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Corporate Alert: Del. Supreme Court Reverses Ruling, Del. Chancery Court Rules Merger Agreement Binds Stockholders, SEC Brings Enforcement Action, Second Circuit Rules Executives May Not Be Indemnified, Del. Supreme Court Recognizes Right to Obtain Identities of Partners, Del. Chancery Court Provides Guidance on Letter of Intent, Del. Chancery Court Addresses Implied Covenant
December 2010
Authors: Irwin A. Kishner, Daniel A. Etna

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Delaware Supreme Court Reverses Chancery Court Ruling on Bylaw Accelerating Annual Meeting of Stockholders

The Delaware Supreme Court has reversed the Delaware Chancery Court's ruling that upheld the validity of an amendment to a dissident stockholder-proposed bylaw, which would have resulted in a target company holding its annual meeting in January rather than August (the month in which the target company's annual meeting has historically been held). The bylaw amendment, which was proposed in a takeover battle, was designed to enable the dissident stockholder to add directors (in addition to those elected at the August 2010 annual meeting) to the target company's staggered board of directors in a relatively short period of time.

The Delaware Chancery Court found that the bylaw amendment was not inconsistent with the staggered board provision in the target company's charter, which provides that directors' terms expire at the annual meeting held in the third year following the year of their election. The Delaware Supreme Court found (as did the Delaware Chancery Court) that the provision at issue was ambiguous as to whether directors are required to serve three-year terms or whether their terms may expire at the annual meeting in the third year whenever scheduled. The Delaware Supreme Court concluded that the shortened meeting period created by the bylaw amendment did not qualify as "annual" under any construction of the term, and held that the bylaw amendment impermissibly truncated the relevant directors' terms and amounted to a de facto removal of those directors without cause without the 67% supermajority vote required by the target company's charter.

The Delaware Chancery Court's decision was previously reported in the October 2010 Corporate Alert.

Airgas, Inc. v. Air Products and Chemicals, Inc., C.A. No. 649,2010 (Del. Sup. Nov. 23, 2010).

Delaware Chancery Court Rules Merger Agreement Binds Non-Signatory Stockholders

The Delaware Court of Chancery has addressed whether certain contractual provisions in a merger agreement, such as post-closing adjustments and indemnity claims, were binding upon minority stockholders who neither signed the merger agreement nor voted upon the merger. The provisions were negotiated on behalf of the minority stockholders by a stockholders' representative appointed in the merger agreement. The Delaware Chancery Court ruled that the provisions at issue were binding upon the minority stockholders.

Aventi v. Cavallieri, C.A. No. 5074-VCL (Del. Ch. Sept. 20, 2010).

SEC Brings Regulation FD Enforcement Action on Basis of Implied Disclosures

The SEC has brought Regulation FD enforcement actions against a publicly-traded company and its CEO and CFO, claiming that selective disclosure was made to analysts and certain shareholders that implied that the company would not meet analysts' quarterly earnings estimates. Regulation FD prohibits publicly-traded companies (and their officers and other agents) from disseminating material non-public information on a selective basis, rather than to the public at large. The SEC brought the enforcement action even though no material non-public information was expressly provided to analysts and no specific references were made to the company or its prospects. Instead, recent public statements of comparable companies regarding the impact of the slowing economy upon their earnings were used, according to the SEC, to "signal" that analysts' expectations would not be met. The company and its CEO and CFO settled the enforcement action without any admission or denial of liability.

SEC Exch. Act Rel. No. 63152 (Oct. 21, 2010).

Second Circuit Rules Executives May Not Be Indemnified for SOX "Clawback" Liability

The U.S. Court of Appeals for the Second Circuit, in a case of first impression, has ruled that a public company may not agree to indemnify its CEO or CFO for any incentive compensation or stock sale profits that they are required to disgorge under Section 304 of the Sarbanes-Oxley Act of 2002. Section 304 requires CEOs and CFOs of public companies to reimburse their companies for any incentive compensation received or stock sale profits recognized during the 12-month period following the filing of financial statements that are subsequently required to be restated as a result of misconduct. 

Cohen v. Viray, Docket No. 08-3860-cv (U.S. Ct. of App. (2nd Cir.) Sept. 30, 2010).

Delaware Supreme Court Recognizes Right to Obtain Identities of Limited Partners

The Delaware Supreme Court has upheld a lower court ruling that ordered a limited partnership to provide a list of its limited partners to one of those limited partners. The limited partner who sought the list complied with the procedures in the partnership agreement. The limited partner wanted to use the list to contact other limited partners to investigate potential claims against the limited partnership's general partner. The general partner, in resisting the request, relied on a privacy policy in a private placement memorandum issued to prospective investors advising that the general partner does not disclose non-public personal information about investors in the limited partnership. The Delaware Supreme Court ruled that the non-disclosure restrictions in the private placement memorandum did not override the right expressly afforded to limited partners under the partnership agreement.

Parkcentral Global, L.P. v. Brown Investment Mgmt., L.P., C.A. No. 5248 (Del. Sup. Aug. 12, 2010).

Delaware Chancery Court Provides Guidance on Enforceability of Letter of Intent

The Delaware Chancery Court has provided guidance in determining when a letter of intent becomes an enforceable agreement. The court ruled that a letter of intent (which, in this case, covered a licensing arrangement) will be deemed a binding agreement if the parties intended to be bound by the document and if the document contained all of the essential terms of an agreement. With respect to the essential terms, the Delaware Chancery Court noted that it must determine whether a reasonable negotiator would have concluded that the agreement was reached on the terms "that the parties themselves regarded as essential." 

Pharmathene Inc. v. SIGA Technologies Inc., C.A. No. 2627 VCP (Del. Ch. Nov. 23, 2010).

Delaware Chancery Court Addresses Implied Covenant of Good Faith and Fair Dealing

The Delaware Chancery Court, through its interpretation of a limited partnership agreement, has provided guidance regarding the application of the implied covenant of good faith and fair dealing. The claimant alleged that a publicly-traded master limited partnership and its board of directors breached the implied covenant of good faith and fair dealing in approving a merger. The court, finding that the merger complied with the conflict of interest provision in the partnership agreement, ruled that the implied covenant of good faith and fair dealing cannot be invoked to override express partnership agreement provisions.

Lonergan v. EPE Holdings LLC, C.A. No. 5856-VCL (Del. Ch. Oct. 11, 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.