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Corporate Quick Hit: Commission salesmen, Internal controls, Material adverse effect clauses, Internal projections, Investors' directors,Attorney-client privilege, Foreign companies/U.S. accounting, Electronic shareholder forums, Mutual funds
December 2007
Authors: Irwin A. Kishner, Daniel A. Etna

Commission salesmen required to enter into written agreements

In October 2007, the New York State Department of Labor extended the New York Labor Law to include commission salesmen. Previously, the Labor Law required sales representatives, defined as independent contractors who solicit orders in New York state, to enter into written agreements with individuals or businesses using their services. That definition now includes commission salesmen who are employees, whose earnings are based in whole or in part on commissions and whose principal activity is not of a supervisory, managerial, executive or administrative nature. The agreement must be signed by both parties and include a description of how wages, salary, drawing account, commissions and all other monies earned and payable are calculated; provisions for payment upon termination; and, where the writing provides for a recoverable draw, the frequency of reconciliation.

Small companies get an extra year to procure audit on internal controls.

The Chairman of the Securities and Exchange Commission recently announced that the SEC is planning to delay for an additional year the requirement that companies with market capitalization of less than $75 million comply with Section 404(b) of the Sarbanes Oxley Act. Section 404(b) requires companies to provide auditor attestation of management's assessment of a company's internal controls. Without this extension, a company with market capitalization below $75 million would have been required to provide the auditor attestation for fiscal years ending after December 15, 2008. With the extension, that year changes to 2009. The SEC still needs to adopt the extension, which it is expected to do as early as January 2008, either by a full SEC vote or by staff action. We will keep you posted.

Pay attention to material adverse effect clauses

Recent efforts by some private equity groups to walk away from previously negotiated acquisitions illustrate the importance of drafting a well-crafted material adverse effect clause – a clause that permits participants in the transaction to walk away if business conditions have deteriorated. In April 2007, J.C. Flowers and a consortium of national banks signed a merger agreement with student lender Sallie Mae. As the credit crisis deepened and Congress considered a legislative change to the student loan industry, J.C. Flowers invoked the merger agreement's material adverse effect clause, seeking to walk away from the deal (and thus escape a potential

$900 million dollar termination fee). The issue as to whether this clause was properly invoked is now before the Delaware Court of Chancery.

Delaware court refuses to require disclosure of internal projections

The Delaware Court of Chancery recently rejected a shareholder group's attempt to enjoin a merger vote on the basis of allegedly insufficient disclosure in the proxy statement. The shareholders based their injunction request on the financial advisor's failure to disclose in the proxy statement the internal financial projections it used in preparing its fairness opinion. They argued that management projections are always material and must be disclosed. In rejecting the claim, the court held that there is no per se rule in Delaware requiring the disclosure of management projections in a merger proxy.

In re CheckFree Corporation Shareholders Lit., C.A. No. 3193-CC, 2007 Del. Ch. LEXIS 148 (Del. Ch. Nov. 1, 2007)

SEC bars investors' directors

The Securities and Exchange Commission recently ruled that public companies can block investors from putting director candidates on corporate ballots. This ruling affirms the SEC's position that shareholder proposals on shareholder access to company proxy statements for director nominations are categorically excludable under Rule 14a-8(i)(8) of the Securities Exchange Act of 1934, as amended. As discussed in a prior Corporate Quick Hit, this ruling adopts one of two proposals advanced by the SEC earlier this year. The companion proposal, which the SEC did not adopt, would have permitted shareholders to propose mandatory by-law amendments to create procedures for shareholder proxy access.

SEC Press Release 2007-246 (Nov. 28, 2007)

Delaware court rejects attorney-client privilege for special committee of board of directors

A recent Delaware Court of Chancery decision is expected to impact the special board committee practices and procedures of many corporations. The court ruled that communications between the company's special committee, formed to investigate backdating allegations, and the committee's attorneys, were not protected by attorney-client privilege because they were waived when the special committee and its attorneys gave a presentation on its findings to the company's board of directors (including certain directors alleged to have participated in the backdating scheme).

The court determined that the presentation constituted a waiver of the privilege because third parties were present at the board meeting, namely the defendant directors and their attorneys, whose interests were not common to those of the special committee. As a result, not only were the details of the presentation denied privilege, but so were all communications regarding the investigation between the special committee and its counsel, and between the special committee's counsel and the company.

Delaware case law has largely upheld the attorney-client privilege in special committee practice, and board presentations have typically resulted in partial waivers of privilege, at most. Of further importance in this case, although not discussed at length by the court, was the fact that the special committee was not a formal special litigation committee. The court indicated in a footnote to its opinion that its analysis might have been different if the committee had been formally organized.

Ryan v. Gifford, C.A. No. 2213 2007 Del. Ch. LEXIS 168 (Del. Ch., Nov. 30, 2007)

SEC says foreign companies do not have to adjust to U.S. accounting

The SEC recently adopted a rule that corporations outside the United States that use international accounting standards will no longer be required to adjust their financial statements to comply with American accounting rules. This change, which had been sought by European companies, means that accounting standards approved by the London-based International Accounting Standards Board can be used in most parts of the world, and makes it more likely that the rules will eventually become the primary rules worldwide. The new rule will take effect for fiscal years that end on or after November 15, 2007.

Prior to the adoption of the new rule, foreign companies that listed their securities in the United States were required to either follow American accounting rules or reconcile their financial statements to those rules. Foreign companies that do not follow the International Financial Reporting Standards will be able to continue reconciling their statements to the American rules.

SEC Press Release 2007-235 (Nov. 15, 2007)

SEC adopts proxy rule amendment encouraging electronic shareholder forums

The SEC recently adopted amendments to facilitate communication between companies and shareholders in electronic shareholder forums. This amendment to the proxy rules is part of the SEC's effort to spark the growth of online forums for shareholders by allowing them to engage the company and each other online with less fear of liability.

The changes clarify that participation in an electronic shareholder forum, which could potentially constitute a solicitation subject to the current proxy rules, will be exempt from most of the proxy rules if the conditions to the exemption are satisfied. The amendments contain a safe harbor allowing any participant in an electronic shareholder forum to rely on the new exemption, so long as their communications occur at least 60 days prior to the date announced by the company for its annual or special meeting of shareholders, and the communicating party does not solicit proxy authority while relying on the exemption. A participant in an electronic shareholder forum will be eligible to solicit proxy authority within 60 days of the annual or special meeting, but must then comply with the proxy regulations comprising Regulation 14A of the Securities Exchange Act of 1934, as amended. The amendments also protect a shareholder, company, or affiliate that maintains an electronic shareholder forum from liability for statements provided by others in the forum.

The rule amendments will take effect 30 days after they are published in the Federal Register.

SEC Press Release 2007-247 (Nov. 28, 2007)

SEC proposes enhanced disclosure and new prospectus delivery requirements for mutual funds

The SEC recently proposed changes intended to enhance mutual fund disclosure by providing investors with key information in a standardized summary format, while improving the means of delivering more detailed information to investors via the internet. The proposal recommends amendments to the form used by mutual funds to register under the Investment Company Act of 1940, as amended, and to offer their securities under the Securities Act of 1933, as amended. If adopted, the proposed amendments would (i) require a mutual fund to include key information in plain English in a standardized order at the front of its statutory prospectus and (ii) permit a person to satisfy its mutual fund prospectus delivery obligations under the Securities Act by sending or giving the key information directly to investors in the form of a summary prospectus and providing the full statutory prospectus on website.

The proposal builds on the current requirement that a mutual fund prospectus contain a risk/reward summary to facilitate comparisons across funds. The SEC's proposed amendments would affect Form N1-A (relating to open-end management investment companies), Form N-4 (relating to insurance company separate accounts offering variable annuity contracts) and Form N-14 (relating to business combinations).

SEC Press Release 2007-235 (Nov. 29, 2007)

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

Irwin A. Kishner at 212.592.1435 or
Daniel A. Etna at 212.592.1557 or

Copyright © 2007 Herrick, Feinstein LLP. Corporate Quick Hit 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. Prior results do not guarantee a similar outcome.