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Corporate Quick Hit: Expansion of Successor Liability for Purchasers in Asset Sales is Rejected, New Executive Compensation Disclosure Rules, Majority Voting Standard for Election of Directors, FederalCourt Strikes Down State Mandated Health Benefits Law
August 2006
Authors: Irwin A. Kishner, Daniel A. Etna

New York Court of Appeals Rejects Expansion of Successor Liability for Purchasers in Asset Sales

A recent New York Court of Appeals decision has shed new light on the limits of successor liability for purchasers in asset sales in New York. The court expressly refused to endorse the so-called "product line exception," and reasserted the long-held standard in New York that a company that acquires the assets of another will not be found liable for the torts of the predecessor company unless:

  • the successor expressly or impliedly assumes its predecessor's tort liability;
  • there is a consolidation or merger of the buyer and seller;
  • the purchasing company is a mere continuation of the selling company; or
  • the transaction is entered into fraudulently to escape such obligations.

The "product line exception" is a tort doctrine adopted in several states. Under this doctrine, a party which acquires a manufacturing business and continues the product line of the business is subject to strict tort liability for defects in products that were manufactured and distributed prior to the acquisition.

In refusing to recognize the "product line exception," the court noted that this doctrine could impact small businesses to the point of "economic annihilation" and would mark "a radical change from existing law implicating complex economic considerations better left to be addressed by the Legislature."

See Semenetz v. Sherling & Walden, Inc., 7 N.Y. 3d 194 (2006).

SEC Adopts New Executive Compensation Disclosure Rules

The Securities and Exchange Commission unanimously approved new disclosure rules with respect to executive and director compensation, related party transactions, director independence and other corporate governance matters, and security ownership of officers and directors.

Under the new rules, issuers will be required to explain in narrative form its compensation policies. More specifically, they will have to make supplemental executive compensation disclosure in the form of a compensation discussion and analysis report. This report will require information regarding, among other things, the policies and decisions of the issuer's compensation committee, and the objectives and implementation of executive compensation programs. The new rules also require a description and quantification of termination and change-of-control payments to certain executive officers.

To address perceived abuses in the timing of stock option grants, the new rules require option grants to be disclosed in a table setting forth the fair value of the option grant as determined under new stock-based accounting rules, the closing market price of the stock on the grant date if higher than the exercise price, and the date that the option was approved for grant if different than the stated grant date. If the exercise price of options differs from the closing market price on the grant date, the issuer will be required to describe its method for determining the exercise price.

The new disclosure rules will be effective generally for proxy statements filed for fiscal years ending after December 15, 2006.

See SEC Rel. No. 33-8732 (Aug. 11, 2006).

Delaware Adopts Majority Voting Standard for Election of Directors

The Delaware General Corporation Law (the "DGCL") has been amended to allow company stockholders to adopt by-laws requiring a majority vote standard while prohibiting the board of directors of said company from reversing that by-law to restore plurality voting (which is the default standard under the DGCL).

Director resignation policies in the DGCL were amended to require a director who does not receive a majority of the votes to tender his or her resignation to the board of directors, which, in turn, may accept or reject it. Further, this amendment permits a resignation to be effective only upon the happening of a future event and provides that, should a director fail to receive a specified vote for reelection, the resignation be deemed irrevocable. Prior to this amendment, it was uncertain whether this resignation requirement would be enforceable against a director who asserted that fiduciary duties preclude him or her from resigning.

See DGCL Sections 141(b) and 216.

Federal Court Strikes Down State Mandated Health Benefits Law

A Federal District Court recently struck down an employee benefits law because it was pertinent only to Wal-Mart. The law, which has become known as the "Wal-Mart law," required private companies with more than 10,000 workers in Maryland to spend at least 8% of payroll on employee health benefits or pay the difference into a state Medicaid fund.

The Federal District Court found that the state law at issue was pre-empted under the Employee Retirement Income Security Act (ERISA), a Federal employee benefits statute. This decision is significant for Wal-Mart and other large companies which are subject to various state regulations on employee benefits as a result of operating in multiple states. As a result of this decision, existing federal laws regulating employee benefits must be considered by state legislatures before they can enact any new laws affecting employee health insurance and pension plans.

See Retail Indus. Leaders Ass'n v. Fielder, 435 F. Supp. 2d 481 (D. Md. 2006).

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

Irwin Kishner at 212.592.1435 or email
Daniel Etna at 212.592.1557 or email

Copyright © 2006 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.