CSG Corporate & Securities Insights Q1 | 2018
CSG's Corporate & Securities Group is pleased to provide the latest installment of Insights – which highlights recent news, activities, judicial decisions, legislative actions and regulatory announcements of interest.
News and Activities
The Transaction of a Lifetime (April 25, 2018)
Tax Reform - What the New Laws Mean to You (April 19. 2018)
Unlock the Power of Planning: Devising an Exit Strategy for Your Business (March 22, 2018)
Newark's Stock is Rising (March 19, 2018)
Crain’s New York Business: Singular Achievement (February 14, 2018)
ROI-NJ: Device Startups Must Stay Alert for Legal Issues (February 13, 2018)
ConstructionDIVE: How to Prepare for a Construction Project Audit (January 25, 2018)
NJBIZ: Center of the Action (January 22, 2018)
NJBIZ: Retailers Take 'Omnichannel' Approach (January 22, 2018)
ROI-NJ: ROI Asks the Experts - Real Estate Predictions for 2018 (January 2, 2018)
Judicial Decisions, Legislative Actions and Regulatory Announcements
Amendments to New Jersey Business Corporation Act
On January 16, 2018, several amendments to the New Jersey Business Corporation Act (the “Act”) became law. These amendments modernize certain provisions of the Act as set forth below:
Corporate Bylaws and Forum Selection Clauses
Amendments to N.J.S.A. 14A:2-9 provide that corporate by-laws may contain any provision, not inconsistent with law or its certificate of incorporation, relating to the corporation’s business, the conduct of its affairs and its rights or powers or those of its shareholders, directors, officers or employees. By-laws may also provide that federal and state courts in New Jersey shall be the sole and exclusive forum for:
Any derivative action or proceeding brought on behalf of the corporation;
Any action by one or more shareholders asserting a claim of a breach of fiduciary duty owed by a current or former director or officer to the corporation or its shareholders, or a breach of the certificate of incorporation or by-laws;
Any action brought by one or more shareholders asserting a claim against the corporation or its directors or officers, or former directors or officers, arising under the certificate of incorporation or the Act;
Any other State law claim, including a class action asserting a breach of a duty to disclose, or a similar claim, brought by one or more shareholders against the corporation, or its current or former directors or officers; or
Any other claim brought by one or more shareholders which is governed by the internal affairs or an analogous doctrine.
Under N.J.S.A. 14A:2-9, the by-laws may provide that one or more shareholders who file an action in breach of a forum selection requirement of the by-laws shall be liable for all reasonable costs incurred in enforcing the requirements – including reasonable attorney’s fees of the defendants. If the by-laws contain an exclusive forum provision, the current and former directors and officers shall be deemed to have consented to the personal jurisdiction of that forum. If the provision is not in the original by-laws but is adopted by an amendment, the provisions and the personal jurisdiction apply only to actions brought after the amendment date and which assert claims arising after such date.
Boards and shareholders of New Jersey corporations should review their by-laws in light of these amendments, as they could have a direct impact on the rights of shareholders with respect to derivative claims and forum selection.
Approval by Electronic Transmission
Amendments to N.J.S.A. 14A:6-7.1 clarify that a member of the Board of Directors or committee of a corporation may approve actions taken without a meeting in writing or by electronic transmission. An “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient, and that may be directly reproduced in paper form by that recipient through an automated process. This would include e-mail or other forms of electronic voting. The amendment was recommended by The New Jersey Corporate and Business Law Study Commission which believed that, in light of changes in technology, it is appropriate to clarify that directors may use electronic transmissions to approve corporate actions.
As technologies continue to evolve and corporations utilize new software protocols for electronic voting they must be certain that such new technologies are in strict compliance with the Act.
Proxy Solicitation Materials
Amendments to Title 14A of the N.J.S.A allow a corporation to establish the procedures or conditions for including materials concerning shareholder-nominated individuals in a corporation’s proxy solicitation materials.
Now, a corporation may establish in its bylaws, procedures or conditions upon which materials regarding shareholder-nominated individuals will be included in its proxy solicitation materials – including the form of proxy – for an upcoming election of directors. Those procedures or conditions may include, but are not limited to, the following:
Minimum levels of beneficial ownership of the corporation’s voting stock by the nominating shareholder or a minimum duration of ownership of those shares;
Limiting nominations of directors who have been previously nominated to the board;
Limiting the number of shareholder-nominated directors for each shareholder meeting at which directors are to be elected;
Requiring the nominating shareholder to submit specified information concerning the shareholder and the shareholder’s nominees, including information concerning ownership by those persons of shares of the corporation’s capital stock;
Limiting nominations to shareholders, or any affiliate of those shareholders, who have not, and whose nominee has not, within a specified time period, publicly proposed to acquire shares constituting a specified percentage of the voting power of the corporation’s outstanding voting stock; and
Requiring that the nominating shareholder undertake to indemnify the corporation in respect of any loss arising as a result of any false or misleading information or statement submitted by the nominating shareholder in connection with a nomination.
FTC Increases Hart-Scott-Rodino Act Thresholds
The Federal Trade Commission (the “FTC”) recently announced increased transaction value thresholds under the Hart-Scott Rodino Antitrust Improvements Act (the “HSR Act”), which become effective February 28, 2018. The HSR Act requires the FTC to revise the thresholds annually based on changes in the gross national product – and they are typically increased in January or February of each year.
The HSR Act requires that parties to a proposed acquisition that exceeds certain dollar thresholds file premerger notification forms with both the FTC and the Department of Justice Antitrust Division (the “DOJ”). It also requires a mandatory waiting period (30 days from filing) prior to closing the transaction. During the waiting period, the FTC and DOJ assess the transaction from an anti-trust perspective and can reject the transaction or further extend the waiting period for additional time to assess the transaction. The parties may also seek to shorten the waiting period by requesting a waiver (referred to as “early termination”), which is often granted less than 30 days after filing where the transaction appears unlikely on its face to raise anti-trust concerns.
Under the revisions, a notification must be filed when an acquisition of voting securities or assets is valued in excess of $84.4 million at the time of closing and one party to the transaction has assets (or, in certain manufacturing industries, either assets or net sales) of at least $16.9 million, and the other party has net sales or assets of at least $168.8 million. Notifications are required despite the value of the parties if the acquisition is valued above $337.6 million, subject to certain exemptions.
For purposes of measuring the size of the parties for HSR, one looks to the "ultimate parent entity” (“UPE”) of both the buyer and the seller. The UPE of a seller entity and a buyer entity is generally the entity or individual that ultimately controls such seller entity or buyer entity, as applicable, going all the way up the ownership chain. For purposes of applying the thresholds to size of the parties, both the buyer and the seller are, in most cases, deemed to include and aggregate the net sales and/or assets (as applicable) of their UPE and all subsidiaries and other entities controlled by their UPE. If the tests are met, then the buyer’s UPE and the seller’s UPE each make separate filings.
The filing fees under the HSR Act remain the same, but the thresholds have been revised. Under the revisions, the filing fee thresholds are:
$45,000 for transactions valued in excess of $84.4 million, but less than $168.8 million;
$125,000 for transactions valued at $168.8 million, but less than $843.9 million; and
$280,000 for transactions valued at or above $843.9 million.
The HSR filing fee is calculated using the thresholds in effect on the date of filing the HSR notification, even if the thresholds are raised after the filing but before closing. However, the determination of whether the size of the parties and the size of transaction tests are met (and therefore whether an HSR filing is required at all) is to be calculated as of the closing date. Thus, if the date by which you would normally have to file under HSR is before the date the new thresholds go into effect, but the closing will occur after the new thresholds go into effect, you look to the new thresholds/tests to determine whether or not an HSR filing will be required before you close.
HSR is a complex area with highly technical rules for determining control, the UPE, the parties/transaction size thresholds and the information required to be disclosed in a filing. The takeaway here is that if you are involved in any transactions of a size where HSR might apply, it can be a gating item affecting transaction timing and closing, and you should consult with HSR legal specialists as early in the sale process as possible.
SPOTLIGHT: CSG TAX GROUP
When considering the sweeping changes in tax law brought about by the recently enacted Tax Cuts and Jobs Act, it helps to receive informed, progressive and knowledgeable tax counsel. CSG’s Tax Group provides sophisticated advice to individuals, closely held businesses, partnerships and corporations on all aspects of federal and state tax law. Drawing from the firm’s diverse industry and service groups, CSG's Tax Group creatively and efficiently addresses a full spectrum of tax concerns.
Delaware Court Limits Books and Records Request
In Aloha Power Co., LLC v. Regenesis Power, LLC, CV 12697-VCMR, 2017 WL 6550429 (Del. Ch. Dec. 22, 2017), the Delaware Chancery Court limited a limited liability company member’s books and records request based on the mandatory and discretionary books and records provisions of the company’s operating agreement.
The company’s operating agreement required that it provide certain documents to members without the need for a demand. These included financial statements, balance sheets, an income statement and statement of changes in financial position, information necessary for members to prepare tax returns, minutes of all member meetings, copies of powers of attorney, and any amendments to the operating agreement. The court required the Company to provide such information to the member without the need for a demand.
The company’s operating agreement also provided that a member shall be granted access to certain books and records once the member has demonstrated that the request is “for purposes reasonably related to the interest” of the member. In this case, the member requested a list of the members and each member’s capital contributions, capital account, number of units and percentage interest in order to understand the dilution of the member’s membership interest. The court found this to be a proper purpose and ordered the Company to provide the information.
The court, however, rejected the member’s request for copies of the company’s operating statements and general ledgers to value its ownership interest, concluding that the financial statements that the company was required to provide satisfied such purpose. The court also rejected the member’s request for copies of the company’s books and records “as they relate to the internal affairs of the company” to allege mismanagement or wrongdoing, finding that the member failed to state a proper purpose for the request and that "a mere statement of a purpose to investigate possible general mismanagement, without more, will not entitle a shareholder to broad books and records inspection relief."
The court's ruling in Aloha highlights the Delaware Chancery Court's prior decisions relating to books and records and the standard plaintiffs must satisfy to be entitled to books and records that are not otherwise mandated by an entity's organizational documents.
Delaware Court of Chancery Illustrates Meaning of “Prevailing Party” for Purposes of Attorneys’ Fees
In a recent decision, the Delaware Court of Chancery determined that neither party was entitled to attorneys’ fees following a litigation in which the agreement at issue contained a provision stating “the Party prevailing in such proceeding shall be entitled to reimbursement of its reasonable costs and expenses[.]”
According to the decision, courts will routinely enforce provisions of a contract allocating costs of legal actions arising from the breach of a contract. The Court followed the standard of “predominance in the litigation” for its analysis of the prevailing party and then reiterated its position that ‘[t]o achieve predominance, a litigant should prevail on the case’s chief issue.’” The Court determined “there can be more than one ‘chief’ or core issue in a case” and then found “because each side both won and lost on one of the two equally core issues in this case…..neither is entitled to an award of attorneys’ fees or expenses as the ‘prevailing party’ under the Agreement.”
This case highlights the Court of Chancery’s respect for attorneys’ fees provisions in contracts, but also demonstrates the need for parties to be careful in drafting any such provisions if their intent is to have fees awarded other than in accordance with the standard established by the Court of Chancery.
The Mrs. Fields Brand, Inc. v. Interbake Foods LLC, C.A. No. 12201-CB (Del. Ch. Jan. 5, 2018)
Member Course of Conduct Might Amend Operating Agreements
In the recent case of Namerow v. Pediatricare Assoc., LLC , N.J. Super. Chancery Div. (Contillo, P.J. Ch.), a New Jersey chancery court rejected defendants’ motion to dismiss plaintiff’s complaint relating to an operating agreement’s buy-out provision – finding sufficient questions of fact as to whether members of a limited liability company, by their actions, had amended the operating agreement provisions regarding valuation. Pursuant to the terms of the Amended Operating Agreement between Plaintiff and Defendant, dated on or about March 12, 2001 (the “Operating Agreement”), the parties had agreed that upon retiring, a member would be entitled to a buy-out of its membership interest. The Operating Agreement provided that any modification to the agreement would require an 80% vote of the members, but did not specify whether such modification must be in writing.
The Operating Agreement set forth the terms upon which the value of the membership interest would be determined upon retirement, including a provision in which the parties could rely on a certificate of agreed value if such certificate was executed in the prior two years. Here, the members had appraised the business in the years after signing the Operating Agreement, using a different valuation method than that set forth in the Operating Agreement, but never amended the Operating Agreement to include a new certificate of agreed value. At the time of retirement, the parties could not agree to a valuation.
In its ruling, the court pointed out that the Operating Agreement was ambiguous and did not specify whether a modification must be in writing, and further, that the members accepted a different valuation method than that contemplated in the Operating Agreement in years prior. As such, the court found that the parties may have amended the Operating Agreement’s terms by their course of conduct.
This recent ruling highlights the importance of having clearly stated provisions regarding amendments to any agreement, as well as the need to follow corporate formalities.
For more information on this issue of Insights, please contact your CSG attorney or one of the members of the Corporate & Securities Group listed below:
Laurence M. Smith | Co-Chair, Corporate & Securities | (973) 530-2021 | email@example.com
Edward B. Stevenson | Co-Chair, Corporate & Securities | (973) 530-2173 | firstname.lastname@example.org
Sean M. Aylward | Vice Chair, Corporate & Securities | (973) 530-2105 | email@example.com