On May 17, 2016, the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”) released new and updated Compliance and Disclosure Interpretations (“C&DIs”) on the use of non-GAAP financial measures (“NGFMs”).  The release of the C&DIs follows a series of recent speeches by SEC Chair Mary Jo White, Chief Accountant James Schnurr and other staff that expressed concerns over prevalent and liberal use of NGFMs.  The C&DIs signal a tightening of the SEC’s policy toward NGFMs and renewed SEC focus on their use. Continue Reading SEC Releases New Guidance on Non-GAAP Financial Measures

The filing by the DOJ of a complaint in federal court on April 4, 2016 against ValueAct — claiming that ValueAct’s purchase of shares of two public companies violated the HSR Act’s notification and waiting period requirements and seeking $19 million in civil penalties (based on the $16,000 per day penalty provisions of the HSR Act) – has the potential to have an immediate impact on the tactics used by brand name “activist hedge funds,” such as ValueAct, to accumulate shares without prior notice to either the issuers in question or the market generally. Continue Reading What the ValueAct Complaint Means for Activism Tactics and the SEC’s Beneficial Ownership Reporting Regime

Courts have long applied the exacting “entire fairness” standard to one-step, going-private merger transactions.  In Delaware, after years of agonizing by courts and commentators, this changed in 2013 in Kahn v. M&F Worldwide Corp. (“MFW”).[1]  MFW held that if certain procedural protections were observed in the course of the transaction the far more deferential business judgment standard would be applied.  The required safeguards included, most notably, negotiation and approval of the transaction by a committee of the target’s independent directors and subsequent approval by an informed majority vote of target stockholders unaffiliated with the acquiror.  Last week, the New York Court of Appeals adopted Delaware’s MFW approach in its review of the Kenneth Cole Productions going-private transaction.[2]  Continue Reading Business Judgment Rule Applied to Going-Private Mergers in New York

On May 6, the Delaware Supreme Court issued an Order that sets forth concisely the contours of the defendant-favorable standards for determining liability of directors and their advisors following the closing of sales of control of companies.  These standards are available, however, only following an uncoerced and informed approval of the sale by the target stockholders, including a majority of the disinterested holders.  Thus, while the Order clarifies a roadmap (set forth recently in Corwin v. KKR and discussed here) for obtaining easy dismissal of post-merger damages claims against directors and advisors, the need for directors and their advisors to avoid, or at least ferret out and disclose, any deficiencies in sales processes remains as strong as ever.  Only if these deficiencies are avoided or uncovered and disclosed in advance of the shareholder approval will the lower courts be able to rely on these defendant-favorable standards to dismiss claims. Continue Reading Delaware Supreme Court Enhances Defenses Available to Directors and Financial Advisors Where Well-Run Sale Processes and Adequate Disclosure

The practice of reporting non-GAAP earnings is back on the SEC’s radar, highlighted in recent speeches by SEC Chair Mary Jo White (see here) and SEC Chief Accountant James Schnurr (see here).  A series of news articles focusing on the increasing number of companies that report non-GAAP earnings (often confusingly called “pro forma” earnings) and the widening gap between these companies’ reported GAAP and non-GAAP earnings have also shed negative light on using NGFMs (see, e.g., here (paywall), here (paywall) and here).
Continue Reading Non-GAAP: The Pendulum Swings Back

The recently introduced “Brokaw Act” that proposes changes to the rules governing the reporting of ownership in U.S. public companies would expand the definition of “beneficial owner” to include any person with a “pecuniary or indirect pecuniary interest”, including through derivatives, in a particular security (borrowing the concept from the SEC’s insider reporting regime, which captures the “opportunity to profit” from transactions related to the relevant security). If passed and ultimately adopted, these changes would have a significant impact on the reporting obligations of investors by expanding the types of interests that would be counted toward the 5% threshold requiring the filing of a Schedule 13D. Because indentures often incorporate by direct reference the 13(d) concept of beneficial ownership, expansion of the definition could have ripple effects beyond increased public ownership filings. Continue Reading Indentures and the Brokaw Act: Will Expanding the Definition of Beneficial Ownership Broaden Change of Control Triggers?

Shareholder activists, and the institutional investors who are increasingly supporting them, continue to press public company boards to take bold steps to unlock the value contained in their various businesses.  While some companies may have assets or business lines ripe for divestiture or spin off, targets of shareholder activism are often resistant to the clarion call to the “pure play” evolution process – and for good reason.  For many companies, in particular in the technology, media and telecommunications (TMT) space, maintaining diverse business lines can serve a strategic purpose despite different growth trajectories, profitability and trading multiples.  Furthermore, the spin-off/divestiture route may pose other challenges – such as the embryonic nature of a new division, the absence of sufficiently developed operations to be a full-fledged standalone company, adverse tax consequences of a separation or a desire to maintain control – which make a spin-off or divestiture undesirable or untimely. Continue Reading Is Tracking Stock, Often Considered a Bygone Darling of the 90’s Tech Boom, in Line for a Comeback?

Recently released proposed regulations that would classify certain intragroup loans as equity for U.S. tax purposes could have very significant consequences for M&A transactions, private equity investments and restructurings.  If adopted in their present form, the proposed regulations would eliminate strategies that have been widely used in cross-border transactions.  However, the proposal could also have unpredictable consequences for the day-to-day funding practices of both U.S. and foreign-owned multinational groups.  Moreover, the proposal would impose burdensome documentation and substantiation requirements on intragroup loans as a necessary condition to having the loans respected as debt for tax purposes (regardless of whether as a legal and economic matter the loans are debt). Continue Reading Not Just Inversions: Proposed Changes in the Tax Treatment of Related-Party Debt Will Affect M&A Transactions, Restructurings and Financings

In two recent cases, the Delaware courts addressed the question of when a minority stockholder has sufficient influence over a corporation to be deemed a controlling stockholder.  The issue typically arises in the context of a transaction between the minority stockholder and the corporation, such as an attempt to acquire the corporation’s publicly held shares.  In such cases, the stakes for the minority stockholder can be quite high as transactions between a corporation and a controlling stockholder may be subject to the exacting  “entire fairness” standard.  Continue Reading Controlling Minority Stockholders — When Does a Minority Constitute a Majority?

On March 28, 2016, on remand from the First Circuit, the United States District Court for the District of Massachusetts held that Sun Capital Fund III and Sun Capital Fund IV were jointly and severally liable for the multiemployer pension plan withdrawal liability of their bankrupt portfolio company, despite the fact that these funds were not parallel investment funds, generally had different investors and neither fund individually held an 80% or greater ownership interest in the portfolio company.  Under the Employee Retirement Income Security Act or “ERISA”, an entity such as a corporation or a partnership engaged in a trade or business may have liability for pension liabilities of other entities in the same “controlled group”.  Although the rules are complicated and technical, entities that are under 80% or more common control with each other will generally be considered to be in the same controlled group for these purposes.  In the Sun Capital case, the District Court concluded that the funds’ coordinated efforts in forming the limited liability corporation through which they held their respective investments resulted in the funds having formed an undocumented general partnership-in-fact that was engaged in a trade or business.   As the 100% owner of the LLC formed by the funds, such de facto partnership was found to be in the portfolio company’s controlled group and its partners, the two funds, were held to be joint and severally responsible for the withdrawal liability of the portfolio company under general partnership unlimited liability principles. Continue Reading Most Recent Sun Capital Decision Expands Reach of Controlled Group Liability Under ERISA