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Corporate Alert: NASD Rule Governs Fairness Opinions, N.J. Helps Small and Mid-Sized Technology and Biotechnology Companies Raise Capital, SEC Simplifies Disclosure and Reporting Requirements, WARN Act
November 2007
Authors: Edward B. Stevenson, Irwin A. Kishner

New NASD Rule Governs Fairness Opinions

As of December 8, 2007, the NASD will regulate when and how fairness opinions are issued. New NASD Rule 2290 will require registered broker-dealers to provide certain disclosures and follow specific procedures when providing fairness opinions in change of control transactions, replacing a void in the previous regulatory framework..

A fairness opinion addresses, from a financial perspective, the fairness of a transaction's consideration. While not currently required by statute or regulation, company directors commonly use fairness opinions to satisfy their fiduciary duties under case law to act with due care and in an informed manner in change of control transactions. On occasion they also provide fairness opinions to a company's shareholders as a part of the proxy materials related to such transactions.

Rule 2290 regulates what information is required to be disclosed in a fairness opinion. The rule also requires any NASD registered broker-dealer issuing a fairness opinion to have written procedures in place relating to its issuance of fairness opinions, including procedures for when and how the firm uses fairness committees in its approval process.

Rule 2290's parameters are complex, and Herrick's attorneys can help you navigate and implement the new regulations.

N.J. Helps Small and Mid-Sized Technology and Biotechnology Companies Raise Capital

The State of New Jersey approved 92 technology and biotechnology companies to share $60 million through the state's Technology Business Tax Certificate Transfer Program.

The program enables eligible companies with fewer than 225 employees, at least 75 percent of whom must be based in New Jersey, to sell their net operating losses and/or research and development tax credits to profitable corporate entities. Proceeds from these sales must be reinvested in the seller's business and can be used for business expenses, such as purchasing equipment or expanding facilities, or for working capital to cover operational expenses. Receiving companies must commit to remain in New Jersey for the year immediately following approval.

Company applications must be reviewed and approved by the State's Division of Taxation, Commission on Science and Technology and Economic Development Agency. Applications for the next round of approvals, which are due June 30, 2008, are available at

SEC Simplifies Disclosure and Reporting Requirements

On November 15, 2007, the Securities and Exchange Commission adopted amendments to Rules 144 and Rule 145 to simplify disclosure and reporting requirements for smaller public companies.

The Rule 144 amendments shorten the holding periods for restricted securities of public companies from one year to six months. The amendments intend to simplify Rule 144 compliance for non-affiliates by permitting non-affiliates to freely resell restricted securities after a six-month holding period, subject to Rule 144(c), and by allowing non-affiliates to freely resell restricted securities after satisfying a 12-month holding period. Additional changes revise the manner of sale requirements for equity securities and eliminate them for debt securities. The amendments also relax the volume limitations for debt securities and raise the reporting threshold for Form 144 filings from 500 shares or $10,000 to 5,000 shares or $50,000, among other changes.

The Rule 145 amendments eliminate the presumptive underwriter provision, other than for transactions involving blank check or shell companies, and revise the resale provisions of Rule 145(d).

The SEC adopted the above amendments in connection with two other measures intended to improve capital-raising, reporting and disclosure requirements for smaller public companies. The amendments become effective sixty days after their publication in the Federal Register.

Can a Lender Be an "Employer" Under the WARN Act?

In Coppola v. Bear Stearns & Co., Inc., the United States Court of Appeals for the Second Circuit found that a lender exerting control over a borrower to stabilize a failing business or facilitate an impending sale is not an "employer" under the Worker Adjustment and Retraining Notification Act.

National Finance Corporation provided mortgages and home equity loans to residential customers, relying on a credit line from Bear Stearns & Co., Inc. However, in early 1999, NFC misappropriated funds belonging to Bear Stearns. As a result, Bear Stearns implemented a workout strategy that allowed NFC to remain in business while trying to sell the company to repay Bear Stearns out of the proceeds. Despite these efforts, NFC continued to struggle financially, and closed business operations on December 22, 1999. NFC notified its employees of the closure on December 23, 1999.

NFC employees filed a class-action lawsuit against Bear Stearns, alleging that Bear Stearns "effectively controlled" NFC and terminated the employees without providing the 60 days advance written notice before a plant closing or mass layoff required under the WARN Act. Bear Stearns argued that it was not the plaintiffs' employer. The District Court for the Northern District of New York agreed, and the plaintiffs appealed to the Second Circuit.

The Second Circuit affirmed summary judgment for Bear Stearns, holding that the critical question in determining whether a creditor qualifies as an "employer" is "whether a creditor is exercising control over the debtor beyond that necessary to recoup some or all of what is owed and is operating the debtor as the de facto owner of an ongoing business." The court also stated that a creditor may exercise "very substantial" control "in an effort to stabilize a debtor and/or seek a buyer so as to recover some or all of its loan or security without incurring WARN liability." However, a creditor risks incurring liability "[w]hen the exercise of control goes beyond that reasonably related to such a purpose and amounts to the operation of the debtor as an ongoing business—such as when there is no specific debt-protection scenario in mind."

The lesson to creditors is that to avoid potential liability under the WARN Act, they should thoroughly document their relationship with the borrower, and avoid actions that a court could interpret as operating an ongoing business. To an extent, the decision does give creditors discretion to take actions to protect their investment in a struggling borrower or facilitate the purchase of the borrower's operations--but this discretion has limits.

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

Irwin Kishner at 212.592.1435 or
Edward Stevenson at 973.274.2025 or

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 or counsel or as an opinion of the firm.