vote before the compensation is paid.
As permitted under Delaware law, the public company had outstanding two classes of common of which only one class had voting rights. The excess executive compensation was approved by a majority of the shares of common stock having voting rights. The claimant argued that in order for such compensation to be tax deductible, Section 162(m) required approval by a majority of the voting and nonvoting shares of common stock. The court, in finding for the public company, ruled that Section 162(m) does not confer voting rights on shareholders not authorized to vote or affect long-settled Delaware corporation law that permits companies to issue shares of stock without voting rights.
Freedman v. Redstone, No. 13-3372 (U.S. Third Cir. Ct. of App. May 30, 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.