Corporate Alert
May 2012
Authors: Edward B. Stevenson, Irwin A. Kishner
The Herrick Advantage
Herrick recently won top honors in the DealMakers magazine 2012 M&A Awards and was recognized as "Law Firm of the Year" in the area of Mergers & Acquisitions. The DealMakers M&A Awards recognize the law firms that best assist clients with transactional matters throughout the mergers and acquisition process. To compile the awards, editors from DealMakers solicited votes from more than 80,000 readers, asking them to name the leading law firms across the globe in a variety of practice areas. We are proud to be recognized as a leading firm by the global M&A community.
JOBS Act Creates "IPO On-Ramp" For Emerging Growth Companies
The recently enacted Jumpstart Our Business Startups Act, or JOBS Act, created the "IPO On-Ramp" provisions to ease the burden of becoming and being a public company for certain small and medium sized companies. An "emerging growth company" will be able to take advantage of the benefits of "IPO On-Ramp" as well as benefits from the JOBS Act once it becomes public.
An emerging growth company is a company with less than $1 billion in revenues for its most recently completed fiscal year. Such company will remain as an emerging growth company until the earliest of (i) the end of the fiscal year in which its revenues equal or exceed $1 billion, (ii) the end of the fiscal year following the fifth anniversary of the IPO; (iii) the date on which the company has issued more than $1 billion in non-convertible debt over the prior three-year period; or (iv) the date on which the company becomes a "large accelerated filer" under the Securities Exchange Act.
The IPO On-Ramp allows an emerging growth company to engage in oral or written communications with potential investors that are qualified institutional buyers or accredited institutional investors either before or after filing a registration statement. Thus, an emerging growth company has the opportunity to test the waters before actually going public and to assess the interest in and the success of the IPO.
An emerging growth company may confidentially submit a draft of the registration statement with the Securities and Exchange Commission ("SEC") for review. The SEC will comment and the emerging growth company may confidentially file amendments in response to the comments, provided that such filings are publicly filed with the SEC at least 21 days prior to the start of the company's road show.
The IPO On-Ramp is expected to reduce the costs of going public by easing regulatory requirements. For example, an emerging growth company would only need to provide two years, rather than three years, of audited financial statements in the registration statement. In addition, an emerging growth company would only need to disclose compensation information with respect to the CEO and the two highest paid executives, rather than to disclose compensation information with respect to five executives.
Post-IPO requirements such as compliance with new or revised financial accounting standards, independent auditor attestation and executive compensation disclosure have also been reduced.
By allowing easier access to the IPO market, the IPO On-Ramp provides small and medium sized companies a new method to raise capital that might not have been considered prior to the enactment of the JOBS Act.
Delaware Chancery Court Indicates that the Combination of No Shop Provisions and Don't-Ask-Don't-Waive Standstills May Constitute a Breach of Fiduciary Duties
In connection with the approval of a settlement of plaintiffs' breach of fiduciary duty claims against the board of directors (the "Board") of Celera Corp. ("Celera"), arising from the acquisition of Celera by Quest Diagnostics ("Quest"), the Delaware Chancery Court recently analyzed whether the Board breached its fiduciary duties to stockholders by agreeing to "Don't-Ask-Don't-Waive Standstills" as well as a "Non-Solicitation Provision" in a merger agreement. Here, the Board solicited bids for a purchase of Celera from various potential bidders and, in each instance, required each such potential bidder to enter into confidentiality agreements that expressly prohibited them from making offers for Celera shares without the express invitation from the Board or without the Board waiving this restriction (the "Don't-Ask-Don't-Waive Standstills"). The Board subsequently entered into a merger agreement with Quest, which required the Board to terminate all discussions with all other potential bidders and prohibited the Board from soliciting competing offers (the "Non-Solicitation Provision"), except when required to do so by their fiduciary duties.
In dicta, the Court stated that while individually Don't-Ask-Don't-Waive Standstills and Non-Solicitation Provisions may serve legitimate purposes, the combination of the Don't-Ask-Don't-Waive Standstills and the Non-Solicitation Provision could be problematic. Don't-Ask-Don't-Waive Standstills prevent potential bidders from informing the Board of their willingness to bid on a target company and the Non-Solicitation Provision prevents the Board from asking potential bidders whether they are interested in placing bids. Taken together, these restrictions could increase the risk that the Board may lack relevant information, including information necessary to consider whether to comply with the merger agreement or pursue a competing bid pursuant to its fiduciary duties. Given the Court's discussion, a board of directors should consider carefully entering into a combination of Don't-Ask-Don't-Waive Standstills and Non-Solicitation Provisions that may effectively keep the board willfully in the dark with respect to competing bids and therefore cause a breach of its fiduciary duties to stockholders.
In re Celera Corporation Shareholder Litigation., C.A. No. 6304-VCP (Del. Ch. March 23, 2012).
Delaware Supreme Court Looks to Plain Meaning of Company's Charter to Define "Liquidation Event"
The Delaware Supreme Court recently upheld a Superior Court decision that in a merger, the holders of Omneon, Inc. (the "Company") Series C-1 preferred stock (the "Holders") were not entitled to a liquidation preference under the plain meaning of the Company's certificate of incorporation. The Court found that the pre-merger conversion of the Series C-1 preferred stock into common stock was a distinct and separate transaction from the merger itself, and therefore was not a "Liquidation Event" under the certificate of incorporation.
Here, the Company entered into a merger agreement conditioned on certain holders of preferred stock automatically converting their shares of preferred stock into common stock via a majority vote prior to the merger. Additionally, as part of the pre-merger conversion, the preferred shareholders would forego their contractual right to any liquidation preference payout that would otherwise be triggered by the merger. Under the Company's certificate of incorporation, a "Liquidation Event" (which includes a merger) is required to trigger the Holders' right to a liquidation preference payment. The stock conversion was duly approved, however, the Holders determined they would have received considerably more compensation for their stock had they been converted as part of a liquidation preference payout through the merger, versus the pre-merger conversion into common stock. The Holders argued that the pre-conversion was "integral" to the acquisition, and it should be deemed a part of the "Liquidation Event" entitling the Holders to additional payments for their shares. The Court disagreed, finding that the Holders' stock was "validly converted into common stock" prior to the actual merger taking effect, and declined to find that the conversion of preferred stock into common stock was part of a "series of related transactions" that constituted a "Liquidation Event." Instead, the Court determined that only the actual merger itself was a "Liquidation Event." As a result, when the "Liquidation Event" took place, the Holders were holders of common stock and not the Series C-1 preferred stock, and, therefore, were not entitled to any liquidation preference payout.
Alta Berkeley VI C.V., et al v. Omneon, Inc., C.A. No. N10C-11-102 (Del. March 5, 2012)
Delaware Court Upholds Confidentiality Agreements and Enjoins Hostile Bid
The Delaware Chancery Court recently upheld confidentiality agreements and temporarily enjoined Martin Marietta Materials ("MMM") from prosecuting a proxy contest and proceeding with a hostile bid for its industry rival Vulcan Materials Company ("Vulcan"). In 2010, MMM and Vulcan entered into confidentiality agreements in connection with entering into merger discussions. The agreements prohibited each party from disclosing to third parties confidential information and the fact that the parties had entered merger discussions. However, after MMM's economic position improved relative to Vulcan, MMM decided to make a hostile bid for Vulcan and launched a proxy contest to make Vulcan more receptive to its offer. The Court determined that MMM breached the confidentiality agreements by (i) using protected information in formulating its hostile bid, (ii) selectively disclosing protected information in one-sided securities filings related to its hostile bid, and (iii) disclosing protected information in non-SEC communications in an effort to sell its hostile bid. While the agreements did not expressly include a standstill, MMM's breach entitled Vulcan to specific performance of the agreements and an injunction. The Court enjoined MMM for four months from pursuing a proxy contest, making an exchange or tender offer or otherwise taking steps to acquire control of Vulcan's shares or assets.
Martin Marietta Materials, Inc. v. Vulcan Materials Co., C.A. 7102-CS (Del. Ch. May 4, 2012).
SEC and CFTC Jointly Propose Swap Participant Definitions
The U.S. Commodity Futures Trading Commission (the "CFTC") and the SEC have unanimously adopted new rules under the Commodity Exchange Act (the "CEA") and the Securities Exchange Act of 1934 (the "Exchange Act"), which further define certain terms under the comprehensive regulatory framework for derivatives established by the Dodd-Frank Act. In addition, the CFTC and SEC adopted a joint final interim rule which excludes certain hedging swaps for purposes of determining whether a person is a swap dealer.
In general, the Dodd-Frank Act divides regulatory authority in respect of swaps among the CFTC and the SEC. The Act also adds the terms "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant" and "eligible contract participant" to the CEA and the Exchange Act. In turn, Congress called upon the CFTC and SEC to further define these terms, among others.
Under the final rules, a person may determine if it is a swap dealer by satisfying one of four regulatory tests. For purposes of these tests, a person may exclude any swap activities that are not part of such person's regular business as well as swaps falling into specifically excluded categories (e.g., swaps that hedge physical positions and swaps between majority-owned affiliates). The final rules also provide for a de minimis exemption for certain credit default swaps of not more than $3 billion ($150 million for other security-based swaps). Persons that meet either the definition of "swap dealer" or "security-based swap dealer" are subject to statutory requirements related to, among other things, registration, margin, capital and business conduct.
Alternatively, a person may be a "major swap participant" or a "major security-based swap participant" under the new rules if it is not a "swap dealer" and it meets one of three statutory tests. In providing guidance with respect to these tests, the CFTC and SEC stated that investment advisers are not required to include the swap positions of their managed accounts. The rules also clarify the definition of "eligible contract participants" generally and for purposes of retail forex transactions.
The rules will become effective 60 days from their publication in the Federal Register, except that the rules with respect to "eligible contract participants" will not take effect until the end of 2012.
For more information on the other issues in this alert, or corporate matters generally, please contact:
NY Irwin Kishner at 212.592.1435 or ikishner@herrick.com
NJ Edward Stevenson at 973.274.2025 or estevenson@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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