January 2010
Authors: Irwin A. Kishner, Edward B. Stevenson
The Herrick Advantage
Herrick's securitization team helps clients complete complex refinancings. We helped Ambac Assurance Corporation complete a two-step refinancing of approximately $800 million worth of student loan backed Asset Backed Securities issued by the Pennsylvania Higher Education Assistance Authority and insured by Ambac. The restructured transactions resulted in overcollateralized securitizations eligible for top investment grade ratings, without the need for credit enhancement through an insurance policy.
DelawareCourt of Chancery Allows Additional Remedies for Breach of Merger Agreement
The Delaware Court of Chancery has held that when a party breaches a merger agreement to accept a better offer, recovery will not necessarily be limited to a contractual termination fee and may include expectancy and reliance damages.
NACCO and Applica entered into a merger agreement whereby NACCO would acquire Applica in a stock-for-stock merger. The merger agreement contained a "no-shop" provision, with an exception for competing proposals reasonably likely to be superior to NACCO's. The "no shop" required prompt notice to NACCO of competing proposals, including the status and terms of any discussions or negotiations. After signing the merger agreement with NACCO, Applica engaged in merger discussions and entered into a merger agreement with another company, Harbinger, without promptly notifying NACCO. NACCO sued Applica for breach of the merger agreement and other claims, notwithstanding the $4 million break-up fee and $2 million in expenses.
In rejecting Applica's motion to dismiss, the Court ruled that NACCO, if it proves Applica breached the merger agreement, may be entitled to expectancy damages (for monies it expected to realize from the transaction) or reliance damages (for the detriment it suffered by relying on the merger agreement, including opportunity costs). The Court reasoned that "[p]arties bargain for provisions in acquisition agreements because those provisions mean something. It is critical that these bargained-for rights be enforced, both through equitable remedies such as injunctive relief and specific performance, and, in the appropriate case, through monetary remedies including awards for damages." Given the decision, a party that is in breach of a merger agreement that it wishes to terminate and that is subject to Delaware law must carefully weigh the benefits of termination against the risks of paying contractually-provided break up fees and paying awards for damages for breaches occurring prior to the termination.
NACCO Industries Inc. v Applica Incorporated, C.A. 2541-VCL (December 22, 2009)
Delaware Supreme Court Holds Oral LLC Operating Agreements Subject to Statute of Frauds
The Delaware Supreme Court has held that the statute of frauds applies to limited liability company operating agreements. Olson, an ousted member of a Delaware LLC, claimed that orally-amended compensation provisions of the LLC's operating agreement providing for a multi-year earn-out of a member's interest in the LLC after leaving the company apply to him. The Court rejected Olson's claim and affirmed the Vice Chancellor's decision to apply the statute of frauds to the enforcement of the orally-modified operating agreement. According to the Court, the orally modified provisions, by their terms, could not be performed within one year (a requirement under the Delaware statute of frauds) and, thus, were unenforceable. Olson argued that the statute of frauds does not apply to LLC operating agreements. The Court, however, held that by giving "maximum effect" to LLC agreements the Delaware General Assembly intended to permit entrepreneurs and investors greater flexibility, in terms of governance, than the corporate form permits, and that, like any other contract, the oral, written or implied operating agreements permitted under the Delaware LLC Act are subject to the statute of frauds.
Olson v. Halvorsen, No. 338, 2009 (Del. Supr. Dec. 15, 2009)
New SEC Disclosure Rules for Proxy Solicitations, Annual Reports and Registration Statements
The SEC has amended its disclosure rules to enhance information provided in proxy solicitations, annual reports and registration statements. The amended rules should provide investors with greater disclosure regarding risk, compensation and corporate governance matters. The rules, which become effective on February 28, 2010, follow public outcry over compensation policies that reward excessive risk-taking.
The rules will require a company to provide narrative disclosure about its compensation policies for all employees, not justexecutive officers, if those policies create risks that are reasonably likely to have a material adverse effect on the company. The rules also amend the Summary Compensation Table and the Director Compensation Table to reflect the aggregate fair value of stock and option awards at the time of award, rather than the amount recognized on financial statements during the fiscal year.
The new rules also aim to improve information related to the background and qualifications of directors and nominees. Under the new rules, a company must disclose to shareholders the directorships held by directors and nominees during the past five years and any legal proceedings in which a director or nominee has been involved during the past 10 years. The rules expand the definition of "legal proceeding" to include any proceeding (or settlement) resulting from involvement in fraud, any proceeding based on violations of federal or state securities, commodities, banking or insurance laws and regulations, and any disciplinary sanctions or orders imposed by a self-regulatory organization.
SEC Release Nos. 33-9089; 34-61175; IC-29092; File No. S7-13-09.
Corporate Proprietary Information at Risk for International Travelers
In the last few years, warrantless border searches carried out at U.S. international airport borders have increasingly put corporate proprietary information at risk. These searches sometimes involve reviews of travelers' laptop files and emails, cell phones and PDAs. When the U.S. Customs & Border Protection Service (CBP) carries out these searches, no legal process is required—the searches do not require the consent of the traveler, no search warrant is necessary, and the inspector need not have a "reasonable suspicion" of wrongdoing to review the files and data. While infrequent, these searches are troubling from a privacy perspective. For example, a federal official seized a British marketing executive's company laptop during a trip from Dulles airport to London. The officer, who copied the executive's log-on name and password, asked her to show him a recent document. The officer also asked her to access her e-mail, but because she did not have internet access she was unable to do so and her laptop was confiscated.
Warrantless border searches have become more controversial because of the increase in international business travel and the volume of corporate proprietary information subject to screening and copying. For lawyers who practice internationally, these searches raise ethical issues concerning their duties to safeguard and protect confidential materials on their laptops and electronic devices. In response to the controversy, privacy groups have asked Congress to hold hearings about CBP's practice of searching and seizing travelers' digital information and electronic devices at U.S. borders and to pass legislation to safeguard fourth amendment rights at the border.
We will keep you updated on this topic in future Corporate Alerts.
SEC Proposal Aims to Facilitate Issuer Access to Capital Markets
The SEC has proposed amending Rule 163 under the Securities Act of 1933 to allow an underwriter or dealer, authorized by and on behalf of a "well-known seasoned issuer" (WKSI), to communicate with potential investors about a securities offering of the WKSI prior to filing a registration statement. Under Rule 163, a WKSI may communicate directly with potential investors about a possible securities offering prior to filing a registration statement without violating the so-called "gun-jumping" provisions of the Securities Act (i.e., those restricting communications regarding public offerings without a filed registration statement). However, the SEC, currently prohibits underwriters and dealers from making these communications.
In its proposal, the SEC notes that WKSIs might prefer to have an underwriter or dealer contact investors to help the WKSI avoid potentially revealing non-public information and to take advantage of the underwriter's or dealer's broad client base. According to the SEC, the proposed amendments would allow WKSIs to gauge the market-interest of their securities from a broader group of potential investors, providing greater access to the capital markets. An issuer is considered a WKSI if it is current and has for at least one year been timely in its Exchange Act reports and has either $700 million of publicly-held shares or has issued $1 billion of non-convertible securities through primary offerings registered under the Securities Act in the preceding three years.
For more information on these issues or other corporate matters, please contact:
NY Irwin Kishner at 212.592.1435 or ikishner@herrick.com
NJ Edward Stevenson at 973.274.2025 or estevenson@herrick.com.
Copyright © 2010 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.
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