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Corporate Alert: Del. Chancery Court Applies Revlon Standard, Del. Chancery Court Refuses to Enjoin Cash Tender Offer, SEC Adopts Rules Implementing Whistleblower Provisions, SEC Enters into First Deferred Prosecution Agreement, New Listing Option for Smaller Companies, FTC Issues Statement on Use of Escrow Arrangements
June 2011
Authors: Irwin A. Kishner, Daniel A. Etna

The Herrick Advantage

Herrick attorneys recently authored a chapter on Sports Law in the critically acclaimed American Corporate Counsel Association (ACCA) treatise "Successful Partnering Between Inside and Outside Counsel". Irwin Kishner and Dan Etna teamed up with our longtime client, Lonn Trost of the New York Yankees, to provide a roadmap to successful collaboration between general counsel and their external advisers in the professional sports industry. The four volume treatise is among the seminal works addressing the relationship between corporate law departments and law firms. Herrick is particularly proud to participate in this important initiative and to demonstrate its commitment to an ongoing partnership with the in-house bar.

Herrick recently won Intercontinental Finance Magazine's award for "Law Firm of the Year; Venture Capital and Emerging Growth; North America". Intercontinental Magazine has issued these awards based on nominations from its 98,000 readers, and we are pleased to be recognized as leading advisors in this area.

Delaware Chancery Court Applies Revlon Standard to Mixed-Consideration Merger

In a case of first impression, the Delaware Chancery Court ruled that the Revlon standard would likely apply to half-cash, half-stock mergers. Under the Revlon standard, certain change of control transactions are subjected to a heightened level of judicial review requiring the board of directors of the target company to obtain the best value reasonably available to the target company shareholders. The court stated that application of the Revlon standard was appropriate since a significant portion of the target company shareholder's investment would "be converted to cash and thereby deprived of its long-run potential." In so ruling, the court cautioned that the Delaware Supreme Court had not provided guidance as to the applicability of the Revlon standard to transactions (such as half-cash, half-stock mergers) involving the cash-out of a significant portion, but not all, of the target company's equity.

In re Smurfit-Stone Container Corp. S'holder Litig., C.A. No. 6164 (Del.Ch. May 20, 2011)

Delaware Chancery Court Refuses to Enjoin Cash Tender Offer

The Delaware Chancery Court refused to preliminarily enjoin a cash tender offer after finding that the deal protection measures associated with the tender offer were not overly burdensome so as to deter other bidders. The deal protection measures included a top-up option, a no-shop clause, provisions guaranteeing the acquirer the right to match offers and receive the same information the target company provided other bidders, and a termination fee payable if the target company withdrew from the transaction or the target company stockholders failed to tender a majority of their shares. The target company also agreed to rescind its poison pill only for the acquirer.  The court also took notice of the 40% premium over market price represented by the cash tender offer price. The court  advised that courts should be wary of depriving shareholders of the opportunity to participate in cash tender offers at a significant premium above market price.

In re Orchid Cellmark Inc. S'holder Litig., C.A. No. 6373 (Del Ch. May 12, 2011)

SEC Adopts Rules Implementing Whistleblower Provisions

The Securities and Exchange Commission (the "SEC") has adopted rules pursuant to Section 922 of the Dodd-Frank Act that create significant financial incentives for whistleblower employees to report suspected securities law violations directly to the SEC. These rules have created controversy over whether individuals should be required to report possible violations via a company's internal programs before going to the SEC.

The SEC will pay awards to whistleblowers who voluntarily provide the SEC with original information that leads to a successful SEC enforcement action in which the SEC obtains monetary sanctions in excess of $1 million. The whistleblower award payments may range from 10% to 30% of the total monetary sanctions collected by the SEC. In determining a particular whistleblower award payment, the SEC will consider specific factors that weigh in favor of an increase to such payment, as well as factors weighing in favor of a reduction to the payment.

Sec. Exch. Act Rel.  No. 34-64545 (May 25, 2011).

SEC Enters into First Deferred Prosecution Agreement

As part of initiatives to encourage greater cooperation in enforcement investigations, the SEC has entered into its first deferred prosecution agreement with a public company. The public company allegedly bribed foreign government officials to obtain contracts which resulted in profits of nearly $5 million. The public company self-reported to the SEC and the Department of Justice, and otherwise cooperated with the federal government. 

The SEC found the public company to be an "appropriate candidate" for the SEC's first deferred prosecution agreement. In support of this finding, the SEC made note of the public company's "immediate self-reporting, thorough internal investigation, full cooperation with SEC staff, enhanced anti-corruption procedures, and enhanced training." The SEC further noted that the public company's response "demonstrated high levels of corporate accountability and cooperation."

Under the deferred prosecution agreement, the SEC will refrain from bringing civil charges against the public company, provided that the public company complies with its obligations under the agreement. Among other things, the public company has agreed to enhance its policies, procedures and controls to strengthen compliance with anti-corruption practices. The public company also agreed to implement due diligence requirements related to the retention and payment of agents. In connection with its entry into the deferred persecution agreement, the public company agreed to pay $5.4 million in disgorgement and prejudgment interest and a $3.5 million criminal penalty.

SEC Press Rel. No. 2011-112 (May 17, 2011).

New Listing Option for Smaller Companies — NASDAQ's BX Venture Market

The NASDAQ OMX Group, Inc. has received approval from the SEC for the creation of a new listing market known as the BX Venture Market. The BX Venture Market provides listing for early stage and smaller companies that do not qualify for a NASDAQ Capital Market listing. The BX Venture Market is expected to attract companies trading on the over-the-counter market, companies that have been or will be delisted by another market for failure to meet that market's quantitative listing standards and smaller, less-liquid companies in need of expanded capital financing opportunities and exit scenarios for initial investors. The BX Venture Market listing standards will require companies to comply with many of the same corporate governance requirements as are required for listing on other securities exchanges and maintain basic quantitative standards. The BX Venture Market is expected to launch later this year.

Additional information concerning the BX Venture Market can be found at

FTC Issues Statement on Use of Escrow Arrangements

The Premerger Notification Office (the "PNO") of the Federal Trade Commission issued a "Statement on Escrows" clarifying the use of escrows in connection with transactions requiring notification under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act").  Absent exceptional circumstances, the PNO is of the view that when assets or voting securities are transferred to an escrow prior to the expiration of the HSR Act waiting period, the beneficial ownership of such assets or securities also has been transferred to the acquiring party, notwithstanding the use of an escrow arrangement. The PNO deems transfers into escrow to be violative of the HSR Act and can result in civil penalties of $16,000 per day.

In the event that the parties to a reportable transaction believe they are facing exceptional circumstances that merit no HSR Act enforcement action be taken if an escrow arrangement is utilized, the PNO recommends that the parties consult with the PNO in advance. If consulted in advance, the PNO may, in limited instances, advise that it will not recommend enforcement action.  The PNO did not identify specific circumstances under which an escrow arrangement would be permitted. At a minimum, the escrow arrangement must prevent the acquirer, to the extent possible, from exercising beneficial ownership of the escrowed assets or voting securities.

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.