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We were quoted in a recent Compliance Week story (subscription required) on the evolution of the ordinary business exclusion in getting the SEC staff to agree on companies’ no-action requests for Rule 14a-8 shareholder proposal.  The exclusion becomes more elusive over time, but requests that continue to be granted include proposals that the Staff agrees relate to the sale of a company’s products and services, terms of code of conducts and policies, managing marketing and other expenditures and income tax risks.  There are sometimes tough lines to draw, for example, proposals implicating board oversight of risk is not excludable, but if the proposal reaches into how management reviews risk, then it’s excludable. Contact Ning Chiu.
8 years 4 months ago
We did so well with our sound bites in our last interview that we were again quoted by Compliance Week (subscription required) on another Rule 14a-8 story, this time on substantial implementation.  It’s easy to show the SEC that you’ve substantially implemented a request to, for example, declassify your board.  But if the proposal asks for any kind of report with a specified list of “asks”, then it’s much harder if not nearly impossible to show that your report on the same subject already complies. Contact Ning Chiu.
8 years 4 months ago
While ISS voting recommendation reports for companies are not “public”, sometimes additional soliciting materials filed by a company are informative.  On March 2nd, Disney filed its first communication indicating that the ISS recommendation to vote against its say-on-pay proposal is based on the disclosure of excise tax gross-ups that was granted in January 2010, and the compensation committee has since then adopted a policy that prohibits excise tax gross-ups in any future agreements (including any material amendments).  It’s tough to battle ISS recommendations, as on March 18th, Disney filed another communication indicating that the company has amended four employment agreements to remove excise tax gross-ups entirely.  Contact Ning Chiu.
8 years 4 months ago
You can’t talk about governance these days without someone bringing up “shareholder engagement,” so it’s not surprising that there is now a study on the subject.  This ISS and IRRC study claims to be first ever benchmarking about engagement, polling 335 issuers and 161 investors, divided between asset owners and asset managers.  Highlights from the study: 50% of issuers, 53% of asset owners and 64% of asset manager report doing more on engagement than they have in the past 87% of issuers, 62% of asset owners and 70% of asset managers report that they’ve had at least one shareholder engagement in the past year In what the study dubs a “barbell effect”, investors either talk to a lot of companies or no one.  28% of asset owners and 34% of asset managers report talking to ten or more companies, but at the same time 45% of asset owners and 43% of asset managers report talking to none.  No surprise that all sides claim that the biggest impediments to engagement is the lack of resources and staffing. Contact Ning Chiu.
8 years 4 months ago
The SEC staff issued a surprising CDI recently.  Seems that the biographies of directors who are not standing for re-election are required to be disclosed under both Item 401(a) and Item 401(e) of Regulation S-K, if not technically in the proxy statement, then in the Form 10-K.  Why investors would be interested in the bios of directors who won’t be continuing is a bit of a mystery.  And for those of you who have asked – Item 401(a) only applies to your current directors.  If they resigned before your published your proxy statement, you don’t have to worry about their biographies. Contact Ning Chiu.
8 years 4 months ago
The SEC just issued a proposal to clarify that there will be no changes to the “beneficial ownership” rules for security-based swaps.  The concern was that language in the Dodd-Frank Act implied that if the SEC failed to enact new beneficial ownership rules for reporting security-based swaps by July 16, 2011, the SEC’s existing rules relating to derivatives reporting would no longer apply.  Yesterday’s proposal will dispel that notion (assuming the rule is made effective before July 16) by preserving the status quo for now.  Although this clarification is intended as a stopgap measure— the SEC is under pressure to reexamine its sections 13 and 16 rules in light of perceived abuses— I expect any rethink of sections 13 and 16 will be delayed by the overwhelming rule-making agenda arising out of Dodd-Frank.  Here’s the Davis Polk memo on the proposal.   Contact Phillip Mills.
8 years 4 months ago
Here’s the Davis Polk memo we released today concerning the Chancery Court’s refusal to order dismantling of the Airgas poison pill.  What’s instructive about the case, I think, is not that it creates new law (it doesn't) but that it underscores the importance of a detailed process and documented strategic thinking.  I've heard some directors already say that it vindicates a “just say no” approach, but I think this paints with too broad a brush.  As usual, the Chancery Court’s analysis here is highly fact-specific and grounded in the court’s intuitive sense that the directors here really were acting in good faith.  It certainly helped, by the way, that the directors that Airgas itself had nominated to the board were aligned with the balance of the board.   Contact Bill Kelly.  
8 years 5 months ago
Here’s our newsflash on the Chancery Court’s much publicized opinion enjoining the Del Monte buyout vote and deal protections due to alleged financial advisor conflicts and misconduct.  Even though Vice Chancellor Laster found that the board appeared to have acted in good faith, he ultimately holds the board responsible for oversight failures and finds that the sponsors probably “aided and abetted” the financial advisor’s misconduct.  Although this case does not create new law (like the earlier TOYS “R” US decision, it clearly admits of the permissibility of a target financial advisor participating in buy-side financing, in the appropriate circumstances), I think it highlights the importance of target boards evaluating the risk/benefit calculus and implementing appropriate procedures when deciding to permit their financial advisor to participate in buy-side financing. Contact Phillip Mills.
8 years 5 months ago
The U.S. Bankruptcy Court for the District of Delaware recently extended the common-interest doctrine to pre-petition communications between the debtor and an informal committee of claimants in In re Leslie Controls Inc.  Gerald Gline and David Kohane, Members of Cole Schotz, and Jason Finkelstein, an associate at Cole Schotz, recently wrote an article for the American Bankruptcy Institute Journal about the common-interest doctrine’s role in bankruptcy proceedings.  Click here to read the article.
8 years 5 months ago
The U.S. Bankruptcy Court for the District of Delaware recently extended the common-interest doctrine to pre-petition communications between the debtor and an informal committee of claimants in In re Leslie Controls Inc.  Gerald Gline and David Kohane, Members of Cole Schotz, and Jason Finkelstein, an associate at Cole Schotz, recently wrote an article for the American Bankruptcy Institute Journal about the common-interest doctrine’s role in bankruptcy proceedings.  Click here to read the article.
8 years 5 months ago
The Delaware Supreme Court today struck down the bylaw amendment that would have accelerated the expiration of one of Airgas’ class of directors.  The Court ultimately cited “practice and understanding” to conclude that directors of staggered boards should serve three full-year terms and that a bylaw requiring the company to hold its next annual meeting just four months after its prior meeting is invalid.  I expect this opinion will give considerable comfort to companies with staggered boards by allaying concerns that the lower court’s decision (upholding the bylaw) weakened their defenses.  That being said, companies with the opportunity to do so (which may only be pre-IPO companies and spin-offs) ought to consider providing in their charters that their board has unilateral power to set the date of annual meetings.  Here’s the Davis Polk memo on the decision.   Contact Phillip Mills.  
8 years 7 months ago
Here’s the Davis Polk newsflash on two recent Delaware rulings validating the widespread use of top-up options, so long as the top-up is excluded from the calculation of value for appraisals and is otherwise properly drafted.  When regulatory approvals and other closing conditions are expected to require less than two to three months, tender offers provide speed of execution advantages over one-step mergers.  The top-up option guarantees the ability to close the squeeze-out merger simultaneously with the tender offer closing which provides significant benefits.  In deals (like GTCR’s acquisition of Protection One earlier this year) where the top-up option does not require any increase in the minimum tender condition, there is also the possibility of more attractive financing commitments due to their shorter duration. Contact Phillip Mills.
8 years 9 months ago
The SEC has stayed implementation of its newly-adopted proxy access rules, including the amendments to Rule 14a-8, pending resolution of a legal challenge to the rule brought by the Business Roundtable and the US Chamber of Commerce.  These controversial rules will likely not be applicable before the 2012 proxy season, at the earliest. Click here to view the SEC order. Contact Phillip Mills.
8 years 9 months ago

The extent of the automatic stay’s extraterritorial reach under chapter 15 of the Bankruptcy Code has been more clearly defined by a memorandum decision entered on August 23, 2010 by the United States Bankruptcy Court for the Southern District of New York in In re JSC BTA Bank, Case No. 10-10638, 2010 WL 3306885 (Bankr. S.D.N.Y. Aug. 23, 2010) (Peck, B.J.).

In JSC BTA Bank, the debtor, JSC BTA Bank (“BTA Bank”), one of the largest banks in the Republic of Kazakhstan, commenced reorganization proceedings in Kazakhstan on October 16, 2009, and subsequently sought recognition of the Kazakh proceeding under chapter 15.  The bankruptcy court granted recognition of the Kazakh proceeding as a main proceeding in March of 2010, along with the relief set forth in section 1520 of the Bankruptcy Code “including, without limitation, the application of the protection afforded by the automatic stay under section 362(a) of the Bankruptcy Code to the Bank worldwide and to the Bank’s property that is within the territorial jurisdiction of the United States.”  Id. at 8 – 9.

8 years 9 months ago

Contributed by Sara Coelho

When a debtor files for bankruptcy protection, one of most important and least appreciated tasks is keeping the lights on.  Like many creditors, once the debtor files its petition for bankruptcy protection, utilities can be stuck with a prepetition claim, and like all creditors they are not happy about it.  Utilities provide an essential service however, and so they have unusual power to wreak havoc on a debtor’s operations if their claim is not paid.  To protect debtors from disruptions in service following a bankruptcy filing, section 366 the Bankruptcy Code requires utilities to continue service without disruption, so long as the debtor provides “adequate” assurance (typically in the form of a deposit) that it will pay its bills postpetition.  This system has protected debtors entering bankruptcy while also providing utilities with protection from further payment failures.

8 years 9 months ago

Contributed by Elisa Lemmer

The recent decision in In re Renegade Holdings confirming a plan of reorganization premised, pursuant to section 1123(a)(5) of the Bankruptcy Code, on preemption of state law has continued to fuel the unresolved circuit split ignited by the Ninth Circuit nearly a decade ago in Pacific Gas & Electric.  Renegade Holdings, like other recent cases outside of the Ninth Circuit, declined to adopt the very narrow view of 1123(a) – a section of the Bankruptcy Code that provides for preemption of applicable nonbankruptcy law in certain circumstances – held by the Ninth Circuit.  Renegade Holdings, however, failed to shed any additional light on the scope of preemption provided by section 1123(a).  The result is that, outside of the Ninth Circuit, where the limits of section 1123(a), are broader but less defined, debtors whose plans are premised on preemption of nonbankruptcy law must continue to tread those proverbial waters carefully.

8 years 9 months ago

In In re Endeavour Highrise L.P., 2010 WL 935359 (Bankr. S.D. Tex. Mar. 12, 2010), the bankruptcy court for the Southern District of Texas held that a party waived his Seventh Amendment right to a jury trial by filing a counterclaim in an interpleader action filed in the bankruptcy case.

Prior to the bankruptcy filing, the debtor, a developer of a high-rise condominium, and a prospective purchaser entered into an earnest money contract relating to the sale of a condominium unit.  The contract provided a right to claim the earnest money if the sale failed to close due to a default by the other party.  After the debtor’s bankruptcy filing, the title company holding the earnest money brought an interpleader action in the bankruptcy court seeking to deposit the earnest money into the court’s registry and have the bankruptcy court determine whether to pay the earnest money to the debtor’s estate or to the prospective purchaser.  A chapter 11 trustee appointed in the case filed an answer to the complaint and a cross-claim against the purchaser.  In response, the purchaser filed an answer and cross-claim asserting a right to the earnest money and demanding a jury trial.  The chapter 11 trustee subsequently moved to strike the demand for a jury trial.

8 years 9 months ago

Contributed by Victoria Vron

This was the question before the Court in Compania Mexicana de Aviacion, S.A. de C.V., Case No. 10-14182 (MG) (Aug. 16, 2010).  In the Mexicana case, the United States Bankruptcy Court for the Southern District of New York was asked by a chapter 15 debtor, Compania Mexicana de Aviacion, S.A. de C.V.  (“Mexicana”), to issue a preliminary injunction affording section 362 type relief to Mexicana prior to recognition of Mexicana’s foreign main proceeding (the “Concurso Proceeding”).  The purported foreign representative of Mexicana, who was appointed as such by Mexicana’s board of directors made the request for the preliminary injunction.  At the time of the injunction request, the foreign representative had not yet been approved by the Mexican bankruptcy court in the Concurso Proceeding to act as the foreign representative.  Under Mexican bankruptcy law, there is generally a gap of at least several weeks between the commencement of the Concurso Proceeding and the time that the Mexican bankruptcy court approves a foreign representative.

8 years 9 months ago

Contributed by Sunny Singh

On July 13, 2010, in one of the most significant and controversial decisions regarding retiree medical benefits in chapter 11, the Third Circuit held – contrary to the majority of lower courts that have considered the issue – that Visteon Corporation, a chapter 11 debtor, could not terminate its retiree health benefits without compliance with section 1114 and notwithstanding that Visteon had retained, as most large companies do, the unilateral right to terminate or modify retiree benefits at any time and without cause.  See In re Visteon Corp., 188 L.R.R.M. 3240 (3d Cir. 2010).

Section 1114 requires a chapter 11 debtor to continue to provide retiree health benefits unless it agrees to a consensual modification of such benefits with the retirees or if the bankruptcy court finds that, after good faith negotiations, the retirees have refused to accept the debtor’s proposal without cause and “such modification is necessary to permit the reorganization of the debtor.”  Section 1114 can be an expensive and time consuming process for debtors and, if applicable, shifts enormous leverage to retirees in a chapter 11 proceeding.

8 years 9 months ago

Contributed by Michael F. Walsh

The chapter 11 case of Thornburg Mortgage, Inc. has generated substantial litigation against former officers and directors of the debtors, as well as the debtors’ corporate counsel.  The case is a useful reminder of some of the issues that may arise when representing a company whose officers, directors, or affiliates may have interests that are not completely aligned with those of the company.  In re TMST, Inc., Bankr. D. Md. 2009, Case No. 09-17787 (DWK).

Prior to its chapter 11 filing in May of 2009, TMST, Inc. (f/k/a Thornburg Mortgage, Inc.) (“TMST”) was a real estate investment trust which, through its subsidiaries, originated, acquired, securitized, and serviced residential mortgage loans.  TMST had none of its own employees, offices, or computer equipment.  Instead, TMST’s businesses were managed on a day to day basis by Thornburg Mortgage Advisory Corporation (“TMAC”) pursuant to the terms of a management agreement between TMST and TMAC.  TMAC’s majority shareholder was Garrett Thornburg, who was also chairman of TMST’s board of directors.  TMST’s CEO and CFO, Larry Goldstone and Clarence Simmons, were also equity holders in TMAC.

8 years 10 months ago