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Corporate Alert: Court Upholds NOL Poison Pill, Court Invalidates Poison Pill, Courts Affirms Validity of Bylaw Accelerating Annual Meeting of Stockholders, LLC Members Can Contract Away Obligation to Act Reasonably, Court Refuses to Second Guess Board Decision, SEC Amends Reporting Rule of Non-Accelerated Filers, MD&A Disclosure
October 2010
Authors: Irwin A. Kishner, Daniel A. Etna

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Delaware Supreme Court Upholds Use of NOL Poison Pill

The Delaware Supreme Court has unanimously affirmed a lower court decision which upheld a board of directors' adoption of a poison pill rights plan with 4.99% triggering threshold designed to protect the availability of the company's net operating losses ("NOLs") and a special committee's subsequent decisions to trigger the rights plan and use the exchange procedures in the rights plan to dilute the triggering stockholder.

The Delaware Supreme Court reviewed the board of directors' actions under the two-pronged Unocal/Unitrin standard. First, the court found that the board of directors had reasonably identified the potential impairment of the NOLs as a threat to the company. Second, the court ruled that the rights plan was not preclusive and within the range of reasonableness under the circumstances. In particular, the rights plan did not render a successful proxy contest realistically unattainable. The court did caution, however, that its holding should not be viewed as generally approving the reasonableness of a 4.99% trigger in a company's rights plan with or without NOLs.

Selectica, Inc. v. Versata, Inc., No. 193,2010 (Del. Sup. Ct. Oct. 4, 2010)

Delaware Chancery Court Invalidates Poison Pill

The Delaware Chancery Court has rescinded a poison pill adopted by a closely-held e-commerce company after finding that the poison pill was intended for purposes other than protecting the company and its stockholders from economic harm. The court reviewed the board of directors' actions under the two-pronged Unocal/Unitrin standard (discussed immediately above) and held that the adoption of the poison pill failed under both prongs. Under the first prong, the court found that the company's argument that it was trying to protect its corporate culture was inadequate. Under the second prong, the court found that the poison pill was adopted to punish the significant stockholder for engaging in competitive activities and was therefore outside of the range of reasonableness.

eBay Domestic Holdings, Inc. v. Newmark, C.A. No. 3705-CC (Del. Ch. Sept. 9, 2010)

Delaware Chancery Courts Affirms Validity of Bylaw Accelerating Annual Meeting of Stockholders

The Delaware Chancery Court has affirmed the validity of a dissident stockholder-proposed bylaw amendment that caused a target company's annual meeting to be held each year in the month of January rather than August, when the target company's annual meeting had historically been held. As a result, the target company will be required to hold its 2011 annual meeting in January 2011, approximately four months after its 2010 annual meeting.  The bylaw amendment, which was proposed in a takeover battle, is designed to enable the dissident stockholder to add directors (in addition to those elected at the 2010 annual meeting) to the target company's staggered board of directors in a relatively short period of time. 

In affirming the bylaw amendment, the court interpreted the word "annual" (as in annual meeting) as meaning only "occurring once each year," rather than "separated by approximately 365 days." In so ruling, the court noted that the target company had not specified a term of office for directors, had not defined the word "annual," and had not required a minimum period of time to have elapsed between annual meetings. 

Airgas, Inc. v. Air Products and Chemicals, Inc., C.A. No. 5817-CC (Del. Ch. October 8, 2010)

Delaware LLC Members Can Contract Away Obligation to Act Reasonably

The Delaware Court of Chancery has again reaffirmed the contractual freedom of limited liability company members in situations where their rights are governed by unambiguous contract provisions. The court dismissed claims brought by a limited liability company member after another member refused to grant needed consents and did not provide additional financing. The claim centered around  operating agreement language stating that the consents at issue were expressly not subject to a duty to act reasonably.

Related Wespac LLC v. JER Snowmass LLC, C.A. No. 5001-VCS (Del. Ch. July 23, 2010)

Delaware Court of Chancery Refuses to Second Guess Board Decision

The Delaware Court of Chancery has refused to enjoin a proposed merger between rental car companies. The target company had engaged in unsuccessful merger negotiations with two competing rental car companies over a two-year period ending in 2009. Following the turnaround of the target company's business, the target company re-engaged in negotiations with one of its competitors that led to an agreement to merge. The merger agreement provided for (i) an all cash per share purchase price representing a 5.5% premium over the target company's per share market price; (ii) a significant termination fee payable by the acquiring company if it abandoned the merger; and (iii) a commitment by the acquiring company to make business divestitures if necessary to secure antitrust approval.

Following the merger announcement, the rental car company that had previously been engaged in negotiations with the target company objected to the merger and offered a higher share merger price. This offer, however, lacked the deal certainty of the merger agreement the target company entered into.

The court ruled that the target company's board of directors' decision to only negotiate with one of the competitors was proper. The court credited the board of directors' well-informed determinations that (i) the other competitor lacked the resources to finance a merger; (ii) a merger with the other competitor was subject to greater antitrust risk; and (iii) the merger agreement the target company entered into might be abandoned if a competitive bid was considered. This case demonstrates the court's steadfast unwillingness to enjoin a transaction when the board of directors has carefully negotiated and structured a corporate sale by means of a thorough and deliberative process.

In re Dollar Thrifty S'holder Litig. C.A. No. 5458-VCS (Del. Ch. Sept. 8, 2010)

SEC Amends Reporting Rule of Non-Accelerated Filers

The SEC has adopted amendments to the reporting rules applicable to non-accelerated filers—generally smaller market cap reporting companies. As a result, non-accelerated filers will not be required to include an attestation report of its registered public accounting firm on internal control over financial reporting in the annual reports they file with the SEC. The amendments conform the SEC's rules to Section 404(c) of the Sarbanes-Oxley Act, as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Non-accelerated filers (as well as all other reporting issuers), however, will still be subject to Section 404(a) of the Sarbanes-Oxley Act requiring that each annual report include a report by management on the issuer's internal control over financial reporting.

SEC Rel. No. 34-62914 (Sept. 15, 2010)

SEC Seeks to Enhance MD&A Disclosure

The SEC has issued a proposed rule that would require issuers to increase disclosure of short-term borrowing arrangements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" ("MD&A") section in their public filings. The SEC issued the proposed rule in response to concerns that period-end disclosures may not accurately present an issuer's ongoing liquidity and investment risks. In this regard, an issuer's short-term borrowings may fluctuate widely during a given reporting period.

The SEC also issued an interpretive release providing additional guidance regarding the liquidity and capital resources disclosure requirements applicable to MD&A. This release identified several trends and uncertainties that should be considered in preparing MD&A liquidity disclosure, including (i) ability to access debt markets; (ii) dependence on short-term financing (such as commercial paper); (iii) maturity mismatches between financing sources and the assets funded by such sources; (iv) changes in terms requested by counterparties; (v) possible liquidity issues that may arise in the middle of a financial reporting period; (vi) repurchase agreements and other short-term borrowings that may not be fully disclosed on period-end balance sheets; (vii) material cash and risk management policies; (viii) collateral valuation issues; and (ix) any industry-specific or issuer-specific leverage ratio issues.

SEC Rel. Nos. 33-9143 (Sept. 17, 2010) & 33-9144 (Sept. 17, 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.