February 2012
Authors: Irwin A. Kishner, Daniel A. Etna
The Herrick Advantage
With the New Year well underway, Herrick continues its commitment to providing a forum for discussion, networking and deal sourcing to private equity, venture capital and hedge fund industry participants. Our partners are proud to join in an industry-wide conversation and bring the benefits of this experience to our clients. In January we hosted a BTIG panel discussion focused on hedge fund launches and choices in strategic capital. In February we participated as panelists in Capital Roundtable's Independent Sponsor's Conference addressing deal making for independent private equity sponsors and the middle market investors who back them. And in March we are excited to once again feature an iEvening Venture Capital event that will provide start-ups with the opportunity to pitch their business plans to a team of early stage investors. For more information on Herrick's regular lineup of events please click here.
Delaware Chancery Court Holds LLC Managers Owe Fiduciary Duties
The Delaware Chancery Court held that the traditional fiduciary duties of loyalty and care are owed by managers of Delaware limited liability companies to their members in the absence of a contractual provision waiving or modifying those duties. In so holding, the court acknowledged that the Delaware Limited Liability Company Act (the "Act") does not expressly provide for fiduciary duties. However, according to the court, such duties can be inferred. In particular, Section 18-1104 of the Act provides that in any case not provided for in the Act, the rules of law and equity shall govern. The court found Section 18-1104 as statutorily requiring the application of fiduciary duties mandated by equity. Section 18-1101 of the Act permits members to expand, restrict or even eliminate fiduciary duties. In the case before the court, the members failed to avail themselves of the contractual flexibility afforded by Section 18-1101.
Auriga Cap. Corp. v Gatz Properties, LLC, No. 4390-CS (Del. Ch. Jan. 27, 2012)
Delaware Chancery Court Addresses Doctrine of Corporate Opportunity
The Delaware Chancery Court found that a co-founder of an apparel business had breached his duty of loyalty by misappropriating assets entrusted to his management and supervision. The claim was brought against the co-founder after he started a competing business. The court's decision was based on the doctrine of corporate opportunity. This doctrine provides that a corporate officer or director may not take a business opportunity for his own if: (i) the corporation is financially able to exploit it; (ii) the opportunity is within the corporation's line of business; (iii) the corporation has an interest or expectancy in the opportunity; and (iv) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position antithetical to his duties to the corporation.
Dweck v. Nasser, C.A. No. 1353-VCL (Del. Ch. Jan. 18,2012)
New York Authorizes Benefit Corporations
New York has become the seventh state to authorize the incorporation of benefit corporations ("B-Corps"). The authorization of B-Corps is intended to allow socially-conscious entrepreneurs to access capital held by like-minded investors. A corporation may be incorporated as a B-Corp by providing in its certificate of incorporation that it was formed for the purpose of creating "general public benefit," which is defined as "a material positive impact on society and the environment taken as a whole, assessed against a third-party standard, from the business and operations of a benefit corporation." Subject to obtaining a supermajority approval of its shareholders, an existing for-profit New York corporation may also become a B-Corp by amending its certificate of incorporation.
S. 79A-2011 (N.Y.), A. 4692A-2011 (N.Y.)
SEC Staff Issues Global No-Action Relief From Exchange Act Registration for Restricted Stock Units
The staff of the Securities and Exchange Commission (the "SEC") issued a global no-action letter providing relief from the registration requirements of the Securities Exchange of 1934, as amended (the "Exchange Act"), for issuers reaching the holder of record registration threshold due to the issuance of restricted stock units ("RSUs"). RSUs generally represent the right to receive a number of shares of stock in the future, subject to certain conditions. These conditions may include time-based or performance-based vesting or the occurrence of an initial public offering or other significant event.
Under the Exchange Act, an issuer with assets in excess of $10 million and a class of equity securities held of record by 500 or more persons is required to register that class of equity securities under the Exchange Act. Issuers that have a class of equity securities registered under the Exchange Act are subject to, among other things, the Exchange Act's periodic and other reporting requirements.
Prior to the issuance of this global no-action letter, the staff of the SEC had granted no-action relief regarding the issuance of RSUs on an individual basis to issuers such as Facebook, Zynga and Twitter.
Fenwick & West LLP No-Action Letter (Feb. 13, 2012)
NYSE Limits Discretionary Voting by Brokers
The New York Stock Exchange recently announced revisions to NYSE Rule 452. This rule governs discretionary voting by brokers when their clients have not provided voting instructions. Rule 452 permits brokers to vote uninstructed shares on "routine" proposals, but not on "non-routine" proposals.
Under revised Rule 452, the following proposals are no longer treated as "routine:" (i) de-staggering a company's board of directors; (ii) implementing majority voting in director elections; (iii) eliminating supermajority voting requirements; (iv) providing for the use of shareholders consents; (v) providing rights to shareholders to call a special meeting; and (vi) providing for certain types of anti-takeover provision overrides. As a result, companies can be expected to encounter more difficulty in passing these types of proposals since "broker non-votes" will have the same effect as votes against the proposals.
Since most brokerage firms are New York Stock Exchange member organizations, revised Rule 452 will affect companies listed on the New York Stock Exchange, as well as Nasdaq and other national securities exchanges.
NYSE Euronext Information Memo 12-4 (Jan. 25, 2012)
FTC Raises Hart-Scott-Rodino Act Thresholds
The Federal Trade Commission (the "FTC") recently announced revisions to the jurisdictional thresholds for the Hart-Scott-Rodino Antitrust Improvements Act (the "HSR Act"). The HSR Act requires parties to transactions meeting certain size and other tests to file premerger notification forms with both the FTC and Department of Justice Antitrust Division and observe a mandatory waiting period prior to closing. The HSR Act requires the FTC to revise the thresholds annually based on changes in the gross national product. The new thresholds apply to any transaction closing on or after February 27, 2012.
Under the revisions, the size of transaction thresholds has been increased from $66.0 million to $68.2 million. As a result, the HSR Act requirements will now apply to acquisitions resulting in the acquiring person holding assets and/or voting securities of the acquired person valued in excess of $68.2 million. For transactions valued between $68.2 million and $272.8 million (up from $263.8 million), the size-of-the-person test will continue to apply. This test will now make the transaction reportable only where one party has sales or assets of at least $136.4 million (up from $13.2 million). All transactions valued in excess of $272.8 million are reportable regardless of the size of the parties.
The filing fee schedule under the HSR Act is (i) $45,000 for transactions valued in excess of $68.2 million but less than $136.4 million, (ii) $125,000 for transactions valued at $136.4 million or greater but less than $682.1 million and (iii) $280,000 for transactions valued at $682.1 million or more.
FTC News Release (Jan. 24, 2012)
For more information on the issues in this alert, or corporate matters generally, please contact Irwin Kishner at 212.592.1435 or ikishner@herrick.com, or Daniel A. Etna at 212.592.1557 or detna@herrick.com
Copyright © 2012 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.
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