Taking Care of Business – Page 2 – Emerging legal issues impacting the business community.

21 Jan

SEC Adopts New Hedging Disclosure Rules

On December 18, 2018, the Securities and Exchange Commission (SEC) announced that it had approved and adopted final rules requiring public companies to disclose, in proxy or information statements for election of directors, any of their policies and practices regarding the ability of the company’s employees, officers and directors to engage in certain hedging transactions with respect to the company’s equity securities. The final rules implement provisions of Section 14(j) of the Securities Exchange Act of 1934, which was added pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The effective date of the new rules is 30 days after publication in the federal register. As noted in the release of the final rules, the new requirements are intended to provide shareholders with information, at the time that they are asked to elect directors, about whether employees, officers or directors may engage in transactions that could reduce the extent to which their equity holdings and equity compensation are aligned with shareholders’ interests.

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17 Jan

Delaware Chancery Court Orders Papa John’s to Deliver Materials Responsive to a Director’s Books and Records Demand

By: Marc Casarino

On January 15, 2019, the Delaware Court of Chancery ruled that Papa John’s International, Inc. must allow its director John Schnatter access to materials responsive to his demand pursuant to the books and records inspection statute, 8 Del. C. § 220, subject to certain restrictions on use of the materials.^[1] Schnatter is Papa John’s founder, its largest stockholder and a director on its board. Until recently, he served as the company’s Chairman of the Board, CEO and spokesman. He resigned as Chairman and CEO following much publicized reports of his commentary on the NFL’s handling of player protests and his use of a racially charged term during a company training session. His spokesman role was terminated following recommendations by a special committee comprised of his fellow board members.
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21 Dec

Delaware Chancery Court Invalidates Charter Provisions Requiring Federal Forum Selection for Claims Under The Securities Act Of 1933

By: Marc Casarino

On December 19, 2018, The Delaware Court of Chancery held in Sciabacucchi v. Salzberg ^[1] that Delaware corporations cannot use charter or bylaw provisions to mandate that claims under the Securities Act of 1933 (‘33 Act) must be pursued in federal court. Such federal forum selection provisions have become a frequent component of corporate constitutive documents. This largely has been in response to increasing pursuit of state court actions asserting ‘33 Act claims and particularly after the Supreme Court’s decision in Cyan, Inc. v. Beaver County Employees Retirement Fund ^[2] – which clarified that ‘33 Act claims may be pursued in either state or federal court.

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17 Dec

A Focus on Variable Interest Entities

By: Howard Jiang

Since the Enron debacle, the Financial Accounting Standards Board (FASB) has paid a lot of attention to the types of entities that were used by Enron to avoid its financial reporting obligations. The FASB released Accounting Rule Bulletin No. 51 (ARB 51) and later FASB Interpretation No.46, as revised (FIN46(R)) to shed more light on Variable Interest Entities (VIE) in which an investor has control of a company that is not based on ownership of a majority of the voting interests and the factors that trigger financial consolidation obligations.

ARB 51 requires that an enterprise’s consolidated financial statements include all subsidiaries in which an enterprise has a controlling financial interest. That rule had historically been applied to circumstances in which an enterprise had control through holding a majority voting interest. However, the financial structuring engaged in by Enron and other entities of that era revealed a weakness in focusing solely on majority voting control as there are other situations in which a party could have a controlling financial interests but not control the majority of the voting interests or in which the equity investors do not bear the actual financial risk.

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Delaware Chancery Court Declines to Apply <i>Zapata</i>-Like Analysis to Deceptive Conduct Affiliated With an Independent Board

30 Nov

Delaware Chancery Court Declines to Apply Zapata-Like Analysis to Deceptive Conduct Affiliated With an Independent Board

By: Marc Casarino and Lori Smith

In Busch v. Richardson Electronics, Ltd.,^[1] the Delaware Court of Chancery held that a board of director’s decision not to pursue litigation on behalf of the corporation did not require the heightened two-step demand futility analysis developed in Zapata v. Maldonado^[2] because the board was not disqualified by lack of independence from making a valid business decision regarding the litigation. Although deference to the business judgment of an independent and disinterested board is not a controversial concept, the path to its decision in this case required the court to address the unique issue of whether a board’s alleged pre-litigation deception of a stockholder should trigger a Zapata-like analysis of the board’s post-litigation decision-making. The court affirmed that Zapata applies only in the limited circumstance where a disqualified board uses an independent committee to cleanse the board’s decision to not pursue litigation, and refused to expand a Zapata-like analysis to alleged deceptive conduct affiliated with an independent board. (more…)

28 Nov

Insight and Analysis of California’s New Gender-Specific Board Requirements

By: Jeremy Miller

California Governor Jerry Brown recently signed legislation requiring all publicly-held domestic corporations and publicly-held foreign corporations headquartered within the state to comply with certain minimum gender-based requirements related to the composition of their board of directors. The new law could be viewed as a step in the right direction to advance gender equality at the highest levels of management, but is not without both proponents and opponents. (more…)

12 Nov

Delaware Chancery Court Provides Guidance on Prior Material Breach and Set-Offs

By: Lori Smith and Melissa Nott Davis

The Delaware Chancery Court recently reaffirmed several important contract interpretation principles in Post Holdings, Inc. v. NPE Seller Rep LLC, Civil Action No. 2017-0772-AGB. The case highlights the fact that a party claiming its contractual obligations were excused by a material breach by the other party may not seek or continue to receive any benefits under the contract after the alleged material breach. The court also clarified set-off rights under a stock purchase agreement. (more…)

05 Nov

Opportunity Zone Tax Incentives: Significant Guidance from the IRS

By: John Eagan

The Internal Revenue Service (IRS) recently issued significant guidance regarding the implementation of the 2017 Tax Act provisions involving opportunity zones and the potential for both capital gain deferral and capital gain exclusion for investments related to these zones. Under the 2017 Tax Act, certain low-income communities can be designated as “qualified opportunity zones” and, after a nomination process, the IRS announced that more than 8,700 communities in all 50 states, the District of Columbia and five U.S. territories (American Samoa, Guam, Puerto Rico, the Northern Mariana Islands and the U.S. Virgin Islands) received the designation. (more…)

22 Oct

Shareholders Agreements: Insurance for Entrepreneurs

By: Michael Mentzel

If you just bought a brand new car, would you drive it off the lot without insurance? Of course you wouldn’t, but many entrepreneurs in a hurry to get their business going set up corporations without considering the risks of proceeding without a shareholders agreement.

Like insurance, you are likely to give a shareholders agreement little thought when things are going well, but if the relationships among the shareholders become contentious, you will find that the time and effort put into crafting a shareholders agreement was worthwhile.

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11 Oct

Delaware Enforces Common Stockholder Contractual Waiver of Appraisal Rights

By: Marc Casarino and Lori Smith

The Delaware Court of Chancery in Manti Holdings LLC v. Authentix Acquisition Company recently confirmed that a stockholder agreement may contractually restrict the exercise of statutory appraisal rights. Although the court has previously ruled on the enforceability of waivers of preferred stockholders’ appraisal right, this marks the first time that a Delaware court has ruled on the enforceability of contractual restriction of appraisal rights for common stockholders. The decision provides guidance for negotiating and drafting investment-related documents to properly address effective waiver of appraisal rights when a triggering event occurs. (more…)

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