Prepared by Eric B. Amstutz
Mergers and Acquisitions
Ways to Craft Purchase Price Adjustments
Most M&A agreements for private company acquisitions include purchase price adjustment mechanisms. An article describing these provisions, written by Melinda Davis Lux and published in the February 2014 issue of The Practical Lawyer, can be found here.
Corporate Attorney-Client Privilege Passes to Surviving Corporation in Merger
Communications between a corporation and its attorney may be protected from disclosure by the attorney-client privilege. If the corporation subsequently merges into another corporation, who can then assert or waive the privilege? In a recent decision, the Delaware Chancery Court held that for Delaware corporations the privilege may be asserted or waived by the surviving corporation in the merger. If this is not the outcome that the shareholders of a merging corporation desire, they should include a special provision in the merger agreement. Delaware court decisions are often taken into account in corporate law decisions of other states, such as South Carolina. (See Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, Del. Ch. No. 7906-CS, 11/15/13)
Corporate Governance
Should Directors and Officers have Indemnification Agreements with their Companies?
Directors and officers want to know that their company will protect them from the legal and financial costs of unfounded shareholder litigation. David Anna has published an article in the January 2014 edition of South Carolina Lawyer providing guidance on ways a South Carolina corporation can provide this protection.
Converting a Corporation into a Limited Liability Company might Erase Pre-existing Indemnification Rights
A recent Delaware Court of Chancery decision (Grace v. Ashbridge LLC, No. 8348-VCN, 12/31/13) held that a corporate director lost indemnification rights when the corporation converted into a limited liability company, even with respect to pre-conversion events. The outcome of the suit would have been different if the new LLC’s operating agreement had carried over the corporation’s indemnification provisions and made clear that the carried-over rights applied retroactively. Decisions of the Delaware courts are often taken into account in corporate law decisions of other states, such as South Carolina.
Securities Regulation
Insider Trading Laws Apply to Private Company Securities
The securities law rules prohibiting insider trading apply to purchases and sale of private company stock as well as publicly traded stock. This is the conclusion of the United States Court of Appeals for the Second Circuit in a January 2014 decision (Steginsky v. Xcelera Inc., Nos. 13-1327-cv, 13-1892-cv, 1/27/14). The Court held that the duty of companies and insiders to disclose material non-public information if they buy or sell stock applies to “any security registered on a national securities exchange or any security not so registered.” The lawsuit involved stock that was no longer registered with the SEC and concerned company insiders buying stock from outside shareholders without disclosure. The Court held that the suit could proceed on the federal securities law claims, noting also that “closed corporations that purchase their own stock have a special obligation to disclose to sellers all material information.” The decision highlights the importance of considering securities laws whenever stock, limited liability company interests or limited partnership interests are bought and sold, whether by an issuing company or between private parties.
Sarbanes-Oxley Whistleblowing Protections Apply to Employees of Private Companies Doing Work for Public Companies
Public-reporting companies are subject to the whistleblower anti-retaliation provisions of the Sarbanes-Oxley Act. On March 4, 2014, the United States Supreme Court held that the same anti-retaliation provisions protect whistleblowing employees of those private companies that are “contractors” or “sub-contractors” of public-reporting companies, such as accounting firms and other service providers. The outer limits of the Court’s decision are uncertain. The lawsuit involved allegations of fraud that adversely affected the public company’s shareholders, but the decision left open whether whistleblowing on other kinds of private company fraud might trigger protection. See Lawson v. FMR LLC, No. 12-3, 3/4/14.