Case Law Developments

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When a corporation sells corporate assets to its (or an affiliate of its) controlling stockholder, Delaware courts generally will review that transaction under the exacting “entire fairness” standard.[1]  But what if the corporation’s minority stockholders are given the opportunity to participate along with the controlling stockholder in the purchase of the corporate assets pro rata to the extent of their stock ownership?
Continue Reading Chancery Court Suggests that Rights Offerings May Limit Liability in Transactions with Controlling Stockholders

On April 27, a civil FCPA litigation against three former executives of a Hungarian telecommunications company officially came to a close after more than five years of contentious litigation in the Southern District of New York when Judge Richard Sullivan approved the settlements of the last two defendants and entered judgment in the matter.  The case alleged that three former executives of Magyar Telekom, Plc., a Hungarian telecommunications company, participated in a scheme between 2004 and 2006 to bribe public officials in Macedonia in order to secure favorable treatment for Magyar’s Macedonian subsidiary.  All three defendants were foreign nationals working for an overseas company; the charged conduct took place exclusively on foreign soil; and the defendants continue to reside overseas.
Continue Reading SEC, Hungarian Executives Settle 5-Year FCPA Suit that Generated Government-Friendly Rulings on Threshold Legal Issues

In a recent decision, the Supreme Court eliminated laches as a defense in patent litigation; as a result, defendants are more vulnerable to unexpected claims of patent infringement.[1]  Given this new layer of risk, it is even more important to conduct thorough and nuanced patent infringement diligence on an M&A target, and parties to M&A transactions should take this increased exposure to liability into account when negotiating the relevant representations and warranties and indemnities.
Continue Reading No Laches, More Problems: Elimination of Laches in Patent Infringement Suits Increases M&A Risks

Last month, in Vento v. Curry,[1] the Delaware Chancery Court preliminarily enjoined the Consolidated Communication Holding (“Consolidated”) shareholder vote[2] on the company’s all-stock acquisition of FairPoint Communications (“FairPoint”) due to Consolidated’s failure to adequately disclose the compensation its financial advisor would receive for participating in the acquisition financing. The court’s ruling ultimately had very little impact on the transaction – Consolidated subsequently disclosed that its financial advisor would receive $7 million in financing fees and the Consolidated shareholders overwhelmingly approved the transaction without any delay.[3]  Vento nonetheless provides important guidance for principals and financial advisors in evaluating whether disclosure of a financial advisor’s transaction-related compensation is required when seeking shareholder approval of an M&A transaction.   
Continue Reading Assessing Financial Advisor Compensation Disclosure Following Vento v. Curry

The Delaware Supreme Court has affirmed the Delaware Court of Chancery’s ruling that Energy Transfer Equity L.P. (“ETE”) did not breach its agreement to merge with The Williams Companies, Inc. when ETE terminated the agreement on the grounds that its counsel was unwilling to deliver a tax opinion that was a condition to closing.

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Earlier this month, following three hours of deliberation, a California federal jury found that Bio-Rad Laboratories, Inc. had violated the federal whistleblower provisions by unlawfully firing Sanford Wadler, its former general counsel, and awarded Wadler nearly $11 million in damages.  Wadler had sued his former company under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and California state law, asserting that he was wrongfully terminated in retaliation for investigating and reporting to senior management potential violations of the Foreign Corrupt Practices Act (“FCPA”) in China.  The pre-trial proceedings and three-week trial involved several whistleblower-friendly rulings that promise to generate additional litigation.  Those legal determinations, as well as the jury’s prompt finding of liability and imposition of a substantial award in the face of an aggressive corporate defense, bring to the forefront significant issues relevant to public companies, directors and other corporate stakeholders – not the least of which is the precedent of a general counsel in the role of whistleblower. 
Continue Reading Jury Awards Ousted General Counsel Nearly $11 Million in Whistleblower Retaliation Action – Key Takeaways

In 2015, Section 115 of the Delaware General Corporation Law (“DGCL”) was added to clarify that Delaware corporations may adopt bylaws requiring that any litigation regarding internal corporate claims be filed in Delaware (commonly referred to as “forum-selection bylaws”).  At the same time, Section 109(b) of the DGCL was amended to make clear that Delaware corporations (other than non-stock corporations) may not adopt bylaws that would shift litigation expenses onto unsuccessful stockholder-plaintiffs in internal corporate litigation (commonly referred to as “fee-shifting bylaws”).  These simultaneous amendments left open the question of whether a limited fee-shifting bylaw, which would only be triggered if the stockholder filed an internal corporate claim outside of Delaware in violation of the corporation’s forum-selection bylaw, would be valid under Delaware law.
Continue Reading Chancery Court Invalidates Bylaw Purporting to Shift Litigation Expenses onto Stockholders Who Violate a Valid Forum-Selection Bylaw

Playing a Zynga game often requires patience.  Patience, and persistence, were a winning combination for the plaintiff Thomas Sandys who brought a derivative suit against Zynga for alleged breaches of fiduciary duties after the Zynga Board approved a secondary sale of company stock by insiders, including Zynga’s controlling shareholder and then-CEO (“controlling shareholder/CEO”) during a blackout period.  Shortly after the sale, a disappointing earnings announcement resulted in a significant stock price drop.
Continue Reading From the Game Room to the Board Room – Reconsidering the Independence of Independent Directors

On Tuesday, December 27, 2016, the United States Court of Appeals for the Tenth Circuit in Bandimere v. S.E.C., found that the Securities and Exchange Commission’s (“SEC”) use of administrative law judges (“ALJs”) violated the U.S. Constitution.  While the court’s opinion relies on a somewhat arcane question of administrative law—whether the hiring of SEC ALJs violated the Appointments Clause—its decision to set aside an SEC order imposing sanctions for securities laws violations raises significant questions about future SEC claims brought before ALJs rather than in federal courts, as well as prior adjudications.  With the D.C. Circuit currently considering whether to grant rehearing en banc on its recent holding that these same SEC proceedings were constitutional, the Tenth Circuit’s decision is sure to draw considerable scrutiny in the months ahead and may well give rise to Supreme Court review of the issue.
Continue Reading Appellate Courts Split Over Constitutionality of SEC Administrative Proceedings

The Supreme Court’s unanimous decision this week in Salman v. United States, No. 15-268, 580 U.S. __ (Dec. 6, 2016), clarified what constitutes a “personal benefit” for purposes of insider trading liability.  In its first merits ruling in an insider trading case in two decades, the Court affirmed the Ninth Circuit’s holding that the personal benefit requirement may be met when an inside tipper simply gifts confidential information to a trading relative or friend.  In so holding, the Supreme Court significantly narrowed a key aspect of the Second Circuit’s landmark insider trading decision in United States v. Newman, which had required prosecutors to prove that the tipper received something “of a pecuniary or similarly valuable nature”—a more difficult standard to meet.

Before Newman was decided, the United States Attorney’s Office for the Southern District of New York had prioritized insider trading prosecutions, obtaining dozens of convictions and over a billion dollars in fines since 2009.  After Newman, however, prosecutors were forced to dismiss several indictments, and some commentators wondered what the future held for insider trading prosecutions.  The Supreme Court’s recent decision should reduce that uncertainty and may bring a renewed focus on insider trading investigations.
Continue Reading Supreme Court Clarifies Insider Trading Liability for Confidential Tips