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Corporate Alert: General Release Trumps Minority Shareholder Fraud Claim; "Short Swing" Profit Issue of First Impression; Cease and Desist Order in Social Media Crowdfunding Venture; NJ WARN Act; Federal Bankruptcy Court in DE Extends Federal WARN Act Liability Beyond Employer; New Large Trader Reporting Requirements; FTC Changes to HSR Form; D.C. Circuit Vacates SEC's "Proxy Access" Rule
August 2011
Authors: Irwin A. Kishner, Daniel A. Etna

The Herrick Advantage

On September 22, Herrick will host its 5th Annual Symposium on the Capital Markets, featuring thought provoking discussion on key topics affecting the industry. A distinguished panel of financial and legal experts, including representatives of JPMorgan Securities, Inc., FTI Consulting, The Deal LLC and Herrick, Feinstein LLP, will assess the current regulatory initiatives underway to implement the mandates of the Dodd-Frank Act. The event will feature The Hon. Michael E. McMahon; former U.S. Congressman and Counsel to Herrick, Feinstein LLP, who played a significant role in crafting the reform legislation. Invitations and details will be forthcoming.

Herrick is happy to congratulate Corporate Department co-chair Ed Stevenson and associate Johanna Ferraro for helping our client Unilever close its $215 million acquisition of Colgate-Palmolive's Colombian laundry detergent business on July 29. Ed and Johanna worked closely with Unilever's in-house counsel, its local lawyers in Colombia and its London-based teams on an acquisition that effectively doubled Unilever's presence in the Colombian laundry detergent market. Congratulations to our deal team on their efforts to make this acquisition a successful one for Unilever.

General Release Trumps Minority Shareholder Fraud Claim

The New York Court of Appeals upheld the dismissal of a lawsuit on the ground that a general release entered into by the parties barred the lawsuit. The decision arose out of a series of transactions that resulted in the majority stockholder buying out the interests of the minority stockholders. The minority stockholders claimed that they sold their interests based on fraudulent information provided to them by the majority stockholder, which undervalued their interests by $900 million.  The majority stockholder argued that the claim was barred by a broad release encompassing "all manner of actions . . . whatsoever . . . future, actual or contingent" given by the minority stockholders. The court held that even unknown fraud claims relating to the transactions at issue were covered by the release, unless the minority stockholders were able to prove a separate fraud (independent from the fraud in the transactions) that induced the release.

Centro Empresarial Cempresa SA v. Amer. Movil SAB de CV, No. 93 (NY Ct. of App. June 7, 2011)

Federal Court Addresses "Short Swing" Profit Issue of First Impression

The United States District Court for the Southern District of New York, addressing an issue of first impression, ruled that purchases and sales involving different classes of common stock possessing different voting rights can not be matched for purposes of the "short swing" profit liability provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended.  Section 16(b) requires that any profit resulting from a purchase and sale (or sale and purchase) of equity securities within a six-month period by directors, officers and 10% stockholders of a public company be disgorged to the public company.  In its decision, the court held that (i) the plain language of Section 16(b) requires that the purchase and sale must involve the same equity security and (ii) a significant correlation between the trading prices of the two types of equity securities does not permit a court to treat them as the same equity security when neither type of equity security was convertible, exchangeable or exercisable for the other.  

Gibbons v. Malone, 10 CV 8640 (BSJ) (S.D.N.Y Aug. 8, 2011)

SEC Cease and Desist Order in Social Media Crowdfunding Venture

The SEC entered into a settlement agreement with two promoters who launched a crowdfunding venture seeking to raise $300 million to buy a beer company. Crowdfunding utilizes social media sites to solicit and pool money from individuals who have a common interest and are willing to provide small investment contributions. The contributors were told that if the $300 million necessary for the beer company purchase was raised, the contributors would receive a "crowdsourced certificate of ownership," as well as a shipment of beer equal in value to the money invested. Although no monies were collected, the SEC alleged that the two promoters nonetheless violated the registration provisions of the Securities Act of 1933, as amended, by offering crowdsourced certificates of ownership without registering the offer with the SEC or having an exemption from registration available for the offer.

SEC Press Rel. 2011-122 (June 8, 2011)

New Jersey WARN Act May Apply to Affiliates of an Employer

A New Jersey appeals court found that the parent or an affiliate of an employer that failed to provide the required notice of a closing under the New Jersey WARN Act may be liable for severance pay.  The New Jersey WARN Act generally requires employers with 100 or more full-time employees to provide its employees with advance notice, or in the alternative, severance pay, in the event of a facility shutdown or mass layoff. In determining parent or affiliate severance payment liability, the court ruled the following 5-factor test applicable under the Federal Worker Adjustment and Retraining Notification Act of 1988 (the "Federal WARN Act") should be utilized: (i) common ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv) unity of personnel policies emanating from a common source and (v) the dependency of operations. The parent or affiliate will be held liable for severance payments if, after application of the test, there is evidence of significant involvement by the parent or affiliate in the employer's employment decisions. 

DeRosa v. Accredited Home Lenders Inc., 2011 N.J. Super. LEXIS 109 (N.J. App. Div. June 14, 2011)

Federal Bankruptcy Court in Delaware Extends Federal WARN Act Liability Beyond Employer

The U.S. Bankruptcy Court for the District of Delaware ruled that an affiliate that held an indirect ownership interest in, and was a lender to, an employer could be liable for severance payments under the Federal WARN Act. In order for liability to apply to the affiliate, the affiliate and employer need to be found to constitute a "single employer" for Federal WARN Act purposes.  In making "single employer" determinations, the following 5-factor test is utilized: (i) common ownership, (ii) common directors and/or officers, (iii) de facto exercise of control, (iv) unity of personnel policies emanating from a common source and (v) the dependency of operations. 

The court determined that only the first 3 prongs of the test had been established.  Nonetheless, the court ruled that the de facto exercise of control prong carried special weight under the test and held the affiliate liable for severance payments.

D'Amico v. Tweeter Opco, LLC, No. 08-12646 (U.S. Bankruptcy Ct. (Delaware) July 8, 2011).                      

SEC Adopts New Large Trader Reporting Requirements

The SEC adopted new Rule 13h-1 and Form 13H under Section 13(h) of the Securities Exchange Act of 1934, as amended, to assist the SEC in both identifying and obtaining trading information on market participants that conduct a substantial amount of trading activity, as measured by volume or market value, in the U.S. securities markets. Rule 13h-1 requires a "large trader," defined as a person whose transactions in NMS securities equal or exceed 2 million shares or $20 million during any calendar day, or 20 million shares or $200 million during any calendar month, to identify itself to the SEC and make certain disclosures to the SEC on Form 13H.  Upon receipt of a Form 13H, the SEC will assign to the large trader an identification number, which the large trader must then provide to its registered broker-dealers. Such registered broker-dealers will be required to maintain records in connection with transactions effected through accounts of the large trader.  In addition, the SEC is requiring broker-dealers to report large trader transaction information to the SEC upon request through the Electronic Blue Sheets systems currently used by broker-dealers for reporting trade information. Finally, certain registered broker-dealers subject to Rule 13h-1 will be required to perform limited monitoring of their customers' accounts for activity that may trigger the large trader identification requirements of Rule 13h-1

Sec. Act Rel. No. 34-64976 (July 27, 2011)

FTC Changes to HSR Form will Require Disclosure of Private Equity Relationships

The Federal Trade Commission adopted changes to the premerger notification rules under the Hart-Scott-Rodino Act (the "HSR Act"). Parties to a transaction subject to the HSR Act are required to use a revised HSR Act form and provide additional categories of information.

The most significant change requires the disclosure of detailed information about relationships between private equity funds and other entities 'associated" with the buyer that compete or have equity investments in the same business categories as the target. Another change requires the filing parties to submit new categories of documents with the revised HSR Act form including documents prepared by third party advisors that cover competitive issues or analyze potential synergies and efficiencies of the proposed transaction.  A further change eliminates several categories of information (i.e., base year revenues and certain SEC filings) of limited value in a preliminary transaction review.

FTC News Release - File No. P989316 (July 7, 2011)

D.C. Circuit Vacates SEC's "Proxy Access" Rule

The U.S. Court of Appeals for the D.C. Circuit vacated the SEC's "proxy access" rule, which would have required director candidates nominated by certain large stockholders to be included in a company's proxy statement.  The court found that the SEC, in adopting the rule, had violated the Administrative Procedures Act by failing to consider the rule's effect on efficiency, competition and capital formation.

Business Roundtable and Chamber of Commerce v. Securities and Exchange Commission, No. 10-1035 (D.C Ct. of App. July 22, 2011)    

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.