Email Page Print Friendly Page Contact
learning center: publication detail
Corporate Alert: One Word Says It All, Minority Shareholder’s Rights, New Arbitration Rules, Letter of Intent Binding, Trust Agreement Dispute, “Bet the Company” Transactions, Preliminary Merger Negotiations, Climate Change Disclosure, HSR Act, New Excise Tax
February 2010
Authors: Irwin A. Kishner, Daniel A. Etna

The Herrick Advantage

Are you managing risk or is it managing you? Improving your enterprise risk management can help you not only prevent financial loss, but also recognize profit. Herrick can help. We are hosting an event entitled "Best Practices in Assessing Your Company here.

Delaware Supreme Court Finds One Word Says It All

The Delaware Supreme Court has addressed, as a matter of first impression, the requirements necessary to establish a contract under seal. Under Delaware law, breach of contract claims in respect of a contract under seal are subject to a 20-year statute of limitations, rather than the three-year period that would otherwise apply. The court held that in the case of an individual, the presence of the word "seal" next to his or her signature is all that is required to create a contract under seal, irrespective of whether there is any indication in the body of the contract that it is intended to be a contract under seal.

Whittington v. Dragon Group, L.L.C., No. 392, 2009 (Del. Sup. Ct. Dec. 18, 2009).

Delaware Chancery Court Addresses Minority Shareholder's Rights

The Delaware Chancery Court has addressed the rights of a minority shareholder cashed out in a merger. The court subjected the merger to heightened scrutiny under the "entire fairness standard" (i.e., fair dealing and fair price), rather than the "business judgment rule." The court made this determination after finding that the defendants failed to employ any procedural fairness safeguards (such as a special negotiating committee of disinterested and independent directors or a majority-of-the-minority shareholder vote) in the approval of the merger. The court also took issue with the defendants' failure to disseminate material information concerning the merger to the former shareholder. The defendants relied on a fairness opinion in seeking to justify the fairness of the merger. The court, however, found the fairness opinion to be highly suspect. The defendants produced the fairness opinion in approximately one week, during which time the lead appraiser was unable to work extensively and meaningfully on the fairness opinion due to other client commitments.     

In re Sunbelt Bev. Corp. S'holder Litig., C.A. No. 10689-CC (Del. Ch. Jan. 5, 2010).

Delaware Chancery Court Adopts New Arbitration Rules

The Delaware Court of Chancery has adopted new rules effective February 1, 2010 to govern the arbitration of business disputes. Under the new rules, the court has jurisdiction to arbitrate "business disputes," which includes most complex corporate and commercial disputes.

To submit a dispute for arbitration, the following requirements must be satisfied: (i) the parties must have consented to arbitration in the court by agreement or stipulation; (ii) at least one party must be a business entity; (iii) at least one party must be a business entity formed or organized under Delaware law, or have its principal place of business in Delaware; and (iv) no party can be a consumer. The amount in controversy must also exceed $1 million where a claim is solely for monetary damages.

The court has designed arbitration to provide prompt and confidential resolution by an experienced and sophisticated arbitrator. A judge or a master sitting permanently in the court will hear the arbitration. A preliminary conference will be held within ten days of the filing of a petition, with a final hearing occurring within 90 days of the filing.

Unless the parties otherwise agree, the arbitration decision may be appealed to the Delaware Supreme Court.

Delaware Chancery Court Finds Letter of Intent Binding

Letters of intent are often used at the outset of a transaction to identify the basic terms, goals and parameters of a transaction. Although preliminary in nature, letters of intent can be found to create contractually binding obligations.

The Delaware Court of Chancery has temporarily enjoined a company from engaging in activities that were alleged to have breached a letter of intent. The letter of intent at issue required that the company (i) negotiate a specific bankruptcy plan in good faith; (ii) be prohibited from disclosing an existing bid by a third party to acquire certain assets of the company; and (iii) refrain from disclosing, soliciting or considering any other acquisition offers during the stated term of the letter of intent.

In granting the temporary restraining order, the court found that the letter of intent was "sufficiently definite" to create legally enforceable rights. 

Global Asset Capital, LLC v. Rubicon US Reit, Inc., C.A. No. 5071-VCL (Del. Ch. Nov. 16, 2009).

Delaware Court of Chancery Applies Narrow Definition of "Beneficial Interest" to Voting Trust Agreement Dispute

The Delaware Court of Chancery has applied a narrow definition of "beneficial interest" to a voting trust agreement dispute. The voting trust agreement provided that the voting trust would terminate when the claimant's "beneficial interest" dropped below a specified percentage of the outstanding shares. The voting trust agreement did not define the term "beneficial interest." The claimant argued that the voting trust had terminated following a permitted transfer of a portion of his shares to his sister. The issuer refused to recognize the voting trust as having been terminated since the claimant's sister would likely vote her shares in a manner consistent with that of the claimant as to his remaining shares. 

The court stated that, although the term "beneficial interest" is ambiguous, it at least implies the existence of some enforceable right or benefit. After finding that the claimant's sister was free to vote her shares as she wished, the court ruled that the claimant had not retained any beneficial interest in his sister's shares. The court declined to apply the broader federal securities law definition of "beneficial owner" on the grounds that the (i) voting trust agreement was governed by Delaware law, and (ii) disclosure policies behind the federal securities law definition were inapposite to the dispute.

Mangano v. PeriCor Therapeutics, Inc., C.A. No. 3777-VCN (Del. Ch. Dec. 1, 2009).

Delaware Chancery Court: Business Judgment Rule Applies to "Bet the Company" Transactions

The Delaware Chancery Court has affirmed that the business judgment rule is available to shield directors from liability for all business decisions, including decisions that expose the company to a great amount of risk and even financial ruin.

The claim was based on the failure of the directors of an acquiring company to condition a merger upon receipt of sufficient financing. The acquiring company was unable to obtain the necessary financing, refused to close the merger and was sued by the other merger party. The claimants—shareholders of the acquiring company—argued that "bet the company" transactions (such as the merger) should not be shielded by the business judgment rule to the same degree as business decisions regarding ordinary transactions. The court, in ruling against the claimants, stated that substantive second-guessing of the merits of a business decision is precisely the kind of inquiry that the business judgment rule prohibits. Directors are entitled to the deferential business judgment rule for all business decisions, regardless of the ultimate outcome or losses resulting from that decision, unless they can show that their process in reaching the decision, as opposed to the substance of the decision, was unsound.

In re The Dow Chemical Company Derivative Litigation, C.A. 4319-CC (Del. Ch. Jan. 11, 2010).

U.S. District Court Imposes No Duty on Public Company to Disclose Preliminary Merger Negotiations

The U.S. District Court for the Northern District of Illinois has provided guidance regarding the disclosure of public company merger negotiations. The case involved federal securities law anti-fraud claims brought by shareholders of one of the merger parties. The claims' genesis occurred in February 2004 when senior executives of the merger parties discussed a potential merger transaction. By April 2004, a decision was reached that the merger would not be pursued. No further discussions were held until late October 2004, at which time agreement was reached to pursue a different merger transaction.  The board of directors of each merger party approved the merger on November 16, 2004, and a public announcement was made on November 17, 2004. 

The claimants alleged that the merger negotiations should have been disclosed to clarify public statements made during the negotiation period. The court noted that three of the public statements cited by the claimants occurred prior to October 31, 2004, the date on which they first discussed the merger.  As such, the court found no duty to disclose merger negotiations at any time before October 31, 2004. The next public statement was issued on November 5, 2004, in which the merger party disclosed that it was taking steps to "improve [its] full-line store performance . . . while simultaneously pursuing an aggressive . . . growth strategy." The court found that nothing within the statement was inaccurate or otherwise misleading (i.e., implying that merger negotiations were not taking place, etc.).  Further, at the time of this statement, the merger negotiations had not progressed far enough to be deemed material. Finally, the claimants alleged that the merger negotiations should have been disclosed in the merger party's November 9, 2004 Form 10-Q filing regarding the MD&A discussion of needs for liquidity. The court, however, relied on an interpretive rule of the SEC directing that companies are not required to disclose merger negotiations in its MD&A discussion if the disclosure could jeopardize completion of the merger. 

Levie & Sears Roebuck & Co., N.D. Ill. No. 04 C 7643 (N.D. Ill. Dec. 12, 2009).

SEC Issues Interpretive Guidance on Climate Change Disclosure

The SEC has issued new interpretive guidance on the obligation of public companies to evaluate the impact of climate change in communications with shareholders.

Public companies generally follow Regulation S-K when making public disclosures. The new guidance clarifies that Regulation S-K, among other SEC disclosure rules, may require public companies to describe climate change matters that materially affect their business. Specifically, the SEC noted that the information called for by Item 101 (description of business), Item 103 (legal proceedings), Item 303 (management's discussion of financial condition and results of operations) and Item 503(c) (risk factors) of Regulation S-K may require climate-related disclosure.

The SEC first addressed disclosure of material environmental issues in the early 1970s. Since that time, the SEC has adopted several rules and interpretations relating to environmental disclosures in public company filings. The new guidance, relating specifically to climate change, addresses four topics that may trigger climate change disclosure in shareholder communications: (i) the impact of existing and pending legislation and regulation; (ii) the impact of international accords, including the Kyoto Protocol; (iii) the indirect consequences of regulation or business trends; and (iv) the physical impacts of climate change on a company's operations and results.


HSR Act "Gun Jumping" Fine Levied

The Antitrust Division of the U.S. Department of Justice has settled a "gun jumping" claim arising out of actions taken by merger parties prior to the expiration of the waiting period under the Hart-Scott-Rodino Act (the "HSR Act"). As part of the settlement, the parties agreed to pay a $900,000 fine.

The HSR Act requires parties to transactions that meet certain threshold levels to notify the federal antitrust agencies and observe a statutory waiting period. During the waiting period, the Act prohibits parties from completing the proposed transaction or transferring beneficial ownership of the companies or assets at issue. The waiting period affords the federal antitrust agencies with the opportunity to investigate the proposed transaction for anticompetitive effects.

The DOJ claimed that, during the waiting period, the target company sought the acquiring company's consent to the terms of three multi-year supply contracts. The DOJ maintained that the acquiring company's consent to the supply contracts was tantamount to an acquisition of the target company's business in violation of the HSR Act.         


HSR Act Thresholds Lowered

The Federal Trade Commission—the agency charged with administering the HSR Act—has announced that it has lowered the HSR Act jurisdictional and filing fee thresholds.  These thresholds are subject to annual adjustment based on changes in the U.S. gross national product. 

After giving effect to the lower thresholds, the HSR Act will require both acquiring and acquired persons in mergers, acquisitions or certain other transactions to file pre-closing notifications if the following jurisdictional thresholds are met: (i)(A) one person has net sales or total assets of at least $126.9 million (previously $130.3 million); (B) the other person has net sales or total assets of at least $12.7 million (previously $13 million); and (C) as a result of the transaction, the acquiring person will hold an aggregate amount of stock and assets of the acquired person valued at more than $63.4 million (previously $65.2 million); or (ii) as a result of the transaction, the acquiring person will hold an aggregate amount of stock and assets of the acquired person valued at more than $253.7 million (previously $260.7 million), regardless of the sales or assets of the acquiring and acquired persons.    

The new jurisdictional thresholds do not affect the HSR Act filing fees, but the applicable filing fee will be based on the new thresholds as follows: (i) $45,000 for transactions valued at less than $126.9 million; (ii) $125,000 for transactions valued from $126.9 million to $634.4 million; and (iii) $280,000 for transactions valued at $634.4 million or more.


New Excise Tax Reporting Requirements for Group Health Plans

Effective January 1, 2010, employers sponsoring group health plans are required to report and pay excise taxes for failing to satisfy requirements applicable to the group health plans. Failure to comply with COBRA; HIPAA's portability and nondiscrimination rules; Genetic Information Nondiscrimination Act; Mental Health Parity; Newborns' and Mothers' Health Protection Act; coverage of dependent students under Michelle's Law; and the requirement for comparable employer contributions to Health Savings Accounts triggers the excise tax and reporting obligations.. The excise tax due varies depending on which group health plan mandate the employer violates. Interest and penalties on the excise tax will accrue if the excise tax is not paid and the excise tax return (Form 8928) is not filed by the required due date. Employers should take appropriate steps to insure that their group health plans comply with all applicable legal requirements.

For more information please contact Irwin A. Kishner at (212) 592-1435 or or Daniel A. Etna at (212) 592-1557 or

 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.