Corporate Alert April 2011

April 2011

The Herrick Advantage

Energy is a booming but complex investment sector, and Herrick can help you understand how to invest in energy without wasting your energy. On May 19, Herrick will host a "Renewable Energy Investments: Opportunities and Pitfalls for Private Equity Investors" event with a panel of seasoned investors that will offer diverse perspectives and key considerations to private equity investors seeking opportunities in the renewable energy space. Our panelists will discuss some of the distinctions among the various asset classes within the renewable energy space; the concept of creating climate wealth; obstacles to achieving returns; and risks and other factors that impact renewable energy business models.

New York Court Rules E-Mail Correspondence Can Create Binding Contract

A New York State appellate court has ruled that an e-mail under certain circumstances can constitute a writing for purposes of the statute of frauds. The statute of frauds requires that certain contracts be in writing in order to be enforceable. In the case before the court, a real estate broker sued a landlord to recover a commission fee set forth in an unsigned e-mail containing a purportedly fully-negotiated brokerage agreement. The court ruled that an e-mail under which the sending party's name is typed can constitute a writing for purposes of the statute of frauds. The court determined that the e-mail exchange between the real estate broker and the landlord resulted in a "meeting of the minds" given the absence of any evidence that the landlord objected to, protested or rejected the real estate broker's final e-mail that included all of the landlord's proposed revisions to the brokerage agreement. The court made this determination notwithstanding that the landlord did not respond to or acknowledge receipt of the broker's final e-mail.

Newmark & Co. Real Estate Inc. v. 2615 East 17 Street Realty LLC, 80 A.D.3d 476 (1st Dept. Jan. 13, 2011)

Delaware Chancery Court Applies Plain Meaning Standard to Interpret Contract

The Delaware Chancery Court has settled a dispute between a special limited partner and general partner over an expense assumption payment provision contained in a partnership agreement by applying the plain meaning standard. At issue was a default provision involving millions of dollars in expense assumptions that were to be automatically applied if, following good faith negotiations, the special limited partner and general partner could not agree upon an alternative allocation. The court declined to adopt a different interpretation of the provision because it diverged from the partnership agreement's plain meaning despite the special limited partner's claim that the provision "produces an unconscionable and absurd result."

The provision contains an annual expense assumption payment escalator calculated by multiplying 1.05 by the expense assumption payment in effect during the preceding year. Although the intent of the provision was to provide for a 5% increase, the calculation resulted in the increase being equal to 105% of the preceding year's expense assumption payment amount. Thus, as a result of imprecise drafting, the expense assumption payment increased by $50,088,510 rather than $2,385,167.15.

In ruling for the general partner, the court stated that its role is not "to rewrite the contract between sophisticated market participants, allocating the risk of an agreement after the fact, to suit the court's sense of equity or fairness." Further, since the dispute was governed by the express terms of the partnership agreement, the doctrine of good faith and fair dealing was inapplicable.

Great-West Investors LP v. Thomas H. Lee Partners LP, C.A. No. 5508-VCN (Del. Ch. Jan. 14, 2011)

Delaware Chancery Court Shifts Burden of Proof in Applying Entire Fairness Standard to Recapitalization

The Delaware Chancery Court has found the recapitalization of a media production company entirely fair. Faced with the possibility of bankruptcy and unable to service its debt, the company's board of directors (acting through its special committee) approved a revised recapitalization plan proposed by the company's majority stockholder and primary debt holder. The special committee retained independent legal counsel and a financial advisor. The special committee, after engaging in extensive due diligence, determined to negotiate the recapitalization proposal. These negotiations resulted in a revised recapitalization proposal. As part of its review process, the special committee retained a second financial advisor to advise whether the revised recapitalization proposal was fair to the company from a financial point of view.

The court reviewed the recapitalization under the entire fairness standard. Under this standard, both the fairness of the (i) dealings between the majority stockholder and the special committee and (ii) price paid to the minority stockholders are analyzed.

The court shifted the burden of proof to the claimants after determining that the special committee was truly independent, fully informed and possessed of the freedom to negotiate at arm's length.

S. Muoio & Co. LLC v. Hallmark Entertainment Inv. Co., C.A. No 4729-CC (Del. Ch. March 9, 2011)

Delaware Chancery Court Applies Entire Fairness Standard to Reverse Stock Split

The Delaware Chancery Court, in reviewing a reverse stock split effected by a controlling stockholder for the purpose of freezing out the minority stockholders, applied the entire fairness standard. Under the entire fairness standard, both the fairness of the (i) dealings between the controlling stockholder and minority stockholders and (ii) price paid to the minority stockholders are analyzed. The court placed the burden of proving the entire fairness of the reverse stock split upon the controlling stockholder. In support of its decision, the court noted that neither a special committee of the board of directors nor a majority-of-the-minority stockholder approval vote procedural protection was employed in connection with the reverse stock split. The court stated that the less stringent business judgment rule would have applied to the reverse stock split if both procedural protections had been employed.

Reis v. Hazelett Strip-Casting Corp., C.A. No. 5145-VCL (Del. Ch. Feb. 21, 2011)

SEC Settles Another "No Fault" SOX Clawback

The SEC settled an enforcement action in which a CEO agreed to a "clawback" of prior compensation and stock sale profits pursuant to Section 304 of the Sarbanes-Oxley Act. Under Section 304, a CEO or CFO must forfeit incentive-based compensation to the issuer when a financial restatement occurs as a result of misconduct. This settlement represents the second time the SEC has obtained "clawback" relief without any evidence that the CEO in question had personally engaged in any misconduct. The SEC's view is that issuer misconduct by itself is sufficient to support a claim for "clawback" relief.

SEC v. McCarthy, No. 1:11-CV-667-CAP (N.D. Ga. March 3, 2011)

California Court of Appeals Does Not Require "Fiduciary Out" for Extraordinary Transactions

The California Court of Appeals has upheld a well-recognized California corporate law principle that boards of directors of California corporations can lawfully obligate themselves to engage in a merger or other extraordinary transaction without the benefit of "fiduciary out." The case was based on an investment agreement providing for a significant capital infusion into a bank to enable it to meet regulatory requirements. Two shareholders unsuccessfully sought to enjoin the capital infusion on several grounds.

In reviewing the lower court's denial of injunctive relief, the California Court of Appeals ruled that the bank's board of directors did not breach its duties to the shareholders by not making the capital infusion subject to a "fiduciary out." The "fiduciary out" would have enabled the bank to terminate the capital infusion if a more favorable transaction became available. In so ruling, the California Court of Appeals refused to follow the Delaware Supreme Court's 2003 Omnicare decision. In Omnicare, the court split 3 to 2, with the majority holding that the target's board of directors had breached its fiduciary duties by agreeing to the target's acquisition pursuant to an agreement that virtually locked up the acquisition. Over time, the Omnicare decision has become one of the more controversial mergers and acquisitions decisions and has been criticized even by the Delaware judiciary.

Monty v. Leis, No. B225646 (Cal. Ct. App. March 30, 2011)

For more information please contact Irwin A. Kishner at (212) 592-1435 or [email protected] or Daniel A. Etna at (212) 592-1557 or [email protected].

Copyright © 2011 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.