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Corporate Alert: SEC Issues Rules on "Say-on-Pay" and "Say-When-Pay", SEC Proposes Amendment to Net Worth Standard, Bill Introduced in NY Senate, DE Court Refuses to Dismiss Failed Merger Claims, DE Court Refuses to Dismiss Claim, DE Supreme Court Clarifies Enforceability of Forum Selection Clauses, City of New York Concludes Seeking Investments from Pension Funds is Lobbying
February 2011
Authors: Irwin A. Kishner, Daniel A. Etna

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SEC Issues Final Rules on "Say-on-Pay" and "Say-When-Pay"

The SEC has issued final rules implementing the "say-on-pay" and "say-when-pay" non-binding stockholder advisory vote provisions of Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act").  The final rules specify that stockholder say-on-pay votes must occur at least once every three years beginning with the first annual stockholders' meeting occurring after January 20, 2011. Companies are also required to hold stockholder say-when-pay votes at least once every six years to allow stockholders to decide how often they would like to cast say-on-pay votes.  Following a say-when-pay vote, a company is required to file a Form 8-K disclosing how often the company will hold say-on-pay votes. Companies are further required to hold non-binding stockholder advisory votes with respect to golden parachute arrangements with certain executive officers in connection with merger transactions. The final rules provide a temporary exemption for smaller public companies (i.e., those with a public float of less than $75 million). These smaller companies are not required to conduct say-on-pay and say-when-pay votes until annual meetings occurring on or after January 21, 2013.   

SEC Rel. No. 33-9178 (Jan. 25, 2011)

SEC Proposes Amendment to Net Worth Standard for Accredited Investors

The SEC has issued a proposed rule conforming the definition of "accredited investor" under the Securities Act of 1933, as amended, to the requirements of Section 413(a) of the Dodd-Frank Act. Under the proposed rule, in determining whether an individual investor has satisfied the $1 million net worth threshold for accredited investor status, the value of the individual investor's primary residence would be excluded. The proposed rule further provides that the value of an individual investor's primary residence would be determined by estimating the property's fair market value and subtracting the amount of debt secured by the property (up to the fair market value of the property). Indebtedness secured by an individual investor's primary residence in excess of the property's fair market value would be considered a liability and would be deducted from the individual investor's net worth.

SEC Rel. No. 33-9177 (Jan. 25, 2011)

Bill Introduced in NY Senate to Encourage Islamic Finance

A bill has been introduced in the New York Senate to permit the issuance of sukuk bonds. The purpose of the bill is to attract more direct foreign investment in New York from observant Muslim investors in the Middle East, Africa and South East Asia who cannot invest in traditional bonds due to the Islamic (or Sharia) law prohibition against charging or paying interest. In a traditional sukuk bond arrangement, the issuer uses the subscription proceeds of the bond to acquire assets, which are then held for the benefit of the holder of the sukuk bond. The income earned from the assets is shared with the bond holder. Upon maturity of the sukuk bond, the assets are sold under a pre-existing arrangement and the proceeds are returned to the bond holder.

Delaware Chancery Court Refuses to Dismiss Failed Merger Claims

The Delaware Chancery Court recently refused to dismiss claims for breach of fiduciary duty, fraud and unjust enrichment in connection with a failed merger.  Under the agreement governing the merger, the target company relinquished all operational control of its business to the acquirer prior to the closing of the merger. Shortly after obtaining operational control of the target company, the acquirer expressed concerns about the target company's business.  These concerns ultimately led the acquirer to exercise its right to terminate the merger agreement.

In ruling for the target company, the court found the target company's allegations regarding the business dealings between the target company and the acquirer were sufficient not only to plausibly suggest that the acquirer breached its obligations under the merger agreement, but also to support a claim for fraudulent misconduct. In so ruling, the court placed particular emphasis on the degree of operational control ceded by the target company to the acquirer under the merger agreement.

Narrowstep, Inc. v. Onstream Media Corp., C.A. No. 5114-VCP (Del. Ch. Dec. 22, 2010)

Delaware Chancery Court Refuses to Dismiss Claim Based on Unsigned Term Sheet

The Delaware Chancery Court has refused to dismiss a claim that an unsigned technology license term sheet bearing a legend that its terms were non-binding was nonetheless an enforceable contract. The court found that a material issue of fact existed as to whether the parties entered into a binding licensing agreement.

The court focused on the course of dealing between the parties after the term sheet had been drafted. In particular, the parties collaborated on product development and entered into an agreement obligating the parties to negotiate in good faith to agree upon a definitive license agreement in accordance with the term sheet. The claim was filed after one of the parties refused to negotiate the definitive license agreement due to certain terms no longer being economically favorable.

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

Delaware Supreme Court Clarifies Enforceability  of Forum Selection Clauses

The Delaware Supreme Court has clarified that a Delaware court need not afford deference to a prior action filed in another state where the parties' written contracts contain a forum selection clause naming Delaware as the chosen forum for litigation. In this case, two corporations were parties to contracts containing forum selection clauses specifying either Delaware or New York as the chosen forum. One corporation filed a breach of contract action against the other in California. In turn, the corporation that was sued in California filed an action in Delaware seeking to prevent the California litigation from proceeding. In affirming the Delaware Chancery Court's denial of a motion to stay the Delaware action, the Delaware Supreme Court ruled that the forum selection clauses in the contracts at issue prevented the California litigation from proceeding. Based on this decision, a Delaware state court will uphold a forum selection clause unless the court determines that upholding the forum selection clause would be unreasonable or that the clause is invalid.

Ingres Corp. v. CA, Inc., C.A. No. 4300 (Del. Dec. 1, 2010)

City of New York Concludes Seeking Investments from City Pension Funds is Lobbying

Regulatory bodies in New York have become increasingly aggressive in monitoring and prosecuting abuses of the process by which public pension monies are invested. The City of New York has released an important opinion for individuals and entities who do business with New York City's pension funds, concluding that seeking investments from the New York City pension funds constitutes "lobbying."

This significant determination means that any individual or entity that is seeking investment from New York City pension funds must register itself as a lobbyist (assuming a low threshold of compensation is exceeded). It also means that success fees related to obtaining these funds are prohibited, and individuals and entities are subject to significant additional penalties and liabilities for failure to follow this law carefully.

To read a copy of the advisory opinion by the New York City Corporation Counsel, please click here. Take note that the New York City Clerk—the entity charged with enforcing the City Lobbying Law—has committed to aggressively enforce this new interpretation.

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

Copyright © 2011 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.