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Consultant or Executive Officer? SEC Brings an Action to Clarify 07/30/2014

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By: Mark Tarallo

On July 16, 2014, the United States Securities and Exchange Commission (“SEC”) brought an action against Natural Blue Resources, Inc. (“Natural Blue”), James E. Cohen (“Cohen”) and Joseph A. Corazzi (“Corazzi”)(Natural Blue, Cohen and Corazzi are referred to collectively as the “Respondents”).  The SEC is seeking a cease-and-desist order against the Respondents, alleging among other items that Cohen and Corazzi acted as the de facto executive management of Natural Blue, while failing to make any of the disclosures required of executive officers of a public company.

Natural Blue was a privately-held corporation based in Nevada that went public in August, 2009 via a reverse merger with Datameg Corporation.  In November 2009, Natural Blue entered into a consulting agreement with JEC Corp. (“JEC”) a corporation owned by Cohen’s family.  Cohen was the President of JEC, and  Corazzi was employed by JEC.  Cohen and Corazzi each had extensive disciplinary histories that would have prevented them from serving as an executive officer of Natural Blue.

From the time that Natural Blue went public in 2009 through the end of 2011, Cohen and Corazzi exercised a significant degree of control over Natural Blue through JEC.  They recommended virtually all of the directors that served on the board of Natural Blue, and almost all of the key executive positions were filled by individuals with whom they had significant preexisting business or social relationships.  Despite the fact that Natural Blue had a named CEO, Cohen and Corazzi controlled all of the key functions of Natural Blue, such as the accounting department (the CFO was an associate of Cohen’s with whom Cohen shared outside office space).  Cohen and Corazzi dealt directly with third parties and purported to enter into agreements on behalf of Natural Blue.  Despite the fact that the actions of Cohen and Corazzi did not actually generate any revenue for Natural Blue or its shareholders, they were paid significant amounts of cash and Natural Blue stock (which was sold at a profit) for their efforts.

The SEC’s action alleges among other things that the Respondents engaged in fraud by failing to accurately report the roles played by Cohen and Corazzi, and that those failures caused harm to investors.  Given the disciplinary histories of Cohen and Corazzi, it is clear why they went to the lengths that they did to hide their actual roles.  The SEC filing can be found here.

For more information on this topic, please feel free to contact Mark Tarallo.

 

SEC Chair Speaks on Corporate Governance 07/10/2014

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By: Mark Tarallo

On June 23, 2014, SEC Chair Mary Jo White spoke to the Twentieth Annual Stanford Directors’ College held at the Stanford University Rock Center for Corporate Governance.  Chair White’s remarks focused on the SEC’s view of the role of the board of directors in a corporation.

Chair White characterized her remarks as covering three topics-one attitudinal, one advisory, and one descriptive.  The “attitudinal” topic was the view that the SEC takes regarding directors as the most important “gatekeepers” of a corporation.  She noted that “it is essential for directors to establish expectations for senior management and the company as a whole, and exercise appropriate oversight to ensure that those expectations are met.  It is up to directors, along with senior management under the purview of the board, to set the all-important “tone at the top” for the entire company.”  From an advisory perspective, Chair White spoke to the obligation of the board to engage in self-reporting when they learn of any wrongdoing and working cooperatively with regulators.  She referred to prior decisions and press releases to show how self-reporting and cooperation is viewed favorably by the SEC, and called on directors to “[m]ake it clear from the outset that the board’s expectation is that any internal investigation will search for misconduct wherever and however high up it occurred; that the company will act promptly and report real-time to the Enforcement staff on any misconduct uncovered; and that the company will hold its responsible employees to account.”  Last, Chair White described the workings of the SEC’s Whistleblower program and why it is necessary for the board to take any tips or accusations seriously.  It is clear from her remarks that the SEC plans to hold boards accountable for compliance failures, and while her remarks were targeted at public reporting companies, they are instructive for private companies as well, and directors of private companies should take note of the increasing obligations to ensure compliance.

A full copy of the text of Chair White’s comments can be found here.

Please feel free to contact Mark with any questions on this topic.

Insider Trading Allegations Continue to Dog Phil Mickelson 07/08/2014

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Corporate Attorney Joseph MarrowBy: Joseph Marrow

As Phil Mickelson prepares to play in the upcoming British Open, he faces additional insider trading allegations (there were previous reports that Mickelson profited from trades involving Clorox, but that investigation allegedly ended without any action). Most recently, federal authorities subpoenaed Dean Foods (Land O Lakes, Garelick Farms and TruMoo brands), a publicly-traded company, about trading activity that closely preceded the announcement of a subsidiary spinoff. Prior to the spinoff, Mickelson and William Walters, a sports gambler and friend of the golfer, placed trades in the shares of Dean Foods. Allegedly, Walters made $15 million in profit and Mickelson made $1 million in profit from the trades. According to reports, the investigation has focused on whether someone inside Dean Foods tipped Walters with material non-public information regarding the proposed spinoff and whether Walters then informed Mickelson.

Insider trading refers to the practice of profiting from the buying and selling of stock in publicly-traded companies through the use of non-public information. In addition, an individual can trip up the insider trading rules by being the “tippee” (recipient) of inside information from a “tipper” (person with access to the inside information). This is the situation purportedly facing Mickelson. Proving insider trading can be very challenging for prosecutors. There has been a noticeable increase in the investigation and prosecution of insider trading cases. Targeting a high profile person like Mickelson may bring more attention to insider trading claims and may serve as a deterrent to individuals considering trading on material non-public information.

For more information on this topic, please feel free to contact Joe.

MBBP Clients make BBJ’s Fastest-Growing Public Companies List 07/01/2014

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BBJ Fastest-Growing Public CompaniesLast month, the Boston Business Journal (BBJ) published its print edition containing a list of the Top 50 Fastest-Growing Public Companies in Massachusetts. Five MBBP clients were selected and ranked on this list according to each company’s two-year revenue growth as of their most recent fiscal year:

Congratulations to all of our clients!

The full list of the Fastest-Growing Public Companies in Massachusetts is available to subscribers via the Boston Business Journal’s digital edition here.

SEC Commissioner Offers Guidance on Cybersecurity Issues 06/30/2014

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By: Mark Tarallo

On June 10, 2014, Commissioner Luis A. Aguilar of the United States Securities and Exchange Commission spoke at the New York Stock Exchange as part of the “Cyber Risks and the Boardroom” Conference.  As Commissioner Aguilar noted, “[c]ybersecurity has become an important topic in both the private and public sectors, and for good reason. … Indeed, according to one survey, U.S. companies experienced a 42% increase between 2011 and 2012 in the number of successful cyber-attacks they experienced per week.”  Commissioner Aguilar indicated that not only are attacks becoming more frequent, they are becoming more expensive, citing one survey that showed that the average annualized cost of cyber-crime to a sample of U.S. companies was $11.6 million per year, representing a 78% increase since 2009.   Commissioner Aguilar concluded his remarks by stating quite clearly that boards of directors bear an increasingly heavy burden when dealing with cybersecurity, as “board oversight of cyber-risk management is critical to ensuring that companies are taking adequate steps to prevent, and prepare for, the harms that can result from such attacks.”  Commissioner Aguilar laid out several steps for proactive boards to engage in, including working with management to ensure that corporate policies match up with NIST Cybersecurity Framework guidelines, creating an enterprise risk committee on the board to make sure that members are adequately educated, and preparing in advance for the “inevitable” cyber attack.  Given the SEC’s recent enhanced focus on cybersecurity issues, Commissioner Aguilar’s remarks send a clear message to directors to embrace the responsibility of addressing cyber risk and adequately preparing for attacks.

The complete transcript of Commissioner Aguilar’s remarks can be found here.

Still a Smaller Reporting Company? 06/25/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

Did you know that once a year smaller reporting companies (“SRCs”) are required to determine whether they continue to qualify as an SRC?  For most companies the determination date is June 30 – the last business day of the company’s second fiscal quarter.  To continue to qualify as an SRC, a company’s public float on the determination date must be less than $75M. Public float is calculated by multiplying the number of shares of common stock held by non-affiliates by the closing price (or average bid and ask price) on the determination date.

What changes if a company loses SRC status?  If a company’s public float exceeds $75M as of the determination date it no longer qualifies as an SRC and must transition to the disclosure requirements applicable to larger companies.  Some of the most significant changes include:

Timing?  To assist with the transition in status, the SEC allows companies until the first quarter of the next fiscal year to begin to comply with the heighted disclosure requirements.

May a non-SRC qualify as an SRC?  It is also possible for a non-SRC to transition to SRC status.  This determination is also made as of the last business day of the second fiscal quarter.  For a non-SRC to qualify as an SRC its public float must be less than $50M (or if the company has no public float, must have annual revenue in the last completed fiscal year of less than $40M).  A new SRC may start taking advantage of the scaled disclosure requirements immediately.

For more information on this topic or assistance in determining whether your company qualifies as an SRC please contact Daniele Levy.

Chair Mary Jo White Discusses SEC, FAF and FASB Shared Interests at Trustees Dinner 06/23/2014

Posted by Morse, Barnes-Brown Pendleton in Legal Developments, Public Companies.
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By: Mark Tarallo

On May 20, 2014 U.S. Securities and Exchange Commission Chair Mary Jo White spoke at the Financial Accounting Foundation Trustees Dinner.  Given the audience, it is not surprising that her remarks focused on accounting issues at the SEC.  In her remarks, Chair White mentioned that the SEC is still considering the addition of International Financial Reporting Standards (“IFRS”) for domestic registrants. Although no timetable was given for when the issue would be addressed, White noted that the interests of U.S. investors would be front and center during the IFRS consideration process.  In addition, Chair White commented on the continuing efforts of the Disclosure Effectiveness Project, noting that she has directed the staff to undertake a comprehensive review of disclosure requirements under Regulation S-K and make specific recommendations for updating the requirements pursuant to a JOBS Act-mandated report on Regulation S-K that provides the staff’s recommendations for a review of corporate disclosure requirements.  She also noted that the Financial Reporting and Audit Task Force, formed in July, 2013, will continue its increased enforcement efforts and will work to look ahead to identify additional areas where financial reporting fraud may be likely to occur, while focusing on internal controls related to the areas that have already been identified as being susceptible to financial reporting fraud.

The complete transcript of Chair White’s remarks is available here.

 

SEC Continues to Adapt to Use of Social Media – Companies not Responsible for Re-Tweets 05/13/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

As we have discussed in prior posts, the U.S. Securities and Exchange Commission (SEC) has been considering how the use of the social media by public companies fits within the existing regulatory framework.  The SEC recently issued additional guidance regarding the use of social media by public companies.  In its guidance, appearing as C&DIs 110.02 and 232.16, the SEC clarified that when third parties re-tweet or otherwise re-transmit a social media post originated by a public company, the company is not responsible for ensuring that the re-transmission complies with securities laws.  Under the SEC’s guidance, a re-tweet or re-transmission is not attributed to the company provided that:

  • the company has no involvement with the third party’s re-transmission of the post;
  • the third party is not acting on behalf of the company; and
  • the third party is not a participant in an offering of company securities.

We believe this new guidance provides another step toward permitting public companies to use social media to communicate with stockholders and the investment community.  This trend toward social media as a preferred platform for communicating with stockholders and potential investors underlines the need for public companies to adopt a comprehensive social media policy.

For more information on this topic please contact Daniele Levy.

U.S. Court of Appeals Narrows Application of Conflict Minerals Rules 05/01/2014

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By: Mark Tarallo

On April 14, 2014, the U.S. Court of Appeals for the D.C. Circuit struck down a portion of the “conflict minerals” rules promulgated by the Securities and Exchange Commission pursuant to the Dodd-Frank Act.  In National Association of Manufacturers v. Securities and Exchange Commission, the court concluded that the provision of the conflict minerals rules that required an issuer to state on its website that its products may incorporate conflict minerals was unconstitutional on free speech grounds.  In a 2-1 decision, the court struck this requirement, while leaving the other conflict minerals reporting obligations in place.

In an effort to combat the ongoing abuses and exploitation in the Democratic Republic of Congo and other African countries, Congress incorporated into the Dodd-Frank Act a provision that the SEC issue regulations requiring certain reporting companies to investigate and disclose the source of any “conflict minerals” such as gold, tantalum and tungsten used in their products.  The goal of the rule is to identify those publicly-traded companies that use conflict minerals in their products and to pressure those companies to find legal sources for those materials.  The final rule promulgated by the SEC required an issuer to undertake a three step process:  i) determine if conflict minerals are used in the issuer’s products, and if so,  ii) undertake a “reasonable country of origin” inquiry to determine the source of those conflict minerals, and if the issuer determines that the conflict minerals may have originated in certain countries,  iii) “exercise due diligence on the source and chain of custody of its conflict minerals.”

Once an issuer determines (or has reason to believe) that the conflict minerals used in its products originated in covered countries, the issuer has an obligation to file a Conflict Minerals Report on Form SD, including a required third-party audit.  In addition, in certain circumstances, issuers were required to post a notice on their website that their products “have not been found to be DRC conflict-free.”  The recent ruling struck down just this last requirement, while leaving much of the remaining framework (including the obligations to investigate sources and file a Form SD) in place.  Issuers should continue to prepare to File Form SD, as it is difficult to predict that any further action will take place prior to the upcoming May 31 deadline.

The SEC has indicated that it is reviewing the ruling.

For more information on this topic, please feel free to contact Mark Tarallo.

Reminder: Deadline for Nasdaq Certification Approaching 04/10/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

As described in prior posts, Nasdaq recently amended its listing rules regarding the independence of compensation committee members.  A description of the changes may be found here and here.

The deadline for complying with Nasdaq’s revised listing requirements is the earlier of (i) a company’s first annual meeting after January 15, 2014, or (ii) October 31, 2014.  Listed companies are required to certify to Nasdaq, within 30 days after the applicable deadline, that they have complied with the new listing rules. The certification must be filed through Nasdaq’s listing center and may be found here.

For more information on the new Nasdaq listing requirements affecting compensation committees please contact Daniele Ouellette Levy.

Action Item for Smaller Reporting Companies – Update Your D&O Questionnaire 03/13/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

It is proxy season for public companies with December 31 fiscal year ends. While the proxy disclosure requirements did not significantly change in 2013, there are important updates companies should make to their D&O questionnaires.

Smaller Reporting Companies (“SRCs”) should consider making the following updates:

  1. Compensation Consultants Conflicts of Interest: All reporting companies are now required to disclose in their proxy statement conflicts of interest of any compensation consultants engaged during the year to provide advice on the amount or form of executive and director compensation. SRCs should revise their D&O questionnaires to include questions regarding personal or business relationships between directors or executive officers and compensation consultants engaged by the company.
  2. Compensation Committee Independence: As described in previous posts, Nasdaq recently adopted changes to its listing standards which require compensation committee members to meet heightened independence standards. While many of these changes do not apply to SRCs, SRCs should consider updating D&O questionnaires to include questions regarding compensation committee independence in order anticipate required changes in the composition of the compensation committee in the event the company no longer qualifies as an SRC.
  3. Bad Actors: SRCs should consider including questions in their D&O questionnaires which would help the company determine whether any directors or executive officers would be considered “bad actors” under the newly adopted Rule 506(d) under Reg. D. The bad actor disqualification in Rule 506(d) would make the Rule 506 exemption under Reg. D unavailable for any private securities offering in which certain bad actors are involved.

For more information or assistance revising your D&O questionnaire please contact Daniele Levy.

Boston Business Journal Revisits Local Biotech IPO’s: “Where are They Now? 03/12/2014

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On March 7, the Boston Business Journal (BBJ) published an article titled “A year of biotech IPOs: Where is their stock price now?” which highlights fourteen local biotech companies that went public last year, ranking them by their stock increase seen since the close of their first day on the market until the March 6 close. A year ago this month, Enanta Pharmaceuticals and Tetraphase Pharmaceuticals, both of Watertown, MA, became the first two Massachusetts biotech firms to go public in what turned out to be the busiest biotech IPO boom in more than a decade.

To see the full list visit the BBJ.

Supreme Court Expands Pool of Claimants in Whistleblower Case 03/07/2014

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Corporate Attorney Joseph MarrowBy: Joseph Marrow

On March 4, 2014, the United States Supreme Court issued its decision in a much anticipated whistleblower retaliation case. In its decision, Lawson v. FMR, LLC, No. 12-3, the Supreme Court expanded the coverage of an anti-retaliation claim under Sarbanes-Oxley Act of 2002 (SOX) to an employee of a privately-held contractor (the contractor provided investment management services to Fidelity mutual funds). Pursuant to the Dodd-Frank Act, the Securities and Exchange Commission established an award program for whistleblowers creating a new private right of action for employees in the financial services sector who suffer retaliation for disclosing information about fraudulent or unlawful conduct related to the offering or provision of a consumer financial product or service. The First Circuit had ruled that the anti-retaliation provision only applies to employees of public companies. In a 6 to 3 vote, the Supreme Court reversed the decision of the First Circuit in favor of expanding the coverage of the whistleblower statute to cover employees of a public company’s private contractors and subcontractors.

In Lawson v. FMR, the Supreme Court interpreted a provision of SOX, namely 18 U.S.C. Section 1514A protecting whistleblowers, which provides in part: “No [public] company …, or any officer, employee, contractor, subcontractor, or agent of such company, may discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of [whistleblowing or other protected activity].” The Supreme Court was faced with the question whether the protected class was simply limited to employees of the public company itself or would include “employees of privately held contractors and subcontractors – for example, investment advisers, law firms, accounting enterprises – who perform work for the public company?” Noting that SOX was enacted following the Enron scandal and in part in response to that scandal, the Supreme Court interpreted the statute as a response to a “concern about contractor conduct of the kind that contributed to Enron’s collapse.” As such, the Supreme Court held that a broader interpretation of the statute (to capture contractors that perform work for public companies) was warranted.

The implications of the Supreme Court’s decision are far reaching. The Supreme Court’s holding significantly expands the pool of potential whistleblower claimants. It remains to be seen whether the parade of horribles predicted by the dissent – resulting in a multitude of spurious claims – will come to fruition.

For more information on this topic please contact Joe Marrow.

SEC Releases Study of Public Company Disclosure Requirements 02/07/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

The JOBS Act, which became law in April 2012, requires the SEC to conduct a review of the disclosure requirements in Reg. S-K in order to identify how the rules could be updated to modernize and simplify the registration process for emerging growth companies and reduce related costs. Reg. S-K is the primary regulation under the federal securities laws detailing the disclosure requirements applicable to public companies.

At the end of December 2013, the SEC released the results of its review of Reg. S-K.  In the study the SEC noted it had not conducted a comprehensive review of Reg. S-K since 1996 and stated that a reevaluation of the disclosure requirements was warranted due to significant changes in the manner many public companies operate their businesses and world events which have altered the regulatory framework for public companies. In such reevaluation the SEC would aim to ensure existing and potential investors, as well as the marketplace as a whole, receive meaningful information upon which to base investment decisions. In addition, the SEC stated that its regulatory framework must ensure that the disclosure requirements focus on information which is material and are flexible enough to adapt to dynamic circumstances.

This study is a starting point. In its conclusion, the SEC proposes undertaking a comprehensive plan to systematically review the disclosure requirements in all of the SEC’s rules and forms concerning the presentation and delivery of information to investors and the marketplace, not just Reg. S-K. We expect more to come on this issue.

For more information on public company disclosure requirements please contact Daniele Ouellette Levy.

Are Higher Insurance Coverage Costs the Result of an Increase in M&A Litigation? 01/24/2014

Posted by Morse, Barnes-Brown Pendleton in M&A, Public Companies.
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Corporate Attorney Joseph MarrowBy: Joseph Marrow

The proliferation of mergers and acquisition litigation activity has led to changes in the directors and officers insurance coverage marketplace. The Wall Street Journal recently reported that in the first three quarters of 2013, 98% of acquisitions valued at $500 million or more have resulted in lawsuits (in 2007, 53% of similar transactions resulted in litigation). The increased litigation activity has caused the insurance industry to take notice and respond. To learn what this means and how companies protect themselves, please read the full post here.

For questions on changes on insurance coverage, please contact Joe Marrow.

Transitioning to the 2013 COSO Framework 01/23/2014

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Corporate Attorney Hillary PetersonBy: Hillary Peterson

In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) published an update to it’s Internal Controls – Integrated Framework, originally published in 1992. The 1992 framework has been adopted by the majority of publicly-traded companies in the United States as a way to design, implement and assess the effectiveness of the internal controls of the company. The 2013 framework has been updated in a number of ways to address the evolving issues facing companies today.

In a recent meeting of the Securities and Exchange Commission (“SEC”) Regulations Committee, the SEC staff indicated that it expects U.S. publicly-traded companies to review their internal controls and to update and revise those controls in order to comply with the newly updated COSO framework. While the new framework is not due to supersede the 1992 framework until December 15, 2014, the 2013 framework was issued in May 2013 in order to allow companies time to review and update their internal controls in advance of that date. The SEC staff has stated that, especially after the December 15, 2014 transition date, companies that continue to rely on the 1992 framework will likely receive questions from the staff about whether or not their internal controls meet the SEC standard.

For more information on the COSO Framwork, please feel free to contact Hillary Peterson.

Nasdaq Revises Compensation Committee Requirements – Again 01/22/2014

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Corporate Attorney Daniele Ouellette LevyBy: Daniele Ouellette Levy

Nasdaq recently amended its listing rules regarding the independence of compensation committee members. The latest amendment comes on the heels of an amendment approved by Nasdaq in early 2013 which imposed new independence requirements on members of compensation committees. Under the rules approved in early 2013, any director who accepts compensation from the company, other than for service as a member of the Board or a committee of the Board, will not meet the independence requirements for membership on the compensation committee and would be in eligible to serve on such committee. In November 2013, Nasdaq eliminated this bright line test and instead provided that the Board must consider compensation as a factor in determining whether a Board member is independent and eligible to serve on the compensation committee.

The deadline for compliance with the revised listing requirements is the earlier of (i) a company’s first annual meeting after January 15, 2014, or (ii) October 31, 2014. Listed companies will be required to certify to Nasdaq, within 30 days after the applicable deadline, that they have complied with the new listing rules. The compensation committee certification must be filed through Nasdaq’s listing center and may be found here.

For more information on the new Nasdaq listing requirements regarding compensation committees please contact Daniele Ouellette Levy.

Social Media – Due Diligence 12/11/2013

Posted by Morse, Barnes-Brown Pendleton in Corporate, Public Companies.
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Corporate Attorney Jonathan CallaBy: Jonathan Calla

Social media websites such as LinkedIn, Twitter, Facebook, Instagram and YouTube have become useful vehicles for companies to disseminate information. The instantaneous promotion and advertising of company products and services to a wide audience through social media websites has motivated companies to incorporate the use of social media websites as a part of their business strategy. The integration of social media websites to the business strategy of companies is expected to continue and grow in response to the pressure on companies to remain competitive in their respective industries.

In most M&A transactions, and more specifically as part of the legal due diligence process, a buyer will typically request from a target any press releases that have been previously disseminated by a target over a defined period of time. While a press release request may not produce the delivery by a target of documents related to its use of social media, review of the content shared by a target on such websites should not be ignored by a buyer. Accordingly, buyers should consider expanding their due diligence requests of a target to specifically include requests for information related to its use of social media websites. More specifically, buyers may want to consider incorporating the following into their due diligence request lists: (i) the names of social media websites used by the company, (ii) the names of employees or third parties who access and operate social media websites used by the company (and any usernames or passwords, if applicable), and (iii) an explanation of the company’s use of each social media website.

Specifically requesting the social media website information above will ensure its delivery by a target, and more importantly, will assist buyers with a comprehensive review of a target’s social media presence.

For more information on this topic, please feel free to contact Jonathan.

Delaware Legislative Update 12/09/2013

Posted by Morse, Barnes-Brown Pendleton in Corporate, Public Companies.
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Corporate Attorney Josh FrenchBy: Joshua French

Many times prior to an institutional financing, acquisition or an IPO, a company will review its corporate records and notice that there may be a couple of loose ends to tie up with ratifying board resolutions. While this works for many corporate actions, certain actions are not permissible to be retroactively approved under Delaware law and are void. Among these actions include the issuance of stock that was not authorized under a company certificate of incorporation filed with the Delaware Secretary of State. This means that if shares of stock were issued to stockholders before there were enough shares authorized, that those shares are void and any action taken by those stockholders (for example, electing board members) would also be void. This, obviously, could be very problematic, particularly if the board is no longer controlled by the original stockholders.

Beginning in April 2014, the Delaware General Corporation Law (the DGCL) will allow these types of mistakes to be rectified and will allow for corporations to remedy any actions taken that would otherwise have been deemed void. In order to remedy a defective corporate act, the following steps will need to be taken:

  • The board of directors must pass a resolution ratifying the defective corporate act and stating in detail the defect seeking to be cured.
  • If the resolution would have needed to have been approved by the stockholders, the stockholders must also approve the resolution and the company must provide at least twenty days prior notice of the meeting at which the resolution is to be adopted. The notice must also state that any challenge to the ratification must be brought within 120 days of the date on which the resolution is adopted.
  • If the action being remedied would have required a filing with the Secretary of State of Delaware, then a “Certificate of Validation” must be filed with the Secretary of State. The form of this certificate is currently being prepared by the Secretary of State’s office.
  • If the resolution did not require stockholder approval, the corporation must provide notice of the adoption of the ratification resolution to the stockholders within 60 days of approval. The notice must also that any challenge to the ratification must be brought within 120 days of the date on which the resolution is adopted.

This procedure will not be effective until April 1, 2014, but it may be worthwhile for corporations to consider if there are any actions which may not have been approved properly when completed and contact your law firm to determine whether those actions need to be approved under this new section of the DGCL or if there are steps that can be taken now to ensure that proper corporate approvals had been obtained.

For more information on this topic, please feel free to contact Josh.

Arbitration Provisions and Post Closing Disputes 12/04/2013

Posted by Morse, Barnes-Brown Pendleton in Corporate, Public Companies.
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Corporate Attorney Joseph MarrowBy: Joseph Marrow

Many business acquisition agreements provide that post-closing disputes relating to earn-outs, working capital adjustments and other purchase price adjustments are to be submitted to an independent third party (i.e., an accounting firm) for resolution. A recent decision of the Delaware Supreme Court, Viacom Int’l, Inc. v. Winshall, No. 513, 2012, 2013 WL 367878786 (Del. July 16, 2013) (“Viacom”), reaffirms the enforceability and binding nature of the alternative dispute resolutions procedures chosen in these agreements. In Viacom, the parties to a merger agreement agreed to submit a dispute regarding an earn-out issue to arbitration subject to resolution by an independent accounting firm which decision would be final, binding and conclusive. The accounting firm made a determination adverse to Viacom and Viacom filed an action in state court seeking a declaration that the arbitration award was erroneous.

The Delaware Supreme Court upheld the arbitration award. The Court noted that the challenge to the arbitration award was governed by the Federal Arbitration Act. Absent a determination that the decision “was procured by fraud” or was subject to “manifest error”, the Court could not vacate the award. The Court rejected Viacom’s arguments of fraud or manifest error.

The Viacom decision lends support to the ability of parties to rely on the enforceability of alternative dispute resolution provisions in business acquisition agreements to resolve post-closing disputes as long as such disputes fall within the scope of the independent arbitrator’s scope of review.

For more information on this topic, please feel free to contact Joe.

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