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Corporate Alert: August 2010
August 2010
Authors: Irwin A. Kishner, Daniel A. Etna

The Herrick Advantage

Herrick will host our Fourth Annual Capital Markets Symposium on September 16. Our distinguished panel of legal and financial experts includes Scott Shay, Signature Bank; Jeff Klein, Kensington Capital Advisors; Stephen Brodie, Herrick, Feinstein LLP; and Patrick Sweeney, Herrick, Feinstein LLP. We will discuss the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, including the regulation of systematic risk, expanded regulation of private investment fund managers, reforms for the asset-backed securitization market, and regulation of market swaps.

Validity of Stockholder Rights Plan Reaffirmed

The Delaware Court of Chancery has reaffirmed Delaware's traditional deference to antitakeover measures adopted by a well-informed and well-reasoned board.  The suit arose out of the adoption of a stockholder rights plan with a 20% triggering threshold in response to a rapid accumulation of stock by an activist investor. The court, applying the long-standing Unocal test, determined that the adoption and use of the stockholder rights plan was a good faith, reasonable response to a threat to the company and its stockholders. Under the Unocal test, the deferential business judgment rule will protect the adoption of an antitakeover measure as long as (i) the board has reasonable grounds for believing that a danger to corporate policy and effectiveness existed and (ii) the antitakeover measure is a reasonable response to the threat posed.

Yucaipa Am. Alliance Fund II, L.P. v. Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 11, 2010).

Officers May Need To Reimburse Payments Received During Periods Later Restated

Companies should carefully consider the effect that issuing a financial restatement will have on their CEOs and CFOs. A federal court refused to dismiss an SEC suit brought under Section 304 of the Sarbanes-Oxley Act seeking reimbursement of bonuses and securities trading profits that a CEO received during the period for which his former employer's financial statements were later restated. Section 304 requires a CEO or CFO to return incentive-based compensation to an issuer when a financial restatement  occurs "as a result of misconduct." The court upheld the SEC's suit against the CEO who, although having certified his former employer's financial statements, otherwise had no knowledge of the accounting irregularities that led to the restatement of the financial statements. The court ruled that a finding of "misconduct" (i.e., the accounting irregularities) on the part of the CEO's former employer was sufficient to support a claim. 

CEOs and CFOs should be aware that their compensation may be at risk due to the misconduct of others, and may result in these officers requiring more of their compensation to be in a form (such as salary) that is not subject to the claw back provisions of Section 304 of the Sarbanes-Oxley Act.    

SEC v. Jenkins, No. CV 09-1510-PHX-GMS (D. Ariz. June 9, 2010).

Law Firm Not Exempt from Broker-Dealer Registration

The SEC has declined to provide no-action relief to a law firm that proposed to assist one of its clients in raising capital without registering as a broker-dealer with the SEC. The law firm requested that the SEC not recommend enforcement action if the law firm introduced potential investors to its client and, upon the closing of any successful debt or equity investments made as a result of these introductions, the client compensated the law firm by paying a "referral fee" based on a percentage of the amounts raised. The law firm stated that it would limit its role to introducing the client to a set number of potential investors. The SEC responded that the law firm's limited role implied that it anticipated both "pre-screening" potential investors and "pre-selling" the client's securities to gauge potential interest. The SEC also stated that the law firm's receipt of compensation that was directly tied to investments in the client by investors whom the law firm introduced gave the law firm a "salesman's stake" in the capital raising process. This denial of no-action relief is the latest in a line of no-action letters that restrict the ability of "finders" to help companies raise capital without triggering broker-dealer registration requirements.

Brumberg, Mackey & Wall, P.L.C. SEC No-Action Letter (May 17, 2010).

Duties Owed to Preferred Stockholders Rights Are Contractual, Not Fiduciary

The Delaware Chancery Court reaffirmed the primarily contractual nature of the duties owed to preferred stockholders under Delaware law.  Notwithstanding the court's recognition that preferred stockholders may be owed fiduciary duties under certain circumstances, the court stressed that unless fiduciary duty claims are based on duties for which a contract does not provide, a preferred stockholder may not maintain both contractual and fiduciary duty claims arising from the same act or omission. At issue was whether a subsidiary's issuance of convertible notes without the parent's preferred stockholders' consent violated the preferred stock's certificate of designations and breached the fiduciary duty owed to the preferred stockholders. The court ruled in the preferred stockholders' favor on the basis of their certificate of designations violation claim.

Fletcher Int.l Ltd. v. Ion Geophysical Corp., C.A. No. 5109-VCP (Del. Ch. May 28, 2010).

Delaware Adds New Short-Form Merger Statute

Delaware has enacted a simplified method for effecting a merger between a parent and a subsidiary—often referred to as a "short-form merger"—when the parent is a Delaware non-corporate entity (such as a general or limited partnership, or a limited liability company) and the subsidiary is a corporation in which the parent owns at least 90% of the outstanding shares of each class of stock. As is the case with short-form mergers involving corporations, a short-form merger involving a non-corporate entity does not require a merger agreement, only a certificate of ownership and merger needs to be filed with the Delaware Secretary of State, or a vote of the subsidiary's stockholders. Delaware has permitted short-form mergers involving Delaware corporations for many years.

Del. Gen. Corp. Law Section 267.

SEC Recommends Life Settlements be Defined as Securities

The SEC has released a staff report recommending that life settlements be clearly defined as securities so that the investors in these transactions are protected under federal securities laws. A life settlement is a transaction in which an individual sells their life insurance policy to someone else who then assumes responsibility for paying the premiums. Typically, the seller no longer wants the policy or can no longer afford to pay the premiums. In exchange, the insured party usually receives a lump sum payment that exceeds the policy's cash surrender value, but is less than the expected payout in the event of death.

SEC Rel. 2010-129 (July 22, 2010).

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.