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Corporate Alert: Delaware Court Rules on Director Liability for Subprime Credit Crisis Losses; When Is an MOA Binding and When Is It Merely an Agreement to Agree?; When to Cash It In; FINRA Proposes New Registration for Investment Banking Professionals
March 2009
Authors: Irwin A. Kishner, Edward B. Stevenson

Delaware Court Rules on Director Liability for Subprime Credit Crisis Losses

The Delaware Chancery Court has issued one of its first "subprime credit crisis" rulings in an action in which plaintiff-shareholders sued current and former Citigroup directors and officers for breaching fiduciary duties and wasting corporate assets. The court dismissed all shareholder claims except one count of waste. The court based its procedural decision on the plaintiffs' failure to make a demand on the board and not on the underlying liability issues. However, the opinion illustrates how Delaware courts will evaluate director and officer liability for losses arising from subprime investments.

Relying on the seminal Caremark fiduciary duty case, the plaintiffs claimed the defendants breached fiduciary duties by failing to monitor and manage risks involved in the subprime lending market, despite "indications of worsening economic conditions." The court distinguished detecting illegal activity from managing business risk and found that risk evaluation was the "essence of the business judgment of managers and directors." As such, any associated liability should be governed by the Business Judgment Rule, under which courts generally honor all business decisions made in good faith on an informed basis, absent gross negligence. This case highlights that the Business Judgment Rule is alive and well in Delaware, even in corporate investments in subprime securities.

n Re Citigroup Inc. Shareholder Derivative Litigation, (Del. Ch., 2009)

When Is an MOA Binding and When Is It Merely an Agreement to Agree?

The Delaware Chancery Court has addressed whether a memorandum of agreement (MOA) is a binding and enforceable contract or merely an agreement to agree. When Lockheed Martin sold a segment of its business, Sanders, to BAE Systems Information, the parties executed an MOA describing a "strategic relationship" between Sanders and Lockheed and identifying specific opportunities for joint work. Lockheed subsequently pursued one of the opportunities alone and claimed it was under no obligation to involve Sanders. BAE claimed doing so breached their binding contract.

The court explained that to prove a binding contract, BAE had to show the intent of the parties to be bound to sufficiently definite terms supported by consideration. The court determined the MOA was executed simultaneously with, and was referenced in, the sale agreement, and that Lockheed had performed under the terms of the MOA for four years following its execution and there was, therefore, sufficient intent to be bound. The court also found that even though the MOA did not contain a pricing structure or an allocation of responsibilities for joint work, it granted BAE a bidding right to participate in certain opportunities. The court found that the prior course of dealing and industry custom could add enough flesh to "a rough skeleton of definite obligations" in the MOA to justify enforcement. The fact that the MOA created a special committee composed of members from both Lockheed and BAE that was required to meet several times a year to discuss opportunities was of particular importance to the court.  Although no disclosure obligations were imposed on either party, the existence of this committee swayed the court. The court also considered the 15 contracts performed between BAE and Lockheed following the execution of the MOA, suggesting that the MOA created a workable protocol. The parties did not dispute the existence of consideration in the transaction. 

If you intend for an MOA, letter of intent, or any other contract to be merely an agreement to agree, include a written "non-binding" provision in the governing document to avoid claims otherwise.

BAE Systems Information and Electronic Systems Integration Inc. v. Lockheed Martin (Del. Ch., Feb. 3, 2009)

When to Cash It In

In New York, the law governing disputes between companies and customers over debt payments differ markedly from those in other states, as well as from the common law. The common law, favoring quick settlements, allows a debtor, in the face of an honest dispute over the amount owed, to submit payment for a lesser amount as full settlement of the claim. Most state courts recognize this payment as an offer to modify the contract, which is deemed accepted when the creditor deposits or cashes the check. This acceptance constitutes an accord and satisfaction, creating a new contract that replaces the previous one and prohibits the creditor from demanding payment on the original, underlying contract's balance. The common law and majority rule is that this principle holds true regardless of any attempt by the creditor to reserve its rights under the original contract.

However, in 1985 the New York Court of Appeals altered this general rule. In Horn Waterproofing Corp. v. Bushwick Iron & Steel Co., Inc., 66 N.Y.2d 321 (1985), the court found that when the payee endorsed the check with the notation "Under Protest," it precluded an accord and satisfaction and was permitted to sue for the balance. The court based the finding on its interpretation of §1-207 of the New York Uniform Commercial Code, which allows a party to assent to performance in a manner offered by the other party without prejudicing certain rights which the first party explicitly reserves. NY UCC §1-207 (2008). This provision states that writing the words such "as 'without prejudice', 'under protest' or the like on the tendered check are sufficient." However, merely scratching out the words "Full Settlement" or "Complete and Final Payment" is not in itself adequate as an explicit reservation of rights. Although §1-207 only applies to "Code-covered" commercial transactions, the court interpreted the reach of this statute broadly to include any "payment of a contract debt by check or other commercial paper."  We note that although the 1990 revisions to the UCC reject New York's interpretation of §1-207, the New York legislature has not adopted such revisions and New York courts continue to favorably cite Horn Waterproofing on this issue. 

We call your attention to this because of the rise in payor attempts to create accord and satisfaction when faced with mounting debts and insufficient revenues to cover them. If you are in involved in a dispute over debts owed you in New York and are presented with a check marked "payment in full" that less than the amount owed, you must endorse the check with such words as "under protest" or "without prejudice" to preserve your rights to sue for the balance.

FINRA Proposes New Registration Category for Investment Banking Professionals

FINRA has filed with the SEC a proposed rule change to establish a new limited representative registration category for investment banking professionals. The proposed new registration category would encompass those associated persons whose activities primarily involve: (1) advising on or facilitating debt or equity securities offerings through a private placement or a public offering; or (2) advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions.

FINRA is also developing an accompanying qualification examination for individuals that would fall within the proposed registration category.  The exam would be taken in lieu of the Series 7 exam by such individuals. If approved, the new registration scheme will become effective 90 days after FINRA officially changes its rules to implement the new investment banking category.

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

NY       Irwin A. Kishner at (212) 592-1435 or
Edward B. Stevenson at  (973) 274-2025 or

Copyright © 2009 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.