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Corporate Alert: Amendments to General Corporation Law, Proposed Increased Tax on Carried Interests,  Manufacturers Dictate Retail Prices, New Rule on Accounting Standards
July 2007
Authors: Edward B. Stevenson, Irwin A. Kishner

Delaware Approves 2007 Amendments to General Corporation Law

On June 30th, by unanimous vote, the Delaware legislature passed the proposed 2007 amendments to the Delaware General Corporation Law, which include clarifications concerning voting rights in two particular areas: (1) directors' voting power, and (2) shareholders' election of directors.

Section 141(d) allows for disparate endowments of voting power among directors or classes of directors as specified by an entity's certificate of incorporation. The 2007 amendment clarifies that such differentiations in voting power, whether endowing greater or lesser individual power, apply to voting by the board of directors as well as to voting by committee and subcommittees of the board. As is the standard of the DGCL, this default is measured against an entity's certificate of incorporation, which ultimately dictates whether and where such differentiations apply.

Section 216(4) provides that, absent specifications within an entity's certificate of incorporation or bylaws, a plurality vote (and not a majority of the quorum), where one or more classes or series of stock votes as a separate class or series, is required to elect directors. However, this does not alter last year's amendments allowing stockholders to institute bylaws requiring a majority vote in the election of directors.

These amendments will be effective August 1, 2007.

Proposed Increased Tax on Carried Interests

Late last month in the United States House of Representatives, Representatives Sander Levin, Charles Rangel, Barney Frank, and others, introduced H.R. 2834, a bill that would more than double the tax on a carried interest— the profits general managers take in venture capital and other private equity deals.

H.R. 2834 proposes to amend the Internal Revenue Code of 1986 to treat income received by partners for performing investment management services as ordinary income received for the performance of services, virtually ensuring that all managers of investment partnerships (including entities formed as limited liability companies that elect to be taxed as partnerships) who receive a carried interest as compensation would pay tax at ordinary income rates (taxed at 35%) as opposed to lower capital gains rates (taxed at 15%).The bill is intended to affect all investment managers who take a share of the investment fund's profits as compensation in the form of a carried interest, and will apply regardless of the types of assets held by the partnership or the amount of compensation involved.

The legislation would require a publicly traded partnership (such as The Blackstone Group L.P. or Fortress Investment Group LLC, both traded on the New York Stock Exchange), to be treated as a corporation for tax purposes, if more than 10 percent of its income derives from distributions of interest. Senate bill S. 1624, a much narrower bill introduced in the United States Senate, serves this same purpose, targeting publicly traded partnerships by precluding them from taking advantage of capital gains tax treatment if they derive income from services provided by an investment manager.

If these bills, or some variation of them, are enacted, the private equity, venture capital and hedge fund industries will be significantly affected.

Leeway for Manufacturers to Dictate Retail Prices

On June 28, 2007, in Leegin Creative Leather Products, Inc. v. PSKS, Inc., the United States Supreme Court held that vertical agreements between manufacturers and distributors that set minimum resale prices are no longer automatically unlawful. Despite the claims of stare decisis from the respondents and the dissenting judges, the Court overruled a 96-year-old case, Dr. Miles Medical Co. v. John D. Park & Sons Co., which made such vertical agreements a per se or automatic violation of the Sherman Antitrust Act.

Justice Kennedy explained that the Dr. Miles case "was decided not long after enactment of the Sherman Act when the Court had little experience with antitrust analysis," and is no longer consistent with the Court's current views on antitrust law. According to the Court, minimum resale price maintenance possesses a myriad of procompetitve benefits such as facilitating market entry for new companies and brands, improving customer service and increasing promotional efforts by retailers. Allowing manufacturers and distributors to agree on minimum resale prices "can stimulate interbrand competition —the competition among manufacturers selling different brands of the same type of product—by reducing intrabrand competition—the competition among retailers selling the same brand." However, the Court admits that there are also anticompetitve effects, such as potential horizontal cartels or price fixing designed to obtain monopoly profits. However, per se illegality, the Court explains, is not the appropriate solution and can, in fact, be counterproductive. Instead, the Court adopts the "rule of reason" standard, allowing the Courts to apply a case-by-case approach.

SEC Proposes New Rule on Accounting Standards

On July 2, 2007, the Securities and Exchange Commission issued a proposed rule release pertaining to acceptable accounting standards for foreign private company financial statements. In this release, the SEC is proposing to accept from foreign private issuers financial statements prepared in accordance with International Financial Reporting Standards ("IFRS") as published by the International Accounting Standards Board ("IASB") without reconciliation to generally accepted accounting principles ("GAAP") as used in the United States. To implement this proposed change, the SEC seeks to amend Form 20-F and make conforming changes to Regulation S-X to accept financial statements prepared in accordance with the English language version of IFRS without reconciliation to U.S. GAAP when contained in the filings of foreign private issuers with the SEC. Under the proposed changes to Form 20-F and Regulation S-X, an issuer would be required to state "unreservedly and explicitly" that its financial statements comply with IFRS in order to be eligible to omit U.S. GAAP reconciliation.

The SEC has established a 75-day comment period for the proposed rule. If approved, amendments to Form 20-F and Regulation S-X would be effective for reports filed in calendar year 2008.

For more information on these issues or other corporate matters, please contact:

Irwin Kishner at 212.592.1435 or ikishner@herrick.com
Edward Stevenson at 973.274.2025 or estevenson@herrick.com 

Copyright © 2007 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.