When shareholders bring a lawsuit following a merger or acquisition of their company, Delaware courts apply one of two standards of review—the “business judgment rule” or the “entire fairness standard.” The business judgment rule allows the court to assume that in making the business decision, the directors of the corporation acted on an informed basis, in good faith, and in the honest belief that the transaction was in the best interest of the company. Under this standard, it is much easier for a lawsuit to get dismissed because shareholders must attack this presumption. On the other hand, the entire fairness standard requires that the directors not only believed that the transaction was entirely fair, but that the transaction was actually objectively fair, independent of the board’s beliefs. Under this standard, courts scrupulously analyze whether the transaction involved both fair dealing and a fair price. Therefore, the burden falls upon the board of directors to prove that they followed a fair process and achieved a fair price. Continue Reading
Recently, the Delaware Chancery Court provided additional guidance on the evolving rules governing a shareholder’s right to inspect a corporation’s books and records. The high profile case, captioned Amalgamated Bank v. Yahoo! Inc., both clarified and expanded those rights.
In the case, Amalgamated Bank demanded to inspect Yahoo’s books and records in order to investigate potential mismanagement and corporate wrongdoing in connection with the payment of compensation to Yahoo’s officers and directors. Specifically, Amalgamated Bank sought information related to the hiring, compensation package, and subsequent termination of Henrique de Castro, Yahoo’s former Chief Operating Officer. Amalgamated Bank sought not only corporate “books and records” as provided for in Section 220 of the Delaware General Corporate Law, but also emails and other electronically stored files of Yahoo’s Chief Executive Officer, Marissa Mayer. Continue Reading
Recently, the Supreme Court of New York, Appellate Division, Second Department reversed a lower court’s ruling that a letter of intent regarding a potential joint venture created a legally binding agreement. The letter of intent provided that the parties “shall negotiate to arrive at mutually acceptable Definitive Agreements” and that “each reserve the right to withdraw from further negotiations at any time….” When the negotiations broke down, plaintiff alleged that there was a breach of contract.
Reversing the lower court’s ruling, the Appellate Division held that it is “well settled in the common law of contracts in this State that a mere agreement to agree, in which a material term is left for future negotiations, is unenforceable.” Here, the language of the letter indicated to the court that the letter was not a binding contract, but a mere “agreement to agree.” Therefore, the lower court should have granted defendants’ motion to dismiss the complaint. Continue Reading
Earlier this week, the SEC announced that it was imposing sanctions on a company that included provisions in severance agreements which would remove financial incentives in the event that the departing employees participated in whistleblowing programs. The company’s severance agreements required departing employees to waive their ability to apply for and obtain monetary awards from the SEC’s Whistleblower Program if they wanted to receive severance payments and other post-employment benefits from the company.
The company had originally added this language to its severance agreements in response to the SEC’s adoption of its Whistleblower Program.
As stated by the SEC, the purpose of the SEC’s Whistleblower Program is to encourage whistleblowers to report potential securities law violations to the SEC. The Program promises financial awards and confidentiality in exchange for whistleblowers’ information. In this case, even though the SEC was unaware of any instances in which a former employee of the company did not submit whistleblower information to the SEC, nor was it aware of any instances of actual enforcement of the waiver provision by the company, merely having the language in the severance agreements was sufficient to cause a violation of Rule 21F-17 under the Exchange Act. Continue Reading
FINRA has filed with the SEC a proposed rule change to amend FINRA Rule 2232 (Customer Confirmations). The new rule would require FINRA members to disclose additional pricing information on retail customer confirmations relating to transactions in fixed income securities. According to FINRA, some retail customers (i.e., not institutional customers) pay materially higher mark-ups or mark-downs than other retail customers for the same fixed income security. FINRA believes that this new amendment would serve to assist customers in evaluating the cost and quality of the execution service that FINRA members provide, as well as promote transparency into firm’s pricing practices, and encourage communications between firms and their customers about the pricing of these types of transactions. You can read the entire proposed rule change here.
According to a recent study released by the FINRA Investor Education Foundation, although most Americans understand the importance of saving and investing, many do not possess the basic financial knowledge needed to make sound financial decisions. FINRA, the largest independent regulator for all securities firms doing business in the United States, is dedicated to market integrity and investor protection. As part of its ongoing investor-education efforts, FINRA has issued an Investor Alert to help investors understand the different types of orders that can be used when making a trade. Understanding the nuances of the different types of orders is important because it gives investors the power to exercise some control over the price and timing. FINRA’s Investor Alert highlights three types of orders: market orders, limit orders, and stop orders. Continue Reading
FINRA has issued an investor alert warning investors to be wary of boiler room-style calls. According to the alert, FINRA has recently seen an increase in aggressive, high pressure sales pitches from cold callers who try to con investors, particularly senior citizens, into buying low-priced securities and other speculative investments.
Although not all of these scams involve low-priced securities, that can be a warning sign. Cold callers frequently try to pressure investors into buying shares by promising high returns on investments, when in reality, the shares are worth next to nothing. Cold callers may also state that they work for an organization that offers stock recommendations when in fact they are not registered with FINRA. They may use fake names and credentials to try gain the investor’s trust, or use Caller ID “spoofing” to make it appear as if the call comes from a respectable broker-dealer.
One of the key things you can do to protect yourself is to verify that the broker or firm is registered with FINRA and has a reputable background by using FINRA BrokerCheck. FINRA also warns against sending checks to PO boxes or addresses that are not associated with a registered broker-dealer. Further, it warns against making wire transfers or putting investment purchases on a credit card if a cold caller asks you to do so.
Corporate income is considered to be taxed twice—once at the corporate level and a second time when earnings paid out to the corporation’s shareholders are taxed. Partnerships and LLCs (which receive the tax advantages of partnerships while maintaining the limited liability of corporations) are able to avoid this double taxation by using a “pass-through” system. Under this system, partnerships and LLCs are not subject to federal income tax at the entity level; instead, the tax responsibility for the profits or losses is passed through to the partners to include on their individual tax returns. However, new legislation repealing the Tax Equity and Fiscal Responsibility Act of 1982 (“TEFRA”) will result in partnership audits now being assessed and collected straight from the entity itself. The new legislation, known as the Bipartisan Budget Act of 2015, creates a centralized partnership audit regime and will apply to returns filed for the taxable years beginning after December 31, 2017. Continue Reading
Last summer, a group of the world’s leading CEOs and investors met in secret to discuss the health of America’s publicly traded companies and examine their corporate governance in order to address the growing disconnect between shareholders and management. The group included Warren Buffet (Berkshire Hathaway), Jamie Dimon (JP Morgan Chase), Mary Barra (General Motors), Larry Fink (BlackRock), Jeff Immelt (General Electric), Lowell McAdam (Verizon), and many others. On July 21, 2016 the group published a letter in the New York Times detailing what they consider to be essential and commonsense corporate governance principles. Continue Reading
In the U.S., every state requires a new corporation (in its initial certificate of incorporation, also known as a charter) to authorize a certain number of shares of issuable stock. If it wishes to issue more shares than authorized, the charter must be amended, which typically requires stockholder approval. If the company is fully reporting with the SEC, this also requires SEC approval of a proxy or information statement.
One factor in determining the number of shares issued is the desired trading range of a company’s stock. If a company is valued at $50 million and 500 million shares are issued, the stock likely will trade around ten cents. Many traders prefer a stock to trade above $1 and sometimes above $5. This in part is determined by the minimum share price rules of certain stock exchanges and in part because some brokerage firms do not permit their brokers to sell stock to customers below a certain price. Private companies merging with shells must ensure that the resulting number of shares outstanding makes sense from a trading perspective and also works within the company’s authorized number of shares of stock. Problems can arise when there are insufficient shares authorized. Continue Reading