The Herrick Advantage

On September 17th, Herrick's Corporate Department will host its Eighth Annual Capital Markets Symposium. This year a distinguished panel of financial and legal experts will opine on recent developments in U.S. and international banking regulations, focusing on Dodd-Frank capital requirements and the disengagement of banks from the securities markets under the Volcker Rule.

Herrick Corporate Partner Stephen D. Brodie will moderate the discussion following a keynote address by Thomas O'Neill, founding member of the Kimberlite Group, LLC and Co-CEO of Kimberlite Advisors, LLC. 

In addition, Herrick Corporate Partners Richard M. Morris and Patrick D. Sweeney will join other speakers in discussing a wide range of related topics, including Basel III's leverage ratio framework and disclosure requirements, and the potential impact of bank departures from the securities markets.

For more information, email RSVP@herrick.com.


Amendments to Delaware General Corporation Law Effective August 1, 2014

On July 15, 2014, Delaware amended various provisions of the Delaware General Corporation Law. The changes, which go into effect on August 1, 2014, address the following areas:

  • Mergers Without Stockholder Vote, Section 251(h): This section provides that public corporations may include a provision in a merger agreement that, in certain circumstances, allows for the approval of a second-step merger following a public tender or exchange offer without the need for a stockholder vote. The amendment to this section clarifies that the merger agreement may merely permit, rather than require, that the merger occurs through Section 251(h), thus allowing the parties to later execute the merger through a different statutory provision if they wish. Among other changes to this section, the amendment clarifies that the tender or exchange offer may exclude certain target corporation stock and permits the use of this section when one merger party is an interested stockholder. The amendment to this section only applies to merger agreements executed on or after August 1, 2014.
  • Actions by Written Consent with Future Effective Dates, Sections 141(f) and 228(c): The amendment expressly permits director or stockholder consents to corporate actions to take effect at a specified future date, but no later than 60 days after the person gives the consent, provided that the director or stockholder still retains that position at the specified future date and has not revoked the consent.
  • Incorporator Unavailability, Sections 103(a)(1) and 108: The amendment provides that if an incorporator becomes unavailable for any reason, such as death or incapacity, a person for whom the incorporator was acting may execute documents on behalf of the corporation. The amendment also eliminates the previous limitations on reasons for an incorporator's unavailability.
  • Amendments to Certificate of Incorporation without Stockholder Approval, Section 242: This section has been modified to allow corporations to amend certain provisions in the certificate of incorporation absent stockholder approval, including, for example, changing the name of the corporation or removing certain stale provisions in the original certificate of incorporation.

Delaware Law Concerning Safe Destruction of Documents Containing Personal Identifying Information

Delaware recently enacted a new law relating to the destruction of personal identifying information by companies.  Effective as of January 1, 2015, any commercial entity seeking to dispose of personal identifying information will be required to protect such personal identifying information by taking reasonable steps to shred, erase, destroy or modify such information to make it entirely unreadable or undecipherable. Under the law, a "commercial entity" may be any corporation, business trust, estate, trust, partnership, limited partnership, limited liability partnership, limited liability company, association, organization, joint venture, or other legal entity, whether or not for profit.  The law defines "personal identifying information" as a consumer's first name or first initial and last name in combination with (i) his or her signature, (ii) full date of birth, (iii) social security number, (iv) passport number, (v) driver's license or state identification card number, (vi) insurance policy number, (vii) financial services account number, (viii) bank account number, (ix) credit card number, (x) debit card number, and/or (xi) any other financial information or confidential health care information.

The purpose of the Delaware law is to protect individuals against the unauthorized access to or use of their personal identifying information.  In furtherance of these objectives, the law provides that any company that violates the new law may face a suit from the Delaware Attorney General and/or any individual who incurs actual damages due to a violation of the law.  Such aggrieved individual may be awarded treble damages by the courts.

Given that more than one million companies have been formed or incorporated in Delaware, the new data destruction law will affect a large number of companies that were not previously subject to the data retention and destruction provisions of the Gramm Leach Bliley Law, the Health Insurance Portability and Accountability Act of 1996 and other similar federal legislation or regulations.  The Delaware law does not apply to banks, financial institutions, and certain health insurers, healthcare facilities and consumer report agencies, already subject to similar federal laws. Governments and governmental agencies are also exempt from the Delaware law.

Delaware Supreme Court Confirms that Verbal Director Resignations are Effective under § 141(b) of the Delaware General Corporation Law 

The Delaware Supreme Court recently affirmed a Chancery Court ruling upholding the verbal resignation of a director of Biolase, Inc. amid a dispute between Oracle Partners, L.P., Biolase's largest stockholder, and Federico Pignatelli, its Chairman and CEO.  Director Alexander Arrow orally resigned his directorship at a board meeting and Paul Clark was elected a director in his place.  Pignatelli planned Arrow's resignation and Clark's appointment to the board, but changed his mind upon learning that Clark had aligned himself with a faction of the board that wanted to remove Pignatelli from his position as CEO and subsequently claimed that Clark's appointment was improper and invalid.  Upon Pignatelli's change of course, Oracle brought suit, seeking a declaration that Arrow had properly resigned and that Clark had replaced him.  Pignatelli argued, among other things, that §141(b) of the Delaware General Corporation Law requires that a director's resignation be in writing and thus Arrow's resignation was invalid.  The Chancery Court disagreed and ruled that both Arrow's oral resignation and Clark's subsequent appointment to the board were effective. 

Upon appeal, the Delaware Supreme Court affirmed, stating that the Chancery Court's decision "that Arrow could resign from the board of directors by means of an oral statement under §141(b) is not legally erroneous."  Section 141(b) of the DGCL states that "[a]ny director may resign at any time upon notice given in writing or by electronic transmission to the corporation."  The Delaware Supreme Court noted that the lower court took a "sensible and reasonable" approach and held that the term "may," as used in §141(b), does not mean "may only."  In doing so, the Delaware Supreme Court upheld a line of Chancery Court decisions dating back to 1984 that have found the written resignation language in §141(b) to be "permissive" rather than mandatory and that such language does not, therefore, rule out director resignation by other means.

Biolase, Inc. v. Oracle Partners, L.P., No. 270, 2014, 2014 WL 2619404 (Del. June 12, 2014)

Delaware Chancery Court Addressed Corporate Benefits Doctrine

The Delaware Chancery Court recently considered a case where a stockholder of a public company, Astoria Financial Corporation, notified Astoria's board of directors that certain of its recent SEC filings were not in compliance with federal law (specifically, the Dodd-Frank Wall Street Reform and Consumer Protection Act), and subsequently sued Astoria for attorneys' fees incurred by the stockholder in investigating the non-compliance and writing a demand letter to the board.

Under the corporate benefits doctrine, a stockholder may receive attorneys' fees where (i) the underlying cause of action was meritorious, (ii) the action producing benefits to the corporation was taken by the defendants before a judicial resolution was achieved, and (iii) the resulting corporate benefit was causally related to the lawsuit. The policy behind this doctrine, which is in contrast to the general rule of the American legal system that each party pays its own legal fees, is to incentivize private actors to police corporate misconduct.

In this case, the stockholder sent a demand letter to the board of directors of Astoria outlining the Dodd-Frank reporting violations and recommending actions. The board responded by curing the violations, as recommended. The board refused to reimburse the stockholder's legal fees, however, and the stockholder brought suit under the corporate benefits doctrine. The stockholder argued it was entitled to receive attorneys' fees as it presented a meritorious claim for breach of fiduciary duties and conferred a benefit on Astoria stockholders by bringing Astoria into compliance with applicable law.

The Court granted Astoria's motion to dismiss, as the Court did not find that any of the stockholder's allegations of breach of fiduciary duties by the directors, for failure to ensure compliance with new reporting obligations under the Dodd-Frank Act, were meritorious. The Court further stated that when a stockholder notifies the board of directors that a corporate loss may be avoided, whether to pay this stockholder for his efforts is in the discretion of the board and not a court matter. "It is only when benefits result from a demand to address corporate wrongdoing under Rule 23.1 [derivative actions by shareholder]...that it is appropriate for the Court to intervene." Expanding further, the Court stated so long as the board acts consistent with its fiduciary duties, "what resources to devote to oversight . . . is a core board function, and not a stockholder function. Only where the stockholder has acted on behalf of the corporation because those whose duty it is to act, the directors, have breached their fiduciary duties . . . will the stockholder be entitled [to attorneys' fees]..."

Amendments to the Delaware LLC Act, the Limited Partnership Act and the Revised Uniform Partnership Act

Delaware passed proposed amendments to Section 18-305 of the Limited Liability Company Act, Section 17-305 of the Revised Uniform Limited Partnership Act and Section 15-403(d) of the  Revised Uniform Partnership Act to confirm that a member of a limited liability company, the limited partner of a limited partnership, or the partner of a general partnership, may make a books and records request to the limited liability company or partnership, as the case may be, in person or by an attorney or other agent.  In addition, Delaware also amended Section 18-305 of the Limited Liability Company Act and Section 17-305 of the Revised Uniform Limited Partnership Act to add a new subsection which provides that a limited liability company or a limited partnership is required to maintain a current record of the name and last known address of each member and manager, or each partner, as the case may be.

SEC Issues Interpretive Guidance on Accredited Investor Verification

On July 3, 2014, the Division of Corporation Finance of the Securities and Exchange Commission issued new Compliance and Disclosure Interpretations ("CDIs") clarifying how issuers of securities may make accredited investor determinations in compliance with Rule 506(c) of Regulation D, promulgated under the Securities Act of 1933, as amended (the "Act").  Under Rule 506(c), an issuer is permitted to engage in general solicitation of a securities offering without registration under the Act, provided the issuer takes reasonable steps to verify a purchaser's accredited investor status. 

The Rule allows the issuer to verify a purchaser's accredited investor status by applying an income test or a net worth test.  Two of the CDIs clarify the general application of these tests to purchasers with non-U.S. income and purchasers who hold assets jointly with someone other than a spouse:

  • Where a purchaser has annual income reported in a non-U.S. currency, the issuer may apply the income test either by using the exchange rate as of the last day of the year being reported, or the average exchange rate for such year; and
  • Where a purchaser holds assets jointly with a non-spouse, the issuer is permitted to include those assets in calculating the purchaser's net worth, but only to the extent of the purchaser's percentage ownership in the assets.

Additionally, the Rule provides a number of non-exclusive safe harbors, compliance with which is deemed to be "reasonable" for purposes of verifying a purchaser's accredited investor status.  The remaining CDIs provide specific guidance as to the application of the income and net worth tests in the context of the Rule's safe harbors:

  • An issuer who verifies a purchaser's income by reviewing his or her IRS forms for the last two years is generally entitled to rely upon a safe harbor.  However, if IRS forms are not available for each of the last two years, the issuer is not entitled to rely on the safe harbor, and instead must apply a principles-based approach which may require the issuer to obtain written representations of the purchaser's income and to review additional documentation.
  • Similarly, issuers are not entitled to rely upon a safe harbor where the purchaser provides foreign tax forms.  The CDIs indicate that, in such a scenario, an issuer may still reasonably conclude that a purchaser is accredited by reviewing tax forms from foreign jurisdictions that impose penalties similar to those imposed in the U.S. for falsely reported income.
  • When applying a net worth test to determine accredited investor status, an issuer may not take advantage of the Rule's safe harbors by reviewing tax assessments that are more than three months old, or by examining non-U.S. consumer or credit reports.  In either of these cases, the issuer would need to take additional steps to verify the purchaser's net worth.

Although the CDIs indicate that the SEC strictly interprets the Rule's safe harbors, issuers are still afforded flexibility in applying a principles-based approach to making accredited investor determinations. Where safe harbors are unavailable, issuers may still rely upon the Rule provided diligent and reasonable steps are taken to verify a purchaser's accredited investor status.

The SEC Explains A Few Things Directors of Public Companies Should Know

On June 23, 2014, the U.S. Securities and Exchange Commission Chair Mary Jo White delivered a speech entitled "A Few Things Directors Should Know About the SEC."  The speech focused on the role directors played as gatekeepers for shareholders, self-reporting of wrongdoing, and how the whistleblower program works.

The SEC explained that directors are essential gatekeepers who share the SEC's mission to ensure that investors can invest with confidence.  Directors are expected to oversee the business and affairs of the company and to prevent, detect and stop violations of the federal securities laws.  Directors, along with senior management under the purview of the board, should set expectations, including a standard of good corporate governance and rigorous compliance.  Directors should ensure that the company's disclosures are accurate, the finances have been adequately and transparently reported and audited, and the management is carrying out business as agreed upon.  In addition to understanding the company's business model, the associated risks, its financial condition, its industry and its competitors, directors should consider the view of regulators and listen to their shareholders' concerns.

The SEC acknowledged that, even in the best run companies, wrongdoing will almost inevitably occur.  The SEC discussed the benefits for self-reporting and cooperating with the SEC, including a reduced penalty, and the downsides in deciding not to self-report.  The SEC explained that cooperation means more than complying with subpoenas.  Rather, cooperation requires a sincere and thorough partnering with the SEC to uncover all of the relevant facts. 

Last, the SEC briefly described the whistleblower program that was created under the Dodd-Frank Act.  The whistleblower program provides monetary awards to individuals who provide original information to the SEC that leads to enforcement action resulting in monetary sanctions that exceed $1 million.  The SEC explained that the whistleblower program encourages whistleblowers to first report any misconduct internally, a factor which the SEC considers when determining the amount of the monetary award.  The SEC expects directors to foster a culture that affirmatively encourages employees to report any wrongdoing without any fear of retaliation. 

The SEC also discussed two cases brought against audit committee chairs, noting that while it has brought cases against directors, such cases should not discourage directors from serving on boards.  The SEC explained that in such cases, there were "clear lines crossed by directors not doing their jobs, and then some."

For a full transcript of the speech, go to http://www.sec.gov/News/Speech/Detail/Speech/1370542148863

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.