Email Page Print Friendly Page Contact
learning center: publication detail
Corporate Alert: Court Considers Reverse Triangular Merger, Court Test for Aggregating a Series of Transactions, Court Guidance Regarding a Seller of Good Will Soliciting, Court Reaffirms Preferred Stockholder Rights, SEC Considers Extending Deadline, Court Enjoins Shareholder Vote, Massachusetts Proposes Regulation on Use of Expert Networks
May 2011
Authors: Edward B. Stevenson, Irwin A. Kishner

The Herrick Advantage

Is investing in energy right for you? Herrick can help you decide. On May 19, Herrick will host a "Renewable Energy Investments: Opportunities and Pitfalls for Private Equity Investors" event with a panel of seasoned investors that will offer diverse perspectives and key considerations to private equity investors seeking opportunities in the renewable energy space. We'll shed light on the distinctions among the various asset classes within the renewable energy space; the concept of creating climate wealth; obstacles to achieving returns; and risks and other factors that impact renewable energy business models. For more information on this event, please click here.

Delaware Chancery Court Considers Whether a Reverse Triangular Merger Constitutes an Assignment "by Operation of Law"

The Delaware Chancery Court has denied a motion to dismiss a breach of contract claim, finding that there may be circumstances in which a contract provision prohibiting an assignment "by operation of law" could be triggered by a reverse triangular merger.  In a reverse triangular merger, a wholly owned subsidiary of the acquiring entity merges into the target entity, with the target entity surviving the merger as a wholly owned subsidiary of the acquiring entity.  The target entity does not incur a change in its corporate existence and, as a result, the rights and obligations of the target entity are not transferred, assumed or affected.

The court reviewed the current state of Delaware law applicable to various transaction structures in considering whether the reverse triangular merger triggered the target corporation's contractual anti-assignment clause, which included a prohibition against stock acquisitions and forward triangular mergers.  While the court agreed that there are similarities between a stock acquisition and a reverse triangular merger, the court concluded that stock acquisition cases, where a "mere change of ownership, without more, does not constitute an assignment as a matter of law," were not controlling.  Further, the court stated that the forward triangular merger cases, which Delaware courts have found to constitute an assignment by operation of law, were not binding for purposes of reverse triangular mergers.  The court noted that after the merger in question was consummated, the target corporation "was gutted and converted into a shell corporation for the [acquiring corporation's] benefit."  This was sufficient for the court to deny the motion to dismiss and require a hearing on the merits to determine whether the merger "resulted in more than a mere change of control."

While the ruling leaves open whether a reverse triangular merger constitutes an assignment of a target corporation's contracts "by operation of law," the court did indicate that an acquirer's post-closing actions with respect to the target corporation's assets could be relevant in making the determination.

Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589-VCP (Del. Ch. Apr. 8, 2011)

Delaware Chancery Court Sets Out Test for Aggregating a Series of Transactions for Purposes of Determining Whether a Sale of Substantially All Assets Occurred

The Delaware Chancery Court has set out a three-part test to determine when a series of transactions should be aggregated for the purpose of determining whether a sale of "substantially all assets" has occurred.

Various bondholders claimed that the bond issuer violated a successor obligor provision in its bond indenture, which prohibits the bond issuer from selling, transferring or otherwise disposing of substantially all of its assets unless the entity to which the assets are transferred assumes the bond issuer's obligations under the indenture.  The bondholders argued that two split-offs completed in 2004, a split-off completed in 2009 and a proposed split-off for 2011—which collectively would involve assets constituting approximately 67% of the bond issuer's book value—should be aggregated, thereby resulting in a sale of substantially all of the assets of the bond issuer. 

The court adopted the "step-transaction doctrine," which allows for the steps in a series of separate but related transactions to be treated as a single transaction if it is determined that the steps are substantially linked.  Steps will be deemed to be "substantially linked" if three tests are satisfied. The "end result test" is satisfied if it appears that a series of separate transactions were prearranged parts of what was a single transaction, cast from the outset to achieve the ultimate result.  The "interdependence test" is satisfied if the steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series.  The "binding alternative test" is satisfied if, at the time the first step is entered into, there was a binding commitment to undertake the later steps.

After examining the facts, the court refused to aggregate the transactions, finding that the interdependence test was not met because each transaction was a distinct corporate event separated from the others by a number of years and each stood on its own merits.  The court also found that the binding commitment test was not met because none of the transactions were contractually connected and that the end result test was not met because although the transactions were part of a larger corporate strategy, the bond issuer had not pursued a unified disaggregation strategy with a sufficiently well-defined starting point or a sufficiently definitive end result.

Liberty Media Corp. v. The Bank of New York Mellon Trust Company, C.A. No. 5702-VCL, 2011 WL 1632333 (Del. Ch. Apr. 29, 2011)

Court of Appeals of New York Provides Guidance Regarding to What Extent a Seller of Good Will May Participate in Soliciting Former Customers

New York courts have historically held that a seller of a business that includes the sale of good will must refrain from soliciting the customers of the business as the buyer has the right to expect that the business' customers will continue to patronize the acquired business.  The Court of Appeals of New York  answered a certified question from the United States Court of Appeals for the Second Circuit regarding what actions under New York law constitute improper solicitation.  In the case at hand, the plaintiff alleged that the defendant had breached his duty of loyalty to the plaintiff by improperly soliciting his former clients to join him at his new place of employment, thereby impairing the good will that the defendant sold to the plaintiff in connection with the plaintiff's purchase of the defendant's business.

According to the Court of Appeals of New York, in determining whether improper solicitation has occurred, courts should consider whether, following the sale of the business, the seller initiated contact with the business' customers or clients.  A seller is prohibited from taking affirmative steps to contact such customers or clients and may not send targeted mailings or make individualized business-related phone calls to his former customers.  However, unless prohibited by a separate non-compete provision, the seller may advertise to the general public.  In addition, a seller may answer factual inquiries initiated by a former client if the seller's responses (i) are limited to the information requested by the former client and (ii) do not disparage the buyer or its business.  The court explains that "a seller loses his right to explain… why he believes his products or services are superior."  The seller may provide certain information about former clients to a new employer, help such new employer prepare for sales pitch meetings requested by the seller's former clients, and even be present at such meetings with the former client provided that the seller's role in such meetings is largely passive and limited to factual responses to specific client questions.

Bessemer Trust Company, N.A. v. Francis S. Branin, Jr., No. 63, 2011 NY Slip Op. 3307, 2011 N.Y. LEXIS 602 (Apr. 28, 2011).

Delaware Chancery Court Reaffirms Preferred Stockholder Rights are Contractual in Nature

The Delaware Chancery Court has reaffirmed that a preferred stockholder's rights under a certificate of incorporation are contractual in nature and, where clear and unambiguous, the certificate of incorporation and the preferred stockholder's rights therein are to be strictly construed.

At issue before the court was a preferred stockholder's right to consent to the sale of stock by a corporation's subsidiary.   The preferred stockholder alleged that the issuing corporation must obtain the preferred stockholder's consent prior to authorizing the sale of the stock of the corporation's subsidiary.  The court focused its analysis on the clear and unambiguous nature of the provisions of the certificate of incorporation that governs the preferred stockholder's voting rights.  The court also made note of the level of sophistication of the preferred stockholder and its role in negotiating its rights under the certificate of incorporation.  The court held that the preferred stockholder's bargained-for consent rights under the corporation's certificate of incorporation were clear and unambiguous and could not be rewritten by the court.  It further reiterated that in Delaware, a preferred stockholder's rights are contractual in nature and where the language governing such rights is clear and unambiguous, such language must be given its plain meaning.

Fletcher International, Ltd. v. ION Geophysical Corp., C.A. No. 5109-VCS (Del. Ch. Mar. 29, 2011)

SEC Considers Extending July 21, 2011, Compliance Deadline for Private Fund Adviser Registration

In a recent letter to the North American Securities Administrators Association (NASAA), the SEC indicated that it is considering extending the deadline for investment advisers to register as a result of the repeal of the "private adviser" exemption by the Dodd-Frank Act.  As a result of the repeal of the "private adviser" exemption, many advisers to private funds (including hedge funds, private equity funds and real estate funds) who were previously exempt from the registration requirements of the Advisers Act of 1940 will be required to register with the SEC.

Currently, the deadline for registration is July 21, 2011.  The SEC has indicated that, given the time needed for advisers to register and fully comply with the obligations applicable to them once they are registered, it is contemplating extending the registration deadline to the first quarter of 2012.

Delaware Court of Chancery Enjoins Shareholder Vote Until Company Makes Additional Disclosures

The Delaware Court of Chancery has preliminarily enjoined Atheros Communications Inc. from holding a meeting of its stockholders to vote on its proposed merger with Qualcomm Inc.   Plaintiffs brought a class action alleging that the board of directors of Atheros breached its fiduciary duties by implementing an inadequate sales process and omitting material facts in the proxy statement seeking shareholder approval. 

In its analysis, the court found that there was no basis to question the board's good faith desire to maximize shareholder value as the board took an active role in the sales process; engaged in deliberations regarding the company's strategic alternatives— including the potential for other suitors to offer a higher price; demonstrated willingness to discuss a sale with other acquirers; and engaged in a robust negotiation process resulting in a significantly higher offer. 

In the court's analysis of the plaintiffs' claim of inadequate disclosure, the court found that Atheros was required to disclose the fact that 98% of its financial adviser's fee was contingent upon the closing of the transaction.  Although there is no bright-line rule as to what ratio requires disclosure, the court stated that it was clear that a contingency fee of this nature requires disclosure to generate an informed judgment by the shareholders.  The court stated that shareholders have the right to disclosure of material facts that might provide reason to question the reliability of the financial adviser's opinion.  In addition, the court found that the board of directors failed to provide sufficient disclosure relating to the CEO's post-merger employment with Qualcomm. 

In re Atheros Communications, Inc. Shareholders Litigation, C.A. No. 6124-VCN (Del. Ch. Mar. 4, 2011)

Massachusetts Proposes Regulation on Use of Expert Networks by Hedge Fund Managers

The Massachusetts Securities Division has made a proposal to expand the "non-exhaustive" list of practices that constitute unethical conduct for investment advisers that is set forth in the Code of Massachusetts Regulations.  The list of prohibited practices may now include the payment by an investment adviser for consulting services, whether directly to the consultant or indirectly to an expert network service, unless the investment adviser obtains certain written certifications from the consultant.  This proposed regulation, as well as the other practices listed in the Code of Massachusetts Regulations, would extend to any investment adviser registered in Massachusetts or operating in Massachusetts under an exemption from registration.

In light of this proposed regulation, fund managers registered or operating in Massachusetts should reassess their policies regarding payment to consultants for information.

For more information on the issues in this alert, or corporate matters generally, please contact:

NY         Irwin Kishner at 212.592.1435 or
NJ          Edward Stevenson at 973.274.2025 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.