CSG Corporate & Securities Insights Q1 | 2017
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.
David Pentlow joins CSG as a member of the Corporate & Securities group. David, who arrives with more than 15 years of experience in corporate law, will reside exclusively in our Midtown Manhattan office, where he will represent a broad base of clients, including financial institutions, hedge funds and real estate investment trusts. Associates Michelle Cortese and Eric Weiss have also recently joined the group.
Rhonda Carniol will serve as a mentor for Blackstone LaunchPad, a campus based accelerator for entrepreneurs. Rhonda will provide advice on legal issues, helping companies analyze legal risks with respect to the use of open source, technology partnerships, evaluating potential investors and whether to obtain patents and trademarks.
BioNJ Gateway Gala (February 2, 2017)
Learn How to Prepare for Cyber Attacks (December 1, 2016)
What Do the New FCC Privacy and Security Rules Mean for Internet Service Providers and Their Subscribers? (November 2016)
CSG Recognized in 2017 Best Law Firm Rankings (November 2016)
Judicial Decisions, Legislative Actions and Regulatory Announcements
New Jersey Supreme Court Addresses the Standard to Dissociate a Member by Judicial Order Under the Limited Liability Company Act
The New Jersey Supreme Court provided guidance in understanding the high threshold that must be met to dissociate a limited liability company (“LLC”) member by judicial order under the New Jersey Limited Liability Company Act (the “LLCA”) and its counterpart, the Revised Uniform Limited Liability Company Act (the “RULLCA”), which replaced the LLCA.
Operating agreements freely entered into by LLC members are liberally construed and enforced in New Jersey. However, in the absence of an operating agreement or certain provisions, the RULLCA provides default provisions to govern the management of an LLC. Under the RULLCA, unless otherwise set forth in the operating agreement, an LLC member may apply to the court for a judicial determination to dissociate an LLC member because, among other circumstances, the member “has engaged, or is engaging, in conduct relating to the company’s activities which makes it not reasonably practicable to carry on the activities with the person as a member.” N.J.S.A. 42:2C-46(e)(3).
In interpreting the above-mentioned provision, the Supreme Court found that the Legislature “did not intend that disagreements and disputes among LLC members that bear no nexus to the LLC’s business will justify a member’s expulsion” and that the disputed member’s conduct must make it “unfeasible, despite reasonable efforts” to operate the LLC “while the disputed member remains affiliated with it.” The Court reasoned that disputes amongst LLC members on most issues relating to the business and operation of the company could be resolved by a majority vote of the members under the default majority rule provision under the RULLCA, and as a result, LLC members must meet a high threshold for a judicial determination to expel an LLC member.
The Court enumerated the following seven factors for courts to consider in conducting a case-specific analysis to evaluate the disputed LLC member’s conduct and whether the LLC can be managed notwithstanding that conduct:
- The nature of the LLC member’s conduct relating to the LLC’s business;
- Whether, with the LLC member remaining a member, the entity may be managed so as to promote the purposes for which it was formed;
- Whether the dispute among the LLC members precludes them from working with one another to pursue the LLC’s goals;
- Whether there is a deadlock among the members;
- Whether, despite that deadlock, members can make decisions on the management of the company, pursuant to the operating agreement or in accordance with applicable statutory provisions;
- Whether, due to the LLC’s financial position, there is still a business to operate; and
- Whether continuing the LLC, with the LLC member remaining a member, is financially feasible.
Thus, it is crucial for LLCs to include clearly defined provisions in an operating agreement to govern the affairs of the LLC and members’ conduct. In the absence of such provisions, members of an LLC must satisfy the RULLCA default provisions, including the high threshold enunciated by the New Jersey Supreme Court to dissociate an LLC member by judicial order under the RULLCA.
IE Test v. Carroll, 226 N.J. 166 (2016)
FTC Increases Hart-Scott-Rodino Act Thresholds
The Federal Trade Commission (the “FTC”) announced increased Hart-Scott Rodino Antitrust Improvements Act (the “HSR Act”) thresholds. The HSR Act requires parties to a proposed acquisition that exceeds certain thresholds file premerger notification forms with both the FTC and the Department of Justice Antitrust Division and observe a mandatory waiting period prior to closing the transaction. The HSR Act requires the FTC to revise the thresholds annually based on changes in the gross national product. The effective date for the new threshold is February 27, 2017.
Under the revisions, a notification must be filed when an acquisition of voting securities or assets are valued in excess of $80.8 million at the time of closing and one party to the transaction has sales or assets of at least $16.2 million and the other party has sales or assets of at least $161.5 million. Notifications are required despite the value of the parties if the acquisition is valued above $323 million, subject to certain exemptions.
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 $80.8 million, but less than $161.5 million;
- $125,000 for transactions valued at $161.5 million, but less than $807.5 million; and
- $280,000 for transaction value at or above $807.5 million.
FTC Press Release – FTC Announces Annual Update of Size of Transaction Thresholds for Premerger Notification Filings and Interlocking Directorates (Jan. 19, 2017)
Delaware Court of Chancery Enforces Disclaimer of Reliance to Dismiss Fraud Claim Based on Misinformation in Data Room
In the latest addition to the growing body of case law governing disclaimers of reliance under Delaware law, the Delaware Court of Chancery dismissed a plaintiff’s fraud claim based on misrepresentations during the due diligence process in documents placed in an electronic data room.
In January 2014, IAC Search (“IAC”) purchased the stock of six subsidiaries of ValueClick, Inc. (“ValueClick”), which is now known as Conversant LLC, a Delaware corporation, for a purchase price of $90 million. Subsequent to the closing of the transaction, IAC alleged that ValueClick fraudulently induced IAC to overpay for Investopedia, one of the subsidiaries IAC acquired in the transaction, by providing IAC with false information concerning Investopedia’s revenue. According to IAC, ValueClick made the misrepresentations during the due diligence process in documents made available in the electronic data room and in statements ValueClick made in response to IAC’s diligence requests. However, the statements were not incorporated in any representation or warranty in the purchase agreement and IAC did not challenge the accuracy of any of the express representations concerning certain financial disclosures for Investopedia. ValueClick argued that the purchase agreement barred IAC’s fraud claim by virtue of IAC’s disclaimer of reliance on any statements made by ValueClick that are not expressly included in a representation or warranty in the purchase agreement.
The Chancery Court held that IAC’s “acknowledgment” provision in the purchase agreement, in which IAC expressly acknowledged that ValueClick was not “making, directly or indirectly, any representation or warranty” with respect to any information received in due diligence “unless such information is expressly included in a representation or warranty” in the purchase agreement, functioned as a disclaimer of reliance under recent Chancery Court precedent. Accordingly, the Chancery Court ruled in ValueClick’s favor on IAC’s fraud claim, and dismissed it on grounds that the purchase agreement contained a valid disclaimer of reliance by IAC on any extra-contractual statements made by ValueClick.
Disclaimers of reliance are critical for sellers in M&A transactions. Without a disclaimer, the seller can be liable for any misinformation it provided to the buyer during the due diligence process, regardless of whether there is a breach of a specific representation or warranty. Moreover, fraud-based claims offer buyers the prospect of seeking damages beyond the negotiated cap on indemnification (which ordinarily applies only to breach of contract claims).
IAC Search, LLC v. Conversant LLC (f/k/a ValueClick, Inc.), C.A. No. 11774-CB (Del. Ch. Nov. 30, 2016)
Delaware Chancery Court Invalidates Fee-Shifting Bylaw
The Delaware Court of Chancery struck down a bylaw provision that purported to shift attorneys’ fees and expenses to an unsuccessful stockholder that filed an internal corporate claim outside of the state of Delaware, in violation of Delaware General Corporate Law (the “DGCL”) Section 109(b).
In 2015, the Delaware legislature enacted two amendments to the DGCL. The first, Section 115, authorized Delaware corporations to adopt a bylaw requiring internal corporate claims to be filed exclusively in the State of Delaware. The second amendment was Section 109, which precluded Delaware corporations from including any provision in bylaws that impose liability on shareholders for the corporation’s attorney fees or expenses in connection with internal corporate claims.
After the amendments to DGCL were enacted, Paylocity Holding Corp. (“Paylocity”) adopted bylaws that (1) required all internal corporate claims to be filed in the state of Delaware, in accordance with Section 115, and (2) purported to shift fees and costs to unsuccessful shareholders that filed internal corporate claims outside the State of Delaware. A shareholder of Paylocity brought suit, seeking a declaration that the fee-shifting bylaw was violation of Section 109. In response, Paylocity argued in part that the simultaneous adoption of Section 109 and Section 115 “’must be read in tandem’ to mean that Section 109 was not intended to prohibit fee-shifting for internal corporate claims filed outside of Delaware when a corporation [has] adopt[ed] an exclusive forum bylaw requiring that such claims be filed in Delaware, as Section 115 allows.”
The court rejected Paylocity’s argument, holding that nothing in the text of Section 115 or 109 of the DGCL reflected any intent by the legislature for them to be read in tandem, and, to the contrary, Section 109 plainly prohibits “any provision that would shift fees.” The court ruled that fee shifting bylaws are invalid and will not be enforced under the DGCL. This decision highlights the importance of drafting bylaws in accordance with the governing statute in the state in which an entity is formed.
Solak v. Sarowitz, C.A. No. 12299-CB (Del. Ch. Dec. 27, 2016)
Delaware Chancery Court Rules Dispute Over Post-Closing Purchase Price Adjustment Should be Resolved by Independent Auditor
The Delaware Court of Chancery enforced a dispute resolution provision in a purchase agreement to resolve a dispute over a post-closing purchase price adjustment. The case involved the sale of a company for $0 at closing, subject to a post-closing adjustment and potential deferred payments in the future. A dispute arose over the post-closing purchase price adjustment, which the seller calculated as requiring a payment from the buyer to the seller of approximately $428 million and which the buyer calculated as requiring a payment from the seller to the buyer of approximately $2.15 billion. The purchase agreement provided that objections to the post-closing purchase price adjustment would trigger dispute resolution which required the parties to negotiate for thirty days and if unsuccessful, submit the dispute to an independent auditor whose determination would be final, binding and non-appealable. Rather than following the dispute mechanism governed by the purchase agreement, the seller filed an action in the Delaware Court of Chancery.
The court ruled that the “plain language of the Purchase Agreement” established that the dispute should be resolved by an independent auditor. The court noted that the potential size of the adjustment is “not a reason to take the issue away from the Independent Auditor.”
While post-closing purchase price adjustments are customarily included in purchase agreements, buyers and sellers should be careful in drafting such provisions to effectuate the desired scope of any included dispute resolution mechanism as well as to ensure the desired relationship between the post-closing purchase price adjustments and the remaining provisions of the purchase agreement.
Chicago Bridge & Iron Co. N.V. v. Westinghouse Electric Co. LLC et al., C.A. No. 12585-VCL (Del. Ch. Dec. 5, 2016)