CSG Corporate & Securities Insights Q3 | 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.
CSG welcomes Sara Jane West as an associate in the firm’s Tax, Trusts & Estates and Corporate groups. She counsels her clients on the tax treatment of business revenue and asset sales and purchases. Sara also represents C Corporations, S Corporations and Limited Liability Companies on corporate governance matters, buyer and seller side acquisitions, as well as shareholder and partner buy-out agreements.
Michelle Schaap has been selected as a 2017 Leading Women Intrapreneur honoree for exhibiting innovation, community involvement, advocacy for women and market potential. The winners will be honored during the Top 25 Leading Women Intrapreneurs event on October 16, 2017. In addition, Michelle was recently appointed President Elect of the New Jersey Women Lawyers Association.
CSG is pleased to announce that 20 of its attorneys and seven of its practice areas have been selected for inclusion in the 2017 edition of Chambers USA: America’s Leading Lawyers for Business, including the Corporate & Securities Group as a whole and corporate attorneys Daniel Schwartz, Laurence Smith and Edward Stevenson. Click here for a full list of CSG honorees.
Our Corporate & Securities Group was also recognized by Best Lawyers in America, with seven attorneys included in the 2018 edition. A total of 26 members from various practice groups were listed in the guide. Click here for a full list of CSG honorees.
CSG has been recognized by BTI Consulting Group in BTI Industry Power Rankings 2017 as a leading core firm for the chemicals industry. BTI Industry Power Rankings 2017 ranks law firms based on interviews with corporate counsel and decision-makers at some of the world’s largest organizations.
The Transaction of a Lifetime (October 4, 2017)
Hedge Fund Legal & Compliance Digest: How Hedge Fund Managers Can Protect Sensitive and Proprietary Data from SEC FOIA Requests (September 8, 2017)
NJBIZ: Francis J. Giantomasi Selected as a ICON Honors Award Recipient (June 28, 2017)
NJLJ: Gemma Giantomasi Named 2017 New Leaders of the Bar (June 20, 2017)
Crain’s New York Business: As Retirement Beckons, Boomers Navigate Complex Private Equity Deals (June 12, 2017)
NJSBA/NJICLE: Anatomy of a Breach Response (June 12, 2017)
U.S. News & World Report: Why Equity Crowdfunding Hasn’t Taken Off (June 6, 2017)
NJBIZ: 6 Ways Entrepreneurs Can Hurdle Common Legal Pitfalls (May 8, 2017)
Judicial Decisions, Legislative Actions and Regulatory Announcements
Delaware Supreme Court Reverses Chancery Court Ruling and Interprets Working-Capital Adjustment Narrowly
The Delaware Supreme Court reversed the decision of the Court of Chancery in Chicago Bridge & Iron Company N.V. v. Westinghouse Electric Company LLC, 2017 WL 2774563 (Del. Jun. 27, rev. Jun 28, 2017), in which the Chancery Court held that the buyer was entitled to pursue a $2 billion purchase price adjustment on the basis of a claim that the seller has failed to adhere to GAAP in its financial statements in breach of its financial-statements representation in the purchase agreement. The Delaware Supreme Court found that the true-up mechanism in the purchase agreement for post-closing adjustments to the purchase price did not provide a basis for the buyer to dispute the seller’s application of GAAP in its historical financial statements, and held that the working-capital adjustment provisions in the purchase agreement were intended only to correct the changes in the sold business between signing and closing.
This case involved the purchase by Westinghouse Electric Company (“Westinghouse”) of CB&I Stone & Webster, Inc. (“Stone”), a subsidiary of the Chicago Bridge & Iron Company (“Chicago Bridge”). Westinghouse designs nuclear power plants and Chicago Bridge builds them. Stone and Westinghouse had been in hired in 2008 as part of a consortium to build two nuclear power plants, and as delays and cost overruns mounted, Chicago Bridge decided to limit its future liabilities by selling Stone to Westinghouse. The terms of the purchase agreement between Chicago Bridge and Westinghouse, included customary representations by Chicago Bridge, including that Stone’s financial statements for the year ending December 31, 2014, and as of June 30, 2015, had “been prepared in accordance with GAAP” and that Stone had no undisclosed liabilities. The purchase agreement also provided that Chicago Bridge would have no post-closing liability for monetary damages and would not owe any indemnification to Westinghouse, including for breach of its representations and warranties, which the Delaware Supreme Court referred to as the “Liability Bar.” The purchase agreement also provided for post-closing adjustments to determine net working capital, as well as earn-out provisions, and that any disputes regarding net working capital were to be presented to an independent auditor for a binding and non-appealable decision.
The Delaware Supreme Court reversed the decision of the Chancery Court and ruled in favor of Chicago Bridge, and instructed the Chancery Court to declare that, under the purchase agreement, Westinghouse’s arguments based on assertions that Chicago Bridge’s historical financial statements and practices did not comply with GAAP may not be heard in proceedings before the auditor, and that Westinghouse cannot submit to the auditor any claims not based simply on changes in facts and circumstances between signing and closing. The Delaware Supreme Court explained that the net working capital adjustment was intended to address changes from the date of the signing of the agreement until the date of closing, and that the Chancery Court had erred by treating the true-up as a “wide-ranging, uncabined right to challenge any accounting principle used by Chicago Bridge.” The Delaware Supreme Court further provided that the working-capital adjustment is not meant to revisit how the target working capital amount was calculated in the first place, as long as the post-closing working capital figure is calculated the same way as the target amount was calculated.
In this decision, the Delaware Supreme Court confirmed that the purpose of working-capital adjustments is narrow, only correcting for changes to the working capital between signing and closing, and not to catch the seller for breaches of its representations and warranties regarding its compliance with GAAP. This decision also provided insight into how the Delaware Supreme Court interpreted the working-capital adjustment provisions in light of the overall transaction context. In reaching its decision, the Delaware Supreme Court noted the specific facts of the case, such as how Chicago Bridge had sought a clean break from the sold business, as reflected in the $0 purchase price and Liability Bar. These factors helped establish for the Court that the purpose of the true-up mechanism was a narrow one. As a practical matter, the parties to a purchase agreement should consider adding language clarifying that disputes over GAAP compliance run through the indemnification process and are not appropriate for the true-up. Otherwise, the buyer may be able to get around the typical caps and baskets and other conditions that qualify its indemnification right.
SPOTLIGHT: FOOD & BEVERAGE
CSG announces the launch of its Food & Beverage Group, which will provide counsel to companies operating within this fast-growing industry. The newly-formed group is comprised of CSG attorneys with extensive industry experience in a wide array of related practice areas, including corporate, litigation, intellectual property, employment, product liability, real estate, liquor licensing and environmental law. For more information, please visit the Food & Beverage Group’s page on CSG’s website.
Delaware Chancery Court Interprets Statutory Ratification of Corporate Acts under Section 204 of the DGCL
The Delaware Chancery Court recently interpreted Section 204 of the Delaware General Corporate Law (“DGCL”) which allows for ratification of defective corporate acts resulting from a failure of authorization. In Nguyen v. View, Inc., View, Inc. (the “Corporation”) accepted an investment from two venture capital funds (the “Funds”) pursuant to which the Funds acquired Series A preferred shares in the Corporation, while the Corporation’s founder, Paul Nguyen (“Nguyen”) maintained 70% of the common stock of the Corporation. The shareholders of the Corporation entered into a voting agreement which established the size and composition of the Corporation’s board of directors, and which designated one seat of the board to be elected by Nguyen.
Subsequently, the Corporation tried to remove Nguyen as a manager and director but Nguyen challenged the removal pursuant to the voting agreement and the Corporation’s charter. Around the same time, the Corporation sought shareholder consent to pursue a Series B financing, which under the Corporation’s governing documents required consent from a majority of the common shareholders. In an effort to resolve the dispute surrounding Nguyen’s removal and to gain Nguyen’s consent to the Series B financing, the Corporation and Nguyen entered into a Settlement Agreement pursuant to which either party could rescind within seven days of execution. Upon closer review of the Series B financing documents and the effect it would have on Nguyen’s rights as a shareholder, Nguyen rescinded the Settlement Agreement during the seven-day period.
Despite Nguyen’s revocation of the Settlement Agreement, which effectively revoked his consent to the Series B financing, the Corporation proceeded with the Series B financing. Nguyen challenged the Series B financing as unauthorized without his consent and the Corporation argued that the Series B Financing was authorized under Section 204 of the DGCL. Section 204 of the DGCL provides that “no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in this section or validated by the Court of Chancery.” A defective corporate act is defined as “any act or transaction purportedly taken by or on behalf of the corporation that is, and at the time such act or transaction was purportedly taken would have been, within the power of a corporation under subchapter II of this chapter, but is void or voidable due to a failure of authorization.”
The Chancery Court was satisfied that Section 204 was inapplicable because Nguyen’s revocation of his consent was more than a failure of authorization—it was an outright rejection of the Series B financing, which voided the Series B financing and the related transaction documents. The Chancery Court stated that “Section 204 is not a license to cure just any defect,” rather, it has been appropriately used in instances where corporate formalities have not been followed; notice wasn’t properly given to shareholders; and technical dating discrepancies existed in shareholder consents.
The Chancery Court’s analysis in Nguyen v. View, Inc. provides guidance on the application of Section 204 to ratify corporate acts that are defective due to a failure of authorization and its inapplicability to “undo a stockholder vote rejecting a transaction.”
Nguyen v. View, Inc., No. CV 11138-VCS, 2017 WL 2439074, at *10 (Del. Ch. June 6, 2017), reargument denied, No. CV 11138-VCS, 2017 WL 3169051 (Del. Ch. July 26, 2017).
Court of Chancery Holds That Stockholder Was Not Bound by Stock Transfer Restrictions That Were Not Noted on Stock Certificates
The Delaware Chancery Court recently interpreted Section 202 of the Delaware General Corporate Law (“DGCL”) which allows for certain restrictions on the transfer of securities. In Henry v. Phixios Holdings, Inc., plaintiff Jon Henry (“Henry”) acquired shares of stock in Phixios Holdings, Inc. which were subject to a shareholder’s agreement that contained stock transfer restrictions. The transfer restrictions were not printed on the stock certificates.
In a challenge to the stock transfer restrictions by Henry, the court held that under Section 202 of the DGCL, an existing restriction on the transfer of securities is enforceable against a subsequent purchaser if: (1) conspicuously noted on the stock certificate; or (2) if the stockholder had actual knowledge of the restriction at the time of acquiring the stock. If the restriction is not noted on the stock certificate or if the stockholder did not have actual knowledge at the time of acquiring the stock, the stockholder can only be bound by the restrictions if he or she affirmatively assents to the restriction. Here, because the transfer restrictions were not noted on the stock certificates, Henry could only be bound by the restrictions if he had actual knowledge of the transfer restrictions or consented to the restrictions after acquiring the shares. The court was satisfied that despite receiving a copy of the shareholder’s agreement in an email which Henry acknowledged receipt of, Henry did not have actual knowledge of the transfer restrictions at the time he acquired the stock and did not thereafter affirmatively assent to the transfer restrictions. As a result, Henry was not bound by the transfer restrictions.
This case serves as a reminder of the enforceability of transfer restrictions on subsequent purchasers of securities and the steps that corporations must take to ensure that such shareholders are bound by the existing transfer restrictions.
Henry v. Phixios Holdings, Inc., No. CV 12504-VCMR, 2017 WL 2928034, at *6 (Del. Ch. July 10, 2017), judgment entered, (Del. Ch. Aug. 4, 2017).
New SEC Amendments Help Entrepreneurs and Investors
The SEC has released a Final Rule adopting technical amendments to conform several rules and forms to amendments to the Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) by Title I of the Jumpstart Our Business Startups (“JOBS”) Act. The new SEC rule set forth amendments to cover pages of certain Securities Act and Exchange Act forms, which must now include new check boxes to indicate whether at the time of filing, the company was an Emerging Growth Company (“EGC”), and if so, whether it has elected to opt out of the extended transition period for an EGC to comply with the new or revised financial accounting standards.
The new rules also include an inflation-adjusted threshold in the definition of the term “emerging growth company” as well as amendments to adjust the dollar amount in Regulation Crowdfunding. Under the new rule the annual gross revenue threshold to qualify as an EGC was increased from $1.0 billion to $1.07 billion. Additionally, adjustments for Regulation Crowdfunding include the following:
- The maximum aggregate amount of money companies can raise under Regulation Crowdfunding during a 12-month period was raised from $1,000,000 to $1,070,000.
- The threshold for assessing an investors annual income of net worth or income to determine investment limits was raised from $100,000 to $107,000.
- The threshold amount of Regulation Crowdfunding securities permitted to be sold to an investor with a net worth less than $107,000 was raised from $2,000 to $2,200.
- The maximum amount that can be sold to an investor under Regulation Crowdfunding in a 12-month period was raised from $100,000 to $107,000.
In a recent press release of the SEC, SEC Acting Chairman Michael S. Piwowar boasted of the new rule that, “regular updates to the JOBS Act, as prescribed by Congress, ensure that entrepreneurs and investors who benefit from crowdfunding will continue to do so.”
Recent Amendments to the Delaware General Corporation Law
A number of amendments to the Delaware General Corporation Law (the “DGCL”), the Delaware Limited Liability Company Act (the “DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) and the Delaware Revised Uniform Partnership Act (“DRUPA”) were adopted by the Delaware Legislature and became effective on August 1, 2017. While this article will focus on several DGCL amendments which may have an immediate impact on our corporate clients, attorneys and clients should seek our corporate assistance on any issue which involves the analysis or interpretation of any provision of the DGCL, DLLCA, DRULPA or DRUPA, or any New Jersey corporate, limited liability company or partnership statute.
The “Blockchain” Amendments
Various provisions of the DGCL [DGCL §§ 151, 202, 219, 224, 232, 364] have been amended to accommodate the use of networks electronic databases, such as the use of “blockchain” or “distributed ledger” technology, for the maintenance of corporate records, including a corporation’s stock ledger. Under the amendments, companies can use this technology to create an electronic ledger of transactions between a network of participants.
In particular, Section 219(c) defines “stock ledger” as “one or more records administered by or on behalf of the corporation in which the names of all of the corporation’s stockholders of record, the address and number of shares registered in the name of each such stockholder, and all issuances and transfers of stock of the corporation are recorded in accordance with §224 of this title.” Similarly, Section 224 has been amended to allow for maintenance of corporate records by use of one or more electronic networks or databases, so long as such records can be converted into paper form within a reasonable time. Section 224 also requires that, in the case of stock ledgers kept by use of electronic networks or databases, such ledger must be able to be used to prepare the lists required by Sections 219 and 220, record certain information specified in Sections 156, 159, 217(a) and 218 and record transfers of stock as governed by Article 8 of Delaware’s Uniform Commercial Code.
Sections 151(f), 202(a) and 364 were also amended to permit notice under such provisions to be given to stockholders by electronic transmissions. The definition of “electronic transmissions,” which is set forth in Section 232, has been amended to include the use of electronic networks or databases and covers “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 thereof, and that may be directly reproduced in paper form by such a recipient through an automated process.”
Simplifying Stockholder Consents
Section 228 of the DGCL, which authorizes stockholder action by written consent, has been amended to eliminate the requirement that the consent “bear the date of signature.” There had been a number of decisions calling into question the validity of undated stockholder consents or consents with pre-printed dates in light of Section 228’s dating requirement. To eliminate potential violations of this statute, Section 228 provides that a stockholder consent will be deemed valid if it is delivered within 60 days of the first date on which a written consent is properly delivered to a corporation. The amendments to Section 228 shall been effective for actions taken by written consent with a record date on or after August 1, 2017.