Corporate AlertFebruary 2014 –
Herrick is pleased to have represented Cardax Pharma, Inc., in its successful reverse merger with OTCBB-traded Koffee Korner Inc. now trading as "CDXI". Cardax is a development stage company that is focusing first on developing products utilizing astaxanthin, a naturally occurring compound demonstrated to reduce inflammation, at its source, without the harmful side effects of current anti-inflammatory treatments such as steroids and NSAIDs. The transaction closed on February 7, 2014.
The Herrick deal team that advised Cardax was led by partner Richard M. Morris, and included partner Louis Tuchman along with associate Liliana Chang.
"We turned to Herrick's Corporate Department because of their practical, business-minded approach for middle-market companies," said David G. Watumull, President and Chief Executive Officer of Cardax. "They provided us with efficient solutions that helped us successfully reach our goals of raising capital and going public through this alternative IPO structure" said Nicholas Mitsakos, Executive Chairman of Cardax.
Empire State Building Buyout Provision Ruled Legal by New York State Appeals Court
A New York State appeals court ruled that a buyout provision covering approximately 3,000 investors in the Empire State Building was legal. In order to gain support for the building operator's plan to take the Empire State Building public, the building operator stated that it would exercise a clause contained in the limited liability company participation agreements under which the investors were bound permitting the participation shares of investors opposing the plan to be bought out at $100 per share, a fraction of the $300,000-plus that the each participation share was estimated to be worth in the public offering. The investors opposing the plan claimed that the buyout provision violated Section 1002 of the New York Limited Liability Company Law which affords dissenting investors a statutorily guaranteed right to receive "fair value" for their interests. In upholding the lower court determination, the court ruled that the buyout provision did not violate the New York Limited Liability Company Law since the investors held participations in, rather than direct membership interests in the limited liability company.
In re Empire State Realty Trust, Inc. Litig., 2014 Slip Op. 01265 (N.Y. App. Div., 1st Dept., Feb. 25, 2014)
Delaware Supreme Court Holds Minority Stockholder Has No Put Right
The Delaware Supreme Court upheld a Delaware Court of Chancery decision which ruled that a minority stockholder in a closely-held corporation did not have the right to a non-conflicted board of directors' decision as to whether her shares should be repurchased by the corporation. The minority stockholder was party to a stockholders agreement which provided that the corporation may repurchase shares that have been approved either (i) by a majority of the board of directors or (ii) in writing by the holders of at least 70% of the corporation's stock. Notwithstanding the foregoing approval requirement, the minority stockholder claimed that she purchased her shares on an alleged oral promise by the corporation's CEO that after ten years, she would have the right to sell the shares to the corporation for full value.
Following the expiration of the ten-year period, the minority stockholder sought to have her shares repurchased by the corporation for full value. The board of directors countered by offering to purchase the shares at a 52% discount from their net asset value. Upon reaching an impasse with the board of directors, the minority stockholder filed suit claiming that the directors owed a fiduciary duty to consider and negotiate, free of any conflicts, a repurchase of her shares by the corporation.
The Delaware Supreme Court ruled that under common law, the directors of a closely-held corporation have no fiduciary duty to cause the corporation to repurchase the shares of a minority stockholder. In so ruling, the court stated that since the minority stockholder had no inherent right to sell her shares to the corporation at full value, she should have sought contractual protections affording her such sale right.
Blaustein v. Lord Baltimore Cap. Corp., No. 272, 2013 (Del. Sup. Ct. Jan. 21, 2014)
Delaware Chancery Court Dismisses Breach of Fiduciary Duty Claims Pertaining to Sale of Company
The Delaware Chancery Court dismissed a class action lawsuit arising out of alleged breaches of fiduciary duties by a target company's board of directors and the purchaser of the target company. The claimants unsuccessfully argued that the board of directors breached its fiduciary duty by conducting an abbreviated market check over a two-week period spanning the 2010 holiday season that was limited to 10 strategic buyers. The claimants also argued that the board of directors further breached its fiduciary duty by continuing to negotiate with the purchaser despite improvements in the target company's financial performance. With respect to the purchaser, the claimants argued that the purchaser had aided and abetted the board of directors' alleged breach of fiduciary duty by pressuring the board of directors to conduct a limited market check.
The court found that the board of directors, despite conducting a limited market check, did engage in extensive negotiations with the purchaser. Further, the purchaser increased its offer price for the target company following the target company's announcement of its improved financial results. The court also found that the purchaser's act of sending a director an e-mail "pushing" the director to complete the target company acquisition did not rise to the level of placing undue pressure upon the board of directors.
In re Answers Corp. S'holders Litig., C.A. 6170-VCN, slip op. (Del. Ch. Ct. Feb. 3, 2014)
Delaware Chancery Court Refuses to Add Non-Competition Covenant to Operating Agreement
The Delaware Chancery Court dismissed an unlawful competition complaint filed against the former member of a limited liability company. The limited liability company owned and operated a specialty Italian grocery store. Following his withdrawal from the limited liability company, the former member opened a competing business on the same block. Prior to his withdrawal, the former member purportedly mentioned on several occasions that he planned to establish a new business in another state.
The claimants unsuccessfully argued that the former member by failing to disclose his true intentions had breached the limited liability company's operating agreement. The court dismissed the claim after finding that the operating agreement provided each member with a right of withdrawal and lacked any sort of non-competition provision (or any other provision limiting the conduct of a former member). The court stated that it was unwilling to enable the claimants to achieve a contractual result -- restraint on post-withdrawal competition -- not contained in the limited liability company's operating agreement.
Touch of Italy Salumeria & Pasticceria, LLC v. Bascio, Civ. Action No. 8602-VCG (Del Ch. Ct. Jan. 13, 2014)
FTC Raises Hart-Scott-Rodino Act Thresholds
The Federal Trade Commission (the "FTC") recently announced revisions to the jurisdictional thresholds for the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act"). 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 new thresholds apply to any transaction closing on or after February 24, 2014.
Under the revisions, the size of transaction threshold has been increased from $70.9 million to $75.9 million. As a result, the HSR Act requirements will now apply to acquisitions resulting in the acquiring person holding assets and/or voting securities of the acquired person valued in excess of $75.9 million. For transactions valued between $75.9 million and $303.4 million (up from $283.6 million), the size-of-the-person test will continue to apply. This test will now make the transaction reportable only where one party has sales or assets of at least $151.7 million. All transactions valued in excess of $303.4 million are reportable regardless of the size of the parties.
The filing fee schedule under the HSR Act is (i) $45,000 for transactions valued in excess of $75.9 million, but less than $151.7 million, (ii) $125,000 for transactions valued at $151.7 million or more, but less than $758.6 million and (iii) $280,000 for transactions valued at $758.6 million or more.
FTC News Release (Jan. 17, 2014)
SOX Whistleblower Protections Don't Extend to Foreign Laws
The U.S. Fifth Circuit Court of Appeals affirmed the Department of Labor's Administrative Review Board's dismissal of a discharged employee's claim that he was passed over for pay raises and eventually terminated because he reported an alleged accounting fraud. The discharged employee brought his claim under Section 806 of the Sarbanes-Oxley Act. Section 806 creates a private cause of action for employees of publicly-traded companies who are retaliated against for engaging in protected activities such as providing information pertaining to fraud in the work place. The Fifth Circuit held that because the information the discharged employee reported concerned an alleged violation of Columbian, rather than United States law, he failed to show that he engaged in activity protected by Section 806.
Villanueva v. Dept. of Labor, No. 12-60122 (U.S. Fifth Cir. Ct. of App. Feb. 12, 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]
Copyright © 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.